In which of the following cases would the auditor be most likely to conclude that all of
the items in an account under consideration should be examined rather than tested on a
sample basis?
A. Tolerable deviation is large and expected deviation is low.
B. Tolerable deviation is small and expected deviation is high.
C. Tolerable deviation is large and expected deviation is high.
D. Tolerable deviation is small and expected deviation is low.
Which of the following procedures is usually included in a review engagement of a
nonpublic entity?
A. The confirmation of accounts receivable.
B. A study and evaluation of internal control.
C. An inquiry concerning subsequent events.
D. The observation of physical inventory counts.
Evaluating a prospective client requires which of the following steps?
A. Communicate with the SEC.
B. Preplan the audit.
C. Determine if the firm is independent of the client.
D. Communicate with the AICPA.
A CPA who is not independent and is associated with financial statements should
disclaim an opinion with respect to those financial statements. The disclaimer should
A. clearly state the specific reasons for lack of independence.
B. not mention any reason for the disclaimer other than that the CPA was unable to
conduct the examination in accordance with generally accepted auditing standards.
C. not describe the reason for lack of independence but should state specifically that the
CPA is not independent.
D. include a middle paragraph clearly describing the CPA’s association with the entity
and explaining why the CPA was unable to gather sufficient appropriate evidential
matter to warrant the expression of an opinion.
The largest public accounting firms typically are structured as
A. Subchapter S corporations.
B. Professional corporations.
C. Limited liability partnerships.
D. Limited liability corporations.
What is the primary purpose of the acceptance and continuance of client relationships
and specific engagements element of quality control?
A. Guarantee that firms do not associate with clients whose management lacks integrity.
B. Provide reasonable assurance that firms do not associate with clients whose
management lacks integrity.
C. Guarantee that firms will not be sued as a result of association with a client.
D. Provide reasonable assurance that firms will not be sued as a result of association
with a client.
Where computer processing is used in significant accounting applications, internal
control activities may be defined by classifying control activities into two types: general
and
A. Administrative.
B. Specific.
C. Application.
D. Authorization.
An auditor is least likely to test the internal controls that provide for
A. Approval of the purchase and sale of marketable securities.
B. Classification of revenue and expense transactions by product line.
C. Segregation of the functions of recording disbursements and reconciling the bank
account.
D. Comparison of receiving reports and vendors’ invoices with purchase orders.
A company has additional temporary funds to invest. The Board of Directors decided to
purchase marketable securities and assigned the future purchase and sale decisions to a
responsible financial executive. The best person(s) to make periodic reviews of the
investment activity authorized by that executive should be
A. an investment committee of the Board of Directors.
B. the chief operating officer.
C. the corporate controller.
D. the treasurer.
Which of the following best describes the occurrence assertion for inventory?
A. Purchase requisitions initiated by authorized personnel.
B. Recorded inventory transactions actually happened.
C. Inventory properly accumulated from journals and ledgers.
D. All inventory is recorded.
An auditor performing an audit of internal control over financial reporting would be
required to
A. Rely on the work of internal auditors.
B. Test all of the entity’s internal controls.
C. Form an opinion on the effectiveness of internal control.
D. Randomly identify accounts for an audit of internal control.
In testing controls over cash disbursements, an auditor most likely would determine that
the person who signs the checks also
A. reviews the monthly bank reconciliation.
B. returns the checks to accounts payable.
C. is denied access to the supporting documents.
D. is responsible for mailing the checks.
The cutoff assertion for accounts payable includes
A. determining whether all accounts payable are recorded.
B. determining whether all accounts payable actually are liabilities.
C. determining whether all accounts payable are recorded in the proper period.
D. determining whether all accounts payable are properly classified in the financial
statements.
According to the SEC’s SAB No. 101, which of the following is not necessary for
revenue recognition?
A. The seller’s price to the buyer is fixed.
B. Collectability is reasonably assured.
C. The seller has determined that the buyer will take the discount.
D. Persuasive evidence of an arrangement exists.
An auditor is testing internal control procedures that are evidenced on an entity’s
vouchers. To select the vouchers for testing, the auditor obtains random numbers
between the first and last voucher number in the period. If a random number matches
the number of avoided voucher, that voucher ordinarily should be replaced by another
voucher in the random sample if the voucher
A. constitutes a deviation.
B. has been properly voided.
C. cannot be located.
D. represents an immaterial dollar amount.
In which of the following instances would the independence of the CPA not be
considered to be impaired? The CPA has been retained as the auditor of a
A. charitable organization in which an employee of the CPA serves as treasurer.
B. municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the
municipality.
C. restaurant where the CPA dines frequently.
D. company in which the CPA’s private investment club owns a one-tenth interest.
Under Section 11 of the Securities Act of 1933, which of the following standards may a
CPA use as a defense?
A. Generally accepted auditing standards and generally accepted fraud detection
standards.
B. Generally accepted auditing standards but not generally accepted fraud detection
standards.
C. Generally accepted fraud detection standards but not generally accepted auditing
standards.
D. Neither generally accepted auditing standards nor generally accepted fraud detection
standards.
Which of the following departments most likely would approve changes in pay rates
and deductions from employee salaries?
A. Human resource.
B. Treasurer.
C. Controller.
D. Payroll.
If the ratio of insurance expense to related property, plant, and equipment is higher than
expected, which of the following is a plausible explanation?
A. Too much expired insurance is still included in prepaid insurance.
B. PP&E insurance expense includes some expenses related to product liability
insurance.
C. Depreciation expense was based on overly short useful lives.
D. Some routine maintenance on equipment was added to the equipment asset account.
Gold, CPA, rendered an unqualified opinion on the financial statements of Eastern
Power Company. Egan purchased Eastern bonds in a public offering subject to the
Securities Act of 1933. The registration statement filed with the SEC included the
audited financial statements. Gold is being sued by Egan under Section 11 of the
Securities Act of 1933 for the misstatements contained in the financial statements. To
prevail, Egan must prove
A. neither scienter nor reliance.
B. reliance but not scienter.
C. scienter but not reliance.
D. both scienter and reliance.
Assurance services may improve all of the following except
A. Relevance.
B. Credibility.
C. Periodicity.
D. Reliability.
An entity’s procurement system ends with the assumption of a liability and the eventual
payment of the liability. Which of the following best describes the auditor’s primary
concern with respect to liabilities resulting from the procurement system?
A. Accounts payable are not materially understated.
B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from one vendor or one group of vendors.
D. Commitments for all purchases are made only after established competitive bidding
procedures are followed.
Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for
several years and had always been paid promptly for services rendered. Last year’s audit
invoices have not been paid because South Bay is experiencing cash flow difficulties
and the current year’s audit is scheduled to commence in one week. With respect to the
past due audit fees, Mavis should
A. perform the scheduled audit and allow South Bay to pay when the cash flow
difficulties are alleviated.
B. perform the scheduled audit only after arranging a definite payment schedule and
securing notes signed by South Bay.
C. inform South Bay’s management that the past due audit fees are considered an
impairment of auditor independence.
D. inform South Bay’s management that the past due audit fees may be considered a
loan on which interest must be imputed for financial statement purposes.
When the audited financial statements of the prior year are presented together with
those of the current year, the continuing auditor’s report should cover
A. both years.
B. only the current year.
C. only the current year, but the prior year’s report should be presented.
D. only the current year, but the prior year’s report should be referred to.
Which of the following best describes the primary purpose of audit procedures?
A. To detect all errors or fraudulent activities.
B. To comply with generally accepted accounting principles.
C. To gather corroborative evidence about management’s assertions.
D. To verify the accuracy of the balance sheet account balances.
When reviewing bank confirmations for any liens on receivables, the auditor is testing
the ______________ assertion.
A. valuation and allocation
B. rights and obligations
C. existence
D. completeness
A company holds bearer bonds as a short-term investment. Responsibility for custody
of these bonds and submission of coupons for collections of periodic interest probably
should be delegated to the
A. chief Accountant.
B. internal Auditor.
C. cashier.
D. treasurer.
During the current year being audited, Hitech, Inc. changed from a conventional payroll
punch clock to a computerized payroll time system. Factory employees now record time
in and out with magnetic cards and the IT system automatically updates all payroll
records. Because of this change
A. the auditor must audit through the computer.
B. internal control has improved.
C. without paper clock cards, part of the audit trail has been altered.
D. the potential for payroll related fraud has been diminished.
An auditor has accounted for a sequence of inventory tags and is now going to trace
information on a representative number of tags to the physical inventory sheets. The
purpose of this procedure is to obtain assurance that
A. the final inventory is valued at cost.
B. all inventory represented by an inventory tag is listed on the inventory sheets.
C. all inventory represented by an inventory tag is bona fide.
D. inventory sheets do not include untagged inventory items.
What is the primary objective of testing all individually significant items rather than
sample testing?
A. To increase the audit risk at which a decision will be reached from the results of the
sample selected.
B. To increase sample size.
C. To accept no sampling risk for items greater than tolerable misstatement.
D. To increase the size of the confidence bound around the projected misstatement.
An auditor would issue an adverse opinion if
A. the audit was begun by other independent auditors who withdrew from the
engagement.
B. a qualified opinion cannot be given because the auditor lacks independence.
C. a restriction on the scope of the audit was significant.
D. the statements taken as a whole do not fairly present the financial condition and
results of operations of the company.
Assertions about classes of transactions and events for the period under audit include
A. existence, completeness, and accuracy.
B. existence, completeness, and classification.
C. occurrence, completeness, and cutoff.
D. occurrence, completeness, and valuation and allocation.
Which of the following is not one of the four general stages in the initiation and
disposition of audit-related disputes?
A. Discovery of fraud subsequent to issuance of the audit report.
B. Users of financial statements incur losses.
C. The legal process commencing with the filing of a lawsuit.
D. Final resolution of the dispute.
An underlying feature of random-based selection of items is that each
A. stratum of the accounting population be given equal representation in the sample.
B. item in the accounting population be randomly ordered.
C. item in the accounting population should have an opportunity to be selected.
D. item must be systematically selected using replacement.