Which of the following statements is true with respect to the quality of audit evidence?
A. Quality is related to the relevance of evidence, but not the reliability of evidence.
B. Evidence is considered of higher quality when gathered prior to year-end than
following year-end.
C. Evidence obtained under environments of stronger internal control is of higher
quality than evidence obtained under environments of weaker internal control.
D. In evaluating quality, sufficiency of evidence is of greater importance than
appropriateness of evidence.
In which of the following circumstances would a CPA who audits XZ Corporation lack
independence?
A. The CPA and XZ’s president are both on the Board of Directors of COD
Corporation.
B. The CPA and XZ’s president each own 25% of FOB Corporation, a closely held
company.
C. The CPA has an automobile loan from XZ, a financial institution. The loan is
collateralized by the automobile.
D. The CPA reduced XZ’s usual audit fee by 40% prior to the audit because XZ’s
financial condition was unfavorable.
During the year under audit, Forrest Corporation experienced significant losses due to a
pervasive fraud scheme. Because of the lack of documentary evidence and inability to
perform appropriate auditing procedures, the auditors were unable to determine the total
amount of the loss. What type of report should the auditors issue?
A. Qualified or adverse opinion
B. Disclaimer or adverse opinion
C. Disclaimer or qualified opinion
D. Unmodified opinion with an other-matter paragraph
A client maintains perpetual inventory records in quantities and in dollars. If the
assessed control risk is high, an auditor would probably
A. apply gross profit tests to ascertain the reasonableness of the physical counts.
B. increase the extent of tests of controls relevant to the inventory cycle.
C. request the client to schedule the physical inventory count at the end of the year.
D. insist that the client perform physical counts of inventory items several times during
the year.
When evaluating the effectiveness of a client’s internal controls with a tolerable rate of
deviation of 5%, the audit team determined the upper limit rate of deviation to be 4%.
Based on this information, which of the following decisions would the audit team most
likely make?
A. Reduce the planned degree of reliance on internal controls.
B. Increase the extent of further audit procedures.
C. Rely on internal controls as planned.
D. Expand the sample to examine additional applications of the control.
Murray & Co., CPAs completed the audit of Classic Inc., a nonpublic entity, on March
1, 2015 for a January 31, 2015 fiscal year end. The audit team encountered no
significant issues and found no material misstatements. Murray & Co. has audited
Classic Inc. for several years and past audits did not reveal any significant issues or
material misstatements. The audit team partner determined that a standard (unmodified)
report on Classic Inc.’s financial statements was appropriate. The auditors’ report,
drafted by I.M. Nu, a staff assistant, is provided below.
Independent Auditor’s Report
To the Board of Directors and Shareholders
Classic, Inc.
We have audited the accompanying financial statements of Classic Inc., which comprise
the balance sheet as of January 31, 2015 and the related statements of changes in
shareholders’ equity and cash flows for the year then ended, and the related notes to the
financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial
statements in accordance with accounting principles generally accepted in the United
States of America.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain absolute assurance
about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation of the financial
statements.
Opinion
In our opinion, the financial statements referred to above present fairly, the financial
position of Classic, Inc. as of January 31, 2015 and the results of its operations and its
cash flows for the year then ended.
Murray & Co, CPAs
January 31, 2015
Identify the deficiencies and errors in the draft report. Do not rewrite the report, but be
specific as to what is incorrect or omitted. Organize your answer by paragraph or
section.
According to PCAOB Auditing Standard No. 5 (AS 5), the auditor should identify
significant accounts and disclosures and their relevant assertions. Which of the
following financial statement assertions is not explicitly identified in AS 5?
A. Completeness
B. Valuation or Allocation
C. Accuracy
D. Existence or Occurrence
E. All of these are assertions identified in AS 5.
The amount by which a projected misstatement in an account balance or class of
transactions differs from an actual misstatement as a result of the sample not being
representative of the population would typically arise from
A. a misunderstanding of accounting principles.
B. sampling risk.
C. management override of an internal control policy or procedure.
D. risk of incorrect acceptance.
The document that generates recording of a sale is the
A. customer order.
B. shipping order.
C. invoice.
D. purchase order.
Which of the following input controls would not be effective in identifying the
erroneous input of numeric fields in a transaction?
A. Batch totals
B. Hash totals
C. Check digits
D. Record counts
If an auditor is performing procedures related to the information that is contained in the
client’s pension footnote, he/she is most likely obtain evidence concerning
management’s assertion about
A. rights and obligations.
B. existence.
C. valuation.
D. presentation and disclosure.
Inherent risk is the
A. probability that some accounts are more susceptible to misstatement than others.
B. probability that the client’s internal control policies and procedures will fail to detect
material misstatements.
C. probability that material misstatements have occurred in transactions entering the
accounting system used to develop financial statements.
D. probability that the auditor may not detect material misstatements in the financial
statements.
When auditors report on a financial audit engagement in accordance with generally
accepted government auditing standards (GAGAS), the basic report(s) include a
A. disclaimer of opinion on financial statements, report on internal control, and report
on compliance audit regarding laws and regulations.
B. report (opinion) on financial statements, report on internal control, and report on
compliance audit regarding laws and regulations.
C. report on internal control and report(s) on efficiency and effectiveness of operations.
D. report on compliance regarding laws and regulations and report(s) on achievement of
program goal(s).
Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were
included in physical inventory but had not been recorded. In this case, which of the
following adjustments should be made?
A. Debit Purchases/credit Cost of Goods Sold.
B. None.
C. Debit Inventory/credit Accounts Payable.
D. Debit Cost of Goods Sold/credit Accounts Payable.
When providing limited assurance that the reviewed financial statements of a nonpublic
entity require no material modifications to be in accordance with generally accepted
accounting principles, the accountant should
A. assess the risk that a material misstatement could occur in a financial statement
assertion.
B. confirm with the entity’s lawyer that material loss contingencies are disclosed.
C. understand the accounting principles of the industry in which the entity operates.
D. develop audit plans to determine whether the entity’s financial statements are fairly
presented.
External auditors are responsible
A. for authenticating documents.
B. for reporting immaterial frauds to a level of management at least one level above the
people involved.
C. for finding all intentional misstatements concealed by collusion.
D. for reporting all frauds to outside agencies or parties.
Shelly’s Bank has loaned money to Pete’s Auto Supply. The loan is collateralized by
inventory. The loan also requires a CPA to observe the count of the inventory and trace
sampled items to the vendor invoices in order to determine the value of inventory is not
misstated. This service would be
A. an assurance service engagement.
B. an attestation engagement.
C. a review engagement.
D. a compilation engagement.
Which of the following risks expose the auditor to effectiveness losses?
A. Risk of assessing control risk too high, risk of incorrect acceptance
B. Risk of assessing control risk too low, risk of incorrect rejection
C. Risk of assessing control risk too high, risk of incorrect rejection
D. Risk of assessing control risk too low, risk of incorrect acceptance
Why is defining the population so important in a sampling application?
A. To permit the auditor to select the appropriate type of substantive procedure
B. To ensure that the results appropriately represent the entire population
C. To reduce sampling risk to the appropriate level
D. To allow the auditor to appropriately measure sample items
Which of the following audit procedures would an auditor most likely perform to test
controls relating to management’s valuation assertion for accounts receivable?
A. Verify that extensions and footings on the entity’s sales invoices and monthly
customer statements have been recomputed.
B. Inspect the entity’s reports of prenumbered shipping documents that have not been
recorded in the sales journal.
C. Compare the invoiced prices on prenumbered sales invoices to the entity’s authorized
price list.
D. Inquire about the entity’s credit-granting policies and test whether credit checks have
been consistently applied to new customers.
The focus of substantive tests in the finance and investment cycle is on
A. reconciliation of detailed listings with general ledger amounts.
B. proper cut-off.
C. search for unrecorded items.
D. gaining an understanding and verifying amounts and calculations.
Carson, CPA, judged that his test of controls of the company’s 10,000 sales transactions
should be based on a risk of overreliance of 10%, a tolerable rate of deviation of 8%,
and an expected population deviation rate of 3.75%. Using the AICPA Sample Size
tables, which of the following modifications would not affect Carson’s sample size?
A. Decrease in the risk of overreliance from 10% to 5%
B. Increase in the tolerable rate of deviation from 8% to 10%
C. Increase in the expected population deviation rate from 3.75% to 4%
D. Decrease in the tolerable rate of deviation from 8% to 7%
Auditors use brainstorming
A. to heighten the audit team’s awareness of fraud potential.
B. to heighten management’s awareness of fraud potential.
C. to determine detection risk.
D. to set materiality.
Which of the following components of the upper limit on misstatements is determined
by multiplying the sampling interval by the confidence factor for the acceptable risk of
incorrect acceptance?
A. Basic allowance for sampling risk
B. Incremental allowance for sampling risk
C. Projected misstatement
D. Sampling interval
A company’s cost accountant periodically reconciles job cost sheets to the
work-in-process inventory accounts. This reconciliation is most likely performed to
provide assurance that
A. recorded production transactions are valid and documented.
B. valid production transactions are recorded and none omitted.
C. production accounting and posting is complete.
D. production transactions are recorded in the proper period.
A transfer agent
A. keeps the stockholder list and, from time to time, determines the shareholders
eligible to receive dividends.
B. handles the exchange of shares, canceling the shares surrendered by sellers and
issuing new certificates.
C. records notes and bonds payable.
D. makes investment decisions for an entity.
The SEC requires companies to disclose fees paid to independent public accounting
firms for audit and consulting services in the belief that
A. such disclosures will end the practice of auditors performing nonaudit services for
audit clients.
B. financial analysts will attribute far less credibility to financial statements audited by
public accounting firms that earn substantial nonaudit fees from audit clients.
C. audit firm consulting on client’s accounting information processing systems
essentially impairs audit independence.
D. client directors and financial statement users should consider all aspects related to
auditors’ independence, and information about fees is important.
Auditors should design the written audit plan so that
A. all material transactions will be selected for substantive testing.
B. substantive tests prior to the balance sheet date will be minimized.
C. the audit procedures selected will achieve specific audit objectives.
D. each account balance will be tested under either tests of controls or tests of
transactions.
The tests of controls for inventory records would include the following procedures.
A. Existence.
B. Rights and obligations.
C. Completeness.
D. Accuracy and valuations.
E. Presentation and disclosure.
For each of the procedures, place the letter of the correct ASB balance assertion(s).
Only one letter per procedure should be used.
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation
of the
A. factors that raise doubts about the auditability of the financial statements.
B. operating effectiveness of internal control policies and procedures.
C. risk that material misstatements exist in the financial statements.
D. possibility that the nature and extent of substantive tests may be reduced.
In considering overall materiality for planning purposes, an auditor believes that
misstatements aggregating $10,000 would have a material effect on an entity’s income
statement but that misstatements would have to aggregate $20,000 to materially affect
the balance sheet. Ordinarily, it would be appropriate to design audit procedures that
would be expected to detect misstatements aggregating
A. $10,000.
B. $15,000.
C. $20,000.
D. $30,000.
This question is related to other public accounting services and reports. For each
statement, description, or phrase (1-5), indicate the related type of engagement or report
(A-F).
A. Reports on elements, accounts, or items of a financial statement.
B. Reports on compliance with contractual agreements or regulatory requirements.
C. Reports on the agreed-upon procedures.
D. Reports on internal control.
E. Reviews of unaudited financial statements of a nonissuer.
F. Compilations of financial statements.
___ 1. Management issues a separate report containing assertions.
___ 2. In our opinion, the schedule of inventory referred to above presents fairly, in all
material respects.
___ 3. It is substantially less in scope than an audit in accordance with generally
accepted auditing standards.
___ 4. Examination or agreed-upon procedures about conforming to the rules and
regulations of a regulatory agency.
___ 5. The report identifies specific users and describes, in detail, the procedures
specified by the users.
If the auditors discover that the carrying amount of a client’s investments is overstated
because of a loss in value that is other than a temporary decline in market value, they
should insist that
A. the approximate market value of the investments be shown in parentheses on the
face of the balance sheet.
B. the investments be classified as long term for balance-sheet purposes with full
disclosure in the footnotes.
C. the loss in value be recognized in the financial statements.
D. the equity section of the balance sheet separately show a charge equal to the amount
of the loss.
The file that contains sales transactions that were initiated in the system but are not yet
completed is the
A. credit check file.
B. sales detail.
C. inventory master.
D. pending order master.