The purpose of summarizing confirmation results is to list the extent of sales tested in
relation to the response rate.
The SEC issued SAB 108 in 2006, which mandates what is termed a dual approachto
assessing uncorrected misstatements.
The inventory account does not require any subjective estimates by management.
The sample size decreases as the risk over over-reliance decreases.
One of the components of internal control, the control environment, is considered
pervasive and the auditor should start the evaluation of controls at this level.
Attribute sampling for testing controls should only be done by the auditor at the end of
the fiscal period under audit.
Management’s refusal to sign the management representation letter is considered a
scope limitation sufficient to preclude the issuance of an unqualified opinion.
Review activities that are completed towards the end of the audit are quite varied.
The lower the dollar amount of the performance materiality the more audit evidence is
required.
Disclosures can be made either on the face of the financial statements in the form of
classifications or in parenthetical notations and/or in the notes to the statements.
The SEC is the governmental body with the oversight responsibility for the efficient
operation of capital markets in the United States.
The subject matter of an attestation engagement has to be as of a point in time.
Supply chain management has helped many companies improve the efficiency of
operations.
Segregation of duties is a control activity that is designed to protect against the risk that
an individual could both perpetrate and cover up a fraud.
Valid evidence obtained in an audit for testing the cutoff of gross sales includes
receiving reports for returned merchandise.
Several significant deficiencies in internal controls may constitute a material weakness.
Sampling risk is defined as the risk that an inference drawn from a sample will be
incorrect.
Recalculation involves independently performing procedures or controls that were
originally performed by the client, such as reperforming a bank reconciliation.
When evaluating an MUS sample, if the auditor finds no misstatements in the sample,
the misstatement projection is zero dollars, and the total estimated misstatement will
equal the projected misstatement for items in lower-stratum.
The American Institute of Certified Public Accountants no longer retains the right to set
audit standards for any engagements as the Securities Exchange Commission has
relinquished such power.
The Public Company Accounting Oversight Board provides the criteria against which
the auditor measures the fairness of financial statement presentation.
An additional procedure related to subsequent events is the reading of the meeting
minutes for the board of directors meeting.
Stable relationships are expected between specific accounts (for example, cost of goods
sold and sales) that can be investigated for unusual discrepancies.
The SEC provides annual reports to the PCAOB.
Non-statistical samples should be based on the same audit considerations as those used
for statistical sampling.
Internal auditors are considered part of the audit committee.
Contingent fees are prohibited for any client for which the auditor performs audit
services, but are otherwise permitted.
An inherent risk related to long-lived assets is the incomplete recording of disposals.
An analysis of the client’s internal control over cash and marketable securities should
take place during the performance of the substantive tests on these accounts.
Audit procedures have to be announced or be completed at predictable times.
Audit tests do not relate to fraud testing because testing for fraud is conducted in a
separate engagement.
The auditor obtains the current market value of marketable securities by confirmation
with the holder of the security.
The SEC’s position is generally that if management refuses to correct a material
misstatement, then the auditor is obligated to issue a qualified or an adverse opinion on
the financial statements.
If the auditor decides that steps should be taken to prevent further reliance on the
financial statements and audit report due to subsequent events after issuance of the audit
report, the auditor should not try to obtain client cooperation, but should immediately
notify any regulatory agency having jurisdiction over the client, such as the SEC, that
the audit report should no longer be associated with the client’s financial statements.
The audit documentation when performing an engagement quality review should
include such information such as how much the firm paid for the review.
According to the AICPA, the purpose of an audit is to enhance the degree of confidence
that users can place in the financial statement.
There are systematic processes that the auditor can use in making most of the complex
judgments in the financial statements.
The internal audit profession adheres exclusively to standards set by the Public
Company Accounting Oversight Board.
The use of audit software makes the audit of the revenue cycle more effective, but not
more efficient.
All internal auditors are required to have the CIA designation in order to practice
internal auditing.
Management has been found involved in many fraudulent schemes; a common one is
“channel stuffing.” What does “channel stuffing” involve?
A.Overly complex transactions.
B.Growth through stock acquisitions.
C.Shipment of goods not ordered.
D.Management compensation schemes.
A key indicator of fraud in the revenue cycle is the auditor’s detection of which of the
following?
A.Customer collections that are over 90 days past due.
B.Credit entries in customer accounts receivable for authorized writeoffs.
C.Recurring entries in the sales journal.
D.Altered shipping documents and invoices.
An example of alternative procedures for the confirmation of accounts receivable
includes which of the following actions?
A.Inquiry of management.
B.Tracing source documents to recorded amounts.
C.Review of subsequent collections on account by the client.
D.Providing an estimate of the allowance for doubtful accounts to be recorded by the
client.
Which of the following statements about fraud is true?
A.Unless auditors can provide assurance that the financial statements are free of
material misstatements due to fraud, there is no justification for the audit function.
B.The AICPA has mandated that the auditor take on more responsibility than previously
required because of management’s demand for fraud detection.
C.It is the responsibility of the auditor to provide internal control over a client
organization sufficient to discover or prevent fraud from occurring.
D.Auditor-initiated fraud is a large concern of shareholders and the audit committee
must continually monitor the auditors to ensure they are not misstating financial
statements.
An “integrated audit” includes an audit of what?
A.The company’s internal controls.
B.The company’s financial statements.
C.The company’s compliance with its rules and policies.
D.Both A and B.
A compilation report provides the user with which one of the following types of
assurance?
A.No assurance.
B.Absolute assurance.
C.Limited assurance.
D.Negative assurance.
The reported fair market value of securities held by the client can be verified by the
auditor through which of the following procedures?
A.Comparing the values to those securities held by the auditing firm.
B.Confirming the fair values with the client as of the close of the year.
C.comparing the fair values with the fair values of similar securities.
D.comparing the fair values to credible publications and websites.
The Center for Audit Quality is dedicated to enhancing investor confidence in what?
A.The financial markets.
B.Management.
C.Auditors.
D.Both B and C.
E.All of the above.
Which of the following statements is true of external auditing?
A.Major focus areas are processes, including risks, controls, and effectiveness and
efficiency of processes.
B.External auditors perform both assurance and consulting services for public
companies.
C.Primary scope of services performed includes audits of financial statements.
D.The primary client for a public company is upper management.
The client makes estimates relative to recorded amounts in the financial statements.
Which of the following assumptions best represents the auditor’s primary focus
regarding the reasonableness of such estimates?
A.That historical trends are followed.
B.That income is managed.
C.That there is an adequate cushion.
D.That management reverses estimates when opportune.
Which of the following is not an AICPA standard of reporting for attestation
engagements?
A.The practitioner must identify the subject matter or the assertion being reported on
and state the character of the engagement in the report.
B.The practitioner must state the practitioner’s conclusion about the subject matter or
the assertion in relation to the criteria against which the subject matter was evaluated in
the report.
C.The practitioner must obtain sufficient evidence to provide a reasonable basis for the
conclusions that is expressed in the report.
D.The practitioner must state all of the practitioner’s significant reservations about the
engagement, the subject matter, and if applicable, the assertion related thereto in the
report.
Which of the following situations represents a risk factor that relates to misstatements
arising from misappropriation of assets?
A.A high turnover of senior management.
B.A lack of independent checks.
C.A strained relationship between management and the predecessor auditor.
D.An inability to generate cash flow from operations.
Under Rule 201, what best describes how an AIPCA member should act?
A.With professional competence.
B.With due professional care.
C.After adequate planning and with appropriate supervision.
D.All of the above
Which of the following models is associated with Level 3 in the FASB hierarchy for
ascertaining fair value?
A.Mark to market model.
B.Replacement model.
C.Mark to model.
D.Historical cost model.
Independence is not required for which of the following types of services?
A.Audits.
B.Reviews.
C.Consulting.
D.Attestation.
According to SAB 108, what approach is used when assessing uncorrected
misstatements?
A.Matrix approach.
B.Dual approach.
C.Percentage approach.
D.Judgmental approach.
What is the auditor trying to accomplish by varying the timing of audit procedures from
the prior year?
A.Introduce unpredictability.
B.Confuse the client.
C.Gather information during different times of the year.
D.Finish the audit sooner.
The PCAOB has authority over the AICPA.
The allowance for doubtful accounts will not be precise by either the client or the
auditor because of which of the following reasons?
A.It is an accounting estimate based upon judgment.
B.GAAP is not clear on the calculation of the allowance.
C.It is merely a reserve that is reversed by the client as income is needed for profitable
results.
D.The precision is determined by the results of confirmation responses.
Which of the following assertions would the auditor usually consider most relevant for
accounts payable?
A.Existence.
B.Valuation.
C.Disclosure.
D.Completeness.
A member of the AICPA must safeguard the confidentiality of client information.
Which of the following is not a valid reason to disclose information to non-clients?
A.To discuss information relating to inadequate disclosure in an audit report.
B.To comply with a validly issued and enforceable subpoena or summons.
C.To accommodate the review of client audit work papers under AICPA, PCAOB, or
State Board of Accountancy authority.
D.To explain to members of the press whether a client is likely to miss payroll in the
forthcoming periods.
Craig Marks, CPA performs an audit of Treasure, Inc., which keeps its financial
statements on the tax basis of accounting. Craig is aware of this fact and audits the
financial statements on the criteria of the tax basis. What type of engagement is this?
A.This engagement is not permitted by the AICPA.
B.This engagement is an audit that will result in the issuance of a special report.
C.This engagement is a compilation.
D.This engagement is only performed by tax accountants who do not provide attest
services.
Which of the following represents a situation in which auditors may disclose client
information to outside parties?
A.Bringing working papers to a professional CPA workshop as an example of quality
work.
B.Complying with a validly issued and enforceable subpoena or summons.
C.Showing the client’s bank statement to a neighbor who is a shareholder to emphasize
its cash position.
D.Explaining to the local television news station why the client is likely to miss payroll
in the forthcoming periods.
What must audit firms do to perform financial statement audits for public companies?
A.Register with the American Institute of Certified Public Accountants.
B.Register with the Institute of Internal Auditors.
C.Register with the U.S. General Accounting Office.
D.Register with the Public Company Accounting Oversight Board.
Incorrect acceptance is directly related to which of the following?
A.The efficiency of the audit.
B.The ineffectiveness of the audit.
C.The cost of the audit.
D.All of the above.
Management has developed cash management techniques for which of the following
reasons?
A.Increase the time to collect billings.
B.Reduce the amount of volume of cash transactions.
C.Automate the cash management process.
D.Increase the liquidity of cash balances.
Which concept is referred to as the cornerstone of auditing?
A.Due professional care.
B.Independence.
C.Technical training.
D.None of the above.
Among immediate family members, whose ownership of client’s stock is not considered
the same as the covered member’s ownership?
A.Spouse.
B.Dependent children.
C.Non-dependent children.
D.All are considered part of the covered members immediate family.
Which auditing standards apply to private companies?
A.The AICPA Standards.
B.The IASSB Standards.
C.The Standards of the PCAOB.
D.All of the above.
Which of the following statements is false?
A.Inherent risk is inversely related to the amount of audit evidence, whereas detection
risk is directly related to the amount of audit evidence required.
B.Inherent risk is directly related to evidence, whereas detection risk is inversely related
to the amount of audit evidence required.
C.Inherent risk is the susceptibility of the financial statements to material misstatement,
assuming no internal controls.
D.Inherent risk and control risk are assessed by the auditor and controlled by the client.
Which of the following would not be a reason to lower the threshold for materiality?
A.The auditor is concerned with potential violations of debt covenants.
B.There were proposed adjusting entries to a particular account in prior years.
C.The consequences of a potential misstatement in an account balance are very high.
D.The audit team wants to limit the amount of time spent at the client’s facilities.
When the auditor is unable to obtain sufficient appropriate evidence because the client
did not allow a procedure to be completed, which of the following would the report
most likely contain?
A.A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
B.A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C.A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D.A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
Which one of the following represents a control deficiency?
A.A missing control that is required for achievement of objectives.
B.A control that operates as designed.
C.A control that ensures the reliability of financial reporting.
D.A control that does not prevent immaterial errors.
Which of the following procedures is an inappropriate agreed-upon procedure?
A.Comparison of documents, schedules, or analyses.
B.Performance of mathematical computations.
C.Confirmation of specific information with third parties.
D.Evaluation of the competency or objectivity of another party.