The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the
financial statements. Certification means that the company CEO and CFO must sign a
statement indicating
A. they have read the financial statements.
B. they are not aware of any false or misleading statements (or any key omitted
disclosures).
C. they believe that the financial statements present an accurate picture of the
company’s financial condition.
D. All of these.
L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a
sample of inventory items from the perpetual records and vouched additions to
receiving reports. This procedure was intended to satisfy which POCAOB assertion?
A. Rights and obligations.
B. Completeness.
C. Existence or occurrence.
D. Valuation or allocation.
As it relates to audit evidence, appropriateness refers to the
A. originality of evidence gathered.
B. quality of evidence gathered.
C. quantity of evidence gathered.
D. timeliness of evidence gathered.
An auditor is evaluating a client’s internal controls. Which of the following situations
would be the most difficult internal control issue for an auditor to detect?
A. The accounting staff neglects the control, due to increased transactions to be
processed.
B. The technology department writes a program that does not properly implement the
control, due to a lack of understanding.
C. Two employees, who work in different departments, are circumventing an internal
control.
D. Someone erroneously disables edit checks in a software program designed to
identify control exceptions.
In end-user computing environments, the processing control procedures would
ordinarily not include
A. transaction logs.
B. control totals.
C. comparing input to output.
D. online editing and sight verification.
Do the following regarding auditors’ concepts of overall “materiality” considered at the
planning stage (i.e., “planning materiality”).
a. Define or describe independent auditors’ concept of “planning materiality.”
b. Name (but do not describe or explain) three common relationships or considerations
used by auditors when assessing the dollar amount considered to be material.
At the end of each business day, Safe Company sends its bank a listing of all checks
written during the day including the check number, payee, and amount. When a check is
sent to the bank for payment the bank compares the payee and the amount with the
listing provided by Safe Company. This system is called
A. PayChex.
B. Pay-As-You-Go.
C. Positive Pay.
D. Pay Master.
The AICPA Council has designated the following bodies to pronounce accounting
principles under Rule 203, except the
A. Financial Accounting Standards Board.
B. Auditing Procedures Board.
C. Opinions of the Accounting Principles Board.
D. Governmental Accounting Standards Board.
Which of the following is not considered in establishing the sample size in a monetary
unit sampling application?
A. Expected misstatement
B. Population size
C. Risk of incorrect acceptance
D. All of these are considered
If the amount of a check is altered by an employee after it has cleared the bank, the
change can be detected by
A. comparing the amount written on the check face to the amount written in the cash
disbursements journal.
B. comparing the magnetic imprint of the amount paid to the amount written on the
check face.
C. examining the endorsement on the back of the check.
D. comparing the check number on the face of the check to the check number in the
cash disbursements journal.
All of the following are correct regarding variables sampling, except
A. variables sampling is used to examine a population when auditors want to estimate
the amount (or value) of some characteristic of that population.
B. the risk of incorrect rejection is of more concern to auditors than the risk of incorrect
acceptance.
C. auditors can use either statistical or nonstatistical sampling approaches to variables
sampling.
D. to determine if an account balance is fairly stated, auditors compare the adjusted
sample estimate of the misstatement to the tolerable misstatement.
When a previously expressed opinion is updated from qualified to unmodified, the
auditors’ report on comparative financial statements should
A. not modify the previously expressed opinion or refer to factors affecting the opinion
on the prior-years’ financial statements.
B. update the opinion expressed on the prior-years’ financial statements but provide no
explanation for the updated opinion.
C. not modify the previously expressed opinion but include a reference to the footnote
describing the factors affecting the opinion on the prior-years’ financial statements.
D. update the previously expressed opinion and explain the reasons for the change,
including a reference to the footnote describing the change.
The upper limit on misstatement is
A. an adjustment of the sample estimate of misstatement to reflect the desired level of
sampling risk.
B. an adjustment of the sample deviation rate to reflect the desired level of sampling
risk.
C. the maximum rate of deviation that could exist before auditors would reduce the
reliance on an internal control.
D. the maximum misstatement that could exist before auditors would conclude that the
account balance is not fairly stated.
Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
A. Depreciation expense.
B. Gain on disposal of equipment.
C. Accounts payable.
D. Repairs and maintenance expense.
Which of the following statements is not included in the Auditor’s Responsibility
section of the standard (unmodified) report?
A. “In accordance with accounting principles generally accepted in the United States of
America.”
B. “We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.”
C. “An audit also includes evaluating the appropriateness of accounting policies used”
D. “Those standards require that we plan and perform the audit to obtain reasonable
assurance”
Management has instated a new grievance process. When an employee has a grievance
a manager, in another department is assigned as an independent mediator to evaluate the
employee’s complaint. That manager must submit a written report to the Vice President
of Human Resources, who must act on the report and discuss the resolution with the
employee, the employee’s manager, and any other relevant personnel.
Management acknowledges that this process will mean that an employee will be paid
for several hours of work during the grievance process and several managers will spend
time in the process. However, this process will likely reduce employee turnover.
This process has been in place for 18 months. Management wants to know what the
costs are for the grievance process and if the new process is achieving the stated
objective of reducing employee turnover. What type of audit would internal perform?
A. Operational audit.
B. Governance audit.
C. Compliance audit.
D. Performance audit.
The work of internal auditors may affect the independent auditor’s
A. procedures performed in obtaining an understanding of the internal control structure
and in assessing the risk of material misstatement only.
B. procedures performed in obtaining an understanding of the internal control structure
and substantive tests performed in gathering direct evidence only.
C. procedures performed in assessing the risk of material misstatement and substantive
tests performed in gathering direct evidence only.
D. procedures performed in obtaining an understanding of the internal control structure
and in assessing the risk of material misstatement and substantive tests performed in
gathering direct evidence.
According to auditing standards, external auditors’ responsibilities for indirect
noncompliance do not include
A. designing audit procedures to detect noncompliance in the absence of specific
information brought to the auditors’ attention.
B. performing audit procedures when specific information indicates that possible
noncompliance may have a material indirect effect on financial statements.
C. considering the qualitative materiality of known and suspected noncompliance.
D. obtaining written management representations concerning the absence of violations
of laws and regulations.
Subsequent events occur between the ____ and the ____.
A. date of the financial statements; date of the auditors’ report
B. date of the auditors’ report; audit report release date
C. date of the financial statements; audit report release date
D. audit report release date; beginning of subsequent year’s audit
Which of the following would not ordinarily be considered when using analytical
procedures to verify the overall reasonableness of revenue and expense accounts?
A. Current-year recorded (unaudited) balances
B. Expected balances using a statistical analysis or relationships among accounts
C. Internal budgets and reports
D. Prior-year balances
Auditors use attributes sampling in assessing the effectiveness of a client’s internal
controls to determine
A. the extent to which internal controls are operating as intended to prevent or detect
misstatements.
B. the degree of inherent risk associated with various account balances or classes of
transactions.
C. the degree of risk present in the client’s business environment.
D. the accuracy of the client’s account balances or classes of transactions.
Which of the following would most likely be a weakness in the internal control of a
client that utilizes portable computing devices rather than a larger computer system?
A. Employee collusion possibilities are increased because portable computing devices
from one vendor can process the programs of a system from different vendors.
B. Computer operators may be able to remove hardware and software components and
modify them at an off-site location.
C. Programming errors result in all similar transactions being processed incorrectly
because those transactions are processed under the same conditions.
D. Certain transactions may be automatically initiated by the computerized processing
system and management’s authorization of these transactions may be implicit in its
acceptance of the system design.
An audit team would most likely examine the detail support for which of the following
charges?
A. Payroll expense.
B. Cost of goods sold.
C. Supplies expense.
D. Legal expense.
What type of evidence would provide the highest level of assurance in an attestation
engagement?
A. Evidence secured solely from within the entity
B. Evidence obtained from independent sources
C. Evidence obtained indirectly
D. Evidence obtained from multiple internal inquiries
Under the liability provisions of section 11 of the Securities Act of 1933, auditors may
be liable to any purchaser of securities for certifying materially misstated financial
statements that are included in the registration statement. Under section 11, which of the
following must be proven by a purchaser of the security?
A. Reliance on financial statements: Yes; Fraud by auditors: Yes
B. Reliance on financial statements: Yes; Fraud by auditors: No
C. Reliance on financial statements: No; Fraud by auditors: Yes
D. Reliance on financial statements: No; Fraud by auditors: No
What are some of the problems in establishing an internal control system in small
business?
The maximum rate of deviation that may exist in the operation of a control policy or
procedure before the auditors would reduce reliance on internal control is referred to as
A. acceptable rate of deviation.
B. control risk.
C. tolerable rate of deviation.
D. upper limit rate of deviation.
For each of the sentences or phrases below, indicate, by letter, in which section of the
standard (unmodified) report on the entity’s financial statements the sentence or phrase
would appear.
A. Introductory paragraph
B. Management’s Responsibility section
C. Auditor’s Responsibility section
D. Opinion paragraph
___ 1. Our responsibility is to express an opinion on these financial statements based on
our audits.
___ 2. The financial statements referred to above present fairly, in all material respects,
the financial position of
___ 3. We have audited the accompanying financial statements of
___ 4. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
___ 5. Management is responsible for the preparation and fair presentation of these
financial statements
Which of the following situations is true with respect to sampling?
A. Sampling results in a tradeoff of efficiency for greater effectiveness.
B. Sampling is most useful when the need for exact information is very important.
C. A well-designed sample can appropriately limit the exposure to nonsampling risk.
D. Sampling is more appropriate when the number of items comprising the population
is relatively large.
To determine the appropriate sample size for an attributes sampling application,
Williams, CPA, defined the population to be 25,000 sales invoices. Williams then
assessed the risk of overreliance to be 10%, the tolerable rate of deviation to be 4%, and
the expected population deviation rate to be 2.5%. Using the AICPA Sample Size tables,
the appropriate sample size would be
A. 9.
B. 13.
C. 353.
D. 513.
In a classical variables sampling application, the auditor determines there is a 95
percent probability that the true (but unknown) value of an entity’s accounts receivable
is between $45,000 and $55,000. If the estimated population value is $50,000, the
precision is
A. $10,000.
B. $5,000.
C. 95%.
D. 5%.
Investment accounting may be on the _____________________________ method,
_____________________________ method, or _____________________________
method.
Below are descriptions of components of the upper limit on misstatements. Match each
description of a situation with the related term. Each component is associated with only
one description.
1. Determined by taking the difference between the recorded value and the audited
value.
2. Determined by multiplying the sampling interval by the tainting percentage.
3. Provides an estimate of the amount of misstatement that may exist in sampling
intervals in which no misstatements were observed.
4. Determined by multiplying the projected misstatement by the incremental change in
the confidence factor minus one.
A. Actual misstatement.
B. Projected misstatement.
C. Incremental allowance for sampling risk.
D. Basic allowance for sampling risk.
What is dual direction testing?
Big Ben’s Toy (BBT) Company has recently outsourced its payroll operation to Mary’s
Payroll Service (MPS). MPS receives the changes to the payroll data base (hirings,
firings, rate increases, etc.) and the number of hours worked for all hourly employees.
MPS calculates the payroll and sends BBT printed payroll checks, a payroll register,
and a list of payments to be made to third parties (IRS, insurance, pension plan, etc.).
BBT transfers an appropriate amount into its payroll bank account and distributes the
checks. Accounts payable uses the list of third-party payments to make appropriate
payments.
You have been hired to perform an audit of BBT Company. During your opening
meeting with BBT management you state that your audit plan includes inquiries of
Mary’s Payroll Service and a review of the AT 801 report on internal controls at MPS.
BBT’s management is confused and states that BBT should not have to pay you to
review controls at another organization.
Prepare a brief explanation to BBT’s management as to why it is necessary to review
the controls at MPS and the importance of this review to BBT Company.
_______________________________ is responsible for making estimates and should
have a _____________________________ and _____________________________
designed to reduce the likelihood of material misstatements in them.
The ASB balance assertion of _____________________________ is paramount in the
verification of long-term liabilities and determination that all liabilities are recorded.
What are “off-balance-sheet” financing transactions? Explain and provide two or more
examples.
A ___________________________ approved by the board of directors constitutes the
authorization for capital asset acquisitions and investments.
___________________________ may be used to access computerized receivable files
to select and print confirmations.
Explain why auditors must put more emphasis on the completeness and obligation
assertion when auditing payables and contrast this with the audit of asset accounts.
Vendor invoices should be compared to _______________________________ and
________________________________ to determine that the vendor is charging the
approved price and for quantity received.
