A) Describe the three broad objectives of management when designing an effective
system of internal control.
B) Describe the aspect of internal control with which auditors are primarily concerned
with for a financial statement audit.
Which of the following control weaknesses could result in problems with collectability
of accounts receivable?
A) Unauthorized individuals can establish or change credit limits.
B) Matching shipping documents to sales records is done weekly.
C) When there is one error in a batch of transactions, the whole batch is rejected.
D) Cash receipts are matched to the customer accounts rather than against specific
invoices.
The auditors have decided upon a materiality level of $100,000 for their audit of ABC
Manufacturing. Which one of the following errors would be considered more important
by the auditors? An
A) error in accounts receivable cut-off of $50,000.
B) overstatement of accounts payable by $15,000.
C) error in allocation between accounts receivable and accounts payable by $75,000.
D) illegal payment of $15,000.
Which of the following internal control tests would be used in assessing that recorded
payroll transactions are for the amount of time actually worked and at the proper pay
rate, and that withholdings are properly calculated?
A) Foot payroll journal and trace to general ledger
B) Prove the bank reconciliation
C) Recompute gross pay
D) Review the payroll journal for large or unusual amounts
Communicating the findings of the audit in accordance with the CASs is a requirement
of which category of generally accepted auditing standard?
A) General
B) Examination
C) Reporting
D) Quality
The standard of due care to which the auditor is expected to be held is referred to as the
A) prudent person concept.
B) common law doctrine.
C) due care concept.
D) reckless regard doctrine.
For which of the following engagements is a contingent fee permitted?
A) An audit engagement of a large listed corporation
B) A tax consulting assignment assessing the excise tax payment processes
C) A review engagement of a small manufacturing corporation
D) An assurance engagement of leasehold payments for a rental agreement
When the auditor has the same level of willingness to risk that material errors will exist
after the audit is finished for all five cycles,
A) the same amount of evidence will be gathered for each cycle.
B) a different extent of evidence is needed for various cycles.
C) he/she has not followed generally accepted auditing standards.
D) the level for each cycle must be no more than 2% so that the entire audit does not
exceed 10%.
Following are three different situations with respect to the audit of accounts receivable
and sales. For each, specify the evidence mix that you would use (tests of control,
substantive tests, type of confirmation/timing), and explain why.
A) The client is in a volatile industry, selling products that can quickly become
technically obsolete. Total accounts receivable is $65 million, with a bad debt
allowance of $7 million. The company has recently laid off three accounting staff to
save money.
B) A small company has 45 different customers, with balances ranging from $500 to
$25,000 per customer. There is one accountant on staff, and a professional accountant
comes in once per week for three hours to review the work and prepare journal entries.
Bad debts are rare, as the owner is actively involved in accounts receivable collection.
C) Big Department Store Finance Corporation has fifty staff in the accounting
department, a sophisticated software package, and about $250 million in accounts
receivable. The corporation manages the department store credit cards. About 100,000
credit card customers have balances less than $300 on their accounts, while the
balances for the remaining customers range up to a maximum of $5,000.
Invoices are prepared using a date equal to the shipping date. This control pertains to
which transaction-related audit objective?
A) posting and summarization
B) classification
C) cutoff
D) completeness
Which of the following illustrates the definition of auditing with respect to the reporting
process?
A) accumulation and evaluation of evidence about balance sheet accounts
B) reporting on the degree of correspondence between financial statements and ASPE
C) writing an operational audit report that is tailored to the client’s situation
D) making sure that the auditor is competent and understands evidence gathering
The objective of the audit of financial statements by the auditor is the expression of an
opinion on
A) the accuracy of the financial statements.
B) the balance sheet and income statement.
C) the fairness of the financial statements.
D) the annual report.
Which of the following internal controls helps ensure that recorded payroll payments
are for work actually performed by existing employees?
A) Procedures requiring the recording of transactions as soon as possible
B) Only valid employees from the computer data files are accepted for processing
C) Internal verification of payroll file contents
D) Independent preparation of payroll bank reconciliation
The CAS require that audit procedures for inventory include that the auditor
A) must count the inventory.
B) must be present at the count and must receive adequate documentation from client
regarding the effectiveness of inventory-taking.
C) must be present at the count and evaluate the methods followed in the determination
of quantities and values.
D) need not be present at the count but must review the methods followed in the
determination of quantities and values.
The requirement for an attitude of skepticism means that the auditor should
A) not be blind to evidence that suggests the documents, books or records have been
altered or are incorrect.
B) plan and conduct the audit with an attitude of distrust in management.
C) perform additional tests of controls to increase the probability of discovering fraud
or errors.
D) not consider management’s explanation as evidence on any subject.
Mary is entering a fictitious transaction in the sales data entry system to see if the
system will reject the order for a client that is already exceeding its credit limit. Mary is
using
A) observation.
B) analytical procedures.
C) test data.
D) generalized audit software.
Prospective financial information prepared using assumptions reflecting management’s
judgment as to the most probable courses of action for the entity is called a(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
The Sarbanes-Oxley Act of 2002 made it a felony to
A) destroy or create documents to impede a federal investigation.
B) have internal control weaknesses.
C) have a significant internal control weakness.
D) engage in transactions with related parties.
A strategic and risk-based audit approach means that the client must be assessed in the
context of the business environment, including which of the following?
A) ensuring that accounting complies with IFRS or ASPE
B) completion of an independence threat analysis with supporting documentation
C) corporate governance process and quality of internal controls
D) talking to those audit committee members who are also part of management
The decision of how many items to test must be made by the auditor for each audit
procedure. The sample size for any given procedure
A) will be the same if the same level of assurance is required.
B) must cover the entire period under audit.
C) is focused on high dollar items only.
D) is likely to vary from audit to audit.
Even though the tests of controls are the most important part of testing payroll, many
auditors spend little time in this area. In many audits, there is a minimal risk of material
misstatements, even though payroll is frequently a significant part of total expenses.
Explain the reasons the auditors have for justifying this position.
A client is suing a PA firm claiming that they are responsible for the losses suffered
from a fraud in the payroll department that was not uncovered during the year end
testing done by the auditor. The auditors did indicate to management that controls over
payroll calculations and payments were weak as there was improper segregation of
duties. The auditor’s best defence is
A) contributory negligence.
B) absence of negligence.
C) absence of causal connection.
D) no damages.
How much control does the auditor have over inherent risk? The auditor
A) adjusts the controls that are considered – high levels of control.
B) considers inherent risk for the business as a whole – some control.
C) assesses the factors that make up inherent risk – no control.
D) calculates inherent risk values as a residual – no control.
Which of the following types of misstatements has the highest level of certainty?
A) identified misstatements
B) likely misstatements
C) likely aggregate misstatements
D) further possible misstatements
Because control risk and inherent risk vary from cycle to cycle, account to account, or
objective to objective,
A) audit risk must also change.
B) planned detection risk and required audit evidence will also vary.
C) planned detection risk will vary but audit evidence will remain constant.
D) planned detection risk will remain constant but audit evidence will vary.
It is normal for the auditor to verify large and unusual transactions for the entire year as
well as a representative sample of typical additions. The size of the sample for
substantive testing depends on the auditor’s
A) sampling selection methodology used.
B) assessed control risk and assessed inherent risks.
C) understanding of the nature of internal controls.
D) availability of client resources to pull supporting documentation.
Which of the following auditing procedures is ordinarily performed last?
A) Reading of the minutes of the directors’ meetings
B) Confirming accounts payable
C) Obtaining a client representation letter
D) Testing of the purchasing function
The most important control in the payroll cycle is clear, properly documentation of the
employee’s job responsibilities and wages by the appropriate level of authority. This
control is associated with which audit objective?
A) completeness
B) classification
C) valuation
D) occurrence
Double dating a report is done when
A) the parent company and their subsidiaries have different year ends.
B) the auditor finishes his work later than planned.
C) a material event occurs after the date of the auditor’s report and affects the period
that was audited
D) a material event occurs after the date of the auditor’s report and before the date the
report is issued.
If a misstatement is immaterial relative to the financial statements of the entity for the
current period and is not expected to have a material effect in future periods, it is
appropriate to issue
A) an unqualified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
PA has designed an audit approach where she places maximum possible reliance on
controls. This means that she will be
A) conducting only tests of controls.
B) using analytical review and tests of controls.
C) following a combined audit approach.
D) setting control risk at 100%.
The auditor has elected to conduct the following audit tests: reperform addition of the
aged accounts receivable trial balance for the total column and for the columns
depicting the aging. Which audit objective is associated with these audit tests?
A) valuation
B) classification
C) accuracy
D) occurrence
The test of balances procedure that requires the auditor to trace the unadjusted book
balance on the reconciliation to the general ledger is an attempt to satisfy the audit
objective of
A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.
For income statement accounts, evidence is more persuasive if there is a sample from
A) the entire period under audit.
B) the period closest to the end of the fiscal period.
C) at least three months of the fiscal year.
D) December, since this would include large holiday sales.
One of the ways to reduce sampling risk is to
A) use an appropriate method of selecting sample items from the population.
B) carefully design the audit procedures to be used.
C) provide proper supervision and instruction of the audit team.
D) use variables sampling rather than attribute sampling.