Going concern issues may arise when:
(a) Acquisitions or discontinued operations have recently occurred.
(b) The accounting information systems have been modified.
(c) The economy has negatively impacted the client company.
(d) Changes in applicable accounting standards affect the client company.
A client acquires a company on January 12, 20X1 while its auditor is preparing the
audit report for 20X0. Plans for this acquisition began in late December, 20X0,
although the auditor was unaware of them. GAAS requires the auditor to:
a. include the purchase transaction in its audit work.
b. include the purchase transaction in the footnotes.
c. disclose the purchase transaction in the audit report.
d. depending on the circumstances, the auditor may choose any of the above.
The auditor sends positive confirmations to the client’s suppliers in order to fulfill
which assertion?
a. Existence.
b. Disclosure.
c. Presentation.
d. Completeness.
Match the assertions below with their appropriate test. You may use an assertion once,
more than once, or not at all. More than one assertion may apply to a single test.
1> Existence or occurrence
2> Completeness
3> Valuation or allocation
4> Rights and obligations
5> Cut off
6> Presentation and disclosure
TESTS
(a) Examine a selection of employee files for the inclusion of all required documents,
authorizations and approvals.
Section 206 of the Sarbanes-Oxley Act states that:
A. an auditor who worked on a company’s audit engagement and goes to work for the
client will not impact the firm’s independence.
B. if a person leaves the audit firm and goes to work for the client as a CEO, CFO,
controller, or equivalent position, the audit firm will not be independent with respect to
the client for one year.
C. an auditor with the firm, who has not worked on the company’s audit engagement,
and goes to work for the client will impact the firm’s independence.
D. if a person leaves the audit firm and goes to work for the client as a CEO, CFO,
controller, or equivalent position, the audit firm will not be independent with respect to
the client for three years.
For which of the following circumstances would it be appropriate for an auditor to
examine the inventory records for evidence of adjustment based on results of the
physical count?
a. To ensure that the process for the physical count of inventory includes proper
procedures.
b. To ensure that the correct result of the physical count, in conjunction with cost
information, is used to update the accounting records.
c. To ensure that the policies for assessing inventory valuation are appropriate.
d. To ensure that the inventory records are updated for physical movement of items
within the production process.
The plaintiff’s legal standing is influenced by:
a. The connection between the potential plaintiff and the auditor.
b. The nature of the wrongdoing alleged against the auditor.
c. Both a and b.
d. None of the above.
Which of the following is NOT one of the sections of the PCAOB rules approved by the
SEC?
A. Inspections.
B. Professional Standards.
C. Due Diligence.
D. Registration and Reporting.
Requiring receiving reports achieves which assertion(s)?
a. Existence.
b. Valuation.
c. Allocation.
d. Both b and c.
The Institute of Internal Auditors standards are grouped under two broad categories.
A. Briefly list and explain the categories of the internal auditing standards.
B. Within each category there are special standards written for specific types of audits.
What are the two types of special standards?
An auditor’s work papers document all of the following except:
(a) the procedures performed and evidence collected by the auditor.
(b) the auditor’s planning and performance of work.
(c) the time required for company personnel to compile the records requested by the
auditor.
(d) conclusions reached by the auditor.
Auditors auditing nonpublic companies must follow:
(a) all audit standards.
(b) only those standards issued by the PCAOB.
(c) only those standards issued by the AICPA.
(d) None of the above.
The client’s correct interpretation of GAAP in company policies is approved by:
(a) the board of directors.
(b) top financial management.
(c) the audit committee.
(d) Both b and c.
A typical transaction activity for sales, billing, and cash receipts are:
a. cash disbursements.
b. purchase returns.
c. purchase allowances.
d. estimating bad debts expense.
e. purchase discounts.
A covered member (i.e., the auditor) will not be independent from the client if he or
she:
A. has, or is going to get, an immaterial indirect financial interest in a client.
B. has, or is going to get, a direct financial interest in a client.
C. has a joint investment with a client.
D. has a loan to or from a client, an officer of a client, or any individual owning more
than 10 percent of a client.
In a compilation engagement, an accountant drafts financial statements of an entity
based on information provided by the:
a. shareholders.
b. audit committee.
c. management or owners.
d. board of directors.
e. company.
For planned communities, common costs can be allocated to individual residential units
using the:
a. relative interest allocation method.
b. relative capitalization of costs method.
c. relative area or relative sales value allocation method.
d. relative impact estimation process.
Pre-numbering purchase orders achieves which assertion(s)?
a. Authorization.
b. Existence.
c. Completeness.
d. Both a and c.
AU 324 identifies which of the below as being a criterion for meeting the significance
test for service providers?
a. It processes classes of transactions that are significant to the financial statements.
b. It affects the financial reporting process leading to the preparation of financial
statements.
c. It affects accounting records, supporting information, and specific accounts related to
the transactions.
d. All of the above.
Indicate the preferred timing during the audit process for performing each of the
following procedures. Explain your choice.
(a) observing the client’s physical inventory
(b) testing of the operating effectiveness of ICFR
(c) observing the shipment and receipt of inventories
(d) substantive testing of property and equipment account balances
(e) roll forward procedures
(f) testing of the design effectiveness of ICFR
(g) examining adjustment made during the course of preparing the financial statements
Which of the following is a current responsibility of the AICPA?
a. Writing and grading the CPA exam that is used by the states.
b. Issuing CPA certificates.
c. Setting international audit standards for nonpublic companies.
d. Writing the code of conduct that is adopted by all of the states.
Purchase commitments:
a. must be disclosed.
b. must be recorded.
c. must be audited prior to recording.
d. Both b and c.
Compiled financial statements of a nonpublic entity should be accompanied by a report
stating that:
a. the accountant does not express an opinion or any other form of assurance on the
financial statements.
b. the scope of the accountant’s procedures has not been restricted in testing the
financial information that is the representation of management.
c. the accountant assessed the accounting principles used and significant estimates
made by management.
d. a compilation consists primarily of inquiries of entity personnel and analytical
procedures applied to financial data.
e. the financial statements were not audited.
Over- and underapplied overhead variances are typically allocated among:
a. direct materials, direct labor, and manufacturing overhead.
b. raw materials, work-in-process, and finished goods inventory.
c. the inventory accounts and cost of goods sold.
d. the inventory and human resources-related accounts.
Recurring financial activities that are reflected in the accounting records in the normal
course of business are referred to as:
(a) recurring events.
(b) routine transactions.
(c) common assertions.
(d) entity-level controls.
Who issues standards for audits of non-public companies?
(a) The AICPA.
(b) The SEC.
(c) The PCAOB.
(d) All of the above.
Match the scenario below with the audit standard(s) and the number within the standard
(e.g. General #1). Some examples may have more than one standard that applies.
Audit standards:
General #1, #2, or #3
Field work #1, #2, or #3
Reporting #1, #2, #3, or #4
SCENARIOS:
(a) Larry works for a CPA firm that has few supervisory auditors.
(b) Mary-Ellen becomes bored with auditing payroll, so she simply checks off the steps
on a work program as being completed without doing the work.
(c) Bruce refuses to attend his firm’s training sessions, attending a baseball game
instead. He has another staff member sign him in and out.
(d) The audit firm runs out of time and thus stops collecting evidence despite worries
that there might be errors in one account.
(e) The staff at a firm like the client, so they raise the materiality threshold beyond the
limit generally set by the firm.
(f) The audit report states that GAAP was used in preparing the financial statements,
even though the client deviated from GAAP in several material respects.
(g) The auditors withhold the audit report because they have not been paid.
(h) The auditors perform the tests of internal control as they perform the substantive
tests in order to save the client money.
(i) The client changes accounting methods with respect to inventory, but failed to restate
its financial statements for the prior periods. The auditors decided to let it go since they
ran out of time.
(j) The auditors fail to audit the footnote disclosures provided by the client.
(k) The auditor is concerned that there are material errors he has not found and so
refuses to issue an audit report.
Accounts payable confirmations are sent to:
a. suppliers with large credit balances.
b. all suppliers, regardless of balance.
c. all suppliers, except those with zero balances.
d. Both b and c.
If the auditor initially considers the internal control environment risky, but later during
the audit concludes it to be adequate as a result of substantive procedures, the auditor:
(a) should reflect the new assessment in its report on ICFR.
(b) should increase substantive testing.
(c) should issue a new opinion on the financial statements.
(d) should issue a new opinion on the ICFR.
A client has a large number of small account balances, with an equal likelihood of over
and understatement. Which of the following sampling techniques would be most
appropriate?
a. Monetary unit sampling.
b. Classical variables sampling.
c. Attribute sampling.
d. All of the above, depending on the circumstances.
The ethical orientation of the decision maker, that suggest the decision maker focuses
on individuals as separate entities is said to be following the:
A. ethic of laws.
B. ethic of accounting.
C. ethic of degree.
D. ethic of care.
The field work standards address:
(a) due professional care.
(b) independence.
(c) attention to GAAP.
(d) obtaining sufficient evidential matter.
Which of the following information would be stored in the permanent files?
(a) Current year financial statements.
(b) Current organization chart.
(c) Audit plan.
(d) All of the above.
Damages can be:
a. Compensatory, but limited to the loss incurred.
b. Compensatory, and include both the loss incurred and an amount for punitive
damages.
c. Compensatory, but limited to the amount set by each state.
d. Both a and b.
Some tests provide evidence on controls and on:
a. financial statement information.
b. financial statement amounts.
c. financial statement disclosures.
d. financial statement controls.
e. financial statement deficiencies.
Retail sales businesses post sales activity to their inventory and cost of sales accounts as
well as to expense accounts.
Why are analytical procedures a required step in audit planning?
The first step in making an ethical decision is to identify the stakeholders and ethical
issues.
Substantive analytical procedures of payroll accounts provide little audit evidence.
A forensic accountant is often likened to Sherlock Holmes, a sleuth out to solve a crime.
Like Sherlock Holmes, forensic accountants are investigators.
Explain the difference in the compensation contracts of doctors and theirpatients and
auditors and their clients, and the significance this difference has forauditor
independence.
Explain how auditing inventory of a company with a standard cost system requires an
audit of estimates.What are the estimates? What procedures would the auditor perform
related to variances produced by the system at year end? Why?
When assessing accounts for misstatement, the auditor frequently sets tolerable limits to
guide her decisions regarding the need for adjusting journal entries.
Even though personal values are shaped by culture, religion, and family, additional
influence will come from firm culture and professional organizations.
The GAO issues an annual Performance and Accountability Report that summarizes the
results of its work and provides audited financial statements.
All transactions in the sales and collection cycle need not be recorded at the correct
amounts.
The PCAOB jointly sets audit standards with the AICPA for publicly traded firms.
Benchmarking allows auditors to skip testing of application controls if ITGC are
effective.
When a client company’s operations have expanded rapidly, auditors should be aware
that existing systems may become strained and break down.
Nile.com is an online retailer of electronics,music, books,DVDs, and a variety of other
consumer goods. All sales are made on the basis of FOB Destination Prepaid; the
shipping costs are paid by the customer.During the last week of the year, Nile.com had
a large year-end sale of all merchandise on the site. The company provided a guarantee
that all orders would be shipped by the end of the year. During that week Nile.com had
sales orders totaling $5.8 million, which was equal to 23% of total sales for the year
before the sale. As the company promised, all the orders were shipped on December
31.At this time, all the money was collected, and no products for these orders were in
the control of the company. The customers received their orders within five days of
shipment. Use the criteria in FASB Statement of Financial Accounting Concepts No.5
and indicate when and/or how the client should recognize the revenue.Assume the
company has a calendar year end. Explain your answer. What controls are in place and
how would you audit these controls?
A material weakness occurs when it is reasonably probable or possible that a material
misstatement of an account balance or disclosure would not be prevented/detected by
an internal control.
You are assigned to audit a public client. This client uses a service provider for
processing its payroll transactions which are considered material and significant. Your
job is to provide a work program listing the steps you would perform as part of the
audit. You may assume that the client receives a SAS 70 Type II report that matches the
period under audit.
Other details:
Your client primarily provides services to a specific industry. It has 5 senior managers
who are eligible for bonus and stock compensation. All other employees are salaried,
except one who is paid only commission. The service provider supplies the terminal
used to enter the transactions and receive the output. Employees are paid using EFT.
There is a Human resource Department and an accounting clerk who together oversee
the payroll function. The accounting clerk reports to the controller.
Observation is the form of audit evidence typically used for testing the operating
effectiveness of many of the physical controls over inventory.