Which of the following is NOT a “Big Four” firm?
a. PwC.
b. Grant-Thornton.
c. Deloitte & Touche.
d. Ernst & Young
The responsibility of the audit firm is to communicate to users:
A. its opinion on whether the company’s financial statements are free from error.
B. the results of the operations of the company during the period.
C. its opinion on whether the company’s financial statements fairly present the
company’s economic events.
D. the names of all individuals involved with the audit.
Under which circumstances should an auditor NOT issue a disclaimer of opinion?
a. When the auditor has not performed all the necessary fieldwork.
b. When an auditor has determined the client is not following GAAP.
c. When the auditor is denied access to the minutes of the Board of Directors.
d. Both “b” and “c”.
In a financial statement audit, the difference between when an auditor issues a
disclaimer or issues a qualified opinion because of a scope limitation centers on:
a. the reason for the scope limitation.
b. management’s attitude and response to the auditor.
c. the cause and severity of the scope limitation.
d. Both “a” and “b”.
Retail sales businesses post sales activity to their inventory and cost of sales accounts as
well as to:
a. expense accounts.
b. asset accounts.
c. liability accounts.
d. revenue accounts.
e. common stock accounts.
The first section of an engagement letter addresses the terms of the services and related
report, including the auditor’s performance of a(n):
(a) integrated audit of the financial statements and ICFR.
(b) integrated audit of the financial statements and income tax returns.
(c) integrated audit of the information contained in each Form 10-Q filed during the
year.
(d) review of the company’s monthly financial information to be filed with the SEC
All of the following are deposited to the retailer’s bank account like cash except:
a. cash.
b. common stock.
c. received checks.
d. sales receipts resulting transactions conducted using bank credit cards.
RICO is typically used for violations of:
a. Securities fraud.
b. Casino fraud.
c. Mail fraud.
d. All of the above.
Moral development theory suggest that the criteria a person uses to make decisions
depends on his or her level of moral development. Which of the following is NOT one
of the levels?
A. Pre-development level.
B. Pre-conventional level.
C. Post-conventional level.
D. Conventional level.
FASB codification 850-10:
a. requires different treatment for related party transactions.
b. requires disclosure of related party transactions.
c. requires the same treatment for related party transactions as it does for non related
party transactions.
d. Both b and c.
The presentation and disclosure assertion is audited by:
a. tracing the paychecks to the bank statement.
b. tracing the cash disbursements in the general ledger to the imprest account.
c. tracing the control totals for the payroll register to the general ledger.
d. All of the above.
Section 302 certifications are:
a. completed by the auditors.
b. completed by management.
c. completed by the audit committee.
d. None of the above.
When ICFR and the quality of perpetual inventory records justify relying on an
inventory count by the company at other than fiscal year end, the auditor’s testing
should include each of the following except:
a. verification of inventory purchases occurring during the period between the time of
the physical count and year end.
b. tests of controls performed during the period between the time of the physical count
and year end.
c. reconciliation of the count result to the final inventory balances in the financial
statements.
d. verification of sales transactions during the period between the time of the physical
count and year end.
The tolerable misstatement affects:
a. whether or not an unadjusted balance is recorded.
b. the determination of materiality.
c. the amount of the unadjusted balance to record.
d. All of the above.
Why will an auditor more extensively test controls for the completeness assertion on
liability accounts than on asset accounts?
(a) The risk of unrecorded liabilities is greater than the risk of unrecorded assets.
(b) The completeness assertion is not applicable to asset accounts.
(c) The liabilities account balances presented in the financial statements tend to be more
complete than the asset accounts.
(d) The most likely type of misstatement for liabilities is overstatements.
Triad, Inc. sells body armor to various governments around the world. One of its major
customers was a country that was experiencing civil unrest throughout the past year.
Triad, Inc. had a very material account receivable from this country’s
military government at its fiscal year end on December 31.
Although it was temporarily kept a secret from the press, the military government was
overthrown in the last week of the calendar year and a new democratic government was
set up with an interim president. When elections were held in January, one of the
decisions made by the voters was to disavow any of the prior government’s debts to any
entities outside the country. Triad, Inc. management and the audit firm learn about these
events from news reports in January while the integrated audit engagement is in
process.
(a) How should these events affect Triad, Inc.’s financial statements? How should
they affect the financial statement audit report? Does this scenario affect the
auditor’s report on ICFR?
(b)Assume that the military government was overthrown in early January and Triad and
the auditor learned of it in February, when the audit was still in process.How does your
answer change?
(c) Assume that the military government was overthrown in March and that Triad and
the audit firm saw the news reports shortly after the 10K, including the audit report, was
filed with the SEC. How does your answer change?
A RFP is an important source of information that is:
(a) provided by a potential client about its proposal process and audit engagement.
(b) provided by an auditor about how its professional competencies match the needs of
the audit engagement.
(c) used only for audits of public companies.
(d) used only when a company needs to change auditors.
You are assigned to audit accounts payable for a manufacturing client. As part of the
planning, your manager sets a tolerable misstatement amount of+/- $125,000. Your
review of unpaid invoices indicates an understatement error of $25,253 from a sample
of $675,467. The population value of A/P is $5,241,687 at October 31st. The estimated
error rate is:
a. 6%.
b. 0.001%.
c. 3%.
d. Cannot be determined.
Valuation techniques:
(a) should use observable inputs.
(b) cannot use unobservable inputs.
(c) may use both observable and unobservable inputs.
(d) None of the above.
Which of the following items are included in the audit planning meeting?
(a) brainstorming about fraud risks
(b) establishing responsibility for preparing the financial statements
(c) establishing responsibility for monitoring of internal controls
(d) preparing the engagement letter.
The presence of material related party transactions:
a. can increase the risk associated with a client.
b. can increase the time needed for performing adequate testing.
c. can cause the auditor to be ill.
d. All of the above.
A material type II subsequent event:
a. requires disclosure in the notes to the financial statements.
b. requires recognition in the body of the financial statements.
c. Either “a” or “b” depending on the circumstances.
d. None of the above.
Which of the following statements is true regarding the SEC’s 2007 interpretive release
to management for assessing and reporting on the effectiveness of ICFR?
(a) Examples of specific management documentation are provided in the release.
(b) If controls appropriately address risks, indicating design effectiveness, management
tests the controls to assess operating effectiveness.
(c) The overall system of ICFR may be deemed effective if one or only a few material
misstatements are identified.
(d) Management only needs to test those controls that are ineffective in the prevention
of material misstatements in the financial statements.
Which of the following statements is correct concerning the use of negative
confirmation requests?
a. Negative confirmation requests are effective when detection risk is low.
b. Unreturned negative confirmation requests rarely provide significant explicit
evidence.
c. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
d. Negative confirmation requests are effective when understatements of account
balances are suspected.
When a decision has to be made for which the maker believes there is no clear right or
wrong answer describes what is meant by a moral dilemma.
A CPA firm engaged in the audit of public companies must:
a. Have at least 5 partners.
b. Have multiple offices across the U.S.
c. Hire and train competent personnel.
d. All of the above.
Variable interest entities:
(a) may be accounted for either using consolidation or fair value.
(b) often do not specify who has the controlling interest.
(c) can be used to shield liabilities from disclosure.
(d) All of the above.
When using monetary unit sampling,
a. smaller amounts are more likely to be sampled.
b. larger amounts are more likely to be sampled.
c. offers automatic stratification.
d. both b and c.
Which of the following would be found on an interbank transfer schedule?
(a) Transfers per books.
(b) Withdrawals per bank.
(c) Deposits in transit.
(d) All of the above.
Listed below are the five financial statement assertions. Match each assertion with the
appropriate test you would perform to test the assertion. You may use an assertion more
than once and some tests require more than one assertion.
1> Existence, occurrence
2> Completeness
3> Rights, obligations
4> Valuation, allocation
5> Presentation and disclosure
TESTS
(a) Observe physical inventory.
(b) Obtain positive confirms directly from the supplier.
(c) Obtain cut-off bank statements directly from the bank.
(d) Examine the board of directors’ minutes.
(e) Examine loan documentation.
(f) Inquire as to related party transactions.
(g) Count cash.
(h) Inspect investment certificates.
(i) Obtain positive confirmations from customers.
(j) Reperform interest expense.
Section 10b-5 of the Securities Act of 1934 requires that:
a. Plaintiffs must show the auditors lacked reasonable care when performing an audit.
b. Plaintiffs must show standing before bringing a lawsuit.
c. Plaintiffs must prove scienter.
d. All of the above.
The document used by a company when it bills a customer directly for a credit sale is
called a(n):
a. invoice.
b. report.
c. pick ticket.
d. bill of lading.
e. transaction.
When a governmental entity meets the $500,000 expenditure threshold, it is subject to a
single audit of both its financial statements and its compliance with the provisions of
any federal awards it received.
External auditors are organizationally independent because they work for a different
entity.
The substantive testing is organized around the transaction cycles.
When using the percentage of completion method, the amount of revenue recognized in
the current period is calculated using the proportion of total expected product costs
relative to costs incurred to date.
If an individual’s job is purchasing agent, and that person is allowed to purchase from
whatever vendor he or she choosesin other words, the purchasing agent does not have to
comply with an approved vendor and price listhow can that person steal from or
perpetrate a fraud on his or her employer?
Sales returns and allowances remain constant in their magnitude and never need
differing levels of control and approval.
It is acceptable for auditors to reduce test of balances and transactions if the ITGC are
effective.
All subsequent events are recorded in the footnotes as a contingent liability.
If a material event occurs subsequent to the issuance of the financial statements that
renders the audit report no longer reliable, the auditor should communicate that fact to
all parties who are known to be relying on the audit report.
Why does a recent or upcoming IPO create more risk for the auditor? Which audit firms
seem best positioned to accept the risk? Which audit firms likely have the greatest
expertise with that type of client? What would be the ultimate outcome if the most
qualified audit firms turn down companies with IPOs because they do not want the risk,
and the companies must use audit firms with less experience and expertise? How does
this scenario fit in with protecting the public interest?
Kiting involves inter-bank transfers.
What are all the possible allegations and charges that might be brought against an
auditor for a single case?
All entities with which a company has long-term relationship are consolidated.
A basic source of information for ethical and moral behavior comes from the field of
philosophy.
Cohen and Single, LLP, are auditing the ICFR and financial statements of Copley and
Sons, a public company that sells supplies to government agencies. Copley and Sons
has a 12/31 fiscal year end. Cohen and Single conclude that the financial statements for
the current and prior year are fairly stated. However, they found a material weakness in
ICFR. There is a lack of separation of duties because the company’s CFO has the ability
to change passwords on employee’s computer identification numbers and has unlimited
access to a computer terminal through which any journal entry can be entered without
approval and review. Management’s evaluation of ICFR is also as of 12/31, and
management’s report states that ICFR is not effective due to the computer security
problem causing the lack of separation of duties. Draft Cohen and Single’s combined
audit report with opinions on the financial statements and ICFR as described.
Jacoby & Ricks, CPAs, is responding to a request for proposal from Z-Berr Industries, a
privately held company located near Milwaukee. Z-Berr is a rapidly growing company
engaged in the manufacture and distribution of bicycle wheels and tires. The company
recently expanded its product offerings into the areas of motor scooters and other small
vehicles used for sports and recreation. Because of its recent growth, Z-Berr is in need
of a great deal of assistance in improving its financial reporting systems. It indicates
that it needs assistance with some nonaudit services, including its income tax planning
and tax return preparation, computer systems upgrade and the hiring and training of a
systems administrator,
and implementation of an internal audit function, including the hiring and training of
internal audit staff. In addition, the company has requested an integrated audit, as it
suspects that an initial public offering is on the horizon.
(a) Assuming that Jacoby & Ricks desires to bid on Z-Berr’s audit engagement,
which of the additional nonaudit services can the firm include in its proposal? Explain.
(b)How would your answer to part (a) change if Z-Berr was already a public company?
What is dual direction testing?
A specific example of the Government Accountability Office’s important contribution is
its assigned work related to the American Recovery and Reinvestment Act.
Why do the audit standards address qualifications of the user of financial statements in
the discussion of materiality?
Why is fraud that is committed by management always considered material, even if the
amount is not quantitatively material?