One of the risks associated with internal control from IT is potential loss of data.
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor
would examine all of the following except the:
A. cutoff bank statement.
B. year-end bank statement.
C. bank confirmation.
D. general ledger.
Assume that an auditor estimates that 10,000 checks were issued during the accounting
period. If an IT application control which performs a limit check for each check request
is to be subjected to the auditor’s test data approach, the sample should include
A. Approximately 1,000 test items.
B. A number of test items determined by the auditor to be sufficient under the
circumstances.
C. A number of test items determined by the auditor’s reference to the appropriate
sampling tables.
D. One transaction.
In auditing accounts receivable, the negative form of confirmation request most likely
would be used when
A. recipients are likely to return positive confirmation requests without verifying the
accuracy of the information.
B. the combined assessed level of inherent and control risk relative to accounts
receivable is low.
C. a small number of accounts receivable are involved but a relatively large number of
errors are expected.
D. the auditor performs a dual purpose test that assesses control risk and obtains
substantive evidence.
In the auditor’s report, the principal auditor decides not to make reference to another
CPA who audited an entity’s subsidiary. The principal auditor could justify this decision
if, among other requirements, the principal auditor
A. issues an unqualified opinion on the consolidated financial statements.
B. learns that the other CPA issued an unqualified opinion on the subsidiary’s financial
statements.
C. is unable to review the other CPA’s audit programs and working papers.
D. is satisfied as to the other CPA’s independence and professional reputation.
All of the following are significant deficiencies except:
A. Absence of appropriate reviews of transactions.
B. Evidence of willful wrongdoing by lower-level employees.
C. Inadequate provisions for safeguarding assets.
D. Inventory is highly subject to obsolescence.
Which of the following elements, if present, would support a finding of constructive
fraud on the part of a CPA?
A. Gross negligence in applying generally accepted auditing standards.
B. Ordinary negligence in applying generally accepted accounting principles.
C. Identified third party users.
D. Scienter.
Auditors who prefer statistical sampling to nonstatistical sampling may do so because
statistical sampling helps the auditor
A. measure the sufficiency of the evidential matter obtained.
B. eliminate subjectivity in the evaluation of sampling results.
C. reduce the level of tolerable misstatement to a relatively low amount.
D. minimize the failure to detect a material misstatement due to nonsampling risk.
When an auditor increases the assessed level of risk of material misstatement because
certain control procedures were determined to be ineffective, the auditor would most
likely increase the
A. Extent of tests of controls.
B. Level of detection risk.
C. Extent of substantive tests.
D. Level of inherent risk.
For certain controls, such as segregation of duties, documentary evidence may not exist.
An auditor would most likely test the procedures by
A. Reperformance and corroboration.
B. Observation and inquiry.
C. Inspection and vouching.
D. Confirmation and recomputation.
Identify whether the following tests are substantive analytical procedures, tests of
details of transactions, or tests of details of account balances.
1) Trace a sample of payroll checks to the master employee list to verify occurrence.
2) Recalculate the mathematical accuracy of a sample of payroll checks.
3) Test a sample of bank reconciliations for the payroll bank account.
4) Estimate sales commissions by applying commission formulas to recorded sales
totals.
5) Compare amounts accrued to supporting documentation, such as payroll tax returns.
6) Compare payroll costs as a percentage of sales to industry data.
When there is a large number of negotiable securities in multiple locations, careful
planning of the physical inspection and count of the securities by the auditor is
necessary to guard against
A. unauthorized negotiation of the securities before they are counted.
B. unrecorded sales of securities after they are counted.
C. substitution of securities already counted at one location for other securities that
should be on hand at a different location but are not.
D. substitution of authentic securities with counterfeit securities.
During an audit, Wicks learns that the entity was granted a 3-month waiver of the
repayment of principal on the installment loan with Blank Bank without an extension of
the maturity date, which is one year in the future. With respect to this loan, the audit
program used by Wicks is least likely to include a verification of the
A. interest expense for the year.
B. balloon payment.
C. total liability at year-end.
D. installment loan payments.
Which of the following is not one of the independent auditor’s objectives regarding the
examination of inventories?
A. Verifying that inventory counted is owned by the entity.
B. Verifying that the entity has used proper inventory pricing.
C. Ascertaining the physical quantities of inventory on hand.
D. Verifying that all inventory owned by the entity is on hand at the time of the count.
The auditor’s communication of material weaknesses in internal control for a nonpublic
company is
A. Required to enable the auditor to state that the examination has been made in
accordance with generally accepted auditing standards.
B. The principle reason for studying and evaluating the system of internal controls.
C. Incidental to the auditor’s objective of forming an opinion as to the fair presentation
of the financial statements.
D. Required to be included as part of the audit opinion.
The concept of reasonable assurance in the context of an entity’s internal controls
recognizes that
A. Auditors may fail to detect material misstatements.
B. Proper internal controls guarantee that material misstatements will not occur.
C. Proper internal controls preclude fraud.
D. The costs of some controls may be too high to implement in relation to potential
benefits.
When control risk is assessed as low for assertions related to payroll, substantive tests
of payroll balances most likely would be limited to applying substantive analytical
procedures and
A. observing the distribution of paychecks.
B. footing and crossfooting the payroll register.
C. inspecting payroll tax returns.
D. recalculating payroll accruals.
An auditor confirms a representative number of open accounts receivable as of
December 31 and investigates respondents’ exceptions and comments. By this
procedure, the auditor would be most likely to learn about which of the following?
A. One of the cashiers has been covering a personal embezzlement by lapping.
B. One of the sales clerks has not been preparing charge slips for credit sales to family
and friends.
C. One of the EDP control clerks has been removing all sales invoices applicable to his
account from the data file.
D. The credit manager has misappropriated remittances from customers whose accounts
have been written-off.
Which of the following subsequent events will be least likely to result in an adjustment
to the financial statements?
A. Culmination of events affecting the realization of accounts receivable owned as of
the balance sheet date.
B. Culmination of events affecting the realization of inventories owned as of the
balance sheet date.
C. Material changes in the settlement of liabilities that were estimated as of the balance
sheet date.
D. Material changes in the quoted market prices of listed investment securities since the
balance sheet date.
Which of the following should not be included in an accountant’s standard report based
upon the compilation of an entity’s financial statements?
A. A statement that a compilation is limited to presenting, in the form of financial
statements, information that is the representation of management.
B. A statement that the compilation was performed in accordance with standards
established by the American Institute of CPAs.
C. A statement that the accountant has not audited or reviewed the financial statements.
D. A statement that the accountant does not express an opinion but expresses only
limited assurance on the financial statements.
When comparing prices and terms on a sample of sales invoices with the authorized
price list and terms of trade, the auditor is testing the ____________ assertion.
A. cutoff
B. authorization
C. occurrence
D. completeness
Effective internal control in a small company that has an insufficient number of
employees to permit proper division of responsibilities can best be enhanced by
A. Employment of temporary personnel to aid in the separation of duties.
B. Direct participation by the owner of the business in the recordkeeping activities of
the business.
C. Engaging a CPA to perform monthly bookkeeping.
D. Delegation of full, clear-cut responsibility to each employee for the functions
assigned to each.
Under Statements on Auditing Standards, which of the following would be classified as
an error?
A. Misappropriation of assets for the benefit of management.
B. Misinterpretation by management of facts that existed when the financial statements
were prepared.
C. Preparation of records by employees to cover a fraudulent scheme.
D. Intentional omission of the recording of a transaction to benefit a third party.
Match the attestation standard with the generally accepted auditing standard that is most
similar in nature.
1)The practitioner must state all of the practitioner’s significant reservations about the
engagement, the subject matter and, if applicable, the assertion related thereto in the
report.
2)The practitioner must adequately plan the work and must properly supervise any
assistants.
3)The practitioner must state the practitioner’s conclusion about the subject matter or
the assertion in relation to the criteria against which the subject matter was evaluated in
the report.
4)The practitioner must have adequate technical training and proficiency in the attest
function.
5)The practitioner must exercise due professional care in the planning and performance
of the engagement.
a)The auditor must have adequate technical training and proficiency to perform the
audit.
b)The auditor must exercise due professional care in the performance of the audit and
the preparation of the report.
c) The auditor must either express an opinion regarding the financial statements, taken
as a whole, or state that an opinion cannot be expressed, in the auditor’s report.
d) The auditor must adequately plan the work and must properly supervise any
assistants.
e) The auditor must state in the auditor’s report whether the financial statements are
presented in accordance with generally accepted accounting principles (GAAP).
An auditor’s decision either to apply analytical procedures as substantive procedures or
to perform tests of transactions and account balances usually is determined by
A. Availability of data aggregated at a high level.
B. Relative effectiveness and efficiency of the tests.
C. Timing of tests performed after the balance sheet date.
D. Auditor’s familiarity with industry trends.
Which of the following could test the assertion of classification for payroll-related
liabilities?
A. Compare items in accrued payroll taxes to the supporting payroll tax return.
B. Search for unrecorded liabilities.
C. Examine payroll tax returns to determine that the expense was recorded in the proper
period.
D. Review payroll liabilities for proper reporting as short- or long-term.
The element of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the
A. Methods of statistical sampling to be used in confirming accounts receivable.
B. Pending legal matters to be included in the inquiry of the client’s attorney.
C. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
D. Timing of the audit.
The auditor is most likely to presume that a high risk of a fraud exists if
A. The entity is a multinational company that does business in numerous foreign
countries.
B. The entity does business with several related parties.
C. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal theft.
D. Inadequate employee training results in lengthy EDP exception reports each month.
Which of the following statements best describes a relationship between sample size
and other elements of auditing?
A. If materiality increases, so will the sample size.
B. If the desired level of assurance increases, sample sizes can be smaller.
C. If materiality decreases, sample size will need to increase.
D. There is no relationship between sample size and materiality or the desired level of
assurance.
Under the “Ultramares” doctrine, to which of the following parties will an accountant
be liable for negligence?
A. Parties in privity and foreseen parties.
B. Parties in privity but not foreseen parties.
C. Foreseen parties but not parties in privity.
D. Neither foreseen parties nor parties in privity.
The following statements were made in a discussion of audit evidence between two
CPAs. Which statement is not valid concerning audit evidence?
A. “I am seldom convinced beyond all doubt with respect to all aspects of the
statements being examined.”
B. “I would not undertake that procedure because at best the results would only be
persuasive and I’m looking for convincing evidence.”
C. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.”
D. “I evaluate the usefulness of the evidence I can obtain against the cost of obtaining
it.”