Five cases are listed below that illustrate different types of audit engagements. In the
space provided, indicate the type of audit that would be conducted, the specific auditor
who might undertake the engagement, and the auditing standards that would probably
apply for the engagement.
A. Report on how federal government agencies could benefit from a shared motor
vehicle pool. (Type of audit, type of auditors, and auditing standards.)
B. Review of the company’s internal control system to determine if it is consistent with
company policy. (Type of audit, type of auditors, and auditing standards.)
C. Review by CPA firm comparing cost and benefits of a health benefits policy for a
federal agency. (Type of audit, type of auditors, and auditing standards.)
D. Determination of the fair presentation of financial statements of a publicly held
company. (Type of audit, type of auditors, and auditing standards.)
E. Review of the U.S. Department of Education program to determine if loans were
made to qualified minority groups in accordance with the provisions of the program.
(Type of audit, type of auditors, and auditing standards.)
Which technique of ICFR documentation describes the activities performed and flow of
documents using diagrams and symbols?
(a) Narratives.
(b) Job descriptions.
(c) Questionnaires.
(d) Flowcharts.
Evidence must be:
(a) sufficient.
(b) persuasive.
(c) convincing.
(d) Both a and b.
Which of the following is not a COSO control activity?
(a) Reconciliations.
(b) Risk tolerance.
(c) Reviews of operating performance.
(d) Segregation of duties.
When issuers file registration statements with the SEC for public offerings of securities,
they include:
a. assertions.
b. limited assurance.
c. financial statements and other financial information.
d. suitable criteria.
e. a compilation.
Which of the following is the most appropriate test for auditing inventory in the land
development and home building industry?
a. Examine subsequent invoices received in support of estimates of the cost of sales for
individual units sold just before year end.
b. Calculate estimated ending inventory using standards and variance information.
c. Review sales contracts for bill-and-hold transactions.
d. All of the above tests are common in the land development and home building
industry.
Go to the PCAOB web site (www.pcaob.org). Find the inspection reports from the
PCAOB on the work of CPA firms; choose one of the Big Four and one firm other than
one of the Big Four.
(a) Identify the firm’s report you selected. What do the reports you selected state?
(b) What recommendations do they make?
(c) If you were the managing partner of the CPA firm that was inspected, based on the
PCAOB’s observations would you feel that your firm had done an adequate job
performing the public company audits reported on? Justify your answer.
(d) Would you want investors and/or clients to read the report? Why or why not?
Which of the following is not an area of interest for anti-fraud controls?
(a) journal entries and adjustments made in the end-of-period financial reporting
process
(b) related party transactions
(c) auditor credentials
(d) significant management estimates
ICFR tests to provide evidence on whether the controls can be relied upon for the
financial statement audit can be performed
(a) only during year-end because they must be performed at the same time as financial
statement audit procedures.
(b) only during interim because they must be performed at the same time as financial
statement audit procedures.
(c) at any time the evidence is available, as long as the entire period of reliance is
evaluated.
(d) at any time after the substantive procedures have been completed, so that the
opinion on financial statement misstatements is not superceded by the opinion on the
effectiveness of controls.
Auditors communicate audit results to users concerning a company’s financial
statements by:
a. issuing a report on the effectiveness of ICFR.
b. issuing the financial statements.
c. issuing a report about the financial statements.
d. None of the above.
Backup controls for data files and hardware are examples of which classification of
ITGC?
(a) Security controls.
(b) Information controls.
(c) Continuity controls.
(d) Application controls.
If a client refuses to provide a management representation letter for an integrated audit,
the auditor may:
a. withdraw from the engagement.
b. note the scope limitation and issue a qualified opinion.
c. issue a report explaining the limitation in the explanatory paragraph.
d. None of the above.
Referring to the facts in #42 above, Mary Ellen will likely prevail if her firm can show:
a. GAAS was followed.
b. GAAP was interpreted correctly.
c. The audit testing reflected the risks known at the time.
d. All of the above.
The user company should:
a. inspect paychecks for completeness.
b. inspect timecard and other input data for accuracy.
c. establish processing controls to detect errors.
d. Both a and b.
To come to an opinion on management’s assertions, an auditor must:
(a) obtain evidence in writing.
(b) obtain evidence that is convincing.
(c) obtain evidence that is appropriate and reliable.
(d) All of the above.
Which of the following is a derivative?
(a) Interest rate swap.
(b) Currency hedge.
(c) Oil price hedge.
(d) All of the above.
An auditor’s professional competence depends upon each of the following except:
(a) knowledge.
(b) a reputation for issuing unqualified audit opinions.
(c) the availability of professional staff and other resources necessary for the audit
engagement.
(d) the requisite training and proficiency necessary for the audit engagement.
Which of the following is not an indicator of competence that is relevant to an auditor’s
evaluation of other individuals performing a portion of the audit work?
(a) professional certification
(b) professional experience
(c) level of education
(d) access to the board of directors
Related party transactions are:
(a) quite rare, and are therefore a reason for auditors to avoid new client relationships
due to the increased risk.
(b) required to be disclosed in the financial statements.
(c) assumed to be arms-length transactions unless they are disclosed in the financial
statements.
(d) considered to be a warning sign of going concern issues.
Section 302 of the Sarbanes-Oxley Act requires the CEO and CFO of each public
company to personally certify each annual and quarterly report issued to the SEC.
These certifications indicate, among other things, that:
(a) the signing officer has reviewed the report.
(b) the financial statements do not contain any untrue statements or omissions of
material facts.
(c) the signing officer acknowledges responsibility for establishing and maintaining
internal controls.
(d) All of the above.
Which of the following assertions would not apply to short-term debt:
(a) existence.
(b) completeness.
(c) right and obligations.
(d) All of the above.
Auditors of public companies are required by SOX to communicate certain matters to
the client company’s audit committee, including:
(a) significant audit findings and adjustments made to the financial statements.
(b) identification of the auditor who will sign the SOX 302 certification.
(c) identification of the auditor who will sign the management representation letter.
(d) an explanation about whether the auditor chose to follow PCAOB or AICPA
standards during the engagement.
The New York Stock Exchange requirements regarding composition of the audit
committee include each of the following except:
(a) the audit committee must have at least three members who are financially
sophisticated, and one of those members must be independent.
(b) the audit committee must have at least three members who are independent, and one
of those members must be financially sophisticated.
(c) each member of the audit committee must not have participated in the preparation of
the financial statements of the issuer at any time during the past three years.
(d) each member of the audit committee must have the ability to read and understand
fundamental financial statements.
An auditor concludes that the internal controls are not operating effectively when in fact
they are. This most likely would result in:
(a) a qualified opinion on the ICFR.
(b) additional substantive testing.
(c) additional scope requirements.
(d) All of the above.
Use of an ITF allows:
(a) test data to be processed alongside actual data.
(b) a comparison of test data output with real data output.
(c) for the possible contamination of company data with test data.
(d) All of the above.
Control risk is:
(a) the risk that inventory will not be sold.
(b) the risk that the internal controls will not disclose material errors.
(c) the risk that the economy will sink into recession.
(d) the risk that accounts receivable will be uncollected.
The SEC requires publicly traded companies to file
a. 10Ks that include audited quarterly financial statements and audited management
reports on internal control over financial reporting.
b. 10Qs that include audited quarterly financial statements.
c. 10Ks that include audited annual financial statements, with or without a management
report on ICFR.
d. 10Ks that include annual financial statements, a management report on ICFR, and the
audit opinions resulting from an integrated audit.
Sample size increases as the:
(a) risk of assessing control risk too high increases.
(b) risk of assessing control risk too low decreases.
(c) tolerable rate of deviation increases.
(d) All of the above.
A debit memo has what effect on the general ledger?
a. It increases cash disbursements.
b. It increases inventory.
c. It decreases accounts payable.
d. None of the above.
The difference between a significant deficiency and a material weakness is:
(a) one of dollars amounts; the material weakness has a greater dollar impact than a
significant deficiency.
(b) a material weakness has a reasonable possibility that a material misstatement will
not be detected; a significant deficiency is less severe.
(c) a material weakness has a reasonable probability that a material misstatement will
not be detected; a significant deficiency is less severe.
(d) All of the above.
Ultramares established that:
a. Auditors could be held liable for negligence.
b. Plaintiffs had to show gross negligence to prevail.
c. Plaintiffs have to show privity in order to sue for negligence.
d. None of the above.
Which one of the following can be helpful in identifying events that motivate fraud?
a. Evidence outside the company’s financial records.
b. Employees living beyond their means.
c. Corporate and partnership records.
d. Restricted databases.
e. Large business receipts.
The audit burdens on state and local governments were reduced by the:
a. Office of Management and Budget.
b. Single Audit Act of 1984 and the Single Audit Amendments of 1996.
c. Multiple Audit Act.
d. Yellow Book.
e. Government Accountability Office.
When is an auditor considered a “rainmaker,” and how is this label applicable to the
client acceptance decision?
Type I subsequent events are always referenced in the audit report.
Currently, the Government Accountability Office workforce consists of about 300
employees.
The invoice processing and billing function should be independent of the shipping
function to provide adequate segregation of duties.
The defendant in a lawsuit involving negligence brought by the audit client is the client.
Kim is a senior auditor at the Wing CPA firm. She is in charge of formulating the audit
plan for several key controls and accounts. Her manager has determined that if any of
the accounts she is working on are misstated by $20,000 the misstatement is material.
The account includes some unusual and significant transactions that have occurred
during the year. Kim wants to utilize sampling for her testing.
(a) How can Kim stratify the transactions in the account to best utilize sampling?
(b)What is sampling risk? How might it affect the audit conclusions Kim makes
basedon the control tests?
(c) If Kim misses anything as a result of sampling, what audit procedures
might uncover the error during the ICFR audit? During the financial statement audit?
FSAS 151 requires that abnormal overhead costs be allocated to products based on
excess capacity of the facilities.
Judges can award punitive damages for cases of negligence.
Suppose you are assigned to the audit engagement team for the Community Bank.
During the prior year, this client experienced problems with fraud perpetrated by two
bank tellers at one of its branch locations. Management has informed us that the
problems have been addressed such that the fraudsters have been terminated and
prosecuted, and the company’s internal controls have been strengthened. (a) What are
the four areas of concern about which the audit team needs to gain an understanding in
order to evaluate the risk of fraud?
(b) For each area of concern identified in part a, provide an example of a question that
the auditor should ask of management and those charged with governance of the
Community Bank.
Certified public accountants follow the AICPA Statements on Standards for Accounting
and Review Services when performing reviews and compilations.
The different philosophical perspectives that are used to determine what is “right” are
very simple and are easy to learn.
An audit firm should immediately decline to propose on a public company’s audit if the
company’s CFO was recently a partner in the audit firm.
Cash transactions should be tested prior to month end to allow for the receipt of
appropriate evidence.
Entity-levels controls are preventative, not detective.
Most of the independence rules relate to independence in fact.
The insurance contract does not need to specify the co-payment that the health-care
provider collects from individual patients.
Auditors frequently use account analysis in auditing expenses.
Examining vouchers for evidence of correct authorization is an example of attribute
sampling.