Auditors must keep a questioning mind when analyzing management responses to
inquiry and auditors should strive to obtain corroborating evidence before accepting the
management responses.
An auditor will conclude an internal control is effective if he or she believes the control
can be relied upon to prevent or detect material misstatements.
Attestation standards require that the practitioner evaluate whether there is reasonable
criteria capable of reasonably consistent estimation by which to judge the assertions
being made in a financial forecast.
The better the quality of the internal controls, the more an auditor can rely on the
controls.
The most important control to ensure completeness of sales and shipping is
pre-numbered shipping and billing documents.
The going-concern evaluation must be based on separate procedures that test the client’s
ability to continue as a going concern.
Even if auditors believe internal controls are ineffective, they must still collect some
evidence to conclude they are ineffective.
The auditor’s procedures should include a determination as to whether tangible assets
have reasonable useful lives.
Stratification of the population into several homogeneous subpopulations generally
creates audit efficiency.
The existence of one or more risk factors means that there is a material misstatement
present.
If a company’s net income varies significantly from year to year, the auditor might
consider using an average of the net income from the prior three to five years as the
materiality benchmark.
The quality of an organization’s internal control will affect both the audit approach and
the amount of testing needed for an engagement.
Audit documentation is frequently called working papers.
The Principles of the AICPA Code of Professional Conduct are aspiration in nature;
only the Rules of Conduct and their Interpretations are enforceable against members.
Approval of items for payment usually involves a three-way match among the vendor
invoice, the purchase order, and the receiving report.
A company issuing prospective financial statements can receive a compilation on the
statements but not an examination.
An auditor of a public client may perform internal audit outsourcing services for a
client because such services coincide with external audit functions.
AICPA standards are frequently called ISAs.
Level 1 assets is a broad category of assets and applies to financial instruments,
property, or lower of cost or market considerations for inventory, loans, or receivables.
At the end of an audit, adjustments that are “waived” will remain uncorrected.
In MUS sampling basic precision is the upper misstatement limit when no
misstatements are detected in a MUS sample. It is computed by multiplying the
sampling interval by the error expansion factor.
When financial statements contain generally accepted accounting principles in the
current year that are different from the generally accepted accounting principles used in
the preceding year, the auditor will typically make mention of it in the opinion.
In all states, a CPA must have completed at least 150 hours of college semester hours to
receive their license.
The valuation/allocation and completeness assertions are usually the most relevant for
auditing cash.
The existence or occurrence assertion as related to cash is concerned with proper
classification on the balance sheet.
Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes
in each income statement item over the previous year are useful for this purpose.
Much of the inherent risk related to long-lived assets is due to the importance of
management estimates.
Internal control is a process designed to guarantee the achievement of the objectives of
reliable financial reporting, compliance with laws and regulations and ineffective and
inefficient operations.
An auditor is not required to obtain evidence about the design and operation of the
internal controls to conclude the controls are effective at preventing material
misstatements from occurring.
The purpose of tests of control is to provide reasonable assurance that internal controls
are operating effectively.
When auditing pension obligations, the auditor will likely use a specialist to assist the
audit team.
The fraud triangle requires the auditor to actively consider and assess the risk of fraud
for clients and their financial statements.
Auditors will perform an analysis of leases using FASB’s Codified Standards (ASC)
criteria to substantiate the accounting treatment.
The landmark Enron fraud in the early 2000’s involved the movement of significant
debt off the books to related, unconsolidated entities.
Because of its importance, the decision about what type of opinion to issue is often
made after consultation with other professionals within the firm.
Andrews Corporation adopted an accounting principle that is a material departure from
GAAP. The auditor determined that the financial statements are fairly presented, except
for this specifically identifiable GAAP departure, and therefore would issue a
disclaimer of opinion.
The recording of a marketable security depends, in large part, on management’s
intention with the investment.
The PCAOB’s fieldwork standards include planning and supervision, understanding the
entity and its internal control structure, and obtaining sufficient appropriate audit
evidence.
The auditor may test a manufacturing client’s cost system to substantiate the valuation
of inventory.
Audit committees play an important role in promoting independence of both internal
and external auditors. Which of the following is the most important limitation on the
effectiveness of audit committees?
A.Audit committees may have close personal and professional friendships with
management.
B.Audit committee members are compensated by the PCAOB.
C.Audit committees devote their efforts to external audit concerns and do not
pay much attention to internal auditing.
D.Audit committee members are required to have degrees in non-accounting fields.
Which one of the following statements is false?
A.Auditing includes the process of gathering evidence to test assertions.
B.No general audit program suits the needs for all situations.
C.Even though all audits are different, they can all be approached in the same manner.
D.All audits involve testing management’s assertions contained in written
communications to another party and independently gathering evidence to test the
relevant assertions.
Which of the following controls is not a typical internal control over intangible assets?
A.Procedures to provide reasonable assurance that decisions are appropriately made as
to when to capitalize or expense research and development expenditures.
B.Development of amortization schedules that reflect the remaining useful life of
patents or copyrights associated with the assets.
C.Procedures to identify and account for intangible asset impairment.
D.All of the above are typical controls for intangible assets.
Which of the following would the auditor most likely do when testing the valuation
assertion?
A.Confirm inventory on consignment.
B.Examine receiving reports for inventory, tracing the recorded amounts.
C.Observe the taking of physical inventory.
D.Trace raw material purchases to vendor invoices.
The standard bank confirmation includes a designated place for the financial institution
to report which of the following?
A.Loans and collateral.
B.A reconciliation of the lockbox.
C.Cash held on consignment.
D.Maturity dates for certificates of deposit.
Which of the following is not a major components of an organization’s internal control
structure?
A.Control risk.
B.The control environment.
C.Risk assessment.
D.Control activities.
Which of the following statements is true of internal auditing?
A.The primary client is the investor in the company.
B.The primary nature of services include assurance and consulting.
C.The parties receiving assurance are regulatory agencies and stockholders.
D.Internal auditing must be responsible for gathering evidence in all audits, including
external audits.
Which of the following is not a technique that auditors can use when performing
preliminary analytical procedures related to long-lived assets?
A.Perform an overall estimate of depreciation expense.
B.Review and analyze gains/losses on disposals of equipment.
C.Compare depreciable lives used by the client for various asset categories with those
of the industry.
D.All the above are techniques that auditors can use.
Which of the following is not an inherent limitation in an auditor’s ability to detect
material misstatements relating to a client’s compliance with laws and regulations?
A.Laws and regulations often relate to operational issues within the entity that do not
necessarily relate to the financial statements, so the information systems relating to
financial reporting may not capture noncompliance.
B.The legal implications of noncompliance are ultimately a matter for legal authorities
to resolve, and are not a matter about which the auditor can resolve.
C.Management may act to conceal noncompliance, or may override controls, or may
intentionally misrepresent facts to the auditor.
D.Auditors are not required to consider the applicable legal and regulatory frameworks
that apply to the entity.
Which of the following would the auditor most likely do when testing the existence
assertion for inventory?
A.Observe the client’s count of the annual physical inventory and test count.
B.Review vendor invoices for the amounts recorded.
C.Perform year-end tests of invoices received in the final month.
D.Trace raw material purchases to invoices and to the general ledger.
Which of the following is an approach used to determine posting material?
A.Dual approach.
B.Percentage approach.
C.Qualitative approach.
D.Planning approach.
Which of the following represents a situation in which an auditor is independent of its
client?
A.The auditor is paid by the client organization rather than the SEC.
B.The auditor takes a personal loan from the president of the company.
C.The auditor’s dependent son holds 25 shares of the client’s common stock.
D.The auditor has not received payment for the previous audit services.
Which of the following ratios provide information about liquidity?
A.Net profit margin.
B.Current ratio.
C.Inventory turnover.
D.Sales to assets.
What does the AICPA Code of Professional Conduct consists of?
A.Principles, Rules of Conduct and Ethics Rulings.
B.Rules of Conduct, Interpretations and Principles.
C.Principles, Rules of Conduct and Ethics Rulings.
D.Principles, Rules of Conduct, Interpretations and Ethics Rulings.
For which of the following special purpose financial statements is a dual opinion on a
special purpose framework and GAAP required?
A.Cash basis.
B.Tax basis.
C.Regulatory basis for general use.
D.Contractual basis.
In which one of the following instances would an auditor most likely issue a standard
unqualified opinion without explanatory language?
A.Management’s disclosures are missing or inadequate.
B.There is substantial doubt about the entity’s ability to continue as a going concern.
C.There is a significant limitation on the scope of the engagement.
D.There is an immaterial deviation from GAAP related to capitalizing repairs.
Appropriateness addresses which aspect of audit procedures?
A.Relevance.
B.Reasoning.
C.Reliability.
D.Both A & C.
Which of the following is most often the client’s preferred audit report?
A.Qualified.
B.Unqualified.
C.Adverse.
D.Disclaimer.
Sam Jones, controller of Mitnikco, spends three days researching the accounting
statements to find loopholes in the “rules” and to make a case for recognizing revenue
earlier, rather than in later years. In the end, Sam and the other members of
management determine that they will reduce the company’s deferred revenue accounts
and begin accounting for all revenues as agreements are signed. What are the
motivations of Mitnikco management based solely on the information above?
A.Pressures.
B.Opportunity.
C.Rationalization.
D.Skepticism.
Which one of the following is the primary reason for documenting audit work?
A.To prevent litigation by other parties that question the audit performance.
B.To provide a stand-alone medium that gives audit conclusions and supports the
opinion.
C.To give the client a full reporting of all work performed on their behalf.
D.To supply a point of reference for all auditors performing the work subsequently.
According to the Foreign Corrupt Practices Act of 1977 (FCPA), companies that have
securities listed on U.S. markets must make and keep financial records that accurately
and fairly reflect the transactions of the company and design and maintain an adequate
system of internal accounting controls.
Which of the following would be considered “the nature of a misstatement” that might
make it material?
A.Comparing the sum of known and projected misstatements to total current assets.
B.Comparing the sum of known and projected misstatements to total current liabilities.
C.Comparing the sum of known and projected misstatements to pretax income.
D.Having the effect of changing a positive earnings trend to a negative earnings trend.
Which of the following is not an element of pensions and other postemployment
benefits that is difficult to estimate?
A.Projected lifetime of former employees that will receive a pension.
B.The future earnings of employees prior to retiring for defined benefit plans.
C.Long-term interest rates to discount future costs back to present value.
D.Current amounts earned on pension plan assets.
With a substantive audit strategy, what is an auditor likely to do?
A.Extensively tests internal controls.
B.Limit the testing of internal controls.
C.Not assess control risks.
D.Issue an adverse opinion on the financial statements.
Which of the following is not a key type of evidence that the auditor needs to examine
with respect to pensions and postemployment benefits?
A.Whether the actuarial firm hired by management is independent, capable, and
objective.
B.The appropriateness of the actuarial firm’s work.
C.The reasonableness of significant interest rate assumptions.
D.The length of illnesses that pension recipients contract.
Which of the following factors is not an inherent risk factor related to asset
impairment?
A.Management is normally not interested in identifying and writing down assets.
B.Sometimes management wants to write down every potentially impaired asset to a
minimum realizable value.
C.Determining asset impairment requires a good information system, a systematic
process, goods controls, and professional judgment.
D.All of the above are inherent risk factors.
The audit team asks management for original documents related to sales contracts.
Despite the team’s persistence, management does not supply the documents for over
two weeks. What should this audit team be most concerned with as it relates to these
documents?
A.The need to complete the audit within a specified period of time.
B.Management’s possible use of the time to fabricate the documents.
C.Discrepancies of the evidence.
D.Conflicting evidence.
What is the typical scale for the risks of material misstatement?
A.0% – 100%
B.0% – 10%
C.0% – 5%
D.1% – 100%
Which one of the following statements is false regarding a review?
A.A review involves assessing fraud risk.
B.A review does not involve obtaining an understanding of the entity’s internal control.
C.A review does not involve testing accounting records by obtaining sufficient
appropriate evidence through inspection, observation, confirmation, or examining
source documents.
D.A review does not involve a practitioner obtaining assurance that he or she will
become aware of all significant matters that would be investigated in an audit.
Which assertion has the greatest emphasis when auditing accounts payable?
A.Existence.
B.Completeness.
C.Presentation.
D.Disclosure.
What is the best way an auditor can detect fraud in the financial statements?
A.Use professional skepticism.
B.Understand Generally Accepted Accounting Standards.
C.Brainstorm with the client to find the types of fraud occurring.
D.Actively search for errors in the financial statements.