Which of the following factors most likely would cause a CPA not to accept a new audit
engagement?
A. The prospective client’s unwillingness to permit inquiry of its legal counsel.
B. The inability to review the predecessor auditor’s documentation.
C. The CPA’s lack of understanding of the prospective client’s operations and industry.
D. Indications that management has not investigated employees in key positions before
hiring them.
Reviewing interest expense to examine payments to debt holders not listed on the debt
analysis schedule is a procedure that can be used to test the audit assertion of
A. occurrence.
B. completeness.
C. cutoff.
D. accuracy.
By selecting a sample of additions to property, plant, and equipment and then
examining the related vendor invoices, the auditor is testing which of the following
assertions for property, plant, and equipment?
A. Occurrence.
B. Completeness.
C. Cutoff.
D. Classification.
An auditor should trace interbank transfers for the last part of the audit period and first
part of the subsequent period to detect whether
A. the cash receipts journal was held open for a few days after the year-end.
B. the last checks recorded before the year-end were actually mailed by the year-end.
C. cash balances were overstated because of kiting.
D. any unusual payments to or receipts from related parties occurred.
In assessing whether to accept a client for an audit engagement, a CPA should consider
A. The current financial health of the prospective client.
B. The integrity of management.
C. The CPA’s overall engagement risk.
D. All of these should be considered.
When considering the use of management’s written representations as audit evidence
about the completeness assertion, an auditor should understand that such
representations
A. complement, but do not replace, substantive procedures designed to support the
assertion.
B. constitute sufficient evidence to support the assertion when considered in
combination with reliance on internal controls.
C. are not part of the evidential matter considered to support the assertion.
D. replace reliance on internal controls as evidence to support the assertion.
Which of the following would be considered a change that does not affect consistency?
A. Change in accounting estimate.
B. Change in accounting principle.
C. Correction of an error in principle.
D. None of these are considered changes that do not affect consistency.
General controls include all of the following except:
A. Organizational controls.
B. Data validation controls.
C. Access security controls.
D. Application system acquisition controls.
Before accepting an engagement to audit a new entity, an auditor is required to
A. Make inquiries of the predecessor auditor.
B. Tell the company whether or not the auditor is willing to issue a “clean” opinion.
C. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
D. Become a member of the entity’s board of directors.
Who generally signs the legal letter?
A. The board of directors.
B. The audit partner.
C. The CEO of the entity being audited.
D. The entity’s attorneys.
Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be
liable to any purchaser of a security for certifying materially misstated financial
statements that are included in the security’s registration statement. Under Section 11,
which of the following must be proven by a purchaser of the security?
A. The CPA committed fraud and the purchaser relied on the financial statements.
B. The purchaser relied on the financial statements, but not that the CPA committed
fraud.
C. The CPA committed fraud, but not that the purchaser relied on the financial
statements.
D. Neither that the CPA committed fraud, nor that the purchaser relied on the financial
statements.
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in
support of the audit assertion that all
A. Non-capitalizable expenditures for repairs and maintenance have been recorded in
the proper period.
B. expenditures for property and equipment have been recorded in the proper period.
C. Non-capitalizable expenditures for repairs and maintenance have been properly
charged to expense.
D. expenditures for property and equipment have not been charged to expenses.
When testing automated IT controls, the auditor is most likely to do all of the following
except:
A. examine the IT software.
B. increase sample size because the tolerable deviation rate tends to be higher for
automated IT controls.
C. test one or a few of each type of transaction.
D. test general controls over system and program changes.
Management’s attitude toward aggressive financial reporting and its emphasis on
meeting projected profit goals most likely would significantly influence an entity’s
control environment when
A. External policies established by parties outside the entity affect its accounting
practices.
B. Management is dominated by one individual.
C. Internal audit personnel have direct access to the board of directors and the entity’s
management.
D. The audit committee is active in overseeing the entity’s financial reporting policies.
An auditor issued an audit report that was dual dated for a subsequent event that
occurred after the completion of fieldwork but before issuance of the auditor’s report.
The auditor’s responsibility for events occurring subsequent to the completion of
fieldwork was
A. limited to the specific event referenced.
B. limited to include only events occurring before the date of the last subsequent event
referenced.
C. extended to subsequent events occurring through the date of issuance of the report.
D. extended to include all events occurring since the completion of fieldwork.
According to the PCAOB, who is responsible for the reliability of the internal controls
over financial reporting process of an entity?
A. The entity’s CEO and/or CFO.
B. The entity’s board of directors.
C. An internal control specialist.
D. The external auditor.
Inquiry and analytical procedures ordinarily performed during a review of a nonpublic
entity’s financial statements include
A. analytical procedures designed to identify material weaknesses in internal control.
B. inquiries concerning actions taken at meetings of the stockholders and the board of
directors.
C. analytical procedures designed to test the accounting records by obtaining
corroborating evidential matter.
D. inquiries of knowledgeable outside parties such as the entity’s attorneys and bankers.
If the principal auditor decides to make reference to the other auditor’s examination, the
introductory paragraph must specifically indicate the
A. The portion of the financial statements examined by the other auditor.
B. name of the other auditor.
C. name of the consolidated subsidiary examined by the other auditor.
D. type of opinion expressed by the other auditor.
Potential benefits of an entity’s controls in an IT environment include all of the
following except:
A. Reduction in the risk that controls will be circumvented.
B. More accurate accounting estimates.
C. Consistent application of predefined business rules.
D. More timely information.
The control environment component of internal control includes all of the following
except:
A. Management’s operating style.
B. Access to computer programs.
C. Organizational structure.
D. Human resource policies and practices.
Tracing a sample of time sheets before and after period end to the weekly payroll report
and tracing the weekly payroll report to the general ledger to verify that payroll
transactions are recorded in the proper period would provide evidence primarily for
which assertion?
A. Classification.
B. Occurrence.
C. Cutoff.
D. Valuation.
Tests of controls for the occurrence assertion for purchases include all of the following
except:
A. evaluating proper segregation of duties.
B. testing a sample of vouchers for an authorized purchase order.
C. testing a sample of vouchers for matching receiving reports.
D. tracing a sample of vouchers to purchases journal.
During the initial planning phase of an audit, a CPA most likely would
A. Identify specific internal control activities that are likely to prevent fraud.
B. Evaluate the reasonableness of the client’s accounting estimates.
C. Discuss the timing of the audit procedures with the client’s management.
D. Inquire of the client’s attorney as to any unrecorded claims.
The SEC has issued independence rules that differ from the AICPA’s in all of the
following areas except:
A. Working paper documentation.
B. Provision of other professional services.
C. Human resource and compensation-related issues.
D. Required communication.
The basic concept of internal control that recognizes the cost of internal control should
not exceed the benefits expected to be derived is known as
A. Reasonable assurance.
B. Management responsibility.
C. Limited liability.
D. Management by exception.
In auditing intangible assets, an auditor most likely would review or recompute
amortization and determine whether the amortization period is reasonable in support of
management’s financial statement assertion of
A. valuation and allocation.
B. existence.
C. completeness.
D. rights and obligations.
Which of the following procedures would an auditor ordinarily perform during the
review of subsequent events?
A. An analysis of related party transactions for the discovery of possible irregularities.
B. A review of the cut-off bank statements for the period after the year-end.
C. An inquiry of the entity’s legal counsel concerning litigation.
D. An investigation of material weaknesses in internal control previously
communicated to the entity.
Match the balance sheet account with the income statement account that is typically
audited at the same time.
1)Investments
2)Property, Plant, and Equipment
3)Bonds Payable
4)Prepaid Insurance
5)Accounts Receivable
a)Interest expense
b)Insurance expense
c)Depreciation expense
d)Investment income
e)Bad debt expense
A violation of the profession’s ethical standards would least likely have occurred when a
CPA in public practice
A. used a records-retention agency to store the CPA’s working papers and client
records.
B. served as an expert witness in a damage suit and received compensation based on the
amount awarded to the plaintiff.
C. referred life insurance assignments to the CPA’s spouse, who is a life insurance
agent.
D. failed to file his personal tax return.
After issuance of the auditor’s report, the auditor has no obligation to make any further
inquiries with respect to audited financial statements covered by that report unless
A. a final resolution of a contingency that had resulted in a qualification of the auditor’s
report is made.
B. a development occurs that may affect the entity’s ability to continue as a going
concern.
C. an investigation of the auditor’s practice by a peer review committee ensues.
D. new information is discovered concerning undisclosed related party transactions of
the previously audited period.
Engagement risk can be eliminated by
A. Establishing policies for client acceptance and continuance.
B. Lowering audit risk.
C. Lowering materiality.
D. Engagement risk cannot be eliminated.
An auditor would issue an adverse opinion if
A. The auditor encounters adverse attitudes toward the auditor on the part of company
management.
B. A qualified opinion cannot be given because the auditor is not qualified to do so.
C. An immaterial misstatement is present.
D. The statements taken as a whole do not fairly present the financial condition and
results of operations of the company.
The following four situations require a modification to the standard unqualified audit
report. Identify the modification required for each.
a. Opinion based in part on the report of another auditor.
b. Going concern.
c. Lack of consistency.
d. Additional emphasis.
An auditor should obtain evidential matter relevant to all the following factors
concerning third-party litigation against an entity except the:
A. period in which the underlying cause for legal action occurred.
B. probability of an unfavorable outcome.
C. jurisdiction in which the matter will be resolved.
D. existence of a situation indicating an uncertainty as to the possible loss.
Which of the following expressions is least likely to be included in a management
representation letter?
A. No events have occurred subsequent to the balance sheet date that require
adjustment to or disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that would
have a material effect on the financial statements in the event of noncompliance.
C. Management acknowledges responsibility for illegal actions committed by its
employees.
D. Management has made available all financial statements and related data.
Listed below are descriptions of various types of documents used in the payroll process.
Identify the document being described for each of the following
1) The document used to record hours worked by an employee.
2) The document that summarizes all payroll payments issued to employees.
3) The document that contains information on an employee’s work history.
4) The form used to authorize deductions from an employee’s pay.
5) The computer file that contains all the entity’s records related to payroll.