The auditors determine which disclosures must be presented in the financial statements.
The phrase “Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
error” is included in the auditor’s opinion section of an audit report.
Professional guidelines for performing internal audits for companies are not as
well-defined as for external audits.
A suspension of judgment is the recognition that people’s motivations and perceptions
can lead them to provide biased or misleading information.
When the estimated population exception rate exceeds the sample exception rate, the
auditor can conclude that the sample results do not support the preliminary assessed
control risk.
Management must recognize that almost any employee is capable of committing a
dishonest act under the right circumstances.
It is generally more difficult for the auditor to detect payment of fraudulent hours than
payment of fictitious employees.
Most people define unethical behavior as conduct that differs from what they believe is
appropriate given the circumstances.
CPAs must be independent to issue a compilation report.
Users of the financial statements rely on the auditor’s report because of the absolute
assurance the report provides.
When the auditor receives inconsistent responses from management and others within
the organization, the auditor should obtain additional audit evidence to resolve the
inconsistency.
Turnover in accounting personnel can create a rationalization for misstatement.
Changes in accounting estimates requires the auditor to issue a modified audit report
with a consistency paragraph inserted after the opinion paragraph.
All litigation by a client related to tax or other nonaudit services will impair
independence.
Of the three types of attestation engagements, examination engagements provide a
higher level of assurance than agreed-upon procedures engagements but less than
review engagements.
The most widely used profitability ratio is the gross profit percent.
A financial statement review conducted in compliance with Statements on Standards for
Accounting and Review Services (SSARS) includes obtaining an understanding of
internal control.
The audit procedure “Perform tests of lower-of-cost-or-market, selling price, and
obsolescence” provides assurance mainly for the realizable value objective for
inventory pricing and compilation.
Acceptable risk of incorrect acceptance is directly affected by acceptable audit risk.
Credit should be approved before goods are shipped to a customer.
A misstatement of an expense account usually also results in an equal misstatement of
accounts receivable.
The introductory paragraph of the auditor’s report states that the auditor is responsible
for the preparation, presentation and opinion on financial statements.
Key controls are not sufficient to achieve the transaction-related audit objectives.
Both accountants and auditors must possess expertise in the accumulation and
interpretation of audit evidence.
Auditors typically perform the acquisitions and cash disbursements tests at different
times.
Risk assessment procedures are performed to assess the risk of material misstatement in
the financial statements.
An auditor will issue a disclaimer when he concludes that the financial statements are
not fairly presented.
The auditor is generally concerned about the realizable value and the rights to cash.
Independence is a fundamental ethical principle for internal auditors.
In job cost systems, costs are accumulated by individual jobs.
When using nonstatistical sampling, the sample must be a probabilistic one.
Ordinarily, if you are auditing a continuing client, it is unnecessary to test the accuracy
objective or the classification objective for fixed assets acquired in prior years.
The auditor should keep in mind that the amount in insurance expense is a residual
amount.
Other accrued expenses are normally considered to be associated with the acquisition
and payment cycle.
One of the most challenging parts of auditing is properly applying the factors that affect
tests of details of balances.
When using MUS, the projected misstatement is the percentage misstatement times the
sampling interval.
When auditing the payroll and personnel cycle, tests of controls are routinely
performed.
Under the Confidential Client Information rule, permission is not required from the
client to use the audit documentation relating to that client during an AICPA authorized
peer review program with another CPA firm.
Procedures to obtain an understanding of internal control generally provide sufficient
appropriate evidence that a control is operating effectively.
Most closely held corporations have numerous transactions during the year for capital
stock accounts.
Which of the following is not a function within the inventory and warehousing cycle?
A) process the goods
B) store raw materials
C) ship finished goods
D) process invoices for shipped goods
Boxes or other containers holding inventory should also be opened during test counts to
determine the ________ of the inventory.
A) classification
B) detail tie-in
C) existence
D) realizable value
Which of the following is not a characteristic of the reliability of evidence?
A) effectiveness of client internal controls
B) education of auditor
C) independence of information provider
D) timeliness
Analytical procedures are so important that they are required during the
A) planning and test of control phases.
B) planning and completion phases.
C) test of control and completion phases.
D) planning, test of control, and completion phases.
Factors that impact inherent risk of financial instruments donot include
A) management’s objectives related to investment activity.
B) the complexity of the securities.
C) the cost of the securities.
D) the company’s prior experience with certain investments.
Cash receipts from sales on account have been misappropriated. Which of the following
acts would conceal this fraud and be least likely to be detected by an auditor?
A) understating the sales journal by not recording cash sales
B) overstating the accounts receivable control account by intentionally misstating prices
charged for goods sold
C) overstating the accounts receivable subsidiary ledger by not recording payments
made by customers
D) understating the cash receipts journal by purposely recording incorrect amounts
Which of the following is not one of the AICPA categories of assertions?
A) assertions about classes of transactions and events for the period under audit
B) assertions about financial statements and correspondence to GAAP
C) assertions about account balances at period end
D) assertions about presentation and disclosure
Which of the following would least concern an auditor regarding the lack of a specific
authorization to conduct the sales transaction?
A) granting of credit
B) shipment of goods
C) determination of discounts
D) selling of goods for cash
Interpretations of the AICPA Code of Professional Conduct are dominated by the
concept of
A) independence.
B) compliance with standards.
C) accounting.
D) acts discreditable to the profession.
How must significant deficiencies and material weaknesses be communicated to those
charged with governance?
A) Either oral or written communication is acceptable.
B) Oral communication is required.
C) Written communication is required.
D) Written communication is required for material weaknesses, but oral communication
is allowed for significant deficiencies.
Which of the following is an accurate statement relating to separation of duties?
A) Management should deny cash access to anyone responsible for entering sales and
cash receipts transaction information into the computer.
B) All disagreements on the monthly statements should be directed to a designated
person who has no responsibility for handling cash or recording sales or accounts
receivable.
C) The credit granting function should be separate from the sales function.
D) All of the above are accurate statements.
Which is usually included in the engagement letter?
A)
B)
C)
D)
The posting and summarization audit objective is the auditor’s counterpart to
management’s assertion of
A) occurrence.
B) completeness.
C) accuracy.
D) classification.
As directed by the Sarbanes-Oxley Act,
A) an attorney must report material violations of federal securities law to the public
company’s chief legal counsel or chief executive officer.
B) attorneys cannot breach confidentiality rules even if a client is committing a crime or
a fraud.
C) if the audit committee fails to remedy any material violations of the federal
securities law, the attorney must report the violation to the SEC.
D) All of the above are required by Sarbanes-Oxley.
Which of the following occurrences would be least likely to warrant further audit
attention for the auditor?
A) deviations from client’s established control procedures
B) deviations from client’s budgeted values
C) monetary misstatements in populations of transaction data
D) monetary misstatements in populations of account balance details
The tests of details of balances procedure which requires the auditor to examine notes
paid after year-end to determine whether they were liabilities at the balance sheet date is
an attempt to satisfy the audit objective of
A) existence.
B) completeness.
C) accuracy.
D) classification.
You are gathering evidence for the audit objective that existing inventory items are
included in the inventory listing schedule. The audit procedure that would provide you
with the best evidence to confirm this objective is
A) trace from inventory tags to the inventory listing schedule and make sure the
inventory on the tags is included.
B) trace the inventory totals to the general ledger.
C) perform tests of lower-of-cost-or-market.
D) account for unused tags shown in the auditor’s documentation to make sure no tags
have been added.
Auditors typically rely on internal controls of their private company clients
A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements.
B) only if the controls are determined to be effective.
C) only if the client asks an auditor to test controls.
D) only if the controls are sufficient to increase control risk to an acceptable level.
An agreed-upon procedures engagement is one in which
A) the CPA and management agree that procedures will be applied to all accounts and
circumstances.
B) the CPA and management agree that procedures will not be applied to all accounts
and circumstances.
C) the CPA, the responsible party making the assertions, and the specific persons who
are the intended users of the CPA’s report agree to all the procedures the CPA will
perform.
D) the CPA, the responsible party making the assertions, and the specific persons who
are the intended users of the CPA’s report agree that the CPA will apply his judgment to
determine the procedures to be performed.
You are auditing Nelson and Company and determined that the sample results support a
conclusion that the account is materially misstated, when in fact it was not misstated.
This illustrates the risk of
A) incorrect acceptance.
B) incorrect rejection.
C) control risk too low.
D) control risk too high.
Match six of the terms (a-j) with the definitions provided below (1-6):
a. Application controls
b. Error listing
c. General controls
d. Hardware controls
e. Input controls
f. Output controls
g Parallel simulation
h. Parallel testing
i Pilot testing
j. Processing controls
________ 1. The new and old systems operate simultaneously in all locations.
________ 2. Controls that relate to all aspects of the IT system.
________ 3. Controls such as review of data for reasonableness, designed to assure that
data generated by the computer is valid, accurate, complete, and distributed only to
authorized people.
________ 4. Controls that apply to processing of transactions.
________ 5. A new system is implemented in one part of the organization while other
locations continue to rely on the old system.
________ 6. Controls such as proper authorization of documents, check digits, and
adequate documentation, designed to assure that the information to be entered into the
computer is authorized, complete, and accurate.
You are the in-charge auditor for a company who has been an audit client for several
years. Which of the following is not a category of tests commonly associated with the
audit of manufacturing equipment?
A) verification of depreciation expense
B) analytical procedures
C) verification of current-period disposals
D) verification of the beginning balance in the equipment account
The PCAOB considers International Standards on Auditing (ISA) when developing its
standards.
A CPA firm
A) can sell securities to a client for whom they perform an attestation service.
B) can receive a commission for a client that they are engaged to perform an attestation
service for.
C) cannot receive a referral fee for recommending the services of another CPA.
D) can receive a commission from a nonattestation client as long as the situation is
disclosed.
A principal advantage of statistical methods of attributes sampling over nonstatistical
methods is that they provide a quantifiable basis for establishing the
A) risk of assessing control risk too low.
B) tolerable exception rate.
C) expected population exception rate.
D) sample size.
Which of the following is an accurate statement concerning the auditor’s responsibility
to consider laws and regulations?
A) Auditors can follow an easy, step-by-step procedure to determine how laws and
regulations impact the financial statements.
B) The auditor’s responsibility will depend on whether the laws or regulations are
expected to have a direct impact on the financial statements.
C) It is the responsibility of the auditor to determine if an act constitutes
noncompliance.
D) The auditor must inform an outside party if management has knowingly not
complied with a law or regulation.
Which of the following is a correct statement regarding analytical procedures?
A) If an auditor identifies a possible misstatement in sales using analytical procedures,
accounts payable will be the likely offsetting misstatement.
B) Auditors should also compare the results of their analytical procedures to budgets
and industry trends.
C) If sales are overstated, the income statement will be incorrect, but the balance sheet
will be correct.
D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume
fraud is involved.
Which of the following is(are) true concerning the Ethical Principles of the Code of
Professional Conduct?
I. They identify ideal conduct.
II. They are general ideals and are not enforceable.
A) I only
B) II only
C) I and II
D) Neither I nor II
The form that must be filed with the Securities and Exchange Commission whenever a
company plans to issue new securities to the public is the
A) Form S-1.
B) Form 8-K.
C) Form 10-K.
D) Form 10-Q.
Which of the following ratios is not a measure of a company’s short-term debt paying
ability?
A) accounts receivable turnover
B) cash ratio
C) current ratio
D) quick ratio
List and describe the six organizational structures available to CPA firms.
Describe each of the following types of confirmations:
– positive confirmation
– blank confirmation
– invoice confirmation
– negative confirmation
Describe the audit procedures typically used to test for out-of-period liabilities (also
referred to as the search for unrecorded accounts payable).
Discuss the differences and similarities between the roles of accountants and auditors.
What additional expertise must an auditor possess beyond that of an accountant?
Consider the steps in sampling for tests of details and for tests of controls. Explain the
differences in applying sampling to these two types of tests.
Describe each of the major types of cash accounts maintained by business entities.
How do auditors commonly verify sales commission expense?
State the four most important audit objectives for capital stock and describe how the
auditor typically verifies each of the four objectives.
List the four underlying principles of risk assessment per the COSO framework
Auditors should be alert for potential judgment tendencies, traps, and biases that may
impact their decision making process. Identify and define four of these judgment
tendencies. Then, for each judgment tendency, suggest a way to avoid or mitigate the
tendency.
The text suggested a five-step approach to identify deficiencies, significant deficiencies,
and material weaknesses. Describe this approach.
Discuss the four areas of responsibility under the IT function that should be segregated
in large companies.
Discuss the key internal controls for prepaid insurance that affect the auditor’s extent of
testing of the prepaid insurance account.
List six accounts in the capital acquisition and repayment cycle commonly found on
balance sheets of corporations. What characteristics do these accounts have in common
that distinguish them from other accounts?
Discuss the required communications between predecessor and successor auditors.
In auditing the long-term investments account, Arens, CPA, is unable to obtain audited
financial statements for an investee located in a foreign country. Levine concludes
sufficient appropriate audit evidence regarding this investment cannot be obtained.
For each of the following situations below, identify the appropriate opinion type and
report modification by selecting a choice from the appropriate tables below.
Operational auditing is the review of an organization for efficiency and effectiveness.
Discuss what is meant by the terms “effectiveness” and “efficiency.”
The “tone at the top” provides a foundation upon which a more detailed code of conduct
can be developed to provide specific guidance for the organization and its employees.
Components of a code of conduct may include sections on 1) general employee
conduct, 2) relationships with clients and suppliers and 3) conflicts of interest. Give a
narrative description of what might be included in each of the above components of a
code of conduct.