According to the ethical standards of the profession, which of the following acts is
generally prohibited?
A. Purchasing a product from a third party and reselling it to a client
B. Writing a financial management newsletter promoted and sold by a publishing
company
C. Accepting a commission for recommending a product to an audit client
D. Accepting engagements obtained through the efforts of third parties
The IIA Performance Standards do not include the standard for
A. managing the internal audit activity.
B. nature of work.
C. compliance with policies, plans, procedures, laws and regulations.
D. engagement planning.
Which of the following is not true with respect to the test data approach for evaluating
computer controls?
A. The test data are created for a separate entity and are run simultaneously with the
client’s actual data.
B. Only one of each type of error transaction needs to be included in the test data.
C. The manual results of processing the test data are compared to the results of
processing these data through the client’s computerized processing system.
D. Audit teams consider potential errors and conditions of interest in generating the test
data.
The responsibilities principle under generally accepted auditing standards does not
include which of the following?
A. Competence and capabilities
B. Independent attitude
C. Due care
D. Planning and supervision
Which of the following statements concerning noncompliance by clients is correct?
A. An auditor’s responsibility to detect noncompliance that has a direct and material
effect on the financial statements is the same as that for errors and frauds.
B. An audit in accordance with generally accepted auditing standards normally includes
audit procedures specifically designed to detect noncompliance that has an indirect but
material effect on the financial statements.
C. An auditor considers noncompliance from the perspective of the reliability of
management’s representations rather than their relation to audit objectives derived from
financial statement assertions.
D. An auditor has no responsibility for noncompliance that has an indirect effect on the
financial statements.
Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client’s accounting staff held in private
B. Inspection of prenumbered client shipping documents
C. Inspection of bank statements obtained directly from the client’s financial institution
D. Analytical procedures performed by auditors on the client’s trial balance
A CPA firm would provide itself reasonable assurance of meeting its responsibility to
offer professional services that conform with professional standards by
A. establishing an understanding with each client concerning individual responsibilities
in a signed engagement letter.
B. assessing the risk that errors and fraud may cause the financial statements to contain
material misstatements.
C. developing specific audit objectives to support management’s assertions that are
embodied in the financial statements.
D. maintaining a comprehensive system of quality control that is suitably designed in
relation to its organizational structure.
When testing internal controls, which of the following statements is not true with
respect to the use of nonstatistical sampling?
A. Nonstatistical sampling is permitted in the audits of both public and nonpublic
entities.
B. Nonstatistical sampling does not require the use of random selection techniques.
C. When using nonstatistical sampling, auditors are required to quantify the parameters
used to determine sample size.
D. Auditors are required to use professional judgment in evaluating the sample results
in a nonstatistical sampling application.
The AICPA has developed sample size tables for attributes sampling that specifically
incorporate all of the following factors except for the
A. expected population deviation rate.
B. risk of overreliance.
C. tolerable rate of deviation.
D. sample rate of deviation.
Which of the following is not an advantage associated with monetary unit sampling
(MUS)?
A. MUS sampling methods typically include transactions or components reflecting
relatively large dollar amounts.
B. MUS sampling methods are more effective in identifying overstatement errors.
C. MUS sampling methods provide a conservative (higher) estimate of misstatement in
the account balance or class of transactions.
D. MUS sampling methods typically result in relatively small sample sizes.
The Orange Corporation was audited for the year ended December 31. The audit was
completed on January 25; prior to the release of the report, auditors learned of a
two-for-one stock split on February 1. If dual dating is used, what are the proper dates
for the auditors’ reports?
A. December 31 and January 25
B. January 25 and February 1
C. January 25 and February 15
D. February I and February 15
When audit teams test a computerized processing system, which of the following is true
of the test data approach?
A. Several transactions of each type must be tested.
B. Test data are processed by the client’s computer programs under the audit team’s
control.
C. Test data must consist of all possible valid and invalid combinations.
D. The computer program used to process test data is different from the program used
throughout the year by the client.
Which of the following would not be estimated using variables sampling?
A. The balance in the client’s accounts receivable
B. The extent to which an internal control procedure is not functioning as intended
C. The amount of misstatement in a client’s inventory
D. All of these would be estimated using variables sampling
When auditing the valuation assertion of an equity method investment, which of the
following is the auditor most likely to do?
A. Inspect stock certificates.
B. Obtain audited financial statements of the investee company.
C. Obtain the market price of the stock as of year-end.
D. Review management’s calculations.
Which of the following is most closely associated with the responsibilities principle?
A. Due care
B. Planning
C. Qualified audit opinion
D. Risk of material misstatement
An auditor is examining an important internal control in his audit of ABC Company.
Because the account balance affected by this control is highly susceptible to fraud, she
will reject the sample if even one deviation is discovered. What type of sampling plan
should she use?
A. Attributes sampling
B. Discovery sampling
C. Sequential sampling
D. Statistical sampling
Extensible Business Reporting Language (XBRL) provides a computer readable
identifying tag for each individual item of data. The advantages of XBRL include all of
the following except
A. increases the speed of handling of financial data.
B. reduces the chance of error.
C. improves the full disclosure of financial information.
D. permits automatic checking of information.
To gather evidence regarding the bank’s balance in a bank reconciliation, an auditor
would examine all of the following except the
A. cutoff bank statement.
B. general ledger.
C. bank confirmation.
D. year-end bank statement.
Which of the following statements best describes why an auditor would use only
substantive procedures to evaluate specific relevant assertions and risks?
A. The relevant internal control components are not well documented.
B. The internal auditor already has tested the relevant controls and found them
effective.
C. Testing the operating effectiveness of the relevant controls would not be efficient.
D. The cost of substantive procedures will exceed the cost of testing the relevant
controls.
The auditor’s sample would indicate that the client’s account balance is fairly stated
when the _____ is less than the _____.
A. upper limit on misstatements; tolerable misstatement
B. actual misstatement; tolerable misstatement
C. tolerable misstatement; upper limit on misstatements
D. tolerable misstatement; actual misstatement
Under monetary unit sampling, the sampling interval is determined by dividing the
_____ by the _____.
A. sample size; population size
B. population size; sample size
C. tolerable misstatement; population size
D. population size; tolerable misstatement
If the auditor were interested in ensuring that all sales have been recorded, the
population would be defined as
A. entries in the cash receipts journal.
B. entries in the general journal.
C. remittance advices.
D. shipping documents.
A disadvantage of using a systematic random selection procedure is that
A. this type of procedure does not permit the auditor to measure the exposure to
sampling risk.
B. this type of procedure does not make all items available for selection.
C. this type of procedure requires that the population be arranged in a random order.
D. this type of procedure provides the auditor with a higher level of exposure to
nonsampling risk compared to other selection procedures.
The accountant’s standard report for a compilation service would not include a
statement that
A. a compilation service has been performed in accordance with standards established
by the AICPA.
B. financial statement information is the representation of the owners of the business.
C. compilation service consists primarily of inquiries of company personnel and
analytical procedures applied to financial data.
D. financial statements have not been audited or reviewed and the accountant does not
express an opinion or any other form of assurance.
When interim financial information is presented as supplementary information
accompanying audited financial statements, the auditor should make reference to the
information
A. in all cases.
B. when it has not been labeled as “unaudited”.
C. when it is material to the financial statement users.
D. when the information has been reviewed rather than audited.
The AICPA Assurance Services Executive Committee identified five megatrends that
can affect public accounting firms” business. Which of the following is NOT one of the
megatrends they identified?
A. Information Technology
B. The shift from the industrial age to the knowledge age
C. Globalization
D. Merging of corporations creating fewer audit opportunities
During an audit of an entity’s stockholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements or
state law. This audit procedure most likely is intended to verify management’s assertion
of
A. existence or occurrence.
B. completeness.
C. valuation or allocation.
D. presentation and disclosure.
The audit failures of both Enron and WorldCom were examples in which the leadership
responsibilities for quality work within the accounting firm were overshadowed by
fears that losing a key client would
A. result in shareholder losses from reduced company profitability.
B. require additional audit procedures and increase the fees paid by the companies to
the accounting firm.
C. negatively influence the results of the firm’s inspection.
D. negatively impact individual auditors’ performance evaluations.
The group auditors decide not to refer to the audit of component auditors who audited a
subsidiary of the group financial statements. After making inquiries about the
component auditors’ professional reputation and independence, the group auditor most
likely would
A. document in the engagement letter that the group auditors assume no responsibility
for the component auditors’ work.
B. obtain written permission from the component auditors to omit the reference in the
group auditors’ report.
C. contact the component auditors’ and review the audit programs and working papers
pertaining to the subsidiary.
D. add an additional paragraph to the group auditors’ report indicating that the
subsidiary’s financial statements are not material to the consolidated financial
statements.
An auditor’s tests of controls over the issuance of raw materials to production would
most likely include
A. reconciling raw materials and work-in-process perpetual inventory records to general
ledger balances.
B. inquiring of the custodian about the procedures followed when defective materials
are received from vendors.
C. observing that raw materials are stored in secure areas and that storeroom security is
supervised by a responsible individual.
D. examining material requisitions and reperforming client controls designed to process
and record issuances.
Below are definitions of terms related to audit sampling. Match the term is most closely
associated with the definition. Each term is associated with only one definition.
1. Reliability. A. The numeric distance from the estimated
population value in which the true (but unknown) population value
may lie with a given probability.
2. Sampling interval. B. The likelihood of achieving a given level of
precision.
3. Precision. C. An interval that has a certain likelihood (equal to
reliability) of including the true population value.
Internal audit findings should always include ___________________,
___________________, ___________________, ___________________, and
___________________.
Auditing the details of customer payments listed in bank deposits in comparison to
details of customer payment postings can detect
_________________________________.
The state Department of Education needs to have audits for various reasons. For each
reason, indicate the related type of engagement or practice that would most likely be
performed.
1. To have an opinion regarding the physical condition of several of the older high
schools in the state
2. To know if hiring practices in various school districts meet state law
3. To know if guidance counselors can adequately handle the number of students
assigned to them in an effective manner
4. To know if various schools are providing appropriate programs to serve the needs of
the students
5. To know if an after school tutoring program has resulted in more high school students
continuing with their education in college Attestation engagement
A. Compliance audit
B. Operational audit
C. Program audit
D. Program audit
E. Attestation engagement
The __________________________________ has transaction initiation authority to
add new employees and delete terminated employees.
__________________________________ of securities can prevent the use of company
securities as _____________________________ for personal loans.
F. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last year’s work
papers in selecting accounts payable to be confirmed. Confirmations were mailed to 50
of Jill’s 200 suppliers. The sample was designed to select accounts with the largest
balances. Jack and Jill spent a lot of time reconciling minor differences between the
confirmation amounts and the accounts payable trial balance.
Do you believe Jack should use the same sample design for accounts payable
confirmations this year? If not, what suggestions can you give to improve the design?
Indicate the type of communication(s) that correspond to each of the following
statements. Use the letters A (attorney letter), M (management letter), and WR (written
representations). Each statement may be related to more than one type of
communication.
____ 1. Discusses management’s responsibility for the fairness of the financial
statements.
____ 2. Is obtained on the date of the auditors’ report.
____ 3. Provides auditors with significant evidence regarding litigation, claims, and
assessments.
____ 4. Discusses the absence of fraud activity by the client and its personnel.
____ 5. Is not required by generally accepted auditing standards.
____ 6. Is intended to be returned to auditors as a form of evidence.
____ 7. Is typically prepared following the audit report release date.
____ 8. Is signed by an executive of the client.
Production planning interacts with the preparation of
____________________________________.
This question requires knowledge of specific account balance assertions, general audit
procedures, and trade accounts payable.
You are assigned to audit the accounts payable of Green Corporation whose business is
wholesale and retail trade. The company purchases products from 1,002,000
manufacturers (“vendors”) and sells the products to its retail and wholesale customers.
The general ledger shows the Accounts Payable control balance as of the balance-sheet
date in the amount of $42 million (which is 70 percent of current liabilities, 50 percent
of total liabilities, and 35 percent of total liabilities and owners’ equity). Green’s
management accountants post the summary entries from the purchases journal and from
the cash disbursements journal each month to the Accounts Payable control account.
The accounts payable manager gave you a detailed trial balance that lists all recorded
unpaid invoices (recording date, vendor name, vendor invoice number, invoice date,
and amount) subtotaled by vendor.
Other members of the audit team have already decided to assess control risk at the
maximum for the accounts payable work. The engagement manager gave you last year’s
audit working papers but said the audit plan was missing (!). Thus, the first part of your
assignment is to write the audit plan for audit of the Green Corporation trade accounts
payable.
For each of the balance assertions (existence, completeness, and valuation or and
allocation), write two or more specific audit procedures designed to produce evidence
related to the accounts payable balance of $42 million.
(Hints: [1] For each of the three balance assertions, think about a specific assertion
before you write a procedure to gather evidence. [2] Write specific procedures as
adaptations of the general audit procedures: recalculation, observation, confirmation,
document examination, inquiry, scanning, analytical procedures. [3] Most procedures
are two-part statements: “Select a sample of… [identify the population]…and “do
something”… [specify an action].)