Post-retirement benefits are generally:
(a) health benefits to retired employees.
(b) health benefits to persons who have left the firm.
(c) health benefits to non-employees.
(d) None of the above.
Client A hires part-time seasonal employees to perform routine accounting tasks during
periods of high transaction volume. The employees frequently make mistakes, some of
which are material, but these are usually detected by a supervisor who reviews their
work. This arrangement in said to:
(a) be a serious control problem .
(b) be a serious problem with an effective compensating control.
(c) be a serious problem without an effective compensating control.
(d) require a qualified audit opinion regarding the ICFR.
For each of the following situations decide whether proper controls have been
implemented. If not, recommend any improvements that can be made.
(a) A catering company prices each job separately based on size, kind of food, and other
variables.Currently, the event planner for each account prices the job, places all the
necessary orders in advance, and collects payment at the time of the event.
(b) A department store has implemented an electronic system to process and
authorize credit card transactions.
(c) A mail order company accepts both checks and credit cards as payment on
sales. The checks received through the mail are collected and processed once a
week when they are restrictively endorsed, and a remittance list is prepared.
(d) The same mail order company from part c does not release any inventory for
shipping until employees have matched the inventory items to be shipped with
an approved sales invoice.
(e) The accounting department at Carly Corporation reconciles its books to its
bank statements every six months.
EDGAR is a database:
a. maintained by the FASB.
b. comprised of public companies.
c. maintained by the PCAOB.
d. None of the above.
What is the primary resource used on an audit engagement?
(a) the client’s IT systems
(b) the auditor’s IT systems
(c) human resources of the audit firm
(d) the client’s internal auditors
To test the valuation assertion for debt, an auditor:
(a) recalculates the amortization of premium or discount on debt.
(b) recalculates interest payments.
(c) recalculates amounts due.
(d) Both a and b.
Situations for which, even for a single individual using their own personal beliefs, there
is no clear cut right or wrong ethical answer are referred to as:
A. ethical decisions.
B. moral dilemmas.
C. moral intensity.
D. ethical standards.
The auditor:
a. prepares the financial statements after the client agrees to all adjustments.
b. writes the footnotes to the financial statements to ensure their accuracy.
c. performs work to reach an opinion on the ICFR and financial statements.
d. None of the above.
Which of the following are steps in an account analysis?
a. Start with the beginning balance, then trace transactions to the ending balance.
b. Start with the beginning balance, then trace transactions to the appropriate
journal/ledger.
c. Start with the beginning balance, then trace transactions to supporting
documentation.
d. All of the above.
In smaller companies where management’s interaction with its controls provides the
basis for its assessment of ICFR, management should provide documentation of how its
interaction provided it with sufficient evidence. Appropriate documentation includes:
(a) memos and emails with instructions and directions to and from management to
company employees.
(b) evidence of formal, direct testing and ongoing monitoring evaluations.
(c) daily checklists and questionnaires indicating the extent of interaction and
monitoring.
(d) All of the above are appropriate for small companies as well as larger companies.
Discovery:
a. Involves depositions.
b. Involves reviewing documents.
c. Involves third parties, such as experts.
d. All of the above.
Dual purpose tests for payroll processing are:
a. encouraged by AS #4.
b. required by SAS #70.
c. not relevant if the auditor is relying on a SAS 70 Type II report.
d. All of the above.
For each of the following scenarios below, determine what type of audit opinion would
be issued on the financial statements. Your choices are:
1> Unqualified
2> Unqualified with explanatory paragraph
3> Qualified
4> Qualified with explanatory paragraph
5> Disclaimer of opinion
6> Adverse opinion
7> No effect on audit opinion
TASK
a. A client refuses to provide details of all pending litigations which while material are
not considered pervasive.
b. A client’s warehouse burns down, making inventory observation impossible.
c. A client files for bankruptcy protection.
d. A client changes from one method of accounting to another method of accounting
promulgated by GAAP.
e. A client changes from one method of accounting to another method not promulgated
by GAAP.
f. A client fails to book material adjusting journal entries proposed by the auditor.
g. A client refuses to allow the auditor to access to the company’s outside legal counsel.
This is a scope limitation.
h. A client switches auditors prior to year-end and selects your firm. The predecessor
auditor is uncooperative.
i. The auditor realizes that the partner on the client is the brother-in-law of the client’s
controller.
j. The client refuses to disclose material related-party disclosures.
k. Material weaknesses are found in the ICFR, although the financial statements are
fairly presented.
l. The outside legal counsel refuses to comply with the request for information despite
pleas from the client.
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 estimate
of true balance(rounded) is:
a. $5,398,938.
b. $5,266,940.
c. $5,391,940.
d. $5,241,940.
Financial statement audits of state and local governments are performed by:
a. internal auditors.
b. external auditors.
c. governmental auditors.
d. GAO auditors.
e. IRS auditors.
Requiring that the supervisor pay and request reimbursement from the next level
manager whenever the supervisor entertains her subordinates is an example of:
(a) management style.
(b) soft controls.
(c) operating effectiveness.
(d) All of the above.
Financial statements must be prepared:
a. in accordance with GAAP.
b. in accordance with IFRS.
c. in accordance with OCBOA.
d. Any of the above, depending on which set of standards the circumstances dictate as
applicable.
AS#5 states that:
a. service providers are part of the client’s IT system.
b. service providers must be audited as part of the ICFR.
c. service providers must be considered when evaluating client risk.
d. None of the above.
Which of the following is used by auditors as a source of guidance on client acceptance
and continuance decisions?
(a) COSO Enterprise Risk Management and Internal Control frameworks.
(b) Auditing standards on risk, fraud, and ICFR.
(c) The audit firm’s quality control standards.
(d) All of the above.
Which of the following internal control activities most likely would assure that all
billed sales are correctly posted to the accounts receivable ledger?
a. Each sales invoice is supported by a prenumbered shipping document.
b. The accounts receivable ledger is reconciled daily to the control account in the
general ledger.
c. Each shipment on credit is supported by a prenumbered sales invoice.
d. The accounts payable ledger is reconciled weekly to the control account in the
general ledger.
e. Daily sales summaries are compared to daily postings to the accounts receivable
ledger.
Which of the below companies would be likely to use foreign currency hedges?
a. National glass manufacturer.
b. A regional glass manufacturer.
c. An international glass manufacturer.
d. None of the above.
Items documented in an engagement letter about which the auditor and client establish
an understanding include:
(a) management’s responsibility for ensuring that the company complies with applicable
laws and regulations.
(b) management’s responsibility for providing reasonable assurance about whether the
financial statements are free of material misstatement.
(c) the auditor’s responsibility for maintaining effective ICFR throughout the audit
engagement.
(d) the auditor’s responsibility for signing a management representation letter at the
conclusion of the audit engagement.
Audit risk involves:
(a) only the financial statements.
(b) only the ICFR.
(c) both the financial statements and ICFR.
(d) only cases where fraud exists.
The AICPA (American Institute of Certified Public Accountants):
a. Is regulated by Congress.
b. Reports to the PCAOB.
c. Regulates CPAs at the state level.
d. None of the above.
The management representation letter:
a. is required per Audit Standard #5.
b. is dated as of the audit report date.
c. cannot substitute for audit evidence.
d. All of the above.
Auditors may obtain information about a client company during other engagements
conducted for the client such as
(a) audits of a subsidiary or other related party entity.
(b) reviews of quarterly financial statements filed with the SEC.
(c) examinations of information included in a registration statement.
(d) All of the above
The GAO issues an annual:
a. Financial Statement Compliance Report.
b. Performance and Accountability Report.
c. Acquisition and Sourcing Report.
d. Applied Research Report.
e. Defense Capabilities Report.
A non-equity partner likely:
a. Shares in all of the work for the firm.
b. Is compensated by sharing in the profits of the firm.
c. Has partner responsibility for work performed.
d. All of the above.
The major advantage to using statistical techniques is:
a. it limits the risk of incorrect acceptance.
b. it relate sample size to audit risk.
c. it limits the risk of inefficiency.
d. it limits sample size to the smallest appropriate size.
When applying the percentage of completion method, companies in the land
development and home building industry must first:
a. estimate the actual costs to be incurred in the current period.
b. calculate a percentage to designate for inventory costing.
c. trace costs incurred to date for each residential unit to the inventory accounting
records.
d. estimate the proportion of actual costs incurred relative to total expected costs.
Which of the following is NOT a professional organization that an accountant or auditor
may join?
A. AICPA.
B. IIA.
C. IMA.
D. PCAOB.
The cut-off assertion is audited by:
a. reviewing the general ledger for adjusting entries after year-end close.
b. reviewing cash disbursements for payments made subsequent to year-end.
c. reviewing cash disbursements for payments made prior to year-end.
d. All of the above.
In order to be held guilty under RICO, the plaintiff must prove that:
a. The auditor was negligent in detecting fraud.
b. The auditor was negligent in detecting material misstatements.
c. The auditor participated in the operations and management of the fraudulent act.
d. All of the above.
According to the PCAOB Guidance for Auditors of Smaller Public Companies, which
of the following important control characteristics is likely to exist in smaller
companies?
(a) Risk of management override.
(b) Use of entity-level controls to achieve control objectives.
(c) Limited opportunities for segregation of duties.
(d) All of the above are important control characteristics existing in small company
environments.
Which of the following is the method of allocating costs to individual residential units
in the land development and home building industry?
a. Variable costing.
b. Job order costing.
c. Historical costing.
d. Acquisition costing.
Control objectives relate to assertions.
Describe the relationship between tolerable misstatement, actual error rate, substantive
testing of details of balances, and analytical substantive procedures.
Homebuilders need not be concerned with unasserted claims because future risks do not
require disclosure in the financial statements.
Kellen Electronics, Inc. (KEI), a public company, has been experiencing negative cash
flows from operations and deteriorating profit margins. Recent press releases have been
quite pessimistic, and the company’s stock price is in a downward trend. How would an
auditor interpret this negative information with regard to a potential audit client? How
would your answer be different if this was a continuing client?
When using sample results to estimate unknown error, the auditor may construct a
confidence interval to determine if the estimated error is within the bounds set by the
tolerable misstatement amount.
Pre-numbering purchase orders is a type of control.
A debit memo is used by the supplier to increase the amount due.
Company A’s balance sheet will be materially misstated if assets are overstated by $1
million or more. The auditor decides to set tolerable misstatement for the investment
account at $30,000. After performing substantive tests, the auditor concludes that the
investment account is overstated by $50,000. The auditor has also found a number of
misstatements in other accounts, but they are all somewhat below
the materiality threshold set for each of the accounts in which the misstatements
are found. Assume the auditor has performed whatever additional steps necessary to
be confident in the audit results found. What does the auditor do next? What happens
regarding the auditor’s opinions on ICFR and the financial statements?
Auditors’ working papers must be in electronic format in order to protect their
confidentiality.
Replacement value is used to estimate fair value.
During her studies at Florida Keys University, a public university that is part of
Florida’s state university system, Amanda took a work-study position in the
university’s financial reporting and accounting department. She figured it would be a
great opportunity to gain some experience because she plans to become an auditor once
she graduates. One day,Amanda’s supervisor informs her that she will be assisting the
“independent auditors” as they audit the university over the next several weeks. As she
knows many classmates who have graduated and have begun careers in public auditing
firms, she is curious to find out who will perform Florida Keys University’s audit.
However, when she asks around, she finds that none of her friends’ firms are engaged to
audit her university. If there are no public accounting firms engaged on the audit, who is
most likely performing the audit of the state agency? Do you think the audit fits the
description of an independent audit? Why or why not?
What are the eight components of the COSO ERM Framework?
Jose is a senior auditor in charge of testing controls over financial reporting. The audit
procedures require that Jose “maintain professional skepticism in assessing controls for
fraud risk.” In the course of his testing, Jose finds a transaction that occurred on January
5 at 11:30 P.M. that decreased the bad debts reserve account enough to increase
earnings per share to $.20, which met analysts’ predictions. Jose has a bad feeling about
this transaction. For documentation purposes, he must articulate the red flags for fraud
risk for this transaction.
(a)What are the red flags for fraud risk demonstrated by this transaction?
(b) For each red flag state (a) why it is important, in other words what it suggests to the
auditor and (b) the follow-up procedure that Jose might use.
Forensic accounting’s unique aspects allow it to stand apart from other career tracks
available to accounting and auditing professionals.
Discuss the difference between independent in appearance and independent in fact.
Authorization and cut-off are two additional assertions.