The “answer” in a legal proceeding:
a. Refers to the auditor’s response.
b. Can cite lack of standing on the part of the plaintiff.
c. Contains answers that agree with the complaint.
d. All of the above.
One test that determines if the completeness assertion is met is:
a. bank reconciliation.
b. reconciling vendor invoices to receiving reports.
c. reconciling vendor invoices to the accounts payable subsidiary ledger.
d. Both b and c.
Arthur Andersen & Co. was found guilty by the:
a. District court.
b. Supreme Court.
c. Court of public opinion
d. Both a and c.
The materiality threshold for each account balance or class of transactions is called
(a) tolerable misstatement
(b) material assertion
(c) substantive rule of thumb
(d) account deficiency
Time budgets are typically
(a) approved by the audit committee
(b) detailed by areas of the audit
(c) signed by the predecessor auditor
(d) All of the above.
Characteristics that drive a need for extensive audit documentation include:
(a) the audit task is very straightforward and objective.
(b) the management assertion related to the audit task involves a lot of risk.
(c) the management assertion related to the audit task has been extensively tested by the
company’s internal auditors.
(d) the audit task involves a conclusion that is self-evident.
Disclosures focus on:
(a) comparisons across entities that use similar measurement techniques for different
assets and liabilities.
(b) comparisons within an entity that uses similar measurement techniques on different
assets and liabilities.
(c) comparisons across entities that use different measurement techniques for similar
assets and liabilities.
(d) comparisons within an entity that uses different measurement techniques for
different assets and liabilities.
When using a statistical sampling plan, the auditor calculates a precision interval
around the population estimate. This involves:
a. setting the tolerable misstatement amount.
b. differentiating between known and estimated misstatements.
c. determining the amount of the adjustment.
d. All of the above.
Which of the following is an example of a transaction-level ITGC?
(a) Supervisory review and approval of supporting documents.
(b) A corporate code of conduct.
(c) Second-layer passwords that limit users to specifically approved individuals.
(d) Programmed recalculations for checking accuracy of data files.
The audit report should include a statement that:
a. the financial statements were presented accurately.
b. the financial statements are free from material error.
c. management is responsible for the audit findings.
d. the audit was performed by testing a sample of transactions.
An example in the book cites the case of a young woman who received an incorrect
W-2 showing more wages than she received. This is an example of:
a. fictitious employee fraud.
b. overpayment fraud.
c. overtime payment fraud.
d. All of the above.
Entity-level controls:
(a) are pervasive.
(b) affect only top management.
(c) can be less than effective if application controls are strong.
(d) All of the above.
Unasserted claims are:
a. potential claims.
b. existing claims.
c. pending claims.
d. None of the above.
Which of the following would be least likely to preclude an audit firm from proposing
on a potential client due to independence concerns?
(a) A recently-promoted partner in the audit firm holds a financial interest in the
potential client company.
(b) Someone who resigned from the audit firm three years ago is now the Chief
Accounting Officer at the potential client company.
(c) The audit firm provides internal audit outsourcing and certain nonaudit services to
the client company.
(d) The audit firm’s pension plan holds securities of the potential client company.
Physical controls over inventory are typically tested for operating effectiveness by:
a. confirmation.
b. observation.
c. walkthrough.
d. reconciliation.
The lead schedule should refer to:
a. the financial statements.
b. the lead schedule for each account listed in the working trial balance.
c. the person preparing the schedule.
d. Both b and c.
Tracing is a specific type of document inspection whereby the auditor verifies whether
the document:
(a) has been posted to the relevant accounting records.
(b) is supported by appropriate source documents.
(c) is mathematically accurate.
(d) proves ownership of the underlying asset or liability.
Which of the following are least problematic for an auditor about going concern issues
of a potential audit client?
(a) Recent cash flow trends raise questions about the company’s ability to pay its audit
fees and other financial obligations.
(b) Recent financial instability heightens the company’s risk for being sued.
(c) Escalating financial pressures heighten the company’s risk of experiencing
management fraud.
(d) Changing economic conditions create additional demand for the company’s
products.
Which of the following items is not important with regard to an auditor’s
responsibilities for communicating with the audit committee?
(a) Disagreements with management.
(b) Difficulties encountered in the performance of audit testing.
(c) Significant deficiencies and material weaknesses in ICFR.
(d) New staff members included on the audit team.
Which of the following statements regarding Enterprise Risk Management (ERM) is
not true?
(a) ERM is broader than COSO’s internal control framework.
(b) ERM provides a logical and orderly way for management to identify, analyze, and
manage all of the company’s risks.
(c) ERM focuses on objectives in the categories of planning, assessment, analysis, and
compliance.
(d) A good ERM system provides confidence that the company’s actions taken to
achieve business objectives will fit within acceptable parameters of risk.
An auditor compiles the financial statements for a nonprofit firm. Per GAAS, the
auditor must:
a. issue an audit opinion on the financial statements.
b. issue a report as to the work performed on the financial statements.
c. require management sign a representation letter.
d. depending on the circumstances, the auditor may choose any of the above.
Which of the following statements is true regarding the evolution of definitions of
internal control?
(a) The definition initiated by the Foreign Corrupt Practices Act in 1977 and included in
the auditing standards took a narrow view that was specific to financial reporting.
(b) COSO’s 1992 framework expanded the definition to include categories for the
effectiveness and efficiency of operations and compliance with laws and regulations.
(c) COSO’s 1994 framework expanded the definition to include the safeguarding of
assets.
(d) All of the above.
The Barchris case set precedent in that:
a. The auditor was found guilty of fraud.
b. The auditor is responsible for reporting material differences that arise between the
audit report date and the registration statement date.
c. The auditor is responsible for all differences that arise between the audit report date
and the registration statement date.
d. All of the above.
A registrar:
(a) determines that all outstanding stock complies with the corporate charter.
(b) determines that all stock issued complies with the corporate charter.
(c) determines who is eligible for dividend payments.
(d) All of the above.
Company A hired Q to perform its year-end audit. Subsequent to year-end, A discovers
that one of its customers, who owes Company A a material amount, has filed for
bankruptcy protection. Assume that Q completed the audit work prior to the date of
bankruptcy filing but has not yet issued the audit report. In this case, Q should:
a. ignore the event since it does not apply to the current year under audit.
b. notify those individuals known to be relying on its work of the bankruptcy.
c. perform additional work, as deemed necessary given the circumstances.
d. None of the above.
The auditor evaluates ICFR to determine whether it operates:
a. at the correct risk level.
b. smoothly.
c. effectively.
d. efficiently.
e. coherently.
Inherent risk is greatest for:
a. accounts with large balances.
b. accounts with large numbers of transactions.
c. accounts whose balance requires estimation.
d. All of the above.
To rely on the ICFR in the financial statement audit, the auditor must:
(a) test the ITCG at both interim and year-end.
(b) assess the control risk below maximum.
(c) Both a and b.
(d) Neither a nor b.
Which of the following is considered a service organization?
(a) arrangements between a company and its pension trustee.
(b) arrangements between contracted workers and the company.
(c) arrangements between landscapers and the company.
(d) All of the above are potential service organizations.
An example of an opportunity for misappropriation of assets risk factor is
(a) compensation inconsistent with expectations.
(b) lack of complete and timely reconciliations of assets.
(c) management’s practice of committing to creditors to achieve unrealistic forecasts.
(d) known history of violations of laws and regulations.
Which of the following factors pertaining to a client’s accounting function is most
significant in the client acceptance or continuance decision?
(a) Effectiveness of internal controls.
(b) Use of a commercial accounting software program.
(c) Frequency of performance evaluations for accounting personnel.
(d) Frequency of updating the general ledger.
AS#5 requires auditors whose public clients use service providers considered
significant:
a. obtain a SAS 70 Type I report.
b. obtain a SAS 70 report.
c. obtain a SAS 70 Type II report.
d. Any of the above considering the circumstances.
None of the offered answers is technically correct. A SAS 70 report is not mandatory.
AU 324 (AS 5 Appendix B20) suggests a SAS 70 report be obtained if the user auditor
can not obtain necessary evidence to reduce control risk through review of client
activities (AU 324.13 and AS5 Appendix B20 (b)). The text (page 714) describes AS 5
Appendix B20 (a) and (c), but is silent on B20 (b). Additionally, the “Auditing In
Action” (blue box) on page 715 suggests an auditor need not use a service provider
report.
Which of the following statements is false related to the PCAOB?
A. The PCAOB has the authority to prose and adopt rules and standards.
B. The PCAOB is a for profit entity.
C. The PCAOB rules are more overarching in that they statement the requirement to
follow PCAOB standards.
D. THE PCAOB was structured by the SEC in response to the Sarbanes-Oxley Act.
Regardless of the specific form, documentary evidence shows that the receiving process
occurred.
Disclosures provide users the means to understand how changes in fair values affect
cash flows.
The financial statements prepared in a compilation engagement may be for management
use only or management and third-party use.
An adverse opinion is issued when the auditor cannot perform appropriate audit
procedures because of a scope limitation.
There are seven separate assertions in the audit of cash.
For each of the allegations listed below, identify the major defenses available to
auditors.
Negligence
Gross negligence
Constructive Fraud
Breach of Contract
Securities Act of 1933
Securities Act of 1934
RICO
For each of the allegations listed below, identify the major defenses available to
auditors.
When checks are received in the mail, they should immediately be restrictively
endorsed and a daily remittance list should be prepared concurrently.
If a company owns many business locations (for example, many store locations), and in
the aggregate they could cause material misstatements to the financial statements, the
auditor would need to obtain sufficient audit evidence for all the locations to conclude
on ICFR effectiveness. Assume the stores do not share a standard accounting system,
and backroom operations and entity-level controls are not uniform across locations.
Is it possible that this situation could make the needed audit procedures cost
prohibitive, so that the company could not get an audit? Discuss. How might the
company need to modify its procedures?
Negligence is considered a cause of action.
An occupational group of individuals with a collective identity are referred to as a
profession.
A test of controls can be modified to be performed as a dual purpose test if the
modification provides evidence about the related account balances. Describe a
substantive procedure that can be added to a test of controls in order make it a dual
purpose test. The substantive procedure you identify must be one that could be added to
most any test of controls involving a sample selection or mathematical verification.
If detection risk is set too “high,” then the sample sizes needed for testing are increased.
What estimates are included in the cost of inventory in the land development and home
building industry? Specifically, what past costs are allocated? What future amounts
must be predicted? What future amounts must be predicted and allocated? Distinguish
between revenue amounts and costs.
Purchasing preferred stock is an equity investment.
Comprehensive income is the sum of all nonowner-related changes in equity.
For the Accounts Receivable, list the analytical procedures you would perform. Which
assertion does each address?
A significant deficiency is more serious than a material weakness.