The procedures used in a review engagement are
A. physical examination, reperformance, and obtaining a management representation
letter.
B. analytical procedures, reperformance, and obtaining a management representation
letter.
C. analytical procedures, inquiry, and obtaining a management representation letter.
D. physical examination, inquiry, and obtaining a management representation letter.
The permanent reference files (master files) in a personnel and payroll database
ordinarily do not include which of the following?
A. Deduction table.
B. Payroll master.
C. Compensation table.
D. Employee earning record.
A number of factors influence the sample size for a variables sampling application. All
other factors held constant, which of the following would lead to a larger sample size?
A. A lower assessed level of risk of material misstatement
B. Increased use of analytical procedures to obtain evidence about particular assertions
C. Lower frequency and magnitude of misstatements
D. Lower levels of tolerable misstatement
Fraud examiners have four main objectives in performing an investigation. Which of
the following is not one of those objectives?
A. Determine whether a fraud exists.
B. Determine who was involved in the fraud.
C. Determine how the fraud occurred.
D. Determine the effect on financial statement users.
If an auditor tested 50 transactions and found two deviations from an important control
activity, the auditor could conclude that
A. the tolerable rate is 4%.
B. the critical rate of occurrence is 4%.
C. the sample rate of deviation is 4%.
D. the expected population deviation rate is 4%.
An entity’s comparative financial statements include the financial statements of the
prior year that were audited by a predecessor auditor whose report is not presented. If
the predecessor’s report was qualified, the successor should
A. issue an updated comparative report indicating the involvement of component
auditors.
B. explain to the client that comparative financial statements may not be presented
under these circumstances.
C. express an opinion only on the current year’s financial statements and make no
reference to the prior-years’ statements.
D. indicate the substantive reasons for the qualification in the predecessor auditors’
opinion.
When auditors lack independence, which of the following is true about the report on the
entity’s financial statements that should be issued?
A. The auditors should disclaim an opinion and should state specifically that they are
not independent.
B. The auditors should disclaim an opinion but not mention that they are not
independent.
C. The auditors should issue an unmodified opinion with an other-matter paragraph
stating that they are not independent.
D. The auditors should issue a qualified opinion with an other-matter paragraph stating
that they are not independent.
Which of the following is an underlying condition that in part creates the demand by
users for reliable information?
A. Economic transactions that are numerous and complex
B. Decisions are time-sensitive
C. Users separated from accounting records by distance and time
D. Financial decisions that are important to investors and users
E. All of these
The characteristics that distinguish computer processing from manual processing would
not include
A. a decrease of management supervision of operations.
B. automatic initiation and execution of transactions.
C. the possible concentration of control activities.
D. a high potential for unauthorized access to data.
The restatement of torts is a general legal doctrine that extends liability for ordinary
negligence to
A. foreseeable third parties.
B. foreseen third parties.
C. primary beneficiaries.
D. all users of financial statements.
Which of the following is the best audit procedure for determining the existence of
unrecorded liabilities?
A. Examine confirmation requests returned by creditors whose accounts are on a
subsidiary trial balance of accounts payable.
B. Examine a sample of cash disbursements in the period subsequent to year-end.
C. Examine a sample of invoices a few days prior to and subsequent to year-end to
ascertain whether they have been properly recorded.
D. Examine unusual relationships between monthly accounts payable and recorded
purchases.
At the request of James Company’s management, E.G. audited James Company’s
financial statements and was aware that James’ management intended to deliver the
financial statements to its 25 shareholders for the purpose of repurchasing their shares
for $50 per share (the investors had originally purchased the shares for $5 per share).
The audit was conducted in accordance with generally accepted auditing standards and
the financial statements were prepared in accordance with generally accepted
accounting principles. Later, the shareholders sued the auditors, claiming that if they
fully realized the significance of disclosures about the market value of the assets, they
could have received $75 per share from James Company. The shareholders’ lawsuit will
probably fail because
A. the shareholders did not suffer a loss.
B. the shareholders were not primary beneficiaries of the audit engagement and they
have no standing to sue.
C. the shareholders failed to prove lack of appropriate professional care on the part of
auditors.
D. the shareholders did not rely properly on the financial statements.
Which of the following components of the upper limit on misstatements will exist in all
monetary unit sampling applications, even in those where no misstatements are found?
A. Basic allowance for sampling risk
B. Computed allowance for sampling risk
C. Incremental allowance for sampling risk
D. Projected misstatement
Vouching a sample of items from the perpetual inventory records to the receiving
reports achieves the specific ASB balance assertion of
A. completeness.
B. occurrence.
C. presentation.
D. valuation.
The sampling method used to examine a population when the auditor wants to estimate
a continuous amount (or value) of the population is
A. attributes sampling.
B. balance sampling.
C. discovery sampling.
D. variables sampling.
The federal law that established uniform requirements for audits of federal assistance
provided to state and local governments is called
A. the Single Audit Act of 1984.
B. the Uniform Requirements Act of 1992.
C. the Sarbanes-Oxley Act or 2002.
D. the Audit Reduction Act of 1985.
In which of the following situations would the use of sampling be most appropriate?
A. The need for precise information is less important.
B. The number of items comprising the population is smaller.
C. The likelihood of selecting a representative sample is relatively low.
D. The use of sampling would be appropriate in all of the above situations.
An auditor discovers that an account balance believed not to be materially misstated
based on an audit sample was materially misstated based on the total population of the
account balance. This is an example of which of the following types of sampling risks?
A. Incorrect rejection
B. Incorrect acceptance
C. Assessing control risk too low
D. Assessing control risk too high
An audit plan for the examination of the retained earnings account should include a step
that requires verification of the
A. market value used to charge retained earnings to account for a 2-for-1 stock split.
B. approval of the adjustment to the beginning balance as a result of a write-down of
account receivables.
C. authorization for both cash and stock dividends.
D. dividends received from investments.
The audit objective that all transactions are recorded in the proper period is related most
closely to which of the Audit Standards Board (ASB) transaction assertions?
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy
If a company keeps investments in a bank safe deposit box, which of the following two
people ideally should have access to the safe deposit box?
A. A director and the president.
B. The president and vice president for finance.
C. A director and vice president for finance.
D. A director and general ledger accountant.
Which of the following statements is generally correct about the appropriateness of
audit evidence?
A. Auditors’ direct personal knowledge, obtained through observation and inspection, is
of higher quality than information obtained indirectly from independent outside
sources.
B. To be reliable, audit evidence must be either valid or relevant, but need not be both.
C. Client accounting data alone may be considered sufficient appropriate audit evidence
to issue an unmodified opinion on client financial statements.
D. Appropriateness of audit evidence refers to the amount of corroborative evidence to
be obtained.
If auditors are appointed on January 3, 2014, the date of the financial statements is
December 31, 2014, the date of the auditors’ report is February 7, 2015 and the audit
report release date is March 3, 2015, what is the appropriate date of the written
representations?
A. January 3, 2014
B. December 31, 2014
C. February 7, 2015
D. March 3, 2015
Which of the following is a definition of control risk?
A. The risk that a material misstatement will not be prevented or detected on a timely
basis by the client’s internal controls.
B. The risk that the auditor will not detect a material misstatement.
C. The risk that the auditor’s assessment of internal controls will be at less than the
maximum level.
D. The susceptibility of material misstatement assuming there are no related internal
controls, policies, or procedures.
Loan covenants are used for which of the following reasons?
A. To protect the lender from the borrower substantially weakening the borrower’s
financial position.
B. To protect the borrower from the lender calling the loan early.
C. To protect the auditors from false information by the borrower.
D. To protect shareholders from management taking on too much debt.
Which of the following is the essential purpose of the audit function?
A. Detection of fraud
B. Examination of individual transactions to certify as to their validity
C. Determination of whether the client’s financial statement assertions are fairly state
D. Assurance of the consistent application of correct accounting procedures
Harris is auditing the financial statements of Cole Corp., an energy company. The
FASB requires that these financial statements must be accompanied by supplementary
mineral reserve information. If this required information is materially misstated, what
type of report should Harris issue?
A. Unmodified opinion with an other-matter paragraph disclaiming an opinion on the
mineral reserve information
B. Adverse opinion on the financial statements and mineral reserve information due to
the misstatement
C. Unmodified opinion on the financial statements with an other-matter paragraph
expressing an adverse opinion on the mineral reserve information
D. Qualified opinion on the financial statements and mineral reserve information due to
the misstatement
Which of the following auditors is responsible for designing and planning an audit to
detect material illegal acts and frauds?
A. External auditors.
B. Internal auditors.
C. Governmental auditors.
D. All of the above
Below are several of the ASB management assertions.
A. Occurrence
B. Completeness
C. Rights and obligations
D. Allocation or valuation
E. Classification
F. Existence
G. Cutoff
H. Accuracy
I. Understandability
For each of the following control activities, identify the management assertion that best
applies by placing the correct letter in the blank space above.
____ 1. Match shipping documents with sales invoices before a sale is recorded.
____ 2. Balance total of individual customers’ receivables with the control account.
____ 3. Sales manager approves taking discounts.
____ 4. Computer check for billing the quantity shipped, list price, and total.
____ 5. Account for numerical sequence of pre-numbered shipping documents.
Which of the following activities is least likely to result in the audit team’s exposure to
sampling risk?
A. Identifying all components of a client’s accounts receivable balance
B. Determining the appropriate number of components of a client’s accounts receivable
balance for confirmation
C. Selecting components of a client’s accounts receivable balance for confirmation
D. Evaluating confirmations returned from the client’s customers and following up on
any discrepancies noted by the customers
Near the end of an audit, the application of analytical procedures is
A. recommended by auditing standards.
B. not mentioned by auditing standards.
C. not useful, since detailed substantive procedures have already been performed.
D. required by auditing standards.
If an audit is performed for the benefit of a specific person or organization, that person
or organization is known as a(n)
A. party to the contract.
B. primary beneficiary.
C. foreseeable third party.
D. prime benefactor.
The purpose of an audit strategy is
A. to provide a defense against litigation.
B. to gain an understanding of the client.
C. to comply with securities law.
D. to set the scope, timing, and direction for auditing each relevant assertion.
A sales clerk enters a customer’s six-number customer account. The computer program
uses the first five numbers to calculate a sixth number. This resulting number is then
compared to the sixth number entered by the sales clerk. This is an example of a
A. a valid character test.
B. missing data test.
C. reasonableness test.
D. check digit.