Foreseeable third parties are best described as
A. management of the entity.
B. those third parties who have a direct relationship with auditors through previous
contract related to the audit engagement.
C. those third parties who will rely on the audit and are specifically known by auditors.
D. those third parties whose decisions normally rely on audited financial statements and
opinions on those financial statements.
Inherent risk and control risk differ from detection risk in which of the following ways?
A. Inherent risk and control risk are calculated by the client.
B. Inherent risk and control risk exist independently of the audit.
C. Inherent risk and control risk are controlled by the auditor.
D. Inherent risk and control risk exist as a result of the auditor’s judgment about
materiality.
The primary objective of analytical procedures used near the end of an audit is to
A. obtain evidence from details tested to corroborate management assertions.
B. obtain evidence on the validity of the assessment of control risk.
C. assist auditors in evaluating the overall financial statement presentation.
D. identify areas that represent specific risks relevant to the audit.
During an audit of an entity’s stockholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements, or
state law. This audit procedure most likely is intended to verify management’s assertion
A. existence or occurrence.
B. completeness.
C. valuation or allocation.
D. presentation and disclosure.
Which of the PCAOB assertions (A-E) are best verified by the following audit
procedures (1-4)?
A. Existence or occurrence
B. Rights and obligations
C. Valuation or allocation
D. Completeness
E. Presentation and disclosure
1. Confirming inventory held on consignment by the client with independent third
party.
2. Consulting the Wall Street Journal for year-end prices of securities held by the client.
3. Physically examine all major property and equipment additions.
4. Review the aged trial balance for significant past due accounts.
Predication is
A. the determination of the method used to enact a fraud.
B. evidence used in a court of law in proving fraudulent behavior.
C. a reason to believe that a fraud has occurred.
D. the amount of restitution that is made to the company when an individual is
convicted of a fraud.
Which of the following is allowed under the Government Independence Standards?
A. Personnel who provide nonaudit services are prohibited from planning, conducting
or reviewing audit work related to the nonaudit service.
B. The audit organization must never reduce the scope of the audit because of nonaudit
services performed.
C. The government entity must have established policies to assure the nonaudit services
will not affect the audit firm’s ability to perform the audit.
D. CPAs that perform nonaudit services are prohibited from being a member of the
audit team.
Which of the following departments most likely would approve changes in pay rates
and deductions from employee salaries?
A. Personnel.
B. Treasurer.
C. Controller.
D. Payroll.
Analytical procedures used in planning an audit should focus on
A. reducing the scope of tests of controls and substantive tests.
B. providing assurance that potential material misstatements will be identified.
C. enhancing the auditor’s understanding of the client’s business.
D. assessing the adequacy of the available evidential matter.
Techniques needed to select specific transactions of audit interest for testing would not
include
A. embedded audit modules.
B. monitoring system activity.
C. snapshot.
D. test data.
An auditor’s observation procedures for inventory may be performed during or after the
end of the period under audit under which of the following conditions?
A. When the client maintains periodic inventory records.
B. When the auditor finds minimal variations in client records and test counts in prior
periods.
C. When total inventory has not varied more than 5% in the last five years.
D. When well-kept perpetual inventory records are checked by the client periodically
by comparisons with physical counts.
Auditors are required to reference consistency in their report when there are changes in
A. accounting estimates.
B. the format of the Statement of Cash Flows.
C. the classification of financial statement amounts.
D. accounting principles.
Control risk is
A. the probability that a material misstatement could not be prevented or detected by
the entity’s internal control policies and procedures.
B. the probability that a material misstatement could occur and not be detected by
auditors’ procedures.
C. the risk that auditors will not be able to complete the audit on a timely basis.
D. the risk that auditors will not properly control the staff on the audit engagement.
Listed below are words and phrases from the auditors’ standard (unmodified) report on
the entity’s financial statements. For each of the words and phrases indicate by letter in
which paragraph of the standard (unmodified) report they should appear:
A. Introductory paragraph
B. Management Responsibility section
C. Auditor’s Responsibility section
D. Opinion paragraph
___ 1. Audit provides a reasonable basis for an opinion.
___ 2. The financial statements present fairly, in all material respects.
___ 3. Auditors’ responsibility is to express an opinion.
___ 4. Auditors perform the audit to obtain reasonable assurance.
___ 5. Financial statements are in accordance with accounting principles generally
accepted in the United States of America.
___ 6. Responsibility of the entity’s management for the financial statements.
___ 7. Results of its operations and its cash flows.
___ 8. Conducted our audits in accordance with the auditing standards generally
accepted in the United States of America.
___ 9. Management is responsible for the design, implementation, and maintenance of
internal control.
___ 10. We have audited the accompanying financial statements.
Match each of the following categories of general controls (letters A – D) to the
description of a computer control (numbers 1 – 8). A category of general controls can be
used more than once.
A. Program development controls
B. Program change controls
C. Computer operations controls
D. Access to programs and data controls
___ 1. Separating the duties of systems programmers, computer operators, and data
librarians.
___ 2. Requiring the use of passwords to access computer programs and files.
___ 3. Using the Systems Development Life Cycle for testing and validation of new
programs.
___ 4. Requiring program modifications to be tested and implemented by appropriate
personnel.
___ 5. Maintaining backup copies of files at safe, remote locations.
___ 6. Involving users in the design of programs and selection of prepackaged software.
___ 7. Using external labels to identify files and programs.
___ 8. Ensuring that emergency requests are appropriately documented and properly
authorized.
Which of the following sampling risks is associated with the use of attributes sampling?
A. Risk of underreliance: Yes; Risk of incorrect rejection: Yes
B. Risk of underreliance: Yes; Risk of incorrect rejection: No
C. Risk of underreliance: No; Risk of incorrect rejection: Yes
D. Risk of underreliance: No; Risk of incorrect rejection: No
According to Rule 203, Accounting Principles, requires the auditor to adhere to official
pronouncements except when
A. complying would violate client confidentiality.
B. pending legislation may change the reporting requirements of the client.
C. adherence to a pronouncement would be misleading.
D. it has been established that financial statement users prefer an alternative
presentation of information.
Audit documentation does not normally include the
A. specific assertions under audit.
B. industry accounting guides.
C. record of the procedures performed.
D. decisions made in the course of the audit.
The U.S. Government Accountability Office (GAO) standards do not specifically
require a written report in financial statement audits for
A. recommendations for actions to improve operations.
B. all instances of illegal acts that could result in criminal prosecution.
C. compliance with applicable laws and regulations.
D. internal control structure and the control risk assessment.
Which of the following factors influences the risk of material misstatement?
A. Option A
B. Option B
C. Option C
D. Option D
Auditors count investment securities held by the client primarily to test the ASB
balance assertion of
A. existence.
B. rights and obligations.
C. completeness.
D. valuation.
Which of the following statements is not true with respect to the responsibility for
establishing generally accepted auditing standards?
A. The PCAOB issues auditing standards for the audit of public entities, subject to SEC
approval
B. Standards issued by the Auditing Standards Board after 2003 apply to the audits of
both public and private entities
C. If not superseded by the PCAOB, Statements on Auditing Standards issued prior to
2003 are applicable to the audit of public entities
D. Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing
standards for the audits of both public and private entities
Which of the following accounts tends to be most predictable for purposes of analytical
procedures?
A. Accounts receivable
B. Travel and entertainment expense
C. Interest expense
D. Income taxes payable
A client has capitalizable leases but refuses to capitalize them in the financial
statements. Which of the following reporting options does an auditor have if the
amounts pervasively distort the financial statements?
A. Qualified opinion
B. Unmodified opinion
C. Disclaimer of opinion
D. Adverse opinion
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.
Williams, CPA, is using attributes sampling to test controls related to the completeness
of purchasing transactions. Williams decided to select all purchase orders from
September for testing. This is an example of
A. random selection.
B. block selection.
C. haphazard selection.
D. monthly selection.
Which of the following is not an acceptable course of action the audit team can choose
when sample evidence suggests that the account balance is materially misstated?
A. Increase the tolerable misstatement and examine additional items.
B. Increase the sample size and examine additional items.
C. Recommend adjustment of the client’s account balance.
D. All of these are acceptable courses of action.
The demand for compliance auditing in generally accepted government auditing
standards (GAGAS) terms is generated by
A. acts discreditable to the profession.
B. financial statement audits performed in accordance with generally accepted auditing
standards.
C. governmental managers’ obligations to follow laws and regulations.
D. public reports on government managers’ following laws and regulations.
Which of the following procedures is considered a test of controls?
A. An auditor reviews the entity’s check register for unrecorded liabilities.
B. An auditor evaluates whether a general journal entry was recorded at the proper
amount.
C. An auditor interviews and observes appropriate personnel to determine segregation
of duties.
D. An auditor reviews the audit workpapers to ensure proper sign-off.
When an employee embezzles company funds from an electric utility company for the
purpose of paying expenses of an anti-nuclear protest organization, the fraudster’s
motive is said to be
A. psychotic.
B. egocentric.
C. ideological.
D. economic.
The upper limit on misstatements is
A. an adjustment of the sample estimate of misstatement to reflect the desired level of
sampling risk.
B. an adjustment of the sample deviation rate to reflect the desired level of sampling
risk.
C. the maximum rate of deviation that could exist before auditors would reduce the
reliance on an internal control.
D. the maximum misstatement that could exist before auditors would conclude that the
account balance is not fairly stated.
Which of the following statements is true?
A. External auditors must consider the internal audit function as part of obtaining an
understanding of a company’s internal control structure.
B. External auditors must review all work performed by internal auditors.
C. External auditors must investigate the competence and objectivity of internal
auditors.
D. External auditors must share responsibility for the work of internal auditors if it is
used for evidence for the financial statement audit.