A board of directors that is actively involved in monitoring management mitigates
opportunities to commit fraud.
In planning an audit for the revenue cycle, the auditor must realize the integrated
relationship of evidence found between the accounts receivable and the notes payable
accounts.
An ethical dilemma occurs in a situation in which moral duties or obligations conflict.
According to professional audit standards, the audit team should assemble early in the
planning stages of an audit to conduct a fraud “brainstorming” meeting in order to
determine the types of fraud that may occur with the client.
Sample size varies directly with sampling risk.
Audit sampling implies the gathering of evidence to use as a basis for making valid
inferences about the characteristics of the population as a whole without examining
every transaction.
Lapping of accounts receivable is least likely to occur when there is an inadequate
segregation of duties.
Confidentiality is the cornerstone of the auditing profession.
Positive accounts receivable confirmations should be used on all accounts which
represent small immaterial balances.
The significant judgments related to “deferred income taxes” are subject to estimates of
future profitable operations against which the deferred asset might be utilized.
A report on compliance with a contractual agreement typically involves the use of
negative assurance by the auditor in a separate report.
Management will often resist a going-concern modification because investors, lenders,
and customers may lose faith in the business.
Professional skepticism involves such things as questioning and corroborating
management responses to inquiries and determining the authenticity of documents.
Review engagements provide limited assurance on financial statements and are less in
scope than audits.
For tests of controls, the most commonly used statistical method is attribute sampling.
A deviation from historical patterns is one of the factors that an auditor focuses on when
evaluating the reasonableness of an estimate.
Typically, omissions may be discovered when audit documentation is reviewed as part
of an external or internal review program.
Either nonstatistical or statistical sampling is appropriate for substantive tests of details.
In attribute sampling if the upper limit of the possible deviation rate exceeds the
tolerable rate the auditor can rely upon the control as being effective.
Evidence can be directly or indirectly relevant to an assertion.
The PCAOB is responsible for conducting audits in the United States.
The type of audit evidence known as inquiry does not ordinarily provide sufficient audit
evidence of the absence of a material misstatement, nor is it alone sufficient to test the
operating effectiveness of controls.
The audit committee is a subcommittee of the board of directors comprised of
independent outside directors.
As a guideline, 1% of total assets or revenue (whichever is larger) can be used to set
materiality.
The AICPA’s Code of Professional Conduct defines an indirect financial interest as an
investment of one percent or less of a client’s organization, and because the amount is
so small it is considered immaterial
The auditor’s expectations in final analytical procedures must be more precise than
those for substantive analytics.
Confirmation statements from banks are common business documents.
The accumulation of which potential misstatements to accumulate for the purpose of
assessing the materiality of misstatements is often based on whether items are
considered clearly trivial.
The inventory observation is performed for the purpose of determining the accuracy of
client counting procedures.
The auditor should consider matters for disclosure only while gathering evidence during
the course of the audit.
In an integrated audit, if one or more material weaknesses exist, the auditor will need to
issue a qualified opinion on internal control over financial reporting.
Random number, haphazard selection and block sampling are acceptable sample
selection methods for non-statistical sampling.
If control deficiencies related to long-lived assets are identified, the auditor will
automatically assess those deficiencies as significant deficiencies.
A sensitivity analysis of changes in value based on industry and cash-flow assumptions
is one of the aspects of the audit program for goodwill impairment testing.
When auditing expense accounts, which of the following would the auditor be least
likely to subject to a detailed test of transactions?
A.Legal expense.
B.Utilities expense.
C.Repairs and maintenance expense.
D.Travel expense.
Which of the following procedurea is not performed as part of an engagement quality
review?
A.Evaluate judgments about materiality and the disposition of corrected and
uncorrected identified misstatements.
B.Call each board member to discuss the potential for fraud.
C.Confirm with the lead audit partner that there are no significant unresolved matters.
D.Evaluate whether appropriate levels of supervision and reviews of individual audit
tasks were completed adequately during the audit.
Which of the following statements is not true about materiality judgments?
A.The auditor’s consideration of materiality is influenced by the auditor’s perception of
the needs of users of financial statements.
B.The auditor considers materiality only in relation to classes of transactions, account
balances, and disclosures.
C.Materiality judgments are used to help the auditor gather sufficient appropriate
evidence about whether the financial statements are free of material misstatement.
D.Materiality decisions differ from one audit client to another.
Who is the client in an audit engagement?
A.Management.
B.The SEC.
C.The audit committee.
D.The stockholders.
From whom should a CPA not accept a commission for recommending a product or
service?
A.A tax client.
B.An audit client.
C.A financial-planning client.
D.A management-services client.
E.Any of the above.
What can users can reasonably expect from the audited financial statements?
A.The audited financial statements are complete and contain all important financial
disclosures, are free from material misstatements, and are presented fairly.
B.The audited financial statements are complete and contain all important financial
disclosures, are free from material misstatements, and are presented fairly according to
GAAP.
C.The audited financial statements are complete, accurate, and are presented fairly
according to GAAP.
D.The audited financial statements are complete, contain all important financial
disclosures, are free from all misstatements, and are presented fairly according to the
substance of GAAP.
Which of the following procedures will an auditor use to better understand a client’s
internal control over accounting systems?
A.An auditor will look over subsequent year working papers.
B.An auditor will review previous year working papers.
C.An auditor will copy previous year working papers.
D.An auditor will re-draft subsequent year working papers.
Concluding that the book value of inventory is correct when it is materially misstated is
an example of which of the following risks?
A.Incorrect rejection.
B.Incorrect acceptance.
C.Insufficient sample size.
D.None of the above.
Auditors will examine significant sales returns immediately subsequent to the period
under audit in order to do which of the following?
A.Substantiate cutoff and the occurrence of net sales transactions.
B.Test the sufficiency of cash balances to cover refunds.
C.Monitor customer satisfaction for disclosure.
D.Assess the nature of procedures that will be performed for the next period’s audit.
The first general standard of the PCAOB requires that an audit be performed by which
type of person?
A.An auditor with seasoned judgment in varying degrees of supervision and review.
B.An auditor with appropriate technical training and proficiency.
C.An auditor with adequate knowledge of the standards of field work and reporting.
D.An auditor satisfying the independence standards.
Which of the following would meet the need for additional control procedures when
using computer-generated purchase orders?
A.Establishment of a maximum quantity limits that can be ordered within a given time
period.
B.Automated acceptance for high dollar levels.
C.Purchase order copies sent by purchasing to receiving.
D.Accounts payable department entering new vendors into the system.
Which of the following is not a type of internal documentation?
A.Legal documents.
B.Business documents.
C.Third-party documents.
D.Accounting documents.
A best practice is to have an oversight of the internal audit function as a responsibility
of which of the following?
A.Management.
B.Internal auditors.
C.Audit committee.
D.External auditors.
When is the assessment of fraud risk complete?
A.Upon completion of the planning stage.
B.Once internal control is understood.
C.Only after the audit risk model has been used to design tests.
D.Once the audit is complete.
As it relates to an audit, which of following statement about professional skepticism is
true?
A.Professional skepticism is not taken into consideration.
B.Professional skepticism relates only to the nature of procedures performed.
C.Professional skepticism is an attitude.
D.Professional skepticism is determined based upon the importance to a user of the
financial statements.
Who are the users of the financial statements?
A.Management.
B.Auditors.
C.Taxing Authorities.
D.Both A and C.
The major risk associated with receivables is related to which of the following?
A.They may be sold to a bank with recourse.
B.They may be recorded as long-term when in fact they will be realized in the current
period.
C.They will not be realized for the entire amount due.
D.They are pledged as collateral as disclosed in the footnotes to financial statements.
Which one of the following is not a typical step used to implement an attribute
sampling plan?
A.Define the attributes of interest and what constitutes failure(s).
B.Select and test the sample items.
C.Evaluate the sample results.
D.Define the non-statistical sampling method that is most effective and efficient.
If management makes appropriate adjustments to correct the implications of a fraud
discovered in a financial statement audit, but does not take appropriate steps to modify
internal controls, upon what does this have a direct impact?
A.The auditor’s opinion on the financial statements.
B.The client’s executive compensation.
C.The auditor’s perception of the overall control environment.
D.All previous work performed by the auditor on this client.
In which of the following situations would a CPA not be considered independent?
A.A CPA has obtained an auto loan from a banking client in the current year.
B.A CPA has obtained an automobile lease term from a client in the current year.
C.A CPA has obtained a $4,000 cash advance from a banking client in the current year.
D.A CPA has obtained a home mortgage loan from a client in the current year.
An increase in the risk of material misstatement would lead to which of the following
responses?
A.Increase in the extent of auditing procedures.
B.Decrease in the extent of auditing procedures.
C.No change in the extent of auditing procedures.
D.No change in the extent of audit procedures.
Reprocessing of transactions helps establish that all valid items have been recorded.
Reprocessing tests which of the following assertions?
A.Occurrence.
B.Rights.
C.Existence.
D.Completeness.
Which of the following is the level at which the control’s failure to operate would cause
the auditor to conclude that the control is not effective and would likely change the
auditor’s planned assessment of control risk in performing tests of account balances?
A.Tolerable failure rate.
B.Allowable risk of assessing control risk too low.
C.Expected failure rate.
D.Allowance for sampling error.
In which of the following situations would the auditor modify the audit report on ICFR?
A.When the auditor relies on the work of other auditors but decides not to include a
reference to the other auditors.
B.When the auditor is unable to perform all procedures needed to evaluate the internal
controls.
C.When the auditor concludes that management’s report on ICFR is not complete or is
improperly presented.
D.When the auditor identifies multiple unrelated significant deficiencies in ICFR.
Detection risk is affected by which aspects of substantive audit procedures?
A.Nature.
B.Timing.
C.Extent.
D.All of the above.
When an auditor issues an adverse opinion, which of the following should be included
in the opinion paragraph?
A.The financial statement effects of the departure from GAAP.
B.A statement that indicates that the financial statements are fairly stated except for a
reason that is described in the separate paragraph.
C.A reference to a separate paragraph that describes the reason for the adverse opinion.
D.The reasons that the financial statements are misleading.
Which of the following is NOT a procedure that the auditor should perform related to
the physical inventory count?
A.Document the first and last tag numbers used.
B.Take notations of all items that appear to be obsolete or are in questionable condition.
C.Make counts of all items and record the counts for subsequent tracing into the client’s
inventory compilation.
D.Observe whether there is any physical movement of goods during the counting of the
inventory.
Which of the following factors is not considered in assessing the quality of the internal
audit?
A.Quality of working-paper documentation, reports, and recommendations.
B.Review of quality of audit policies, programs, and procedures.
C.Attestation services as demanded by market place.
D.Educational level and professional experience.
Which one of the following is an instance where the auditor would add a paragraph
after the opinion paragraph?
A.There is serious doubt that the client can continue as a going concern.
B.Management’s disclosures are not adequate.
C.There are significant uncertainties that are not properly disclosed in the footnotes.
D.There is a material dollar misstatement in the financial statements.
Which of the following processes are included in the revenue cycle?
A.Shipping products to customers.
B.Sending disbursements to suppliers.
C.Issuance of capital stock.
D.Preparation of a time card.
Which of the following is a reason a predecessor auditor can decline to reply to a firm’s
current auditor?
A.Data is under court order.
B.They must always respond.
C.The client does not approve of confidential information being shared.
D.Both A and C are correct.
Which component of COSO’s internal control system concerns the process that provides
feedback on the effectiveness of the other four components of internal control?
A.Information and communication.
B.Monitoring.
C.Control activities.
D.Risk assessment.
Disclaimers of opinion can only be issued by auditors based on which of the following?
A.Violations of GAAP.
B.Substantial scope limitations.
C.Going concern.
D.Lack of independence.
E.Either B or D.
Internal control is a process affected by the organization’s board of directors,
management, and other personnel to provide reasonable assurance of achieving certain
objectives. Which of the following does not fit into one of these categories of
objectives?
A.Reliability of financial reporting.
B.Compliance with laws and regulations.
C.Continuing existence.
D.Effectiveness and efficiency of operations.
When an auditor lacks independence with respect to a client, which of the following
should the auditor issue?
A.A disclaimer of opinion.
B.An adverse opinion.
C.A qualified opinion with explanatory paragraph.
D.An unqualified opinion.