Which of the following subsequent events is most likely to result in an adjustment to a
company’s financial statements?
A) merger or acquisition activities
B) bankruptcy (due to deteriorating financial condition) of a customer with an
outstanding accounts receivable balance
C) issuance of common stock
D) an uninsured loss of inventories due to a fire
Which of the following statements is correct?
A) A letter of representation is documentation of management’s acceptance of
responsibility for the financial statements and is deemed to be reliable evidence.
B) A letter of representation is not deemed to be reliable evidence because of the
potential incompetence of management.
C) A letter of representation is not deemed to be reliable evidence because it is a written
statement from a nonindependent source.
D) A letter of representation is documentation of the CPA’s acceptance of responsibility
for the audit of the financial statement and is deemed to be reliable.
Which of the following types of owners’ equity transactions would require authorization
by the board of directors?
A) issuance of capital stock
B) repurchase of capital stock
C) declaration of dividends
D) all of the above
The American Institute of Certified Public Accountants (AICPA)
A) is responsible for issuing licenses to new CPAs.
B) restricts its membership to CPAs who are independent auditors.
C) sets auditing standards for both public and private companies.
D) sets rules of conduct that CPAs are required to meet.
Which of the following is not a likely source of information to assess fraud risks?
A) communications among audit team members
B) inquiries of management
C) analytical procedures
D) consideration of fraud risks discovered during recent audits of other clients
When auditing financial instruments, analytical procedures can be used to
A) test the reasonableness of interest and dividend income.
B) test the year-end balance.
C) determine if the financial instruments were properly valued.
D) determine if the gain or loss on the sales were properly computed.
Which of the following is a correct statement regarding block sampling?
A) It is acceptable to use block sampling only if a reasonable number of blocks are
used.
B) Block sampling uses sampling with replacement.
C) Block sampling is a probabilistic sampling method.
D) There is considerable cost and time involved when block sampling is used.
Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but
it is most commonly used with
A) ratio estimation.
B) discovery sampling.
C) difference estimation.
D) mean-per-unit estimation.
The sample exception rate equals
A) the number of exceptions in the population divided by the sample size.
B) the number of items in the population multiplied by the number of exceptions in the
sample.
C) the number of exceptions in the sample divided by the sample size.
D) the number of exceptions in the population divided by the population size.
The audit of cost accounting begins with the internal transfer of assets from raw
materials to work-in-process to
A) manufacturing overhead.
B) finished goods inventory.
C) the perpetual inventory master files.
D) retail sales.
When the auditor is determining whether the client followed a consistent depreciation
policy from period to period, and the client’s depreciation calculations are correct, the
balance-related audit objective of ________ is being determined for depreciation
expense.
A) completeness
B) existence
C) classification
D) accuracy
Which of the following auditor’s defenses usually means nonreliance on the financial
statements by the user?
A) lack of duty
B) non negligent performance
C) absence of causal connections
D) contributory negligence
The objective of an audit of the financial statements is an expression of an opinion on
A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements.
C) the accuracy of the annual report.
D) the accuracy of the balance sheet and income statement.
Which of the following would generally not need to be approved by the board of
directors?
A) issuing capital stock
B) repurchasing capital stock
C) declaration of a dividend
D) payment of a dividend
Auditors generally allocate the preliminary judgment about materiality to the:
A) balance sheet only.
B) income statement only.
C) income statement and balance sheet.
D) statement of cash flows.
Audit documentation
A) should identify the items tested when the audit procedures involve sampling of
transactions or balances.
B) does not aid in the preparation of the tax return since accounting and tax rules differ.
C) is another term for the audit program.
D) should not be given to anyone outside the audit firm, even if a subpoena has been
issued.
Tests of controls
A) are the procedures used to test the effectiveness of controls in support of a reduced
assessed control risk.
B) are used to support the ending balances in the balance sheet and income statement
accounts.
C) are performed at the end of the audit.
D) are designed to detect fraud.
Which of the following statements regarding the letter of representation is not correct?
A) It is prepared on the client’s letterhead.
B) It is addressed to the CPA firm.
C) It is signed by high-level corporate officials, usually the president and chief financial
officer.
D) It is optional, not required, that the auditor obtain such a letter from management.
The Statements on Auditing Standards issued by the Auditing Standards Board
A) are regarded as authoritative literature.
B) mandate the amount of evidence that must be obtained.
C) must be followed in all situations.
D) are optional guidelines which an auditor may choose to follow or not follow when
conducting an audit.
Oehlers, CPA, is a staff auditor participating in the engagement of Capital Trust, Inc.
Which of the following circumstances impairs Oehlers’ independence?
A) Oehlers’ sister is an internal auditor employed by Capital Trust.
B) Oehlers’ friend, an employee of another local accounting firm, prepares the tax
return of Capital Trust’s CEO.
C) Oehlers’ and Capital Trust’s 401K plans own stock with the same corporation.
D) During the period of professional engagement, Capital Trust and Oehlers discussed
business over lunch at a first-class restaurant.
The auditor’s responsibility with respect to events occurring between the balance sheet
date and the end of the audit examination is best expressed by which of the following
statements?
A) The auditor is fully responsible for events occurring in the subsequent period and
should extend all detailed procedures through the last day of fieldwork.
B) The auditor is responsible for determining that a proper cutoff has been made and
performing a general review of events occurring in the subsequent period.
C) The auditor’s responsibility is to determine that a proper cutoff has been made and
that transactions recorded on or before the balance sheet date actually occurred.
D) The auditor has no responsibility for events occurring in the subsequent period
unless these events affect transactions recorded on or before the balance sheet date.
When designing audit procedures, tracing of source documents to the customers
subsidiary ledger and subsequently to the general ledger is done to satisfy what
assertion?
A) valuation
B) cutoff
C) completeness
D) classification
A typical objective of an operational audit is to determine whether an entity’s
A) internal control is adequately operating as designed.
B) financial statements present fairly the results of operations.
C) specific operating units are functioning efficiently and effectively.
D) operational information is in accordance with generally accepted government
auditing standards.
External financial statement auditors must obtain evidence regarding what attributes of
an internal audit (IA) department if the external auditors intend to rely on IA’s work?
A) integrity
B) objectivity
C) competence
D) all of the above
The risk which the auditor is willing to take in accepting a control as being effective
when the true population exception rate is greater than a tolerable rate is the
A) finite correction factor.
B) tolerable exception rate.
C) acceptable risk of overreliance.
D) estimated population exception rate.
Amounts involving fraud are usually considered ________ important than unintentional
errors of equal dollar amounts.
A) less
B) no less
C) no more
D) more
Which of the following is an accurate statement regarding assurance services?
A) Assurance services must be performed by a CPA.
B) An attestation service is not a type of assurance service.
C) Assurance services improve the quality of information for decision makers.
D) Assurance services can only be performed on financial data.
Which of the following is an accurate statement regarding presentation and disclosure?
A) Auditors generally set the risk as low that all required information may not be
completely disclosed in the footnotes.
B) Audit tests performed in earlier audit phases provides sufficient appropriate evidence
about contingent liabilities and subsequent events.
C) Auditors do not conduct tests of controls related to disclosures when the initial
assessment of control risk is below maximum.
D) In phase IV (completing the audit), auditors evaluate whether the overall
presentation of the financial statements and related footnotes complies with accounting
standards.
Smith, CPA, has requested permission to communicate with the predecessor auditor in
order to review certain workpapers for high risk accounts for a new audit client. The
new audit client’s refusal to allow this communication to occur would impact Smith’s
decision concerning
A) the auditor’s ability to design audit tests.
B) possible scope exception due to lack of access.
C) the desirability of accepting the prospective engagement.
D) violation of the GAAP rules concerning consistency and comparability of financial
information.
The audit procedures for the subsequent events review can be divided into two
categories: (1) procedures integrated as a part of the verification of year-end account
balances, and (2) those performed specifically for the purpose of discovering
subsequent events. Which of the following procedures is in the first category?
A) Inquire of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Subsequent period sales and purchases transactions are examined to determine
whether the cutoff is accurate.
D) Review journals and ledgers of year 2 to determine the existence of any transactions
related to year 1.
A proof of cash is effective at identifying which of the following misstatements?
A) checks written for an improper amount
B) checks issued to invalid vendors
C) fraudulent checks
D) checks recorded in the books for an amount different from that on the check
When auditing financial instruments,
A) the auditor usually performs more extensive substantive testing to reduce reliance on
controls.
B) analytical procedures are critical in assessing the year-end balances for financial
instruments.
C) the auditor relies on statements and broker’s advices from investment managers to
test purchases and sales as long as controls were deemed effective.
D) tests of transactions are generally not performed.
A CPA learns that his client has paid a vendor twice for the same shipment, once based
upon the original invoice and once based upon the monthly statement. A control
procedure that should have prevented this duplicate payment is
A) attachment of the receiving report to the disbursement report.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
The written communication stating the auditor cannot guarantee that all acts of fraud
will be discovered is found in the
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter.
The standard unmodified opinion audit report for a nonpublic entity must
A) have a report title that includes the word “CPA.”
B) be addressed to the company’s stockholders and creditors.
C) be dated.
D) include an explanatory paragraph.