The last component of the of the fraud triangle is that the person must be capable of
rationalizing or personally justifying his or her illegal behavior.
In the course of an investigation, forensic accountants may look at evidence from the
same perspective as traditional auditors.
A classic fraud scheme related to cash receipts known as lapping is possible when poor
segregation exists for duties of cash receipts and posting accounts receivable.
If a company’s system of ICFR is effective, auditors can rely upon the evidence that is
produced by the system to reduce the extent of substantive testing on the audit.
Departures from the most complicated form of a return transaction include return of
damaged goods or the return of only part of the goods that were purchased.
The first step in substantive testing is assessing internal control.
A manufacturer uses raw materials, labor, and overhead to create a finished good.
The types of business structures used by CPA firms are designed to make the
professionals who own the firms responsible for providing high quality services.
Audit risk is experienced by all auditors.
In selecting controls to test, the auditor chooses those designed to prevent the greatest
risk.
When a customer returns a purchase or the seller grants the customer credit for a
defective item, a debit memo is prepared.
A company must either purchase or manufacture the goods it sells, and it must have the
human resources to produce goods and provide services.
The audit plan documents detailed information about audit procedures to be performed
on the engagement.
Pensions are always defined-benefit plans.
The final phase of the audit occurs after the report date.
Most firms process their own payroll.
Publically-traded company refers to any SEC registrant.
Dual purpose tests performed in the planning stages of the audit inform the auditor
regarding changes in the inventory that will influence the audit procedures required by
this cycle.
The term forensic accounting usually refers to fraud investigations and accounting work
to support legal actions.
The primary responsibility of the auditor is detect fraud.
The risk of client misconduct is concerned with management’s reputation and integrity.
CPAs who perform financial statement audits of public companies are responsible for
the accuracy of the client’s financial statements.
A cash equivalent is always short-term.
In the land development and home building industry, the cost of a parcel of land must
be allocated to the various residential units and other facilities in a community.
Accounts payable confirmations:
a. address the completeness assertion.
b. address the cut-off assertion.
c. address the valuation assertion.
d. All of the above.
Which of the following matters would not be included in the terms of an engagement
letter?
(a) Audit fees and billing arrangements.
(b) Involvement of internal auditors and/or a predecessor auditor.
(c) Additional services to be provided in connection with the engagement.
(d) Conditions under which the auditor’s independence requirement may be waived.
The client includes which of the following in its representation letter:
a. a statement that all transactions for the period under audit have been recorded.
b. a statement that management has no knowledge of fraud amongst its employees.
c. a statement that management has responsibility for the accuracy of the financial
statements.
d. All of the above.
Examples of controls tested in the period-end financial reporting process include:
(a) an estimation of the contingent liabilities at year-end.
(b) a review of appropriate authorization over paid invoices.
(c) the client’s accounting policies conform to GAAP and/or IFRS.
(d) All of the above.
When a potential client has announced its intention to “go public,” the auditor’s client
acceptance decision is likely to depend upon:
(a) the results of background checks performed on individuals in key financial
management positions.
(b) whether a formal RFP was used.
(c) whether the predecessor auditor was appropriately independent.
(d) characteristics of the shareholders who will purchase the public shares.
Sampling risk:
a. is a function of statistical procedures.
b. is a function of the statistical method chosen.
c. is a function of the audit, regardless whether statistical methods are used or not.
d. Both a and b.
Which of the following source of evidence would be the most reliable:
(a) a written confirmation sent by a bank directly to the auditor.
(b) a written confirmation sent by a debtor to the client.
(c) a written document produced electronically by a client with good internal controls.
(d) a written document in the form of a fax sent by a debtor to the client indicating
acceptance of a special offer.
Auditors test the operating effectiveness of internal controls only if they
(a) are effectively designed to prevent or detect material misstatements.
(b) address multiple risk factors.
(c) are applied in conjunction with other controls to address a single risk factor.
(d) cause susceptibility to material misstatements.
In deciding on sampling technique, the auditor will:
a. choose sampling with replacement for a smaller sample size.
b. choose sampling without replacement for a smaller sample size.
c. It doesn”t matter which method is used as the auditor can ignore duplicates.
d. None of the above.
The first steps of an integrated audit are to understand the industry and:
a. initial audit planning.
b. contract with the client to do the audit.
c. initial risk assessment.
d. evaluating ICFR design effectiveness.
e. a walkthrough.
Which of the following assertions address account balances at the period end:
(a) completeness.
(b) right and obligations.
(c) existence.
(d) All of the above.
The engagement letter states that an auditor’s opinion on the financial statements and
effectiveness of the company’s ICFR will depend upon the following type of evidential
matter:
(a) results of audit testing.
(b) responses to auditor inquiry.
(c) management representation letter.
(d) All of the above.
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 minimum
amount of the adjustment (rounded) is:
a. $125,000.
b. $25,253.
c. $157,251.
d. $32,251.
Information system refers to:
(a) the client’s accounting information system.
(b) the system by which management collects and analyzes information.
(c) the computer system used by the client.
(d) Both a and b.
Which of the following duties should be segregated?
a. Executing and issuing the purchase order.
b. Recording the receipt of goods and payment to the supplier.
c. Recording the payment and updating the general ledger.
d. All of the above should be separated.
Auditors consider internal control during the audit of a nonpublic company:
a. For all the same purposes as on an audit of a public company.
b. To identify areas of risk and help to plan the financial statement audit.
c. To help to plan the financial statement audit and issue an opinion on effectiveness.
d. Only if they are sure it will be helpful when performing the financial statement audit.
Match the following assertions with their meanings below.
1> Existence or Occurrence
2> Completeness
3> Accuracy
4> Cutoff
5> Classification
6> Ownership, Rights, and Obligations
7> Valuation and Allocation
TASK
(a) _____ Amounts in the financial statements reflect reasonable estimates.
(b) _____ Transactions are posted properly and balances are shown in the correct
accounts.
(c) _____ Recorded transactions and account balances are valid.
(d) _____ The financial statements reflect numbers that are correctly calculated.
(e) _____ All transactions and account balances have been included in the financial
records.
(f) _____ All assets and liabilities shown in the financial statements actually belong to
the company.
(g) _____ All transactions are recorded in the proper time period.
Ethical orientation related to the ethic of rights would NOT include which of the
following?
A. Individuals as interdependent.
B. Importance of rights of others.
C. Independence as strength.
D. Importance of autonomy.
Match the following business activities with the related documents used during that
activity. You will need to use some activities more than once, and some documents may
have more than one related activity.
1> Place materials into production
2> Process the goods
3> Make finished goods available for sale
(a) _____ Materials requisition
(b) _____ Finished goods inventory files
(c) _____ Raw materials inventory files
(d) _____ Cost accounting records
For an auditor’s report to conclude that ICFR is effective, the auditor must have
confidence in the conclusion that the ICFR are effective in both design and operation.
The applicable period of time pertaining to this conclusion is:
(a) the last day of the fiscal year.
(b) the end of the fiscal year and for a reasonable period of time prior to the fiscal
year-end.
(c) throughout the majority of the fiscal year.
(d) throughout the entire fiscal year.
In order to obtain evidence regarding valuation of accounts receivable, the auditor is
likely to:
(a) send out confirmations to the client’s debtors requesting amount owed verification.
(b) inquire of management as to the accuracy of sales transactions.
(c) examine completed confirmation requests for discrepancies between debtor and
client amount.
(d) All of the above.
Long-term debt is included in short-term liabilities if:
(a) debt covenants are violated.
(b) debt covenants are waived.
(c) no portion of the debt is due the following year.
(d) All of the above.
Which of the following assertions do NOT address classes of transactions and events
for the period under audit:
(a) rights and obligations.
(b) completeness.
(c) cut-off.
(d) None of the above.
When reviewing subsequent events, the auditor should:
a. treat ICFR events separate from financial statement events.
b. review SEC correspondence with the client for evidence of any lapses in internal
control.
c. inquire of management as to any lapses in internal control.
d. All of the above.
The appellate court can:
a. Reverse the lower court’s decision.
b. Remand the case back to the lower court for further fact finding.
c. Uphold the lower court’s decision.
d. All of the above.
Development of the audit strategy includes all of the following activities except
(a) specifying the work that has to be performed.
(b) specifying the timing of the work to be performed.
(c) documenting an audit planning memorandum.
(d) defining initial estimates of audit risk and materiality.
A registration statement is a:
a. Document filed by the auditor with the SEC for new securities being offered.
b. Document filed by a client with the SEC for new securities being offered.
c. Can be filed by either the client or auditor.
d. None of the above.
A public client uses a service provider who has received a favorable SAS 70 Type II
report. The auditor can:
a. limit his/her testing of internal controls.
b. decide to rely entirely on the SAS 70 report.
c. refer to the work of the SAS 70 auditor in the audit report.
d. None of the above.
Which of the following documents is most likely to provide evidence to support the
validity of estimates used in a client’s standard costing system?
a. Variance reports.
b. Consignment confirmations.
c. Materials requisitions.
d. Purchase orders.
Which of the following is not a reason why auditors perform an investigation of
potential clients as part of their client acceptance and continuance procedures?
(a) It is important for auditors to establish good reputations, so they strive to accept
clients that possess a high level of integrity.
(b) They want to avoid business risks associated with potential litigation.
(c) They want to be reasonably assured of their ability to earn a profit from the audit
engagements they perform.
(d) They want to assist their audit clients in recovering from financial decline.
The Securities Act of 1933 significantly differs from other statutes concerning auditor
liability in that:
a. The plaintiff does not need to show negligence.
b. The plaintiff does not need to show (s)he relied on the financial statements.
c. Any third party that purchased securities described in the registration statement may
sue the auditor for any material misrepresentation.
d. All of the above.
Within the ERM framework, the sequence of tasks is objective setting, event
identification, risk assessment, and risk response.
Retailers sell indirectly to end consumers and generally have few business customers
whom they bill indirectly.
Facts that warn an auditor that fraud may be occurring can also inform the auditor’s
judgments on client acceptance and continuance.
Recalculation is a form of reperformance.
How do audits serve a “preventive” purpose?
A highly effective audit would have all of its testing performed at an interim date.
Audit steps for the revenue cycle are anchored in the overall audit plan.
Just-in-time inventory is usually only employed by large manufacturers.
The audit opinion on the financial statements and the ICFR must be in the same report.
An Unbilled Services account can be used to capture services that are provided before
and during the surgery that have not yet been billed. The Unbilled Services account is
most important at the end of the fiscal period so that proper revenue is recorded.
Statutory audits are required on all integrated audits performed in accordance with
international accounting standards.
The planning process begins with an evaluation of entry level controls.
Derivatives can be recorded as either an asset or liability.
The internal audit function should play an even more vital role within organizations in
the years ahead.
Assume that an auditor conducts an integrated audit in year one and issues a
clean opinion on management’s assessment of internal control, internal control
effectiveness,
and fairness of the financial statements. There is no change in the accounting
information system. During the first quarter of year two, the auditor identifies a
control deficiency that has not yet caused a material misstatement in the financial
records or statements, but could cause a material misstatement. What does this mean
regarding the appropriateness of the auditor’s reports on ICFR in the prior year?
The AICPA generates all field standards.