Which of the following statements is correct regarding the audit of inventory cost
accounting?
A) Cost accounting systems and controls are the same for all manufacturing companies.
B) All companies that have work-in-process must use a perpetual inventory system.
C) Auditors test perpetual inventory master files by examining documentation that
supports additions and reductions of inventory amounts in the master files.
D) Manufacturing companies keep their cost accounting records separate from the
production and other accounting records.
The main difference between job order and process costing systems is that
A) one accumulates costs by materials issued and the other by labor incurred.
B) one accumulates costs by individual jobs and the other by particular processes.
C) one emphasizes costs accumulated in completed products and the other emphasizes
costs associated with work-in-process.
D) one emphasizes costs adding value to the product and the other emphasizes costs
incurred because of waste, scrap, and obsolescence.
Which of the following material events occurring subsequent to the balance sheet date
would require an adjustment to the financial statements before they could be issued?
A) loss of a plant as a result of a flood
B) sale of long-term debt or capital stock
C) settlement of litigation in excess of the recorded liability
D) major purchase of a business that is expected to double the sales volume
Level ________ estimates use observable inputs other than quoted prices.
A) 1
B) 2
C) 3
D) 4
The scope paragraph of the auditor’s responsibility section of the audit report issued for
financial statements of a nonpublic company should refer to auditing standards
generally accepted in the United States of America.
Which of the following statements is not correct regarding probabilistic and
nonprobabilistic sample selection?
A) In probabilistic selection, every population item has a known chance of being
selected.
B) It is acceptable to evaluate a nonprobabilistic sample using statistical methods.
C) Probabilistic selection is required for all statistical sampling methods.
D) Both probabilistic and nonprobabilistic methods are acceptable and commonly used.
Analytical procedures
A) performed during the audit planning phase generally use aggregate data.
B) are never performed during the testing phase of an audit.
C) are declining in importance as a type of audit evidence.
D) performed during the audit planning stage help the auditor take a final objective look
at the audited financial statements.
Which of the following is a generally accepted attestation standard for fieldwork?
A) The practitioner must state in the report that the report is intended solely for the
information and use of specified parties.
B) The practitioner must state all of their significant reservations about the engagement.
C) The practitioner must adequately plan the work and must properly supervise any
assistants.
D) The practitioner must exercise due professional care in the planning and
performance of the engagement and the preparation of the report.
Which of the following is a substantive analytical procedure to determine if there is idle
equipment or equipment that was disposed of but not written off?
A) Compare depreciation expense divided by gross equipment cost with previous years.
B) Compare gross manufacturing cost divided by some measure of production with
previous years.
C) Compare accumulated depreciation divided by gross equipment cost with previous
years.
D) Compare annual repairs and maintenance accounts with previous years.
The auditor uses knowledge gained from the understanding of the client’s business and
industry to assess
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk.
Attributes sampling is based on the ________ distribution, in which each possible
sample in the population has one of two possible values, such as yes or no.
A) random
B) binomial
C) statistical
D) nonstatistical
A company is concerned with the theft of cash after the sale has been recorded. One
way in which fraudsters conceal the theft is by a process called “lapping.” Which of the
following best describes lapping?
A) reduce the customer’s account by recording a sales return
B) write off the customer’s account
C) apply the payment from another customer to the customer’s account
D) reduce the customer’s account by recording a sales allowance
With respect to the SEC,
A) the attitude of the SEC is generally considered in any major change proposed by the
FASB.
B) the SEC is the sole agency responsible for setting generally accepted accounting
principles.
C) the SEC requirements of greatest interest to CPAs are set forth in the their
enforcement regulations.
D) the SEC has the power to establish rules for all CPAs.
At what point in the audit process are tests of details most appropriately designed?
A) plan and design audit approach
B) perform audit tests of controls and substantive tests of transactions
C) perform substantive analytical procedures and tests of details of balances
D) complete the audit and issue the audit report
Which of the following statements is correct?
A) The overhead charged to inventory at the balance sheet date can be understated if the
salaries of administrative personnel are inadvertently or intentionally charged to indirect
manufacturing overhead.
B) When jobs are billed on a cost-plus basis, revenue and total expenses are both
affected by charging labor to incorrect jobs.
C) Payroll is a significant portion of inventory for retail and service industry
companies.
D) The valuation of inventory is affected if the direct labor cost of individual employees
is improperly charged to the wrong job or process.
When developing the overall strategy for the audit, the auditor will
A) decide whether to accept a new client.
B) determine if any audit specialists will be required.
C) identify why the auditor needs an audit.
D) obtain an engagement letter.
Attributes sampling would be an appropriate method to use on which one of the
following procedures in an audit program?
A) Review sales transactions for large and unreasonable amounts.
B) Observe whether the duties of the accounts receivable clerk are separate from
handling cash.
C) Examine a sample of duplicate sales invoices for credit approval by the credit
manager.
D) Review the aged schedule of accounts receivable to determine if receivables from
officers are included.
Which of the following statements is correct regarding the audit of dividends?
A) The emphasis is on the ending balance in the dividends account.
B) When auditors verify that the dividends are paid to stockholders that exist, they are
concerned with the completeness objective.
C) If the client uses a transfer agent to disburse dividends, the total can be traced to a
cash disbursement entry to the agent and also confirmed.
D) All of the above are correct statements.
The auditor is concerned with four aspects of cost accounting, including
A) documents and records for transferring inventory.
B) perpetual inventory master files.
C) unit cost records.
D) all of the above.
Master files, spreadsheets, and reports that accumulate material, labor, and overhead as
the costs are incurred are
A) accounting systems.
B) storeroom documents.
C) cost accounting records.
D) finished goods inventory records.
Which of the following best describes the systems of internal control for payroll for
large companies?
A) loosely structured but well controlled
B) loosely structured and loosely controlled
C) highly structured and well controlled
D) highly structured but loosely controlled
An important statistic to consider when using a statistical sampling audit plan is the
population variability. The population variability is measured by the
A) sample mean.
B) standard deviation.
C) standard error of the sample mean.
D) estimated population total minus the actual population.
Members of the Public Company Accounting Oversight Board are appointed and
overseen by the
A) U.S. Congress.
B) American Institute of Certified Public Accountants.
C) Auditing Standards Board.
D) Securities and Exchange Commission.
The Code of Professional Conduct is established by the membership of the AICPA, and
the Interpretations of the Rules of Conduct are prepared by the
A) Financial Accounting Standards Board.
B) Securities and Exchange Commission.
C) CPA licensing agencies within each state.
D) Professional Ethics Executive Committee of the AICPA.
The underlying reason for a code of professional conduct for any profession is
A) the need for public confidence in the quality of service of the profession.
B) it provides a safeguard to keep unscrupulous people out.
C) it is required by federal legislation.
D) it allows licensing agencies to have a yardstick to measure deficient behavior.
When dealing with contingencies,
A) all contingencies must be disclosed or footnoted.
B) the auditor must exercise considerable professional judgment when evaluating
whether the client has applied the appropriate treatment.
C) it is easy for the auditor to uncover contingencies without management’s
cooperation.
D) the review for contingent liabilities is only performed at the beginning and the end
of the audit.
If a bank does not respond to a bank confirmation request, the auditor would most
likely
A)
B)
C)
D)
CPAs may provide bookkeeping services to their private company audit clients, but
there are a number of conditions that must be met if the auditor is to maintain
independence. Which of the following conditions is not necessary?
A) The CPA must not assume a management role or function.
B) The client must hire an external CPA to approve all of the journal entries prepared by
the auditor.
C) The auditor must comply with GAAS when auditing work prepared by his/her firm.
D) The client must accept responsibility for the financial statements.
Which of the following statements is usually true?
A) Materiality is easy to quantify.
B) Fraudulent financial statements are often easy for the auditor to detect, especially
when there is collusion among management.
C) Reasonable assurance is a low level of assurance that the financial statements are
free from material misstatement.
D) An item is considered material if it would likely have changed or influenced the
decisions of a reasonable person using the statements.
Which of the following statements is not a correct statement regarding audit evidence?
A) Evidence obtained from an independent source outside the client organization is
more reliable than that obtained from within.
B) Documentary evidence is more reliable when it is received by the auditor indirectly
rather than directly.
C) Documents that originate outside the company are considered more reliable than
those that originate within the client’s organization.
D) External evidence, such as communications from banks, is generally regarded as
more reliable than answers obtained from inquiries of the client.
When testing manual or automated controls,
A) automated controls are always subject to random error or manipulation.
B) automated controls cannot be altered by making a change to the software
application.
C) when there are effective general controls and automated application controls, the
auditor will need to select a larger sample size of transactions to verify.
D) the extent of testing depends on whether it is a manual or automated control.
You are auditing Rodgers and Company. After performing substantive analytical
procedures you conclude that, for the accounts tested, the client’s balance appears
reasonable. This may indicate that
A) details test of balances can be eliminated for those accounts.
B) certain tests of details of balances may be eliminated for those accounts.
C) control tests may be eliminated for those accounts.
D) control tests may be reduced for those accounts.
Describe an ethical dilemma that an auditor or an accountant might face in his or her
business career, then illustrate how the auditor or accountant might use the six-step
approach presented in the text to resolve that dilemma. Be specific.