When a company keeps its own stock records, which of the following procedures is not
required?
A. Confirm outstanding common stock with stock registrar agent.
B. Inspect the stock record stubs for certificate numbers and number of shares.
C. Inspect the unissued certificates.
D. Obtain written representation about the number of shares issued and outstanding.
What are (a) the AICPA Principles of Professional Conduct, (b) Rules of Conduct, and
(c) Interpretation of Rules of Conduct?
In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
When selecting a sample of items to perform a test of controls, all of the following
should be true of a representative sample, except
A. the transactions have been processed by the entity throughout the year.
B. the transactions should be limited to those processed in a specific geographic area.
C. the transactions have been processed by different individuals.
D. the transactions represent both large and small dollar amounts.
An erroneous decision to assess control risk at excessively high levels can have an
adverse effect on
A. the efficiency of an audit engagement.
B. the effectiveness of an audit engagement.
C. the validity of an audit.
D. the type of report the auditor decides to render.
When determining the inherent risk related to an account balance, an auditor
theoretically does not explicitly consider the
A. liquidity of the account.
B. degree of management estimation involved in determining the proper account
balance.
C. related internal control policies and procedures.
D. complexity of calculations involved.
Which of the following is a factor in the control environment?
A. Segregation of duties
B. Information processing
C. Performance reviews
D. Management’s philosophy and operating style
The primary purpose of the auditors’ study of internal control for a nonpublic entity is
A. to provide constructive suggestions to the client for improving its internal control.
B. to report on internal control as required by Auditing Standard No. 5.
C. to identify and detect fraud and irregularities perpetrated by client personnel.
D. to determine the nature, timing, and extent of further audit procedures.
Operational audits do not include determining
A. whether the entity is acquiring, practicing, and using resources economically and
efficiently.
B. review of control systems to ensure compliance with company policies.
C. the causes of inefficiencies or uneconomical practices.
D. whether the department’s goals are aligned with the organization’s goals.
An auditor assesses the risk of material misstatement because it
A. is relevant to the auditor’s understanding of the control environment.
B. provides assurance that the auditor’s overall materiality levels are appropriate.
C. indicates to the auditor where inherent risk may be the greatest.
D. affects the level of detection risk that the auditor may accept.
What is the projected misstatement?
A. $5,000
B. $10,000
C. $15,000
D. $30,000
Independent auditors must consider whether the entity has the ability to continue as a
going concern. If a substantial doubt exists but disclosure is adequate and no other basis
exists for modifying the report, the auditors would normally
A. disclaim an opinion.
B. express an adverse opinion.
C. qualify the opinion.
D. express an unmodified opinion with an emphasis-of-matter paragraph describing the
going-concern uncertainty.
An auditor most likely would extend substantive tests of payroll when
A. payroll is extensively audited by the state government.
B. payroll expense is substantially higher than in the prior year.
C. overpayments are discovered in performing tests of controls.
D. employees complain to management about too much overtime.
Auditors are auditing the cash receipts for Great Wall Corporation. For each audit
procedure performed (numbered 1 – 5 below) select the control objective being tested
by placing the correct letter in the blank.
A. Existence
B. Completeness
C. Authorization
D. Accuracy
E. Classification
F. Accounting and posting
G. Proper period
____ 1. For a sample of recorded cash receipts, the auditors compared the date of
receipt to the recording date.
____ 2. The auditors traced a sample of daily cash reports to the cash receipts journal.
____ 3. The auditors vouched a sample of recorded cash receipts to the deposits in the
bank statement.
____ 4. The auditors recalculate the cash listed on the daily deposit for a sample of
recorded cash receipts.
____ 5. The auditors traced a sample of recorded cash receipts to postings in the correct
customers’ accounts.
Which of the following internal control activities most likely addresses the
completeness assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary inventory
records.
B. Employees responsible for custody of finished goods do not perform the receiving
function.
C. Receiving reports are prenumbered and the numbering sequence is checked
periodically.
D. There is a separation of duties between the payroll department and inventory
accounting personnel.
What are the characteristics that distinguish computer processing from manual
processing?
Solo, CPA, performed a nonstatistical sampling plan to examine the inventory balances
of Hope Inc., and estimated the account balance by projecting the misstatement based
on the number of items examined. In selecting her sample of 70 items, she used an
expected misstatement of $40,000 and a tolerable misstatement of $65,000. The account
balance consisted of 1,050 items totaling $1,200,000. The sample recorded value was
$80,000, and the audited value was $76,000. What conclusion did Solo draw regarding
the account balance?
A. Accept because the expected misstatement is less than the tolerable misstatement
B. Reject because the expected misstatement is greater than the expected misstatement
C. Accept because the expected misstatement is less than the expected misstatement
D. Reject because the expected misstatement is greater than the tolerable misstatement
A governmental auditor assigned to audit the financial statements of the state highway
department would not be considered independent if the auditor
A. spouse was the CFO of the highway department.
B. lived in the state and utilized the highway system on a daily basis.
C. performed audits of the state budget that included funding to the highway
department.
D. reported the audit findings to the transportation committee of the state legislature.
When accounts receivable are confirmed at an interim date, auditors need not be
concerned with
A. obtaining a summary of receivables transactions from the interim date to the
year-end date.
B. obtaining a year-end trial balance of receivables, comparing it to the interim trial
balance, and obtaining evidence and explanations for large variations.
C. sending negative confirmations to all the customers as of the year-end date.
D. considering the necessity for some additional confirmations as of the balance sheet
date if balances have increased materially.
The primary reason for preparing a reconciliation between interest-bearing obligations
outstanding during the year and interest expense in the financial statements is to
A. evaluate internal control over securities.
B. determine the validity of prepaid interest expense.
C. ascertain the reasonableness of imputed interest.
D. detect unrecorded liabilities.
How does the auditor typically determine the appropriate level of the risk of incorrect
rejection when using classical variables sampling?
A. Based on prior assessments of audit risk, risk of material misstatement, and
analytical procedures risk
B. Based on the recorded amount of the account balance as well as the relationship of
the account balance with important financial statement subtotals
C. Based on the findings in prior audits or based on a small sample taken during the
current year
D. Based on the anticipated cost of conducting additional substantive procedures
The standard (unmodified) report issued in the audit of a nonpublic entity includes a(n)
A. management’s responsibility section providing a general description of an audit
conducted in accordance with the applicable auditing standards.
B. introductory paragraph identifying the responsibility of management and auditors in
the financial reporting process.
C. internal control paragraph indicating the effectiveness of the entity’s internal control
over financial reporting.
D. opinion paragraph providing the auditors’ conclusion as to the fair presentation of the
financial statements.
George Wilson is on the board of directors of a small manufacturing company, Smith
Plastics Inc. George holds a CPA certificate and is a member of the AICPA. The
president of the company, John Smith, has asked George to prepare financial statements
for the company to be submitted to Sixth First Bank as part of a loan request. Mr. Smith
tells George that the bank would like a review or an audit, but would settle for a
compilation from a CPA. He would like George to do the compilation.
Under what conditions, if any, George Wilson would be allowed to prepare a
compilation of the financial statements of Smith Plastics Inc.?
Which of the following would a successor auditor ask the predecessor auditor to
provide after accepting an audit engagement?
A. Disagreements between the predecessor auditor and management as to significant
accounting policies and principles
B. The predecessor auditor’s understanding of the reasons for the change of auditors
C. Facts known to the predecessor auditor that might bear on the integrity of
management
D. Matters that may facilitate the evaluation of financial reporting consistency between
the current and prior years
The risk an entity will fail to meet its objectives is referred to as
A. business risk.
B. information risk.
C. assurance risk.
D. audit risk.
Based on audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit
risk level that is substantially the same as the planned audit risk level, the auditor would
A. decrease substantive testing.
B. decrease detection risk.
C. increase inherent risk.
D. increase materiality levels.
Inquiries of warehouse personnel concerning possible obsolete or slow moving
inventory items provide assurance about the PCAOB assertion of
A. completeness.
B. existence.
C. presentation.
D. valuation.
E. rights and obligations.
The performance principle would include all of the following except
A. the auditors’ determination of materiality levels.
B. the auditors’ evaluation of independence with respect to their clients.
C. the auditors’ evaluation of the risk of material misstatement.
D. the auditors’ determination of the nature, timing, and extent of further audit
procedures.
Which of the following is not a concept from the performance principle under generally
accepted auditing standards?
A. The auditor must plan the work and properly supervise any assistants.
B. The auditor must express an opinion in accordance with the auditor’s findings.
C. The auditor must obtain sufficient appropriate evidence about whether material
misstatements exist.
D. The auditor must determine and apply an appropriate materiality level throughout
the audit.
Paula performed the audit of the financial statements of Abdul Company (a nonpublic
entity currently not subject to filing requirements under the Securities Act of 1933 or
Securities Exchange Act of 1934). Abdul Company is currently considering several
alternatives for raising capital, including seeking financing from area banks or an initial
public offering of its securities. Which of the following parties would have the lowest
likelihood of successfully bringing suit for ordinary negligence against Paula?
A. Abdul Company
B. Purchasers of Abdul Company’s securities in an initial public offering
C. First State Bank, a bank with whom Abdul Company has not previously done
business
D. Simon Whitaker, a private investor who is considering acquiring Abdul Company
An auditor discovers that an account balance believed not to be materially misstated
based on an audit sample was materially misstated based on the total population of the
account balance. This is an example of which of the following types of sampling risks?
A. Incorrect rejection
B. Incorrect acceptance
C. Assessing control risk too low
D. Assessing control risk too high
In an agreed-upon procedures engagement, an accountant must
A. follow the attestation standard related to internal control.
B. follow the attestation standard related to evidential matter.
C. include negative assurance explicitly in the report.
D. all of these are true.
The function of _________________________________ refers to comparing the
physical count of inventory to the perpetual inventory records.
Prosecution of fraud perpetrators is advisable because if not prosecuted, they
_______________________________, and failure to do so
______________________________________________________.
Micro Chip Corporation (MCC) has a special PO Box for customer payments. Jane is
responsible for:
– going to the post office every day,
– emptying the post office box,
– opening the mail,
– making a prelist,
– sending the remittance advices to accounts receivable, and
– sending the checks to the cashier’s office.
Jane has opening a business account at her bank for Master Cleaning Company (MCC).
Several of Micro Chips checks are made out with only the initials MCC. Jane selects
certain checks made out only with the initials MCC and deposits them in her business
account. She would destroy the remittance advice.
1. Name two controls that would prevent or detect this fraud.
2. Name two audit procedures that might detect this fraud.
The cost accounting department at Blue Manufacturing Company receives various
types of information at the end of each week. The production floor reports time and
production work data directly to the cost accounting department. Also, the payroll
department sends labor cost data to the cost accounting department. What is the cost
accounting department likely to do with this information? Why?
Indicate how each of the following considerations would impact sample size in a
classical variables sampling application by using I (increase), D (decrease), or N (no
effect).
____ 1. The inventory account balance several unusually large items. Carson had
decided to stratify the inventory account balance so that the unusually large items are
selected.
____ 2. Carson assigned a higher level of the risk of incorrect rejection initially because
he can quickly and inexpensively select additional items for examination if needed.
____ 3. Carson increased the expected misstatement due to the change in Furniture
Expert’s method of processing and recording transactions.
____ 4. Carson conducted a small pilot sample to assess the population’s standard
deviation. The results indicated that the population was highly variable.
____ 5. The risk of incorrect acceptance has been decreased because the results of
Carson’s attributes sampling related to inventory transactions indicated control risk
should be increased.
____ 6. During the audit, Carson realized his initial determination of the population size
only included the first 11 months of year. When he corrected the population to include
all 12 months the recorded inventory account balance increased by $100,000 and 55
items.
The ________________________________________ is a set of procedures designed
to yield audit evidence of liabilities that were not recorded in the reporting period.
What is the role of the PCAOB’s Division of Enforcement and Investigation in dealing
with independence violations involving accountants engaged to audit public
companies?
List and explain briefly the phases of an internal control evaluation.
Below are some examples of methods used to select sample items. Match the sample
selection method is most closely associated with the example. Each selection method is
associated with only one example.
1. Haphazard selection. A. Hannah, CPA, identified 30
random numbers using a computerized random number program
and matched these numbers to items in the population.
2. Block selection. B. Meghan, CPA, selected every
10th item in a randomly ordered population.
3. Systematic random selection. C. Courtney, CPA, selected a
sample of invoices associated with customer files drawn
nonsystematically from a file drawer.
4. Unrestricted random selection. D. Haley, CPA, selected all invoices
prepared on five different days throughout the year.