In the U.S., the first legislation requiring management of public companies to maintain
a system of internal controls was the:
(a) Committee of Sponsoring Organizations (COSO) of the Treadway Commission Act.
(b) Sarbanes-Oxley Act.
(c) Foreign Corrupt Practices Act.
(d) Public Company Accounting Oversight Board (PCAOB) Act.
Which of the following is a compensating control for a lack of segregation of duties in a
small business environment?
(a) Collusion between an accountant and cashier.
(b) Active involvement and oversight by the owner.
(c) Cumulative access and authority of a super-user.
(d) Requirement for an annual physical inventory count.
Social engineering is the term used to describe:
(a) policies defining employee’s acceptable uses of the company’s email system.
(b) the behavior of someone who plans to circumvent controls by manipulating
employees.
(c) policies that address warning signals regarding the risk of circumvention of controls.
(d) the network of computer assets and sensitive employee data.
Which of the following is not a consideration for an auditor while ‘scaling” the audit?
(a) The client company has multiple locations throughout the region.
(b) Another firm is responsible for auditing one of the client’s out-of-town subsidiaries.
(c) An outside service provider prepares all of the client company’s payroll accounting
records.
(d) The client company plans to hire and develop employees so that it can prepare its
payroll accounting records in-house within the next two years.
The balance sheet for a client shows a balance of $5,000. This is an example of which
assertion:
(a) completeness.
(b) right and obligations.
(c) valuation and allocation.
(d) All of the above.
A blanket purchase order is used to:
a. communicate expected demand to a supplier.
b. communicate firm purchase orders from a supplier.
c. communicate firm demand to a supplier.
d. All of the above.
Fraud investigations and accounting work to support legal actions refers to:
a. forensic accounting.
b. internal auditing.
c. vendor fraud.
d. customer fraud.
e. identity theft.
Explain the audit steps for detecting the following issues.
(a) Unrecorded noted payable
(b) Unrecorded dividends payable
(c) Unrecorded NSF checks
(d) Unrecorded pension liabilities
(e) Unrecorded stock buybacks (treasury stock)
(f) Unrecorded stock compensation expense
(g) Unrecorded covenant violations
(h) Unrecorded debt issuance
Some tests of controls are performed simultaneously with tests of details of balances
that provide audit evidence on the:
a. performance of oral and written testing.
b. PCAOB standards on audits of ICFR.
c. observing employees performing controls.
d. amount and disclosure of the account balance.
e. limitations of observations.
“Tone at the top” refers to the:
(a) thoroughness of policies for screening and electing the company’s board of directors.
(b) clarity of the company’s written code of conduct which sets forth the expectations
for personal ethical behavior to support the internal control structure.
(c) environment in which management supports the internal control system by behaving
ethically and making business decisions that emphasize its importance.
(d) effectiveness of the company’s internal audit function in monitoring the control
environment.
An auditor would search for unrecorded liabilities by:
a. examining paid invoices for inclusion in the proper accounting period.
b. examining bank statements for outstanding checks written to vendors.
c. examining the cash disbursements journal for the period subsequent to year-end but
prior to issuance of the financial statements for payments made but not properly
recorded as a liability in the correct period.
d. All of the above.
Match each scenario with its legal origin.
A. Privity
B. Near Privity
C. No need to prove reliance on financial statements
D. Need to prove the auditor knowingly sought to deceive the plaintiff.
E. Sets civil and criminal penalties for auditors and management for material
misstatements in the financial statements.
F. Can directly cause civil and/or criminal penalties to be assessed against auditors.
G. Intent to deceive must exist in order for the plaintiff to prevail.
I. Ultramares
II. Credit Alliance
III. Securities Act of 1933
IV. Securities Act of 1934
V. Sarbanes-Oxley Act of 2002
VI. SEC Action
VII. Hochfelder
When an auditor relies on the work of another auditor, the auditor issuing the audit
report may:
a. state this fact in the audit report.
b. disclaim responsibility for this audit work.
c. issue a qualified opinion with an explanatory paragraph.
d. issue a qualified opinion, except for the work of the other auditor.
Kiting:
(a) involves unintentional misplacement of cash.
(b) involves intentional duplication of cash.
(c) is detected through review of the bank reconciliations.
(d) None of the above.
The term audit objectives refers to:
a. what must be accomplished during the audit of a particular account to be persuaded
about management assertions.
b. the work that must be performed by the auditor.
c. the goal of the overall audit.
d. All of the above.
The difference between a SAS 70 Type I and Type II report is:
a. Type II reports extend Type I reports by testing the operating effectiveness of
controls.
b. Type II reports extend Type I reports by testing the design effectiveness of internal
control.
c. Type II reports occur prior to year-end.
d. Answers C and A.
Analytical procedures can help an auditor assess the reasonableness of the inventory
balances by highlighting changes that:
a. suggest slow-moving inventory for possible obsolescence.
b. address whether inventory includes operating costs that should be expensed rather
than capitalized.
c. compare the reasonableness of inventory balances with purchases and cost of goods
sold.
d. All of the above.
An example of a substantive analytical test for a hotel would be:
a. determine if the occupancy rate exceeded 100% for a given time period.
b. determine if the rate charged is in excess of that published.
c. determine if the food and beverage charges correspond to the occupancy rate.
d. All of the above.
Disclosures associated with payroll include:
a. underfunded pension liability.
b. share based payments.
c. other comprehensive income.
d. All of the above.
Which of the following procedures would you perform for an audit of inventory?
a. Determine its existence through physical inspection.
b. Count physical inventory and reconcile it to the perpetual inventory.
c. Observe how inventory is valued.
d. All of the above.
If a subsequent event that has a material effect on ICFR is discovered after the financial
report date, but existed at year-end, the duty of the auditor is to:
a. disclose the event in the audit report and issue a qualified opinion.
b. disclose the event in the audit report and issue an adverse opinion on the ICFR.
c. disclose the event in the audit report and add an explanatory paragraph.
d. depending on the circumstances, the auditor may choose any of the above.
If an audit program calls for the auditor to interview the client about an important
control activity, this is an example of which type of audit procedure?
(a) reperformance
(b) tracing
(c) inspection
(d) inquiry
When a client company’s systems rely heavily on IT, auditors will be concerned with
the possibility that:
(a) unauthorized program changes could result in a system that uniformly processes
data in an unauthorized manner.
(b) embedded controls are likely to be circumvented.
(c) risk of material misstatement is likely to increase as the complexity of the client’s IT
system increases.
(d) specialized IT knowledge on the audit engagement team is not necessary unless the
client company engages in electronic commerce.
AU 336 applies to:
(a) using the work of an actuary.
(b) whether a pension obligation is funded or not.
(c) the responsibility the auditor assumes when auditing pension plans.
(d) All of the above.
Purchase authorization is granted by:
a. using a pre-approved supplier list.
b. using a pre-approved price list.
c. requiring management approval for all purchases.
d. All of the above.
The human resources payroll cycle interfaces with the cost accounting system by:
a. classifying costs as either product or period.
b. use of job time tickets to reduce payroll expense and increase WIP.
c. use of time sheets to bill clients.
d. Both a and b.
EFT involves:
a. Direct deposit.
b. A computer.
c. Electronic transfer of funds.
d. All of the above.
The test data approach works well when testing which type of control?
(a) Output controls.
(b) Error handling procedures.
(c) Output accuracy.
(d) All of the above.
Which of the following is least likely to warrant further investigation of a potential
client company?
(a) Several companies in the same industry are experiencing business failures.
(b) None of the audit committee members is a financial expert.
(c) The audit committee concurs with management’s selection of accounting treatments.
(d) One of the directors was convicted of tax evasion.
In order to obtain audit evidence about account balances, many tests of controls may be
enhanced by the added activity of tracing the sampled items from the inventory
compilation report and verifying that the compilation amounts agree with the general
ledger. This enhanced test would be considered a:
a. substantive procedure.
b. dual-purpose test.
c. walkthrough.
d. physical inventory count.
As part of the proposal process the auditor:
(a) determines if the potential client is a good fit.
(b) determines of the auditor can perform an effective audit.
(c) determines if the potential client management is reputed to be of good character.
(d) All of the above.
SOX:
a. Essentially makes the audit of public companies a regulated industry.
b. Provides auditors less protection from lawsuits.
c. Re-establishes auditors as primarily responsible for detecting fraud in the financial
statements.
d. All of the above.
Which of the following is an illegal act that has an indirect effect on the financial
statements?
(a) Fraud detected in the payment cycle by the auditor.
(b) Bribing local officials for favorable lease terms.
(c) Failure to pay required taxes.
(d) Placing foreign substances in food in an effort to save money.
Internal auditors do not need to follow a code of ethics.
Human Resources (personnel) should maintain the payroll master file.
A principal auditor may share responsibility for an audit opinion when another auditor
performs all of the audit procedures for subsidiary of the client company.
Section 10b-5 of the Securities Act of 1934 targets fraud.
For a company that sells retail goods to customers both online, and in stores located in
shopping malls with payment made via cash and bank credit cards, which of the
following are important classes of transactions? Why? For those that are not, why not?
Online sales
In-store sales
Purchase of raw materials
Purchase of finished goods merchandise
Lease expense
Payroll expense
Costs of goods manufactured
Purchase of fixed assets
Entity-level controls include ITGC.
An audit firm must submit a proposal if a potential new client inquires about their audit
services.
An adverse opinion requires modification of the opinion paragraph and the addition of a
paragraph preceding the opinion paragraph explaining the circumstances motivating the
opinion.
Michael is a new employee in the financial reporting department of Goldberg
Corporation, a midsize publicly-held corporation with annual revenues of$75 million.
As Goldberg Corporation prepared for its annual audit, his manager came to him to
complain about the auditors. Their audit fees were so high, yet every year they never
found all of the mistakes made by the staff in Goldberg Corporation. One year, he
explained, they even missed a $5,000 fraud. (a)How can Michael use the objectives of
an audit to help his manager understand the value that the company receives from an
audit? (b)How can Michael explain that missing a $5,000 fraud in a company with
revenuesof$75 million does not indicate that the auditors performed an ineffective
audit?
Assume you are a senior who has been assigned to the audit of Overkill Motor Yachts,
when the senior previously assigned to the engagement left the firm for another
position. Most of the audit planning has been completed, but the audit plan for the
wrap-up phase is not finished. Draft the audit plan for the wrap up, including all audit
procedures and steps for the wrap up stage of the integrated audit of Overkill Motor
Yachts.
Why does having audited financial statements bring down a company’s cost of capital?
Assume the role of a member of the Audit Committee of the Board of Directors of a
midsize, publicly traded company that has decided to ask for auditor proposals for the
upcoming year’s integrated audit.
List the steps the company should take when solicitin proposals for next year’s audit,
including information that might be included in the RFP.
Describe what is by the term profession and identify the characteristics of individual
who is a professional.
Auditors must understand the flow of transactions in order to identify likely sources of
financial statement misstatements.
EDGAR is the name of the SEC database.
An unfilled order report is an internal document listing customer orders that have
received credit approval but have not been shipped.
Controls in the inventory cycle that support proper records of units and costs cannot be
effective unless the documentation and controls for purchasing, payroll, and sales are
also effective.