Improperly capitalizing an expense item results in
A. understatement of profit in the current year and overstatement in future years.
B. understatement of profit in the current year and in future years.
C. overstatement of profit in the current year and understatement in future years.
D. overstatement of profit in the current year and in future years.
Carson, LLP audited Best Corporation’s financial statements for the year ended
December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue
the report previously issued on and dated March 1, Year 2. When is the cutoff date for
Carson’s responsibility on the reissued report?
A. December 31, Year 1
B. March 1, Year 2
C. December 31, Year 2
D. February 15, Year 3
Which of the following is a substantive test that an auditor most likely would perform
to verify the existence and valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that prenumbered purchase
orders are used and accounted for
B. Receiving the client’s unopened mail for a reasonable period of time after year-end to
search for unrecorded vendor’s invoices
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase
orders and receiving reports
D. Confirming accounts payable balances with known vendors and suppliers who have
zero balances at year-end
The standard auditors’ report refers to standards of the PCAOB and GAAP in which
paragraph?
A. Standards of the PCAOB: Scope only; GAAP: Opinion only
B. Standards of the PCAOB: Introductory only; GAAP: Scope and opinion
C. Standards of the PCAOB: Introductory and scope; GAAP: Opinion only
D. Standards of the PCAOB: Introductory only; GAAP: All paragraphs
Which of the following fraud detection steps could not be performed by CAATs?
A. Look for photocopies in invoice files.
B. Look for vendor invoices in numerical order.
C. Look for vendor invoices slightly below the approval threshold.
D. Look for duplicate vendor numbers.
According to Sarbanes-Oxley, accountants performing an audit or review must maintain
all engagement documentation for a period of
A. 2 years.
B. 3 years.
C. 5 years.
D. 7 years.
Which of the following is not a judgment or estimate auditors must make when
performing attributes sampling?
A. Tolerable rate of deviation
B. Expected population deviation rate
C. Sample rate of deviation
D. Risk of overreliance
Which of the following selection methods selects individual dollars within an account
balance or class of transactions for examination?
A. Attribute sampling
B. Classical variables sampling
C. Monetary unit sampling
D. Nonstatistical variables sampling
The auditor traces items from the receiving reports to the accounts payable journal in
order to satisfy the
A. existence assertion.
B. rights and obligations assertion.
C. completeness assertion.
D. valuation assertion.
An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial
statement assertion of
A. rights and obligations.
B. completeness.
C. presentation and disclosure.
D. existence or occurrence.
Generally accepted accounting principles (GAAP) require that inventory be recorded at
A. the lower of cost or fair market value.
B. the lower of cost or net realizable value.
C. the higher of cost or net realizable value less a normal profit (floor).
D. none of the above.
An auditor traced a sample of purchase orders and the related receiving reports to the
purchases journal. The purpose of this substantive audit procedure most likely was to
A. identify usually large purchases that should be investigated further.
B. verify that cash disbursements were for goods actually received.
C. determine that purchases were properly recorded.
D. test whether payments were for goods actually ordered.
An auditor wanted to test credit approval on 10,000 sales invoices processed during the
year. The auditor designed a statistical sample that would provide a 1% risk of
overreliance (99% confidence) that not more than 7% of the sales invoices lacked
approval. The auditor estimated from previous experience that about 2.5% of the sales
invoices lacked approval. A sample of 200 invoices was examined and 7 of them were
lacking approval. The auditor then determined the upper limit rate of deviation to be
8%.
In evaluating this sample, the auditor decided to increase the level of the preliminary
assessment of control risk because the
A. tolerable rate of deviation (7%) was less than the upper limit rate of deviation (8%).
B. expected population deviation rate (7%) was more than the percentage of errors in
the sample (3.5%).
C. expected population deviation rate (2.5%) was less than the tolerable rate of
deviation.
D. upper limit rate of deviation (8%) was more than the percentage of errors in the
sample (3.5%).
Generally, fraud examiners are called when a fraud is already known or suspected. The
term that means a reason to believe a fraud has occurred is
A. Prediction.
B. Suspicion.
C. Predication.
D. Admonition.
The confirmation of an account payable balance selected from the general ledger
provides primary evidence regarding which management assertion?
A. Completeness
B. Valuation
C. Allocation
D. Existence
Which of the following is considered in determining the sample size in a classical
variables sampling application but not in a monetary unit sampling application?
A. Standard deviation: Yes; Risk of incorrect acceptance: Yes
B. Standard deviation: Yes; Risk of incorrect acceptance: No
C. Standard deviation: No; Risk of incorrect acceptance: Yes
D. Standard deviation: No; Risk of incorrect acceptance: No
The auditor maintains control of the mailing and receipt of confirmations by typically
performing all of the following except
A. preparing the confirmation letters.
B. mailing the confirmation letters.
C. receiving the confirmation letters.
D. None of the above.
An auditor’s analytical procedures indicate a lower than expected return on an equity
method investment. This situation most likely could have been caused by
A. an error in recording amortization of the excess of the investor’s cost over the
investment’s underlying book value.
B. the investee’s decision to reduce cash dividends declared per share of its common
stock.
C. an error in recording the unrealized gain from an increase in the fair value of
available-for-sale securities in the income account for trading securities.
D. a substantial fluctuation in the price of the investee’s common stock on a national
stock exchange.
To test the control assertion of completeness in the area of work-in-process inventory,
the auditor most likely would
A. select a sample of open and closed production cost reports and recalculate all costs
entered.
B. select a sample of issue slips from the raw materials stores file and trace
materials-used reports to production cost reports.
C. select a sample of open and closed production cost reports and vouch overhead
charges to overhead analysis schedules.
D. select a sample of production orders and determine whether the production orders
were authorized.
Zimmerman is auditing a client’s accounts balance recorded at $1 million using
monetary unit sampling. After assessing the appropriate parameters, Zimmerman
determined an appropriate sample size of 100 items. The following two misstatements
were identified as a result of the substantive tests:
Assume that Zimmerman’s parameters included a tolerable misstatement of $60,000 and
a risk of incorrect acceptance of 5%. (Confidence factors for a 5% risk of incorrect
acceptance are shown below):
Which of the following is not true with respect to the above?
A. The actual misstatement detected by Zimmerman is $6,500.
B. The projected misstatement is $7,000.
C. The basic allowance for sampling risk is $30,000.
D. If the upper limit on misstatements is $46,750, Zimmerman should accept the
account balance as fairly stated.
How does the auditor establish the level of tolerable misstatement in a variables
sampling application?
A. Based on prior assessments of audit risk, risk of material misstatement, and
analytical procedures risk
B. Based on the recorded amount of the account balance as well as the relationship of
the account balance with important financial statement subtotals
C. Based on the findings in prior audits or based on a small sample taken during the
current year
D. Based on the anticipated cost of conducting additional substantive procedures
Assume that the audit team established a tolerable rate of deviation of 5%, an expected
population deviation rate of 1%, and desired to control the risk of overreliance to 10%.
What is the appropriate sample size in this situation?
A. 77 items
B. 93 items
C. 132 items
D. 124 items
A client has a large and active investment portfolio that is kept in a bank safe deposit
box. If the auditors are unable to count securities at the balance-sheet date, they most
likely will
A. request the bank to confirm to the auditors the contents of the safe deposit box at the
balance-sheet date.
B. examine supporting evidence for transactions occurring during the year.
C. count the securities at a subsequent date and confirm with the bank whether
securities were added or removed since the balance-sheet date.
D. request the client to have the bank seal the safe deposit box until the auditors can
count the securities at a subsequent date.
When component auditors are involved in the audit of group financial statements, the
group auditors are required to
A. consider the independence and professional reputation of the component auditors in
deciding how to utilize their work.
B. identify the extent of component auditors’ involvement if they choose not to rely on
the component auditors’ work.
C. identify the component auditors by name in their report to appropriate limit their
liability for the component auditors’ work.
D. disclaim an opinion on the portion of the financial statements examined by the
component auditors.
The auditor tests the quantity of materials charged to work-in-process by vouching
these quantities to
A. cost ledgers.
B. perpetual inventory records.
C. receiving reports.
D. material requisitions.
If management fails to provide adequate justification for a change from one generally
accepted accounting principle to another, the auditors should
A. add an additional paragraph and express a qualified or an adverse opinion on the
entity’s financial statements for lack of conformity with generally accepted accounting
principles.
B. disclaim an opinion on the entity’s financial statements because of uncertainty.
C. disclose the matter in an additional paragraph but not modify the opinion paragraph
on the entity’s financial statements.
D. neither modify the opinion on the entity’s financial statements nor disclose the matter
because both principles are generally accepted accounting principles.
Which of the following procedures is least likely to be performed before the
balance-sheet date?
A. Observation of inventory.
B. Review of internal control over cash disbursements.
C. Search for unrecorded liabilities.
D. Confirmation of receivables.
Which of the following events occurring after the audit report release date most likely
would cause auditors to make further inquiries about the previously-issued financial
statements?
A. An uninsured natural disaster occurs that may affect the entity’s ability to continue as
a going concern.
B. A contingency is resolved that had been disclosed in the audited financial statements.
C. New information is discovered concerning undisclosed lease transactions during the
period under audit.
D. A subsidiary is sold that accounts for 25% of the entity’s consolidated net income.
In each of the following situations, indicate whether attribute (A) or variables (V)
sampling is used.
___ 1. Observe a sample of employees at various cash registers to ensure they log in to
the system before they can begin processing transactions, and subsequently log out
when their shift is over to prevent unauthorized access to the cash registers.
___ 2. Select a sample of purchase orders and ensure they are from vendors on the
approved vendor list.
___ 3. Select a sample of unpaid vendor invoices and determine a projected balance for
accounts payable.
___ 4. Select a sample of perishable items from inventory to see if they have exceeded
their expiration date.
___ 5. Select a sample of accounts receivable transactions to determine the accuracy of
the current period’s bad debt expense.
___ 6. Send confirmations of the account balance for debt obligations greater than the
materiality threshold.
All of the following are examples of procedures a firm can use to monitor its system of
quality control except
A. discussions with firm personnel.
B. conducting reviews of engagement documentation.
C. devoting sufficient resources to developing a system of quality control.
D. assessing compliance with independence policies and procedures.
Analytical procedures are most appropriate when testing which of the following types
of transactions?
A. Payroll and benefit liabilities
B. Acquisitions and disposals of fixed assets
C. Operating expense transactions
D. Long-term debt transactions