When analytical procedures reveal unusual fluctuations in an account balance, the
auditor will probably perform fewer tests of details for that account and increase the
tests of controls related to the account.
Companies using e-commerce systems to transact business electronically do not need to
be concerned about how their e-commerce partners manage IT systems risks.
If the audit assurance rate is 95%, then the level of acceptable audit risk is 5%.
Auditors are normally more concerned about violations of the completeness objective
for acquisitions than about violations of the occurrence objective for acquisitions.
Tests of controls provide evidence about the likelihood for misstatements in a client’s
financial statements.
It is equally acceptable under professional auditing standards for auditors to use either
statistical or nonstatistical sampling methods.
Firing personnel terminates the payroll and personnel cycle.
The shipping point is critical because it is the first point at which company assets are
released to another party.
For automated controls, the auditor’s procedures to determine whether the automated
control has been implemented cannot also serve as the test of that control.
Changes in reporting entities, such as the inclusion of an additional company in
combined financial statements, affect comparability but not consistency, and therefore
do not require an explanatory paragraph in the audit report.
One of the reasons that auditors verify equipment differently from current assets is the
amount of any given equipment acquisition is often material.
One major limitation in the application of the audit risk model is the difficulty of
measuring the components of the model.
The Private Securities Litigation Reform Act of 1995 capped damage awards against
auditors to the amount of the audit fees charged.
At the completion of the audit, management is typically asked to make a written
statement as a part of the engagement letter that it is aware of no undisclosed contingent
liabilities.
For financial auditing, the audit report typically goes to many users of financial
statements, whereas operational audit reports are intended primarily for management.
Quality controls are established for the entire CPA firm whereas auditing standards are
applicable to the individual engagement.
Management typically allocates overhead using total raw materials as the basis for the
allocation.
The sales journal is generated from the sales transaction file.
Violations of the occurrence/existence objective for sales are of greater concern to the
auditor than violations of the completeness objective.
The evidence mix includes risk assessment procedures.
The probability threshold for dealing with uncertainty in loss contingencies uses the
terms likely and unlikely.
Analytical procedures are the least costly type of audit test.
In vertical analysis, the account balance is compared to the previous period, and the
percentage change for the period is calculated.
Walkthroughs combine observation, inspection, and inquiry to assure that the controls
designed by management have been implemented.
Performance materiality impacts inherent risk and control risk.
An agreed-upon procedures engagement cannot be undertaken for a federal
government agency.
Recording a sale that did not occur violates the occurrence transaction-related audit
objective and the existence balance-related audit objective.
The emphasis in the audit of dividends is on the ending balance rather than the
transactions.
An auditor assesses the risk of material misstatement to determine the impact on the
audit plan and to determine the nature, extent, and timing of the audit procedures.
Professionals are expected to conduct themselves at a higher level than most other
members of society.
Expulsion from the AICPA for failing to follow the rules of conduct is, by itself,
sufficient to prevent a CPA from practicing public accounting.
The larger the sample size, the more confident the auditor can be that the point estimate
is close to the true population value.
Accounting standards require disclosure of inventory valuation methods.
The acquisition and payment cycle typically begins with the initiation of a purchase
requisition for goods and services from an authorized individual.
Fictitious revenue transactions have the same level of documentary evidence as
legitimate transactions.
Auditors use the results of the substantive tests of transactions of sales and the
collection cycle to determine the extent to which inherent risk is satisfied for each
accounts receivable balance-related audit objective.
A sales invoice is a document that usually indicates credit approval.
Separation of duties in the sales and collection cycle should mandate that the
credit-granting function be separate from the sales function.
Statements on Standards for Accounting and Review Services (SSARS) govern the
CPA’s association with unaudited financial statements of nonpublic companies.
Which of the following parties provides an assessment of the effectiveness of internal
control over financial reporting for public companies?
A)
B)
C)
D)
Which of the following audit procedures would not likely detect a client’s decision to
pledge or factor accounts receivable?
A) a review of the minutes of the board of directors’ meetings
B) discussions with the client
C) confirmation of receivables
D) examination of correspondence files
The most significant effect of the results of the tests of controls and substantive tests of
transactions in the sales and collection cycle is on
A) bad debt expense.
B) the analytical tests to be performed.
C) the confirmation of accounts receivable.
D) the impact of processing cash receipts.
Which of the following verifications would generally not be performed by the auditor
in the month subsequent to the balance sheet date?
A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
B) Verify the bank statement balances when the footed totals are used.
C) Verify the book statement balances tie to the cash receipts and disbursements
journals for the year under audit.
D) Review the items included in the footings to make sure that they were cancelled by
the bank.
Evidence is usually more persuasive for balance sheet accounts when it is obtained
A) as close to the balance sheet date as possible.
B) only from transactions occurring on the balance sheet date.
C) from various times throughout the client’s year.
D) from the time period when transactions in that account were most numerous during
the fiscal period.
The auditor obtained an aged list of receivables and traced the accounts to the master
file, footed the schedule, and traced the amounts to the general ledger. Which
balance-related audit objective was met?
A) existence
B) cutoff
C) detail tie-in
D) all of the above
For effective internal control, employees maintaining the accounts receivable subsidiary
ledger should not also approve
A) employee overtime wages.
B) credit granted to customers.
C) write-offs of customer accounts.
D) cash disbursements.
Under Sarbanes-Oxley, the audit committee of a public company
A) must meet on a monthly basis.
B) must be comprised entirely of financial experts.
C) is responsible for the oversight of the work of the independent auditor.
D) should have at least one independent member.
Backup and contingency plans should also identify alternative hardware that can be
used to process company data.
The audit procedures for the subsequent events review can be divided into two
categories:
(1) procedures normally integrated as a part of the verification of year-end account
balances, and (2) those performed specifically for the purpose of discovering
subsequent events. Which of the following procedures is in the second category?
A) Correspond with attorneys.
B) Test the collectability of accounts receivable by reviewing subsequent period cash
receipts.
C) Subsequent period sales and purchases transactions are examined to determine
whether the cutoff is accurate.
D) Compare the subsequent-period purchase price of inventory with the recorded cost
as a test of lower of cost or market valuation.
Management has recorded prepaid insurance as an asset in the previous year. This year,
to reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the
financial statements,
A) a disclaimer opinion is issued.
B) a a qualified opinion is issued.
C) a standard unmodified opinion audit report is issued.
D) no audit report can be issued.
Which of the following modifications of the auditor’s report does not include an
explanatory paragraph?
A) A qualified report is due to a GAAP departure.
B) The report includes an emphasis of a matter.
C) There is a very material scope limitation.
D) A principal auditor accepts the work of an other auditor.
Which type of evidence is not used by the auditor to obtain an understanding of the
design and implementation of internal control?
A) inquiry
B) observation
C) confirmation
D) inspection
Which of the following is a major balance-related audit objective in testing payroll
liabilities?
A) Payroll tax expense is properly recorded.
B) Transactions in the payroll and personnel cycle are recorded in the proper period.
C) Accrual of salaries is the same as the amounts paid on the payroll tax returns.
D) Time records are recorded by supervisors.
What tools do companies use to limit access to sensitive company data?
A)
B)
C)
D)
When auditing prepaid insurance,
A) for many audits, significant substantive procedures are needed if the control risk is
low.
B) companies often have a standard monthly journal entry to reclassify prepaid
insurance as insurance expense.
C) the emphasis in the tests of details of balances is on insurance expense.
D) the auditor must prepare the insurance register.
Below are five audit procedures, all of which are tests of balances associated with the
audit of accounts receivable. Also below are the eight general balance-related audit
objectives and the four management assertions. For each audit procedure, indicate (1)
its audit objective, and (2) the management assertion being tested.
1. Obtain an aged listing of accounts receivable. For a sample of individual customers
on the listing, agree the customer’s name, amount, and other information with the
corresponding information in the accounts receivable master file.
(1) ________
(2) ________
2. Examine details of sales for five days before and five days after year-end to
determine whether sales have been recorded in the proper period.
(1) ________
(2) ________
3. Assess the reasonableness of the balance in the allowance for doubtful accounts.
(1) ________
(2) ________
4. Inquire as to whether any accounts receivable have been factored or sold during the
period.
(1) ________
(2) ________
5. Inquire as to whether there are any receivables from related parties.
(1) ________
(2) ________
Which of the following is not a factor that relates to opportunities to misappropriate
assets?
A) inadequate internal controls over assets
B) presence of large amounts of cash on hand
C) inappropriate segregation of duties or independent checks on performance
D) adverse relationships between management and employees
Balance-related audit objectives
A) are never applied to income statement accounts.
B) are designed to detect fraud.
C) provide a framework to help the auditor accumulate sufficient appropriate evidence
related to account balances.
D) can have only one specific-related audit objectives.
If material, all of the following are required to be separately disclosed in the financial
statements except for
A) accounts receivable from officers.
B) accounts receivable from affiliates.
C) sales and assets for different business segments.
D) sales for the last ten days of the fiscal year.
The auditor’s internal control objective to determine that “recorded acquisitions are for
goods and services received” satisfies the audit objective of
A) accuracy.
B) occurrence.
C) authorization.
D) completeness.
Which of the following is an accurate statement regarding principles and auditing
standards?
A) The principles underlying an audit give specific guidance to an auditor when a
problem arises in an audit.
B) The principles underlying an audit state that the only objective of an audit is to
provide financial statement users with an opinion.
C) All auditing standards issued by the PCAOB are given two classification numbers.
D) The SAS number identifies the order in which it was issued in relation to other
SASs.
Which of the following is an accurate statement regarding the audit of pricing and
compilation of inventory?
A) Inventory compilation tests include all of the tests of the client’s unit prices to
determine whether they are correct.
B) The review for obsolete inventory should be performed by the accounting
department.
C) The most important internal control for accurate unit costs is external verification by
an outside consultant.
D) Inventory compilation internal controls are needed to ensure that the physical counts
are correctly summarized and priced.
One significant result of the Escott et al. v. BarChris Construction Corporation case
was
A) a greater emphasis on subsequent events procedures.
B) new standards for unaudited statements.
C) a broader definition of third party beneficiaries.
D) a requirement that more companies file annual reports with the SEC.
An imprest petty cash fund
A) is a bank account.
B) is used for large, unusual purchases.
C) is usually reimbursed at least once a week for good internal control.
D) is being replaced by pre-approved purchase cards in many companies.
________ is fraud that involves theft of an entity’s assets.
A) Fraudulent financial reporting
B) A “cookie jar” reserve
C) Misappropriation of assets
D) Income smoothing
Which of the following is not a “cash equivalent”?
A) time deposits
B) certificates of deposit
C) money market funds
D) marketable securities
When a CPA performs an examination engagement under the attestation standards, the
amount of evidence gathered is ________ and the level of assurance is ________.
A) extensive; varying
B) significant; high
C) extensive; high
D) significant; moderate
In using audit sampling for exception rates
A) the auditor wants to know the most the exception rate is likely to be.
B) sampling error is the likelihood that the auditor will miss a monetary misstatement.
C) the upper limit of the interval estimate is known as the sampling risk.
D) the computed upper exception rate (CUER) cannot be considered in the context of
specific audit objectives.
Which of the following deals with ongoing or periodic assessment of the quality of
internal control by management?
A) verifying activities
B) monitoring activities
C) oversight activities
D) management activities
Which of the following is a prescribed set of moral principles or values?
A) codes of business ethics for professional groups
B) laws and regulations
C) codes of conduct within an organization
D) all of the above
Which of the following is a correct statement?
A) The proof of cash receipts is a test of the balance in the cash account at a point in
time.
B) The proof of cash disbursements is effective for discovering a check written for the
incorrect amount for which the dollar amount in cash disbursements is also incorrect.
C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted
transactions and account balances.
D) Segregation of duties is not an important control procedure for cash in a small
business.
Which of the following is a correct statement regarding performance materiality?
A) Determining performance materiality is necessary because auditors accumulate
evidence by segments.
B) The level of performance materiality does not affect the amount of evidence needed.
C) Performance materiality cannot vary for different classes of transactions.
D) Performance materiality is required for public companies, but not for private
companies.
The separate report on internal control over financial reporting
A) cannot contain a cross-reference to the auditor’s report on the financial statements.
B) includes a paragraph that addresses the inherent limitations of internal controls.
C) is addressed to the PCAOB.
D) includes a scope paragraph which refers to the framework used to evaluate internal
controls.
While performing a substantive test of details during an audit, the auditor determined
that the sample results supported the conclusion that the recorded account balance was
not materially misstated. It was, in fact, materially misstated. This situation illustrates
the risk of
A) incorrect rejection.
B) incorrect acceptance.
C) assessing control risk too low.
D) assessing control risk too high.
Describe the audit procedures used to verify the accuracy and detail tie-in objectives for
prepaid insurance.
Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff
bank statement in the audit of cash.
The auditor receives the client’s schedule of recorded disposals and then performs detail
tie-in tests of the recorded disposals schedule. What procedures does the auditor
perform on the client’s schedule of recorded disposals?
Define forecast and projection.
In evaluating the operational effectiveness of internal controls, the auditor is likely to
use four types of audit procedures. List the procedures below.
Explain why there is a special need for ethical conduct in the auditing profession.
You are part of the audit team that is auditing Hillsburg Hardware Co. and you have
been assigned to the sales and collection cycle. You are testing whether the cash
receipts are deposited and recorded at the amounts received (accuracy objective). List
two tests of controls and one test of transactions that you would do to satisfy yourself
regarding the accuracy objective.
In phase IV of the audit, complete the audit and issue an audit report, there are five
activities required. List below the activities.
The examination of prospective financial statements contains four elements that
comprise the examination. List the four elements below.
What are several substantive analytical procedures used in the audit of prepaid
insurance and insurance expense?
Due to qualitative factors, certain types of misstatements are likely to be more
important to users than others, even if the dollar amounts are the same. Identify two
qualitative factors that might significantly affect an auditor’s materiality judgment, and
give an example of each.
Why do auditors use the audit risk model when planning an audit?
For each of the following potential misstatements, provide one potential audit test that
could be used to detect the misstatement.
– sales included in the journals for which there was no shipment
– sale recorded more than once
– shipments made to nonexistent customers and recorded as sales
Distinguish between internal documentation and external documentation as types of
audit evidence. Give two examples of each. Which type is considered more reliable?
Discuss each of the three broad categories (types) of operational audits.
Identify each of the seven factors that influence sample size for nonstatistical tests of
details of balances, and state whether each factor is directly or inversely related to
sample size.
U.S. auditing standards indicate that auditors should use external confirmations for
accounts receivable. However, there are certain circumstances where confirmation may
not be appropriated. List these three situations.
Assuming the client’s internal controls are effective, describe how the auditor can verify
proper cutoff of sales transactions.
CPAs can be held liable for criminal activity under both state and federal laws.
Infamous cases include United States vs. Natelli and ESM Government Securities v.
Alexander Grant and Co. Discuss what occurred in each case.
What are three factors that have increased the importance of obtaining an understanding
of a client’s business and industry? How can an auditor obtain this understanding?