Forensic accountants rely on the:
a. identify theft theory.
b. tax evasion theory.
c. vendor fraud theory.
d. fraud triangle theory.
e. customer fraud theory.
An audit report may need to be reissued if:
a. the auditor is replaced and the subsequent auditor refuses to rely on the predecessor
auditor’s work.
b. the predecessor auditor relies wholly on the work of the successor auditor.
c. the successor auditor requests that the predecessor auditor issue an audit report on the
previous year’s financial statements, presented for comparative purposes.
d. depending on the circumstances, the auditor may choose any of the above.
Which of the following is NOT a transaction cycle?
a. Cash receipts.
b. Inventory.
c. Cash disbursements.
d. All are transaction cycles.
Which of the following is the not-for-profit entity structured by the SEC in response to
the Sarbanes-Oxley Act to oversee the auditors and audits of public companies?
A. FASB.
B. AICPA.
C. IASB.
D. PCAOB.
The different reasons for testing highlight the importance of good audit:
a. efficiency.
b. planning.
c. effectiveness.
d. control.
e. design.
Inquiry of a client’s lawyer:
a. is required by GAAS.
b. requests that the lawyer identify the nature and reason for any limitation on her
response.
c. requires disclosure of any omission made by management in identifying existing and
pending litigation.
d. All of the above.
Substantive analytical procedures for payroll include:
a. comparing compensation expense account balances with prior year and budget.
b. comparing compensation expense as a percent of total expense.
c. comparing compensation expense as a percent of total sales.
d. All of the above.
If audit tests are performed at an interim date, supplemental audit evidence:
(a) is not necessary because the same controls are assumed to be in place that resulted
in the balances tested during interim.
(b) is still needed regarding the account balances between the interim testing date and
the end of the fiscal year.
(c) is obtained from the predecessor auditor, when needed to corroborate any changes in
the client’s ICFR systems.
(d) is the responsibility of the audit committee, as it would be inefficient for the auditors
to focus on a single audit area during multiple time periods.
Health-care providers sell a:
a. product.
b. drink.
c. food.
d. way of life.
e. service.
Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second
requests?
a. Inspect the shipping records documenting the merchandise sold to the debtors.
b. Review the cash receipts journal for the month prior to the year-end.
c. Intensify the study of the internal control structure concerning the revenue cycle.
d. Increase the assessed level of detection risk for the existence assertion.
e. Trace the cash disbursements journal for the month prior to the year-end.
A covered member (i.e., the auditor) will be considered independent from the client if
his or her close relative:
A. has a direct financial interest in the client.
B. is an employee of the client in a key position.
C. has a financial interest in a client that allows the relative to have an insignificant
influence over the activities of the client.
D. has a material indirect financial interest in a client.
Company A hired Q to perform its year-end audit. Subsequent to the completion of field
work, but prior to the issuance of the financial statements, A discovers that one of its
customers has filed for bankruptcy protection. Assume that Q decides to perform
additional work to determine the affect of the bankrupt customer on A’s financial
statements, then Q:
a. should issue a dual-dated report.
b. should expand the testing procedures and wrap-up work in order to extend the report
date.
c. amend the financial statements with a footnote and issue the audit report as planned.
d. Either “a” or “b” depending on the amount of additional testing performed.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most
likely reviews the entity’s aging of receivables to support management’s financial
statement assertion of:
a. existence.
b. completeness.
c. rights and obligations.
d. valuation or allocation.
e. occurrence.
While auditing a client’s inventory processes, an auditor computes the gross profit
margin ratio and compares it to prior years and budgeted amounts. If the result indicates
that the gross profit margin has increased since the prior year and exceeds the budget, it
is likely that:
a. ending inventory is overstated and cost of goods sold is understated.
b. both inventory and cost of goods sold is overstated.
c. both inventory and cost of goods sold is understated.
d. ending inventory is understated and cost of goods sold is overstated.
The simplest retail transaction is one for:
a. credit, in which the customer uses a credit card.
b. cash, in which the customer exchanges cash for goods at the point of sale.
c. credit, in which the customer uses a debit card.
d. cash, in which the customer writes a check.
e. a combination of a cash down payment and credit.
Section 105(c)(4) of SOX:
a. Gives the PCAOB the authority to assess penalties against public accounting firms or
individual auditors.
b. Requires the PCAOB to inspect public accounting firms that audit public companies.
c. Gives the PCAOB the power to issue subpoenas.
d. All of the above.
For the following tests, list the assertion(s) it addresses. Answers may have more than
one assertion.
ASSERTIONS:
1> Existence or occurrence
2> Completeness
3> Rights and obligations
4> Valuation or allocation
5> Presentation and disclosure
6> Authorization
7> Cut-off
a. Examine a sample of document packages for inclusion of appropriate supporting
documents.
b. Examine a sample of documents supporting paid invoices and trace to the appropriate
journal/ledger.
c. Trace entries in the general ledger to the appropriate subsidiary ledger and to the
supporting documentation.
d. Account for the numeric sequence of purchase orders.
e. Examine evidence that the accounts payable subsidiary ledger is reconciled to the
general ledger. Answer sheet says 5 – Presentation & Disclosure. While I have
commented on earlier questions of this nature (#52 & #69), the suggested answer for
those questions was 2 ” Completeness.
f. Review how overhead is calculated, paying particular attention to product versus
period costs.
g. Review a sample of ACH transactions (electronic payments) to determine who can
release such transactions for payment.
h. Review the controls surrounding automatic posting of receiving reports to the
inventory account.Answer sheet says answers are 1, 2, & 4. Disagree with 4 ” valuation
since receiving reports do not include dollar amounts. Receiving reports post to
perpetual inventory systems, not to the ledger. Inventory accounts are posted resulting
from payment of invoices or posting transfers between inventory accounts. Quantities
in perpetual inventory are price extended in order to reconcile to the ledger.
i. Test the numerical accuracy of cash disbursements by tracing a sample to the
supporting purchase order. Answer sheet says answer is 4 ” valuation. Disagree that this
is the best answer. Primary function of the purchase order is authorization
documentation. A proper valuation test of disbursements requires comparison to the
payment support package.
j. Test the accuracy of postings to the general ledger by reviewing supporting
documentation on a sample basis. Answer sheet says answers are 5 & 7. Vouching
(ledger to supporting documents) is a test of existence. Best answer is 1; answer 5 is
also possible. I disagree with answer 7 ” cut-off.
k. Trace receiving reports and supplier invoices to the accounts payable subsidiary
ledger.
l. Use CAAT to check the clerical accuracy of the cash disbursements journal and trace
these amounts to the general ledger.
The audit engagement team consists of:
a. more than one partner.
b. associates and seniors.
c. managers.
d. All of the above.
Place one or more of the following terms on the line for each phrase below. You may
use each term more than once or not at all.
A. Procedures
B. OCBOA
C. Audit committee
D. ICFR audit
E. Integrated audit
F. Evidence
G. AS
H. Forensic accounting
I. Internal auditing
J. FASB
K. Errors
L. External financial relations committee
M. Review engagement
N. SFAS
O. SAS
P. GAO
Q. Fraud
R. Operational auditing
S. External financial relations committee
T. Attest engagement
U. PCAOB
V. COSO
1> A subset of the Board of Directors that, for a public company, has direct
responsibility for hiring, compensation and oversight of the external auditor.
2> An examination in which an auditor assesses and reports on the effectiveness of a
company’s internal controls.
3> Client-related information used by the auditor to come to an audit conclusion.
4> Using client information in engagements related to fraud, business valuation and
legal disputes.
5> An accepted basis of accounting that differs from GAAP.
6> Deals only with efficiency and effectiveness issues.
7> Results in misstated financial statements.
8> Entity that has produced one of the frameworks of internal control over financial
reporting that is used by management and auditors.
9> The set of audit standards that must be followed when auditing public companies.
10> An example is the activities required by the federal government for loans
associated with the “Term Asset-Backed Securities Loan Facility” (TALF).
The Sarbanes-Oxley Act of 2002 (SOX):
a. Sets auditor penalties in sections 104 and 105.
b. Requires the PCAOB to inspect public accounting firms that audit public companies.
c. Requires an annual audit for all publically traded companies.
d. Both a and b.
Which of the following is not true regarding the performance of a walkthrough?
(a) It is a type of ICFR consisting of a set of related procedures that are performed
together for the purpose of identifying important control points or deficiencies in
controls.
(b) The auditor follows a transaction from origination through the processes and
information systems until it is recorded in the accounting books.
(c) It combines the audit procedures of tracing, inquiry, and observation.
(d) It is an efficient way for an auditor to test the operating effectiveness of controls.
The human resource department:
a. hires and fires employees.
b. oversees the employees’ work.
c. is charged with authorizing changes to the payroll master file.
d. None of the above.
The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees is known for making recommendations to audit committees concerning:
(a) composition of the committee, communication requirements, and oversight
responsibilities.
(b) qualifications of the committee, timing of their terms, and specific corrections in
ICFR systems.
(c) SEC filing deadlines, stock exchange requirements, and qualifications of
membership.
(d) liquidity of the capital markets, types of SEC affiliations and reporting forms, and
compensation requirements.
Regarding the PCAOB, which of the following is INCORRECT? The PCAOB:
a. Is responsible for oversight of audit firms engaged in the audit of public companies.
b. Issues standards that govern audits of public companies.
c. Is a not-for-profit entity.
d. Has authority that is equal in power to the SEC.
The ICFR for the procurement process is:
a. especially critical for manufacturing industries.
b. especially critical in the automotive industry.
c. especially critical in an industry with a high degree of production.
d. All of the above.
For each of the following accounts, list the five management assertions from most to
least important for that account. State the reason justifying your order. Cash is
completed as an example.
(a) Cash (in home currency)
1> Existence
2> Rights
3> Presentation and disclosure
4> Completeness
5> Valuation
If cash does not exist, then none of the other assertions matter. However, even if cash is
found to exist, it has to be owned by the company claiming it. Various disclosures can
be required for cash, for example, if it is committed as a compensating balance.
Completeness is not a big audit risk because it is unlikely that management would not
report cash or that any amount omitted is material. Cash is reported at face value, so
valuation is not an issue for cash unless it is in a foreign currency.
(b) Long term debt
(c) Officer salary expense paid through stock options
(d) Sales revenue
(e) Accounts receivable
(f) Property, plant and equipment
Financial statement restatements:
(a) are a strong indicator of material weakness in ICFR when they are undertaken for
the purpose of correcting an error in previously issued financial statements.
(b) may not be considered significant when they are the result of more evidence
becoming available after the financial statements have been released.
(c) are required to be disclosed in the financial reports, as well as in the financial press.
(d) All of the above.
Forensic accounting stands apart from other career tracks in accounting and auditing
because of its:
a. current enthusiasm.
b. unique aspects.
c. head start.
d. places to go.
e. evidence evaluation.
An activity that complicates sales transactions involves the shipment of goods to the
customer rather than the customer taking the goods at the time of sale. The shipping
process requires that the seller:
a. restocks the shelves.
b. makes online adjustments.
c. removes goods from storage.
d. programs the credit sales flows.
“Fraud on the Market” theory holds that:
a. The auditor need not be liable for damages if the market ignored the audit report.
b. The auditor is liable for damages to those who relied on financial statements it
audited that contained a material misstatement.
c. The plaintiffs do not have to show they relied on the financial statements, but merely
that the market used the information contained in the financial statements to affect the
stock price.
d. Both a and b.
The moral philosophy that states “right is whatever creates the greatest good” justifies
the application of progressive income taxes in the United States.
When state and local governments receive funds from the United States government,
they are held accountable for the expenditures they make using those funds.
A client company’s new or modified accounting information system requires more audit
effort to understand the new system and assess its design and operating effectiveness.
A forensic accountant performs a fraud investigation with the same mind-set as an
accountant working on an audit.
How can the language of an unqualified ICFR audit report be modified and for what
reasons?
An audit strategy will focus on going concern issues for a client company operating in
an industry which has experienced a recent market downturn.
Auditors are responsible for setting up procedures for a physical inventory count that
will be observed by management
For each of the following assertions below, indicate how you would audit it, specifying
both the type of test to be performed, (e.g. substantive analytical review) and the details
as to what you would examine.
COMPLETENESS
RIGHTS AND OBLIGATIONS
CUT-OFF
AUTHORIZATION
COMPLETENESS
EXISTENCE
PRESENTATION AND DISCLOSURE
VALUATION/ALLOCATION
Computers are the primary resources used on an audit.
AS #4 stipulates ways in which auditors can use electronic tools in their audit.
Evidence outside the company’s financial records can be helpful in identifying events
that motivate fraud.
Tests of details of balances provide evidence about whether ICFR is operating as
designed and whether the control is being performed by someone with appropriate
authority and qualifications.
Substantive testing can be reduced as a result of ITGC testing performed at year-end.
The answer from the defendant might include an argument that the plaintiff does not
have standing.
Direct tracing is a cost accounting technique for tracking individual costs associated
with a manufactured product or production process.
Cut-off determines the period in which the transaction is recorded.
The term “privity” is an example of the relationship between auditor and plaintiff.
Since much of a health-care provider’s collections are paid by third-party payers, it is
not important that the seller (the health-care provider) verify the patient’s insurance
coverage before providing services.
If the unadjusted difference resulting from projecting the error rate to the account
balance is less than the tolerable misstatement, the auditor may choose to ignore the
error.