You are assigned to audit accounts payable for a manufacturing client. As part of the
planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your
review of unpaid invoices indicates an understatement error of $25,253 from a sample
of $675,467. The population value of A/P is $5,241,687 at October 31st. The amount of
any additional adjustment required by the auditor (rounded) is:
a. $0.
b. $131,998.
c. $6,998.
d. $125,000.
The Yellow Book identifies the following ethical principles except:
a. integrity.
b. objectivity.
c. professional behavior.
d. the private interest.
e. proper use of government information, resources, and position.
The document that presents all of the issues discussed as part of audit strategy is the
(a) engagement letter
(b) quarterly financial statements
(c) audit planning memo
(d) risk assessment memo
Planning is a continuous process that must occur throughout the audit engagement
because
(a) disconfirming information is likely to arise.
(b) the audit committee is likely to point out flaws in the original audit plan.
(c) all information affecting the audit occurs concurrently.
(d) auditor skill levels are continuously fluctuating.
Input and submission controls required of the user company include:
a. use of passwords and IDs for authorizing access to input and transmission functions.
b. updating the employee master file.
c. updating hash totals of information submitted.
d. All of the above.
The value of an integrated audit
a. Is limited to its effects on the capital markets since integrated audits are conducted
only for publicly traded companies.
b. Extends to various groups and probably is different for the different people and
entities.
c. Is exactly the same as the value generated by a financial statement audit of a
nonpublic company.
d. None of the above are correct.
A W-2 form can be used as a control for:
a. detecting payment never received.
b. detecting unused vacation time.
c. preventing payment to fictitious employees.
d. All of the above.
An alternative to a fee”for’service plan is a(n):
a. co-payment.
b. third-party payer.
c. service contract fee.
d. capitation agreement.
e. unbilled service agreement.
The audit of stock compensation also involves the audit of:
a. sales commissions.
b. payroll tax expense.
c. deferred tax expense.
d. All of the above.
Audit firms use time budgets for
(a) indicating the amount of time expected for the various levels of auditors for each
audit area.
(b) tracking and reporting time spent on each audit area.
(c) billing and bidding and future engagements.
(d) All of the above.
All rules of the Code of Conduct do not apply to all members of the AICPA.
Which of the following organizations is considered to be a public company?
a. A firm whose privately held stock is owned exclusively by an individual.
b. A partnership of doctors.
c. A privately-held firm controlled by three family members.
d. A firm whose stock is registered with the SEC.
Comparing the current year balance to the prior year’s balance is an example of:
a. a substantive analytical procedure.
b. a fluctuation analysis.
c. change analysis.
d. Both a and b.
Evidence of proper payment involves which documents:
a. a supplier invoice and a receiving report.
b. a supplier invoice and a purchase order.
c. a supplier invoice, a purchase requisition, and a receiving report.
d. None of the above.
An imprest payroll account:
a. is similar to other imprest accounts.
b. balance should reach zero.
c. serves to make reconciliation easier.
d. All of the above.
Dual purpose tests for payroll involve:
a. the transfer of money from the general bank account to the payroll bank account.
b. the transfer of money from the payroll bank account to the individual employees.
c. tracing the amounts from the payroll register to individual employee records.
d. All of the above.
This is the same question as number 52 below
The management assertion that is concerned with whether recorded transactions are real
and actually happened is the:
(a) occurrence assertion.
(b) accuracy assertion.
(c) completeness assertion.
(d) cutoff assertion.
Ethics is an important discussion topic within the accounting profession. The chapter
discussed the difference between the ethic of rights and the ethic of care. Explain both
and indicate which of the following characteristics relates to each one.
(a) Individuals as interdependent
(b) Independence as strength
(c) Importance of autonomy and self-sufficiency
(d) Importance of the needs of others
(e) Importance of the rights of others
Which of the following is an assertion?
a. A statement made by management regarding the collectability of accounts receivable.
b. The audit firm’s estimation of the client’s inventory obsolescence.
c. The statement by management regarding the appointment of auditors.
d. The statement by management that the firm will close its branch office because of
snow.
An internal control that is ineffective to the extent that it might not prevent the financial
statements from being materially misstated is referred to as a
(a) significant risk
(b) substantive error
(c) material weakness
(d) tolerable misstatement
An adverse opinion on ICFR includes:
a. The definition of a material weakness.
b. Identification of the material weakness.
c. A statement that a material weakness has been identified.
d. All of the above.
If an auditor concludes the financial statements contain only immaterial errors, then the
auditor should:
(a) correct the errors.
(b) have the client correct the errors.
(c) issue an unqualified (“clean”) opinion on the financial statements.
(d) issue a qualified opinion on the financial statements.
Management assertions contain which of the following:
(a) statements concerning that accounts exist.
(b) statements that all liabilities are included in the balance sheet.
(c) statements that the financial statements are presented fairly.
(d) All of the above.
Why is it necessary for an auditor to perform audit work after the “as of” date to which
the opinion on ICFR applies?
(a) Whistleblower information may become available after the end of the year.
(b) Audit documentation is only prepared after the end of the year.
(c) End-of-period financial reporting occurs after the end of the year.
(d) IT systems may be changed after the end of the year.
Calculating the inventory turnover ratio:
a. helps the auditor to determine if inventory accounts are properly stated.
b. helps the auditor to determine if sales accounts are properly stated.
c. Both a and b.
d. None of the above.
Which of the following business functions or activities is unique to the manufacturing
industry with respect to the production of finished goods from raw materials?
a. An effective cost accounting function.
b. An effective inventory stores function.
c. The requirement for a physical inventory count at year-end.
d. The consideration of impairment losses.
A current tax liability is recognized for:
(a) the current year’s net loss.
(b) the current year’s net income.
(c) estimated taxes payables for the current year.
(d) estimated taxes payable for the previous year.
In order for punitive damages to be awarded, the auditors must be guilty of:
a. Negligence.
b. Gross negligence.
c. Fraud.
d. Either b or c.
Bank reconciliations should be prepared by:
a. the controller.
b. the treasurer.
c. the cashier who works for the treasurer.
d. Any of the above.
When an accountant is engaged to compile a nonpublic entity’s financial statements that
omit substantially all disclosures required by GAAP, the accountant should indicate in
the compilation report that the financial statements are:
a. prepared in conformity with a comprehensive basis of accounting other than GAAP.
b. not compiled in accordance with Statements on Standards for Accounting and
Review Services.
c. special-purpose financial statements that are not comparable to those of prior periods.
d. not designed for those who are uniformed about the omitted disclosures.
e. prepared on an interim basis.
Individuals at this level of moral development make decisions in a self-centered way.
A. Pre-development level.
B. Pre-conventional level.
C. Conventional level.
D. Post-conventional level.
Allmark, the client, is a small manufacturing company currently in need of cash in
order to stay in business. Loan payments exceeding its cash on hand are due in 60 days
and if Allmark defaults, its bank says it will foreclose on the assets used as collateral.
Allmark’s only recourse then would be to file bankruptcy. One solution is to seek
outside financing from vendors eager to keep Allmark in business, although the
availability of financing will not be known until the next fiscal year. The auditor should:
a. audit the financial statements and disclose the possibility that Allmark may not be
able to continue as a going concern.
b. withhold the audit report until financing has been secured.
c. disclaim an opinion on the financial statements.
d. ignore the issue as it does not affect the current year under audit.
What procedures should an auditor perform for a positive confirmation that is not
returned by the client’s customer?
What happens to client companies that are not desired as clients by the CPA firms that
are very concerned about client reputation? These might be companies with known
management integrity issues or fee disputes with prior auditors. Will these companies
still be able to get audits? From whom? What do you think this means regarding
protecting the public interest and integrity of the capital markets?
An audit report must be issued whenever an auditor is associated with financial
statements.
Disclosures are meant to facilitate comparisons between entities that select different
measurement attributes for similar assets and liabilities.
All supporting documentation should be separated from the invoice to prevent duplicate
payment.
Auditors test the operating effectiveness of those controls that are intended to prevent
and detect material misstatements.
Describe in detail the audit steps required in performing an audit from beginning to end.
Identify how you would address each of the auditing standards in your work.
An incoming auditor should protect its independence by avoiding communications with
the predecessor auditor.
To which of the following accounts would the management assertion “valuation” be
relevant, and why? For any accounts to which it would not be relevant, explain why.
Cash
Cash when foreign currency translation is involved
Gross amount of accounts receivable
Net amount of accounts receivable
There are three separate components to the human resources payroll cycle.
Compensating controls override other controls.
If a client outsources payroll to a service firm, the auditor must obtain a SAS 70 Type I
report.
Long-term debt can be audited without testing controls.
A purchase requisition usually precedes a purchase order.
In tests of controls, auditing, auditors need to define “deviations” in advance. Give
seven examples of control compliance deviations related to a client’s processing of
credit sales transactions and the related assertion that was violated.
When there is a material misstatement in the financial statements, the auditor requires
management of the company to correct the financial statements so the auditor can issue
an audit report.