Both SEC rules and the Sarbanes-Oxley Act prohibit auditors from providing
bookkeeping services to their public company audit clients.
All owners of a CPA firm must be CPAs who are qualified to practice.
Errors are usually more difficult for an auditor to detect than frauds.
An acceptable audit risk assessment of low indicates a risky client requiring more
extensive evidence, assignment of more experienced personnel, and/or a more extensive
review of audit files.
Since the amount of expense report reimbursements is insignificant, auditors can ignore
expense reports for officers and directors.
Audit committee oversight also serves as a deterrent to fraud by senior management.
Many litigation experts believe that a well written engagement letter significantly
reduces the likelihood of adverse legal actions.
The overall objective in the audit of the sales and collection cycle is to evaluate whether
the account balances affected by the cycle are fairly presented in accordance with
accounting standards.
Effectiveness is concerned with whether defined goals are achieved, whereas efficiency
is concerned with whether the goals are achieved with a minimum use of resources.
When an auditor sets a low acceptable audit risk, it means that he wants to be more
certain that the financial statements are not materially misstated.
The transaction-related audit objective that deals with whether recorded transactions
have actually occurred is the completeness objective.
The criteria by which an auditor evaluates the information under audit may vary with
the information being audited.
The auditor performs tests of controls and substantive procedures to obtain assurance
that all audit objectives are achieved for information and amounts included in those
disclosures.
Audit documents are the joint property of the auditor and the audit client.
Separation of duties in the payroll and personnel cycle will prevent overpayments, but
not payments to nonexistent employees.
Current professional auditing standards prohibit external auditors from using internal
auditors for direct assistance on external audits.
The letter of representation is prepared on the CPA firm’s letterhead, addressed to the
client’s chief executive officer, and signed by the audit engagement partner.
Whenever an auditor issues a qualified report, he or she must use the term “except for ”
in the opinion paragraph.
If a sale was for a valid shipment, but the amount of the sales invoice was calculated
incorrectly, the accuracy objective was violated.
The auditor must obtain evidence that the interim financial information agrees or
reconciles with the accounting records for a public company interim review.
The most difficult type of cash embezzlement for the auditor to detect is when the cash
is stolen before it can be recorded in the cash receipts journal.
When auditing acquisitions of property, plant, and equipment, the auditor’s review of
lease and rental agreements most closely relate to the cutoff objective.
Cost accounting systems and controls are the same for all manufacturing companies.
An example of a specific authorization is management setting a policy authorizing the
ordering of inventory when less than a one-week supply is on hand.
The auditor’s understanding of internal control performed as part of risk assessment
procedures provides the basis for the auditor’s initial assessment of control risk.
A CPA firm may use any name as long as it is not misleading.
Parallel testing can be used in combination with pilot testing to test new systems.
There has been an increased emphasis on the use of analytical procedures during an
audit.
The presence of fraud risk factors increases the likelihood of fraud and may suggest that
fraud is being perpetrated.
Audit risk is the risk there will be an audit failure for a given audit engagement.
As society becomes more complex, decision makers are more likely to receive reliable
information.
If a particular internal control is not followed by the client exactly 6% of the time, and
the auditor’s tests of that control find three control violations in a sample of 50, the
sample is considered to be representative.
Tests of the presentation and disclosure-related objectives are generally done as part of
the completion phase of the audit.
Who is responsible for establishing a private company’s internal control?
A) senior management
B) internal auditors
C) FASB
D) audit committee
Which one of the following best describes the auditors responsibilities regarding
appropriate authorizations in the sales/collections cycle?
A) Credit must be authorized before the sale.
B) Goods must be shipped after the authorization
C) Prices must be authorized.
D) All of the above should be of concern to the auditor.
Which of the following would the auditor be most concerned about regarding a
heightened risk of intentional misstatement?
A) Senior management emphasizes that it is very important to beat analyst estimates of
earnings every reporting period.
B) Senior management emphasizes that budgeted amounts for expenses are to be
achieved for each reporting period or explained in the variance analysis report.
C) Senior management emphasizes that job rotation is a worthwhile corporate
objective.
D) Senior management emphasizes that job evaluations are based on performance.
A sample in which every possible combination of items in the population has an equal
chance of constituting the sample is a
A) random sample.
B) statistical sample.
C) judgment sample.
D) representative sample.
A liability is properly accounted for as an account payable if
A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal
year.
D) the amount is estimated and owed within 90 days of the balance sheet date.
The purpose of the requirement in having communication between the predecessor and
successor auditors is to
A) allow the predecessor to disclose information which would otherwise be
confidential.
B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor.
Which of the following types of receivables would not deserve the special attention of
the auditor?
A) accounts receivables with credit balances
B) accounts that have been outstanding for a long time
C) receivables from related parties
D) each of the above would receive special attention.
When performing planning analytical procedures for a client the auditor detected that
the gross profit percentage had declined by 50% from the previous year to the year
currently under audit. The auditor should
A) investigate the possibility the client may have made an error in their cost of goods
sold computation.
B) assist management in developing greater cost efficiencies in their product line.
C) prepare a going concern opinion for the client.
D) advise the client to have extensive disclosure to alleviate investor concerns.
An auditor traces a sample of electronic time cards before and after the bi-weekly
payroll report and then traces to the payroll master file to determine that payroll
transactions are reported in the correct period. The auditor is gathering evidence for
which audit objective?
A) completeness
B) existence
C) cut-off
D) accuracy
A CPA firm normally uses one or a combination of four defenses when there are legal
claims by clients. Which one of the following is generally not a defense?
A) lack of duty
B) nonnegligent performance
C) contributory negligence
D) foreseeable users
According to the Association of Certified Fraud Examiners, the average company loses
________ percent of its revenues to fraud.
A) one
B) five
C) ten
D) fifteen
Which of the following statements is the most correct regarding errors and fraud?
A) An error is unintentional, whereas fraud is intentional.
B) Frauds occur more often than errors in financial statements.
C) Errors are always fraud and frauds are always errors.
D) Auditors have more responsibility for finding fraud than errors.
An engagement letter sent to a publicly held audit client usually would not include a(n)
A) reference to the auditor’s responsibility for the detection of errors or irregularities.
B) estimation of the time to be spent on the audit work by audit staff and management.
C) statement that management advisory services would be made available upon request.
D) reference to management’s responsibility for the financial statements.
Auditors compare client data with
A) industry data.
B) client-determined expected results.
C) similar prior-period data.
D) all of the above.
When selecting a sample size for substantive tests of balances which factor, other
factors being equal, would result in a larger sample?
A) a decrease in the tolerable misstatement
B) small expected misstatements
C) an increase in the tolerable misstatement
D) an increase in the acceptable risk of incorrect acceptance
Responsibility for the issuance of new notes payable would normally be vested in the
A) board of directors.
B) purchasing department.
C) accounting department.
D) accounts payable department.
The possibility that a business may not be able to repay a bank loan because of an
economic downturn is referred to as
A) materiality risk.
B) information risk.
C) interest rate risk.
D) business risk.
Indicate which changes would require an explanatory paragraph in the audit report.
A)
B)
C)
D)
The most commonly used method of statistical sampling for tests of details of balances
is
A) attributes sampling.
B) systematic sampling.
C) discovery sampling.
D) monetary unit sampling.
The audit tests to verify that the client is using an inventory method which is generally
accepted and to verify that physical counts were correctly summarized are performed
during the audit of the
A) acquisition and payments cycle.
B) payroll and personnel cycle.
C) inventory and warehousing cycle.
D) sales and collection cycle.
Cutoff misstatements occur when
A)
B)
C)
D)
Which of the following is not a key control in the acquisition and payment cycle?
A) authorization of purchases
B) authorization of credit
C) timely recording and independent review of transactions
D) authorization of payments
The AICPA principles underlying an audit are organized around four principles. Which
of the following is not one of those principles?
A) fairness
B) responsibilities
C) reporting
D) performance
Which of the following is most correct regarding external auditors use of internal
auditors directly on the audit engagement?
A) discourage
B) prohibit
C) require
D) permit
After a purchase requisition is approved, a ________ must be initiated to purchase the
goods or services.
A) purchase order
B) vendor order
C) call order
D) vendor invoice
All of the following are causes for the addition of an explanatory paragraph under both
AICPA and PCAOB standards except for
A) emphasis of a matter.
B) reports involving other auditors.
C) lack of consistent application of generally accepted accounting principles.
D) auditor agrees with a departure from promulgated accounting principles.
After the balance sheet date but prior to issuance of the auditor’s report the auditor
learns that the client’s facility in a foreign country has been expropriated. Management
refuses to disclose this information in a financial statement footnote or present
pro-forma data as to the effect of the event. The auditor should
A) add a footnote to the financial statements.
B) disclaim an opinion due to the client imposed scope limitation.
C) provide the information in the report and modify the opinion.
D) issue an unqualified opinion but provide the information in the auditor report.
Controls which provide a means of ensuring that the physical counts are properly
summarized, priced at the same amount as the unit records, correctly extended and
totaled, and included in the general ledger at the proper amount are known as
A) standard cost controls.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.
Which of the following is not one of the responsibilities of an auditor under the
principles underlying an audit?
A) possess appropriate competence and capabilities
B) comply with ethical requirements
C) plan work and supervise assistants
D) maintain professional skepticism and exercise professional judgment
Which of the following is not one of the three primary objectives of effective internal
control?
A) reliability of financial reporting
B) efficiency and effectiveness of operations
C) compliance with laws and regulations
D) assurance of elimination of business risk
In many audits, no substantive tests of transactions are made for the ________ assertion
on the grounds that understatement of sales is not a concern.
A) accuracy
B) existence
C) completeness
D) none of the above
Recent academic research on the topic of professional skepticism suggests that there are
six characteristics to skepticism. List and briefly describe each of these characteristics.
There are eight types of audit evidence: physical examination, confirmation, inspection,
observation, inquiries of the client, reperformance, analytical procedures, and
recalculation. For each of the following types of audit tests, indicate the type(s) of
evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests
of transactions, (3) analytical procedures, and (4) tests of details of balances.
In addition to performing analytical procedures that examine the relationship of
inventory account balances with related financial statement accounts, auditor’s will
often use nonfinancial measures in determining the reasonableness of inventory
balances. List below at least two nonfinancial measures that may be useful to auditors.
Auditors will often prepare a proof of cash when the client has material internal control
weaknesses in cash receipts and cash disbursements. The purpose of the proof of cash is
to determine the client’s accounting records for cash are reliable. List below the four
requirements the proof of cash is designed to provide for the auditor.
In the context of the audit of sales, distinguish between the occurrence and
completeness transaction-related audit objectives. State the effect on the sales account
(overstatement or understatement) of a violation of each objective.
Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are
taking to reduce the practitioner’s exposure to lawsuits.
How do auditors determine the extent of testing of internal controls in the acquisition
and payment cycle?
Mathews and Company has $112,000 in an accrued payroll account. The company’s
weekly payroll is $186,700 and the accrual represents 3 days out of 5 working days. If
the auditor has determined that controls are effective over payroll, what additional work
should the auditor perform for this account?
Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the
threefold approach an auditor performs for each account above to determine the
reasonableness of the cutoff.
Control activities help assure that the necessary actions are taken to address risks to the
achievement of the company’s objectives. List the five types of control activities.
An environmental clean-up lawsuit is pending against your client. What information
about the lawsuit would you as the auditor need in order to determine the proper
accounting treatment?
Discuss the audit procedures performed when testing the detail tie-in objective for
accounts receivable, and explain why this objective is ordinarily tested before any other
objectives for accounts receivable.
There are 14 steps to audit sampling for tests of details of balances, divided into three
sections: plan the sample, select the sample and perform the audit procedures, and
evaluate the results. Discuss 5 of the 9 steps included in the “plan the sample” section
for nonstatistical sampling.
Internal controls over year-end cash balances in the general account can be divided into
two categories. List the two below.
“Failure to bill a customer” is an example of an error that results in the failure to receive
cash, but would not be discovered as part of the audit of the bank reconciliation. State
three other examples of errors or irregularities that result in the improper payment of, or
failure to receive, cash, but that would not be discovered during the audit of the bank
reconciliation. How are these types of misstatements normally uncovered in the audit?
Explain the decision rule used in monetary unit sampling to determine whether the
population is acceptable.
The primary accounting record for property, plant, and equipment accounts is the fixed
asset master file. What is included for each fixed asset in the master file?
Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and
(3) tests of details of balances. Give an example of each.
Discuss each of the three types of compilation reports and the circumstances in which
each should be used.
What types of exceptions are auditors most concerned with when evaluating
populations of accounting data?