The sum of the tolerable exception rate and the estimated population exception rate is
the precision of the initial sample estimate.
Operational audits are often categorized as functional, organizational, or special
assignments.
Subsequent events represent events that occasionally occur after the balance sheet date,
but before the issuance of the financial statements and the auditor’s report, that have an
effect on the financial statements.
Considerable guidance is provided by the AICPA Guide for Prospective Financial
Statements which includes criteria against which an attestation engagement can be
compared.
Paying employees for their services ends the payroll and personnel cycle.
Statements on Standards for Accounting and Review Services (SSARS) are issued by
the SEC.
An analytical procedure to determine a possible misstatement of commission expense is
to compare commission expense to salaries payable.
Favorable results from analytical procedures may reduce the extent to which the auditor
needs to test details of balances.
Required sample size increases as the auditor’s tolerable misstatement for an account
balance or class of transactions decreases.
When there is a lack of consistent application of GAAP due to a new accounting
pronouncement, no explanatory paragraph is required.
A nonaudit engagement in which the accountant undertakes to present, in the form of
financial statements, information that is the representation of management, without
undertaking to express any assurance on the statements is called a review engagement.
In an audit of a nonpublic company, the less control risk there is, the smaller the amount
of planned substantive evidence that is required.
Only tests of details of cash balances are useful when auditors are specifically testing
for fraud.
Information obtained by a CPA from a client is legally privileged in federal court.
Auditors must perform tests of controls separately from substantive tests of
transactions.
Auditors perform preliminary analytical procedures to better understand the client’s
business and to assess client business risk.
An effective procedure to test the occurrence/existence objective for sales is to vouch
sales journal entries to copies of sales orders, shipping documents, and sales invoices.
The results of tests of controls and substantive tests of transactions affect the design of
tests of details of balances.
The audit procedure “Examine canceled check for authorized signature, proper
endorsement, and cancellation by the bank” is used to test the occurrence objective for
cash disbursements.
One of the auditor’s primary objectives when auditing manufacturing equipment is
completeness.
When documenting their understanding of a client’s internal controls, auditors are
required to use narratives.
A narrative should describe the disposition of every document and record in the system.
The scope of the auditor’s report on internal control is limited to obtaining reasonable
assurance that significant weaknesses in internal control are identified.
Internal auditing standards are included in the Blue Book.
When a client has standard cost records, an efficient and useful method of determining
valuation is to review and analyze variances.
An acquisitions transaction file is a computer generated file that includes all
information entered into the system regarding acquisition transactions.
The assessment of control risk is the measure of the auditor’s expectation that internal
controls will prevent material misstatements from occurring or detect and correct them
if they have occurred.
If internal controls are tested and are considered effective, the auditor generally will
increase both substantive tests of transactions and tests of details of balances.
It is typically more difficult to evaluate the materiality of potential misstatements
resulting from a scope limitation than for failure to follow GAAP.
It is virtually impossible to reduce sampling risk to zero.
Substantive tests are procedures designed to test for dollar misstatements that directly
affect the correctness of financial statement balances.
An approved purchase requisition form authorizes shipment of goods to customers.
Confirmations are among the most expensive type of evidence to obtain.
Subsequent discoveries of facts requiring the reissuance of financial statements arise
from events occurring after the date of the auditor’s report.
Determining materiality requires professional judgment.
Total estimated misstatements include known misstatements and projected
misstatements plus a sampling error.
The primary purpose of a compliance audit is to determine whether the financial
statements are prepared in compliance with generally accepted accounting principles.
The embedded audit module approach requires the auditor to insert an audit module in
the client’s application system to to identify specific types of transactions.
Auditing standards define ________ as the magnitude of misstatements that
individually, or when aggregated with other misstatements, could reasonably be
expected to influence the economic decisions of users made on the basis of the financial
statements.
A) fraud
B) inherent risk
C) materiality
D) significant
Each page of the financial statements reviewed for a nonpublic entity should include the
reference
A) “These financial statements are unaudited.”
B) “We express no assurance on these financial statements.”
C) “See independent accountant’s review report.”
D) “See the audit opinion for the review procedures performed.”
The acceptable risk of overreliance
A) is normally assessed at a high level when auditing an accelerated filer public
company.
B) and the extent of tests of controls depends on assessed control risk for accelerated
filer public companies.
C) and the control risk will be assessed as low for audits where there is extensive
reliance on internal controls.
D) does not impact the effectiveness of the audit.
A substantive tests of transactions for acquisitions that would be used to provide
evidence regarding the occurrence assertion would be to
A) compare the classification with the chart of accounts by referring to vendors’
invoices.
B) recompute the clerical accuracy on the vendors’ invoice.
C) review the acquisitions journal for large or unusual amounts.
D) trace from a file of receiving reports to the acquisition journal.
Which of the following statements is most correct with respect to the evaluation of
nonprobabilistic sample results?
A) It is acceptable to make nonprobabilistic evaluations only when probabilistic sample
selection is used.
B) It is acceptable to make nonprobabilistic evaluations only if the auditor cannot
quantify sampling risk.
C) It is never acceptable to evaluate a nonprobabilistic sample using statistical methods.
D) All of the above are correct.
Ethics are
A) needed in the professions, but is not needed for society in general.
B) a set of moral principles or values.
C) not formed by life experiences.
D) always incorporated in laws.
An audit to determine whether an entity is following specific procedures or rules set
down by some higher authority is classified as a(n)
A) audit of financial statements.
B) compliance audit.
C) operational audit.
D) production audit.
Which of the following is likely to be detected as part of the audit of the bank
reconciliation?
A) failure to bill a customer
B) duplicate payment of a vendor invoice
C) cash received by the client after year-end, but included in cash receipts in the current
year
D) an embezzlement of cash by intercepting cash receipts from customers before they
are recorded
Which of the following are major difficulties auditors face when allocating materiality
to balance sheet accounts?
A)
B)
C)
D)
The following situations involve a possible violation of the AICPA’s Code of
Professional Conduct. For each situation, 1/ determine the applicable rule from the
Code, 2/ decide whether or not the Code has been violated, and 3/ briefly explain how
the situation violates (or does not violate) the Code.
a. In 2014, Freeman and Johnson, both CPAs, decided to form a CPA practice. In 2016,
Freeman and Johnson approached Bill Delaney, a physician and medical expert, and
asked him to assist them with their growing medical consulting practice. Delaney
agreed, but only after he was given an ownership interest in the firm. Delaney does not
intend to quit his private medical practice.
Rule: ________ Violation? Yes No
Explanation:
b. Brian DePalie has a successful dentistry practice in Charleston. Brian has
recommended one of his patients to Katie Walton, CPA. To show gratitude for the
referral, Katie has agreed to pay Brian a token gift of $50. Katie discloses the payment
arrangement to her new clients.
Rule: ________ Violation? Yes No
Explanation:
c. The accounting firm of Bayer & Peng, CPAs, is negotiating a fee with a new audit
client. They agree the client will pay $50,000 if Bayer & Peng issues a clean,
unmodified opinion, $40,000 if a qualified opinion is issued, and only $20,000 if an
adverse opinion is issued.
Rule: ________ Violation? Yes No
Explanation:
d. Don Smith, CPA, is a member of the engagement team that performs the audit of
Shaw Corporation. Don’s five-year-old daughter, Precious, received ten shares of Shaw
Corporation’s common stock for her fifth birthday. The stock was a gift from Precious’s
grandmother.
Rule: ________ Violation? Yes No
Explanation:
e. Jennifer Harris, CPA, is a partner in the CPA firm that audits Alltech, Inc., a closely
held corporation. Jennifer’s sister-in-law is the chief financial officer at Alltech, Inc.
Rule: ________ Violation? Yes No
Explanation:
The starting point for the verification of the balance in the general bank account is to
obtain
A) a bank reconciliation from the client.
B) the client’s cash account from the general ledger.
C) a cutoff bank statement directly from the bank.
D) the client’s year-end bank statement.
An auditor is likely to use four types of procedures to support the operating
effectiveness of internal controls. Which of the following would generally not be used?
A) make inquiries of appropriate client personnel
B) examine documents, records, and reports
C) reperform client procedures
D) inspect design documents
Which of the following is most correct regarding the requirements under Section 404 of
the Sarbanes-Oxley Act?
A) The audits of internal control and the financial statements provide reasonable
assurance as to misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute
assurance as to misstatements.
Practitioners who perform preparation, compilation, or review engagements are referred
to in the Statements on Standards for Accounting and Review Services (SSARS)
standards as
A) bookkeepers.
B) accountants.
C) auditors.
D) CPAs.
Which of the following accounts is not associated with the acquisition and payment
cycle?
A) common stock
B) property, plant and equipment
C) accrued property taxes
D) income tax expense
The auditor’s objectives for the sales and cash collections activities when the client is
primarily an e-commerce business as compared to a “brick and mortar” business are
A) unchanged.
B) expanded.
C) mitigated.
D) decreased.
Rodgers CPA believes that the rate of client billing errors is 4% and has established a
tolerable deviation rate of 6%. In auditing client invoices Rodgers should use
A) stratified sampling.
B) classical sampling.
C) proportional sampling.
D) attributes sampling.
As part of their internal control procedures, management needs to have procedures in
place to properly classify financial instruments as trading, available-for-sale, or
held-to-maturity, based on
A) cost.
B) intent.
C) maturity.
D) probable future gain or loss.
If the auditor has obtained a reasonable level of assurance about the fair presentation of
the financial statements through understanding internal control, assessing control risk,
testing controls, and analytical procedures, then the auditor
A) can issue an unqualified opinion.
B) can significantly reduce other substantive tests.
C) can write the engagement letter.
D) needs to perform additional tests of controls so that the assurance level can be
increased.
An examination of part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit?
A) operational audit
B) compliance audit
C) financial statement audit
D) production audit
Under the Ultramares doctrine, ordinary negligence is insufficient for liability to third
parties unless the third party is
A) a primary beneficiary.
B) an injured party.
C) a foreseen user.
D) a bank.
Which of the following is correct regarding supplementary information?
A) The auditor must express an opinion on the supplementary information.
B) When reporting on supplementary information, the auditor uses a different
materiality threshold from that used in forming an opinion on the basic financial
statements.
C) If the auditor’s report on the audited financial statements contains an adverse
opinion, the auditor can still issue an unqualified opinion on the supplementary
information.
D) The auditor can issue a separate report on the supplementary information; it does not
need to be part of the report on the financial statements.
To minimize the opportunity for fraud, unclaimed salary checks should be
A) redeposited.
B) kept in the payroll department.
C) left with the employee’s supervisor.
D) held for the employee in the personnel department.
The most significant audit issue that came as a result of the court decision in the Escott
et al. v. BarChris Construction Corporation case in 1968 was
A) the court’s reaffirmation that the burden of proof was on the plaintiff to prove the
auditor was negligent.
B) the affirmation of an increase in the auditor’s responsibility when performing a
review of events subsequent to the balance sheet date (S-1 review) for registration
statements.
C) the increased auditor responsibility when associated with unaudited financial
statements.
D) the court’s refusal to allow the percentage-of-completion method of accounting for
revenues.
The auditor will issue an unqualified opinion on internal control over financial
reporting when
A) there are no identified material weaknesses as of the end of the fiscal year.
B) there have been no restrictions on the scope of the auditor’s work.
C) both a and b
D) either a or b
Which of the following statements are true for the standard unmodified opinion audit
report of a nonpublic entity?
I. The introductory paragraph states that management is responsible for the preparation
and content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates
made by management.
A) I only
B) II only
C) I and II
D) Neither I nor II
A correct relationship among the auditor, the client, and the external users is
A) management of a public company hires the independent auditor.
B) the audit committee of a private company hires the independent auditor.
C) the client provides capital to the external users.
D) the external users can rely upon the auditor’s report to reduce information risk.
The appropriate audit report date for a standard unmodified opinion audit report for a
nonpublic entity should be
A) the date the financial statements are given to the Board of Directors.
B) the date of the financial statements.
C) the date the auditor completed the auditing procedures in the field.
D) 60 days after the date of the financial statements as required by the SEC.
Handling the receipt of ordered goods is a part of the ________ cycle.
A) purchasing
B) acquisition and payment
C) inventory
D) inventory and warehousing
If the auditor concludes that there are contingent liabilities, he or she must evaluate the
significance of the potential liability and the nature of the disclosure needed in the
financial statements. Which of the following statements is not true?
A) The potential liability is sufficiently well known in some instances to be included in
the financial statements as an actual liability.
B) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
C) A CPA firm often obtains a separate evaluation of the potential liability from its own
legal counsel rather than relying on management or management’s attorneys.
D) The client’s attorneys must remain independent when evaluating the likelihood of
losing the lawsuit.
Which phase(s) of the audit uses inquiries of clients as a type of evidence?
A) plan and design
B) tests of controls and substantive tests of transactions
C) completion of the audit and issuance of the audit report
D) all of the above
Risk assessment procedures are performed by auditors during an audit in order to
A) determine the risk of material misstatement in the financial statements.
B) determine the amount of testing of internal control.
C) determine the extent of testing of details of balances.
D) determine the extent of testing of transactions.
External auditors typically consider internal auditors effective if they meet three
criteria. What are these criteria?
Which of the following is a substantive test of transactions?
A) Review personnel policies.
B) Account for a sequence of payroll checks.
C) Reconcile the disbursements in the payroll journal with the disbursements on the
payroll bank statement.
D) Examine printouts of transactions rejected by the computer as having invalid
employee IDs.
Distinguish between “joint and several liability” and ‘separate and proportionate
liability.”
Your CPA firm has completed the fieldwork for the 2016 audit of Sharp Corporation, a
private company with an October year-end. You were preparing to draft a standard,
unqualified audit report when you discovered that the audit manager on the Sharp
engagement owns 10 shares of Sharp’s common stock. Prepare the appropriate report.