Archives: Quiz

Because they spend all their time within one company, internal auditors have much greater knowledge about the company’s operations and internal controls then external auditors. If the preliminary judgment of materiality increases, the amount of audit evidence required will decrease. […]

Professional skepticism must be maintained only if the auditor suspects fraud. Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of the company’s credit policies. Answer: FALSE Section 404 of the Sarbanes-Oxley Act requires public companies […]

A high detection risk equates to a low amount of audit evidence needed. CPA firms are required to be independent when performing any professional service. Answer: FALSE For each significant internal control deficiency identified by the auditor, he or she […]

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk. Depreciation expense is normally verified as a part of tests […]

The sum of the tolerable exception rate and the estimated population exception rate is the precision of the initial sample estimate. Operational audits are often categorized as functional, organizational, or special assignments. Answer: TRUE Subsequent events represent events that occasionally […]

Fraud is more prevalent in large businesses than small businesses and not-for-profit organizations. Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units. Answer: FALSE Sales returns and allowances […]

The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company’s financial position and results of operations. Analytical procedures may be used to […]

The auditors ultimate substantive tests depend on the relative effectiveness of internal controls related to accounts payable. For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective. Answer: FALSE Auditors seldom expect to find misstatements when testing […]

A major consideration in audit staffing is the need for continuity from year to year. As the impact from noncompliance is further removed from affecting the financial statements, the less likely the auditor is to become aware of or recognize […]

The auditors determine which disclosures must be presented in the financial statements. The phrase “Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error” is included […]

Statistical sampling eliminates any professional judgment for the auditor. In the scope paragraph of the audit report issued for financial statements of a nonpublic company, the auditor expresses an opinion about the internal controls of the company. Answer: FALSE According […]

All known related parties must be identified and included in the auditor’s permanent files related to the client. Auditing standards require the auditor’s assessment of going concern issues. Answer: TRUE When performing substantive analytical procedures for notes payable, if actual […]

Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit. Depreciation amounts are determined by exchange transactions with outside parties. Answer: FALSE International Standards on Auditing are issued by the International […]

The auditor’s tests for proper cutoff of current year acquisitions of property, plant, and equipment are usually done as part of accounts payable cutoff tests. Auditors are allowed to have an indirect financial interest in an audit client, such as […]

A primary concern in reporting on a comprehensive basis is to make sure that the statements clearly indicate that they are prepared on a basis other than GAAP. Cutoff for acquisitions of insurance is normally not a significant problem for […]

Extensive professional development is necessary for auditors doing governmental audits. In process cost systems, costs are accumulated by individual jobs. Answer: FALSE The auditor must perform substantive tests related to assertions deemed to have significant risks. Answer: TRUE Because of […]

When a successor auditor requests information from a company’s previous auditor, and there are legal problems or disputes between the client and the predecessor auditor, the predecessor auditor’s response to the new auditor may be limited to stating that no […]

When analytical procedures reveal unusual fluctuations in an account balance, the auditor will probably perform fewer tests of details for that account and increase the tests of controls related to the account. Companies using e-commerce systems to transact business electronically […]

An auditor must evaluate a specialist’s professional qualifications and understand the objectives of the specialist’s work. The starting point for the verification of the balance in the general bank account is to obtain a bank cut-off statement. Answer: FALSE When […]

When customers purchase goods by credit card, the issuer of the credit card uses EFT to transfer funds into the company’s bank account. The three most important audit objectives for cash are accuracy, existence, and classification. Answer: FALSE Auditing standards […]

Staff assigned to an audit engagement must be knowledgeable about the client’s industry. Current professional standards prohibit accountants from performing engagements to review forecasts or projections. Answer: TRUE It is common to use a combination of positive and negative confirmations […]

Both SEC rules and the Sarbanes-Oxley Act prohibit auditors from providing bookkeeping services to their public company audit clients. All owners of a CPA firm must be CPAs who are qualified to practice. Answer: FALSE[/cpmembership] Errors are usually more difficult […]

Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures? A.Management representation letter. B.GAAS. C.Inquiry of the CFO. D.Checklists. If a client makes payments to a […]

Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence? A.Reprocessing. B.Recalculation. C.Vouching. D.Examination of documentation. Which of the following controls related to management’s asset impairment judgments does the auditor need to understand? A.A systematic process […]

Which of the following is not one of management’s responsibilities? A.Ensuring accounting principles are following in preparing financial statements. B.Engaging a qualified auditor. C.Implementing effective internal controls. D.Ensuring financial statements and disclosures are accurate. For which of the following special […]

When the year-end cash balance is immaterial, audit procedures on the cash account are unnecessary. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control. Answer: TRUE If a significant scope […]

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects. Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the […]

Transparency is a desirable, but not critical, element of effective corporate governance. An auditor must be independent in fact and in appearance. Answer: TRUE Part of the understanding the client process of an audit is identifying factors that may require […]

Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements. The cutoff statement is mailed to the client for an agreed upon-date and then copied for the audit files. Answer: FALSE When testing controls, the […]

Auditors test the assertion of completeness by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes. Audit firms should NOT customize the audit programs based on the assessment of the risk […]

Derivative instruments are long-term hybrid-type securities meant to increase the return on investments. The most difficult decisions about which opinion to issue are generally centered around decisions based on the materiality level and pervasiveness of GAAP violations, the significance of […]

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 […]

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. Answer: TRUE Auditors […]

The purpose of summarizing confirmation results is to list the extent of sales tested in relation to the response rate. The SEC issued SAB 108 in 2006, which mandates what is termed a dual approachto assessing uncorrected misstatements. Answer: TRUE […]

A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud. In planning an audit for the revenue cycle, the auditor must realize the integrated relationship of evidence found between the accounts receivable and the […]

The need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information. The tolerable failure rate is the level at which the control’s failure […]

Auditors must keep a questioning mind when analyzing management responses to inquiry and auditors should strive to obtain corroborating evidence before accepting the management responses. An auditor will conclude an internal control is effective if he or she believes the […]

In limited assurance engagements, practitioners perform limited procedures (usually analysis of an issue but without significant testing) and checks to see if anything comes to their attention indicating a problem. When management is unable to provide an explanation for a […]

Monitoring of the revenue cycle may be accomplished partially through the use of exception reporting. Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing. Answer: TRUE The Rules of […]

Management always uses journal entries to commit fraud because they are not reviewed by auditors. The familiarity threat is the most relevant issue for mandatory partner or audit firm rotation. Answer: TRUE Test of controls are a type of substantive […]

Generally accepted auditing standards are the cornerstone for the interpretation of financial accounting. For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents. Answer: TRUE […]

The greatest risk of recording transactions in the incorrect period occurs during the roll-forward period. A special purpose framework can use a cash basis financial reporting framework. Answer: TRUE The PCAOB does not currently have a mandate for convergence with […]

The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results. A state insurance commission requires an insurance company to prepare its financial statements […]

When performing substantive tests using sampling methods, the auditor’s main concern is the risk of incorrect rejection. The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the […]

Internal controls that the auditor expects to rely on to reduce substantive testing must be tested. When the value of a long-lived asset has been impaired, the organization must write down the asset reflecting the decline in economic benefit of […]

The PCAOB requires that the auditor will express an opinion on the financial statements as a whole. The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud scheme. Answer: TRUE Users rely on […]

When preliminary fraud risk is high the auditor should pay close attention to areas of the audit that are highly subjective and should increase the predictability of the audit procedures. Audit staff performing audit work must be appropriately supervised by […]

Vouching recorded transactions involves taking a sample from the journal and tracing the items back to the source documents to ensure the transactions occurred. News media and web searches can provide useful information related to client management’s integrity and the […]

If a customer’s account was recorded at $45,000, the audited value was $30,000, and the sampling interval was $30,000, the projected misstatement would be A. $10,000. B. $15,000. C. $20,000. D. $30,000. Which of the following sample selection techniques can […]

Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the A. date of the financial statements. B. date of the auditors’ report. C. audit report release date. D. subsequent year’s date of the financial […]