Derivative instruments are long-term hybrid-type securities meant to increase the return
on investments.
The most difficult decisions about which opinion to issue are generally centered around
decisions based on the materiality level and pervasiveness of GAAP violations, the
significance of scope limitations, and the likelihood of the entity being a going concern.
Accounts receivable confirmation letters should be prepared on the auditing firm’s
letterhead.
It is beneficial in the testing of notes receivable to confirm not only the balance of the
notes, but also their terms.
Audit documentation serves as support for the financial statements.
Audit firm culture plays a role in audit firm portfolio management in that some audit
firms are willing to provide audits to riskier clients, while other audit firms are not
willing to do so.
Restrictions on the scope of the audit whether imposed by the client or circumstances
may require the auditor to issue either a qualified or an adverse opinion.
The volume of transactions affected is one of the critical criteria in assessing identified
internal control deficiencies.
Auditors should mail third party confirmations through the client’s mailroom.
Audited financial statements should be presented fairly according to the substance of
GAAP.
Analytical procedures are a type of substantive evidence.
The obsolescence of long-lived assets is an inherent risk that should be considered by
the auditor.
The auditor is permitted to violate the confidentiality rule in providing relevant
information to an inquiry by a major shareholder of the client.
Tolerable misstatement is the amount of misstatement in an account balance that the
auditor could tolerate and still not judge the underlying account balance to be materially
misstated.
The audit program specifies what the client must do to perform the audit in accordance
with generally accepted accounting procedures.
Self-checking digit algorithms have been developed to test for transposition errors
associated with identification numbers
If the auditor determines that management’s annual report on internal controls is
incomplete or not properly presented, the auditor’s report will include an explanatory
paragraph that describes the reasons for this determination.
The objective of financial reporting is to provide useful information to interested users.
When an organization disposes of a long-lived asset it should determine and record the
gain or loss on the disposal of the asset.
Population items with a zero balance have the same chance of being chosen as those
with dollar balances when using MUS sampling.
Auditors are required to inform the audit committee of any significant audit adjustments
discovered during the engagement.
The revenue cycle considered by auditors includes the sales process but not collections.
When obtaining reasonable assurance that the financial statements are free from
material misstatements, auditors should consider the applicable legal and regulatory
frameworks that apply to the entity.
It is simple for auditors to test the costs capitalized for discovery of natural resources
because only successful efforts may be recorded
As part of a quality audit, the audit firm must have policies and procedures in place for
conducting an engagement quality review of each audit before issuing the audit opinion
for public companies.
The standards of the PCAOB consist of seven principles.
The confidentiality between auditor and client is legally equivalent as the
confidentiality shared between attorney and client.
Regarding loss contingencies, legal counsel should be instructed by the client to
respond directly to the auditors.
The reliability of audit evidence is a measure of the quality of the underlying evidence
and is influenced by risk, potential management bias associated with the evidence, and
the quality of the internal control system underlying the preparation of the evidence.
Under Common Law, liability concepts are developed through court decisions based on
negligence, gross negligence, or fraud.
Which of the following factors will result in control risk being assessed at a higher
level?
A.Controls are well designed.
B.There is a lack of supervision of accounting personnel.
C.Accounting staff are well trained and educated.
D.The control environment is operating effectively.
Who should the auditors first notify if they discover a material misappropriation of
assets?
A.The PCAOB.
B.The SEC.
C.The management of the company.
D.The audit committee of the company.
E.They are not required to notify anyone.
The AICPA includes which of the following categories that guide the conduct of an
audit?
A.Purpose of an audit and premise upon which an audit is conducted.
B.Responsibilities.
C.Performance.
D.All of the above.
According to the framework for ethical decision making, which of the following should
the decision maker consider?
A.All possible alternative courses of action.
B.The consequences associated with possible actions.
C.Whether the rights framework would cause any course of action to be added.
D.All of the above.
Which of the following reflects the scope of services performed in external auditing by
a CPA?
A.Risk analysis.
B.Control analysis.
C.Operations analysis.
D.Audits of financial statements.
Although different audit firms take different approaches, performance materiality could
be the same as overall materiality, or could be a percentage of overall materiality.
Generally this range is which of the following?
A.25% to 75% of overall materiality.
B.50% to 75% of overall materiality.
C.25% to 50% of overall materiality.
D.40% to 75% of overall materiality.
Which of the following is the best example of the control objective in the revenue cycle
that all transactions are recorded accurately?
A.Sales are recorded at the invoice price expected to be collected from customers.
B.Sales orders have sequential numbering.
C.Recorded sales transactions are evidenced by valid invoices and shipping documents.
D.Credits to customer accounts are classified as liabilities.
Why should the client’s legal expenses be examined?
A.To compare with previously released attorney’s letters.
B.To determine the types of fraud occurring in the organization.
C.To ensure proper recording of vendor payables.
D.To determine if there is any litigation pending or threatened.
A method used by companies to fraudulently inflate revenues includes which of the
following?
A.Use of hidden ‘side letters” giving the customer an irrevocable right to return the
product.
B.Recording of fictitious sales.
C.Shipment of product not ordered by customers.
D.All of the above.
If a client expensed the acquisition cost of some assets that should have been
capitalized and depreciated them over their useful lives, which of the following would
be incorrect?
A.A qualified opinion would be appropriate.
B.The opinion paragraph should be modified to include language such as: “except for
the effects of not capitalizing the acquisition costs of some assets…”
C.An explanatory paragraph should include the effects of the subject matter of the
qualification, where practicable.
D.An explanatory paragraph should be modified to include language such as: ‘subject to
the qualified act…”
Who licenses CPAs?
A.The PCAOB.
B.The AICPA.
C.The state boards of accountancy.
D.The SEC.
Which of the following is not an AICPA general standard for attestation engagements?
A.The practitioner must have adequate technical training and proficiency to perform the
attestation engagement.
B.The practitioner must have reason to believe that the subject matter is capable of
evaluation against criteria that are suitable and available to users.
C.The practitioner must adequately plan the work and must properly supervise any
assistants.
D.The practitioner must exercise due professional care in the planning and performance
of the engagement and the preparation of the report.
Which of the following best represents fraudulent financial reporting?
A.The transfer agent issues 40,000 shares of the company’s stock to a friend without
authorization by the board of directors.
B.The controller of the company decreases warranty expense by $3 million because the
company will otherwise miss analysts’ expectations this quarter.
C.The in-house attorney receives payments from the French government for negotiating
the development of a new plant in Paris.
D.The accounts receivable clerk covers up the theft of cash receipts by writing off older
receivables without authorization.
Which of the following statements about fraud or fraud detection is true?
A.Management may physically alter evidence to perpetrate and conceal the fraud.
B.Most fraudulent financial reporting is not material enough to consider.
C.Journal entries do not supply evidence necessary to detect fraud.
D.The advent of new technology prevents fraud, thereby leading to less fraud over time.
Which of the following occurs when, based on sample results, control risk is assessed
excessively high?
A.Audit inefficiency.
B.A less expensive audit.
C.Reduction of substantive testing.
D.Errors that are more likely to occur than anticipated.
Which of the following is false regarding the valuation of goodwill?
A.U.S. accounting standards require that goodwill be specifically identified with an
operating segment or a reporting unit.
B.By definition, acquired parts of the business (or goodwill) must be sufficiently
identifiable so that they can be managed as a unit or may be separately identified and
sold as a unit.
C.Goodwill is tested for impairment quarterly.
D.Goodwill is the excess of the purchase price over the fair market value of the
acquired company’s tangible assets, identifiable intangible assets, and liabilities.
Which one of the following subsequent events will least likely result in an adjustment
to the financial statements?
A.Material change in the amount of settlement of a lawsuit which had been estimated at
year end.
B.Bankruptcy of a customer who owes your client a material amount on open account
at year end for which there is an inadequate allowance estimate.
C.Sale of a large block of inventory at a price materially below carrying value.
D.Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.
Who is most often involved in perpetrating fraudulent financial reporting?
A.The auditors and the attorneys.
B.The treasurer and the board of directors.
C.The chief executive and chief financial officers.
D.The shareholders and the chief operating officer.
To support an assessment that controls are effective, what must an auditor do?
A.Achieve the same conclusion after appropriately testing internal control.
B.Achieve the opposite conclusion after appropriately testing internal control.
C.Perform increased substantive procedures.
D.Perform limited substantive procedures as the assessment is justified.
Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow
assumption will require the auditor to examine which of the following?
A.Invoices representing the more recent purchases of inventory.
B.Invoices representing the purchase of base year inventory in the year of inception.
C.Shipping documents for a sample of cost of goods sold transactions during the year.
D.Shipping documents for a sample of units on hand in the interim period.
Which of the following is the IIA’s stated position regarding the internal auditing
activity?
A.All responsibilities for internal auditing activity can be outsourced.
B.An in-house liaison, such as an executive or senior management member, should be
assigned the responsibility for internally managing the internal auditing activity.
C.All internal auditors involved in the internal auditing activity must be CIAs.
D.Internal auditors for the internal auditing activity should be supervised by CPAs.
Which of the following procedures is an appropriate agreed-upon procedure?
A.Evaluating the competency or objectivity of another party.
B.Performing of mathematical computations.
C.Obtaining an understanding about a particular subject.
D.Reading the work performed by others solely to describe their findings.
In what way does the risk of material misstatement differ from detection risk?
A.Risk of material misstatement arises because audit procedures have been misapplied.
B.Risk of material misstatement can be controlled and changed by the auditor.
C.Risk of material misstatement can be assessed in quantitative and non-quantitative
terms.
D.Risk of material misstatement is controllable by the client.
The aged accounts receivable report is utilized by the auditor to accomplish which of
the following?
A.Encourage the client to collect on receivables that are long past due.
B.Select the type of confirmations that will be sent to banks.
C.Assess the adequacy of the allowance for doubtful accounts.
D.Identify debits in the receivables balance that should be reclassified to payables.
If materiality judgments change during the audit opinion formulation process, what
happens to previous evidence collection decisions that were based on the initial
judgments?
A.They need to be reassessed.
B.They need to be noted in the footnotes.
C.No action is required.
D.None of the above.
If the auditor concludes that there may be a going-concern problem with the client,
which of the following is the best course of action for the auditor to follow?
A.Issue a qualified opinion.
B.Identify and assess management’s plan to overcome the situation.
C.Chart the negative trends as an addendum to the audit report.
D.Increase fees to cover the probable exposure.
Two determinants of the persuasiveness of evidence include which of the following?
A.Competence and Sufficiency.
B.Relevance and Reliability.
C.Appropriateness and Sufficiency.
D.Independence and Effectiveness.
In which of the following situations will auditors typically rely on internal controls over
financial reporting?
A.Only as needed to satisfy SOX.
B.Only if the controls are determined to be designed and operating effectively.
C.Only if the clients asks the auditor to test controls.
D.Only if the controls are sufficient to increase control risk to an acceptable level.
During your audit of Brown Company you are trying to determine whether all accounts
payable were recorded. Which assertion are you gathering evidence for?
A.Occurrence.
B.Presentation and Disclosure..
C.Completeness.
D.Valuation or allocation.
In which of the following circumstances would an auditor be most likely to express an
adverse opinion on a company’s financial statements?
A.The client has had significant transactions with related entities that the auditor wants
to emphasize.
B.The financial statements are not in conformity with FASB requirements regarding the
capitalization of leases.
C.The auditor is not independent.
D.There is substantial doubt about the entity’s ability to continue as a going concern.
If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the
effect on the amount of direct testing performed by the auditor?
A.Increase in direct testing.
B.Decrease in direct testing
C.No change in direct testing.
D.Direct testing is not needed.
The cutoff bank statement is used by the auditor to address which of the following
concerns?
A.Lapping.
B.Kiting.
C.Omitting outstanding checks on reconciliations.
D.All of the above.
Which one of the following is not a management expectation for independent auditors?
A.An outside source of expertise on accounting matters.
B.Individuals who perform tests and draw conclusions on assertions.
C.A participant in management decision making.
D.A provider of a written communication.
Which of the following is NOT a system of internal financial accounting controls for
inventory?
A.Authorization for all purchases.
B.Proper accounting for receipt of inventory.
C.Perpetual inventory system.
D.Rapid introduction of new products without market studies.
Which of the following best represents a walkthrough?
A.The controller reviews the bank reconciliation prepared by the accountant and its
resulting journal entries.
B.The auditor walks the production line to find inefficiencies in the inventory process
and reports them to management.
C.The controller takes a sample of write-offs to ensure they have been adequately
documented and recorded.
D.The auditor traces three purchasing transactions from the purchase order to the
financial statement for observation and understanding.