Vouching recorded transactions involves taking a sample from the journal and tracing
the items back to the source documents to ensure the transactions occurred.
News media and web searches can provide useful information related to client
management’s integrity and the risk of material misstatement in the financial
statements.
The cash balance that a financial institution requires its customer to maintain in a
non-interest-bearing account to offset a line of credit is a compensating balance.
Changes in the depreciable lives of equipment may be identified through a substantive
audit procedure that includes analyzing depreciation expense as a percent of assets.
After the balance sheet date but prior to the audit report date the client decides to
acquire Bargain Company to obtain a significant increase in revenues. The auditor
would probably give a report that includes the statement: “except for the acquisition of
Bargain Company…”.
The subject matter of a non-audit attestation engagement can be quite varied.
Invoices are processed, including their mailing to customers, only subsequent to proof
of valid delivery to customers.
An auditor should compare the unaudited financial statements with both past results and
industry trends to gain an indication about the possibility of fraud.
Investors and lenders are not concerned with internal control of the companies in which
they invest.
Random number, systematic sampling and material value sampling are acceptable
sample selection methods for statistical sampling.
Special reports would include compliance with contractual agreements.
Reporting on a specified account is a form of special report that an auditor may issue in
relation to a specific basis of accounting.
The AICPA requires that auditor expresses an opinion as to whether the financial
statements are free of material misstatement or states that an opinion cannot be
expressed.
When forming an opinion on special purpose financial statements, the auditor should
evaluate whether the financial statements include a summary of significant accounting
policies.
An example of physical observation is the auditor’s testing of inventory by counting it
to substantiate the existence assertion.
In the audit of the depreciation methods and possible impairment of manufacturing
equipment, the auditor can tour the facility during operations to determine if any of the
machines are idle.
The performance of analytical procedures is often used by an auditor as a procedure to
gather certain types of audit evidence.
The iron curtain method for assessing materiality focuses on assuring that the year-end
balance sheet is correct and considers the impact of prior-year uncorrected
misstatements reversing in later years.
When the auditor seeks evidence concerning the allowance for doubtful accounts he or
she would most likely use an aged trial balance to help identify past due balances.
Appropriateness deals with the quantity of evidence the auditor collects, whereas
sufficiency deals with the quality of evidence the auditor collects.
An example of the subject matter of a non-audit attestation engagement is
management’s assertions about historical financial information and associated
disclosures.
CPA certificates for auditors are issued by state boards of accountancy.
The audit team typically reviews journal entries in the receivables ledger for unusual
entries that may be indicators of fraudulent activity.
The term “except for” is used in the opinion paragraph of an audit report that will be
qualified for a GAAP violation that is not pervasive.
The total likely misstatements found during the audit are equal to the sum of known and
projected misstatements.
Goodwill arising from many acquisitions can be netted into one test at the company
level.
Working capital may be tied to certain debt covenants causing cash to be considered
significant for audit purposes.
The deposit of cash directly at the bank to speed collections often involves the use of a
lockbox.
Test counts are performed by the auditor to give the impression of control and they are
not used for substantive testing.
The standard bank confirmation includes the confirmation of cash accounts but not
liabilities with financial institutions.
Determining materiality is based solely on quantitative factors.
A networked software system linking a company’s Web site to other vendors whose
offerings and prices have been preapproved by appropriate management is call an
automated purchasing system.
The auditor’s performance of an independent reconciliation of the client’s bank accounts
provides evidence as to the rights and obligations of the year-end cash balances.
The PCAOB is a public board, appointed by Congress, to provide oversight of the firms
that audit public companies registered with the SEC.
Which of the following statements about assertions is true?
A.All assertions are equally important for all accounts.
B.The importance of an assertion depends upon the account.
C.Assertions are not related to accounts.
D.None of the above.
Which of the following is not a reason for a client to employ cash management
techniques?
A.Speed the collection and deposit of cash.
B.Reduce the effect of compensating balances.
C.Reduce the amount of paperwork.
D.Automate the cash management process.
To be considered reliable evidence, confirmations must be controlled by which of the
following individuals?
A.A client employee responsible for accounts receivable.
B.An external auditor.
C.A client’s internal audit department.
D.A client’s controller or CFO.
For intangible assets, controls should be designed to do which of the following?
A.Identify and account for intangible asset impairments.
B.Develop amortization schedules that reflect the remaining useful life of patents or
copyrights associated with the asset.
C.Provide reasonable assurance that decisions are appropriately made as to when to
capitalize or expense research and development expenditures.
D.All of the above.
Which of the following best describes kiting?
A.Theft of cash for personal use and cover-up using the bank statement.
B.A fraudulent cash scheme to overstate cash assets at year end by recording deposits in
transit.
C.Manipulation of financial reporting by increasing both cash and debt by the same
amount.
D.Colluding to steal cash by wiring money to a fictional vendor and concealing it with
customer payments.
What can users of the audit report reasonably expect from the audited financial
statements?
A.The financial statements are complete and contain many of the important financial
disclosures.
B.The financial statements are presented fairly according to the substance of GAAP.
C.The financial statements are free from all errors.
D.All of the above.
E.None of the above.
Management of AllTech, Inc. refuses to sign the management representation letter given
to them in the course of the audit on the grounds that it invades the company’s privacy.
What does this refusal constitute?
A.A violation of full and fair disclosure.
B.A securities law violation.
C.A scope limitation.
D.A breakdown in internal controls.
Which of the following is least likely to require significant auditor judgment about the
dollar amount to be disclosed in the financial statement?
A.Contingent liability related to pending litigation.
B.Assumptions made in preparation of the estimate of income tax expense for the year.
C.The value of inventory.
D.Cash on hand at the end of the year.
An audit program is created to specify which of the following?
A.The type of audit opinion to be rendered based upon procedures performed.
B.The audit procedures that will be performed every year for the client.
C.How an auditor should think while performing audit procedures.
D.Audit objectives and procedures to be followed during the audit process.
Fulton Educational Company, Inc. has a matter of material litigation that is threatened,
but that has not gone to trial. The auditor’s consideration of such a matter will not
include which of the following?
A.Sending a letter to the client’s attorneys for more information.
B.Discussing the matter with the client and their insurance adjuster.
C.Confirming with the harmed party regarding the amount that will be claimed.
D.Assessing whether accrual or disclosure by the client was reported in accordance
with GAAP.
Which of the following should the client have as part of its process for estimating fair
value?
A.A systematic process to identify each asset that is subject to realizable value
estimation.
B.A process to identify relevant historical values.
C.An analysis of transactions that have taken place within the client’s organization.
D.A realistic process to estimate future cash flows to discount back to a present value.
Which of the following factors would lead an auditor to assess inherent risk at a higher
level?
A.The account balance is easily determined without estimation.
B.The account balance represents an easily embezzled asset.
C.The account balance is composed of simple transactions.
D.All of the above would lead the auditor to assess a higher level of inherent risk.
Accounts receivable confirmations usually provide strong evidence about which of the
following?
A.The existence of receivables.
B.The completeness of receivables.
C.The presentation and disclosure of receivables.
D.The obligations of receivables.
Which of the following is an accounting service that involves performing inquiry and
analytical procedures as a reasonable basis for expressing limited assurance that no
material modifications need to be made to the financial statements in order for the
financial statements to conform to GAAP?
A.A compilation.
B.An audit.
C.A review.
D.An agreed upon procedure.
What is the scope of applicability of the auditing standards of the AICPA?
A.Nonpublic companies traded in non-U.S. markets.
B.Nonpublic companies in the U.S.
C.Public companies traded in non-U.S. markets.
D.Public companies traded in the U.S.
Which of the following task is not performed by generalized audit software?
A.Footing a file.
B.Obtaining file statistics.
C.Checking for gaps in processing sequences.
D.Preparing custom reports.
E.All of the above tasks can be performed using GAS.
In a tour of a client’s manufacturing facility, the auditor is most likely attempting to
satisfy which of the following management assertions related to long-lived assets?
A.Completeness.
B.Existence.
C.Rights.
D.Presentation and disclosure.
Who is responsible for operating an enterprise?
A.The auditor.
B.The audit committee.
C.Management.
D.The board of directors.
After an audit report is issued, the auditor discovers through a peer review that an
important audit procedure has been omitted. In this case, what should the auditor do?
A.Notify all parties known to be relying on the report.
B.Immediately request the client recall the report.
C.Contact his or her professional liability insurance carrier.
D.Determine whether the report can still be supported in light of the omitted procedure.
For which of the following services must a CPA be independent?
A.Audits: Yes; Reviews: Yes; Compilations: Yes
B.Audits: Yes; Reviews: Yes; Compilations: No
C.Audits:Yes; Reviews: No; Compilations: No
D.Audits:Yes; Reviews: No; Compilations: Yes
The auditor’s report specifically covers the statements and disclosures made by
management in the “Management Discussion and Analysis” (MD&A) section of the
annual report.
Each of the audit procedures that an auditor could select possesses which of the
following characteristics?:
A.Audit procedures take time, effort, and money.
B.Audit procedures are difficult to perform.
C.Audit procedures require multiple people from the firm to perform.
D.All of the above.
An audit firm culture that emphasizes “doing the right thing” does not incorporate
which of the following to enhance audit quality?
A.Encouraging auditors to seek consultation with other members of the audit firm.
B.Yielding to management’s demands in order to promote additional service
engagements.
C.Taking sufficient time to deal with difficult client issues.
D.Emphasizing long-term reputation over the immediate satisfaction of client
preferences.
Which of the following is not a factor adding to the complexity of materiality
judgments made by auditors?
A.Regulators pay particular attention to the judgmental aspects of auditor materiality
decisions.
B.SEC regulators do not believe it is appropriate to use percentage terms to substitute
for a full analysis of all relevant considerations regarding the magnitude of
misstatement.
C.Regulators focus on how materiality decisions can affect client financial results.
D.SEC regulators have few requirements for auditors to comply with since the AICPA
fills that role.
Which of the following factors should an auditor consider in evaluating the effect of
fraud upon the planned audit procedures?
A.The type of fraud that may occur.
B.The potential materiality of fraud.
C.The likelihood of fraud occurring.
D.All of the above.
Performance materiality helps the auditor to determine which of the following?
A.Extent of audit evidence needed.
B.The specific analytical procedures to perform.
C.The specific substantive procedures to perform.
D.Control risk assessment.
Which of the following is a driver of audit quality?
A.Audit firm culture.
B.Engagement team skills and attributes.
C.Factors outside control of auditors.
D.Investor requirements.
E.A, B, and C only.
In which one of the following instances would an auditor most likely issue an adverse
opinion?
A.Management declines to present earnings per share in the income statement.
B.There is substantial doubt about the entity’s ability to continue as a going concern.
C.There is a material dollar misstatement that overshadows the overall financial
statements.
D.The client does not allow the auditor to send confirmations to its three largest
customers.
Which of the following best represents actions that may indicate fraud is pervasive
throughout the company under audit?
A.The company’s management negotiates deals with vendors in such a manner as to pay
lower prices.
B.The company’s management drives luxury vehicles and takes vacations to exotic
places.
C.The company’s management takes an overly aggressive approach to revenue
recognition.
D.The company’s management estimates bad debts using an aged accounts receivables
ledger rather than as a percent of sales.
Which of the following statements best describes what is meant by a 1% level of
detection risk?
A.High detection risk and low audit risk.
B.High detection risk and high audit risk.
C.Low detection risk and high audit risk.
D.Low detection risk and low audit risk.
The auditor should have a sound basis, supported by objective evidence, regarding
accounting estimates and should not fall victim to an “all estimates are subjective”
argument in order to waive which of the following?
A.Contingent liability.
B.Material misstatements.
C.Unrecorded liability.
D.Material adjustments.
Develop a list of substantive tests to test whether pledged, discounted, assigned, and
related-party accounts receivable are properly disclosed.
Identify at least four professional or regulatory organizations. Explain how and why
they assist and/or monitor the audit and assurance profession.
When considering risk responses, what steps should the auditor take?
A CPA has completed an audit of the financial statements of a long-haul trucking
company for the year ended December 31, 2014. Prior to 2014, the company
depreciated its trucks over 10 years. However, during 2014, the company determined
that a more realistic estimated life for its trucks was 8 years and computed the 2014
depreciation on the basis of the revised estimate. The CPA is satisfied that the 8 year
estimate is reasonable, but the change will have a material effect on the comparability
of the company’s financial statements. The company adequately disclosed the change in
estimated useful lives of its trucks and the effect of the change on 2014 income in a
note to the financial statements.
REQUIRED:
Which type of audit report would you suggest be issued on the 2014 financial
statements and why?
What is a management letter and how does it differ from a management representation
letter?
List the advantages for implementing a centralized purchasing function. What are the
disadvantages (if any)?
One of the elements of an organization’s control system is the “control environment.”
Identify at least four factors that the auditor should consider when reviewing the control
environment and discuss how the auditor would relate this review to the assessment of
control risk.
AU-C Section 805 provides guidance on audits of single financial statements and
specific elements, accounts, or items of a financial statement. What are some examples
of these types of situations?
Discuss what a disclaimer is, when it is issued, and how it would affect the format of a
standard three paragraph audit report.
Confirmation of accounts receivable is required under GAAS unless certain conditions
exist. Identify the conditions that will be present in an audit that does not confirm
accounts receivable.
Discuss the procedures that the audit team will most likely perform upon arrival at each
site right before physical inventory is taken.
What are four ways that Sarbanes-Oxley impacted the auditing profession?
Describe the cash management technique of a lockbox, including why it is used.
In the audit of inventory the auditor must perform important procedures prior to the
actual observation. Identify the steps the auditor must take prior to the day the inventory
is actually counted.