An auditor’s analytical procedures performed during the overall review stage indicated
that the entity’s accounts receivable balance had doubled since the end of the prior year.
However, the allowance for doubtful accounts as a percentage of accounts receivable
remained about the same. Which of the following explanations most likely would
satisfy the auditor?
A. The entity liberalized its credit standards in the current year and sold much more
merchandise to customers with poor credit ratings.
B. Twice as many accounts receivable were written off in the prior year than in the
current year.
C. A greater percentage of accounts receivable were currently listed in the “more than
90 days overdue” category than in the prior year.
D. The entity opened a second retail outlet in the current year and its credit sales
approximately equaled the older, established outlet.
The auditor’s primary means of obtaining corroboration of management’s information
concerning litigation is a
A. letter of audit inquiry to the entity’s lawyer.
B. letter of corroboration from the auditor’s lawyer upon review of the legal
documentation.
C. confirmation of claims and assessments from the other parties to the litigation.
D. confirmation of claims and assessments from an officer of the court presiding over
the litigation.
Accepting an engagement to examine an entity’s financial projections would most likely
be appropriate if distribution of the projections were limited to
A. the general public on the entity’s website.
B. potential stockholders who request a prospectus or a registration statement.
C. a bank with which the entity is negotiating for a loan.
D. all stockholders of record as of the report date.
Effective internal control over the payroll function would include which of the
following?
A. Total time recorded on time-clock punch cards should be reconciled to job reports by
employees responsible for those specific jobs.
B. Payroll Department employees should be supervised by the management of the
Human Resource Department.
C. Payroll Department employees should be responsible for maintaining employee
personnel records.
D. Total time spent on jobs should be compared with total time indicated on time clock
punch cards.
West & Company, CPAs, was engaged by Sand Corporation to audit its financial
statements. West issued an unqualified opinion on Sand’s financial statements. Sand has
been accused of making negligent misrepresentations in the financial statements that
Reed relied upon when purchasing Sand’s stock. West was not aware of the
misrepresentations and was not negligent in performing the audit. If Reed sues West for
damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934, West will
A. lose, because the statements contained negligent misrepresentations.
B. lose, because Reed relied upon the financial statements.
C. prevail, because some element of scienter must be proved.
D. prevail, because Reed was not in privity of contract with West.
When comparative financial statements are presented, the fourth standard of reporting,
which refers to financial statements “taken as a whole,” should be considered to apply
to the financial statements of the
A. periods presented plus the one preceding period.
B. current period only.
C. current period and those of the other periods presented.
D. current and immediately preceding period only.
During the course of an audit, a CPA’s substantive analytical procedure provides an
expected interest expense that is significantly higher than the amount recorded in the
entity’s accounting records. This observation would most likely lead the auditor to
suspect that
A. the entity failed to record all debt.
B. discount on Bonds is misstated.
C. interest income is overstated.
D. the entity failed to record all interest expense.
When performing an audit, a CPA will most likely be considered negligent when the
CPA fails to
A. detect all of a client’s fraudulent activities.
B. include a negligence disclaimer in the client engagement letter.
C. warn a client of known internal control weaknesses.
D. warn a client’s customers of embezzlement by the client’s employees.
In general, the third-party (primary) beneficiary rule as applied to a CPA’s legal liability
in conducting an audit is relevant to which of the following causes of action against a
CPA?
A. Fraud and constructive fraud, but not negligence.
B. Fraud, but not constructive fraud or negligence.
C. Constructive fraud and negligence, but not fraud.
D. Negligence, but not fraud or constructive fraud.
Which of the following nonfinancial information would an auditor most likely consider
in performing analytical procedures during the planning phase of an audit?
A. Turnover of personnel in the accounting department.
B. Objectivity of audit committee members.
C. Square footage of selling space.
D. Management’s plans to repurchase stock.
An auditor will use the IT test data method in order to gain certain assurances with
respect to the
A. Input data.
B. Machine capacity.
C. Procedures contained within the program.
D. Degree of keypunching accuracy.
In the substantive audit procedures for payroll where the control risk is set at low, an
auditor most likely would
A. verify that checks representing unclaimed wages are mailed.
B. trace individual employee deductions to entity journal entries.
C. observe entity employees during a payroll distribution.
D. compare payroll costs with entity standards or budgets.
Which assertions may be tested for the “presentation and disclosure” category of
management assertions?
A. Existence, rights and obligations, cutoff and classification, completeness, accuracy
and valuation.
B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and
classification.
C. Occurrence, completeness, classification and understandability, cutoff and
classification.
D. Occurrence, rights and obligations, completeness, classification and
understandability, accuracy and valuation.
The primary responsibility for the adequacy of disclosures in the financial statements of
a publicly held company rests with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Auditor in charge of the fieldwork.
D. Securities and Exchange Commission.
According to the Code of Professional Conduct, which of the following individuals is
not in a position to influence an attest engagement (i.e., not a covered member)?
A. The office’s managing partner (or partner equivalent) who determines the
compensation of the attest engagement partner.
B. The office’s IT expert, who consulted with the engagement partner (or partner
equivalent) regarding the client’s IT system.
C. The partner (or partner equivalent) in another office in a nearby city who regularly
plays golf with the engagement partner (or partner equivalent).
D. The office’s partner (or partner equivalent) who monitors quality control over the
attest engagement.
An entity’s control activities include all of the following except:
A. Performance reviews.
B. Information processing.
C. External auditor’s tests of controls.
D. Segregation of duties.
After an audit report containing an unqualified opinion on a nonpublic entity’s financial
statements is issued, the auditor learns that the entity has decided to sell the shares of a
subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income.
The auditor should
A. determine whether the information is reliable and, if it is determined to be reliable,
request that revised financial statements be issued.
B. notify the entity that the auditor’s report may no longer be associated with the
financial statements.
C. describe the effects of this subsequently discovered information in communications
with persons known to be relying on the financial statements.
D. take no action because the auditor has no obligation to make any further inquiries.
For each of the following categories of analytical procedures, indicate (a) whether an
auditor is required to use the procedure and (b) the purpose(s) of the procedure.
Preliminary analytical procedures (risk assessment procedures)
Substantive analytical procedures
Final analytical procedures
Tests designed to detect purchases made before the end of the year that have been
recorded in the subsequent year most likely would provide assurance about
management’s assertion of
A. accuracy.
B. occurrence.
C. cutoff.
D. classification.
Which of the following is an example of a related party transaction?
A. An action is taken by the directors of Company A to provide additional
compensation for vice presidents in charge of the principal business functions of
Company A.
B. A long-term agreement is made by Company A to provide merchandise or services to
Company B, a long-time, friendly competitor.
C. A short-term loan is granted to Company A by a bank that has a depositor who is a
member of the board of directors of Company A.
D. A nonmonetary exchange occurs whereby Company A exchanges property for
similar property owned by Company B, an unconsolidated subsidiary of Company A.
Which assertions may be tested for the “transactions and events” category of
management assertions?
A. Existence, completeness, rights and obligations, accuracy, cutoff and classification.
B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification.
C. Occurrence, completeness, authorization, accuracy, cutoff and classification.
D. Existence, rights and obligations, accuracy, authorization, and completeness.
Generally, loss contingencies that are judged to be remote
A. should be disclosed in the footnotes.
B. should be recorded in the financial statements.
C. should not be disclosed in the footnotes.
D. should be recorded in the financial statements and the footnotes.
Which of the following factors does an auditor generally need to consider in planning a
particular audit sample for a test of controls?
A. Number of items in the population.
B. Total dollar amount of the items to be sampled.
C. Desired confidence level.
D. Risk of assessing control risk too high.
What is meant by the Code of Professional Conduct’s definition of “holding out”?
A. Informing a client about one’s status as a CPA.
B. Withholding an audit report until the fee is paid.
C. Not sharing audit documentation with a successor auditor.
D. Not suggesting that management make an adjusting entry that is deemed immaterial.
In a common law action against an accountant in a state following the Ultramares
doctrine, lack of privity is a viable defense if the plaintiff
A. can prove the presence of gross negligence which amounts to a reckless disregard for
the truth.
B. bases the action upon fraud.
C. is the client’s creditor who sues the accountant for negligence.
D. is the accountant’s client.
A written representation from an entity’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements should
normally be signed by the
A. chief executive officer and the chief financial officer.
B. chief financial officer and the chairman of the board of directors.
C. chairman of the audit committee of the board of directors.
D. chief executive officer, the chairman of the board of directors and the entity’s lawyer.
A limit test is a
A. Test to ensure that a numerical value does not exceed some predetermined value.
B. Check to ensure that the value in a field falls within an allowable range of values.
C. Check to ensure that the data in a field have the proper arithmetic sign.
D. Check on a field to ensure that it contains either all numeric or alphabetic characters.
In determining the extent to which the auditor may use the work of others in the audit of
ICFR, the auditor should do all of the following except:
A. Test some of the work performed by others to evaluate the quality and effectiveness
of their work.
B. Evaluate the nature of the controls subjected to the work of others.
C. Evaluate the competence and objectivity of the individuals who performed the work.
D. All of these are required.
Procedures specifically outlined in an audit program are designed primarily to
A. Assess risk for planning purposes.
B. Detect all errors or fraudulent activities.
C. Test internal control systems.
D. Gather evidence about management’s assertions.
In testing plant and equipment balances, an auditor may inspect new additions listed on
the analysis of plant and equipment. This procedure is designed to obtain evidence
concerning management’s assertion(s) about
A. presentation and disclosure.
B. existence or occurrence.
C. both (1) presentation and disclosure and (2) existence and occurrence.
D. neither (1) presentation and disclosure nor (2) existence and occurrence.
With respect to ethics, the rights-based approach
A. suggests that auditors should always verify ownership of a client’s material tangible
assets.
B. is primarily concerned with equity and impartiality.
C. suggests that an individual’s actions should not violate the rights of any individual.
D. recognizes that decisions involve trade-offs between costs and benefits.
Which one of the following statements best describes the concept of materiality?
A. Materiality is determined by reference to specific quantitative guidelines established
by the AICPA.
B. Materiality depends only on the dollar amount of an item relative to other items in
the financial statements.
C. Materiality depends on the nature of an item but not on the dollar amount of the
item.
D. Materiality is largely a matter of professional judgment.