The existence of a related party transaction may be indicated when another entity
A. Sells real estate to the corporation at a price that is comparable to its appraised value.
B. Absorbs expenses of the corporation under audit.
C. Borrows from the corporation at a rate of interest which equals the current market
rate.
D. Lends to the corporation at a rate of interest which equals the current market rate.
In confirming accounts receivable, an auditor decided to confirm customers’ account
balances rather than individual invoices. Which of the following most likely would be
included with the entity’s confirmation letter?
A. An auditor-prepared letter explaining that a nonresponse may cause an inference that
the account balance is correct.
B. A client-prepared letter reminding the customer that a nonresponse will cause a
second request to be sent.
C. An auditor-prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor.
D. A client-prepared statement of account showing the details of the customer’s account
balance.
Once a CPA has determined that accounts receivable has increased because of slow
collection in a “tight money” environment, the CPA would be likely to
A. increase the balance in the allowance for bad debts account.
B. review the going concern ramifications.
C. require the entity to tighten its credit policy.
D. expand tests regarding the collectability of receivables.
In a properly designed internal control system, the same employee may be permitted to
A. Receive and deposit checks and also approve write-offs of customer accounts.
B. Approve vouchers for payment and also sign checks.
C. Reconcile the bank statements and also receive and deposit cash.
D. Sign checks and also cancel supporting documents.
If the size of the sample to be used in a particular test of controls has not been
determined by utilizing statistical concepts, but the sample has been chosen in
accordance with random selection procedures
A. no inferences can be drawn from the sample.
B. the auditor has committed a nonsampling error.
C. depending on the size of the sample chosen, the auditor may actually achieve desired
precision.
D. the auditor will have to evaluate the results by reference to the principles of
discovery sampling.
Which of the following is an internal control that would prevent a paid disbursement
voucher from being presented for payment a second time?
A. Vouchers should be prepared by individuals who are responsible for signing
disbursement checks.
B. Disbursement vouchers should be approved by at least two responsible management
officials.
C. The date on a disbursement voucher should be within a few days of the date the
voucher is presented for payment.
D. The official signing the check should compare the check with the voucher and
should “cancel” the voucher documents by marking them “paid.”
Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with GAAP, while other matters are
not important.
B. An auditor considers materiality for the aggregate level of misstatements that could
be material to any one of the financial statements individually.
C. Materiality judgments are made in light of surrounding circumstances and
necessarily involve both quantitative and qualitative judgments.
D. An auditor’s consideration of materiality is influenced by the auditor’s perception of
the needs of a reasonable person who will rely on the financial statements.
When performing an audit, a CPA
A. must exercise the level of care, skill, and judgment expected of a reasonably prudent
CPA under the circumstances.
B. must strictly adhere to generally accepted accounting principles.
C. is strictly liable for failing to discover client fraud.
D. is not liable under any legal standard unless the CPA commits gross negligence or
intentionally disregards generally accepted auditing standards.
An auditor obtains knowledge about a new client’s business and its industry in order to
A. Make constructive suggestions concerning improvements to the client’s internal
control.
B. Develop an attitude of professional skepticism concerning management’s financial
statement assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client’s
financial statements.
An auditor reconciles the total of the accounts receivable subsidiary ledger to the
general ledger control account as of October 31. By this procedure, the auditor would
be most likely to learn about which of the following?
A. An October invoice was improperly computed.
B. An October check from a customer was posted in error to the account of another
customer with a similar name.
C. An opening balance in a subsidiary ledger account was improperly carried forward
from the previous accounting period.
D. An account balance is past due and should be written-off.
Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial
information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.
Which of the following is an effective internal control used to prove that production
department employees are properly validating payroll timecards at a time-recording
station?
A. Timecards should be carefully inspected by those persons who distribute pay
envelopes to the employees.
B. One person should be responsible for maintaining records of employee time for
which salary payment is not to be made.
C. Daily reports showing time charged to jobs should be approved by the foreman and
compared to the total hours worked on the employee timecards.
D. Internal auditors should make observations of distribution of paychecks on a surprise
basis.
The formula for nonstatistical sampling for tests of account balances provided by the
AICPA
A. must be used for nonstatistical sampling.
B. includes a provision for the risk of incorrect acceptance.
C. is affected by the nature of other substantive procedures used to test the account
balance.
D. is largely based on the variation of items in the account.
Match the Trust Services Principle with its proper definition.
1)Availability
2)Processing integrity
3) Confidentiality
4)Security
5)Online Privacy
a) Personal information is collected, used, retained, and disclosed in conformity with
the commitments in the entity’s privacy notice and with criteria set forth in Generally
Accepted Privacy Principles issued by the AICPA/CICA.
b) System processing is complete, accurate, timely, and authorized.
c) The system is available for operation and use as committed or agreed.
d) Information designated as private is protected as committed or agreed.
e) The system is protected against unauthorized access (both physical and logical).
A modification of the standard report is required for all of the following conditions
except:
A. There is a restriction on the scope of the engagement.
B. There is other information contained in management’s report on internal control.
C. Management has concluded that internal controls are not effective.
D. A significant subsequent event has occurred since the date being reported on.
The risk that an auditor will conclude, based on substantive procedures, that a material
error does not exist in an account balance when, in fact, such an error does exist is
referred to as
A. Sampling risk.
B. Detection risk.
C. Nonsampling risk.
D. Inherent risk.
Blue Co., a privately-held entity, asked its tax accountant, Cook, a CPA in public
practice, to reproduce Blue’s internally-prepared interim financial statements on Cook’s
computer when Cook prepared Blue’s quarterly tax return. Cook should not submit
these financial statements to Blue unless, at a minimum, Cook complies with the
provisions of
A. statements on Responsibilities in Tax Practice.
B. statements on Standards for Accounting and Review Services.
C. statements on Responsibilities in Unaudited Financial Services.
D. statements on Standards for Attestation Engagements.
Which of the following is something that the plaintiff must prove in order for an
accountant to be liable for damages under Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934?
A. The accountant was ordinarily negligent.
B. There was a material omission.
C. The security involved was stock.
D. The security was part of an original issuance.
In general, revenue is recognized when
A. goods are shipped.
B. it is earned and realized.
C. it is recorded in the sales journal.
D. it is received in cash.
The permanent (continuing) file of an auditor’s working papers most likely would
include copies of the
A. Bank statements.
B. Debt agreements.
C. Lead schedules.
D. Attorney’s letters.
Which of the following departments typically approves purchase requisitions?
A. Raw materials stores.
B. Cost accounting.
C. Inventory management.
D. IT.
When searching for unrecorded liabilities at year-end, the population identified for
sampling would be
A. cash receipts from related parties recorded before year-end.
B. creditors whose accounts appear on a subsidiary trial balance of accounts payable.
C. cash disbursements recorded in the period subsequent to year-end.
D. invoices dated a few days before and after year-end.
Comparative financial statements include the financial statements of a prior period that
were examined by a predecessor auditor whose report is not presented. If the
predecessor auditor’s report was qualified, the successor auditor must
A. obtain written approval from the predecessor auditor to include the prior year’s
financial statements.
B. issue a standard comparative audit report indicating the division of responsibility.
C. express an opinion on the current year statements alone and make no reference to the
prior year statements.
D. disclose the reasons for any qualification in the predecessor auditor’s opinion.
Statements on Standards for Accounting and Review Services (SSARS) require an
accountant to report when the accountant has
A. typed client-prepared financial statements, without modification, as an
accommodation to the client.
B. provided an entity with a financial statement format that does not include dollar
amounts, to be used by the entity in preparing financial statements.
C. proposed correcting journal entries to be recorded by the client that change
client-prepared financial statements.
D. generated, through the use of computer software, financial statements prepared in
accordance with a comprehensive basis of accounting other than GAAP.
Which of the following is not a Principle of Professional Conduct as defined by the
Code of Professional Conduct?
A. Integrity.
B. Due care.
C. Reporting.
D. Scope and nature of services.
When a sample of sales transactions recorded in the sales journal is traced back to the
customer orders and shipping documents, the auditor is testing the ____________
assertion.
A. cutoff
B. authorization
C. completeness
D. occurrence
While substantive procedures may support the accuracy of underlying records, these
tests frequently provide no affirmative evidence of segregation of duties because
A. Substantive procedures rarely guarantee the accuracy of the records if only a sample
of the transactions has been tested.
B. The records may be accurate even though they are maintained by persons having
incompatible functions.
C. Substantive procedures relate to the entire period under audit, but compliance tests
ordinarily are confined to the period during which the auditor is on the entity’s
premises.
D. Many computerized procedures leave no audit trail of who performed them, so
substantive procedures may necessarily be limited to inquiries and observation of office
personnel.
Which of the following would provide the best form of evidential matter pertaining to
the annual valuation of a long-term investment in which the entity owns a 45 percent
voting interest?
A. Market quotations of the investee company’s stock.
B. The current fair value of the investee company’s assets.
C. Historical costs of the investee company’s assets.
D. Audited financial statements of the investee company.
In auditing accounts payable, an auditor’s procedures most likely would focus primarily
on management’s assertion of
A. existence.
B. rights and obligations.
C. completeness.
D. valuation and allocation.
Based on conversations with the owner-manager of an audit client, the auditor
ascertained that the company’s primary motivation is to avoid paying income taxes.
Based on this motivation, which account balance assertion for ending inventory will the
auditor be most concerned about verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Observation.
Which of the following auditing procedures most likely would provide assurance about
a manufacturing entity’s inventory valuation?
A. Vouching the raw materials’ costs to vendors’ invoices.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing shipping and receiving cutoff activities for inventories.
D. Tracing test counts to the entity’s inventory listing.
If recorded interest expense is higher than the auditor’s expectation calculated using
recorded debt, all of the following are potential explanations except that
A. the entity failed to record debt.
B. debt was recorded as equity.
C. the entity used the face interest rate to calculate interest expense on a bond issued at
a discount.
D. the entity used the face interest rate to calculate interest expense on a bond issued at
a premium.
An advantage of using systems flowcharts to document information about internal
control instead of using internal control questionnaires is that systems flowcharts
A. Identify whether segregation of duties prevent collusion.
B. Provide a visual depiction of the entity’s activities.
C. Indicate whether controls are operating effectively.
D. Reduce the need to observe the entity’s employees performing routine tasks.
To satisfy the valuation assertion when auditing an investment accounted for by the
equity method, an auditor most likely would
A. inspect the stock certificates evidencing the investment.
B. examine the audited financial statements of the investee company.
C. review the broker’s advice or canceled check for the investment’s acquisition.
D. obtain market quotations from financial newspapers or periodicals.