The audit team is planning to examine a sample of control policies and procedures.
Assume that, based on the intended degree of reliance on internal control, the audit
team wishes to control the risk of overreliance to 5% and, based on past audits,
estimates the expected population deviation rate to be 2%. Initially, the audit team was
planning for a moderate degree of reliance on internal control and established a
tolerable rate of deviation of 7%; however, it is considering increasing its reliance on
internal control and reducing the tolerable rate of deviation to 4%. Which of the
following is not true with respect to the impact of the reduction in the tolerable rate of
deviation on sample size?
A. The reduction in the tolerable rate of deviation would result in a smaller sample size.
B. The audit team would likely not seek a reduction in the tolerable rate of deviation
unless it could obtain a reduction in its substantive testing.
C. The resultant sample size assuming the reduction in the tolerable rate of deviation
would be 294 items.
D. The reduction in the tolerable rate of deviation would result in the audit team
examining an additional 206 items.
Scanning sales invoices for missing numbers in the sequence would be an activity
intended to satisfy what assertion?
A. Completeness.
B. Accuracy.
C. Occurrence.
D. Classification.
An auditor may report on summary financial statements that are derived from a
complete set of audited financial statements only if the auditor
A. expresses an unmodified opinion on the audited financial statements from which the
summary financial statements are derived.
B. indicates whether the information is fairly stated in all material respects in relation to
the complete financial statements.
C. determines that the summary financial statements include all the disclosures
necessary for the complete set of financial statements.
D. presents the summary financial statements in comparative form with the prior-year
summary financial statements.
The phrase “Trust services” refers to
A. WebTrust and SysTrust Services.
B. XBRL and SysTrust Services.
C. WebTrust and XBRL Services.
D. all AICPA designated assurance services.
Which of the following is not an estimate required in the finance and investment cycle?
A. Actuarial assumptions for pension accruals.
B. Residual values for leases.
C. Stated market value of publicly traded stocks.
D. All the above are estimates.
Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud
diamond has been proposed. Which of the following is an element of the fraud diamond
and is not an element of the fraud triangle?
A. Motive
B. Opportunity
C. Capability
D. Liquidity
Confirmation of individual accounts receivable balances directly with debtors will, of
itself, normally provide the strongest evidence concerning the
A. collectability of the balances confirmed.
B. ownership of the balances confirmed.
C. existence of the balances confirmed.
D. internal control over balances confirmed.
The SEC requires all of the following for revenue to be recognized except
A. cash is collected.
B. persuasive evidence of an arrangement exists.
C. delivery has occurred or services have been rendered.
D. the seller’s price to the buyer is fixed or determinable.
In which of the following circumstances would a qualified opinion not be appropriate?
A. A scope limitation prevents the auditors from completing an important auditing
procedure.
B. The entity has failed to properly disclose going-concern uncertainties.
C. An accounting principle at variance with generally accepted accounting principles is
used.
D. The auditors lack independence with respect to the audited entity.
The audit objective that all balances include all items that should be recorded in that
account is related most closely to which one of the ASB balance assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation
What is the auditors’ responsibility for reporting on other information accompanying
financial statements?
A. Because this information is not a fundamental part of the financial statements, the
auditors have no reporting responsibility with respect to this information.
B. Auditors are required to report on other information only if it is misstated or
inconsistent with the financial statements.
C. Auditors are required to provide reasonable assurance with respect to whether the
other information is presented in accordance with generally accepted accounting
principles.
D. Auditors are required to express an opinion on whether the other information is
presented in accordance with generally accepted accounting principles.
In the audit of accounts receivable, the most important emphasis should be on the
A. completeness assertion.
B. existence assertion.
C. rights and obligations assertion.
D. presentation and disclosure assertion.
An increase in which of the following would cause the sample size in a test of controls
to decrease?
A. Expected population deviation rate
B. Risk of overreliance
C. Risk of underreliance
D. Population size
When an auditor increases the planned assessed level of control risk because certain
control activities were determined to be ineffective, the auditor would most likely
increase the
A. extent of substantive tests of details.
B. level of inherent risk.
C. extent of tests of controls.
D. level of detection risk.
Before accepting an engagement to audit a new client, an auditor is required to
A. make inquiries of the predecessor auditor after obtaining the consent of the
prospective client.
B. obtain the prospective client’s signature to the engagement letter.
C. prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
D. discuss the management representation letter with the prospective client’s audit
committee.
While conducting an audit, Larson Associates, CPAs, failed to detect material
misstatements included in its client’s financial statements. Larson’s unqualified opinion
was included with the financial statements in a registration statement and prospectus for
a public offering of securities made by the client. Larson knew that its opinion and the
financial statements would be used for this purpose. In a suit by a purchaser against
Larson, Larson’s best defense would be that the
A. audit was conducted in accordance with generally accepted auditing standards.
B. client was aware of the misstatements.
C. purchaser was not in privity of contract with Larson.
D. identity of the purchaser was not known to Larson at the time of the audit.
Which of the following procedures would auditors most likely perform in obtaining
evidence about subsequent events?
A. Determine that changes in employee pay rates after year end were properly
authorized.
B. Recompute depreciation charges for plant assets sold after year end.
C. Inquire about payroll checks that were recorded before year end but cashed after year
end.
D. Investigate changes in long-term debt occurring after year end.
Which of the following is the best reason for prenumbering in sequence such
documents as sales orders, shipping documents, and sales invoices?
A. Enables company personnel to determine the accuracy of each document.
B. Enables personnel to determine the proper period for recording of sales revenue and
receivables.
C. Enables personnel to check the numerical sequence for missing documents and
unrecorded transactions.
D. Enables personnel to determine the validity of recorded transactions.
Analytical procedures are audit methods of evaluating financial statement accounts by
studying and comparing relationships among financial and nonfinancial data. The
primary purpose of analytical procedures conducted during the planning stages is to
A. identify the appropriate schedules to be prepared by the client.
B. identify the types of errors or frauds that can occur in transactions.
C. identify unusual conditions that deserve additional audit effort.
D. determine the existence of unrecorded liabilities or overstated assets.
The ultimate purpose of control risk assessment is to
A. estimate the overall risk of failing to detect material misstatements.
B. decide the nature, timing, and extent of further audit procedures.
C. determine the risk of incorrect acceptance.
D. determine the probability that errors entered the accounts.
If the auditor obtains sufficient competent evidence on the client’s accounts receivable
balance by alternative procedures because it is impractical to confirm accounts
receivable, the auditor’s opinion should be unqualified and could be expected to
A. disclose the fact that alternative procedures were used due to client-imposed scope
limitation.
B. disclose in the opinion paragraph that confirmation of accounts receivable was
impracticable.
C. avoid mentioning the alternative procedures.
D. include an explanatory paragraph that discloses the performance of alternative
procedures.
When applying analytical procedures during an audit, which of the following is the best
approach for developing expectations?
A. Considering unaudited account balances and ratios to calculate what adjusted
balances should be
B. Identifying reasonable explanations for unexpected differences before talking to
client management
C. Considering the pattern of several unusual changes without trying to explain what
caused them
D. Comparing client data with client-determined expected results to reduce detailed
tests of account balances
Interim testing normally occurs between the ____ and the ____.
A. beginning of the year under audit; audit report release date
B. date of the financial statements; audit report release date
C. beginning of the year under audit; date of the financial statements
D. end of the year under audit; date of the auditors’ report
An audit team’s responsibility would not include
A. designing client’s internal controls.
B. documentation of understanding of a client’s internal controls.
C. communicating internal control deficiencies.
D. assessing the effectiveness a client’s internal controls.
Fishkin, CPA, is attempting to determine whether the average height of a player on a
basketball team is greater than 80 inches. Based on his sample of basketball players, he
determined an estimate of 76 inches with an associated precision of 10 inches. The
confidence in this estimate is 90 percent.
A. What is the precision interval associated with Fishkin’s sample?
B. Based on this sampling interval, what is Fishkin’s conclusion?
C. If Fishkin wanted a higher level of confidence in his sample estimate, would the
precision be more or less than 10 inches?
Program audits include determining
A. the degree to which an entity is acquiring, protecting, and using its resources
effectively.
B. the effectiveness of an organization’s programs, activities, or functions.
C. the causes of an organization’s inefficiencies or uneconomical practices.
D. the entity’s compliance with laws and regulations concerning matters of efficiency.
Inquiries of warehouse personnel concerning possible obsolete or slow moving
inventory items provide assurance about the ASB balance assertion of
A. completeness.
B. existence.
C. presentation.
D. valuation.
E. rights and obligations.
Cash receipts from sales on account have been misappropriated. Which of the following
acts would conceal this defalcation and be least likely to be detected by an auditor?
A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Understating the cash receipts journal.
Which of the following statements is correct concerning statistical sampling in tests of
controls?
A. As the population increases, the sample size should increase proportionally.
B. The expected population deviation rate can either be based on prior audits or a small
sample of controls examined in the current year.
C. There is an inverse relationship between the expected population deviation rate and
sample size.
D. In determining the tolerable rate of deviation, an auditor considers the desired level
of detection risk.
While observing a client’s annual physical inventory, an auditor recorded test counts for
several items and noticed that certain test counts were higher than the recorded
quantities in the client’s perpetual records. This situation could be the result of the
client’s failure to record
A. purchase discounts.
B. purchase returns.
C. sales.
D. sales returns.