Whenever a company refuses to allow business professionals to communicate openly
with an auditor, the auditor should be concerned about the likelihood that:
(a) a RFP was not formalized.
(b) information exists that the company wants to withhold.
(c) management is centralized.
(d) the company is experiencing rapid growth.
The service provider needs to:
a. enforce input controls to detect discrepancies between client and service provider.
b. oversee user company personnel on its computers.
c. review the employees granted access to its system by the user company.
d. All of the above.
Punitive damages are:
a. Added to compensatory damages in setting total damages.
b. Only assessed in cases where the auditor is guilty of fraud.
c. Assessed at the discretion of the jury.
d. All of the above.
Substantive analytical procedures for long-term debt include:
(a) recalculating interest expense based on overall terms of debt.
(b) comparing interest expense with prior year amount.
(c) calculate times interest earned ratio.
(d) All of the above.
Which of the following helps to ensure that transactions are posted in the correct
period?
a. Reconciliation of vendor invoices to the payment authorization.
b. Reconciliation of the bank statement.
c. Reconciliation of the cash disbursements journal to the accounts payable subsidiary
ledger.
d. All of the above.
For each scenario below, indicate which element of the fraud triangle is present.
(a) Large amounts of cash are on hand.
(b) Management failed to correct ICFR deficiencies in a timely manner.
(c) The organizational structure is complex and lines or authority are unclear.
(d) Future employee layoffs are expected.
(e) Employee behavior suggests dissatisfaction with the company.
(f) Restrictions on the auditor limit access to evidence.
(g) Management attempts to influence the scope of the audit work.
(h) Industry factors threaten the company’s financial stability.
(i) Significant related party transactions are audited by another firm.
(j) The personal financial situation of management is threatened.
An auditor selects a sample using a random number generator, even though she believes
the account being audited presents increased risk. This is a violation of:
(a) professional care.
(b) professional skepticism.
(c) Both a and b.
(d) Neither a nor b.
Confirmations by an outside third party to the auditor include confirmations from:
a. suppliers.
b. the SEC.
c. consignees.
d. patients.
e. the IRS.
Which of the following is not one of the operating benefits provided by a strong system
of internal controls?
(a) Streamlining accounting and financial information systems.
(b) Improving the company’s financial activities.
(c) Identifying procedures that are not cost effective.
(d) Isolating transactions that generate significant profits or losses.
Health-care providers exemplify the revenue and collections transactions cycle because
their activities include all of the following except:
a. sales of services.
b. sales settled via cash.
c. sales that are billed to individuals.
d. All of the choices are correct.
An engagement letter for an audit:
(a) provides recommendations to management about improvements in its system of
ICFR.
(b) distinguishes management’s responsibilities throughout the audit process from the
auditor’s.
(c) specifies the high risk areas that will be the focus of the audit engagement.
(d) specifies the type of audit opinion that will be issued.
Equity investments:
(a) are carried at fair value on the balance sheet.
(b) are carried at cost on the balance sheet.
(c) are accounted for using the equity method or consolidation.
(d) any of the above based on management’s intentions.
An auditor concludes that the internal controls are operating effectively when in fact
they are not. This most likely would result in:
(a) reduced audit testing.
(b) increased detection risk.
(c) increased audit risk.
(d) All of the above.
Planning an audit involves which of the following steps:
(a) risk assessment.
(b) collecting information concerning the client’s information system.
(c) collecting information about the client.
(d) All of the above.
A key position is one in which an individual:
A. has the ability to exercise influence over the contents of the financial statements.
B. has primary responsibility for the preparation of the financial statements.
C. has a primary responsibility for significant functions that support material
components of the financial statements.
D. All of the above.
Who is responsible for compliance with SOX section 404:
a. management.
b. the auditors.
c. both management and the auditors.
d. It depends on the specifics.
Internal auditors may not perform:
a. Audits of financial statements resulting in reports intended for management’s use
only.
b. Forensic audits.
c. Integrated audits leading to an audit opinion issued in accordance with AICPA or
PCAOB standards.
d. All of the above.
The Institute of Internal Auditors standards are grouped under 2 broad categories.
A. Briefly list and explain the categories of the internal auditing standards.
B. Within each category there are special standards written for specific types of audits.
What are the 2 types of special standards?
Absolute assurance:
(a) is desired and strived for by auditors.
(b) is not cost-effective.
(c) is not possible given the estimation of many numbers in the financial statements.
(d) Both b and c.
How would you detect that purchase transactions have not been properly recorded in
the correct time period?
a. Trace receiving reports to supplier invoices.
b. Compare the dates on the receiving tickets.
c. Trace unmatched receiving reports to the appropriate journal or ledger.
d. Both a and c.
Near privity differs from privity in that:
a. The plaintiff has standing in cases where the wrongdoing is less severe than fraud.
b. The auditor must know the plaintiff.
c. The plaintiff must show that (s)he relied on the financial statements.
d. All of the above.
Identify and list the company controls in place related to purchase transactions and cash
disbursements.
(a) For each control identified:
– state the purpose of the control.
– state which management assertion(s) are related to the control.
– list the procedures and documents needed to test the control.
(b)What are some additional controls that could be implemented to improve
Raptor Manufacturing’s control environment pertaining to its purchases and cash
disbursements cycle?
When well-maintained perpetual inventory records are verified periodically by the
client by comparisons with physical counts, what is the appropriate timing of the
auditor’s observation procedures?
a. Either during the period under audit or at the balance sheet date.
b. Either during or after the end of the period under audit.
c. Only at the balance sheet date.
d. Only during the end of the period under audit.
To which of the following would AICPA attest standards not apply?
a. SSARs.
b. Elder care.
c. Loans under TALF.
d. Internal control for a nonpublic company.
If a jury “finds for the defendant,” then:
a. The auditor must pay the damages awarded.
b. The plaintiff must pay the damages.
c. The auditor may appeal.
d. The plaintiff may appeal.
Under the joint and severally liable theory, if there are three defendants and defendant 1
goes bankrupt, then defendants 2 and 3 are:
a. Each liable for one-third of the amount.
b. Each liable for one-half the amount.
c. Both liable for the full amount, although each only has to pay half assuming both can
pay.
d. None of the above.
Which of the following items is not one of management’s responsibilities for
communicating with the auditors?
(a) Suspected fraudulent activities within the company.
(b) Deficiencies in the design or operating effectiveness of ICFR.
(c) Key accounts and transactions to be selected for testing.
(d) Violations of regulations applicable to the company’s activities.
In auditing a defined benefit plan, the auditor must:
(a) recalculate the over- or under- funded status of the plan.
(b) trace the amount shown as pension expense to the cash journal.
(c) determine if any gains or losses need to be disclosed.
(d) All of the above.
An auditor tests a sample of transactions for proper authorization. Assume the auditor
performs test of transactions and concludes that the authorization control is operating
effectively when in fact it is not, this is termed:
(a) sampling error.
(b) sampling risk.
(c) detection error.
(d) All of the above.
Tests of controls over the authorization assertion for long-term debt would include:
(a) reviewing the minutes of the board of directors meetings.
(b) tracing new debt issuances to the appropriate ledger.
(c) tracing cash received from debt to the cash receipts journal and general ledger.
(d) All of the above.
If Fraud on the Market Theory prevails, then which of the following is likely to occur:
a. More findings of negligence on the part of juries.
b. Greater punitive damages awarded by juries.
c. Increased audit fees to cover increased costs of litigation.
d. Both a and c.
For purposes of an integrated audit, materiality is assessed within the context of users
who have
(a) appropriate knowledge of business and economic activities
(b) an understanding that financial statements are prepared and audited to levels of
materiality
(c) the ability to make appropriate economic decisions on the basis of information in the
financial statements
(d) all of the above
Match the following control objectives below with the appropriate test of controls.
1> To ensure that inventories are physically protected from theft or damage
2> To ensure that inventory exists
3> To ensure that inventory in the production process is properly included in the
work-in-process records
4> To ensure that the work-in-process and finished goods inventory records are updated
when production is completed
5> To ensure that cost accounting procedures are accurate
6> To ensure that physical inventory counting procedures are proper
7> To ensure that the correct result of the physical count, in conjunction with cost
information, is used to update the accounting records
8> To ensure that policies for assessing inventory valuation are appropriate
(a) _____ Inspect documentation and reperform calculations of inventory value to
identify and evaluation declines in value.
(b) _____ Select a sample of inventory for which production is complete and examine
physical and documentary evidence showing that the items were transferred.
(c) _____ Select a sample of work-in-process inventory and trace to the inventory
records and supporting documents from purchasing and payroll.
(d) _____ Review management’s policies for making estimates for reasonableness of
underlying assumptions, relevant factors, and process.
(e) _____ Select samples from each category of inventory records and inspect the goods
for physical existence and consistency with the category of inventory records.
(f) _____ Tour the storage and production facilities and observe the security procedures
being used for inventory.
(g) _____ Evaluate whether management’s inventory count controls and procedures are
appropriate and observe inventory counting to assess whether the procedures are being
followed.
(h) _____ Test the mathematical accuracy of any calculations performed on the results
of the inventory count.
Substantive analytical procedures over stock transactions include:
(a) calculation of fully diluted EPS.
(b) calculation of dividend payout ratio.
(c) calculation of debt to equity.
(d) All of the above.
The absence of sufficiently documented evidence to support management’s assessment
of the operating effectiveness of ICFR is a(n):
(a) material weakness that would require the auditor to withdraw from the audit
engagement.
(b) internal control deficiency that could preclude the issuance of an unqualified audit
report.
(c) matter of concern only to the company’s audit committee, predecessor auditors, and
internal auditors.
(d) example of the effective operation of the company’s document retention policy.
The SOX Act has not affected the workload of internal auditors.
During the audit of a major division, an auditor interviewed an accounting clerk. The
clerk tells the auditor that she believes that the division has been capitalizing research
and development expenses (GAAP requires that all R & D costs be charged to ordinary
expense in the period in which they are incurred). R & D is a significant part of the
division’s budget. If found to be true, the division may have to expense millions of
dollars previously capitalized and significantly reduce its operating profit. The auditor
has not performed any testing to determine if this problem actually exists, but has
discussed the potential problem with the division controller and the Director of Internal
Audit.
The following day the Director of Internal Audit received the following e-mail from the
company president:
“The controller of Division B informs me that you have discovered a questionable
account classification dealing with research and development expense. I am aware of
the issue. You are directed to discontinue any further investigation of this matter until
informed by me to proceed. Under the confidentiality standard of your profession, I also
direct you not to discuss this matter with other managers, the audit committee, or the
outside auditors.”
You are the Director of Internal Audit. Write a short memo in response to the president’s
e-mail. Be sure to explain the position you are taking and why this position is
appropriate.
Deciding that internal controls are effective when they in fact they are not is an example
of assessing control risk too high.
If management has presented the actual economic events and situation according to the
accounting standards, then there is a high degree of correspondence between the
underlying evidence and the resulting financial statements.
Tests of balances is achieved by confirming accounts payable.
How does the auditor’s approach and emphasis in auditing assets differ from auditing
liabilities? Compare and contrast the objectives in the audit of current assets to those in
the audit of current liabilities.
Your chapter discussed the AICPA Principles of Professional Conduct. Identify and
describe the six principles.
Sampling errors are caused when the auditor tests the wrong documentation.
The auditor evaluates ICFR to determine whether it operates effectively.
One reason for negligence is that the auditor failed to follow GAAS.
Hobson Brothers, Inc., engaged Young, Simpson, and Norris, CPAs, to compile their
financial statements from books and records maintained by Jim Hobson, one of the
principals in the business. The Hobsons own and operate three
airconditioning businesses in Kansas City.Although the business is growing, they
have not employed a full-time bookkeeper. Jim indicates that he wants a balance
sheet, a statement of operations, and a statement of cash flows. He is unable to
provide footnotes to accompany the statement because he is too busy in the operation of
the business. Jim directed the physical count of inventory on March 31, 2011, and
then adjusted and closed the books on that date. The auditors find that Jim is a pretty
good accountant and has taken a few university accounting courses. The records
appear to have been maintained in accordance with GAAP and they find no obvious
errors.
Prepare a compilation services report that Young, Simpson, and Norris, CPAs,
might issue.
The AICPA guidance defines fourteen management assertions, and the PCAOB
standards utilize six.
Payroll should be notified first when an employee leaves the company.
Only payments made by paper check are posted in the cash disbursements journal.
What types of audit reports are issued for financial statement audits? Are all of those
types of reports likely to be issued for audits of public companies? If not, which ones
are not likely used and why?
Accurate posting of accounts receivable subsidiary ledgers is important.
Authorization for the cash sale should come from a source that is independent of the
person completing the sale.
List the steps required in client acceptance, in exact order. Also include important
factors the auditor would consider in deciding whether or not to accept the client.
Deciding that internal controls are not effective when they in fact they are is an example
of assessing control risk too low.