Which of the following is the best argument against the use of negative accounts
receivable confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients received them.
C. Recipients are likely to feel that, in reality, the confirmation is a subtle request for
payment.
D. The inference drawn from receiving no reply may not be correct.
For publicly-held companies, which of the following is integrated into the audit of
financial statements?
A. Budgetary information audit.
B. The audit of internal controls.
C. Audit of management forecasts.
D. Audit of interim financial statements.
What is the primary reason that Congress passed the Securities Litigation Uniform
Standards Act of 1998?
A. To overturn the Private Securities Litigation Reform Act of 1995.
B. As a result of concerns that plaintiff attorneys could get around the Private Securities
Litigation Reform Act of 1995 by filing class action lawsuits involving nationally
traded securities in state courts.
C. To provide for joint and several liability rather than proportionate liability.
D. To ensure that all publicly-held companies receive similar audits.
When audited financial statements are presented in an entity’s document containing
other information, the auditor should
A. perform inquiry and analytical procedures to ascertain whether the other information
is reasonable.
B. add an explanatory paragraph to the auditor’s report without changing the opinion on
the financial statements.
C. perform the appropriate substantive auditing procedures to corroborate the other
information.
D. read the other information to determine that it is consistent with the audited financial
statements.
An auditor will ordinarily examine invoices from lawyers primarily in order to
A. substantiate accruals.
B. assess the legal ramifications of litigation in progress.
C. estimate the dollar amount of contingent liabilities.
D. identify possible unasserted litigation, claims, and assessments.
A scope limitation sufficient to preclude an unqualified opinion always will result when
management
A. prevents the auditor from reviewing the working papers of the predecessor auditor.
B. engages the auditor after the year-end physical inventory is completed.
C. requests that certain material accounts receivable not be confirmed.
D. refuses to provide a representation letter acknowledging its responsibility for the fair
presentation of the financial statements in conformity with GAAP.
Which of the following is an advantage of generalized computer audit packages?
A. They are all written in one identical computer language.
B. They can be used for audits of entities that use differing IT equipment and file
formats.
C. They have reduced the need for the auditor to study input controls for IT-related
procedures.
D. Their use can be substituted for a relatively large part of the required compliance
testing.
Which of the following is an essential factor in evaluating the sufficiency of evidence?
The evidence must
A. Be well documented and cross-referenced in the audit documents.
B. Be based on sources that are considered reliable.
C. Bear a direct relationship to the audit assertion.
D. Be persuasive enough to enable the auditor to form an opinion.
Which of the following is not an issue related to the valuation of accounts receivable?
A. The valuation of revenue that makes up the detail of accounts receivable.
B. A proper allowance for doubtful accounts.
C. The net realizable value of accounts receivable.
D. Proper cutoff.
An investor is reading the financial statements of the Stankey Corporation and observes
that the statements are accompanied by an auditor’s unqualified report. From this, the
investor may conclude that
A. Any disputes over significant accounting issues have been settled to the auditor’s
satisfaction.
B. The auditor is satisfied that Stankey will be highly profitable in the future.
C. The auditor is certain that Stankey’s financial statements have been prepared
accurately and that all account balances are precisely correct.
D. The auditor has determined that Stankey’s management is not qualified to lead the
company.
Which of the following statements included in management’s assessment of the
effectiveness of internal control over financial reporting would be considered
acceptable for issuing an unqualified opinion?
A. Nothing has come to management’s attention to suggest that the entity’s internal
control is less than effective.
B. Statements suggesting only negative assurance.
C. A conclusion that the entity’s internal control over financial reporting is effective
when a material weakness exists at the end of the reporting period.
D. Disclosure of material weaknesses corrected during the period.
As the acceptable level of detection risk decreases, an auditor may change the
A. Timing of tests of controls by performing them at an interim date rather than at
year-end.
B. Nature of substantive procedures from less effective to more effective procedures.
C. Timing of tests of controls by performing them at several dates rather than at one
time.
D. Assessed level of risk of material misstatement to a higher amount.
To reduce the risks associated with accepting e-mail responses to requests for
confirmation of accounts receivable, an auditor most likely would
A. request the senders to mail the original forms to the auditor or the auditor may
follow up with a telephone call to verify the response.
B. examine subsequent cash receipts for the accounts in question.
C. consider the e-mail responses to the confirmations to be exceptions.
D. mail second requests to the e-mail respondents.
Listed below are definitions of the six Principles of Professional Conduct. For each,
identify the principle being defined.
a. A member should observe the profession’s technical and ethical standards, strive
continually to improve competence and the quality of services, and discharge
professional responsibility to the best of the member’s ability.
b. Members should exercise sensitive professional and moral judgments in all their
activities.
c. A member should be free of conflicts of interest in discharging professional
responsibilities.
d. A member in public practice should observe the Principles of the Code of
Professional Conduct in determining the type and extent of services to be provided.
e. Members should accept the obligation to act in a way that will honor the public trust
and demonstrate commitment to professionalism.
f. To maintain and broaden public confidence, members should perform all professional
responsibilities with the highest sense of _____________.
Match each of the following controls with the assertion for long-term debt that it
supports.
1)The portion of long-term debt due in the next year is classified as a short-term
liability
2)A subsidiary ledger is maintained that contains information about all the long-term
debt and the amount recorded in this ledger is reconciled to the general ledger
3)Premiums and discounts on bond and notes payables are properly amortized using the
effective interest rate method
4)Any significant debt commitments are approved by the board of directors or
delegated executives
a) Occurrence and Authorization
b) Valuation
c) Disclosure – Classification
d) Completeness
An auditor concludes that there is a material inconsistency in the other information in
an annual report to shareholders containing audited financial statements. If the auditor
concludes that the financial statements do not require revision, but the entity refuses to
revise or eliminate the material inconsistency, the auditor may
A. issue an “except for” qualified opinion after discussing the matter with the entity’s
board of directors.
B. consider the matter closed since the other information is not in the audited financial
statements.
C. disclaim an opinion on the financial statements after explaining the material
inconsistency in a separate explanatory/emphasis-of-matter paragraph.
D. revise the auditor’s report to include a separate explanatory/emphasis-of-matter
paragraph describing the material inconsistency.
Which of the following statements is generally correct about the appropriateness of
audit evidence?
A. The more effective the internal control, the more assurance it provides about the
reliability of the accounting data and financial statements.
B. Appropriateness of audit evidence refers to the amount of corroborative evidence
obtained.
C. Information obtained indirectly from independent outside sources is more persuasive
than the auditor’s direct personal knowledge obtained through observation and
inspection.
D. Appropriateness of audit evidence refers only to audit evidence obtained from
outside the entity.
The permanent audit file usually includes
A. Working trial balance.
B. Organizational chart.
C. Audit plan.
D. Audit programs.
Which of the following is the most important qualitative factor that auditors should
consider when making materiality judgments?
A. A misstatement exceeded five percent of net income.
B. The auditor also provides consulting services to the audit client.
C. The misstatement will cause the client to fail to meet an earnings forecast.
D. The audit committee is not well-educated about the accounting principle in question.
Which of the following tests of controls most likely would help assure an auditor that
goods shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive prenumbering.
Key segregations of duties in the human resource management process include all of
the following except:
A. the supervision function should be separate from the payroll-processing function.
B. the disbursement function should be separate from the supervision function.
C. the human resource function should be separate from setting salaries.
D. the payroll-processing function should be separate from the general ledger function.
Which of the following controls would a company most likely use to safeguard
marketable securities when an independent trust agent is not employed?
A. The investment committee of the board of directors periodically reviews the
investment decisions delegated to the treasurer.
B. Two company officials must be present to access marketable securities, which are
kept in a bank safe-deposit box.
C. The internal auditor and the controller independently trace all purchases and sales of
marketable securities from the subsidiary ledgers to the general ledger.
D. The chairman of the board verifies the marketable securities, which are kept in a
bank safe-deposit box, each year on the balance sheet date.
In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of
controls most likely support?
A. Completeness.
B. Occurrence.
C. Accuracy.
D. Classification.
Assume that you are the new audit senior on the LV Drug Corporation (LVD)
engagement. LVD is a pharmaceutical company that has three successful drugs and a
number of drugs in progress in its research and development pipeline. You are
considering your audit plan and it is important to identify the inherent risks that LVD
has and how they relate to the planning process.
Required:
For each of the following factors, indicate whether it will tend to increase, decrease, or
have no effect on inherent risk, and the reasoning for your answer.
a. Dr. Jones is the major shareholder of LVD and its CEO.
b. Your firm has audited LVD for the last four years.
c. There has been high turnover of key accounting personnel during the last two years.
d. The internal audit function reports to the audit committee.
e. LVD has been the subject of lawsuits by users of Framadon who claim that the drug
affects their liver functions. LVD is confident that there are no such side effects from
the use of Framadon.
Which of the following procedures should an auditor generally perform regarding
subsequent events?
A. Compare the latest available interim financial statements issued after year-end with
the financial statements being audited.
B. Send second requests to the entity’s customers who failed to respond to initial
accounts receivable confirmation requests.
C. Communicate material weaknesses in internal controls to those charged with
governance.
D. Review the cutoff bank statements for several months after year-end.
Customers having substantial year-end past due balances fail to reply after second
request confirmation forms have been mailed directly to them. Which of the following
is the most appropriate audit procedure?
A. Examine shipping documents.
B. Review collections during the year being examined.
C. Intensify the study of the entity’s system of internal control with respect to
receivables.
D. Increase the balance in the allowance for uncollectible accounts.
Communications between the auditor and those charged with governance should
include all of the following except:
A. a summary of specific audit procedures used.
B. significant audit adjustments.
C. consultations with other accountants.
D. major issues discussed with management before the auditor was retained.
Operating control over the check signature plate normally should be the responsibility
of the
A. Secretary.
B. Chief accountant.
C. Vice President of Finance.
D. Treasurer.
Due professional care requires
A. Auditors to plan and perform their duties with the skill and care that is commonly
expected of accounting professionals.
B. The examination of all available corroborating evidence.
C. The exercise of error-free judgment.
D. A study and review of internal controls that includes tests of controls.
An effective system of internal control over the payroll function would include
A. verification of agreement of job time tickets with employee clock card hours by a
payroll department employee.
B. reconciliation of totals on job time tickets with job reports by employees responsible
for those specific jobs.
C. custody of rate authorization records by the supervisor of the payroll department.
D. preparation of payroll transaction journal entries by an employee who reports to the
supervisor of the human resource department.
Due professional care requires auditors to
A. Obtain independent, third party (non-auditee) documentation as evidence for all
information presented in the financial statements.
B. Exercise professional skepticism during the audit.
C. Disregard any evidence generated by the auditee during the audit.
D. Find every error contained in the financial statements prepared by management.
When evaluating internal control of an entity that processes revenue transactions on the
Internet, an auditor would be most concerned about the
A. potential for computer disruptions in recording sales.
B. lack of sales invoice documents as an audit trail.
C. frequency of archiving and data retention.
D. inability to establish test data.
Management believes and the auditor is satisfied, that a material loss probably will
occur when pending litigation is resolved. Management is unable to make a reasonable
estimate of the amount or range of the potential loss, but fully discloses the situation in
the notes to the financial statements. If the auditor wishes to call attention to the matter
and management does not make an accrual in the financial statements, the auditor
should issue a(an)
A. qualified report due to a scope limitation.
B. qualified report due to a departure from GAAP.
C. unqualified report with an explanatory/emphasis-of-matter paragraph.
D. a standard unmodified auditor’s report.
Observing an entity’s inventory held on consignment by others tests the assertion of
A. existence.
B. completeness.
C. valuation.
D. rights and obligations.