Because they spend all their time within one company, internal auditors have much
greater knowledge about the company’s operations and internal controls then external
auditors.
If the preliminary judgment of materiality increases, the amount of audit evidence
required will decrease.
If employees have positive feelings about their employers, they are less likely to
commit fraud.
Inherent risk and control risk exist independent of the audit of the financial statements.
When the allowance for doubtful accounts is understated, bad debt expense is
understated and net income is also understated.
An operational auditor may use “engineered standards” as an evaluation criterion.
Auditing guidance is provided for auditing accounting estimates specifically for fair
values estimates as considerable auditor judgment is involved.
The auditor generally owes a duty of care to third parties who are part of a limited
group of persons whose reliance is “foreseen” by the auditor.
Both overstatements and understatements must be considered when allocating
materiality to balance sheet accounts.
If the client refuses to prepare and sign a letter of representation, the auditor would be
required to issue either a qualified opinion or a disclaimer of opinion.
Auditors usually make the materiality judgment by referring to a standard checklist.
At the completion of the tests of controls and substantive tests of transactions, auditors
must analyze each exception to determine its cause and the implication of the exception
on assessed control risk.
The guidance for service auditors has been moved to the attestation standards.
Other than inquiring of management about policies they have established to prevent
illegal acts and whether management knows of any laws or regulations that the
company has violated, the auditor should not search for illegal acts that do not have a
direct effect on the financial statements unless there is reason to believe they may exist.
An audit generally provides no assurance that illegal acts that do not have a direct effect
on the financial statements will be detected.
Assessing acceptable audit risk, client business risk, and risk of material misstatement
helps determine the audit procedures that will be needed.
Each state also has rules of conduct that are required for licensing by the state.
A public company may obtain internal audit services from their financial statement
auditor if it is approved by the company’s audit committee.
The transportation and installation costs for a piece of equipment should be charged to
an expense account.
In the test of details of balances, the auditor wants to make inferences about the entire
population based on a sample.
Because a management representation letter is a written statement from a
nonindependent source, it cannot be regarded as reliable evidence.
Fraudulent financial reporting usually involves manipulation of amounts rather than
disclosures.
The transfer of money from one bank account to another and improperly recording the
transfer so that the amount is recorded as an asset in both banks is referred to as kiting.
The difference between the Securities Act of 1933 and the Securities Act of 1934 is that
only the 1934 act requires audited financial statements.
All of the Big Four accounting firms and many of the smaller CPA firms now operate as
limited liability partnerships.
A company’s size should have no impact on the nature of internal control and the
controls that are implemented.
When an auditor has failed to conduct an adequate audit, liability may depend on the
level of negligence.
Misappropriation of assets is normally perpetrated at the lowest levels of the
organization hierarchy.
The cost of each type of evidence does not vary in different situations.
Business risks associated with financial instruments are the same for all companies.
CPAs must be independent to issue a review report.
Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should
appear as deposits on the cutoff bank statement.
One way to control sampling risk is to increase sample size.
Client imposed restrictions on the audit always require a disclaimer of opinion.
Flowcharts are harder to read aad update than narratives.
In pricing raw materials in manufactured products, auditors must consider both the unit
cost of the raw materials and the number of units required to manufacture a unit of
output.
A factor that increases inherent risk for financial instruments is the complexity of the
relevant accounting standards.
When using financial ratios, the most important comparisons are to those of previous
years for the company and to industry averages or similar companies for the same year.
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.
Which of the following is an accurate statement regarding sampling distribution?
A) A sampling distribution is a sample with characteristics the same as those of the
population.
B) Sampling distributions allow the auditor to make probability statements about the
likely representativeness of any sample that is in the distribution.
C) Each population exception rate and sample size has the same sampling distribution.
D) Auditors cannot use sampling distributions to draw statistical conclusions about the
unknown population being sampled.
The basic legal concept which was affirmed in the 1985 New York case, Credit
Alliance, was that
A) the auditor’s defense of privity of contract is still valid against third parties.
B) the auditor is liable for ordinary negligence to specifically foreseen third parties.
C) the auditor is liable for ordinary negligence to reasonably foreseeable third parties.
D) the auditor’s defense of contributory negligence is no longer valid.
An effective procedure to test for unfilled shipments is to trace from the
A) sales journal to the shipping documents.
B) shipping documents to the sales journal.
C) sales journal to the accounts receivable ledger.
D) sales journal to the general ledger sales account.
Because of its central role in auditing of accounts receivable, which of the following
would normally be one of the first items tested?
A) accounts receivable master file
B) customer file
C) aged trial balance
D) sales register
Internal auditors
A) must be independent of the entity that employs them.
B) generally report to the accounting department.
C) are employed by all types of organizations.
D) must be CPAs.
Which of the following is not completed during phase IV of the audit?
A) Obtain a client representation letter.
B) Read information in the annual report to make sure that it is consistent with the
financial statements.
C) Perform substantive tests of transactions.
D) Perform final analytical procedures.
In a WebTrust attestation engagement the client engages a CPA to provide what level of
assurance that the company’s website complies with Trust Services principles?
A) absolute
B) reasonable
C) limited
D) moderate
Which of the following statements is correct?
A) Auditors must obtain bank confirmations for audits of nonpublic entities.
B) Auditors are required to obtain bank confirmations under international auditing
standards.
C) Auditing standards do not address specific requirements regarding bank
confirmations.
D) Auditing standards do not require bank confirmations.
Presentation and disclosure related audit objectives would be performed in which phase
of the audit process?
A) plan and design audit approach
B) perform audit tests for controls and transactions
C) perform analytical procedures and tests of balances
D) complete the audit and issue the audit report
The Code of Conduct rule on independence indicates that materiality must be
considered when
A)
B)
C)
D)
If a company has an effective internal audit department,
A) the internal auditors can express an opinion on the fairness of the financial
statements.
B) their work cannot be used by the external auditors per PCAOB Standard 5.
C) it can reduce external audit costs by providing direct assistance to the external
auditors.
D) the internal auditors must be CPAs in order for the external auditors to rely on their
work.
A(n) ________ failure occurs when an auditor issues an erroneous opinion because it
failed to comply with requirements of auditing standards.
A) business
B) audit
C) ethics
D) process
Which of the following statements is true concerning the allocation of preliminary
materiality?
A) It is necessary to allocate preliminary materiality to financial statements as a whole
rather than by segments.
B) Preliminary materiality should be allocated to income statement accounts only.
C) Preliminary materiality is required by the SEC.
D) The PCAOB term used when preliminary materiality is allocated to segments is
tolerable misstatement.
The CPA must not subordinate his or her professional judgment to that of others in any
A) engagement.
B) audit engagement.
C) engagement excluding tax services.
D) engagement where the opinion of a specialist is used.
Which of the following most accurately describes constructive fraud?
A) absence of reasonable care
B) lack of slight care
C) knowledge and intent to deceive
D) extreme or unusual negligence without the intent to deceive
When an adverse opinion is issued, a scope paragraph would be
A) qualified.
B) unchanged.
C) deleted.
D) expanded to identify the additional procedures which the auditor performed.
Cutoff information for inventory acquisitions should be obtained during
A) the interim period prior to year-end.
B) the interim period immediately following year-end.
C) the physical observation of inventory.
D) either the interim period prior to or immediately following year-end.
Under the laws of agency, partners of a CPA firm may be liable for the work of others
on whom they rely. This would not include
A) employees of the CPA firm.
B) employees of the audit client.
C) other CPA firms engaged to do part of the audit work.
D) specialists employed by the CPA firm to provide technical advice on the audit.
Which of the following statements regarding the relevance of evidence is correct?
A) To be relevant, evidence must pertain to the audit objective of the evidence.
B) To be relevant, evidence must be persuasive.
C) To be relevant, evidence must relate to multiple audit objectives.
D) To be relevant, evidence must be derived from a system including effective internal
controls.
If tests of controls support the control risk assessment, then ________ in the audit risk
model is increased.
A) planned detection risk
B) planned inherent risk
C) planned fraud risk
D) planned assurance risk
If the CPA negligently failed to properly prepare and file a client’s tax return, the CPA
may be liable for
A) the penalties the client owes the IRS.
B) the penalties and interest the client owes.
C) the penalties and interest the client owes, plus the tax preparation fee the CPA
charged.
D) the penalties and interest, the tax preparation fee, and the amount of tax that was
underpaid.
Which of the following audit tests is usually the least costly to perform?
A) substantive analytical procedures
B) tests of controls
C) tests of balances
D) substantive tests of transactions
The AICPA’s Code of Professional Conduct requires independence for all
A) attestation engagements.
B) services performed by accountants in public practice.
C) accounting and auditing services performed.
D) professional work performed by CPAs.
If the auditor decides to reduce acceptable audit risk, planned detection risk
A) increases.
B) decreases.
C) stay the same.
D) cannot be determined.
A common inventory observation procedure is to be alert for items that are damaged,
rust- or dust-covered, or located in inappropriate places. The balance-related audit
objective being achieved by this procedure is
A) classification.
B) cutoff.
C) realizable value.
D) rights.
Refusal by a client to prepare and sign the representation letter would require the
auditor to issue a(n)
A) qualified opinion or a disclaimer of opinion.
B) adverse opinion or a disclaimer of opinion.
C) qualified or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.
International auditing standards and U.S. GAAP classify assertions into three
categories. Which of the following is not a category of assertions that management
makes about the accounting information in financial statements?
A) assertions about classes of transactions for the period under audit
B) assertions about account balances at period end
C) assertions about the quality of source documents used to prepare the financial
statements
D) assertions about presentation and disclosure
In the flow of inventory and costs, when work-in-progress is credited, ________ is (are)
debited.
A) raw materials
B) cost of goods sold
C) finished goods
D) direct labor
The word below that best explains the relationship between required sample size and
the acceptable risk of incorrect acceptance is
A) inverse.
B) direct.
C) proportional.
D) indeterminate.
The auditors primary purpose in auditing the client’s system of internal control over
financial reporting is
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company’s internal controls over all relevant
assertions in the financial statements.
C) to report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.
When evaluating the audit findings, the auditor should be satisfied that the
A) amount of known misstatement is documented in the management representation
letter.
B) estimate of the total known and likely misstatements is less than a material amount.
C) estimate of the total likely misstatement includes sample error.
D) amount of known misstatement is acknowledged and recorded by the client.
The primary factor affecting the auditor’s decision about acceptable risk of incorrect
acceptance (ARIA) is assessed inherent risk.