Which of the following most likely would be an advantage in using classical variables
sampling rather than monetary-unit sampling?
A. An estimate of the standard deviation of the population’s recorded amounts is not
required.
B. The auditor rarely needs the assistance of a computer program to design an efficient
sample.
C. Inclusion of zero and negative balances generally does not require special design
considerations.
D. Any amount that is individually significant is automatically identified and selected.
You are auditing a store that sells merchandise. Some of the store merchandise is held
on consignment. Which account balance assertion for inventory should you be most
concerned about verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Valuation or allocation.
A dual-purpose test
A. Simultaneously tests debits and credits.
B. Is a procedure completed by both the internal and external auditors.
C. Is useful to both the entity and the auditor.
D. Is both a substantive test of transactions and a test of controls.
Which of the following is the most important control activity over acquisitions of
property, plant, and equipment?
A. Establishing a written company policy distinguishing between capital and revenue
expenditures.
B. Using a budget to forecast and control acquisitions and retirements.
C. Analyzing monthly variances between authorized expenditures and actual costs.
D. Requiring acquisitions to be made by user departments.
As generally conceived, the audit committee of a publicly held company should be
made up of
A. Representatives of the major equity interests (preferred stock, common stock).
B. The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
C. Representatives from the client’s management, investors, suppliers, and customers.
D. Members of the board of directors who are not officers or employees.
For monetary-unit sampling, a sampling interval of 400 means that
A. every 400th item in the account will be selected in the sample.
B. the average size of items in the account is 400.
C. every 400th dollar in the account will be included in the sample.
D. the average misstatement in sample items is $400.
During a review of financial statements of a nonpublic entity, the CPA would be least
likely to
A. perform analytical procedures designed to identify relationships that appear to be
unusual.
B. obtain written confirmation from banks regarding loans to the entity.
C. obtain reports from other accountants who reviewed a portion of the total entity.
D. read the financial statements and consider their conformance with generally accepted
accounting principles.
The AICPA’s Statements on Auditing Standards can be described as
A. Providing very specific guidance about the specific activities an auditor must
perform on each engagement.
B. Similar to financial accounting standards in that they are developed by the
government.
C. Defining the minimum standards of performance for an auditor.
D. Providing assurance that an auditor will not issue an incorrect opinion.
Alpha Company uses its sales invoices for posting perpetual inventory records.
Inadequate control activities over the invoicing function allow goods to be invoiced that
are not shipped. The inadequate control activities could cause an
A. understatement of revenues, receivables, and inventory.
B. overstatement of revenues and receivables and an understatement of inventory.
C. understatement of revenues and receivables and an overstatement of inventory.
D. overstatement of revenues, receivables, and inventory.
An auditor most likely would make inquiries of production and sales personnel
concerning possible obsolete or slow-moving inventory to support management’s
financial statement assertion of
A. valuation.
B. rights and obligations.
C. existence.
D. completeness.
Compilations provide which of the following types of assurance about the fair
presentation of financial statements?
A. No assurance.
B. Negative assurance.
C. Limited assurance.
D. Reasonable assurance.
Which of the following is not an inherent risk factor for the revenue process?
A. Complexity of revenue recognition issues.
B. Difficulty of auditing transactions.
C. Special industry practices.
D. The entity does not follow its stated policies for sales order approvals.
An auditor’s primary consideration regarding an entity’s internal controls is whether the
policies and procedures
A. Affect the financial statement assertions.
B. Prevent management override.
C. Relate to the control environment.
D. Reflect management’s philosophy and operating style.
While conducting an audit, Larson Associates, CPAs, failed to detect material
misstatements included in its client’s financial statements. Larson’s unqualified opinion
was included with the financial statements in a registration statement and prospectus for
a public offering of securities made by the client. Larson knew that its opinion and the
financial statements would be used for this purpose. In a suit by a purchaser against
Larson for common-law negligence, Larson’s best defense would be that the
A. audit was conducted in accordance with generally accepted auditing standards.
B. client was aware of the misstatements.
C. purchaser was not in privity of contract with Larson.
D. identity of the purchaser was not known to Larson at the time of the audit.
The first PCAOB standard of reporting requires that, “the report shall state whether the
financial statements are presented in accordance with generally accepted accounting
principles.” This passage requires
A. A statement of fact by the auditor.
B. An opinion by the auditor.
C. An implied measure of fairness.
D. An objective measure of compliance.
According to the Code of Professional Conduct, what response is appropriate when an
accountant, who is not independent, performs a compilation of financial statements?
A. The accountant should indicate in the last sentence of the report that he/she is not
independent.
B. The accountant should withdraw from the engagement.
C. The accountant should express a disclaimer opinion on the compilation.
D. The accountant should express an adverse opinion on the compilation.
An auditor is concerned with completing various phases of the examination after the
balance sheet date. This ‘subsequent period” involving formal audit procedures extends
to the date of the
A. auditor’s report.
B. final review of the audit working papers.
C. public issuance of the financial statements.
D. delivery of the auditor’s report to the entity.
Which of the following procedures would ordinarily be expected to best reveal
improper cutoff of sales at the balance sheet date?
A. Compare shipping documents with sales records.
B. Apply gross profit rates to inventory disposed of during the period.
C. Trace payments received subsequent to the balance sheet date.
D. Send accounts receivable confirmation requests.
Which of the following is not a qualitative factor that may affect an auditor’s
establishment of materiality?
A. Potential for fraud.
B. The company is close to violating loan covenants.
C. Firm policy sets materiality at 4% of pretax income.
D. A small misstatement would interrupt an earnings trend.
According to the profession’s ethical standards, a CPA would be considered independent
in which of the following instances?
A. A client leases part of an office building from the CPA, resulting in a material
indirect financial interest to the CPA.
B. The CPA has a material direct financial interest in a client, but transfers the interest
into a blind trust.
C. The CPA owns an office building and the mortgage on the building is guaranteed by
a client.
D. The CPA belongs to a country club client in which membership requires an annual
fee.
In which one of the following situations would a CPA be in violation of the AICPA
Code of Professional Conduct in determining a fee?
A. A fee based on whether the CPA’s report on the client’s financial statements results in
the approval of a bank loan.
B. A fee based on an estimate of the number of hours needed to complete the
engagement by auditors of various levels of experience.
C. A fee based on the nature of the service rendered and the CPA’s particular expertise
instead of the actual time spent on the engagement.
D. A fee based on the fee charged by the prior auditor.
Prior to commencing the compilation of financial statements of a nonpublic entity, the
accountant should
A. perform analytical procedures sufficient to determine whether fluctuations among
account balances appear reasonable.
B. complete the preliminary phase of the study and evaluation of the entity’s internal
control.
C. verify that the financial information supplied by the entity agrees with the books of
original entry and supporting documentation.
D. acquire a knowledge of any specialized accounting principles and practices used in
the entity’s industry.
A Type I subsequent event usually requires
A. an adjustment to the financial statements.
B. no adjustment to the financial statements.
C. withdrawal from the engagement.
D. no action.
Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the
following?
A. Reasonable assurance on the financial statements, absolute assurance on internal
control.
B. Reasonable assurance on internal control, absolute assurance on the financial
statements.
C. Absolute assurance on both the financial statements and internal control.
D. Reasonable assurance on both the financial statements and internal control.
When communicating internal control-related matters noted in an audit of a nonpublic
company, an auditor’s report issued on significant deficiencies should indicate that
A. Errors or fraud may occur and not be detected because there are inherent limitations
in any internal control system.
B. The issuance of an unqualified opinion on the financial statements may depend on
corrective follow-up action.
C. The deficiencies noted were not detected within a timely period by employees in the
normal course of performing their assigned functions.
D. The purpose of the audit was to report on the financial statements and not to provide
assurance on internal control.
Under the Rusch Factors doctrine, to which of the following parties will an accountant
be liable for negligence?
A. Only parties in privity and not those reasonably foreseeable third parties.
B. Both parties in privity and reasonably foreseeable third parties.
C. Only reasonably foreseeable third parties and not those parties in privity.
D. Neither reasonably foreseeable third parties nor parties in privity.
After an auditor has issued an audit report on a nonpublic entity, there is no obligation
to make any further audit tests or inquiries with respect to the audited financial
statements covered by that report unless
A. new information comes to the auditor’s attention concerning an event that occurred
prior to the date of the auditor’s report that may have affected the auditor’s report.
B. material adverse events occur after the date of the auditor’s report.
C. final determination or resolution was made on matters that had resulted in a
qualification in the auditor’s report.
D. final determination or resolution was made of a contingency that had been disclosed
in the financial statements and no liability arose from the resolution.
A properly planned and performed audit may fail to detect a material misstatement
resulting from fraud because
A. Audit procedures that are otherwise effective may be ineffective for fraud that is
concealed through collusion.
B. An audit is planned and performed to provide reasonable assurance of detecting
material misstatements caused by errors but not by fraud.
C. The factors considered in assessing control risk indicated an increased risk of error
but only a low risk of fraud in the financial statements.
D. The auditor did not consider factors influencing audit risk for account balances that
have effects pervasive to the financial statements taken as a whole.
In determining whether transactions have been recorded, the direction of the audit
testing should start from the
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.
Tracing shipping documents to prenumbered sales invoices provides evidence that
A. no duplicate shipments or billings occurred.
B. shipments to customers were properly billed.
C. all goods ordered by customers were shipped.
D. all prenumbered sales invoices were accounted for.
Which of the following auditing procedures is ordinarily performed last?
A. Confirming accounts payable.
B. Testing the purchasing function.
C. Reading the minutes of directors’ meetings.
D. Obtaining a management representation letter.
Absolute assurance is provided in
A. an audit engagement.
B. a compilation engagement.
C. a review engagement.
D. none of the items listed.
External auditors are referred to as “external” because
A. They report to users outside of the audited entity.
B. They are paid by parties outside of the audited entity.
C. They are not employees of the entity being audited.
D. Their offices are not at the entity’s place of business.
The three PCAOB general standards are concerned with
A. Adequate training and proficiency of the auditor, proper planning and supervision,
and due professional care.
B. Adequate training and independence.
C. Due professional care.
D. Independence, adequate training and due professional care.
Transactions processed through the payroll process include all of the following except:
A. payments to employees for services rendered.
B. payments to independent contractors for services rendered.
C. accrual of social security taxes.
D. payment of unemployment taxes.