The ________ is helpful in preventing classification errors if it accurately describes
which type of transaction should be in each account.
A) general ledger
B) general journal
C) trial balance
D) chart of accounts
Interpretations of the rules regarding independence allow an auditor to serve as
A) a director or officer of an audit client.
B) an underwriter for the sale of a client’s securities.
C) a trustee of a client’s pension fund.
D) an honorary director for a not-for-profit charitable or religious organization.
Which of the following audit tests would be regarded as a test of controls?
A) comparison of the inventory pricing to vendors’ invoices
B) tests of the signatures on canceled checks to board of directors’ authorizations
C) tests of the additions to property, plant, and equipment by physical inspections
D) review of the specific items making up the balance in a given general ledger account
The most serious shortcoming of the haphazard sample selection method is
A) it is not subject to statistical sampling methods.
B) it is time consuming to use.
C) it is costly to use.
D) it is difficult to remain completely unbiased in the selection.
Auditors are especially concerned about the ________ and ________ balance-related
audit objectives because of the potential for understatements in the account balance.
A) completeness; cutoff
B) completeness; accuracy
C) classification; realizable value
D) classification; cutoff
An auditor is performing a credit analysis of customers with balances over 60 days due.
She is most likely obtaining evidence for which audit related objective?
A) realizable value
B) existence
C) completeness
D) occurrence
The principal issue to be resolved in cases involving alleged negligence is usually
A) the amount of the damages suffered by plaintiff.
B) whether to impose punitive damages on defendant.
C) the level of care exercised by the CPA.
D) whether defendant was involved in fraud.
When auditing a client who uses a database management system, the auditor is
principally aware of elevated risk due to the fact that
A) multiple users can access and update data files.
B) the accounting information is only in one place.
C) the database administrator may lack appropriate accounting knowledge.
D) multiple users could all access the data simultaneously causing a system shutdown.
In addition to confirming bank balances of your audit client, a bank confirmation would
normally contain
A) the client’s bank loans with due date, interest rate, and collateral requested.
B) the client’s credit history as regards to paying back loans.
C) the client’s managements bank account information.
D) the client’s business prospects.
An auditor should consider two key issues when obtaining an understanding of a client’s
internal controls. These issues are
A) the effectiveness and efficiency of the controls.
B) the frequency and effectiveness of the controls.
C) the design and operating effectiveness of the controls.
D) the implementation and operating effectiveness of the controls.
You are the in-charge auditor and are designing audit procedures for accounts payable.
Which of the following management assertions would you normally be most concerned
about?
A) occurrence
B) accuracy
C) completeness
D) existence
Clients occasionally enter into loan agreements that require them to provide the
________ with a report from a CPA about the existence or nonexistence of some
condition.
A) underwriters of securities
B) audit committee
C) lender
D) Securities and Exchange Commission
Two determinants of the persuasiveness of evidence are
A) competence and sufficiency.
B) relevance and reliability.
C) appropriateness and sufficiency.
D) independence and effectiveness.
Auditing standards for public companies are established by the
A) SEC.
B) FASB.
C) PCAOB.
D) IRS.
When assessing risk, it is important to remember that
A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for
public clients.
B) inherent risk can be changed by the auditor.
C) detection risk can only be determined after audit risk, inherent risk, and control risk
are determined.
D) control risk is determined by company management since they are responsible for
internal control.
When using the test data approach,
A) auditors process test data supplied by the client.
B) auditors often obtain assistance from a computer audit specialist.
C) the tests must be performed at the end of the year.
D) the test data must remain in the client’s records.
Financial ratios
A) are used during the planning and final review phases of the audit.
B) can be linked to the trial balance so that calculations are automatically updated as
adjustments are made.
C) should be compared to previous years and industry averages.
D) all of the above
Auditors involved in planning, performing, or reporting on audits under Generally
Accepted Government Auditing Standards (GAGAS) must complete ________ hours of
continuing professional education in each two-year period.
A) 20
B) 40
C) 60
D) 80
One of the auditor’s primary concerns in verifying the transfer of inventory from one
location to another is that
A) recorded transfers exist.
B) all actual transfers are recorded.
C) the quantity, date, and description of all recorded transfers are accurate.
D) all of the above
An example of an “indirect financial interest in a client” would be
A) ownership of less than 10% of the client’s stock by the covered members spouse.
B) an ownership of less than 10% of the client’s stock by a staff member who is not
involved in the audit.
C) the covered member’s ownership of a mutual fund that has an investment in the
client.
D) All of the above are examples of an indirect financial interest in a client.
Which of the following is not one of the reasons auditors verify equipment differently
from current asset accounts?
A) There are usually fewer current period acquisitions of equipment.
B) The amount of any given acquisition is often material.
C) The equipment is likely to be kept and maintained in the accounting records for
several years.
D) Current assets are subject to liens and encumbrances while equipment is not.
An estimate of the largest likely overstatement in a population at a given ARIA, using
monetary unit sampling is the
A) point estimates.
B) precision intervals.
C) confidence intervals.
D) misstatement bound.
A type of positive confirmation in which an individual invoice is confirmed, rather than
the customer’s entire accounts receivable balance is the ________ confirmation.
A) invoice
B) specific
C) balance
D) voucher
Which of the following is a true statement regarding auditors’ liability?
A) The level of care is easy to determine in a review or compilation.
B) Engagement letters will relieve the auditor of all liability.
C) An auditor will always be guilty of negligence if they fail to uncover fraud.
D) The most common source of lawsuits against CPAs is from clients.
If the auditor lacks independence, a disclaimer of opinion must be issued
A) if the client requests it.
B) only if it is highly material.
C) only if it is material but not pervasive.
D) in all cases.
Once auditors determine that entity level controls are designed and placed in the
operation, they
A) make a preliminary assessment for each transaction-related audit objective for each
major type of transaction.
B) make a preliminary assessment of control risk.
C) obtain an understanding of the design and implementation of internal control.
D) prepare audit documentation in order to express their opinion on the company’s
internal control system.
The most important general ledger account included in and affecting several cycles is
the
A) cash account.
B) inventory account.
C) income tax expense and liability accounts.
D) retained earnings account.
In order to protect themselves from legal liability, it is important that CPAs
A) are organized as sole-proprietors.
B) accept client representations.
C) understand the client’s business.
D) use engagement letters, not representation letters.
Auditors who prefer statistical to nonstatistical sampling believe that the principal
advantage of statistical sampling flows from its ability to
A) quantify sampling risk.
B) promote a more legally defensible procedural approach.
C) define the precision required to provide audit satisfaction.
D) establish conclusive audit evidence with decreased audit effort.
A company recorded an acquisition of merchandise and its related liability, but failed to
include the merchandise in ending inventory. The effect on the financial statements was
to
A) understate liabilities.
B) understate net income.
C) overstate net income.
D) have no impact on the financial statements since the errors cancel each other out.
Which event that occurred after the end of the fiscal year under audit but prior to
issuance of the auditor’s report would not require disclosure in the financial statements?
A) sale of a bond or capital stock issue
B) loss of plant or inventories as a result of fire or flood
C) a significant decline in the market price of the corporation’s stock
D) a merger or acquisition
Which is a liquidity activity ratio?
A) profit margin
B) inventory turnover
C) return on assets
D) times interest earned
When management has an adequate level of integrity for the auditor to accept the
engagement but cannot be regarded as completely honest in all dealings, auditors
normally
A) reduce acceptable audit risk and increase inherent risk.
B) reduce inherent risk and control risk.
C) increase inherent risk and control risk.
D) increase acceptable audit risk and reduce inherent risk.