Even though the tests of controls are the most important part of testing payroll, many
auditors spend little time in this area. In many audits, there is a minimal risk of material
misstatements, even though payroll is frequently a significant part of total expenses.
Explain the reasons the auditors have for justifying this position.
A useful starting point for becoming familiar with the client’s inventory is for the
auditor to
A) obtain and review industry ratios.
B) review accounting theory covering special problems, such as gas and oil accounting,
or lease-purchase agreements.
C) read client’s Accounting Manual.
D) tour the client’s facility.
The most important internal control for petty cash is
A) the use of an imprest fund that is the responsibility of one individual.
B) keeping it in a safe or locked drawer.
C) keeping the amount of cash to a minimum.
D) accessibility so that cheques won’t have to be written for small amounts.
The auditor has examined the financial statements, particularly the cash flow statement,
and the notes to the financial statements to determine that all relevant information is
presented clearly. Which audit assertion is associated with this audit test?
A) classification
B) allocation
C) understandability
D) valuation
At every audit engagement, the auditor is required to consider that there could be
significant risks of misstatement for revenue recognition. At ABC Ltd., the auditor has
concluded that, yes, there are material risks of misstatement associated with revenue
recognition. How does this affect the extent of testing for accounts receivable?
A) audit risk will be increased
B) inherent risks will be decreased
C) decreased control testing is required
D) increased substantive testing is required
To succeed in an action against the auditor, the client must be able to show that
A) the auditor was grossly negligent.
B) the auditor was fraudulent.
C) there is a close causal connection between the auditor’s breach of the standard of due
care and the damages suffered by the client.
D) there was a written contract.
The auditor has determined that the risks are high that the client would overvalue
inventory. Which audit assertions would require additional testing?
A) accuracy and existence
B) allocation and accuracy
C) accuracy and valuation
D) valuation and classification
A well-designed organizational structure at an entity
A) has operations and programming personnel tasks combined.
B) clearly defines authority and responsibility assignments.
C) requires that wage rates are recorded and tracked by the human resources
department.
D) has the internal audit department report to the Chief Financial Officer.
“An engagement where, pursuant to an accountability relationship between two or more
parties, a practitioner is engaged to issue a written communication expressing a
conclusion concerning a subject matter for which the accountable party is responsible”
is the definition of a(n)
A) audit engagement.
B) assurance engagement.
C) review engagement.
D) compilation engagement.
A client acquired 25% of its outstanding capital stock after year-end and prior to
completion of the auditor’s fieldwork. The auditor should
A) advise management to adjust the balance sheet to reflect the acquisition.
B) issue pro forma financial statements giving effect to the acquisition as if it had
occurred at year-end.
C) advise management to disclose the acquisition in the notes to the financial
statements.
D) disclose the acquisition in the opinion paragraph of the auditor’s report.
When setting the objectives for auditing notes, the auditor should consider inherent
risks associated with
A) recording errors.
B) uncollectible notes.
C) duplicated notes.
D) management bias.
After the auditor has identified the key internal controls and weaknesses and assessed
control risk, it is appropriate to decide whether
A) substantive tests will be increased sufficiently to justify the cost of performing tests
of controls.
B) substantive tests will be reduced sufficiently to justify the cost of performing tests of
controls.
C) tests of controls will be increased sufficiently to justify the cost of performing
substantive tests.
D) tests of controls will be reduced sufficiently to justify the cost of performing
substantive tests.
One of the main advantages of a “big” public accounting firm is the
A) lower professional fees due to economies of scale.
B) ability to share knowledge and experience of similar companies they audit with the
client.
C) ability to serve all major international cities as globalization of businesses increases.
D) increased reliance that can be placed on the audit report by financial statement users.
A PA firm has an organizational structure that assures the technical review of every
engagement by a partner who has expertise in the client’s industry. This is an example
of good
A) entity level controls.
B) adherence to professional standards.
C) business risk management.
D) quality controls.
The auditor has completed analyzing the results of tests of details of the accounts
receivable ending balance. Errors totaling $25,000 were found. These exceptions are
A) indications that the credit limit is being incorrectly applied.
B) probably cut-off errors that can be explained.
C) an indication of potential errors in the ending balance.
D) financial statement misstatements.
As part of the review for subsequent events, the auditor will review financial statements
prepared after the balance sheet date. The statements should be discussed with
management to determine whether they
A) were approved by the controller prior to your review.
B) are mathematically correct, including calculation of depreciation.
C) are prepared on the same basis as the current-period statements.
D) were completed on a comparative basis, showing the last three years.
If detection risk is reduced, the amount of evidence the auditor accumulates will
A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.
Which of the following substantive tests would the auditor conduct as a search for
contingent liabilities?
A) select an attribute sample of legal expenses for matching to invoices
B) select a dollar unit sample of legal expenses, for matching to invoices
C) inspect legal expense invoices, doing a census test of legal expenses
D) review a sample of legal invoices, looking for appropriate authorization for payment
A) Discuss the key control procedures relating to the client’s physical count of
inventory.
B) State the primary determinants of the amount of time needed to perform the physical
observation of inventory.
PA is auditing a client where the accounts receivable are in worse shape than last year:
many accounts are significantly overdue. How would this fact be dealt with in the audit
risk model?
A) increase inherent risk for accounts receivable
B) decrease inherent risk for accounts receivable
C) increase control risk for accounts receivable
D) decrease control risk for accounts receivable
The leading precedent-setting case in third-party liability was a 1931 U.S. case,
Ultramares v. Touche. What is the key aspect of this case?
A) to succeed, claimants must be foreseebale users of the audited financial statements
that are part of the claim process
B) ordinary negligence is insufficient for liability to third parties because of lack of
privity of contract
C) the auditor must have actual knowledge of the users of the financial statements to
establish privity
D) there is no general auditor liability to shareholders, since the loss of equity was
suffered by the company
The main focus taken by the auditor in verifying liability balances is on the discovery of
A) liabilities posted to the wrong account.
B) overstated liabilities.
C) understated or omitted liabilities.
D) overstated or extraneous liabilities.
When inherent risk is assessed as higher (i.e. more material errors are likely to exist)
and control risk is assessed the same from one year to the next, what is the likely effect
on detection risk? Detection risk will
A) increase.
B) decrease.
C) stay the same.
D) need less documentation.
Management assertions are
A) stated in the footnotes to the financial statements.
B) implied or expressed representations about the accounts in the financial statements.
C) explicitly expressed representations about the financial statements.
D) provided to the auditor in the engagement letter, but are not disclosed on the
financial statements.
The scope paragraph of the standard unqualified audit report in the auditor
responsibility section states that the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) obtain reasonable assurance whether the statements are free of material
misstatement.
D) conform to a generally accepted financial reporting framework.
The auditor and the entities should agree on the criteria to be used in the audit
A) before the audit starts.
B) after the audit planning has been done.
C) as they progress with the audit as they can determine which criteria is more suitable.
D) at the end of the audit.
Jenny is the information technology support manager at CMH. Jenny is considered to
be a super-user at CMH since she can circumvent normal controls. In order to address
the risk of super-users, management should
A) remove the super-user.
B) establish effective compensating controls.
C) update the background check on the super-user on a yearly basis.
D) ensure that the super-user is familiar with the code of conduct of the company.
A communication addressed to the debtor requesting him or her to confirm whether the
balance as stated on the communication is correct or incorrect is a
A) legal confirmation.
B) negative confirmation.
C) positive confirmation.
D) bank confirmation.
The auditor obtains corroborating audit evidence for accounts receivable by using
positive or negative confirmation requests. Under which of the following circumstances
might the negative form of the accounts receivable confirmation be useful?
A) A substantial number of accounts are in dispute.
B) Internal control over accounts receivable is ineffective.
C) Client records include a large number of relatively small balances.
D) The auditor believes that recipients of the requests are unlikely to give them
consideration.
An auditor would be found negligent if he/she
A) relied on a report from management without considering management integrity.
B) relied on a report that contained errors that had been concealed by management.
C) did not consider the expenses from a division due to management intentionally
withholding that information.
D) failed to discover a payroll fraud by testing a statistical sample of transactions in the
salary expense account.