When auditing a public company, a CPA must follow the auditing standards and Code
of Professional Conduct of the PCAOB.
There are typically only a couple of disclosure items that need to be considered for
stockholders’ equity.
An auditor can be sued by a third party under statutory law for willful violation of
federal statutes.
If an entity has few capital asset purchases, it will generally not have a formal control
system over such transactions.
Accounts payable confirmations are used less frequently by auditors than accounts
receivable confirmations.
The auditor’s observation of inventory is a generally accepted auditing procedure.
An example of a contingent liability is an income tax dispute.
Substantive analytical procedures can be used extensively to test revenue and expense
accounts.
The risk of a material misstatement includes inherent risk and sampling risk.
All companies must have an audit committee.
Credit authorization is used to determine if a customer is able to pay for goods.
The auditor must use his or her professional judgment to determine the amount of audit
evidence to be gathered.
The sufficiency of evidence refers to the quality of audit evidence.
Engagement risk is the auditor’s exposure to loss or injury of his or her reputation from
events arising in connection with financial statements audited.
The relevance of audit evidence or specific audit procedures depends on the assertion
being tested.
Dual dating is used to identify unrecorded contingent liabilities.
A basic assumption that underlies financial reporting is that an entity will continue as a
going concern.
Substantive analytical procedures are commonly used to test prepaid accounts.
Audit sampling is commonly used to gather scanning audit evidence.
A high inventory turnover ratio normally indicates inefficient inventory policies.
All companies must follow the guidelines of AS5.
If a CPA owns an insurance policy issued by an attest client, independence would be
considered impaired, even if the policy was purchased under the insurance company’s
normal terms and procedures and does not offer an investment option.
Interpretations of Rules of Conduct are enforceable.
A financial statement audit is generally organized based on the five basic business
processes or cycles.
Privity of contract is the most restrictive view for plaintiffs under common law.
PCAOB auditing standards must be followed on all audits of public companies’
financial statements.
If the entity maintains custody of its investments, the auditor normally examines the
actual securities.
Audit procedures are designed to test management assertions.
The extent of an entity’s use of IT can affect any of the components of internal control.
Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation
model.
The audit test of control “Review and test procedures for issuing materials to
manufacturing departments” provides assurance mainly for the occurrence assertion for
inventory management.
The payroll-processing function is responsible for paying employees for services and
benefits.
Management assertions fall into four main categories.
Order entry is the initial function in the revenue cycle.
Type II subsequent events are conditions that require an adjustment to the account
balance shown on the financial statements.
Once a level of control risk has been established, it cannot be changed.
A substantive strategy is used when control risk has been set at high.
The purpose of audit sampling is to draw inferences about the entire population from
the results of a sample.
Confidence level is inversely related to sample size.
The registrar is responsible for preparing stock certificates and maintaining adequate
stockholders’ records.
Which of the following is a general control that would most likely assist an entity
whose systems analyst left the entity in the middle of a major project?
A. Grandfather-father-son record retention.
B. Input and output validation routines.
C. Systems documentation.
D. Check digit verification.
The auditor can respond to an increased risk of fraud by doing all of the following
except:
A. Evaluating whether the accounting policies selected may be indicative of fraudulent
financial reporting through earnings management.
B. Assigning more experienced personnel to the audit.
C. Increasing detection risk.
D. Taking steps to obtain more reliable evidence.
You are concerned with unrecorded transactions in the purchasing cycle. Which audit
procedure are you most likely to use when auditing purchases?
A. Vouching transactions in accounting records to vendor invoices.
B. Tracing vendor invoices to accounting records.
C. Recalculation of vendor invoice amounts.
D. Confirmation of customer accounts.
Failure to record inventory in the proper period can affect all of the following accounts
except:
A. sales.
B. receivables.
C. cost of Goods Sold.
D. prepaid Expenses.
The authoritative body designed to promulgate standards concerning a CPA’s
association with audited financial statements of an entity that is required to file financial
statements with the SEC is the
A. Financial Accounting Standards Board.
B. General Accounting Office.
C. Public Company Accounting Oversight Board.
D. Auditing Standards Board.
The adverse effects of events causing an auditor to believe there is substantial doubt
about an entity’s ability to continue as a going concern would most likely be mitigated
by evidence relating to the
A. ability to expand operations into new product lines in the future.
B. feasibility of plans to purchase leased equipment at less than market value.
C. marketability of assets that management plans to sell.
D. committed arrangements to convert preferred stock to long-term debt.
Many of Granada Corporation’s convertible bond holders have converted their bonds
into stock during the year under examination. The independent auditor should review
Granada Corporation’s statement of cash flows to ascertain that it shows
A. only cash used to reduce convertible debt.
B. only cash provided by issuance of stock.
C. cash provided by the issuance of stock and used to reduce convertible debt.
D. nothing relating to the conversion because it does not affect cash.
Which of the following audit procedures would an auditor be least likely to perform
using a generalized computer audit program?
A. Searching records of accounts receivable balances for credit balances.
B. Investigating inventory balances for possible damaged goods.
C. Selecting accounts receivable for positive and negative confirmations.
D. Listing of unusually large inventory balances.
Which of the following is not included in the broad category of assurance services?
A. Operational audit.
B. Reporting on internal control.
C. Accounting or review services.
D. Evaluation of the auditee’s risk management framework.
A CPA is most likely to refer to one or more of the three PCAOB general auditing
standards in determining
A. The nature of the CPA’s report qualification.
B. The scope of the CPA’s auditing procedures.
C. Requirements for the review of the entity and its environment.
D. Whether the CPA should undertake an audit engagement.
A control is deemed to be more important than thought at the time that attributes
sampling parameters were set. The auditor is most likely to respond by
A. decreasing the risk of assessing control risk too high.
B. increasing population size.
C. decreasing the tolerable deviation rate.
D. decreasing the expected deviation rate.
Which of the following is least likely to represent a material weakness in internal
control for Flynt Corporation?
A. Flynt Corporation’s computer systems were not working properly for two days;
consequently, employees needed to do all reconciliations manually.
B. Flynt Corporation’s CFO was arrested last year for embezzling money from the
entity.
C. For the current year, the auditor found a material misstatement in Flynt’s sales
recognition that was undetected by the internal controls.
D. Flynt’s audit committee is deemed to be ineffective.
Which of the following is a plausible explanation for a large increase in the number of
days outstanding in inventory?
A. Obsolete inventory.
B. New product line where sales exceed production.
C. Manufacturing overhead was not allocated to the production process.
D. Manufacturing salaries were recorded as administrative expenses.
Which of the following procedures is more likely to be performed in a review
engagement of a nonpublic entity than in a compilation engagement?
A. Gaining an understanding of the entity’s business transactions.
B. Making a preliminary assessment of control risk.
C. Obtaining a representation letter from the chief executive officer.
D. Assisting the entity in adjusting the accounting records.
Which of the following control activities may prevent the failure to bill customers for
some shipments?
A. Each shipment should be supported by a prenumbered sales invoice that is accounted
for.
B. Each sales order should be approved by authorized personnel.
C. Sales journal entries should be reconciled to daily sales summaries.
D. Each sales invoice should be supported by a shipping document.
Which of the following is false?
A. Regardless of the achieved level of control risk in connection with the audit of the
financial statements, auditing standards require the auditor to perform some substantive
procedures for all significant accounts and disclosures.
B. The absence of misstatements in financial statements is considered convincing
evidence that existing controls are effective.
C. The audit of internal control is intended to draw conclusions about the effectiveness
of internal control over financial reporting as of a specific date.
D. The auditor is required by AS5 to evaluate the implications of the financial statement
audit for the effectiveness of internal control over financial reporting.
To emphasize auditor independence from management, publicly traded corporations are
required to
A. Appoint a partner of the CPA firm conducting the examination to the corporation’s
audit committee.
B. Establish a policy of discouraging social contact between employees of the
corporation and the independent auditors.
C. Request that a representative of the independent auditor be on hand at the annual
stockholders’ meeting.
D. Have the independent auditor report to an audit committee of independent members
of the board of directors.
As a result of tests of controls, an auditor over relied on internal control and decreased
substantive testing. This overreliance occurred because the true deviation rate in the
population was
A. less than the risk of assessing control risk too low on the auditor’s sample.
B. less than the deviation rate in the auditor’s sample.
C. more than the risk of assessing control risk too low on the auditor’s sample.
D. more than the deviation rate in the auditor’s sample.
An auditor would consider internal control over an entity’s payroll procedures to be
ineffective if the payroll department supervisor is responsible for
A. hiring subordinate payroll department employees.
B. having custody over unclaimed paychecks.
C. updating employee earnings records.
D. applying pay rates to time tickets.
Which of the following circumstances normally does not affect the consistency phrase
in the auditor’s standard report?
A. A change in accounting estimate.
B. A change in accounting principle.
C. A change in the companies included in combined financial statements.
D. A correction of an error in principle.
Preliminary engagement activities include
A. Evaluating internal controls.
B. Assessing audit risk at the account balance level.
C. Setting materiality.
D. Performing background checks on top management.
A deficiency that implies that there is a reasonable possibility of misstatement in the
financial statements that is significant but not material is
A. A material weakness.
B. A significant deficiency.
C. An insignificant deficiency.
D. A probable deficiency.
A Type II subsequent event usually requires
A. an adjustment to the financial statements and the footnotes.
B. an adjustment to the financial statements but no special disclosure is required.
C. disclosure in the footnotes.
D. neither an adjustment to the financial statements nor disclosure in the footnotes.
An auditor typically sets inherent risk for intangible assets at this level
A. low.
B. moderate.
C. zero.
D. high.
According to the COSO definition of safeguarding of assets
A. Controls over financial reporting are effective if they provide reasonable assurance
that asset losses will not occur.
B. Controls over financial reporting are effective if they provide reasonable assurance
that losses are properly reflected in the financial statements.
C. Controls over financial reporting are effective if they provide reasonable assurance
that asset losses will not occur and that losses are properly reflected in the financial
statements.
D. There is no way to create controls that will provide reasonable assurance that asset
losses will not occur.
In testing for unrecorded retirements of equipment, an auditor most likely would
A. select items of equipment from the accounting records and then locate them during
the plant tour.
B. compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment.
C. inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
D. scan the general journal for unusual equipment additions and excessive debits to
repairs and maintenance expense.
The primary purpose of a generalized computer audit program is to allow the auditor to
A. Use the entity’s employees to perform routine audit checks of the electronic data
processing records that otherwise would be done by the auditor’s staff accountants.
B. Test the logic of computer programs used in the entity’s electronic data processing
systems.
C. Select larger samples from the entity’s electronic data processing records than would
otherwise be selected without the generalized program.
D. Independently process electronic data processing records.
As part of an audit, a CPA often requests a management representation letter from the
entity. Which one of the following is not a valid purpose of such a letter?
A. To provide audit evidence.
B. To emphasize to the entity their responsibility for the fairness of the financial
statements.
C. To satisfy himself or herself that a certain account balance is fairly stated when
certain customary auditing procedures are not performed.
D. To provide possible protection to the CPA against a charge of knowledge in cases
where fraud is subsequently discovered to have existed in the accounts.
The three PCAOB standards of fieldwork are concerned with
A. Planning and supervision and understanding the auditee’s internal control system.
B. Choosing evidence with due professional care.
C. Adequate training to understand the auditee’s internal controls system.
D. Ensuring consistency in financial statements for periods presented.
The management letter is used
A. to allow management to document, in writing, oral representations to the auditor.
B. to confirm the terms of the audit engagement.
C. to list all reportable conditions with respect to internal controls.
D. to make recommendations to the entity based on observations made during the audit.
Which of the following is not one of the auditor’s primary objectives in an examination
of marketable securities?
A. To determine whether securities are authentic.
B. To determine whether securities are the property of the entity.
C. To determine whether securities actually exist.
D. To determine whether securities are properly classified on the balance sheet.
Substantive procedures to examine the cutoff assertion for accounts payable include
A. selecting a sample of vouchers and agreeing them to authorized purchase orders.
B. selecting a sample of vouchers and agreeing them to the purchases journal.
C. selecting a sample of receiving reports around year-end and comparing dates on
related vouchers to dates in the purchases journal.
D. recomputing the mathematical accuracy of a sample of vendor invoices.
The acceptable level of detection risk is inversely related to the
A. Extent of the substantive procedures.
B. Risk of misapplying auditing procedures.
C. Overall materiality.
D. Risk of failing to discover material misstatements.
Which audit procedure is most closely related to management’s assertions about the
presentation and disclosure of stockholders’ equity?
A. Determining whether restrictions have been imposed on retained earnings.
B. Counting treasury stock certificates.
C. Inspecting minutes of the board of directors to verify that cash dividends were
declared.
D. Establishing that treasury stock is valued at cost.
As part of gaining an initial understanding of internal control, an auditor is required to
do all of the following except:
A. Consider factors that affect the risk of material misstatement.
B. Ascertain whether internal control policies and procedures have been placed in
operation.
C. Identify the types of potential misstatements that can occur.
D. Obtain knowledge about the operating effectiveness of the internal control.
Whenever a statistical method is used, a decision rule determines whether the
population is acceptable. The decision rule for monetary-unit sampling is “Accept the
conclusion that the book value is not misstated by a material amount if
_______________________.”
Explain how the human resource management process can affect the financial
statements.
What type of liability has the Private Securities Litigation Reform Act of 1995 created
for cases filed under federal statutory law? How did this change from previous
legislation? How has this impacted the cases against auditors and the way cases are now
presented?
On the audit of Technology Unlimited, a leading manufacturer of computer chips, the
external audit staff discovers that the internal audit staff has performed extensive
evaluation and testing on the control environment. What should the external auditors do
to determine the extent to which they may use the work of the internal audit staff? Can
the external audit staff rely on the internal audit staff for evaluating and testing the
control environment?
Explain the importance of observing physical inventory during an audit.
Name three Sarbanes-Oxley Act requirements of the members and duties of the audit
committee of a public company.
A standard, unqualified auditor’s report contains three paragraphs, plus a fourth
explanatory paragraph in some circumstances. Provide a brief (one sentence)
description for each paragraph.
Describe two advantages and two disadvantages of monetary-unit sampling (MUS).
Explain the occurrence and completeness assertions. How does failure to meet each
assertion affect the financial statements?
The principles underlying an audit conducted in accordance with generally accepted
auditing standards are grouped into four categories. The second category is that of
“personal responsibility of the auditor.” Generally explain what is intended by this
principle.
Explain the relationship between audit, attest and assurance services.
Sarah is auditing the sales of a new client. In one procedure Sarah performs, she begins
with the original sales documents and then searches the accounting records to find the
corresponding entry. What test is Sarah performing and what management assertion is
she testing?
The IAASB and the ASB have collaborated on the principles underlying an audit
conducted in accordance with generally accepted auditing standards. These principles
are grouped into four categories. What are the four categories?
Your manager, Sally, believes that nonstatistical sampling is the best method to use on
the audit of YaYa Corporation. You, however, believe that statistical sampling is by far
the better method. In addition, you have a great deal of training in the proper use of
sampling techniques. Prepare an argument to convince Sally why statistical sampling
should be used.
What are some typical types of evidence that may be collected in testing an entity’s
internal controls?