1) What are the two major balance-related audit objectives in testing payroll liabilities?
A) Accuracy and detail tie-in
B) Completeness and valuation
C) Completeness and rights and obligations
D) Accuracy and cutoff
2) There is very little opportunity for confirmation from third parties of balance sheet
accounts related to the payroll and personnel cycle.
A) True
B) False
3) Match seven of the terms (a-i) with the definitions provided below (1-:
a.Control environment
b.Control activities
c.Independent checks on performance
d.Internal control
e.Monitoring
f.Separation of duties
g.General authorization
h.Specific authorization
i.Risk assessment
________ 1> Management’s ongoing and periodic assessment of the quality of internal
control performance to determine that controls are operating as intended and are
modified when needed.
________ 2> Company-wide policies for the approval of all transactions within stated
limits.
________ 3> The actions, policies, and procedures that reflect the overall attitudes of
top management, directors, and owners of an entity about internal control and its
importance to the entity.
________ 4> Segregation of the following activities in an organization: custody of
assets, accounting, authorization, and operational responsibility.
________ 5> Management’s identification and analysis of risks relevant to the
preparation of financial statements in accordance with an applicable accounting
framework.
________ 6> Policies and procedures that help ensure that necessary actions are taken
to address risks in the achievement of the entity’s objectives.
________ 7> A process designed to provide reasonable assurance regarding the
achievement of management’s objectives in the following categories: (1) reliability of
financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance
with applicable laws and regulations.
4) A basic objective of a CPA firm is to provide professional services to conform to
professional standards. Reasonable assurance of achieving this basic objective is
provided through:
A) continuing professional education
B) compliance with generally accepted reporting standards
C) a system of quality control
D) a system of peer review
5) A lack of independence will override any other scope limitations and requires a
disclaimer of opinion.
A) True
B) False
6) The doctrine of joint and several liability is one factor that has contributed to the
recent increase in the number of lawsuits against auditors and the size of awards to
plaintiffs.
A) True
B) False
7) Recording an acquisition of a fixed asset at an improper amount affects the balance
sheet until the company disposes of the asset, but the income statement is not affected.
A) True
B) False
8) The emphasis in auditing manufacturing equipment is on the verification of
current-period disposals and acquisitions.
A) True
B) False
9) Related party transactions may be indicated when another company:
A) Subsidizes certain operating expenses of the company
B) Purchases its securities at their fair value
C) Loans to company at market rates
D) Has had a distributor relationship with the company for 10 years
10) An example of a fraud risk factor describing opportunities is “ineffective board of
director oversight over financial reporting.”
A) True
B) False
11) Management is responsible for:
A)
B)
C)
D)
12) When sales invoices are automatically calculated and posted by a computer, the
auditor may be able to reduce substantive tests of transactions for which, if any,
assertion?
A) accuracy
B) existence
C) completeness
D) none of the above
13) Statements on Auditing Standards provide detailed, objective guidance on how
auditors are to establish a preliminary materiality level, thus eliminating the need for
subjective auditor judgment in this task.
A) True
B) False
14) If acceptable audit risk is low, and inherent risk and control risk are both low, then
planned detection risk should be high.
A) True
B) False
15) Which of the following is correct with respect to the design and use of business
documents?
A) Not all documents used for internal purposes need to be prenumbered
B) Documents should be designed for single purposes only to avoid confusion in their
use
C) Documents should be designed to be understandable only by those who use them
D) Documents designed for external use must be prenumbered
16) An auditor plans to examine a sample of 40 canceled checks for a countersignature
which is prescribed in the client’s control procedures manual. Two of the checks in
sample cannot be located by the company or the auditor. The auditor would most likely:
A) treat the missing checks as a deviation when evaluating the results of the sample
B) draw a conclusion on a sample size of 38
C) substitute two more checks to get to a sample size of 40
D) recalculate the sample excluding the original 40 checks
17) Auditors are required to communicate either orally or in writing with the audit
committee about internal control weaknesses.
A) True
B) False
18) Why do auditors establish a preliminary judgment about materiality?
A) To determine the appropriate level of staff to assign to the audit
B) So that the client can know what records to make available to the auditor
C) To plan the appropriate audit evidence to accumulate and develop an overall audit
strategy
D) To finalize the control risk assessment
19) “The auditor should not assume that management is dishonest, but the possibility of
dishonesty must be considered.” This is an example of:
A) unprofessional behavior
B) an attitude of professional skepticism
C) due diligence
D) a rule in the
20) An example of auditor legal liability to third parties under common law would be
the federal government prosecuting an auditor for knowingly issuing an incorrect audit
report.
A) True
B) False
21) Auditors must issue a qualified opinion on internal control whenever senior
management commits fraud that is considered a material weakness.
A) True
B) False
22) Tests of the perpetual inventory master files for the purpose of reducing the tests of
physical inventory or changing their timing are done through the use of:
A) inquiry
B) observation
C) confirmation
D) documentation
23) An inventory acquisition is received late in the afternoon of December 31 after the
physical inventory is completed. If the acquisition is included in accounts payable and
purchases, but excluded from inventory, the result:
A) is an understatement of net earnings
B) is an overstatement of net earnings
C) is an overstatement of working capital
D) is an overstatement of owner’s equity
24) The legal right to perform audits is granted to a CPA firm by regulation of:
A) each state
B) the Financial Accounting Standards Board (FASB)
C) the American Institute of Certified Public Accountants (
D) the Audit Standards Board
25) The audit procedure “foot the schedule of fixed assets acquisitions and trace the
total to the general ledger” relates most closely to the completeness objective for fixed
assets acquisitions.
A) True
B) False
26) When selecting a sample, random numbers may be obtained either with
replacement or without replacement. Although both selection methods are theoretically
sound, auditors rarely use replacement sampling.
A) True
B) False
27) Client imposed restrictions on the audit always require a disclaimer of opinion.
A) True
B) False
28) In the audit of inventory, the auditor and client are jointly responsible for making
and recording the count of physical inventory; while the auditor is responsible for
drawing conclusions about the adequacy of the physical inventory.
A) True
B) False
29) A commitment is best described as:
A) an agreement to commit the firm to a set of fixed conditions in the future
B) an agreement to commit the firm to a set of fixed conditions in the future that
depends on company profitability
C) an agreement to commit the firm to a set of fixed conditions in the future that
depends on current market conditions
D) a potential future obligation to an outside party for an as yet to be determined
amount
30) Which of the following statements about the payroll and personnel cycle is correct?
A)
B)
C)
D)
31) Hardy Company mass-produces eight different products. The controller who is
interested in strengthening internal controls over the accounting for materials used in
production would be most likely to implement a(n):
A) perpetual inventory system
B) job order cost accounting system
C) economic order quantity system
D) separation of duties among production personnel
32) Auditing Standards (SAS No. 59) requires auditors to evaluate whether there is a
substantial doubt about a client’s ability to continue as a going concern. One of the most
important audit procedures to perform to assess the going concern question is:
A) analytical procedures
B) confirmations of creditors
C) statistical sampling procedures
D) inquiries of client and its legal counsel
33) The auditor is testing for unrecorded retirements/disposals of equipment. Which of
the following audit procedures would the auditor most likely use?
A) Select items from the fixed asset master file and then physically locate them
B) Examine the repairs and maintenance amount for large debits
C) Compare current years depreciation expense with the previous year’s depreciation
expense
D) Trace acquisition documents to the fixed asset master file
34) One of the strongest internal corporate governance mechanisms over senior
management is the audit committee of the board of directors.
A) True
B) False
35) When allocating materiality, most practitioners choose to allocate to:
A) the income statement accounts because they are more important
B) the balance sheet accounts because there are fewer
C) both balance sheet and income statement accounts because there could be errors on
either
D) all of the financial statements because it is required by GAAS
36) When an auditor discovers a highly material GAAP violation in the financial
statements and the client refuses to correct it, the auditor should issue a disclaimer of
opinion.
A) True
B) False
37) The primary emphasis in most tests of details of balances is on the:
A) balance sheet accounts
B) revenue accounts
C) cash flow statement accounts
D) expense accounts
38) The auditor’s preliminary judgment about materiality is the maximum amount by
which the auditor believes the financial statements could be misstated and still not
affect the decisions of reasonable users.
A) True
B) False
39) When performing tests of controls and tests of transactions for sales, the auditor
generally defines the population as:
A) all accounts receivable transactions for the year
B) all sales invoices for the year
C) all cash receipts transactions for the year
D) all sales invoices less sales return credit memos
40) Your accounting firm has accepted a compilation engagement from a client in
which your firm is not independent. In that case you:
A) may not accept the engagement
B) may accept the engagement and disclose the lack of independence
C) may accept the engagement and not disclose the lack of independence
D) may accept the engagement and disclose the lack of independence and the reason for
the lack of independence
41) Define business risk. List several factors that may impact the auditor’s assessment
of business risk.
42) Discuss the differences between errors, frauds, and illegal acts. Give an example of
each.
43) One purpose of performing analytical procedures in the planning phase of an audit
is to assess the client’s financial condition. Explain how the assessment of a client’s
financial condition can affect the auditor’s decisions concerning evidence accumulation
in later phases of the audit.
44) Define the following terms commonly used in audit procedures:
1>Examine
2>Scan
3>Compute
4>Foot
5>Compare
6>Count
7>Vouch
45) State the two primary types of subsequent events that require consideration by
management and evaluation by the auditor, and give two examples of each type.
46) Separation of duties is essential in preventing errors and intentional misstatements
on the financial statements. List below the four general guidelines.
47) There are 14 steps to audit sampling for details of balances, divided into three
sections: plan the sample, select the sample and perform the audit procedures, and
evaluate the results. Discuss 5 of the 9 steps included in the “plan the sample” section
for nonstatistical sampling.
48) Describe the audit risk model and each of its components.