On March 15, 2015, Kent, CPA, issued an unqualified opinion on a client’s audited
financial statements for the year ended December 31, 2014. On May 4, 2015, Kent’s
internal inspection program disclosed that engagement personnel failed to observe the
client’s physical inventory. Omission of this procedure impairs Kent’s present ability to
support the unqualified opinion. If the stockholders are currently relying on the opinion,
Kent should first
A. advise management to disclose to the stockholders that Kent’s unqualified opinion
should not be relied on.
B. undertake to apply alternative procedures that would provide a satisfactory basis for
the opinion.
C. reissue the auditors’ reports and add an explanatory paragraph describing the
departure from generally accepted auditing standards.
D. compensate for the omitted procedure by performing tests of controls to reduce audit
risk to a sufficiently low level.
In confirming a client’s accounts receivable in prior years, an auditor discovered many
differences between recorded account balances and confirmation replies. These
differences were resolved and were not misstatements. In defining the sampling unit for
the current year’s audit, the auditor most likely would choose
A. customers with credit balances.
B. small account balances.
C. individual overdue balances.
D. individual invoices.
“Are interest payments and accruals monitored for due dates and financial statement
dates?” is an internal control questionnaire item that is related to the ASB transaction
assertion of
A. occurrence.
B. completeness.
C. cutoff.
D. accuracy.
Cutoff tests designed to detect credit sales made before the end of the year that have
been recorded in the subsequent year provide assurance about management’s assertion
of
A. presentation and disclosure.
B. completeness.
C. rights and obligations.
D. existence.
Pronouncements issued by the Public Company Accounting Oversight Board are
subject to formal approval by the
A. American Institute of Certified Public Accountants.
B. Auditing Standards Board.
C. International Auditing and Assurance Standards Board.
D. Securities and Exchange Commission.
Assurance services involve all of the following, except
A. relevance as well as the reliability of information.
B. nonfinancial information as well as traditional financial statements.
C. providing absolute rather than reasonable assurance.
D. electronic databases as well as printed reports.
In auditing accrued liabilities, an auditor’s procedures most likely would focus primarily
on management’s assertion of
A. existence or occurrence.
B. completeness.
C. presentation and disclosure.
D. valuation or allocation.
When performing attributes sampling, the appropriate AICPA Sample Size table is
initially selected based on the auditors’ assessment of the
A. risk of overreliance.
B. risk of underreliance.
C. tolerable rate of deviation.
D. expected population deviation rate.
Which of the following sampling risks is associated with the use of variables sampling?
A. Risk of assessing control risk too high: Yes; Risk of incorrect rejection: Yes
B. Risk of assessing control risk too high: Yes; Risk of incorrect rejection: No
C. Risk of assessing control risk too high: No; Risk of incorrect rejection: Yes
D. Risk of assessing control risk too high: No; Risk of incorrect rejection: No
The existence of audit risk is recognized by the statement in the auditor’s standard
report that the
A. auditor is responsible for expressing an opinion on the financial statements, which
are the responsibility of management.
B. financial statements are presented fairly, in all material respects, in conformity with
applicable financial reporting framework.
C. audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. auditor obtains reasonable assurance about whether the financial statements are free
of material misstatement.
In classical variables sampling, a measure of the variability of the population is known
as the
A. sampling average.
B. tolerable misstatement.
C. standard deviation.
D. tainting percentage.
When a client company does not maintain its own capital stock records, the auditors
should obtain written confirmation from the transfer agent and registrar concerning.
A. Restrictions on the payment of dividends.
B. The number of shares issued and outstanding.
C. Guarantees of preferred stock liquidation value.
D. The number of shares subject to agreements to repurchase.
After performing work in a compliance attestation engagement and finding that a
governmental agency’s managers failed to install and perform even the most elementary
controls to ensure compliance with laws and regulations and, in fact, committed
numerous violations, an auditor most likely would
A. write an adverse report on actual compliance.
B. write an unqualified report on actual compliance.
C. write a report modified to disclose particular noncompliance events (specific
violations of laws and regulations).
D. write a disclaimer of opinion related to knowledge of noncompliance.
All corporate capital stock transactions should ultimately be traced to the
A. minutes of the meetings of the board of directors.
B. cash receipts journal.
C. cash disbursements journal.
D. numbered stock certificates.
Jones, CPA, used a classical variables sampling application to examine the inventory
balance of XYZ Company. The recorded value of the inventory was $240,000, and
Jones determined a tolerable misstatement of $12,000. Jones’ sampling procedures
resulted in a precision interval of $224,000 to $236,000. As a result, Jones should
conclude that the
A. inventory balance is fairly stated.
B. inventory balance is materially misstated.
C. tolerable misstatement should be increased.
D. risk of incorrect acceptance is below the desired level.
Which of the following would be an indicator of potential fraud?
A. Photocopies of invoices in the voucher file.
B. Vendor invoices in numerical order.
C. Vendors with only post office box addresses.
D. All of the above indicate potential fraud.
Holmes & Smith LLP were engaged to audit the financial statements of Sodolak Reality
for the year ended December 31. During the engagement, Sodolak filed a lawsuit
against Holmes & Smith LLP. What effect, if any, will this lawsuit have on the auditors’
report?
A. The report should be modified to include an emphasis-of-matter paragraph
describing the pending litigation.
B. A disclaimer of opinion should be issued because the auditors’ independence is
impaired.
C. The litigation will not have any impact on the report or auditors’ independence unless
Holmes & Smith are found guilty.
D. A qualified or adverse opinion should be issued depending on the severity of the
lawsuit.
Which of the following allow the auditor to limit the exposure to sampling risk?
A. Determining an appropriate sample size: Yes; Performing an appropriate audit
procedure: Yes
B. Determining an appropriate sample size: Yes; Performing an appropriate audit
procedure: No
C. Determining an appropriate sample size: No; Performing an appropriate audit
procedure: Yes
D. Determining an appropriate sample size: No; Performing an appropriate audit
procedure: No
Generally accepted government auditing standards (GAGAS) regarding performance
reporting standards requires the reports to tell about which of the following?
A. Presentation of financial statements in accordance with GAAP and abuse of public
money and property.
B. Presentation of financial statements in accordance with GAAP and internal control
design and strength of operation.
C. Abuse of public money and property and management’s noteworthy positive
accomplishments.
D. Abuse of public money and property and internal control design and strength of
operation.
The role of the Public Company Accounting Oversight Board in the standard-setting
process is to develop
A. Statements on Auditing Standards for the audits of nonpublic entities.
B. Auditing Standards for the audits of public entities.
C. Governmental Auditing Standards for the audits of governmental entities.
D. International Standards on Auditing for the audits of foreign entities.
An auditor wishes to perform tests of controls on a client’s purchasing procedures. If the
control activities leave no audit trail of documentary evidence, the auditor most likely
will test the procedures by
A. confirmation and observation.
B. observation and inquiry.
C. analytical procedures and confirmation.
D. inquiry and analytical procedures.
“Bill and hold” refers to an arrangement where
A. sales are recorded but are not shipped.
B. sales are shipped but are not recorded.
C. sales are billed but not collected.
D. inventory is held but not billed.
When bringing suit against auditors under section 10(b) of the Securities Exchange Act
of 1934, plaintiffs must allege and prove
A. the financial statements in the offering registration filing contained a material
misstatement.
B. auditors were aware of material misstatements in the financial statements.
C. auditors were guilty of ordinary negligence and failed to discover material
misstatements in the financial statements.
D. the plaintiffs purchased the specific securities through a public offering and thus
have a right to sue.
Which of the following is an element of a system of quality control that should be
considered by a public accounting firm in establishing its quality control policies and
procedures?
A. Lending credibility to a client’s financial statements
B. Using statistical sampling techniques
C. Acceptance and continuance of client relationships and specific engagements
D. Membership in the Center for Public Company Audit Firms
Which of the following is NOT a restriction placed on audit partners by
Sarbanes-Oxley?
A. Limits engagement partners to a five-year term as the engagement partner.
B. Limits other partners associated with the engagement to a seven-year term.
C. Engagement partners must review nonaudit work to insure that independence has not
been compromised.
D. Partners that engage in selling services, other than audit, review, and attestation
services, to an audit client are not independent with respect to that client.
A client’s inventory is recorded at $300,000 and is comprised of 1,000 items. If auditors
examined a sample of 200 items and found a total misstatement of $20,000
(overstatement), what is the estimated audited balance for inventory?
A. $20,000
B. $100,000
C. $200,000
D. $400,000
For each of the situations below, indicate, by letter, the type of report most likely to be
issued.
A. Unmodified opinion, no modification.
B. Unmodified opinion, emphasis-of-matter paragraph for consistency.
C. Unmodified opinion, emphasis-of-matter paragraph for a going-concern uncertainty.
D. Qualified opinion.
E. Disclaimer of opinion.
___ 1. The entity has a lawsuit pending against them. There is significant uncertainty
about the outcome of the lawsuit, which could have a highly material impact on the
viability of the entity. Management has provided adequate disclosure of the lawsuit in
the footnotes accompanying the financial statements.
___ 2. The entity has a lawsuit pending against them. It is probable that the entity will
lose the suit. Management has accrued the best estimate of the loss and provided
adequate disclosure. It is not expected that this lawsuit will have a significant effect on
the entity’s ability to continue as a going concern.
___ 3. The entity has a lawsuit pending against them. It is probable that the entity will
lose the suit. Management has not accrued the best estimate of the loss, but has
provided information in the footnotes. It is not expected that this lawsuit will have a
significant effect on the entity’s ability to continue as a going concern.
___ 4. Based on recent analysis of usage, the entity has changed the useful life of its
office equipment from five to four years. This change is reflected in the depreciation
amounts computed for the current year.
___ 5. The entity’s management has not provided written representations requested by
the auditors. The failure to provide these representations is considered to be a
significant limitation on the scope of the auditors’ work.
When obtaining an understanding of an entity’s internal control in a financial statement
audit at a non-public company, an auditor is not obligated to
A. determine whether the control activities have been placed in operation.
B. perform procedures to understand the design of the internal control system.
C. document the understanding of the company’s internal control system.
D. search for significant deficiencies in the operation of the internal control system.
What agency has the ultimate authority in defining independence for public companies?
A. AICPA
B. SEC
C. Department of Justice
D. Congress
Why should auditors be particularly concerned with “miscellaneous”, “other”, and
“clearing” accounts classified as revenues or expenses?
A. These accounts are likely to relate to going-concern matters.
B. These accounts are often more difficult to audit using normal substantive procedures.
C. These accounts may represent attempts of earnings management.
D. These accounts are likely to require the assistance of a specialist.
Which of the following sections is no longer included in the AICPA Rules of Conduct?
A. Responsibilities to Clients
B. Independence, Integrity, and Objectivity
C. Responsibilities to Colleagues
D. General and Technical Standards
Which of the following audit procedures would not likely be performed for audits of
shareholders’ equity?
A. Read board of directors’ minutes for authorization of equity transactions.
B. Confirm outstanding common and preferred stock with stock registrar.
C. Compare valuation of stock to published market prices.
D. Obtain management representation about number of shares issued and outstanding.
In which of the following circumstances would auditors most likely add an
emphasis-of-matter paragraph to the standard (unmodified) report without modifying
the opinion on the entity’s financial statements?
A. The auditors are asked to report on the balance sheet, but not on the other basic
financial statements.
B. There is substantial doubt about the entity’s ability to continue as a going concern.
C. Management’s estimates of the effects of future events on the entity’s financial
condition, results of operations, and cash flows are unreasonable.
D. Certain transactions cannot be tested because of management’s records retention
policy.
ABC Company has issued a bond that pays 5% interest semiannually to bond holders
on record June 30 and December 30. Payments are made on July 15 and January 15.
ABC Company has a December 31 fiscal year-end. The auditor vouches the January 15,
2010 payment to the liabilities recorded on the December 31, 2009 balance sheet.
Which of the following ASB balance assertions is the auditor testing?
A. Existence.
B. Rights and obligations.
C. Completeness.
D. Valuation.
When an accountant is engaged to compile a nonpublic entity’s financial statements that
omit substantially all disclosures required by GAAP, the accountant should indicate in
the compilation report that the financial statements
A. might influence users’ conclusions about the business, if the disclosures were
included.
B. are prepared in conformity with a comprehensive basis of accounting other than
GAAP.
C. are not compiled in accordance with Statements on Standards for Accounting and
Review Services.
D. are special-purpose financial statements that are not comparable to those of prior
periods.