Examples of attest engagements include examination, review, and agreed-upon
procedures engagements.
Audit evidence includes only written information used by the auditor in arriving at an
opinion about the fairness of financial statements.
A purchase transaction usually begins with the preparation of a purchase order.
In order to properly preplan the audit, the auditor must determine the engagement team
requirements and ensure the independence of the audit team and audit firm.
A change in accounting estimate is an example of an accounting change that affects
comparability and requires an explanatory/emphasis-of-matter paragraph in the audit
report.
The dividend-disbursing agent prepares and mails dividends checks to the stockholders
as of the date of declaration.
An example of a prepaid account is prepaid interest.
Inherent risk is the susceptibility of an assertion to material misstatement, assuming no
related controls.
If an auditor is not independent of the client, it is unlikely that a user of financial
statements will place much reliance on the CPA’s work.
After a sample is drawn randomly, the allowance for sampling risk must be statistically
quantified within a specified level of confidence.
Expected misstatement is directly related to sample size.
The auditor must perform final analytical procedures before deciding on the appropriate
audit report to issue for the entity.
Principles are stated at a conceptual level, not a detailed level.
Management and the external auditor are responsible for the effectiveness of the entity’s
internal control.
Notes receivable is a common type of long-term financing.
A negative confirmation requests that customers respond whether they agree or not with
the amount due to the entity stated in the confirmation.
A remittance advice is used to track purchases.
In the audit of inventory, the entity is responsible for actually making and recording the
count of physical inventory; the auditor’s responsibility is to evaluate and observe the
entity’s procedures and draw conclusions about the adequacy of the physical inventory.
Long-term borrowing should be properly authorized.
A financial interest is “beneficially owned” when an individual or entity is NOT the
recorded owner of the interest but has a right to some or all of the underlying benefits of
ownership.
One of the five basic business processes is the warehousing cycle.
The AICPA Code of Professional Conduct deals mainly with behavior and actions of
individual auditors.
It is generally more efficient to follow a substantive strategy for auditing investments.
An attest service occurs when a practitioner is engaged to issue a report on subject
matter that is the responsibility of another party.
PCAOB rules require tax services provided by a public company auditor to be
considered and approved by the company’s audit committee.
A major control that directly affects the audit of cash is the bank reconciliation prepared
by the auditor.
PCAOB auditing standards must be followed on all financial statement audits
performed in the U.S.
An auditor can be guilty under federal statutory law if s/he was reckless in performance
of her/his professional duties.
The purchase of capital assets should be consistent with the authorization table used by
the entity to approve such transactions. However, no such table is normally used for
lease transactions.
The term “ethics” refers to a person’s propensity to follow the laws of the land.
As per the Conceptual Framework for AICPA Independence Standards made effective
in 2006, a CPA is required to identify and assess the extent to which a threat to
independence exists.
If the prospective client refuses to allow the predecessor auditor to communicate with
the successor auditor, the successor auditor should have reservations about accepting
the client.
Production personnel should ordinarily be responsible for maintaining perpetual
inventory records.
When the prospective client has previously been audited, auditing standards require that
the successor auditor make certain inquiries of the predecessor auditor before accepting
the engagement.
If the internal audit function is competent and objective, the auditor may generally rely
on the work of an internal audit function in certain areas to reduce the amount of
external audit work in these areas.
The auditor should insist that a representative of the entity be present during the
physical examination of securities in order to
A. lend authority to the auditor’s directives.
B. detect forged securities.
C. coordinate the return of all securities to proper locations.
D. acknowledge the receipt of securities returned.
A CPA’s failure to file a tax return is
A. considered acceptable by the AICPA Code of Professional Conduct.
B. ill-advised because it would impair the CPA’s independence with respect to attest
clients.
C. considered discreditable to the profession.
D. a violation of generally accepted auditing standards.
In the audit of a medium-sized manufacturing concern, which one of the following
areas can be expected to require the least amount of audit time?
A. Retained earnings.
B. Revenue.
C. Assets.
D. Liabilities.
Which audit procedure is most closely related to management’s assertion regarding
presentation and disclosure of liabilities?
A. Tracing cash received from a bond issue to the accounting records.
B. Confirmation with the bond trustee of amounts owed on a private placement of
bonds.
C. Reviewing the renewal of a note payable immediately after the balance sheet.
D. Inspection of public records of lien balances.
According to the ethical standards of the profession, which of the following acts is
generally prohibited?
A. Issuing a modified report explaining a failure to follow a governmental regulatory
agency’s standards when conducting an attest service for a client.
B. Revealing confidential client information during a quality review of a professional
practice by a team from the state CPA society.
C. Accepting a contingent fee for representing a client in an examination of the client’s
federal tax return by an IRS agent.
D. Retaining client records after an engagement is terminated prior to completion and
the client has demanded its return.
In the confirmation of accounts receivable, the auditor would most likely
A. randomly select a representative sample of accounts for confirmation.
B. seek to obtain positive confirmations for at least 50% of the total dollar amount of
the receivables.
C. require confirmation of all receivables from agencies of the federal government.
D. require that confirmation requests be sent within one month of the fiscal year-end.
An auditor usually tests the reasonableness of dividend income from investments in
stock of public companies by computing the amounts that should have been received by
referring to
A. dividend record books produced by investment advisory services.
B. stock indentures published by corporate transfer agents.
C. stock ledgers maintained by independent registrars.
D. annual audited financial statements issued by the investee companies.
A disclosure of a contingent liability in the footnotes is made rather than adjusting the
financial statement accounts when
A. the outcome of the event is judged to be reasonably possible and the loss can be
reasonably estimated.
B. the loss can be reasonably estimated, but the outcome is unknown.
C. the outcome of the event is judged to be reasonably possible but the loss cannot be
reasonably estimated.
D. the outcome is unknown and the loss is reasonably estimable but the entity does not
want to book the loss.
You are a new employee at the accounting firm Murray & Murray, CPAs. Before you
are assigned to your first audit, your supervisor tests your knowledge and asks you to
explain the term ‘scope” in the context of a financial statement audit.
Required:
A. Provide a definition of scope.
B. Describe what influences an auditor’s determination of scope.
An audit client loses a lawsuit and the judgment is for an amount in excess of the
contingent liability the client had recorded in the audited financial statements. The
auditor, using the typical degree of due care as other members of the profession,
determined that the amount of contingent liability recorded by the client in the financial
statements for the pending lawsuit was reasonable, given the facts at the time of the
audit. This judgment by the auditor is likely to result in
A. sanctions by the PCAOB levied against the individual auditor as well as the
accounting firm.
B. a successful lawsuit claiming auditor negligence.
C. a successful lawsuit claiming breach of contract.
D. no legal action whatsoever since due care was exercised.
Which of the following statements is not true with respect to assurance, attest, and audit
services?
A. These services are applied only to financial statements and financial statement
accounts.
B. These services all involve obtaining and evaluating evidence.
C. These services all involve determining the correspondence of some information to a
set of criteria.
D. These services all involve issuing a report.
Which of the following procedures would an auditor least likely perform before the
balance sheet date?
A. Assessment of inherent risk.
B. Observation of merchandise inventory.
C. Assessment of control risk.
D. Identification of related parties.
A company issued bonds for cash during the year under audit. To ascertain that this
transaction was properly recorded, the auditor’s best course of action is to
A. request a statement from the bond trustee as to the amount of the bonds issued and
outstanding.
B. confirm the results of the issuance with the underwriter or investment banker.
C. trace the cash received from the issuance to the accounting records.
D. verify that the net cash received is credited to an account entitled “Bonds Payable.”
An entity’s physical count of inventories was higher than the inventory quantities per
the perpetual records. This situation could be the result of the failure to record
A. sales.
B. sales discounts.
C. purchases.
D. purchase returns.
In testing the payroll of a large company, the auditor wants to establish that the
individuals included in a sample actually were employees of the company during the
period under review. What will be the best source to determine this?
A. Telephone contacts with the employees.
B. Tracing from the payroll register to the employee’s earnings records.
C. Confirmation with the union or other independent organization.
D. Examination of Human Resource Department records.
For effective internal control, the accounts payable department should compare the
information on each vendor’s invoice with the
A. receiving report and the purchase order.
B. receiving report and the voucher.
C. vendor’s packing slip and the purchase order.
D. vendor’s packing slip and the voucher.
All of the following are important controls over credit memos except:
A. proper segregation of duties to ensure that sales discounts taken were earned.
B. credit memos should be approved by someone other than whoever initiated it.
C. credit memos should be supported by a receiving document for returned goods.
D. proper segregation of duties between access to customer records and authorizing
credit memos.
An auditor ordinarily should send a standard confirmation request to all banks with
which the entity has done business during the year under audit, regardless of the
year-end balance, because this procedure
A. provides for confirmation regarding compensating balance arrangements.
B. detects kiting activities that may not otherwise be discovered.
C. seeks information about indebtedness to the bank.
D. verifies securities held by the bank in safekeeping.
Which of the following strategies most likely could improve the response rate of the
confirmation of accounts receivable?
A. Including a monthly statement of the customer’s account with the confirmation.
B. Restricting the selection of accounts to be confirmed to those customers with
relatively large balances.
C. Requesting customers to respond to the confirmation requests directly to the auditor
by fax or e-mail.
D. Notifying the recipients that second requests will be mailed if they fail to respond in
a timely manner.
For each assertion about cash listed below, give an example of a test of transactions for
(1) cash receipts and (2) cash disbursements.
a. Classification.
b. Occurrence.
c. Authorization.
d. Completeness.
An auditor plans to examine a sample of 20 checks for countersignatures as prescribed
by the entity’s internal control procedures. One of the checks in the chosen sample of 20
cannot be found. The auditor should consider the reasons for this limitation and
A. evaluate the results as if the sample size had been 19.
B. treat the missing check as a deviation for the purpose of evaluating the sample.
C. treat the missing check in the same manner as the majority of the other 19 checks
(i.e., countersigned or not).
D. choose another check to replace the missing check in the sample.
In a manufacturing company, which one of the following audit procedures would give
the least assurance about the valuation of inventory at the audit date?
A. Testing the computation of standard overhead rates.
B. Examining paid vendors’ invoices.
C. Reviewing direct labor rates.
D. Obtaining confirmation of inventories pledged under loan agreements.
Which of the following is a source of detection risk?
A. Unstable business environment.
B. Poor client controls.
C. A nonrepresentative sample.
D. Inherent risk assessed too high.
The audit client’s board of directors and audit committee refused to take any action with
respect to an immaterial illegal act which was brought to their attention by the auditor.
Because of their failure to act, the auditor withdrew from the engagement. The auditor’s
decision to withdraw was primarily due to doubts concerning
A. Adequate financial statement disclosures.
B. Compliance with the statutory laws and regulations.
C. Scope limitations resulting from their inaction.
D. The integrity of management.
Which of the following courses of action would an auditor most likely follow in
planning a sample of cash disbursements if the auditor is aware of several unusually
large cash disbursements?
A. Set the tolerable deviation rate at a lower level than originally planned.
B. Identify the large and unusual disbursements as individually significant and test 100
percent.
C. Increase the sample size to reduce the effect of the unusually large disbursements.
D. Continue to draw new samples until all the unusually large disbursements appear in
the sample.
Which of the following procedures most likely would be included as part of an auditor’s
tests of controls?
A. Inspection.
B. Reconciliation.
C. Confirmation.
D. Analytical procedures.
Which of the following transactions is an auditor most likely to examine when auditing
the retained earnings account?
A. Changing from one method of depreciation to another.
B. Adjusting the percentage used to estimate the allowance for doubtful accounts.
C. Changing from the FIFO to LIFO method of inventory valuation.
D. Correcting an error in depreciation in a prior year.
Which of the following is not a concept that is included in the scope paragraph of the
auditor’s report?
A. The conformance of the financial statements with generally accepted accounting
principles.
B. The audit was conducted in accordance with applicable auditing standards.
C. The audit was planned and performed to obtain reasonable, rather than absolute,
assurance.
D. An audit involves examining items on a test (i.e. sampling) basis.
Which of the following is not required for establishing an auditor’s liability for
negligence?
A. An undetected material misstatement.
B. Failure to exercise due care.
C. A connection between the auditor’s negligence and a plaintiff’s loss.
D. A duty to conform to a standard of care.
Audit documents often include an aged trial balance of accounts receivable as of the
balance sheet date. This aging is used by the auditor to
A. evaluate internal control over credit sales.
B. test the accuracy of recorded credit sales.
C. evaluate the allowance for doubtful accounts.
D. verify the existence of the recorded receivables.
The date of the management representation letter should coincide with the
A. date of the latest subsequent event referred to in the notes to the financial statements.
B. balance sheet date.
C. date of the auditor’s report.
D. date of the engagement agreement.
Match each factor of sample size to (1) its relationship to sample size (A-Direct or
B-Inverse) and (2) the appropriate effect on the sample size if the factor increases
(C-Increase or D-Decrease).
1) Tolerable misstatement
2) Population size
3) Desired confidence level
4) Expected misstatement
State the six functions that make up the inventory management process. For each
function, identify the related documents and/or records that would be used by a
manufacturing company.
Name and discuss the seven phases of the audit process.
Identify 3 of the 6 tests an auditor uses on the bank reconciliation.
(Only 3 are required for the student’s answer)
Explain each of the three PrimePlus Services typically offered by practitioners.
Your classmate asserts, “Accountants shouldn’t need to take business courses besides
accounting, because they are only interested in the financial statements of a company.”
Defend or refute this statement.
You are the senior on an audit of Two Be Gone, a large public company. The company
recently completed an acquisition of its fifth largest competitor. What risks might this
present? How will you, the auditor, respond to these risks (i.e. what actions should you
take)?
Cart and Blanche, a regional accounting firm is determining whether it wants to accept
a new client, Ivy Photos. Ivy Photos is currently a privately held photography studio
operating 24 studios in several states, but the company’s management is planning an
Initial Public Offering in the near future. This is the company’s first audit. What steps
should Cart and Blanche take in evaluating this new client?
Give an example of how the audit of income statement accounts could be affected by
results of audit work done in other areas of the audit.
Explain how cash plays a role in all business processes.
CBA Associates is auditing a large publicly traded company. The audit of internal
controls over financial reporting has been properly planned and the auditors have
already identified controls to test using a top-down, risk-based approach. What is the
next step? Give three examples of procedures that may be completed in the next step in
the audit.
Identify the two primary types of subsequent events that require consideration by
management and evaluation by the auditor and give two examples of each type.
Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of
audit risk for the audit of accounts payable at.06. The risk of material misstatement is
assessed at .65. What is the detection risk for this audit?
Ms. Lembke is a partner for DTS, a CPA firm. She is the lead partner for the firm’s
largest client, The Grey Elephant. Ms. Zadina, who works in the same office as Ms.
Lembke, has a sister who is the controller for The Grey Elephant. Because of potential
independence issues, Ms. Zadina does no work for The Grey Elephant. Ms. Zadina is
being considered for promotion to partner. What independence issues should Ms.
Lembke consider before promoting Ms. Zadina?
An agreed-upon procedures engagement is significantly more limited in scope than an
examination. An accountant may perform an agreed-upon procedures attestation
engagement for prospective financial statements provided that attestation standards are
complied with and ten criteria are met. Identify five of the ten criteria below.
You have been placed in charge of determining the sample size for an audit of accounts
receivable. Your superior would like a confidence level of 99%. How does this affect
your determination of sample size? What can you infer about the level of risk of
incorrect acceptance that your superior is willing to accept?
Why is appropriateness important for audit evidence? What qualities must evidence
have to be considered appropriate?
Define the term “contingent liability” and discuss the criteria used to classify these
events or conditions. Provide some examples of contingent liabilities.
Generally, is the inherent risk level for the human resource management process set at
low, moderate or high? For what area of the process might the appropriate level differ
from the previous answer? Why?