C. Hill, CPA, has been retained to audit the financial statements of Monday Co.
Monday’s predecessor auditor was K. Post, CPA, whom Monday has notified by that its
services have been terminated. Under these circumstances, which party should initiate
the communications between Hill and Post?
A. Hill, the auditor
B. Post, the predecessor auditor
C. Monday’s controller or CFO
D. The chair of Monday’s board of directors
Charlie Company’s comparative financial statements include the financial statements of
the prior year that were audited by predecessor auditors whose report on those financial
statements is not presented. If the predecessor’s report was qualified, the successor
auditors should
A. indicate in their report the substantive reasons for the qualification issued by the
predecessor auditors.
B. request the entity to reissue the predecessor’s report on the prior-years’ statements.
C. issue an updated comparative report on the entity’s financial statements, indicating
the involvement of component auditors.
D. express an opinion only on the current-year’s financial statements and make no
reference to the prior-years’ financial statements or opinion.
A voucher would typically contain
A. a purchase requisition, purchase order, vendor invoice, receiving report, and check
copy.
B. a purchase requisition, purchase order, sales invoice, receiving report, and check
copy.
C. a purchase requisition, sales order, sales invoice, receiving report, and check copy.
D. a purchase requisition, sales order, vendor invoice, receiving report, and check copy.
An auditor’s determination of a lower level of control risk would most likely be
associated with
A. larger population sizes for tests of controls.
B. larger samples for substantive procedures.
C. smaller samples for substantive procedures.
D. lower levels of detection risk.
The preferred method of determining fair value of transactions is
A. market-based values.
B. basing them on reasonable management assumptions.
C. external auditor estimates.
D. detailed computations by outside experts.
Typical defenses for auditors in common law actions include all of the following,
except
A. the plaintiff was foreseen.
B. the plaintiff contributed to the failure to detect material misstatements.
C. the financial statements were not materially misstated.
D. the audit was conducted in accordance with generally accepted auditing standards.
Errors in data processed in a batch computer system may not be detected immediately
because
A. transaction trails in a batch system are available for only a limited period of time.
B. there are time delays in processing transactions in a batch system.
C. errors in some transactions cause rejection of other transactions in the batch.
D. random errors are more likely in a batch system than in an online system.
The idea of the cycle approach is to group accounts together by
A. specific function.
B. financial statement assertion.
C. audit objective.
D. transactions that affect all accounts in that particular group.
An auditor most likely would assess control risk at the maximum if the payroll
department supervisor is responsible for
A. examining authorization forms for new employees.
B. comparing payroll registers with original batch transmittal data.
C. distribute payroll checks to all employees.
D. hiring all subordinate payroll department employees.
The underlying conditions that create demand by users for reliable information include
all of the following, except
A. transactions are numerous and complex.
B. users lack professional skepticism.
C. users are separated from accounting records by distance and time.
D. financial decisions are important to investors and users.
E. decisions are time-sensitive.
When the audit team increases the planned assessed level of control risk because certain
control activities were determined to be ineffective, the audit team would most likely
increase the
A. extent of substantive tests of details.
B. level of inherent risk.
C. extent of tests of controls.
D. level of detection risk.
Auditors will issue an adverse opinion when
A. a severe scope limitation has been imposed by the entity.
B. a violation of generally accepted accounting principles is sufficiently material and
pervasive that a qualified opinion is not justified.
C. a qualified opinion cannot be rendered because the auditors lack independence.
D. the entity’s ability to continue as a going concern is subject to substantial doubt.
An accountant’s report includes the phrase “We are not aware”. This phrase indicates
A. an attestation was not performed.
B. management had not established sufficient criteria for an opinion to be issued.
C. the auditor is providing negative assurance.
D. a disclaimer of opinion is presented.
Auditors must complete various phases of an audit after the date of the financial
statements. The auditors’ responsibility for matters affecting the client extends from the
date of the financial statements to the
A. date of the auditors’ report.
B. final review of the audit documentation.
C. audit report release date.
D. delivery of the auditors’ reports to the client.
PCAOB inspections are conducted by
A. individuals selected by the PCAOB who are not current employees of public
accounting firms.
B. another public accounting firm selected by the firm being inspected.
C. current employees of another public accounting firm selected by the PCAOB.
D. the AICPA’s Public Oversight Board.
Which cycle is not directly linked to the production cycle?
A. Acquisition and expenditure cycle.
B. Payroll cycle.
C. Revenue and collection cycle.
D. Finance and investment cycle.
In auditing related party transactions, an auditor ordinarily places primary emphasis on
A. the probability that related party transactions will recur.
B. confirming the existence of the related parties.
C. verifying the valuation of the related party transactions.
D. the adequacy of the disclosure of the related party transactions.
The audit team decided to reduce planned reliance on internal controls based on the
results of attributes sampling. However, the actual rate of deviation in the population is
lower than the tolerable rate of deviation. Which type of risk and loss is the audit team
exposed to?
A. Risk of assessing control risk too low; efficiency loss
B. Risk of assessing control risk too high; effectiveness loss
C. Risk of assessing control risk too low; effectiveness loss
D. Risk of assessing control risk too high; efficiency loss
A periodic review of an audit firm’s system of quality control by the PCAOB is referred
to as a(n)
A. inspection.
B. peer review.
C. principles review.
D. quality review.
Which of the following would be evaluated during the PCAOB inspection process?
A. Option A
B. Option B
C. Option C
D. Option D
Independent auditors who consider fraud in the course of financial statement audits are
well-advised to quantify “materiality” in terms of
A. the maximum amount of asset overstatement that might mislead investors in relation
to the latest financial statements under audit.
B. a maximum percentage of net income overstatement that might mislead investors in
relation to the latest financial statements under audit.
C. a cumulative amount of misstatement of assets or income over several years past and
current that might mislead investors in relation to the latest financial statements under
audit.
D. controversial accounting measurements that might mislead investors in relation to
the latest financial statements under audit.
Dara & Co. Audit Hill Corporation. Ellie is the engagement partner on the audit with an
office in Buffalo Grove. Which of the following would NOT be considered a covered
member?
A. Jason, who is a member of the attest engagement team with an office in Elmhurst
B. Adam, who is a tax partner and provided 50 hours of tax service to Hill Company
during the year of the audit with an office in Elmhurst
C. Ben, a partner in Dara & Company, with an office in Buffalo Grove
D. Julie, a partner in Dara & Company, with an office in Elmhurst
Which of the following information that comes to an auditor’s attention most likely
would raise a question about the occurrence of illegal acts?
A. The exchange of property for similar property in a nonmonetary transaction
B. The discovery of unexplained payments made to government employees
C. The presence of several difficult-to-audit transactions affecting expense accounts
D. The failure to develop adequate procedures that detect unauthorized purchases
Your client counts inventory three months before the end of the fiscal year. Internal
controls over inventory are excellent. Which procedure is not necessary for the
inventory roll-forward?
A. Check that shipping documents for the last three months agree with perpetual
records.
B. Tracing receiving reports for the last three months to perpetual records.
C. Compare gross margin percentages for the last three months.
D. Request the client to recount inventory at the end of the year.
Which of the following controls would be most effective in ensuring that the proper
custody of assets in the investing cycle is maintained?
A. Direct access to securities in the safety deposit box is limited to only one corporate
officer.
B. Personnel who post investment transactions to the general ledger are not permitted to
update the investment subsidiary ledger.
C. The purchase and sale of investments are executed on the specific authorization of
the board of directors.
D. Independent personnel periodically compare the recorded balances in the investment
subsidiary ledger with the contents of the safety deposit box.
Audit teams would least likely use computer-assisted audit techniques to
A. access client data files.
B. prepare spreadsheets.
C. assess control risk related to computerized processing systems.
D. construct and perform parallel simulations.
All other factors being equal, as the risk of incorrect acceptance and tolerable
misstatement increase, the sample size will
A. not be affected.
B. increase.
C. decrease.
D. cannot determine from the information given.
For which of the following accounts would the matching concept be the most
appropriate?
A. Cost of goods sold.
B. Research and development.
C. Depreciation expense.
D. Sales.
The total amount of misstatement identified in a sample is referred to as the
A. projected misstatement.
B. tolerable misstatement.
C. actual misstatement.
D. incremental allowance for sampling risk.
Which of the following would not be a typical feature of management’s control over the
production of estimates?
A. Accumulation of relevant, sufficient, and reliable data.
B. Preparation of estimates by qualified personnel.
C. Review by the independent auditor.
D. Consideration by management of whether particular accounting estimates are
consistent with the company’s operational plans.
A practitioner is engaged to express an opinion on management’s assertion that the
square footage of a warehouse offered for sale is 150,000 square feet. The practitioner
should refer to which of the following sources for professional guidance?
A. Statement of Auditing Standards.
B. Statements on Standards for Attestation Engagements.
C. Statements on Standards for Accounting and Review Services.
D. Statements on Standards for Consulting Services.
In order for the auditor to decide to perform tests of controls, which of the following
relationships should exist?
A. The sampling risk should be less than 5%.
B. The tolerable rate of deviation should exceed the expected population deviation rate.
C. The expected population deviation rate should exceed the risk of overreliance.
D. The expected population deviation rate should exceed the tolerable rate of deviation.
Which of the following procedures would best prevent or detect the theft of valuable
items from an inventory that consists of hundreds of different items selling for $1 to
$10 and a few items selling for hundreds of dollars?
A. Maintain a perpetual inventory of only the more valuable items with frequent
periodic verification of the accuracy of the perpetual inventory record.
B. Have an independent accounting firm prepare an internal control report on the
effectiveness of the controls over inventory.
C. Have separate warehouse space for the more valuable items with frequent periodic
physical counts and comparison to perpetual inventory records.
D. Require a manager’s signature for the removal of any inventory item with a value
above $50.
When an auditor plans to rely on controls that have changed since they were last tested,
which of the following courses of action would be most appropriate?
A. Test the operating effectiveness of such controls in the current audit.
B. Document that reliance and proceed with the original audit strategy.
C. Inquire of management as to the effectiveness of the controls.
D. Report the reliance in the report on internal controls.
The pending sales orders can be reviewed for evidence of the
_________________________________ of recorded
_________________________________ and ________________________________.
Below are some of specific activities performed in an attributes sampling application.
Match the major step in an attributes sampling application is most closely associated
with the specific activity. Each step is associated with only one activity.
1. Measure sample items. A. Identifying important controls
to be relied upon.
2. Determine the objective of sampling. B. Identifying an example of
when a control is not functioning as intended.
3. Select the sample. C. Determining the physical
representation of the population.
4. Evaluate sample results. D. Estimating the expected
population deviation rate.
efine the population. E. Identifying a series of random
numbers and matching those numbers to corresponding
items in the population.
5. Define the deviation condition. F. Calculating the sample rate of
deviation.
6. Determine sample size. G. Calculating the upper limit rate
of deviation.
The responsibility for financing and investment transactions is basically in the hands of
_____________________________________.
What are the different types of government audits?
Below are descriptions of how key parameters are determined in a monetary unit
sampling application. Match each description of a situation with the related term. Each
parameter is associated with only one description.
Identify the two types of audit plans and indicate the purpose of each.
What is the difference between an internal control’s design effectiveness and its
operating effectiveness?
Internal audit reports are usually considered “____________________” until a
_________________________ is performed.
