Transparency is a desirable, but not critical, element of effective corporate governance.
An auditor must be independent in fact and in appearance.
Part of the understanding the client process of an audit is identifying factors that may
require extension or modification of the audit tests, such as potential related-party
transactions or the possibility of material misstatements.
A lockbox is a mailbox type of depository device that is located in front of the client’s
premises, allowing customers to remit payment in a timely manner.
Existing professional guidance notes that auditors must make materiality assessments
for purposes of (1) audit planning and (2) evidence evaluation after audit procedures are
completed.
A limitation of observation is that observing a process on one day does not necessarily
indicate how the transactions were processed on a different day or over a relevant
period of time.
Pressure upon management to manipulate financial information is a common
characteristic in fraud cases.
According to professional audit standards, the audit team should assemble early in the
planning stages of an audit to conduct a fraud “brainstorming” session in order to
determine the types of fraud that may occur with the client.
Events or transactions occurring after the balance sheet date and before the audit report
date, can be useful in identifying and evaluating the reasonableness of estimates.
The auditor may discover evidence of lapping by preparing an interbank transfer
schedule.
Asset impairment is not typically assessed by the independent auditor since it is a
subjective management estimate.
Property and casualty insurance premiums are examples of estimates found on financial
statements.
Audit evidence is also referred to as an audit opinion.
The payroll department should be responsible for signing payroll checks.
Inventory may become obsolete because of technological advances even though there
are no signs of physical wear.
The auditor is responsible for auditing the necessary disclosures when material lines of
credit and compensating balance arrangements have been made by the client with a
lender.
Audit documentation should include the initials or electronic signature in order to
identify the audit personnel responsible for the work and the managers and partners
reviewing the work.
The SEC is concerned with situations between an auditor and a public company that
allow the auditor to act as management of the client.
A cooling off period is the number of years after which the individual auditor or audit
firm may resume its prior role with the audit client.
When the risk of material misstatement is heightened, the auditor increases the extent of
audit procedures and demands more evidence.
Proper internal control over the inventory account would require that inventory items
should be reviewed for obsolescence and proper accounting treatment.
A contingency fee is a situation in which no fee will be charged unless a specified
finding or result is attained.
The acquisition process begins with a purchase of goods or services.
An imprest payroll account should never reach a zero balance.
CPAs are no longer able to practice as a sole proprietorship.
Evaluating statistical sample results is one of the tasks that can be performed by GAS.
Limited physical access to long-lived assets is a typical internal control that affects
multiple assertions for long-lived assets.
Net income before tax is common base used to determine materiality in a non-for-profit
company.
Electronic Funds Transfers have controls built into the process and do not require
further reconciliation by the client.
The purpose of auditing is to improve the quality of the information provided.
Internal controls over fixed assets should provide reasonable assurance that all
purchases are authorized and reasonably valued.
According to the PCAOB, the detection of material fraud is a reasonable expectation of
users of audited financial statements.
On an audit, only CPAs are required to comply with the AICPA’s independence rules.
One procedure that is common to an audit engagement, as well as to both the
compilation and review engagement, is obtaining an engagement letter.
Monetary unit sampling (MUS) sampling is designed to test whether there is an
acceptable risk of account balance understatement.
Which of the following statements is false regarding materiality judgments?
A.Materiality judgments are a matter of professional judgment.
B.Materiality judgments depend on the needs of a reasonable person (an investor,
potential investor, or other stakeholder) relying on the information.
C.Materiality judgments involve both quantitative and qualitative considerations.
D.Materiality judgments are easy for auditors to make.
As the risk of material misstatement increases, what happens with detection risk?
A.Medium increase.
B.Stay the same.
C.Decrease.
D.Severely increase.
Which one of the following is not an example of an independence violation?
A.Audit partner’s spouse is the CFO at a client.
B.Audit firm accepts money for conducting the audit.
C.Auditors owning a small amount of stock in a client.
D.Providing investment tips to friends about clients.
The standards of competence, independence, and due professional care are covered by
what standards?
A.General standards.
B.Standards of fieldwork.
C.Reporting standards.
D.None of the above.
Misstatements detected during the audit that were initially deemed to be immaterial
must be summarized to determine which of the following?
A.Materiality.
B.Quantitative effect.
C.Aggregate effects.
D.Nature of misstatement.
Which one of the following is not an example of a typical review program?
A.Interoffice reviews.
B.Engagement quality review.
C.Peer reviews.
D.Self reviews.
Which of the following is not a type of statistical method that provides results in dollar
terms?
A.Variables sampling.
B.Attributes sampling.
C.Monetary unit sampling.
D.Probability proportional to size sampling.
Which of the following is an acceptable organizational form for an audit firm?
A.A partnership.
B.A professional corporation.
C.A sole proprietorship.
D.Any organizational form permitted by state law or regulation.
Which of the following is not a required communication with the audit committee?
A.Auditor’s responsibility under GAAS.
B.Analytical review.
C.Audit adjustments.
D.Uncorrected misstatements.
Which of the following is not a typical accounting cycle?
A.Revenue.
B.Inventory.
C.Cash.
D.Internal Controls.
Who does the public expect the auditor will recognize as the primary users of the
audited financial statements?
A.Their clients.
B.The Public Company Accounting Oversight Board.
C.Members of management.
D.Third-party users.
Which of the following standards represents the standards followed by CPAs providing
a review of a client’s financial statements?
A.Statements on Standards for Accounting and Review Services.
B.Statements on Auditing Standards.
C.Statements on Standards for Consulting and Review Services.
D.Statements on Accounting Principles.
Which of the following items is not included in the engagement letter?
A.The responsibilities of the auditor.
B.The responsibilities of management.
C.The objective of the financial statements.
D.Identification of the applicable financial reporting framework for the preparation of
the financial statements.
Which of the following techniques is one of the most common techniques used to
fraudulently misstate financial statements for public companies?
A.Overstatement of assets through undervaluing existing assets.
B.Overstatement of assets through overvaluing existing assets.
C.Understatement of assets through undervaluing existing assets.
D.Understatement of assets through overvaluing existing assets.
The processes used by management in developing estimates include which of the
following?
A.Controls over the process.
B.The reliability of underlying data in developing the estimate.
C.Use of outside experts by management (for example, how they were used and their
expertise).
D.All of the above.
Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley’s five-year-old daughter
owns shares of stock in McBurgers Corporation, then what is Pulley considered to
have?
A.An immaterial indirect financial interest in McBurgers Corporation.
B.A material indirect financial interest in the McBurgers Corporation.
C.A loophole for claiming independence from McBurgers Corporation.
D.An direct financial interest in McBurgers Corporation.
If the auditor concludes that there may be a going-concern problem, which of the
following is not typically evaluated to determine the reasonableness of management’s
plans to overcome this problem?
A.Management’s assumption about increasing prices or market share in relationship to
current industry developments.
B.Management’s assumptions about cost savings related to a reduction in the work force
should be recomputed and evaluated to determine any hidden costs.
C.Management’s past track record related to delaying unnecessary expenditures.
D.Management’s assumptions about selling off assets and their relationship to current
market prices.
Which of the following items are registered audit firms not required to report to the
audit committee?
A.Critical accounting policies and practices.
B.Alternative treatments of financial information within generally accepted accounting
principles that have been considered by management, as well as the preferred treatment
of the audit firm.
C.A list of all audit procedures performed.
D.Significant written communications between the audit firm and management.
Attribute sampling is used in which of the following situations?
A.Testing rates of deviations of controls.
B.Testing the reasonableness of account balances.
C.Need to estimate some amount.
D.Both A and B.
Which of the following represents fraud procedures used by auditors?
A.The auditor must disregard complex transactions for reasons of economic substance.
B.The auditor cannot allow the client to pressure the timing of the audit for early
release of earnings.
C.The auditor must put less emphasis on capital additions and more on payroll.
D.The auditors must no longer use confirmations and move forward to internal
verification.
The discovery of an intentional misstatement, even if immaterial, could impact the
auditor’s opinion on the effectiveness of which of the following?
A.The client’s external controls.
B.The client’s interim financial statements.
C.The client’s internal controls over financial reporting.
D.The client’s segment reports.
What is the primary determinate in the difference between fraud and errors in financial
statement reporting?
A.The materiality of the misstatement.
B.The intent to deceive.
C.The level of management involved.
D.The type of transaction affected.
Which one of the following is considered effective documentation of an internal control
system?
A.Electronically pre-numbered records.
B.A cathode ray screen used in input.
C.Verbal authorization.
D.The financial statements.
In determining the types of activities, engagements and interactions an auditor should
have with a client, what must the CPA and the audit firm do?
A.Follow the rules exactly as they are written.
B.Assess all of their relationships with every client to ensure that independence is
intact.
C.Focus on client satisfaction above all other considerations.
D.Realize that ethics are only guidelines and a matter of personal judgment.
What is the main reason to establish guidelines for brainstorming sessions?
A.To not hurt feelings.
B.It is required by the SEC.
C.To encourage interactive and constructive group dialogue and idea exchange.
D.To pass information up to top-level management efficiently.
In the United States,what is the most common criteria against which the auditor
measures the fairness of financial statement presentation?
A.Auditing standards.
B.Generally accepted accounting principles.
C.Generally accepted accounting standards.
D.Governmental accounting principles.
Which of the following is an example of a test of controls?
A.Examining the reasonableness of interest accrued on notes payable.
B.Verify that cash surrender value of life insurance is classified as a long-term asset.
C.Using a spreadsheet to create a pivot table for the summarization of accounts
receivable.
D.Reviewing management’s monthly bank reconciliations.
Which of the following is a reason why an automated purchasing system is beneficial?
A.Apply preloaded specifications and materials lists to the system to start the process.
B.Automatically flag invoices that do not reconcile with purchase orders.
C.Create change orders and analyze variances from purchase orders.
D.All of the above.
According to the AICPA, the auditor needs to clearly express an opinion based on audit
evidence obtained in the form of a written report.This is stated in which AICPA
principle governing an audit conducted in accordance with GAAS?
A.Principle 1
B.Principle 4
C.Principle 5
D.Principle 7
Which of the following terms best describes the types and appropriateness of audit
procedures used?
A.Nature of detection risk.
B.Material misstatement risk.
C.Nature of auditing procedures.
D.Nature of risk response.
Which of the following items would not normally appear on bank reconciliations?
A.Balance per bank.
B.Outstanding deposits list.
C.Balance per books.
D.Outstanding checks list.
Which of the following procedures is not a fraud-related audit procedure used to
respond to identified fraud risk factors?
A.Physically inspect tangible assets, including major additions, and agree serial
numbers with invoices or other supporting documents.
B.Use the work of a specialist for asset valuations, including impairments.
C.Confirm the terms of significant additions of property or intangibles with other
parties involved in the transaction.
D.All of the above are fraud-related audit procedures.
Which of the following is not a major components of an organization’s internal
controls?
A.Risk assessment.
B.Control environment.
C.Control activities.
D.Control risk.
Which of following is not part of the ethical framework derived from utilitarianism and
rights theories?
A.Identification of the legal issues.
B.Determination of affected parties and their rights.
C.Determination of the most important rights.
D.Development of alternative courses of action.