Tracing the payables to the cash disbursements journal can provide the evidence
regarding the valuation of accounts payable.
Forensic accounting is a term used solely to describe work that is performed when
evidence of fraud exists in an organization.
Changes to the payroll master file should be approved by human resources department.
Confirmations yield evidence about existence and the gross valuation of a receivable
balance.
The document that indicates what property plant and equipment the company wants to
purchase in a given year is the cash flow forecast.
When obtaining evidence about accounts receivable, auditors must put emphasis on the
completeness and obligations assertions.
An objective for an audit is to obtain evidence related to management’s financial
statement assertions.
A principle that may reduce or eliminates auditors’ liability to clients is
A. client’s constructive negligence.
B. client’s contributory negligence.
C. auditors’ ordinary negligence.
D. auditors’ gross negligence.
Assume that the audit team established a tolerable rate of deviation of 5%, an expected
population deviation rate of 1%, and desired to control the risk of overreliance to 5%.
What is the appropriate sample size in this situation?
A. 77 items
B. 93 items
C. 132 items
D. 124 items
Ranger, CPA used nonstatistical sampling to examine the accounts receivable balances
of Cowboy Inc., He audited a sample of 150 items and found an audited value of $5,000
less than the recorded value of $25,000. The entire account balance contained 2,000
items and had a total recorded value of $350,000. Using nonstatistical methods and
assuming that Ranger used the ratio of audited value to recorded value to estimate the
account balance, the estimated total account balance is
A. $345,000.
B. $330,000.
C. $295,000.
D. $280,000.
Hamell Corporation is making a presentation to a perspective investor. The presentation
includes a projection showing that the company’s sales will be between $25,000,000
and $27,000,000 within the next three years. Hamell believes the information will be
better received if its CPA provides an attestation report on the projection. The CPA
should insure that proper disclosure is made to indicate that
A. the $27,000,000 estimate is a best case scenario.
B. the range of the projection is appropriate given the circumstances.
C. the range does not indicate a “best” and “worst” case scenario.
D. projections are limited in their information content due to uncontrollable changes in
the business environment.
During a review engagement, which of the following is NOT a required inquiry of
management?
A. The accounting principles and practices used
B. Significant transactions occurring near the end of the reporting period
C. Status of uncorrected misstatements identified in previous engagements
D. The changes made to internal controls during the period under review
To determine whether accounts payable are complete, auditors perform a test to verify
that all merchandise received has been recorded. The population for this test consists of
all
A. vendors’ invoices.
B. purchase orders.
C. receiving reports.
D. canceled checks.
Before the impact of adjusting entries proposed by auditors are included in the client’s
financial statements, the adjustments must be approved by the
A. client’s management.
B. audit manager.
C. engagement partner.
D. engagement quality review partner.
To test the transaction assertion of occurrence in the area of payroll, the auditor most
likely would
A. select a sample of personnel files and trace the pay rate to union contracts or other
rate rights and obligations.
B. select a sample of personnel files and trace the pay rate to payroll department files
used in payroll preparation.
C. select a sample of payroll register entries and recalculate gross pay, deductions, and
net pay.
D. select a sample of payroll register entries and vouch hours worked to clock time
cards.
The control activity “credit sales approved by credit department” is directed toward
which transaction assertion?
A. Occurrence.
B. Completeness.
C. Accuracy.
D. Cutoff.
The auditor decided to test accounts payable by sending open-ended (blank)
confirmations to selected vendors. The auditor’s best approach in selecting the vendor
accounts to confirm is to
A. select vendor accounts with large balances.
B. select vendor accounts at random in order to apply a statistical sampling procedure.
C. select vendor accounts based on the number of purchases from vendors during the
year.
D. select vendor accounts that are past due.
Many individuals are apprehensive about using the Internet to purchase items. This
apprehension mainly arises from users’ concerns about
A. the reliability of computer technology.
B. the time delays in Internet purchases.
C. a lack of security for information transmitted over the Internet.
D. the lack of CPA involvement in Internet company financial information.
Confirmations of accounts receivable provide the most evidence for which of the
following assertions?
A. Existence.
B. Valuation or allocation.
C. Rights and obligations.
D. Completeness.
Assessing control risk at below the maximum level most likely would involve
A. performing more extensive substantive tests with larger sample sizes than originally
planned.
B. reducing inherent risk for most of the assertions relevant to significant account
balances.
C. changing the timing of substantive tests by omitting interim-date testing and
performing the tests at year end.
D. identifying specific internal control activities that are relevant to specific financial
statement assertions.
In an audit of contingent liabilities, which of the following procedures would be least
effective?
A. Examining customer confirmation replies
B. Reviewing a bank confirmation letter
C. Examining invoices for professional services
D. Reading the minutes of the board of directors meetings
R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns
a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to
the retail store on a cash-on-delivery (COD) basis, thereby enabling his relative to buy
at Lake’s wholesale prices. Budd was probably able to accomplish this because of
Lake’s poor internal control over
A. purchase requisitions.
B. cash receipts.
C. perpetual inventory records.
D. purchase orders.
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.
Explain briefly (a) written representations, (b) internal control communications, and (c)
management letters. In your answer, include the general content of the communication,
the parties involved with the communication, the required form of the communication,
and whether the communication is required under generally accepted auditing
standards.
a. Written representations normally take the form of a letter on the client’s letterhead,
addressed to auditors, and signed by a responsible officer of the client. The purpose of
this letter is to impress upon management its responsibility for the financial statements.
The major categories covered by written representations include sections that discuss
(1) the entity’s financial statements, (2) information provided to auditors, and (3)
internal control over financial reporting (for audits of public entities). This
communication is required by generally accepted auditing standards and must be in
writing.
b. An internal control communication is normally made by auditors to the client or
client’s audit committee (those charged with governance). It involves the
communication of deficiencies in the client’s internal control. This communication is
required by generally accepted auditing standards and should be made in writing.
c. The management letter is sent by auditors to the client after the completion of the
audit. The letter can include recommendations for improvement and suggestions for
other possible auditors’ services. Management letters are not required by generally
accepted auditing standards; while they are typically prepared in writing, the related
communication can be made orally.
Explain briefly auditors’ responsibility for subsequently discovered facts existing at the
date of the auditors’ reports.
Which of the following is the least likely outcome when the upper limit on
misstatements exceeds the tolerable misstatement?
A. The auditor would be exposed to the risk of incorrect rejection.
B. The auditor would be exposed to an efficiency loss.
C. The auditor would consider expanding the sample to evaluate additional transactions
or components of the account balance.
D. The auditor would conclude that the account balance is fairly stated.
Which of the following parties is most likely to recover against auditors for losses
resulting from acts of ordinary negligence?
A. Third parties that auditors should have foreseen could rely on the client’s financial
statements
B. The auditors’ client
C. Purchasers and sellers of securities under the Securities Exchange Act of 1934
D. Third parties whose reliance on the client’s financial statements was reasonably
foreseeable
Control activities intended to ensure that transactions are recorded in the right period
are designed to achieve the ASB assertion of
A. occurrence.
B. accuracy.
C. valuation or allocation.
D. cutoff.
Which of the following situations would most likely be in conflict with the
responsibilities principle?
A. Auditors perform the engagement with the performance level expected of prudent
auditors, but not expert auditors.
B. Auditors obtain expertise in their client’s industry as they are conducting the audit
examination.
C. Auditors are directly involved with a client manager in a strategic decision-making
capacity.
D. Auditors fail to document their assessment of control risk following their study of
internal control.
Fraud examiners must be concerned with the integrity of the evidence that they find.
Preserving the evidence is called
A. expert identification.
B. chain of custody.
C. evidence conservation.
D. admissibility of testimony.
Periodic or cycle counts of selected inventory items are made at various times during
the year rather than during a single inventory count at year-end. Which of the following
is necessary if the auditor plans to observe inventories at interim dates?
A. Complete recounts by independent teams are performed.
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production accounting records.
D. Inventory balances are rarely at low levels.
When considering the results of an attributes sampling application, the auditor
compares which of the following two measures?
A. upper limit rate of deviation; sample rate of deviation
B. tolerable rate of deviation; sample rate of deviation
C. expected rate of deviation; upper limit rate of deviation
D. upper limit rate of deviation; tolerable rate of deviation
An auditor most likely would inspect additions to the audit client’s Property, Plant, and
Equipment account to obtain evidence concerning management’s assertions about
A. existence or occurrence.
B. rights and obligations.
C. presentation and disclosure.
D. valuation or allocation.
Inherent risk and control risk differ from detection risk in that inherent risk and control
risk are
A. elements of audit risk whereas detection risk is not.
B. changed at the auditor’s discretion whereas detection risk is not.
C. considered at the individual account-balance level whereas detection risk is not.
D. functions of the client and its environment whereas detection risk is not.
The typical business activity in the financing and investment cycle that requires an
accounting entry is
A. short- and long-term forecast.
B. meeting with investment bankers.
C. proposal to board of directors for investing excess monies.
D. investment of excess funds in temporary or long-term securities.
Which of the following scope limitations would ordinarily be of most concern to the
auditors?
A. The inability to observe inventories because auditors were appointed following the
date of the financial statements
B. Management’s refusal to provide auditors with written representations
C. The inability to obtain confirmation of year-end balances from customers because of
different billing dates
D. The use of the work of component auditors in the audit of group financial statements
The engineering department at Omni Company built a piece of equipment in the
company’s own shop for use in the company’s operations. When looking at the ending
balance for the fixed asset account the auditor examined all work orders, purchased
materials, labor cost reports, and applied overhead that were capitalized as part of the
equipment costs. Which of the following is the ASB balance assertion most closely
related to the auditor’s testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation
Which of the following is a difference between performing an audit and performing a
fraud examination?
A. Auditors are not concerned with the nature of a financial misstatement; fraud
examiners are concerned with the nature of the misstatement.
B. Auditors use analytical procedures, such as trend analysis, to identify risks of
misstatements; fraud examiners are not interested in analytical procedures because they
must identify specific items that prove the occurrence of fraud.
C. Auditors are generally not concerned with small immaterial misstatements; fraud
examiners generally do not believe that any fraud is immaterial.
D. Auditors are concerned only with financial statement errors; fraud examiners are
concerned only with the theft of assets by employees.
Which of the following controls most likely would help ensure that all credit sales
transactions of an entity are recorded?
A. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account
balances.
B. The accounting department supervisor independently reconciles the accounts
receivable subsidiary ledger to the accounts receivable control account monthly.
C. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
D. The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.
Which of the following is a requirement of the Standards for the Professional Practice
of Internal Audit if the Institute of Internal Auditors (IIA) that is not a requirement of an
external auditor performing a financial statement audit?
A. Due care.
B. Internal control evaluation.
C. Reporting to the audit committee.
D. Performing a follow-up on audit findings.
Which of the following would be considered an analytical procedure?
A. Testing purchasing, shipping, and receiving cutoff activities.
B. Comparing inventory balances to recent sales activities.
C. Projecting the deviation rate of a statistical sample to the population.
D. Reconciling physical counts to perpetual records and general ledger balances.
In each of the following situations, indicate whether a fixed (F), sequential (S), or
discovery (D) attributes sampling plan is being used.
____ 1. The audit team has determined the tolerable rate of deviation to be 5%, the risk
of overreliance to be 10%, and the expected population deviation rate to be zero.
____ 2. Based on the risk of overreliance, expected population deviation rate and
tolerable rate of deviation, the audit team examined a sample of 50 items before
determining if additional items should be included in the sample.
____ 3. Using the AICPA Sample Size tables, the audit team determined the appropriate
sample size and selected the sample items. However, the audit team stopped the
examination after a deviation was found.
____ 4. The audit team established the risk of overreliance to be 5%, the tolerable rate
of deviation to be 4%, and the expected population deviation rate to be 3%. Using the
AICPA Sample Size tables, the audit team decided to sample over 1,000 items.
____ 5. The audit team is performing a sampling application to evaluate the operating
effectiveness of an entity’s internal controls. The application used could provide a more
efficient method of examination, but it is important that the audit team evaluate the
sample in the order they were selected.
Prepare an audit plan for inventory pricing and compilation.
A person testifying about findings during litigation support, application of accounting
principles, or application of auditing standards is called a(n)
_________________________________.
Assertions related to account balances are ________________________________,
________________________________, _________________________________
________________________________, _________________________________ and
________________________________.
A ______________________________ is a control feature relied upon when a standard
internal control procedure is not in place.
Wally Wide is the partner on the audit engagement for First National Bank for their
fiscal year-end of January 31, 2011. Wally was recently promoted to partner. Based on
his increase in income, Wally and his family bought a larger home and a new car. First
National Bank had the most competitive mortgage rate and auto loan rates so Wally
obtained both his mortgage loan and car loan from First National. Wally paid 20%
down on the house, received no special rate of interest, and the First National Bank
holds the title to the house. Wally traded in his old car and made and additional down
payment on the car and financed 60% of the price of the car with the bank. Again,
Wally paid the prevailing interest rate and the bank holds the title to the car.
Post, CPA, accepted an engagement to audit the financial statements of General Co., a
new client. General is a publicly held retailing entity that recently replaced its operating
management. In the course of applying audit procedures, Post discovered that General’s
financial statements may be materially misstated due to the existence of fraud.
Describe Post’s responsibilities on the circumstances described above.
Describe Post’s responsibilities for reporting on General’s financial statements and other
communications if Post is precluded from applying necessary procedures in searching
for frauds.
Describe Post’s responsibilities for reporting on General’s financial statements and other
communications if Post concludes that General’s financial statements are materially
affected by frauds. (AICPA adapted)