The accountants who record cash receipts and credits to customer accounts should not
handle the cash.
The Bill of Materials provides pricing information on all materials used in production.
Governmental and internal auditors are more concerned with compliance with laws,
regulation and policy than are external auditors.
If an auditor was not present at a new client’s inventory count, the auditor should
require the client to perform another inventory count.
The production order is the document used to authorize the movement of raw materials
from inventory to the production line.
If internal controls over the expenditure cycle are weak, auditors will need to design
substantive procedures to try to detect whether control failures have produced
misleading financial statement account balances.
Internal auditors perform audits and consulting engagements.
Investment transactions list on the monthly statement from the broker should be
vouched to the broker’s advice, proper authorization, and the cash accounts.
A computer generally cannot be used for scanning large files of accounts receivable for
unusual credit balances.
Internal auditors should be independent when obtaining evidence in the sense of being
free financial relationships such as owning stock.
When fixed assets are acquired during the year under audit, auditors should inspect the
assets.
Auditors’ test of controls over the production of estimates amounts is limited to a
comparison of past estimates compared to actual amounts.
An important test for unrecorded debt is to compare the interest expense accounts with
long-term debt.
Internal auditors are responsible for providing a report on internal controls that is
included in the 10K.
The Government Accountability Office (GAO) is provides auditing standards that are
followed by internal auditors and governmental auditors.
Auditors should not place total reliance on controls to the exclusion of other substantive
testing procedures.
The payroll department approves payroll hours prior to processing the payroll.
Inquiries of management usually do not provide very convincing evidence about the
existence and rights assertions.
Credit checks should be performed by the sales department before credit is approved.
The GAO emphasizes the risk management in government for the efficient, economical,
and effective use of public funds and resources.
The principal goal of the physical inspection of property, plant, and equipment is to
determine actual valuation of property.
A stated objective of internal auditing is to add value to the organization.
External auditors accepting engagements to audit federal grants and programs must
follow both GAAS and the GAO standards.
Unrecorded liabilities can be prevented if there is an appropriate segregation of duties
in accounts payable.
Proper separation of duties involves the purchasing department as the recordkeeping
function.
If a person is absent from the company due to illness or vacation, their paycheck should
be returned to the payroll department.
The use of confirmations to test accounts receivable is considered a generally accepted
audit procedure.
An inventory roll back is required when inventory is counted prior to the end of the
year.
The GAO standards go beyond the AICPA’s GAAS in a number of respects.
If control risk is assessed very low, the substantive audit procedures on account
balances must be expanded.
The aging information for accounts receivable is typically used in connection with
assessing the allowance for doubtful accounts.
In order to ensure appropriate segregation of duties, the supervisor in each department
handles the custody of the payroll checks.
Performance audits determine whether an entity’s program has resulted in the desired
outcomes.
The sales forecast is the document that production uses to determine what to produce
and when to produce it.
If control risk is assessed high, cost accumulations will require additional substantive
procedures to lower the risk of failing to detect material misstatements in inventory.
A comparison of checks listed on a sample of deposit slips to the detail of customer
credits posted to customer accounts receivable can be an audit test for lapping.
Documenting ownership of bonds can be handled by a registrar and transfer agent.
The emphasis is on the completeness assertion because financial statement users tend to
be more concerned about understated expenses and liabilities than overstated.
When independent CPAs in public practice take engagements to audit government units
or financial assistance recipients, they must follow
A. GAAS only.
B. GAAS and GAGAS.
C. GAGAS only.
D. Internal auditing standards.
Which of the following audit procedures probably would provide the most reliable
evidence concerning the entity’s assertion of rights and obligations related to
inventories?
A. Trace test counts noted during the physical count of inventory to the summarization
of quantities.
B. Inspect agreements for evidence of inventory held on consignment.
C. Select the last few shipping advices used before the physical count and determine
whether the shipments were recorded as sales.
D. Inspect the open purchase order file for significant commitments to consider for
disclosure.
Which of the following is ordinarily considered an “extended procedure” during the
independent audit of financial statements?
A. Send positive confirmations on recorded customer accounts receivable balances.
B. Perform physical observation and test count during the client’s inventory taking.
C. Measure the time lag between the date of recording cash receipts in the books to the
date of deposit credit in the bank.
D. Conduct interviews with the client’s sales billing personnel to learn about sales
recording control activities.
When an auditor decides to confirm accounts receivable balances rather than individual
invoices, it most likely would be beneficial to include with the confirmations
A. copies of the client’s shipping documents that support the account balances.
B. lists of the customers’ recent payments that the client has already recorded.
C. client-prepared statements of account that show the details of the account balances.
D. copies of the customers’ purchase orders that support the account balances.
Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second
requests?
A. Review the cash receipts journal for the month prior to the year-end.
B. Intensify the study of the internal control structure concerning the revenue cycle.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.
If the upper limit rate of deviation exceeds the tolerable rate of deviation, the auditor
would most likely
A. accept the account balance as fairly stated.
B. reject the account balance as fairly stated.
C. increase the planned effectiveness of substantive procedures.
D. not increase the planned effectiveness of substantive procedures.
In the study of internal control, the auditor uses sampling to compare the
______________ to the ______________.
A. adjusted estimate of misstatement; overall materiality
B. sampling risk; precision
C. adjusted estimate of the deviation rate; tolerable rate of deviation
D. precision interval; upper limit on misstatement
An auditor most likely would analyze inventory turnover rates to obtain evidence
concerning management’s balance assertions about
A. existence.
B. rights and obligations.
C. completeness.
D. accuracy and valuation.
An advantage of statistical sampling over nonstatistical sampling is that statistical
sampling helps an auditor to
A. eliminate the risk of nonsampling error.
B. reduce the level of audit risk and overall materiality to a relatively low level.
C. measure the sufficiency of the evidence gathered.
D. minimize the failure to detect misstatements and irregularities.
ABC Company prepares financial statements showing the last two years, years X and Y
(Year X is the year prior to year Y). The auditor performed an audit of year X and a
review of year Y. The auditor may
A. report on the year Y review and reissue the year X audit report.
B. provide only the report concerning the year Y review.
C. reissue the year X audit report with an explanatory paragraph disclosing that only a
review was performed on year Y.
D. notify the client that prior year audited financial statements cannot be presented
when the current years statements have not been audited.
In designing written audit plans, an auditor should establish specific audit objectives
that relate primarily to the
A. timing of audit procedures.
B. cost-benefit of gathering techniques.
C. selected audit techniques.
D. financial statement assertions.
Which of the following does not represent a difference between the use of various
approaches to classical variables sampling?
A. The use of mean-per-unit estimation typically results in a larger standard deviation
than the use of either difference estimation or ratio estimation.
B. The use of difference and ratio estimation normally provides smaller sample sizes
than the use of mean-per-unit estimation.
C. The use of difference and ratio estimation require the auditor to expect a certain
number of differences to exist in the population while the use of mean-per-unit
estimation does not.
D. The use of mean-per-unit estimation requires a reliable measure of recorded value
while the use of difference and ratio estimation do not.
Elliot Corp. is interested in purchasing Roger Corp. Prior to the purchase Elliot hired
Adam & Co. to audit the financial statements of Roger. During the audit, Adam & Co.
failed to discover a fraud that resulted in material misstatements in Roger’s financial
statements. After the acquisition, the fraud was discovered and Elliot Corp. suffered
substantial losses. If Elliot sues Adam & Co., Elliot must prove that Adam & Co
A. acted recklessly or with lack of reasonable grounds for belief.
B. knew of the instances of fraud.
C. failed to exercise the appropriate level of professional care.
D. demonstrated gross negligence.
Incorrect rejection occurs when the auditor concludes that the account balance is _____
when in fact it is _____.
A. material; immaterial
B. immaterial; material
C. fairly stated; misstated
D. misstated; fairly stated
An independent auditor must have which of the following?
A. A pre-existing and well-informed point of view with respect to the audit
B. Technical training that is adequate to meet the requirements of a professional
C. A background in many different disciplines
D. Experience in taxation that is sufficient to comply with generally accepted auditing
standards
Which of the following courses of action is most appropriate if an auditor concludes
that there is a high risk of material misstatement?
A. Use smaller, rather than larger, sample sizes.
B. Perform substantive tests as of an interim date.
C. Select more effective substantive tests.
D. Increase tests of controls.
The internal control in small business is highly dependent on the
A. separation of functional responsibilities.
B. complexity of the client’s internal controls.
C. owner-manager’s competence, as well as his/her ethics and integrity.
D. bonding of employees.
Which of the following is not a criterion for using a selection method with statistical
sampling?
A. The method provides a reasonable likelihood of selecting a representative sample.
B. The method allows the probability of selecting sample items to be determined.
C. The method specifically identifies each item in the population with a number.
D. The method allows the selection process to be replicated.
Which of the following is not a correct relationship between a factor and sample size in
a monetary unit sampling application?
A. Expected misstatement; Inverse
B. Recorded balance of the account; Direct
C. Risk of incorrect acceptance; Inverse
D. Tolerable misstatement; Inverse
The major emphasis in GAAS related to consideration of fraud in a financial statement
audit (AU 240) is on
A. employee misappropriation of assets.
B. management fraud.
C. client fraud on customers.
D. employee embezzlement.
Which of the following is the most likely outcome when the upper limit rate of
deviation is less than the tolerable rate of deviation?
A. The auditor would be exposed to the risk of overreliance.
B. The auditor would decide to reduce the planned degree of reliance on internal
control.
C. The auditor would increase the extent of further audit procedures.
D. The auditor would be exposed to a potential efficiency loss.
The negative request form of accounts receivable confirmation is useful particularly
when the
A. Option A
B. Option B
C. Option C
D. Option D
For each of the statements below, indicate through the appropriate letter whether it
relates to the PCAOB, Auditing Standards Board, both the PCAOB and Auditing
Standards Board, or neither the PCAOB nor Auditing Standards Board.
A. PCAOB
B. Auditing Standards Board
C. Both PCAOB and Auditing Standards Board
D. Neither PCAOB nor Auditing Standards Board
___ 1. Conducts inspections of firms that audit public entities.
___ 2. Pronouncements may be used in the audit of nonpublic entities.
___ 3. Pronouncements may be used in the audit of public entities.
___ 4. Was created by the Sarbanes Oxley Act of 2002.
___ 5. Involved with the certification and licensure of public accountants.
___ 6. Issues Statements on Auditing Standards.
___ 7. Conducts peer reviews of firms that audit nonpublic entities.
___ 8. Sanctions individual auditors for violations of generally accepted auditing
standards.
Which of the following statements is true with regard to sampling?
A. Sampling can only be used in situations in which the population is relatively
homogenous in nature.
B. Sampling is typically more efficient than examining the entire population.
C. Sampling is typically more effective than examining the entire population.
D. Sampling should be used when the need for more precise information is important.
An entity’s income statements were misstated due to the recording of journal entries that
involved debits and credits to an unusual combination of expense and revenue accounts.
Auditors most likely could have detected this irregularity by
A. tracing a sample of journal entries to the general ledger.
B. evaluating the effectiveness of the internal control policies and procedures.
C. investigating the reconciliations between controlling accounts and subsidiary
records.
D. performing analytical procedures designed to disclose differences from expectations.
Which of the following is NOT included in Rule of Conduct 102, Integrity and
Objectivity?
A. Prudent assessment of facts
B. Free of conflict of interests
C. Not knowingly misrepresent facts
D. Not subordinate judgment to others
The confirmation of an accounts receivable balance provides primary evidence
regarding which management assertion?
A. Completeness
B. Valuation
C. Allocation
D. Existence
Which of the following actions can be used to control the audit team’s exposure to
sampling risk?
A. Option A
B. Option B
C. Option C
D. Option D
Auditors are evaluating an account with a recorded balance of $600,000 using classical
variables sampling. Based on an allowable risk of incorrect acceptance of 5%, the
auditors have determined the following:
– Estimated account balance = $680,000
– Precision = $20,000
– Tolerable misstatement = $50,000
Which of the following best describes the auditors’ decision and rationale for that
decision?
A. The auditors would accept the account balance as fairly stated, since the sample
estimate falls outside of the precision interval.
B. The auditors would conclude that the account balance is not fairly stated, since the
sample estimate falls outside of the precision interval.
C. The auditors would accept the account balance as fairly stated, since the difference
between the lower bound of the precision interval and recorded balance exceeds the
tolerable misstatement.
D. The auditors would conclude that the account balance is not fairly stated, since the
difference between the lower bound of the precision interval and recorded balance
exceeds the tolerable misstatement.
In testing control activities, an auditor ordinarily selects from a variety of techniques,
including
A. inquiry and analytical procedures.
B. reperformance and observation.
C. comparison and confirmation.
D. inspection and verification.
An auditor is determining the appropriate sample size for a variables sampling
application. Compared to prior engagements, the auditor concludes that the population
variability has increased. In addition, the partner on the engagement is requiring lower
levels of the risk of incorrect acceptance than those used in previous audits. What effect
will these changes have on the auditor’s determination of sample size?
A. Both of these changes will decrease sample size.
B. The increase in population variability will increase sample size; reducing sampling
risk will have no effect on sample size.
C. The increase in population variability will increase sample size; reducing sampling
risk will decrease sample size.
D. Both of these changes will increase sample size.
Vouching debits from a sample selection of customers’ accounts receivable records to
supporting sales invoices is an audit procedure designed to obtain evidence about the
assertion of
A. occurrence.
B. completeness.
C. classification.
D. accuracy.
An auditor has substantial doubt about the entity’s ability to continue as a going concern
for a reasonable period of time because of negative cash flows and working capital
deficiencies. Under these circumstances, the auditor would be most concerned about the
A. control environment factors that affect the organizational structure.
B. correlation of detection risk and inherent risk.
C. effectiveness of the entity’s internal control activities.
D. possible effects on the entity’s financial statements.
Which of the following functional responsibilities would not typically relate to salaried
employees?
A. Collecting timekeeping data.
B. Supervision.
C. Personnel or labor relations.
D. Payroll distribution.
When updating the report on prior-years’ financial statements presented in comparative
form, the auditors’ responsibility for the prior-years’ financial statements is
A. limited to the previously issued report date.
B. extended to the date of the updated audit report.
C. limited to 30 days after the date of the prior years’ financial statements.
D. extended to the updated report date only if information comes to the auditors’
attention requiring modification of the previously expressed opinion.
Review work on unaudited financial statements consists primarily of conducting
inquiries, performing analytical procedures, and obtaining a management representation
letter. List the typical procedures accountants would perform on a review engagement.
A _____________________________ is a cover sheet containing all supporting
documentation for an acquisition.
Indicate the type of sampling risk involved in each of the following situations. Use the
following in your
A. Risk of assessing control risk too high
B. Risk of assessing control risk too low
C. Risk of incorrect acceptance
D. Risk of incorrect rejection
N. No risk
___ 1. An auditor determined the adjusted sample rate of deviation to be higher than the
tolerable rate of deviation. However, the rate of deviation in the population is less than
the tolerable rate of deviation.
___ 2. While examining accounts payable, the sample results supported the auditor’s
conclusion that the accounts payable balance was correctly stated. However, the balance
was materially misstated.
___ 3. An audit team used attributes sampling to evaluate a client’s internal control
policies regarding the physical security of inventory and determined they would need to
reduce their planned reliance on internal controls. This decision is consistent with the
results of evaluating the entire population.
___ 4. An auditor concluded that the upper limit on misstatement was less than the
tolerable misstatement, but in reality the actual misstatement was greater than the
tolerable misstatement.
___ 5. While performing an evaluation of internal controls, an auditor determined that
internal controls were operating effectively. However, if the entire population had been
evaluated, the auditor would have increased control risk.
___ 6. An auditor concluded that the inventory account balance was materially
misstated based on the results of variables sampling. However, the balance was not
materially misstated.
Analytical procedures are one type of evidence gathering procedure. According to
auditing standards, there are five general forms of analytical procedures. Auditing
standards also provide examples of five sources of information for analytical
procedures.
Describe three of the five general forms of analytical procedures. For each form,
describe a typical source of the information for the form. For each source, include any
questions or concerns an auditor would have about the reliability or relevancy of the
source.
The five general forms of analytical procedures (and sources of information):
1. Comparison of current year account balances of one or more comparable periods.
2. Financial account information for comparable prior period(s).
3. Comparison of the current year account balances to anticipated results found in the
company’s budgets and forecasts.
4. Evaluation of the relationships of current year account balances to other current year
balances and conformity with predictable patterns based on the company’s experience.
(Financial relationships among accounts in the current period.)
5. Comparison of current year account balances and financial relationships (e.g., ratios)
with similar information for the industry in which the company operates. (Industry
statistics.)
Internal control assessment is important because it governs the
________________________________, _________________________________ and
_________________________________ of substantive procedures.
List, and briefly describe, the three factors that increase the probability of fraud.
The audit risk model includes the four risks listed below. Match the type of risk with the
related definition.
Detection risk The probability that material misstatements have occurred in
transactions entering the accounting system.
Control risk The probability that an auditor will give an inappropriate
opinion on financial statements.
Inherent risk The probability that the client’s internal control policies and
procedures will fail to detect material misstatements if they
have entered the accounting system.
Audit risk The probability that audit procedures will fail to produce
evidence of material misstatements.