Misstatements detected during the audit that were initially deemed to be immaterial
need not be summarized to determine their aggregate effects.
Commissions and referral fees are allowed to audit firms as long as the audit client is
informed of the fees.
Customer checks received at the client company should be restrictively endorsed within
one week of receipt in the mail.
The most efficient method of testing a large population is the use of non-statistical
sampling.
In addition to risk factors, an important consideration in client continuance decisions
involves the audit firm’s growth strategy.
When a public accounting firm issues a report on financial statements that are issued on
an other comprehensive basis of accounting, this special report includes an opinion
paragraph identical to an adverse opinion.
Auditing standards recognize that there are inherent limitations in an auditor’s ability to
detect material misstatements relating to the entity’s compliance with laws and
regulations.
The shipping department confirms the shipment of goods by completing the packing
slip and returning it to the purchasing department.
After the auditor completes the current audit, an issue of importance for subsequent
year audits is mandatory partner rotation.
For a change in accounting principles that management does not justify to the auditor,
the auditor will likely choose between a qualified and an adverse opinion.
All audit procedures must be completed before year end.
The auditor will issue an unqualified opinion on ICFR if the auditor has identified only
one material weakness in ICFR.
If the auditor has no reservations about management’s financial statements then the
auditor will issue a qualified opinion.
The signing officers for the certifications under the Sarbanes-Oxley Act are typically
the controller and the treasurer of the company.
The auditor compares the total likely misstatements to each significant segment of the
financial statements, such as total current assets, total noncurrent assets, total current
liabilities, total noncurrent liabilities, owners’ equity, and pretax income, to determine if
they are, in aggregate, material to the financial statements.
By performing a final analytical review, the audit firm will identify any unusual,
unexpected, or unexplained relationships that should be resolved before the issuance of
the audit report.
An audit of Level 1 assets is likely to be less challenging than an audit of Level 3
assets.
Auditors may consider only quantitative effects and not qualitative effects in making
materiality judgments.
Fraud is an intentional act involving the use of deception that results in a material
misstatement of the financial statements.
The client will not allow Collier and Company, CPAs to read the minutes of the board
of director’s meetings that occurred during the year under audit. Such a limitation will
usually result in the auditor issuing a disclaimer.
The auditor must define the population to which sampling relates if the auditor is to use
statistical sampling for substantive tests of account balances.
The lower of cost or market assumption is not important to valuation of inventory.
Trend analysis deals with the relationship between two or more accounts.
An audit must be performed by persons who can make sound judgments relating to
complex accounting issues.
The expectations gap represents a misunderstanding whereby shareholders mistakenly
believe that they are entitled to recover losses on investments for which the auditor
provided an unqualified opinion on the financial statements.
The audit team should develop its own ideas about how fraud may be performed by the
client and then covered up.
Heightened risk of material misstatement causes the auditor to perform audit procedures
closer to year end.
The process of understanding the client includes the preparation of the audit program.
A company’s internal auditing function should not be considered when assessing the
effectiveness of internal controls.
Management may intentionally misstate inventory balances by overvaluing items that
are obsolete.
Assume that an auditor notes a large series of checks that does not clear the bank for an
unusually long time after period end. Which of the following would the auditor likely
suspect from this observation?
A.Vendors are eager to get their payments.
B.The reconciliation is accurate.
C.Cash does not exist.
D.The presence of held-checks at period-end.
Which of the following is a procedure used in an audit where there is a heightened risk
of fraud related to accounts payable and other related expense accounts?
A.Send blank confirmations to vendors that ask them information about all outstanding
invoices, payment terms, payment histories, and so forth.
B.Scan journals for unusual or large year-end transactions and adjustments.
C.Obtain and examine documentation for payments of invoices that are for amounts just
under the limit that typically requires some level of approval.
D.All the above.
Vouching of transactions deals with which of the following?
A.Testing forward.
B.Testing backward.
C.Testing at a point in time.
D.Directional testing either forward or backward.
Investments in securities are classified as which of the following?
A.Held-to-maturity.
B.Trading securities.
C.Available-for-sale securities.
D.All of the above.
If a member owns several shares of stock of a company during the first few months of
the fiscal year under audit and then sells the shares before accepting the engagement,
the firm does not violate the independence rules of the AICPA.
Qualified opinions can only be issued by auditors for which of the following?
A.Violations of GAAP.
B.Scope limitations.
C.Going concern.
D.Lack of independence.
E.Either A and B.
External documentation may lack reliability. Which of the following is the most
probable reason for that?
A.The external party may be competent in performing duties.
B.The documentation may be properly understood by the client in the response.
C.The auditor may decide not to use the documentation and replace it with other
documents.
D.The documentation may have been altered if the process is not controlled from
inception.
Which assertion related to investments is tested when the auditor examines the
documents for any restrictions?
A.Existence.
B.Rights.
C.Completeness.
D.Valuation.
What is the primary reason for management’s ability to easily overvalue inventory
without rapid detection by auditors?
A.The limited volume of transactions in the inventory accounts.
B.The auditor’s assessment of inventory as a low-risk area.
C.Complexity in the valuation of inventory.
D.Consideration by the auditor of non-financial indicators of inventory fraud.
In the FASB hierarchy of inputs to consider for assessing fair value, which is associated
with Level 1?
A.Observable information on similar items.
B.Nonexistence of active markets.
C.Quoted prices on identical items.
D.Relevant economic and industry factors.
An audit firm is considered independent even if it performs which of the following
services for a publicly traded audit client?
A.Serving as a member of the client’s board of directors.
B.Determining which accounting policies will be adopted by the client.
C.Accounting information system design and implementation.
D.Tax return preparation as approved by the board of directors.
Which of the following terms best describes the numerical depiction of the relationship
between control risk, inherent risk, detection risk, and audit risk?
A.Audit risk model.
B.Risk of misstatement model.
C.Significance model.
D.Materiality equation.
Which of the following employment positions could an auditor’s spouse hold in a client
without violating the independence requirements?
A.Controller.
B.Treasurer.
C.Order entry staff.
D.Internal audit director.
In testing the reasonableness of an account balance, if MUS sampling cannot be used
because of its limitations, what is an alternative statistical method?
A.Attribute sampling.
B.Classical variables sampling.
C.Discovery sampling.
D.All of the above.
Which of the following is required by accounting standards for the presentation and
disclosure of investments in marketable securities?
A.By classification as trading, available-for-sale or held-to maturity.
B.For an analyst’s determination of liquidity.
C.For the company’s physical possession of the security versus agent holdings.
D.For the expected success of the organization of investment.
Which of the following factors is not relevant when assessing identified internal control
deficiencies?
A.Weaknesses in the control environment.
B.The absence of a material misstatement in the financial statements.
C.Volume of transactions affected by the deficiency.
D.Effectiveness of oversight/governance.
About what should an auditor assure audit committees have an accurate understanding?
A.Any meaningful threats to auditor objectivity.
B.The scope of the audit.
C.The qualitative aspects of the entity’s accounting and reporting and potential ways of
improving financial reporting.
D.All of the above.
Which of the following types of evidence is an auditor most likely to consider in
determining whether internal controls are operating as designed?
A.A letter from management corroborating inventory pricing.
B.Questionnaires completed by employees in the receiving department concerning
their duties and responsibilities.
C.Attorneys’ responses to the auditor’s inquiries.
D.Direct confirmations of receivables verifying account balances.
Which of the following activity is not part of the compilation of prospective financial
statements?
A.Assembling prospective financial statements based on the responsible party’s
assumptions.
B.Performing compilation procedures, including reading the prospective financial
statements, along with their assumptions and accounting policies, and considering
whether they appear to be presented in conformity with AICPA presentation guidelines
and that they are not obviously inappropriate.
C.Issuing a compilation report.
D.Providing assurance on the prospective financial statements.
Which of the following frauds is most common?
A.Chief financial officer misappropriation of funds.
B.Misapplication of revenue recognition principles.
C.Management’s theft of cash held in reserve accounts.
D.Over-recording expenses related to stock options.
Which of the following statement is false regarding analytical procedures that help
auditors assess the overall final presentation of the financial statements?
A.By performing a final analytical review, the audit firm will identify any unusual,
unexpected, or unexplained relationships that should be resolved before the issuance of
the audit report.
B.A basic five step process for using analytical procedures applies.
C.Analytical procedures provide evidence on whether certain relationships make sense
in light of the knowledge obtained during the audit.
D.Auditing standards require the use of analytical procedures in the final review phase
of the audit to assist in identifying ending account relationships that are unusual.
An auditor’s examination of the sales account using a cut-off test would most likely
detect which of the following?
A.Kiting.
B.Sales that should be deferred.
C.Lapping of accounts receivable.
D.Sales recorded in the wrong period.
A company must do which of the following, if a company maintains a compensating
balance of cash?
A.Disclose the compensating account arrangement in financial statements.
B.Close out the balance prior to year-end.
C.Tie balances to debt covenants.
D.Provide a lockbox for appropriate line-of-credit draws.
Which of the following approaches can be used to introduce unpredictability into the
audit?
A.Assessing high risk accounts.
B.Performing procedures on an unannounced basis.
C.Performing the audit in the same location each year.
D.Selecting items that would normally be tested.
When determining sampling size in attribute sampling, which of the following is
usually true?
A.Sampling risk will be too high.
B.Tolerable failure rate is predetermined.
C.A failure rate is not to be expected.
D.Population size is not a major factor.
What document is prepared so that auditors can aggregate potential misstatements in
order to assess the materiality of misstatements?
A.The audit opinion.
B.The summary of unadjusted audit differences.
C.The summary of earnings trends.
D.The post-closing trial balance.
When are publicly owned companies required to file a Form 10Q with the SEC?
A.Within 10 to 15 days (depending on the company size) after the end of each of the
first three quarters of the fiscal year
B.Within 30 to 45 days (depending on the company size) after the end of each of the
first three quarters of the fiscal year
C.Within 40 to 45 days (depending on the company size) after the end of each of the
first three quarters of the fiscal year
D.Within 45 to 60 days (depending on the company size) after the end of each of the
first three quarters of the fiscal year
Which of the following is not considered when obtaining audit evidence through
sampling?
A.The effectiveness of control procedures.
B.The efficiency of control procedures.
C.The dollar accuracy of account balances.
D.The dollar accuracy of classes of transactions.
While auditors may use either statistical or non-statistical sampling, some auditors
restrict the use of non-statistical sampling for what reason?
A.It is less effective.
B.It is less objective.
C.It is less efficient.
D.It is less risky.
Which of the following is not true of internal control as defined by COSO?
A.It is narrower than internal control over financial reporting.
B.It is a process that includes all elements of internal control working together.
C.It includes all the people in the organization.
D.It starts at the top of the organization in setting a tone.