Managers must use professional judgment to determine whether identified control
deficiencies rise to the level of a significant deficiency or material weakness.
A risk factor indicating a heightened risk of fraud would be considered a significant
risk.
Auditors should conduct their work with an attitude of professional skepticism.
Financial accounting personnel who do not have the proper education, experience and
backgrounds may signal the auditor to the risk of financial statement fraud.
The purpose of making materiality judgments is to make sure that financial statements
are free of any material misstatement.
Population items with zero balances have no chance of being selected using PPS
sampling.
Audit committees of publicly traded companies must establish whistleblowing
mechanisms within the company.
The amount of evidence gathered is not important to an auditor since the quality of the
evidence is of primary importance.
A company that ships a large quantity of its products from its manufacturing plant to a
warehouse that it leases until the customer is ready for the product should record the
delivery as revenue.
Long-lived assets typically represent the smallest single category of assets in many
organizations.
Auditors make materiality assessments to help in planning the audit evidence to obtain
and in evaluating the audit evidence that was obtained.
The auditor need not be independent to perform a review engagement as it has a scope
that is far less than that of an audit.
The standard bank confirmation should be sent to all banks used by the client during the
year except those with a zero balance.
The external auditors are only responsible for their opinion of the financial statements
and internal controls.
The standards of fieldwork include the responsibility of the auditor to exercise due
professional care.
Internal auditing only provides assurance about internal control effectiveness.
The auditor has a responsibility to design the audit to provide absolute assurance of
detecting material fraud.
Auditors should obtain a management representation letter at the end of each audit.
Underlying accounting records consist of evidence of controls as well as supporting
records such as checks, invoices, the general and subsidiary ledger and journal entries.
The auditor’s job is to gather sufficient appropriate audit evidence on which to base an
opinion.
A quality audit is one performed “in accordance with generally accepted auditing
standards (GAAS) to provide reasonable assurance that the audited financial statements
and related disclosures are presented in accordance with generally accepted accounting
principles (GAAP) and (2) are not materially misstated whether due to errors or fraud.”
A comprehensive chart of accounts and a review of complex or unusual transactions by
supervisory personnel are control procedures necessary for proper classification of
accounts.
The failure of a client to include a statement of cash flows will result in the issuance of
a disclaimer of opinion by the auditor.
In agreed-upon procedure engagements, the practitioner does not perform a review, and
does not provide an opinion or negative assurance.
Gross negligence is a failure to use even minimal care or evidence of activities that
show a recklessness or careless disregard for the truth.
The FASB provide the criteria against which the auditor can measure the fairness of
financial statement presentation.
An auditor is required to gain an overall understanding of internal controls related to
long-lived assets for integrated audits, but NOT for financial statement only audits.
Inconsistent application of accounting principles by the client is a GAAP violation and
would result in a qualified audit report.
The auditor should not consider that fraud is present in revenue accounts because the
auditor must remain objective.
If control risk is assessed high, the auditor may send significantly fewer confirmations
for a sample of accounts receivable than if the control risk is assessed low.
The primary purpose of the cutoff bank statement is to verify the reconciling items on
the bank reconciliation.
LEXIS is a public database where the existence of legal proceedings against a company
or key members of the company can be found.
One issue that may threaten independence is that of the fee pressures placed on the
auditor when an audit is under bid.
The auditor should only provide an opinion on the financial statements if the opinion
indicates that the financial statements are fairly stated in all material respects.
What is the letter called that is drafted by the auditor and reports observations to
management which may help management perform more effectively?
A.The letter of reportable conditions.
B.The management representation letter.
C.The management letter.
D.The contingent events document.
Which of the following types of information is not a type of evidence that the auditor
should obtain concerning contingencies?
A.Information about major contracts in which contingencies may be present.
B.Documentation of communication with internal and external legal counsel of the
client.
C.Accounts receivable confirmations.
D.Documentation of contingent liabilities contained in corporate minutes,
correspondence from governmental agencies, and bank confirmations.
Impairment is measured by the difference between market value of the operating
segment and which of the following?
A.Carrying value of net assets.
B.Fair market value of net assets.
C.Book value of total assets.
D.Book value of current assets.
During the testing of a year end bank reconciliation, an auditor noticed that the majority
of checks listed as outstanding at year-end had not cleared the bank. Which of the
following is a likely explanation?
A.A high probability of kiting.
B.A high probability of lapping.
C.The year-end cash disbursements records had been closed prior to year-end.
D.The year-end cash disbursements records had been held open past year-end.
The auditor traces recorded sales to invoices, sales orders and shipping documents in
order to substantiate which assertion?
A.Cutoff.
B.Completeness.
C.Legality.
D.Occurrence.
An audit program provides an effective means for which of the following?
A.Reviewing the completeness and persuasiveness of procedures performed.
B.Recording the audit work performed and those responsible for performing the work.
C.Organizing and distributing the work.
D.All the above.
A control that may be implemented to ensure all sales that occur are recorded in the
general ledger includes which of the following?
A.Use of prenumbered shipping, invoice and sales documents.
B.Use of prenumbered statements, inventory lists and credit memos.
C.Reconciliation of invoices with customer statements.
D.Use of pre-authorized price lists.
Which of the following management assertions is NOT relevant to inventory?
A.Existence or occurrence.
B.Completeness.
C.Rights and obligations.
D.Reporting.
For a review report, identify:
A. for whom what type of the organization the report may be performed;
B. the procedures the auditor performs;
C. the type of assurance provided;
D. the requirement for auditor independence.
Which governing board performs quality reviews on registered audit firms that audit
public companies?
A.PCAOB.
B.GAO.
C.AICPA.
D.FASB.
Why does the AICPA remain a valuable organization?
A.Its continued involvement in the enforcement of auditing standards, particularly for
public companies.
B.Its continued involvement in the regulation and enforcement of the audit profession.
C.Its continued involvement in the education and administration of the CPA exam.
D.Its continued involvement in the promulgation of accounting standards.
In evaluating the reasonableness of an estimate, the auditor would not normally
concentrate on which of the following factors and assumptions?
A.Subjective judgments that introduce bias.
B.Deviations from historical patterns.
C.Amounts that are inconsistent with current economic trends.
D.All of these are a focus of the auditor regarding reasonable estimates.
Which of the following statement is true?
A.Intangible assets should be recorded at fair market value.
B.Intangible assets should be recorded at cost.
C.Intangible assets should be recorded at future market value.
D.Intangible assets should not be recorded.
In the letter of audit inquiry concerning a description and evaluation of litigation,
claims and assessment provided by management to the auditor, which of the following
is the client’s lawyer not requested to provide?
A.Information on the completeness of management’s list.
B.Information on the compliance of the disclosures with GAAP.
C.Information on the likelihood and range of possible losses.
D.Information on any limitations on the lawyer’s response.
Appropriateness of evidence is a measure of which of the following?
A.Quantity of evidence.
B.Quality of evidence.
C.Sufficiency of evidence.
D.Meaning of evidence.
Which of the following terms best describes the risk that audit evidence will fail to
detect misstatements exceeding tolerable misstatement?
A.Audit risk.
B.Control risk.
C.Detection risk.
D.Inherent risk.
Which of the following situations is not one where the practitioner will modify the
standard compilation report?
A.There is an omission of disclosures for the compilation.
B.A compilation report is not required
C.The practitioner lacks independence.
D.An understanding of internal controls cannot be obtained.
An Integrated Audit Report provides opinion(s) on which of the following?
A.The financial statements.
B.Internal controls.
C.Both financial statements and internal controls.
D.Neither financial statements or internal controls.
Directional testing involves testing transactions or balances primarily for which type of
error?
A.Overstatement.
B.Understatement.
C.Either overstatement or understatement.
D.Either overstatement nor understatement.
Harry Rawlins CPAs, are engaged by DK, Inc., a public company to perform the
year-end audit.
A. Discuss the types of services that Harry Rawlins CPAs will not be able to perform
for DK under the Sarbanes-Oxley Act of 2002.
B. Under what circumstances may Harry Rawlins CPAs perform certain non-audit
services for DK, Inc. under Sarbanes-Oxley Act of 2002?
Commissions and referral fees are not permitted for which types of services?
A.Tax.
B.Reviews.
C.Audits.
D.Both B and C.
Which of the following is not a main provision of the Foreign Corrupt Practices Act of
1977 (FCPA)?
A.No U.S. person or companies that have securities listed on U.S. markets may make a
payment to a foreign official for the purpose of obtaining or retaining business.
B.Companies that have securities listed on U.S. markets must make and keep financial
records that accurately and fairly reflect the transactions of the company.
C.Designing and maintaining internal accounting controls is the role of internal auditors
when management conducts business in a foreign country.
D.Certain payments made to an official to expedite the performance of the duties that
the official would already be bound to perform are acceptable.
An audit of the other postemployment benefits does not require estimates with respect
to which of the following?
A.Changes in medical expenses.
B.Changes in coverage.
C.Changes in average life expectancies.
D.Changes in Human Resource personnel in charge of postemployment benefits.
Auditors are concerned with the addresses provided for customers in the confirmation
of accounts receivable because of which of the following reasons?
A.Confirmations are selected based upon zip codes.
B.A P.O. Box is more reliable than a street address.
C.Confirmations should be sent only to business addresses and not residential.
D.The address may be routed to the client for retrieval and fraudulent signing.
Which one of the following is a proper course of action for the auditor when the total
estimated misstatement exceeds the tolerable misstatement?
A.The auditor can ask the client to correct the known misstatements.
B.The auditor will analyze the detected misstatements for some common problems.
C.The auditor can expand the sample.
D.All of the above.
Barrett Jennings, CPA, has prepared a letter of representation for the president and
controller to sign. The following items are contained in it:
(a) Inventory is fairly stated at the lower of cost or market and includes no obsolete
items.
(b) All actual and contingent liabilities are properly included in the financial statements.
(c) All subsequent events, relevant to the financial statements, have been disclosed.
Required:
(1) Why is it desirable to have a letter of management representation letter from the
client concerning these matters when the evidence accumulated during the course of the
audit is meant to verify the same information?
(2) How is the letter of management representation useful as audit evidence?
(3) What are several other types of information commonly included in the management
representation letter?
Accounting for inventories is a major consideration for many companies because of its
significance to which of the following financial statements?
A.Balance sheet.
B.Income statement.
C.Accounts receivable statement.
D.Both A and B.
The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the
following valuations are generally viewed as the most subjective?
A.Level 0.
B.Level 1.
C.Level 2.
D.Level 3.
Which of the following is not part of the control environment?
A.Management philosophy and operating style.
B.Methods of assigning authority and responsibility.
C.Personnel policies and practices.
D.Control activities.
Which one of the following reports is not a special report issued as a result of an
examination?
A.Report on a specified financial statement element.
B.Report on compliance with contractual agreements.
C.Agreed upon procedures.
D.Report on information presented in prescribed forms.
An emphasis of a matter may result in which of the following?
A.A disclaimer of an audit opinion.
B.A qualified audit opinion.
C.An adverse opinion.
D.An unqualified audit opinion with an explanatory paragraph either before or after the
opinion paragraph.
Which one of the following is a decision the auditor makes when using attribute
sampling?
A.The sampling unit.
B.Period covered by testing.
C.Completeness of the population.
D.All of the above are auditor decisions.