Loan covenants
A. describe the collateral of the loan.
B. require the borrower to maintain certain financial characteristics.
C. describe the lender’s responsibilities.
D. include all the above.
Roll-forward work normally occurs between the ____ and the ____.
A. beginning of the year under audit; audit report release date
B. date of the financial statements; audit report release date
C. beginning of the year under audit; date of the financial statements
D. date of interim work; date of the auditors’ report
The typical assertions related to investments and related accounts would not include the
PCAOB assertion that
A. capitalized intangible costs relate to intangibles acquired in exchange transactions.
B. amortization is properly calculated.
C. research and development costs are properly classified.
D. goodwill is valued at market value.
A client’s purchasing system ends with the recording of a liability and its eventual
payment. Which of the following best describes auditors’ primary concern with respect
to liabilities resulting from the purchasing system?
A. Accounts payable are not materially understated.
B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from one vendor or one group of vendors.
D. Commitments for all purchases are made only after established competitive bidding
procedures are followed.
Which of the following might be detected by auditors’ cutoff review and examination of
sales journal entries for several days prior to the balance sheet date?
A. Lapping year-end accounts receivable.
B. Inflating sales for the year.
C. Kiting bank balances.
D. Misappropriating merchandise.
Green, CPA, performed a mean-per-unit sampling plan to examine the inventory
balances of ABC Company. Green audited 120 items from a sample and found an
audited value of $24,600. The sample had a recorded value of $30,000. If the entire
inventory contained 2,400 items and the total recorded value of the inventory was
$480,000, the estimated account balance using mean per unit estimation is
A. $393,600.
B. $474,500.
C. $480,000.
D. $492,000.
During the audit of the quality control area, an auditor identified that a specific product
has a 3 percent failure rate when tested. The specification calls for a failure rate of less
than 1.8 percent. Product failure might lead to customer injury and in turn lawsuits
against the company. The auditor has communicated this to management. Which of the
following is not an acceptable response from management with regard to this risk?
A. Management is aware of the risk and has decided that it is acceptable.
B. Management has decided not to continue manufacturing this product.
C. Management has decided to increase the quality control activity to reduce the
manufacture of unacceptable product to an acceptably low level.
D. Management has decided that the test data are unreliable and has decided not to
respond to the audit findings.
Cruz, CPA decided to use nonstatistical sampling to examine the accounts payable
balances of Maverick Inc., Based on his professional judgment, Cruz judgmentally
selected sample invoices from a file, but did so without any intentional bias. The
selection method used by Cruz was
A. haphazard selection.
B. block selection.
C. systematic selection.
D. random selection.
An internal evaluation of the significant judgments made by the audit team and the
conclusions reached in formulating its report for engagements meeting specified criteria
is known as a(n)
A. engagement quality control review.
B. inspection.
C. peer review.
D. performance control evaluation.
Management letters are not a means of
A. reporting recommendations to the client.
B. assisting the client in improving its operations.
C. satisfying professional requirements to communicate matters related to the client’s
internal control.
D. developing rapport with the client.
In which of the following circumstances would the auditor most likely use variables
sampling?
A. Identifying the susceptibility of the account balance to misstatement
B. Evaluating the operating effectiveness of specific control procedures
C. Evaluating the operating design of specific control procedures
D. Determining whether the client’s accounts receivable balance is correctly recorded
To determine whether facts support management’s intent to hold securities to maturity,
an auditor might
A. study the entity’s cash flow forecasts.
B. obtain published market quotations.
C. compare fair value of the securities to cost.
D. confirm that the securities are held by a broker.
Which of the following management assertions for long-term liabilities is related to the
ASB balance assertion of completeness?
A. All material long-term liabilities are recorded.
B. New long-term liabilities and debt extinguishments are properly authorized.
C. Terms, conditions, and restrictions relating to noncurrent debt are adequately
disclosed.
D. Disclosures of maturities for the next five years are accurate and adequate.
Which of the following procedures would auditors most likely perform to obtain
evidence about the occurrence of subsequent events?
A. Confirming a sample of material accounts receivable established after year-end
B. Comparing the financial statements being reported on with those of the prior period
C. Reading minutes of meetings of owners, management, or those charged with
governance held after the date of the financial statements
D. Inquiring as to whether any unusual adjustments were made just before year-end
Which of the following audit procedures is the most effective in testing sales for
understatement?
A. Analyze the aged trial balance of recorded accounts receivable.
B. Confirm recorded accounts receivable.
C. Trace a sample of shipping documents to sales invoices recorded in the sales journal.
D. Vouch a sample of recorded sales from the sales journal to shipping documents.
Which of the following information would not be included in the auditors’ standard
report?
A. The names of the financial statements audited
B. A description of the nature of an audit
C. An indication that all necessary disclosures have been presented
D. An opinion on the entity’s financial statements
In a single audit of federal financial assistance programs, which of the following does
the auditor not need to determine and report for each organization?
A. An expanded scope audit of economy, efficiency, and program results.
B. That the financial statements are presented fairly in accordance with GAAP.
C. That an adequate internal control system is in place.
D. That the laws and regulations have been complied with.
Which of the following is not correct with respect to sample size?
A. In a statistical sampling application, the determination of sample size is used to
control the auditor’s exposure to sampling risk.
B. As the desired level of sampling risk decreases, the necessary sample size decreases.
C. Auditors determine sample size after defining the characteristic of interest and the
population of interest.
D. As the expected misstatement (or expected rate of deviation) increases, the necessary
sample size increases.
Attestation engagements include
A. only examinations.
B. examinations and assurance services.
C. examinations, reviews, and agreed-upon procedures.
D. examinations, reviews, compilations, agreed-upon procedures and assurance
services.
Regardless of the assessed level of control risk, an auditor of a non-public company
would perform some
A. tests of controls to determine the effectiveness of internal control policies.
B. analytical procedures to verify the design of internal control activities.
C. substantive tests to restrict detection risk for significant transaction classes.
D. dual purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk.
Which of the following is not true with respect to the auditors’ report for a public
entity?
A. The report title should contain the word “independent.”
B. The report provides a detailed listing of major auditing procedures performed during
the examination.
C. The opinion assesses the financial statements against an applicable financial
reporting framework.
D. The report specifically identifies the financial statements and years examined by the
auditor.
The SEC Rule 10b-5 deals with
A. fraud in the purchase or sale of securities.
B. penalties for willfully and knowingly violating the Securities Exchange Act of 1934.
C. the use of the “due diligence” defense to avoid liability.
D. integrated disclosure system for annual reports.
Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa works. Julie’s
independence is impaired if
A. Lisa owns 25% of the company.
B. Lisa is the Controller.
C. Lisa is the marketing manager.
D. independence is impaired in all of these situations.
When auditing financial statements and finding indications of a possible
misappropriation of assets, independent auditors should
A. investigate fully to determine the total amount of the misappropriation.
B. determine which accounts are affected and the amount by which they are overstated
or understated.
C. determine the methods by which the misappropriation was carried out.
D. identify a person(s) who are likely responsible for the misappropriation and obtain
evidence about some other fraud indications in their work.
E. all of these.
A small business owner can best offset the lack of separation of duties by
A. creating an internal audit department.
B. installing the latest computer equipment and software.
C. being actively involved in the accounting process.
D. relying on the external auditor to detect errors.
The audit team made a copy of the client’s sales and billing program early in the audit.
Several times during the audit, the audit team used this copy of the program to process
actual client data. The output of the secured program was compared to that of the
client’s system. This audit technique would be considered
A. generalized audit software.
B. parallel Simulation.
C. test data.
D. tagging transactions.
When audited financial statements are presented in a document containing other
information, the auditors should
A. perform inquiry and analytical procedures to ascertain whether the other information
is reasonable.
B. add an emphasis-of-matter paragraph to the auditors’ report without modifying the
opinion on the financial statements.
C. perform the appropriate substantive procedures to corroborate the other information.
D. read the other information to determine that it is consistent with the audited financial
statements.
Which of the following is not a PCAOB assertion about inventory related to
presentation and disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at its cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in
notes.
D. All of these are PCAOB presentation and disclosure assertions about inventory
What course of action should auditors take if, after evaluating management’s plan to
mitigate the effect of factors that suggest going-concern uncertainties, they believe that
substantial doubt about going concern does not exist?
A. Modify their report on the financial statements to describe management’s plan to
mitigate going-concern uncertainties, the procedures performed by the auditors, and
indicate that substantial doubt about going concern does not exist.
B. Prepare a separate report that describes management’s plan to mitigate going-concern
uncertainties, the procedures performed by the auditors, and indicate that substantial
doubt about going concern does not exist.
C. Require financial statement disclosure of management’s plan to mitigate
going-concern uncertainties with no modification to the auditors’ report on the financial
statements or no separate report on going concern.
D. Conclude that substantial doubt about going concern does not exist and not require
financial statement disclosure or modification of the auditors’ report.
A GAO audit report entitled Aviation Safety: Safer Skies Initiative Has Taken Initial
Steps to Reduce Accident Rates by 2007 is most likely a report based on work the
auditors performed during a
A. financial statement audit.
B. compliance audit of air safety regulations.
C. performance audit of program goal achievement.
D. performance audit of air control regulation effectiveness.
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit
team members should discuss the potential for material misstatement due to fraud.
Which of the following best characterizes the mind-set that the audit team should
maintain during this discussion?
A. Presumptive
B. Judgmental
C. Criticizing
D. Questioning
Confirmations provide evidence of _________________________________ and, to a
limited extent, ________________________________ of accounts and notes
receivable.
Below are examples of procedures performed in a sampling plan to estimate the average
height of a student-athlete. Match the sampling process is most closely associated with
the example. Each step is associated with only one example.
1.Measure the sample items. A. Hypothesize the
expected relationship between the height of student-athletes and a
predetermined comparator group.
2.Define the population. B. Identify the sport(s) from
which you wish to select student-athletes.
3.Evaluate the sample results. C. Using a tape measure or
other system, determine the height of the sample of student-
athletes.
4.Determine the objective of sampling. D. Compare the height of
the student-athletes against a predetermined comparator
group.
Indicate how each of the following conditions affect sample size by using the letters I
(increase), D (decrease), or N (no effect). For each condition, hold all other factors
constant.
____ 1. An increase in the expected population deviation rate from 2% to 5%.
____ 2. A decrease in the population from 10,000 controls to 5,000 controls.
____ 3. An increase in the tolerable rate of deviation from 3% to 10%.
____ 4. An increase in the risk of underreliance from 5% to 10%.
____ 5. A decrease in the risk of overreliance from 5% to 1%.
Selecting inventory from locations on the warehouse floor, obtaining a test count, and
tracing the count to the final inventory compilation produces evidence for the
_____________________________ ASB balance assertion.
What are the different types of internal audits?
Define a scope limitation and distinguish between client-imposed and
circumstance-imposed scope limitations. What reporting options are available to
auditors when scope limitations are encountered during the engagement?
What constitutes a material weakness?
Although internal auditors are associated with their employers in the eyes of the public,
they seek ____________________ and ____________________ independence.