In performing a financial statement audit in accordance with government auditing
standards, an auditor is required to report on the entity’s compliance with laws and
regulations. This report should
A. state that compliance with laws and regulations is the responsibility of the entity’s
management.
B. describe the laws and regulations with which the entity must comply.
C. provide an opinion on overall compliance with laws and regulations.
D. indicate that the auditor does not possess legal skills and cannot make legal
judgments.
MES is auditing a client’s accounts receivable balance recorded at $2 million using
MUS sampling. The following parameters have been established for this account:
– Tolerable misstatement = $200,000
– Expected misstatement = $100,000
– Risk of incorrect acceptance = 5%
Which of the following statements would not be true with respect to the sample size in
this situation?
A. The correct sample size is 116 customer accounts.
B. Increasing tolerable misstatement from $200,000 to $600,000 (holding all other
factors constant) will increase the sample size.
C. If MES can accept a risk of incorrect acceptance of 10% (holding all other factors
constant), sample size will be decreased to 80 accounts.
D. Because the size of the population is relatively large, this element does not affect
sample size.
Which of the following is not related to the responsibilities principle?
A. Continuing professional education to ensure that professionals’ knowledge keeps
pace with changes in the accounting and auditing profession
B. Firm-wide policies to evaluate the financial and professional relationships of its
professionals
C. Specific auditing procedures designed to determine the effectiveness of the entity’s
internal control over financial reporting
D. The auditors’ use of professional judgment throughout the examination
An auditor would vouch inventory on the inventory status report to the vendor’s invoice
to obtain evidence concerning management’s balance assertions about
A. existence.
B. rights and obligations.
C. completeness.
D. valuation.
Tests performed by auditors that examine evidence for both control attributes and
monetary misstatements are known as
A. standard-purpose tests.
B. multi-function tests.
C. dual-purpose tests.
D. substantive tests.
The sampling unit in a test of controls pertaining to the existence or occurrence of
payroll transactions ordinarily is a(an)
A. clock card or time ticket.
B. employee Form W-2.
C. employee personnel record.
D. payroll register (journal) entry.
Which of the following is an audit procedure that auditors most likely would perform
concerning litigation, claims, and assessments?
A. Request the client’s attorney to evaluate whether the client’s pending litigation
claims, and assessments indicate a going concern problem.
B. Examine the legal documents in the client’s attorney’s possession concerning
litigation, claims, and assessments to which the attorney has devoted substantive
attention.
C. Discuss with management its policies and procedures adopted for evaluating and
accounting for litigation, claims, and assessments.
D. Confirm directly with the client’s attorney that all litigation, claims, and assessments
have been recorded or disclosed in the financial statements.
Which of the following does not directly relate to an auditor’s responsibility for having
appropriate competence and capabilities to perform the audit?
A. Participating in continuing professional education
B. Gaining experience through hands-on practice
C. Obtaining reliable documentary evidence
D. Attending on-the-job training
The definition of administrative control does not include reference to
A. operational efficiency.
B. accounting errors.
C. adherence to managerial policies.
D. plan of organization.
The Single Audit Act of 1984 requires an annual audit of all governments, agencies, and
nonprofit organizations that
A. receive $300,000 or more federal funds.
B. receive $500,000 or more federal funds.
C. spend $300,000 or more federal funds.
D. spend $500,000 or more federal funds.
Which of the following philosophical theories places emphasis on the consideration of
projecting the consequences of a choice in terms of this question: “What may be the
consequences of similar persons making this choice in similar circumstances?”
A. Imperative principle
B. Utilitarianism
C. Generalization principle
D. Virtue ethics
The audit objective that all balances include items owned by the client is related most
closely to which one of the ASB balance assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation
Failure to record a liability generally results in
A. an understatement of profit.
B. an understatement of current ratio.
C. an overstatement of profit.
D. an overstatement of assets.
Senior management has ordered a compliance audit of the organization’s employee
benefits package. Which of the following do both the chief audit executive and senior
management consider a primary engagement objective?
A. The level of the organizational contributions is adequate to meet the program’s
demands.
B. Individual programs are operating in accordance with contractual requirements and
government regulations.
C. Participation levels support continuation of individual programs.
D. Benefits payments, when appropriate, are accurate and timely.
Horizontal analysis refers to
A. the trend of income from year to year of persons suspected of fraud.
B. changes of financial statement numbers and ratios across several years.
C. financial statement amounts expressed each year as a proportion of a base amount.
D. the change in a suspect’s net worth from the beginning to the end of a period.
An auditor is concerned about a policy of management override as a limitation of
internal control. Which of the following tests would best assess the validity of the
auditor’s concern?
A. Matching purchase orders to accounts payable
B. Verifying that approved spending limits are not exceeded
C. Tracing sales orders to the revenue account
D. Reviewing minutes of board meeting
Which of the following is a general control that would most likely assist an organization
whose systems analyst resigned during the development of a major project?
A. Grandfather-father-son file retention
B. Input and output validation routines
C. Systems documentation
D. Check digit verification
An auditor should normally perform alternative procedures to substantiate the existence
of accounts receivable when
A. no reply to a positive confirmation request is received.
B. no reply to a negative confirmation request is received.
C. collectability of the receivables is in doubt.
D. pledging of the receivables is probable.
An auditor wanted to test credit approval on 10,000 sales invoices processed during the
year. The auditor designed a statistical sample that would provide a 1% risk of
overreliance (99% confidence) that not more than 7% of the sales invoices lacked
approval. The auditor estimated from previous experience that about 2.5% of the sales
invoices lacked approval. A sample of 200 invoices was examined and 7 of them were
lacking approval. The auditor then determined the upper limit rate of deviation to be
8%.
The allowance for sampling risk was
A. 5.5%.
B. 4.5%.
C. 3.5%.
D. 1%.
Summitt, CPA, performed a nonstatistical sampling plan to examine the inventory
balances of Hero Inc., Which of the following methods of sample selection are
available to her?
A. Random and systematic only
B. Block and haphazard only
C. Any method she believes will result in a representative sample
D. Any method where the results can be probabilistically estimated
Which of the following procedures would be most appropriate for testing the
completeness assertion as it applies to inventory?
A. Scanning perpetual inventory, production, and purchasing records.
B. Examining paid vendor invoices.
C. Tracing inventory items from the tag listing back to the physical inventory quantities.
D. Performing cutoff procedures for shipping and receiving.
In order to be considered as external auditors with respect to government agencies,
GAO auditors must be
A. organizationally independent.
B. empowered as the accounting and auditing agency by the U.S. Congress.
C. funded by the federal government.
D. guided by standards similar to GAAS.
When examining the client’s internal control, what is the relationship of each of the
following with sample size?
A. Option A
B. Option B
C. Option C
D. Option D
The type of sampling most frequently used by the auditors during their substantive
procedures is referred to as
A. account balance sampling.
B. attributes sampling.
C. item sampling.
D. variables sampling.
A report on internal control effectiveness by the management team of public companies
is required by
A. the Sarbanes-Oxley Act of 2002.
B. the PCAOB.
C. the AICPA.
D. the auditors.
Which of the following most likely would not be considered an inherent limitation of
the potential effectiveness of an entity’s internal controls?
A. Incompatible duties
B. Management override
C. Mistakes in judgment
D. Collusion among employees
The risk that an auditor’s procedures will lead to the conclusion that a material
misstatement does not exist in an account balance when, in fact, such misstatement
actually exists is
A. audit risk.
B. inherent risk.
C. control risk.
D. detection risk.
Auditors sometimes use comparisons of ratios as audit evidence. An unexplained
decrease in the ratio of gross profit to sales may suggest which of the following
possibilities?
A. Unrecorded purchases.
B. Unrecorded sales.
C. Merchandise purchases being charged to selling and general expense.
D. Fictitious sales.
An auditor’s purpose in auditing the information contained in the pension footnote most
likely is to obtain evidence concerning management’s assertion about
A. rights and obligations.
B. existence.
C. presentation and disclosure.
D. valuation.
Your client is in the process of acquiring another company. You have been requested to
verify that cash for the company being acquired is properly stated. The audit technique
that will yield the most persuasive evidence is
A. examination of the company’s escrow account.
B. interview with the company’s treasurer and cash manager.
C. preparation and review of standard bank confirmation inquiries.
D. analytical computations comparing current cash in the bank with previous
accounting periods.