Because of the risk of material misstatement, an audit of financial statements in
accordance with generally accepted auditing standards should be planned and
performed with an attitude of
A. objective judgment.
B. independent integrity.
C. professional skepticism.
D. impartial conservatism.
If it would be appropriate to confirm capital stock, the auditor would obtain the
confirmation from
A. management.
B. the board of directors.
C. stockholders.
D. an independent registrar.
The internal control questionnaire for purchases and accounts payable includes the
following questions. Next to each of the questions, indicate the letter of the related
transaction assertion.
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
E. Cutoff
Which of the following would typically result in nonsampling risk?
A. Selecting a nonrepresentative sample
B. Making a mistake in recording sample results
C. Intentionally omitting several items in the population from examination
D. None of these result in nonsampling risk
Which of the following courses of action would an auditor most likely follow in
planning a sample of cash disbursements if the auditor is aware of several unusually
large cash disbursements?
A. Set the tolerable misstatement at a lower level than originally planned.
B. Stratify the cash disbursements population so that the unusually large disbursements
are selected.
C. Increase the sample size to reduce the effect of the unusually large disbursements.
D. Continue to draw new samples until all the unusually large disbursements appear in
the sample.
Which of the following internal control activities most likely would deter lapping of
collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with
dates of daily cash summaries.
B. Authorization of write-offs of uncollectible accounts by a supervisor independent of
credit approval.
C. Separation of duties between receiving cash and posting the accounts receivable
ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts
journal entries.
Which of the following is a correct statement regarding the nature and timing of
communications between an accounting firm performing an initial audit of an issuer
and the issuer’s audit committee?
A. Prior to accepting the engagement, the firm must orally affirm its independence to
the audit committee with all members present.
B. The firm must address all independence impairment issues on the date of the audit
opinion.
C. Communications related to independence may occur in any form prior to issuance of
the financial statements.
D. Prior to accepting the engagement, the firm should describe in writing all
relationships that, as of the date of the communication, may reasonably be thought to
bear on independence.
Which of the following statements is correct concerning the use of negative
confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit
evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
D. Negative confirmation requests are effective when understatements of account
balances are suspected.
Holmes, CPA, assisted Williams Corporation in preparing its financial statements and
gave Williams permission to use Holmes’s name in communications containing these
financial statements. If Holmes did not audit the financial statements, what type of
opinion should be expressed?
A. Unmodified opinion with an other-matter paragraph limiting the level of assurance
provided by Holmes
B. Qualified opinion with an additional paragraph indicating a circumstance-imposed
scope limitation
C. Disclaimer of opinion because Holmes did not audit the financial statements
D. Homes is not required to issue a report or opinion in this situation
An entity with a large volume of customer remittances by mail could most likely reduce
the risk of employee misappropriation of cash by using
A. employee fidelity bonds.
B. independently prepared mailroom prelists.
C. daily check summaries.
D. a bank lockbox system.
The process of a CPA obtaining a certificate and license in a state other than the state in
which the CPA’s certificate was originally obtained is referred to as
A. substantial equivalency.
B. quid pro quo.
C. relicensing.
D. re-examination.
Which of the following is not required by AU 240, “Consideration of Fraud in a
Financial Statement Audit”?
A. Conduct a continuing assessment of the risks of material misstatement due to fraud
throughout the audit.
B. Conduct a discussion by the audit team of the risks of material misstatement due to
fraud.
C. Conduct the audit with professional skepticism, which includes an attitude that
assumes balances are incorrect until verified by the auditor.
D. Conduct inquiries of shareholders as to their views about the risks of fraud and their
knowledge of any fraud or suspected fraud.
At a minimum, in order to comply with PCAOB AS 5, an auditor of a public company
that has material transactions processed by a service organization would have to request
from the service organization
A. a description of its internal controls.
B. a type one service auditors’ report.
C. a type two service auditors’ report.
D. a Service Organization Control (SOC) 3 report.
The Public Company Accounting Oversight Board was established by which of the
following?
A. The Financial Accounting Standards Board
B. The American Institute of Certified Public Accountants
C. The Sarbanes-Oxley Act of 2002
D. The International Accounting Standards Board
In which of the following should an auditors’ report refer to the lack of consistency
when there is a change in accounting principle that is significant?
A. The Auditor’s Responsibility section
B. The opinion paragraph
C. An emphasis-of-matter paragraph following the opinion paragraph
D. An emphasis-of-matter paragraph before the opinion paragraph
During an audit of an entity’s stockholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements, or
state law. This audit procedure most likely is intended to verify the ASB presentation
and disclosure assertion of
A. occurrence.
B. completeness.
C. rights and obligations.
D. understandability.
When verifying debits to the perpetual inventory records of a nonmanufacturing
company, auditors would be most interested in examining a sample of purchase
A. approvals.
B. requisitions.
C. invoices.
D. orders.
An auditor who uses 7 percent of income before taxes as a basis for overall materiality
would be basing judgment on
A. absolute size.
B. relative size.
C. nature of the item.
D. cumulative effects.
Beckler & Associates, CPAs, examined and issued an unqualified opinion on the
financial statements of Queen Co. The financial statements contained misstatements
that resulted in a material overstatement of Queen’s net worth. Queen provided the
audited financial statements to Mac Bank in connection with a loan made by Mac to
Queen. Beckler knew that the financial statements would be provided to Mac. Queen
defaulted on the loan. Mac sued Beckler to recover for its losses associated with
Queen’s default. Which of the following must Mac prove in order to recover?
I. Beckler did not conduct the audit with the appropriate level of professional care.
II. Mac relied on the financial statements.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
The three fundamental principles underlying GAAS include all of the following, except
A. general principle.
B. performance principle.
C. reporting principle.
D. responsibilities principle.
The audit objective that all transactions and accounts that should be presented in the
financial statements are in fact included is related to which of the PCAOB assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation
Which ASB balance assertion is of the most importance to auditors for long-term
liabilities?
A. Existence.
B. Completeness.
C. Rights and obligations.
D. Valuation.
Which of the following paragraphs or sections of the group auditors’ report is modified
to identify the extent of component auditor involvement in the audit of group financial
statements?
A. The introductory paragraph
B. The Management’s Responsibility section
C. The Auditor’s Responsibility section
D. The opinion paragraph
Which of the following actions should a CPA firm take to comply with the AICPA’s
quality control standards?
A. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.
B. Use attributes sampling techniques in testing internal controls.
C. Consider inherent risk and control risk before determining detection risk.
D. Establish policies to ensure that the audit work meets applicable professional
standards.
This question is related to other public accounting services and reports. For each
statement, description, or phrase (1-5), indicate the related type of engagement or report
(A-F).
A. Reviews of unaudited financial statements of a nonissuer.
B. Compilations of financial statements.
C. Reviews of unaudited interim financial statements of a public company.
D. Reports on financial statements prepared special purpose framework.
E. Reports on compliance with contractual agreements or regulatory requirements.
F. Reports on elements, accounts, or items of a financial statement.
___ 1. The information should conform to the accounting principles in ASC 270,
“Interim Financial Reporting.”
___ 2. In our opinion, the schedule of accounts receivable referred to above presents
fairly, in all material respects.
___ 3. Limited to presenting in the form of financial statements information that is the
representation of management.
___ 4. As described in Note 2, these financial statements were prepared on the cash
receipts and disbursements basis of accounting.
___ 5. A reasonable basis for expressing limited assurance that there are no material
modifications that should be made to the statements.
The relevant ethical requirements relating to due care, professional skepticism, and
professional judgment are responsibilities of the auditor at which stage(s) of the audit?
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following management assertions is an auditor most likely testing if the
audit objective states that all inventory on hand is reflected in the ending inventory
balance?
A. The entity has rights to the inventory.
B. Inventory is properly valued.
C. Inventory is properly presented in the financial statements.
D. Inventory is complete.
Which of the following would be an example of an action that exposes an auditor to
nonsampling risk?
A. The audit team draws a sample of transactions from throughout the entire period
under audit.
B. The audit team uses an inappropriate type of audit procedure to evaluate sample
evidence.
C. The audit team uses professional judgment in evaluating sample results.
D. The audit team limits the selection of sample items to larger dollar balances in an
account.
Which of the following would most likely be a violation of the independence
requirement found in the responsibilities principle under generally accepted auditing
standards?
A. An auditor on the engagement has a distant relative who is employed by a vendor
that does a significant amount of business with clients.
B. The client’s Chief Executive Officer graduated from the same university as the
partner in charge of the accounting firm.
C. An auditor on the engagement owns a financial interest in the stock of the client.
D. The client provides financial support to a number of charitable causes that also
receive support from the accounting firm.
Which of the following procedures would an auditor most likely perform in searching
for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just prior to year-end.
B. Contrast the ratio of accounts payable to purchases with the prior year’s ratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and
purchase orders.
D. Compare cash payments occurring after the balance sheet date with the accounts
payable trial balance.
What is the general order in which the following steps in attributes sampling are
performed?
1 = Define the population
2 = Determine the objective of sampling
3 = Determine the sample size
4 = Select the sample
A. 1, 2, 3, 4
B. 2, 1, 3, 4
C. 1, 2, 4, 3
D. 2, 1, 4, 3
A voucher package is used to
A. document receipt of inventory.
B. document completion of services.
C. document a purchase contract.
D. provide a source document for recording the purchase of a good or service.
Which party should request a letter regarding litigation, claims, and assessments from
the client’s attorney?
A. Attorney
B. Auditors
C. Client
D. Securities and Exchange Commission or other regulatory body
Information about the internal control system can be gathered by completing an
__________________________________________.
List several elements of a company’s control environment.
Alan Fallon was recently promoted to senior accountant. He was put in charge of the
Mellow Markets audit because of his experience with other grocery clients. Mellow
Markets has a small, but growing, chain of natural food stores. This is the first year
Mellow Markets has been audited. Because of their growth, Mellow Markets needs
additional capital and intend to use their audited financial statements to secure a loan.
Alan has been assigned two inexperienced staff assistants for the audit. Because this is
his first engagement as a senior, he intends to bring the job in on budget. To save time,
he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He
told them that this would make things go more quickly. He also told them that he could
not spend much time with them at the client’s place of business, because “my time is
billed out at such a high rate, we’ll go right over budget.” However, he did call them
once a day from another audit on which he was working.
After beginning their work, the assistants told Alan that the audit plan did not always
match up with what they found at Mellow Markets. Alan responded, “just cross out
whatever is not relevant in the audit plan and don’t add anything – it will only make us
go over the budget.” When Alan came to the client near the end of field work, one
assistant was concerned that no inventory observation was done at the out-of-town
locations of Mellow Markets (the audit plan had stipulated that inventory should be
observed for in-town stores only). Happy Time had only one out-of-town location,
while three of Mellow Markets’ five stores were in other cities. Alan told the assistant to
get inventory sheets from the client for the other stores and added “make sure that the
inventory balance in the general ledger agrees with the total for all the inventory
sheets.” The next day, Alan reviewed all audit documentation and submitted the job for
review by the manager.
1. Describe the performance principle of GAAS.
2. Do you believe that the Mellow Markets audit complies with the performance
principle? Explain.
When you examine canceled checks returned in the bank statement by a client’s bank,
how could you tell whether the amount on the check had been skillfully raised
(increased, say, from $75.00 to $7,500 in the amount box, and altered in the written line
from “Seventy-five dollars” to “Seventy-five hundred dollars”) after the check was
cleared by the bank?
A procedure to gather evidence on both account balances and controls is called a
______________________________________ procedure.
An inventory trial balance can be used to scan for
__________________________________ and as a population for sample selection for
the ______________________________________.