Which of the following assertions address presentation and disclosure:
(a) existence.
(b) accuracy and valuation.
(c) rights and obligations.
(d) Both b and c.
Controls are needed to ensure that goods are shipped on a timely basis and bills are sent
out for all goods that are:
a. controlled.
b. removed.
c. billed.
d. identified.
e. shipped.
If the auditor disagrees with management’s assertion of internal control, the auditor:
(a) ignores this and issues the proper opinion.
(b) notes this in the footnotes.
(c) notes this in the audit report.
(d) None of the above.
A debt covenant waiver:
(a) implies there is not a going concern risk.
(b) relieves the client from making payment for the debt.
(c) relieves the client from penalties resulting from covenant violations.
(d) All of the above.
For public companies, the auditor also reviews which of the following on a regular
basis:
(a) the 10Qs filed quarterly with the SEC.
(b) the 8-Ks (if filed) with the SEC.
(c) the 10Ks filed annually with the SEC.
(d) All of the above.
Auditing Standard #3 requires the auditor:
a. to complete all documentation as of the audit report date.
b. to complete all testing as of the audit report date.
c. to complete all documentation within 45 days of the audit report date.
d. None of the above.
A stock transfer agent:
(a) maintains corporate records of stock issued.
(b) maintains records of current and previous shareholders.
(c) maintains records of current shareholders.
(d) All of the above.
Jimmy Joe, a young staff auditor, finds a document in his briefcase that relates to a
client he worked on two months ago. Jimmy, fearing the worst, inserts the document in
the client working papers without notifying his supervisors. By doing this, Jimmy has
violated:
a. AS #5
b. AS #7
c. AS #3
d. Impossible to determine given lack of specifics.
A client has a small number of large account balances, with a greater likelihood of over
rather than understatement. Which of the following sampling techniques would be most
appropriate?
a. Monetary unit sampling.
b. Classical variables sampling.
c. Attribute sampling.
d. All of the above, depending on the circumstances.
Which of the following procedures is ordinarily performed by an accountant in a
compilation engagement of a nonpublic entity?
a. Reading the financial statements to consider whether they are free of obvious
mistakes in the application of accounting principles
b. Obtaining written representations from management indicating that the compiled
financial statements will not be used to obtain credit
c. Making inquiries of management concerning actions taken at meetings of the
stockholders and the board of directors
d. Applying analytical procedures designed to corroborate management’s assertions that
are embodied in the financial statement components
e. The preparation of a cutoff bank reconciliation
Referring to #42 above, Mary Ellen will not prevail if:
a. The “reasonable man” standard was met, but barely.
b. Her firm followed GAAS.
c. The ICRF was not reasonably tested for accuracy.
d. All of the above.
Which of the following is acceptable under the AICPA Rules of Conduct?
A. Using the name of a past owner in the firm name of a successor organization.
B. Receive a commission from one client for recommending the products or services of
another client.
C. A firm may advertise itself as “Members of the American Institute of Certified Public
Accountants”, as long as at least one of its CPA owners is a member.
D. Perform any professional services for a contingent fee for a client for whom the
member performs an audit or review of the financial statements.
The terms statistical testing and risk are intertwined. Below, describe how each of the
statistical terms relates to sample size or sampling error and the different types of risk.
Statistical Terms
(a) Likely rate of deviation
(b) Tolerable rate of deviation
(c) Assessing control risk too high
(d) Assessing control risk too low
(e) Incorrect acceptance
(f) Incorrect rejection
Analytical procedures for testing investments would include:
(a) calculate interest income based on principal amounts and rates.
(b) compare interest rates with prior periods.
(c) review the general ledger for any adjustments posted to cash.
(d) All of the above.
If debt covenants are violated, then an auditor must:
(a) issue a going concern opinion.
(b) obtain evidence that the company will continue in operations.
(c) be certain that this fact is disclosed in the financial statements.
(d) All of the above.
Many people mistakenly believe forensic accounting is limited to:
a. client interviews.
b. fraud detection.
c. fraud investigations.
d. reward systems.
e. the fraud triangle theory.
Standing is defined as:
a. The right to bring a lawsuit.
b. The right to bring a legal cause of action.
c. The court’s permission for a plaintiff to bring a lawsuit.
d. The court’s permission for a plaintiff to bring a legal cause of action.
Client A has equity interests in several affiliates. In addition, Client A sits on the Board
of Directors for Company B, one of the affiliates. If Client A decides to appoint his
spouse as the managing director at Company B, then which of the following would be
an example of a related-party transaction?
(a) Sales between Client A and all of its affiliates.
(b) Sales between Client A and Company B.
(c) Sales from Company B to another of Client A’s affiliates.
(d) All of the above.
For each of the following audit procedures, indicate the type of evidence that is
involved.
(a) reading a sales contract
(b) determining whether a sales invoice is properly included in the sales journal
(c) communicating with management about changes in accounting personnel
(d) watching the cashier perform the daily closing procedures
(e) verifying the mathematical accuracy of discounts included on the sales invoice
(f) verifying the accuracy of the sales journal by reference to a supporting shipping
document and sales invoice
(g) receiving verification from an independent third party
Which of the following is an appropriate substantive test of details of account balances
for the inventory cycle for the verification of an accurate cutoff?
a. Test movements between raw materials, work-in-process, and finished goods by
selecting transactions from the inventory records and examining supporting documents.
b. Reperform calculations testing mathematical accuracy including total extensions of
price and quantity and unit or batch aggregations.
c. Examine shipping documents for a few days before and after year end and trace to
inventory records, agreeing for proper inclusion and exclusion.
d. Review and recalculate client’s analysis supporting adjustments resulting from the
physical inventory count.
Audit risk is defined as:
(a) the risk that the client is committing fraud.
(b) the risk associated with a specific client.
(c) the risk that the auditor fails to detect a material misstatement.
(d) All of the above.
Which of the following best describes an engagement to report on an entity’s internal
control over financial reporting for a nonpublic company?
a. An audit engagement to render an opinion on the entity’s internal control structure.
b. An attestation engagement to examine and report on management’s written assertions
about the effectiveness of its internal control structure
c. A compilation engagement to render an opinion on the entity’s internal control
structure.
d. A prospective engagement to project, for a period of time not to exceed one year, and
report on the expected benefits of the entity’s internal control structure.
e. A consulting engagement to provide constructive advice to the entity on its internal
control structure.
When a sale is conducted using a credit card, the invoice:
a. is sent from the retailer/vendor to the customer.
b. is sent from the customer to the retailer/vendor.
c. is sent from the credit card company to the customer.
d. is sent from the credit card company to the vendor.
Under what circumstances can an auditor rely exclusively on entity-level controls for its
test of IFGC?
(a) If the controls are pervasive.
(b) If the controls achieve the greatest precision.
(c) If the controls support those in the application processes.
(d) All of the above.
In order to meet the completeness assertion when considering a dual purpose test, the
auditor should:
a. trace receiving reports and supplier invoices to the accounts payable subsidiary
ledger.
b. agree the amount from the receiving report to the supplier invoice.
c. agree the amount from the supplier invoice to the accounts payable subsidiary ledger.
d. Both a and c.
If the auditor expects that internal control is weak, then this implies that:
(a) the sample size should increase.
(b) the tolerable rate of deviation should increase.
(c) the expected rate of deviation should increase.
(d) Both a and c.
Which of the following is not an attribute of a financial expert?
(a) An understanding of internal controls and procedures for financial reporting.
(b) An affiliation with the company or its subsidiaries.
(c) Education and experience as a financial officer, accountant, or auditor.
(d) An understanding of GAAP.
Investments are a greater risk to auditors now as opposed to in the past because:
a. they can be carried at market value.
b. entity risk has increased.
c. valuation methods are numerous.
d. All of the above.
A sampling unit:
a. is an individual account.
b. is an individual transaction.
c. is an individual unit.
d. can be any of the above depending on the sampling frame.
Which of the following tests should be performed by an auditor to ensure that all
completed inventory is physically moved to finished goods and that the inventory
records are updated concurrent with the physical movement?
a. Evaluate whether management’s inventory count controls and procedures are
appropriate and observe inventory counting to assess whether the procedures are being
followed.
b. Inspect the inventory records for evidence that they have been properly adjusted
based on the results of the physical counts.
c. For a sample of finished goods inventory items, agree the increase in the finished
goods inventory records to a corresponding decrease in work-in-process for the same
date.
d. For a sample of finished goods inventory items, agree the increase in the finished
goods inventory records to a corresponding decrease in raw materials, purchasing, and
payroll.
Scaling the audit refers to
(a) weighing the risks associated with the client’s susceptibility to fraud.
(b) preparing evidence for an outside service provider.
(c) fitting the audit work to the specific characteristics of the client.
(d) delivering products or services as contracted in the engagement letter.
In auditing mergers and acquisitions, the auditor:
(a) first understands whether a pooling of interest method is allowed.
(b) first reads the agreement between the parties to understand the transaction.
(c) first determines of the event is material or not.
(d) All of the above.
When testing the occurrence assertion, the auditor may:
(a) examine supporting documentation for paid invoices.
(b) examine open purchase orders.
(c) examine the appropriate journals for evidence of posting.
(d) All of the above.
Substantive audit procedures are performed so that the auditor may identify
(a) deficiencies in the design or operating effectiveness of internal controls.
(b) weaknesses in the effectiveness of the client company’s audit committee.
(c) material misstatements in the client company’s financial statements.
(d) Calculations and controls that mitigate the risk of fraud.
The SEC can bring civil as well as criminal actions against auditors.
Generally accepted auditing standards refer to those standards that have been adopted
by the PCAOB.
Identify and describe two organizations that exercise authority over auditors.
Some businesses use a lock box system for checks received through the mail.
The use of computer-assisted audit techniques replaces traditional auditing judgment.
Sampling error occurs when incorrect conclusions are drawn from testing a sample
versus the entire population.
AU 328 requires the use of fair value for certain accounts.
The contract between the audit firm and client is called the engagement letter.
Not all businesses have a human resources cycle.
Rule 102 of AICPA Rules of Conduct states that a CPA should not subordinate
judgment, which means that they should not let others make decisions that are his or her
responsibility.
You are the auditor for a nonpublic company, “A Golden Rule Carpentry.” The company
has a 12/31 fiscal year end. During your audit, you did not identify any material
misstatements in the financial statements.
(a) Draft the appropriate audit report for the financial statement audit of”A Golden Rule
Carpentry.”
(b)What assurances are provided in the audit report when the auditor states that the
financial statements “present fairly …in conformity with accounting principles generally
accepted in the United States of America”?
(c)How does the audit report refer to materiality, and how does it relate to your response
to (b)?
(d)How do you think the auditor should respond upon finding a misstatement that he or
she believes is material, and the client disagrees? In other words, client management
believes the misstatement is not material?
Transactions between a client and its employee trusts are considered related-party
transactions.
Forensic accountants and auditors approach client interviews the same.
You are a newly hired associate auditor for Praxo & Hanks, CPAs, a professional
services firm that provides financial audits, integrated audits, and tax work for a variety
of private and public company clients in the mid-Atlantic region of the U.S. Your first
week with the firm was spent in a training program for audit staff, which was led by
two of the firm’s audit managers. The first day of the training program focused on
understanding the responsibilities of auditors and the nature and objectives of the
services provided to audit clients. Answer the following based on what you should have
learned in the first day of training.
(a)Distinguish between the assertions made by management in presenting financial
statements and reporting on ICFR, and the statements made within an auditor’s report.
(b)How do management’s assertions relate to audit evidence?