When financial statements contain a departure from GAAP, the auditors should explain
the unusual circumstances in a separate paragraph and express an opinion that is
A. unmodified.
B. qualified.
C. adverse.
D. qualified or adverse, depending on the overall materiality and pervasiveness of the
GAAP departure.
Why is it important that the organization establish systems development and
documentation standards?
A. These standards enable the organization to understand the programming logic
underlying recently-developed programs.
B. These standards ensure that the program controls and documentation included in
recently-developed programs is adequate.
C. The absence of these standards would constitute a material weakness in internal
control.
D. These standards ensure the appropriate separation of duties of computer personnel.
In performing variables sampling, the auditor will conclude that the account balance is
not materially misstated if the ____ is less than or equal to ____.
A. upper limit on misstatement; tolerable misstatement
B. expected error; tolerable misstatement
C. tolerable misstatement; upper limit on misstatement
D. tolerable misstatement; expected error
Which of the following situations would not result in auditors adding an additional
paragraph to their report without modifying the introductory, scope, or opinion
paragraphs of that report?
A. Reference to a change in the method of accounting mandated by the issuance of a
new accounting standard.
B. Reference to a going-concern uncertainty facing the entity.
C. Reference to a departure from GAAP that is material, but not pervasive, to the
financial statements.
D. Reference to an acquisition made by the entity during the most recent fiscal year.
Which of the following statements is a standard applicable to financial statement audits
in accordance with government auditing standards?
A. Assess whether the entity has reportable measures of economy and efficiency that
are valid and reliable.
B. Report on the scope of the auditor’s testing of internal controls.
C. Briefly describe in the auditor’s report the method of statistical sampling used in
performing tests of controls and substantive tests.
D. Determine the extent to which the entity’s programs achieve the desired level of
results.
Which of the following is the most effective method of identifying potential earnings
management attempts?
A. Analytical procedures
B. Detailed substantive procedures
C. Inquiry of client management and key financial personnel
D. Scanning accounts for unusual items
In performing attributes sampling, the auditor will conclude that the control is
functioning as intended if the ______ is less than or equal to ______.
A. expected population deviation rate; tolerable rate of deviation
B. upper limit rate of deviation; tolerable rate of deviation
C. tolerable rate of deviation; expected population deviation rate
D. tolerable rate of deviation; upper limit rate of deviation
If not already performed during the overall review stage of the audit, the auditor should
perform analytical procedures relating to which of the following transaction cycles?
A. Payroll
B. Revenue
C. Purchasing
D. Inventory
An auditor concludes that there is substantial doubt about an entity’s ability to continue
as a going concern for a reasonable period of time. The entity’s financial statements
adequately disclose its financial difficulties. Under these circumstances, the auditor’s
report is required to include an emphasis-of-matter paragraph that specifically uses the
following phrase(s).
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following is not considered one of the three factors increasing the
probability of fraud?
A. Motive
B. Lack of training
C. Opportunity
D. Rationalization
An auditor selected a product recorded in the finished goods perpetual inventory
subsidiary account. The auditor went to the warehouse and counted the product and
compared this amount with the amount in the finished goods perpetual inventory
subsidiary account. Which ASB balance assertion is the auditor most likely testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation
Which of the following statements is correct regarding nonstatistical sampling?
A. Nonstatistical sampling must use random selection techniques.
B. The sample size when using nonstatistical sampling methods is generally not
comparable to that determined using statistical sampling methods.
C. Nonstatistical sampling does not use a formal process to mathematically estimate the
allowance for sampling risk.
D. When using nonstatistical sampling, the audit team is not required to select a sample
that is representative of the population.
Which of the following is the least likely outcome when the upper limit on
misstatement 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 is an Information Technology General Control?
A. Check digit
B. Run-to-run totals
C. Distribution of computerized output
D. Separation of duties in the IT department
Selecting a sample of paid notes and tracing interest to the general ledger account is a
test of the PCAOB assertion for
A. accounting.
B. valuation or allocation.
C. completeness.
D. existence or occurrence.
The typical functions of the production and conversion includes
A. cash payments for raw materials purchased.
B. inventory planning and control.
C. purchase requisitioning and purchase ordering for inventory.
D. receiving of inventory shipments from vendors.
In the planning stage, analytical procedures are used to
A. identify potential problem areas.
B. provide direct evidence about the balances in accounts.
C. determine the mathematical correctness of the financial statements.
D. all of these.
Which of the following would be considered an independence issue for an internal
auditor?
A. The company decreased every department’s budget, including internal audit, by 5%.
B. The auditors participated in the employee stock plan and, therefore, owned stock in
the company.
C. The CAE reports directly to the audit committee.
D. The controller had authority to change the audit schedule before being sent to
management and the audit committee.
The process of subdividing a population into more homogeneous subgroups is known
as
A. classification.
B. identification.
C. sampling.
D. stratification.
An audit team’s approach to evaluating computerized processing systems that compares
source documents to the computer output is known as auditing
A. around the computer.
B. through the computer.
C. without the computer.
D. with the computer.
For each situation (1-5), identify the most applicable AICPA rule of conduct and
whether there is a violation or no violation of the rule (A-F). One or more letters may
not be used.
A. Rule 101: Independence; no violation
B. Rule 101: Independence; violation
C. Rule 301: Confidential Client Information; no violation
D. Rule 301: Confidential Client Information; violation
E. Rule 302: Contingent Fees; no violation
F. Rule 302: Contingent Fees; violation
___ 1. Jackson, CPA, and one of his audit clients are considering investing in a business
together. Jackson would own 25% of the business and the client would own 50%.
Jackson’s investment in the business is material to his net worth.
___ 2. Feller, CPA, is the corporate controller for Robert Corporation. Feller believes
his employer may have committed an illegal act. After discussing the matter with his
attorney, Feller decides to disclose the matter to the appropriate authorities.
___ 3. Brock, CPA, is an owner in the firm Louis and Brock, CPAs. Brock’s husband is
on the board of directors of Midland Corporation, an audit client of Louis and Brock.
Brock does not participate on the audit engagement.
___ 4. Ruth, CPA, owns a building and leases a portion of the space to an audit client.
The income from the lease is not material to Ruth.
___ 5. Maris, CPA, performs investment advisory services for an audit client and
receives an annual fee based on a percentage of the value of the client’s investment
portfolio at the end of each year.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the
voucher register. This is a test for
A. occurrence.
B. completeness.
C. classification.
D. cutoff.
For which of the following audit tests would an auditor most likely use attributes
sampling?
A. Inspecting purchase orders for proper approval by supervisors
B. Making an independent estimate of recorded payroll expense
C. Determining that all payables are recorded at year end
D. Selecting accounts receivable for confirmation of account balances
What is one of the primary benefits of stratifying a population?
A. Stratifying the population allows different types of audit procedures to be performed
on larger and smaller transactions or components.
B. Stratifying the population allows the auditor to have a higher likelihood of reaching a
favorable conclusion with respect to the client’s financial statements.
C. Stratifying the population allows the auditor to reduce the necessary sample size.
D. Stratifying the population reduces the auditor’s exposure to nonsampling risk.
To satisfy the valuation assertion when auditing an investment in another company that
is publicly and actively traded, an auditor most likely would seek to
A. inspect the stock certificates evidencing the investment.
B. examine the audited financial statements of the investee company.
C. review the broker’s advice or canceled check for the investment’s acquisition.
D. obtain market quotations from The Wall Street Journal or another independent
source.
For each of the items below, indicate through the appropriate letter the fundamental
principle to which the item is most closely related.
A. Responsibilities principle
B. Performance principle
C. Reporting principle
___ 1. Maintaining professional skepticism.
___ 2. An auditors’ overall conclusion of the fairness of the client’s financial statements.
___ 3. The use of an audit plan to identify audit procedures to be performed during the
engagement.
___ 4. Auditors’ assessment of the risk of material misstatement.
___ 5. Accounting firm policies with respect to the level of expected continuing
professional education.
___ 6. Expressing an opinion in accordance with the auditor’s findings.
___ 7. Proper supervision of assistants on the audit.
___ 8. Auditors’ requests to obtain bank statements directly from financial institutions
with whom the client does business.
___ 9. An indication that an opinion cannot be expressed.
___ 10. Determining and applying an appropriate materiality level.
As part of understanding the internal control, an auditor is not required to
A. consider factors that affect the risk of material misstatement.
B. ascertain whether internal control policies and activities have been placed in
operation.
C. identify the types of potential misstatements that can occur.
D. obtain knowledge about the operating effectiveness of the client’s internal control
activities.
Which of the following substantive procedures would not ordinarily be used by auditors
in evaluating the potential existence of subsequent events?
A. Reviewing the latest interim financial statements
B. Performing cut-off testing near year end
C. Inquiring of officers and other client executives
D. Obtaining written representations
Which of the following is found by dividing the amount of misstatement noted in a
logical unit by the recorded amount of that logical unit?
A. Sample size
B. Sampling interval
C. Projected misstatement
D. Tainting percentage
Cash disbursements are authorized by
A. purchase orders.
B. invoices.
C. receiving reports.
D. a complete voucher package.
In determining whether transactions have been recorded, the direction of the audit
testing should start from the
A. general ledger balances.
B. adjusted trial balance.
C. original source documents.
D. general journal entries.
Under the anti-fraud provisions of section 10(b) of the Securities Exchange Act of
1934, auditors may be liable if they acted
A. with ordinary negligence.
B. with independence.
C. without due diligence.
D. without good faith.
For each of the following situations related to determining the average weight of a
National Football League player, indicate how the appropriate sample size would
change by using the letter I (increase), D (decrease), or N (no change). Assume that all
other factors are held constant.
___ 1. The desired level of precision changes from 20 pounds to 10 pounds.
___ 2. The sampling risk increases from 5 percent to 10 percent.
___ 3. The number of football players in the population increases from 1,400 to 1,600.
___ 4. You initially want to estimate the weight for offensive linemen only but decide to
in include quarterbacks, running banks, and placekickers.
___ 5. Your initial sample estimate changes from 250 pounds to 230 pounds.
Few fraud auditors believe in the concept of an “immaterial fraud” because
________________________ and ________________________________________.
The test of controls for payroll includes the following audit procedures. Next to each of
the procedures, indicate the related management assertion about transactions.
A _____________________________ is a financial institution appointed to record the
issuance and ownership of company securities.
Materials requisitions should be compared in the
__________________________________ department with the
______________________________________ on the production order.
Sleek Corporation is a public corporation whose stock is traded on a national securities
exchange. Sleek hired Garson Associates, CPAs, to audit Sleek’s financial statements.
Sleek needed the audit to obtain bank loans and to make a public stock offering so that
Sleek could undertake a business expansion program.
Before the engagement, Fred Hedge, Sleek’s president, told Garson’s managing partner
that the audited financial statements would be submitted to Sleek’s banks to obtain the
necessary loans.
During the course of the audit, Garson’s managing partner found that Hedge and other
Sleek officers had embezzled substantial amounts of money from the corporation.
These embezzlements threatened Sleek’s financial stability. When these findings were
brought to Hedge’s attention, Hedge promised that the money would be repaid and
begged Garson not to disclose the embezzlements.
Hedge also told Garson’s managing partner that several friends and relatives of Sleek’s
officers had been advised about the projected business expansion and proposed stock
offering, and had purchased significant amounts of Sleek’s stock based on this
information.
Garson submitted an unqualified opinion on Sleek’s financial statements, which did not
include adjustments for or disclosures of the embezzlements and insider stock
transactions. The financial statements and auditors’ opinion were submitted to the banks
Sleek normally does business with, including Knox Bank. Knox, relying on the
financial statements and the auditors’ report, loaned Sleek $2,000,000.
Sleek’s audited financial statements were also included in a registration statement
prepared under the provisions of the Securities Act of 1933. The registration statement
was filed with the SEC in conjunction with Sleek’s public offering of 100,000 shares of
its common stock at $100 per share.
An SEC investigation of Sleek disclosed the embezzlements and the insider trading.
Trading in Sleek’s stock was suspended and Sleek defaulted on the Knox loan. As a
result, the following legal actions were taken:
– Knox Bank sued Garson.
– The purchasers of Sleek’s stock offering sued Garson.
a. Would Knox recover from Garson for fraud?
b. Would the purchasers of Sleek’s stock offering recover from Garson
1. Under the liability provisions of section 11 of the Securities Act of 1933?
2. Under the antifraud provisions of section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934?
_________________________________ of accounts receivable records implies the
power to alter them directly or enter transactions to alter them.
A _________________________ handles the exchange of shares, canceling the shares
surrendered by sellers and issuing new certificates to buyers.
Assessment of _____________________________ of
__________________________________ is important because it governs the nature,
timing, and extent of substantive procedures that will be applied in the audit of account
balances in the acquisition cycle.
Public accounting firms have consistently looked for additional services that might
increase the profitability of the public accounting firm. To that end, CPAs can provide
value to clients with assurance services.
A. Describe two of the services identified by the AICPA.
B. Why would the public prefer to have a public accounting firm as a provider of these
services?
C. What are the possible negative consequences for public accounting firms if they
provide services outside the realm of traditional accounting services?
A personnel file should establish the reality of a person’s _______________________
and ____________________________.