Specific balance assertions typical of accounts payable would not include
A. recorded liabilities are obligations of the entity.
B. estimated liabilities are properly valued.
C. accounts payable are not pledged as collateral.
D. payables are recorded in the proper period.
Which of the following matters does an auditor usually include in the engagement
letter?
A. Arrangements regarding fees and billing
B. Analytical procedures that the auditor plans to perform
C. Indications of negative cash flows from operating activities
D. Identification of working capital deficiencies
The interpretation of Independence Rule 101 allows members to
A. hold a material indirect interest in a client.
B. have loans from a client that are collateralized by cash deposits held by the client.
C. have home mortgages with a client even if they are on the engagement.
D. be a trustee of a client pension or profit sharing trust.
An important method used by auditors to learn of material contingencies is
A. examining documents in the client’s possession concerning contingencies.
B. inquiring and discussing them with management.
C. obtaining responses to an attorney letter.
D. confirming accounts receivable with the client’s customers.
A liability for a long-term purchase contract should generally be recognized when
A. the contract is signed.
B. the goods are shipped.
C. the goods are received.
D. the goods are sold to match the cost.
In order to perform a review of interim financial information, the auditor must
A. have audited or be in the process of auditing the entity’s latest financial statements.
B. tested the entity’s internal controls to determine that financial information is reliable.
C. sent confirmation to third-parties concerning significant related-party transactions.
D. established sufficient criteria to form an opinion on the fair presentation of the
financial information.
Charlie Company is headquartered in Wisconsin. Charlie Company’s auditors are
headquartered in Minnesota. Bob lives in Bloomington, Indiana but works in Chicago,
Illinois. Based on a tip from his boss, Bob calls his stockbroker (Jim, who offices in
Chicago) and instructs him to purchase 1,000 shares of Charlie Company despite never
having requested or reviewed Charlie Company’s financial statements. Charlie
Company is traded on the New York Stock Exchange and the transaction takes place 15
minutes later on the floor of the exchange.
Charlie Company declared bankruptcy three months later and Bob lost his entire
investment. Bob sued Charlie Company’s auditors for ordinary negligence.
The trial is scheduled for hearing in Madison, Wisconsin. Before the opening of the
trial, the attorney for the auditors objects to the trial being held in Wisconsin, since the
transaction between Bob and Jim took place in Illinois. The attorney asks that the trial
be moved to Illinois.
A. Why would the attorney ask for the trial to be moved?
B. What defense would you raise if you were the auditors’ attorney?
The reasons for outsourcing an internal audit include
A. more expertise only.
B. more expertise and improved control over audit costs.
C. improved control over audit costs and improved alignment with company goals.
D. all of the above
Which of the following is not a recommendation usually made following the
completion of an operational audit?
A. Economic and efficient use of resources
B. Effective achievement of business objectives
C. Attesting to the fairness of the financial statements
D. Compliance with company policies
Audit planning requires that the auditor consider possible inventory errors or frauds that
might occur that could affect the financial statements.
Which of the following is not an example of a general control?
A. The organization’s use of the systems development life cycle when implementing or
modifying computerized processing systems
B. The organization’s use of check digits to ensure accurate input of transaction data
C. Periodic and preventative maintenance performed on the computer and related
equipment
D. The existence of appropriate separation of duties within the computer department
An auditor selected items for test counts from the client’s warehouse during the physical
inventory observation. The auditor then traced these test counts into the detailed
inventory listing that ultimately agreed to the financial statements. This procedure most
likely provided evidence concerning management’s assertion of
A. completeness.
B. valuation.
C. presentation and disclosure.
D. existence.
E. rights and obligations.
The audit procedures used in an observation of the client’s physical inventory taking are
designed primarily to
A. test and observe the client’s physical count of inventory.
B. verify independently the physical counts obtained by the client.
C. assist the client in taking test counts of year-end inventory.
D. determine whether inventory contains obsolete goods.
The standards of the Institute of Internal Auditors (IIA) are grouped under two broad
categories. Identify and briefly explain each of the categories. Each category has special
standards written for specific types of audits. Identify the two types of special standards
for each category.
How do auditors make the following representations when issuing the standard
(unmodified) auditors’ report?
A. Option A
B. Option B
C. Option C
D. Option D
An auditor will usually trace the details of the test counts made during the observation
of physical inventory counts to a final inventory compilation. This audit procedure is
undertaken to provide evidence that items physically present and observed by the
auditor at the time of the physical inventory count are
A. owned by the client.
B. not obsolete.
C. physically present at the time of the preparation of the final inventory schedule.
D. included in the final inventory schedule.
Which of the following is not an acceptable method of determining inventory cost
under GAAP?
A. FIFO.
B. LIFO.
C. Average cost.
D. All of the above are acceptable.
The composition of Oak and Company’s accounts receivable are as follows:
Over $250,000 – 5 accounts
Between $25,000 and $250,000 – 80 accounts
Less than $25,000 – 200 accounts
The best confirmation strategy for the auditor is:
A. Positive confirmations on a sample of all 285 accounts.
B. Positive confirmations on all a sample of all accounts over $25,000; negative
confirmations on a sample of accounts less than $25,000.
C. Positive confirmations on all 5 accounts over $250,000; positive confirmations on a
sample of the accounts between $25,000 and $25,000; negative confirmations on a
sample of accounts less than $25,000.
D. Positive confirmations on all 5 accounts over $250,000; negative confirmations on a
sample of the accounts less than $250,000.
After obtaining an understanding of the entity’s internal control and assessing control
risk, an auditor of a non-public company decided not to perform additional tests of
controls. The auditor most likely concluded that the
A. additional evidence to support a further reduction in control risk was not cost
beneficial.
B. assessed level of inherent risk exceeded the assessed level of control risk.
C. internal control structure was properly designed and justifiably may be relied on.
D. evidence obtainable through tests of controls would not support an increased level of
control risk.
When auditors conclude that a material and pervasive departure from GAAP exists in
an entity’s financial statements, which of the following phrases would most likely be
included in their report?
A. “Do not present fairly in all material respects.”
B. “Except for the effects of the departure from generally accepted accounting
principles, as discussed in the preceding paragraph.”
C. “We were engaged to audit the accompanying financial statements.”
D. “As a result of the departures discussed in the following paragraph.”
The audit objective that all the transactions and accounts presented in the financial
statements represent real assets, liabilities, revenues, and expenses is related most
closely to which of the PCAOB assertions?
A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure
During which stages of an audit examination are auditors required to exhibit the
appropriate use of professional judgment?
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following would not typically be a specific relevant assertion about fixed
asset accounts?
A. Fixed assets in the accounts exist and are in productive use.
B. Net carrying book values in the accounts are reflected at current market values.
C. Depreciation has been calculated properly using accepted methods and reasonable
estimates of useful life and other factors.
D. Fixed assets are properly classified in the balance sheet under appropriate descriptive
captions.
Tests of controls in the finance and investment cycle
A. normally focus on tests of transactions.
B. primarily involve observing physical security of assets.
C. typically amount to inquiries and observations related to management involvement.
D. can significantly reduce the extent of substantive tests.
In the preparation of an audit plan, which of the following items is not essential?
A. A review of material from prior audits
B. The preparation of a budget identifying the costs of resources needed
C. An understanding of controls established by management
D. Assessment of inherent risk
Which of the following outcomes is a likely benefit of information technology used for
internal control?
A. Processing of unusual or nonrecurring transactions
B. Enhanced timeliness of information
C. Potential loss of data
D. Recording of unauthorized transactions
Red and Green, CPAs are the external auditors for Blue Corporation, a publicly-held
company. Blue Corporation has outsourced its internal audit function to Red and Green.
Which of the following statements is true?
A. Doing internal audit work does not impair the independence of Red and Green.
B. The independence of Red and Green is impaired only if employees of Red and Green
act in a management capacity or make management decisions.
C. The independence of Red and Green is impaired only if a member of Red and
Green’s engagement team is hired to manage an accounting function in Blue
Corporation.
D. Public accounting firms cannot be both the internal and external auditors for
publicly-held companies and maintain independence.
The purpose of the internal audit’s evaluation of the effectiveness of existing risk
management processes is to determine that
A. management has planned and designed the process to provide reasonable assurance
of achieving objectives and goals.
B. management directs processes to provide reasonable assurance of achieving
objectives and goals.
C. the organization’s objectives and goals will be achieved efficiently and economically.
D. the organization’s objectives and goals will be achieved in an accurate and timely
manner and with minimal use of resources.
As the expected misstatement is large relative to the tolerable misstatement, the audit
team would most likely
A. increase their degree of reliance on internal controls.
B. consider the possibility of an increased level of tolerable misstatement.
C. increase the sample size.
D. decrease the sample size.
When auditing financial statements of a private company, the minimum work an auditor
must perform in connection with a company’s internal control is best described by
which of the following statements.
A. Perform exhaustive tests of accounting controls and evaluate the company’s control
system effectiveness.
B. Determine whether the company’s control policies are designed well enough to
prevent material misstatements.
C. Prepare auditing working papers that document the auditor’s understanding of the
company’s internal control.
D. Design procedures to search for significant deficiencies in the actual operation of the
company’s internal control.