The risk of material misstatement refers to
A) control risk and acceptable audit risk.
B) inherent risk.
C) the combination of inherent risk and control risk.
D) inherent risk and audit risk.
Which of the following services is not prohibited by the SEC whenever a CPA also
audits the company?
A) actuarial services
B) assisting the company in preparing certain SEC registration statements (e.g., 10-Q,
10-K)
C) investment banker services
D) bookkeeping services
When an audit client uses a service organization to manage their investment activity,
A) the auditor can always rely on the internal controls of the service organization.
B) the auditor must state in their audit opinion that the client uses a service
organization.
C) the auditor can rely on the internal controls of the service organization if the service
organization’s auditor issues a report on their internal control.
D) the auditor must rely on the service organization to determine the fair level 1, 2, and
3 estimates.
Match seven of the legal terms (a-j) with the definitions provided below (1-7):
a. common law
b. constructive fraud
c. breach of contract
d. joint and several liability
e. ordinary negligence
f. third-party beneficiary
g. gross negligence
h. statutory law
i. fraud
j. separate and proportionate liability
________ 1. laws that have been passed by the U.S. Congress and other governmental
units
________ 2. absence of reasonable care that can be expected of a person in a set of
circumstances
________ 3. lack of even slight care, tantamount to reckless behavior that can be
expected of a person
________ 4. the assessment against a defendant of that portion of the damage caused by
the defendant’s negligence
________ 5. failure of one or both parties in a contract to fulfill the requirements of the
contract
________ 6. the assessment against a defendant of the full loss suffered by a plaintiff
regardless of the extent to which other parties shared in the wrongdoing
________ 7. existence of extreme or unusual negligence even though there was no
intent to deceive or do harm; also termed recklessness
Which of the following is an accurate statement relating to the extent of procedures?
A) If an auditor wants a lower assessed control risk than the preliminary assessed
control risk, the number of controls tested increases while the extent of the tests for
each control decrease.
B) The extent of testing depends on the frequency of the operation of the controls.
C) All controls must be tested only at year-end.
D) The frequency of testing is the same for both manual and computer controls.
When assessing risk control, the auditor must do all of the following except
A) assess control risk for each objective by evaluating the controls and deficiencies for
each objective.
B) perform the detailed test of balances.
C) identify the key internal controls and deficiencies.
D) associate the key controls and deficiencies with the objectives.
Which of the following statements is true?
I. The auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
II. The auditor is required to issue a disclaimer of opinion in the event of a going
concern problem.
A) I only
B) II only
C) I and II
D) Neither I nor II
If the population is not considered acceptable, one step the auditor is likely to take is to
A) retest all internal controls.
B) ask the client to adjust the account balance.
C) test the entire population.
D) decrease inherent risk.
An auditor’s decision concerning whether or not to dual date an audit report is primarily
based on the auditor’s decision to
A) extend appropriate audit procedures.
B) assume responsibility for events after the date of the auditor’s report.
C) assume responsibility for event from fiscal year-end to the date of the audit report.
D) roll the dice and hope for a successful outcome.
One type of shipping document is the ________, which is a written contract between
the carrier and the seller of the receipt and shipment of goods.
A) sales order
B) bill of lading
C) sales invoice
D) customer order
Auditors usually test cost accounting records as part of the
A) acquisition tests.
B) payroll tests.
C) sales tests.
D) All of the above are correct.
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) representation letter.
B) negative confirmation.
C) bank confirmation.
D) positive confirmation.
An auditor should perform alternative procedures to substantiate the existence of
accounts receivable when
A) no reply to a positive confirmation request is received.
B) no reply to a negative confirmation request is received.
C) collectibility of the receivables is in doubt.
D) pledging of the receivables is probable.
Standards issued by the Public Company Accounting Oversight Board must be followed
by CPAs who audit
A) both private and public companies.
B) public companies only.
C) private companies, public companies, and nonprofit entities.
D) private companies only.
Which one of the following statements is true? In deciding on substantive tests of
transactions
A) some procedures are commonly employed on every audit regardless of the
circumstances.
B) all procedures are dependent on the adequacy of the controls and the results of the
tests of controls.
C) results obtained in the prior year’s audit will not affect the procedures used this year.
D) the materiality of the item will not influence the choice of procedures used.
Acceptable risk of incorrect rejection affects auditors’ action only when they conclude
that a population is
A) fairly stated.
B) acceptable.
C) not fairly stated.
D) acceptable after certain adjustments.
If a control total were to be computed on each of the following data items, which would
best be identified as a hash total for a payroll IT application?
A) gross wages earned
B) employee numbers
C) total hours worked
D) total debit amounts and total credit amounts
When labor is a material factor in inventory valuation, the auditor should place special
emphasis on testing the internal controls concerning
A) fictitious employees.
B) authorization of wage rates.
C) proper classification of payroll transactions.
D) completeness of recorded transactions.
Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to
as
A) the antifraud provisions.
B) the new issues provisions.
C) the full employment act for accountants.
D) the RICO provisions.
You are preparing to issue a report on the compilation of financial statements for a
nonpublic company. Prior to issuing the report you should
A) read the financial statements to determine if they are free from obvious material
errors.
B) perform analytical procedures to determine if they are free from material
misstatements.
C) perform tests of balances on selected accounts to determine if they are free from
material misstatements.
D) perform limited control tests to determine if there are any material misstatements.
The method used to measure the estimated total misstatement amount in a population
when there is both a recorded value and an audited value for each item in the sample is
A) difference estimation.
B) mean-per-unit estimation.
C) ratio estimation.
D) monetary unit sampling.
Tests of controls and substantive tests of transactions are an important determinant of
the extent of the auditor’s use of tests of details of balances. Which of the following is
true?
A) They are likely to be performed prior to the client’s end of the fiscal year.
B) They are likely to eliminate the need for tests of details of balances.
C) They are likely to have no impact on the planned tests of details of balances.
D) They are likely to be used only in the audit of internal control.
Which of the following is an accurate statement regarding the various types of other
assurance services?
A) Assurance services must be about the reliability of another party’s assertion about
compliance with specified criteria.
B) Other assurance services must meet the definition of an attestation service.
C) The primary purpose of a management consulting engagement is to improve the
quality of information.
D) The market for other forms of assurance services is open to non-CPA competitors.
Which of the following is least likely to impair a CPA firm’s independence with respect
to an audit client in the Oklahoma City office of a national CPA firm?
A) A partner in the Oklahoma City office owns an immaterial amount of stock in the
client.
B) A partner in the Jersey City office owns 25% of the client’s stock.
C) A partner in the Oklahoma City office, who does not work on the audit engagement,
previously served as controller for the audit client.
D) A partner in the Chicago office previously served as vice president of finance for the
audit client.
If the client’s internal control for recording sales returns and allowances is evaluated as
ineffective,
A) a larger sample may be needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation.
D) all sales returns must be confirmed with the customer.
Analytical procedures
A) focus on the ending balances for income statement accounts.
B) are only performed during the planning stage of the audit.
C) are required to be performed when auditing an account balance.
D) provide substantive evidence.
The capital acquisition and repayment cycle does not include
A) payment of interest.
B) payment of dividends.
C) payment of vendor invoices.
D) acquisition of capital through interest-bearing debt.
The auditor ________ rely on the internal controls of the payroll service organization if
the service organization’s auditor issues a report on the service organization’s internal
control.
A) must
B) cannot
C) can rarely
D) can often
The U.S. Supreme Court ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs
could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934, the auditor’s
________ would be required to be shown to the court.
A) ordinary negligence
B) gross negligence
C) knowledge and intent to deceive
D) financial gain at the expense of the plaintiff
Sarbanes-Oxley requires management to issue an internal control report that includes
two specific items. Which of the following is one of these two requirements?
A) a statement that management is responsible for establishing and maintaining an
adequate internal control structure and procedures for financial reporting
B) a statement that management and the board of directors are jointly responsible for
establishing and maintaining an adequate internal control structure and procedures for
financial reporting
C) a statement that management, the board of directors, and the external auditors are
jointly responsible for establishing and maintaining an adequate internal control
structure and procedures for financial reporting
D) a statement that the external auditors are solely responsible for establishing and
maintaining an adequate system of internal control
Which of the following is an accurate statement regarding how the acceptable risk of
overreliance (ARO) and the acceptable risk of incorrect acceptance (ARIA) interact to
affect evidence accumulation?
A) If internal controls are likely to be effective, preliminary control risk can be
increased.
B) A lower control risk requires a lower ARO in testing the controls, which requires a
smaller sample size.
C) If controls are found to be effective, control risk can remain low, which permits the
auditor to increase ARIA, thereby requiring a smaller sample size in the substantive
tests of details of balances.
D) If misstatements are considered unlikely, ARIA will decrease, and the sample size
will also decrease.
Which of the following is least likely to cause uncertainty about the ability of an entity
to continue as a going concern?
A) The entity is suing a competitor for a minor patent infringement.
B) The entity has lost a major customer.
C) The entity has significant recurring operating losses.
D) The entity has working capital deficiencies.
Match seven of the terms (a-p) with the description/definitions provided below (1-7):
a. commitments
b. completing the engagement checklist
c. contingent liability
d. dual-dated audit report
e. financial statement disclosure checklist
f. independent review
g. inquiry of client’s attorneys
h. letter of representation
i. other information in annual reports
j. review for subsequent events
k. subsequent events
l. unadjusted misstatement worksheet
m. management letter
n. pending claim
o. unasserted claim
p. Audit documentation review
________ 1. a review of the financial statements and the entire set of audit files by an
independent reviewer to whom the audit team must justify the evidence accumulated
and the conclusions reached
________ 2. a potential future obligation to an outside party for an unknown amount
resulting from activities that have already taken place
________ 3. a written communication from the client to the auditor formalizing
statements that the client has made about matters pertinent to the audit
________ 4. a potential legal claim against a client where the condition for a claim
exists but no claim has been filed
________ 5. transactions that occurred after the balance sheet date, which affect the fair
presentation or disclosure of the statements being audited
________ 6. agreements that the entity will hold to a fixed set of conditions, such as the
purchase or sale of merchandise at a stated price
________ 7. the use of one audit report date for normal subsequent events and a later
date for one or more subsequent events
Which of the following business functions is not considered to be part of the
acquisitions class of transactions?
A) processing purchase orders
B) recognizing liabilities
C) receiving goods and services
D) processing cash disbursements
To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, the auditor fulfills several performance
responsibilities, including
A) complying with the AICPA Code of Professional Conduct.
B) issuing a written report on the financial statements.
C) determining and applying materiality levels.
D) having the appropriate competence to perform the audit.