Per GAAS, a standard audit report consists of at least:
a. opinion, scope, and explanatory paragraphs in that order.
b. introductory, explanatory, and scope paragraphs in that order.
c. introductory, scope, and opinion paragraphs in that order.
d. None of the above.
Mary Ellen Dillon is an audit partner with a large public accounting firm. Recently, one
of her long-standing clients suddenly filed for bankruptcy protection. Mary Ellen’s firm
had previously issued an unqualified opinion on the client’s financial statements. As a
result, Mary Ellen’s firm is being sued for negligence. Mary Ellen’s best defense would
be:
a. To challenge standing on the part of the defendant.
b. To cite the professional standards and maintain that the firm met the “prudent person”
standard.
c. To cite the client’s responsibility for the financial statements.
d. All of the above.
The complaint, as filed by the plaintiff, includes:
a. Remedies being sought.
b. Proposed course of action.
c. Dollar amount of damages sought from the auditor.
d. All of the above.
Which of the following is not a valid reason for the performance of audit procedures at
an interim date?
(a) More time is available for management to correct problems identified by interim
audit testing.
(b) The client company does not retain the records that are needed as audit evidence
through the year-end time frame.
(c) Most controls and transactions cannot be audited during busy season.
(d) More time is available for the auditors to concentrate on problem areas, if needed.
A common title for the head of the internal audit function is the:
a. Head Audit Honcho.
b. Internal Audit Leader.
c. Chief Audit Executive.
d. Chief Audit Officer.
e. Independent Internal Auditor.
For an integrated audit to be possible:
a. Established criteria must exist against which the financial statements and ICFR can
be compared.
b. The auditor must have sufficient knowledge of both the AICPA SAS and PCAOB AS.
c. The entity must have sufficient books, records and other underlying evidence so that
the auditor can determine whether there is a high degree of correspondence between the
underlying evidence and the financial statements.
d. a and c
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 lower
amount of the tolerable misstatement assuming the client booked an adjusting entry for
the known errors (rounded) is:
a. $5,391,940.
b. $5,241,687.
c. $5,141,940.
d. $5,266,940.
Which of the following transactions is considered a related-party transaction?
(a) Borrowing funds from the pension fund maintained by the company.
(b) Transferring monies to a subsidiary.
(c) Selling inventory to a parent.
(d) All of the above.
An inventory posting method which uses “triggers” to indicate when inventory has
passed through a manufacturing stage is:
a. perpetual.
b. periodic.
c. weighted average.
d. backflush.
The following are all principles of the Institute of Internal Auditors Code of Ethics
except:
a. integrity.
b. objectivity.
c. confidentiality.
d. reliability.
e. competency.
An engagement letter states that a company should maintain documentation sufficient
to support its assessment of ICFR for a period of:
(a) ten years from the date of the audit report.
(b) seven years from the date of the audit report.
(c) five years from the date of the financial statements.
(d) three years from the date of the financial statements.
Payroll fraud can consist of:
a. paying employees more than agreed to.
b. paying employees less than agrees to.
c. paying employees vacation time.
d. All of the above.
Privity is:
a. Connection or relationship between two parties each having a common interest in the
same subject matter.
b. Connection or relationship between two parties each having a material interest in the
same subject matter.
c. Connection or relationship between two parties each having any interest in the same
subject matter.
d. None of the above.
Communications between an incoming auditor and predecessor auditor:
(a) require advanced approval from the client company.
(b) are required to be documented in an engagement letter.
(c) must be documented in a RFP if going concern issues exist.
(d) are limited whenever the potential client is a public company.
In order for an auditor to test valuation of a client’s inventories, each of the following
substantive tests of details of account balances are appropriate except:
a. using computer-assisted auditing techniques, reperform calculations testing the
mathematical accuracy of report extensions and batch aggregations.
b. reperform calculations supporting decisions about inventory write-downs or
write-offs.
c. obtain documentation supporting amounts of obsolete or slow-moving inventory
items.
d. evaluate any changes made to the client’s impairment policies in light of engineering
and production information or other underlying assumptions.
Significant developments within the client that affect audit strategy include:
(a) A change in ownership and/or capital structure has occurred.
(b) Acquisitions or discontinued operations have recently occurred.
(c) The accounting information systems have been modified.
(d) All of the above
Which assertion(s) is met if proper cut-off is achieved:
(a) right and obligations.
(b) completeness.
(c) existence or occurrence.
(d) Both b and c.
Contingency controls are primarily concerned with:
(a) batch processing.
(b) recovery.
(c) capacity planning.
(d) end user computing.
Ethical orientation related to the ethic of care would include which of the following?
A. Independence as strength.
B. Individuals as separate.
C. Importance of interdependence.
D. Importance of self-sufficiency.
Errors in financial statements are:
a. never material.
b. intentional.
c. unintentional.
d. Both a and c.
The level of the AICPA Code that is intended to be the ideal standard of conduct is:
A. Rules of Conduct.
B. Rulings by the Professional Ethics Executive Committees.
C. Interpretations of the Rules of Conduct.
D. Principles of Professional Conduct.
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 upper
amount of the tolerable misstatement assuming the client booked an adjusting entry for
the known errors (rounded) is:
a. $5,241,687.
b. $5,266,940.
c. $5,141,940.
d. $5,391,940.
Properly posting of transactions involves:
a. posting the correct amount.
b. posting in the correct period.
c. posting in the correct account.
d. All of the above.
The auditor discovers that the likely rate of deviation in a population is increasing. This
affects:
(a) the sample size.
(b) the tolerable rate of deviation.
(c) the risk of assessing control risk too low.
(d) All of the above.
The transaction to record bad debt expense is posted as a debit to Bad Debt Expense
and a credit to:
a. Accounts Receivable.
b. Accounts Payable.
c. Cash.
d. Sales.
e. Allowance for Doubtful Accounts.
FASB ASC 718-10:
(a) concerns only restricted stock compensation plans.
(b) requires use of fair value accounting for stock compensation.
(c) requires stock compensation to be fully amortized prior to exercise.
(d) All of the above.
Comparing prices and quantities on a supplier’s invoice achieves which assertion(s)?
a. Existence.
b. Valuation.
c. Rights and obligations.
d. Both b and c.
Which of the following is least important to the auditor when investigating a potential
new audit client?
(a) The audit committee does not have the requisite number of independent members or
financial experts.
(b) The company has experienced recent operating losses and other financial
difficulties.
(c) The company has a highly decentralized organizational structure.
(d) The company has experienced high turnover rates among management or members
of the accounting, internal audit, or IT staff.
The GAO is headed by the:
a. Comptroller General.
b. U.S. Congress.
c. Acquisition General.
d. Applied Research General.
e. Investigating General.
The SEC rules of practice:
a. Involve criminal complaints against auditors.
b. Can result in sanctions and penalties against auditors.
c. Can be appealed to Congress.
d. All of the above.
If an auditor determines that a client company’s internal controls are producing reliable
and complete financial information, the auditor will rely upon the internal control
system and:
(a) reduce the extent of controls testing in the interim phase of the financial statement
audit.
(b) reduce the planned substantive testing during the financial statement audit.
(c) increase the amount of evidence collected during the financial statement audit.
(d) increase the planned substantive testing during the financial statement audit.
A “clean” audit report states that:
a. there are no errors in the financial statements.
b. the internal control environment is operating well.
c. the auditors evaluated evidence.
d. All of the above.
Which of the following audit procedures can be used as a substitute for confirmations
not returned?
a. Subsequent account activity.
b. Subsequent account adjustments.
c. Subsequent payments.
d. All of the above.
What are the characteristics of fraud, and how does the suspicion of fraud in a company
affect an auditor’s client acceptance or continuance decision?
The Sarbanes-Oxley Act requires that all public companies have an audit committee
comprised of at least three independent financial experts and at least one other person.
The Single Audit Act of 1984 and the Single Audit Act Amendments of 1996 increased
the audit burdens on state and local governments.
You are assigned to the audit of Hopewell Homebuilders, Inc., a new audit client.
Hopewell uses a standard costing system for inventory accounting. What audit
procedures are appropriate for evaluating the reasonableness of management’s estimates
and underlying assumptions used in a standard costing system?
Management may estimate costs of material, labor, and overhead for each unit of
inventory based upon experience and/or engineering specifications.
Tracing wages paid to the union contract listing wages per job is an example of the
rights and obligations assertion.
Instead of a role on the audit committee, assume the role of a partner in a public
accounting firm that is considering whether or not to propose on a company that
recently issues an RFP.
(a) List the steps the auditing firm should take when deciding whether or not to propose
to a potential client company.
(b) List the important considerations of the firm concerning its staff, industry expertise,
and potential engagement profitability.
(c) What should the auditor investigate about the company?
A receiving report documents receipt of goods.
What different audit procedures (forms of evidence) are appropriate for financial
statement audits that are not applicable for testing of controls?
Section 404 of the Sarbanes-Oxley Act of 2002 requires that ICFR effectiveness be
audited by the PCAOB.
Tracing wages paid to the appropriate time and attendance data is an example of the
existence assertion.
You are approached by Dillon Audit Firm to finalize the audit for Jerrod Corp, a
publically traded company having net sales of $10 million dollars, assets of $50 million,
liabilities of $35 million and net income of $5 million. You agree and determine that the
fieldwork is complete and only wrap-up remains. Describe below the procedures you
would follow and order them appropriately.
Big Boi Co., a U.S. publicly traded company regulated by the SEC, and its auditor,
Chappelle CPA,were recently found liable in a civil case pursuant to the
Securities Exchange Act of 1934. The judgment entered against the codefendants
totaled $10 million, proportionately liable 70% to 30%, respectively. Before the
judgment, however, Big Boi entered bankruptcy proceedings and became insolvent. In
this case, how much is Chappelle CPA liable for? If they were found jointly and
severally liable, what would be Chappelle CPA’s liability?
An ICFR audit is a stand-alone activity with its own objectives and requirements, and
can therefore be conducted separately from the financial statement audit.
Detail schedules need to tie to the lead schedule.
Disclosures are meant to facilitate comparisons between entities that select similar
measurement attributes for similar assets and liabilities.
Cash receipts should be deposited daily, and the accounting records should be updated
on a timely basis.
The principles of the Institute of Internal Auditors Code of Ethics are integrity,
objectivity, confidentiality, and competency.