A review report issued by a public accounting firm on a public client’s interim financial
statements includes reference to adherence to the standards of the Public Company
Accounting Oversight Board.
Audit quality is driven, in part, by the audit firm’s culture.
FASB has set forth four categories of potential losses that can be reasonably estimated.
If the auditor believes that misstatements aggregating approximately $50,000 would be
material to the income statement, but misstatements aggregating approximately
$100,000 would be material to the balance sheet, the auditor typically assesses overall
materiality at $100,000 or less.
The auditor multiplies the quantity of inventory on the inventory ledger by the cost of
the inventory to arrive at total inventory balance per product number. This is an
example of recomputation by footing.
Control activities implemented to mitigate transaction processing risk that typically
affect only certain processes, transactions, accounts, and assertions are referred as
transaction or application controls.
Contingent fees are prohibited for tax professionals when preparing tax returns for
clients
Auditors are permitted to perform for a contingent fee an audit of the financial
statements if the audit committee approves the agreement in advance of the services
being provided.
While inspecting documents, auditors should use original documents rather than copies,
because copies are easy for management to falsify.
An appropriate mix of evidence for a low risk client could include 20% tests of details,
40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high risk
client could include 60% tests of details, 20% analytics, and 20% tests of controls.
The auditor is responsible for actively considering fraud risks in order to obtain
reasonable assurance that the financial statements are free of material fraud.
When the client has a large number of relatively small accounts receivable and the
assessed level of control risk for receivables and related revenue transactions is high,
the auditor is more likely to use negative confirmations.
A walkthrough involves following a transaction back from when it is reflected in the
financial records to when it originated to determine if the controls are effectively
designed and have been implemented.
Only public companies have to be concerned with business risk.
The client should have methods in place to identify and account for intangible-asset
impairments.
Once the auditor obtains a fixed asset additions schedule from the client, testing of the
existence of the additions must immediately ensue to ensure effectiveness of the
substantive procedures.
A well-controlled organization has an appropriate structure and clearly defined lines of
responsibility and authority where everyone in the organization has equal responsibility
for the effective operation of internal control.
Under international auditing standards, when the audit client has engaged other audit
firms to audit remote locations around the country, the principal auditor must mention
the other audit firms in the audit report.
A disclosure checklist is a convenient documentation format for evidence that the
auditor adequately evaluated the client’s disclosures.
The risk of material misstatement related to the existence of long-lived assets at Client
A is considered low, while this risk at Client B is considered high. Sufficiency of
evidence for testing the existence of equipment would be higher for client B.
Testing cutoff involves procedures applied to sales transactions selected from those
recorded immediately prior to period end and immediately following period end.
The auditor must perform a brainstorming session with client management in order to
plan the procedures to be performed.
A timing difference type of exception in the confirmation process may include a
misunderstanding by the reader as to the date being confirmed.
Notes issued by major corporations are known as commercial paper.
An ethical dilemma occurs an ethically correct action may conflict with an individual’s
immediate self-interest.
Without independence, the value of the auditor’s attestation function would be nil.
An example of a Type I subsequent event would be a significant lawsuit that is initiated
relating to an incident that occurred after the balance sheet date.
Customer complaints noted in returned accounts receivable confirmations may be an
indicator of fraud.
Inadequate records of cash by the company can provide opportunity for fraud.
While performing goodwill impairment testing, if the original reporting unit no longer
exists because operations have been fully integrated into operations of the parent
company, the approach would be to determine whether all other assets have been
adjusted to fair value, where applicable.
If the auditor continues to have substantial doubt about the client continuing as a going
concern, the auditor should evaluate the adequacy of the client’s related disclosures.
An example of a control over the sales cycle is the authorization of price lists by the
appropriate sales and marketing manager.
Scanning is a type of analytical procedure which involves reviewing accounting data to
identify significant or unusual items, such as examining a credit balance in an account
that typically has a debit balance.
Tolerable misstatement is the maximum amount of misstatement the auditor can accept
in the population without requiring an audit adjustment or a qualified audit opinion.
The auditor’s determination that day’s sales in accounts receivable increased from 44
days to 100 days would usually be found through the use of ratio analysis.
If omitted audit procedures cannot be performed, the auditor should extend previous
work done and modify the report, if necessary.
The Generally Accepted Auditing Standards represent the minimum standards for
performing an audit.
The Center for Audit Quality has the primary authority to set auditing standards.
Complex audit judgments and decisions often involve accounts that require subjective
estimates by management.
Testing cash disbursements subsequent to the year under audit allows the auditor to
determine certain payables that may not have been recorded previously.
Audit documentation should contain which of the following?
A.A heading that includes the name of the audit client, an explanatory title, and the
balance sheet date.
B.The initials or electronic signature of the auditor performing the audit test and the
date the test was completed.
C.The initials or electronic signature of the manager or partner who reviewed the
documentation and the date the review was completed.
D.All of the above.
Which of the following statements best describes the primary difference between an
audit and forensic accounting?
A.An audit has the focused responsibility to detect fraud in the client organization,
while forensic accounting sets out to prevent fraud.
B.An audit has no responsibility for detecting fraud, while forensic accounting provides
an audit specific to material fraud discovery.
C.An audit must follow Generally Accepted Auditing Standards, while the forensic
accountant is bound to Generally Accepted Fraud Standards.
D.An audit utilizes sampling techniques to detect material misstatements, while
forensic accounting examines the entire population of fraudulent transactions.
What is the management of a company is responsible for?
A.Hiring the auditor.
B.Preparing the financial statements.
C.The audit workpapers.
D.Ensuring auditor independence.
Which one of the following is an example of a conflict of interest for a CPA?
A.Performing tax services and a compilation engagement for a client.
B.Serving as legal counsel and an auditor for a client.
C.Providing an audit on internal financial controls and financial statements for a client.
D.Serving as a chief financial officer as an employee and as a member of the board of
directors.
What should an auditor do when becoming aware of violations of the FCPA?
A.Contact foreign officials in the country where the client has business operations.
B.Notify the audit committee about the violations, their circumstance, and the effect on
the financial statements.
C.Contact the U.S. marshals.
D.Design internal controls to deter improper payments.
Which of the following factors influence the risk of material misstatement?
A.The business risks.
B.Management incentives.
C.IT risks.
D.All of the above.
In selecting a sample for attribute testing, haphazard selection involves which of the
following approaches?
A.Each item in the population having an equal chance of selection.
B.Every nth item being selected after a random start.
C.An arbitrary selection with no conscious bias.
D.Selecting all items on a day or week.
The principle of lower of cost or market and the potential obsolescence of inventory are
a concern for the audit team because of which of the following?
A.They are uncommon and may not exist.
B.They are a burden to the auditor in the undue amount of work caused.
C.They are likely to occur in the last month of the year and cause cutoff problems.
D.They are an inherent component of complexity related to valuation.
Which of the following assertions is the primary assertion that is satisfied by physically
observing the client’s count of inventory?
A.Rights.
B.Valuation.
C.Completeness.
D.Existence.
If $15,000 is considered to be material to the income statement, but $25,000 is material
to the balance sheet, the auditor should set overall materiality at which of the following
dollar amounts?
A.$20,000
B.$25,000
C.$40,000
D.$15,000
Which of the following is subject to fair value assessment?
A.Marketable securities.
B.Inventory.
C.Property that will be sold.
D.All of the above could require fair value adjustments.
Which of the following is not a reason that the auditor must gain an understanding of
the client’s internal control system?
A.Better understand the client, its risks, and how it manages those risks.
B.Assess control risk and identify the types of financial statement misstatements that
are most likely to occur.
C.Plan direct tests of account balances to determine if misstatements have occurred.
D.All are reasons why auditors must gain an understanding of the client’s internal
control system.
What are the PCAOB standards that cover the essential elements of communication, the
criteria against which the assertions were tested, and an explanation of the basis for the
auditor’s opinion are known as?
A.General standards.
B.Standards of fieldwork.
C.Standards of reporting.
D.None of the above.
If the auditor failed to confirm receivables when that should have been done and it may
be too late to confirm now, what should the auditor do?
A.Issue an adverse opinion.
B.Extend the previous work done on subsequent collections to help determine that the
receivables existed and were properly valued at the balance sheet date
C.Automatically decide that the previously issued audit report cannot be supported in
light of the omitted procedures.
D.Issue a disclaimer of opinion.
Which of the following is an example of inspection of documentation?
A.Review shipping documents.
B.Estimate the expected amount of interest income.
C.Observe controls.
D.Recalculate the total amount include on a sales invoice.
Which of the following best describes what is meant by the timing of risk response?
A.Where procedures are conducted.
B.When procedures are conducted.
C.How procedures are conducted.
D.Who conducts the procedures.
Reprocessing of transactions involves which of the following?
A.Testing forward.
B.Testing backward.
C.Testing at a point in time.
D.Directional testing either forward or backward.
Which of the following would the auditor use to determine the existence of
investments?
A.Footing the schedule of recorded investments.
B.Confirming or examining recorded investments.
C.Examining the recorded investments for name and title.
D.Recomputing interest and/or gains and losses.
Which of the following approaches for determining fair value of Level 3 assets is used
by the auditor?
A.Determining appropriate model and sensitivity of model.
B.Reviewing contracts to determine if loss is other than temporary.
C.Performing an analysis of volume of trading activity.
D.Performing an analysis of trades on similar assets.
Which one of the following is not a key attribute needed to perform an audit?
A.Subject matter knowledge.
B.Independence.
C.Established criteria or standards.
D.Accounting skills.
What is a situation in which an individual is morally or ethically required to do
something that conflicts with his or her immediate self-interest called?
A.An ethical dilemma.
B.An ethical problem.
C.An ethical theory.
D.None of the above.
Which of the following is a major disadvantage of MUS sampling?
A.Sample selection is relatively easy.
B.Sample sizes are relatively small.
C.It is easy way to test for understatement.
D.It directly controls for the risk of incorrect acceptance.
Which of the following statements best describe an issue related to inventory?
A.Impairment testing based on most likely sale or disposal price.
B.Subject to allowance for noncollectibility.
C.Lower of cost or market impairments, including an allowance for obsolescence.
D.Subject to estimates made regarding the expected life of the assets and the
appropriateness of the depreciation method.
Which one of the following risks is not a risk associated with cash?
A.The large volume of transactions.
B.Importance of meeting debt covenants.
C.Documents are prenumbered.
D.Easy to manipulate.
Bar code scanning may best be utilized in the receiving process to accomplish which of
the following?
A.Identify goods arriving automatically in conjunction with a count.
B.Notify the shipper that product has arrived.
C.Order new items on behalf of the purchasing department.
D.Record inventory that has been written off the books.
Which of the following is most likely considered an omission from financial statement
reporting?
A.The company no longer discloses a contingency because it was settled previously.
B.The company does not present goodwill because it was impaired currently.
C.The company does not disclose earnings per share because it is privately held.
D.The company does not present a statement of cash flows because of its current net
loss.
Which of the following is a type of control that the PCAOB recommends the auditor to
consider in evaluating whether or not the organization has sufficiently addressed fraud
risk?
A.Controls over significant, unusual transactions, particularly those that result in late or
unusual journal entries.
B.Controls over entries that relate to foreign sales.
C.Controls over related-party transactions.
D.Both A and C
E.All of the above.
Which of the following is an example of a detective control in an information system?
A.Automated reports to management that specifically identify delinquent receivable.
B.A requirement that salaried employees submit written requests to work overtime.
C.Assurance from top management that computer centers are kept locked.
D.The employment of trustworthy people to enter data into the information system.
Credit approval policies are implemented by organizations primarily to accomplish
which of the following objectives?
A.To determine revenue recognition policies.
B.To ensure customer satisfaction.
C.To prevent lapping by the accounts receivable department.
D.To ensure the realization of receivables.
When a purchasing agent benefits personally by accepting payment from a vendor, the
purchasing agent is guilty of which of the following?
A.Performing kiting.
B.Committing embezzlement.
C.Receiving kickbacks.
D.Stealing company assets.
Which of the following items is not typically requested from the lawyer of a company
regarding contingencies?
A.Any limitations on the lawyer’s response such as not devoting substantial attention to
the item or that the amounts are not material.
B.Information about the attorney’s other clients with similar contingencies.
C.A description of each contingency, as well as progress and action that the company
plans to take.
D.A comment on the completeness of management’s list of contingencies and an
evaluation.
Which of the following would not be used as a substantive analytical procedure related
to depreciation expense and accumulated depreciation?
A.Current depreciation as a percentage of previous year assets.
B.Fixed assets as a percentage of previous year assets.
C.Depreciation expense as a percentage of assets each year.
D.Average age of assets.
Which of the following describes sampling risk?
A.The sample will not contain characteristics representative of the population such that
inferences made about that population will be incorrect.
B.The population will not contain characteristics representative of the sample such that
inferences made about that sample will be incorrect.
C.Neither A nor B is correct.
D.Both A and B are correct.
Which assertion addresses whether all transactions and accounts that should be included
in the financial statements are included?
A.Existence.
B.Valuation.
C.Completeness.
D.Rights and Obligations