When assessing the risk of material misstatements in the financial statements,
A) inadequate internal control procedures will mitigate client business risk.
B) GAAS specifies in detail how much and what types of evidence the auditor needs to
obtain.
C) company management is responsible for determining materiality levels.
D) the auditor must have an understanding of the client’s business and industry.
Companies may intentionally understate earnings when income is high to create
________ that may be used in future years to increase earnings.
A) income smoothing
B) cookie jar reserves
C) cash
D) sales
Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client’s reason for the audit.
The most important test of details of balances to determine the existence of recorded
accounts receivable is
A) tracing details of sales invoices to shipping documents.
B) tracing the credits in accounts receivable to bank deposits.
C) tracing sales returns entries to credit memos issued and receiving room reports.
D) the confirmation of customers’ balances.
Which financial ratio is computed by dividing current assets by current liabilities?
A) quick ratio
B) debt to equity
C) accounts receivable turnover
D) current ratio
Which of the following instances would impair a CPA’s independence when they have
been retained as the auditor?
I. A charitable organization where the CPA serves as treasurer
II. A municipality where the CPA owns $250,000 of the $25 million outstanding bonds
of the municipality
III. A company that the CPA’s investment club owns a 10% investment interest
A) I and II
B) I and III
C) II and III
D) I, II, and III
Auditors often integrate procedures for presentation and disclosure objectives with
A)
B)
C)
D)
An auditor has a duty to
A) provide reasonable assurance that material misstatements will be detected.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial
statements.
D) be an insurer of the fairness in the statements.
The auditor should identify and include only ________ controls since they will be
sufficient to achieve the transaction-related audit objectives and will also provide audit
efficiency.
A) key
B) significant
C) material
D) compensating
In a preparation service engagement,
A) the CPA’s responsibilities are similar to those performed during a review.
B) the CPA does not provide any assurance of the financial statements.
C) the CPA must issue a preparation service engagement report.
D) the CPA must be independent.
Interpretations of the rules of conduct
A) are enforceable.
B) are finalized after being approved by the FASB.
C) are issued as exposure drafts to the profession and others for comments.
D) do not apply to members in business.
When the auditor identifies or suspects noncompliance with laws and regulations, the
auditor
A) should discuss the matter with those whom they believe committed the illegal act.
B) begin communication with the FASB in accordance with PCAOB regulations.
C) may disclaim an opinion on the basis of scope limitations if he is precluded by
management from obtaining sufficient appropriate evidence.
D) should withdraw from the engagement.
In which case were auditors prosecuted for filing false financial statements for a client
with the government?
A) United States v. Natelli
B) United States v. Simon
C) Escott et al. v. BarChris
D) ESM Government Securities v. Alexander Grant & Co.
Which of the following statements regarding block sampling is least likely to be true?
A) Block sampling is the selection of several items in sequence.
B) It is acceptable to use block sampling for tests of transactions only if a reasonable
number of blocks is used.
C) Only one block should be selected to increase the probability of a representative
sample.
D) Once the first item in the block is selected, the remainder of the block is chosen
automatically.
Analytical procedures performed during the completion stage of the audit
A) help the auditor understand the client’s business and industry.
B) are typically performed by a senior partner with extensive knowledge of the client’s
business.
C) help the auditor identify significant matters requiring special attention later in the
engagement.
D) all of the above
In systematic sample selection, the population size is divided by the number of sample
items desired in order to determine the
A) sampling interval.
B) tolerable exception rate.
C) computed upper exceptions rate.
D) mean.
________ is one of the Big Four international CPA firms.
A) Deloitte
B) KPMG
C) Ernst & Young
D) All of the above are classified as Big Four international CPA firms.
As part of the brainstorming sessions, auditors are directed to emphasize
A)
B)
C)
D)
If an auditor were concerned with obtaining evidence about the appropriateness of the
value of inventory, which of the following tests would be most appropriate?
A) compilation tests
B) price tests
C) confirmation of inventory held by outside parties
D) physical examination of the inventory
The document that details the specific audit procedures for each type of test is the
A) audit strategy.
B) audit program.
C) audit procedure.
D) audit risk model.
Which of the following is the most objective type of evidence?
A) a letter written by the client’s attorney discussing the likely outcome of outstanding
lawsuits
B) the physical count of securities and cash
C) inquiries of the credit manager about the collectability of noncurrent accounts
receivable
D) observation of cobwebs on some inventory bins
Factors considered by an auditor to determine the possibility that the true population
misstatement exceeds a tolerable amount in a nonstatistical sample include all of the
following except for
A) the extent to which items in the population have been audited 100%.
B) the difference between the point estimate and acceptable control risk.
C) whether misstatements tend to be offsetting or in only one direction.
D) the amounts of individual misstatements.
An auditor determines the financial statements include at least a material departure
from GAAP. Which type of opinion may be issued?
A)
B)
C)
D)
The audit report date on a standard unmodified opinion audit report indicates
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and
Exchange Commission.
C) the last date on which users may institute a lawsuit against either the client or the
auditor.
D) the last day of the auditor’s responsibility for the review of significant events that
occurred after the date of the financial statements.
Which of the following would not be classified as an analytical procedure?
A) benchmarking the company’s profitability ratios against others in the industry
B) preparing common size financial statements
C) calculating income statement account balances as a percent of sales when the level
of sales has changed from the prior year
D) reconciling fixed asset dispositions with the fixed asset ledger
Tests of which balance-related audit objective are normally performed first in an audit
of the sales and collection?
A) accuracy
B) completeness
C) rights
D) detail tie-in
Which of the following statements about the audit of fixed assets is the least correct?
A) The primary accounting record for manufacturing equipment and other property,
plant and equipment is generally a fixed asset master file.
B) Manufacturing equipment and current assets are normally audited in the same
fashion regardless of the activity within a particular account.
C) The emphasis on auditing fixed assets is on verification of current-period
acquisitions.
D) Failure to record the acquisition of a fixed asset affects the income statement until
the assets are fully depreciated.
Which audit tests involve physical examination and confirmation?
A) tests of controls
B) tests of transactions
C) tests of details of balances
D) analytical procedures
The auditor’s independent estimate of interest expense from notes payable uses average
interest rates and
A) average notes payable outstanding.
B) year-end notes payable outstanding.
C) only notes payable above the level of materiality.
D) only notes payable to major lenders.
A control that relates to all parts of the IT system is called a(n)
A) general control.
B) systems control.
C) universal control.
D) applications control.
Which balance-related audit objective cannot be assessed using monetary unit
sampling?
A) accuracy
B) completeness
C) existence
D) All of the above can be assessed using monetary unit sampling.
Which of the following is not one of the categories of items included in the letter of
representation?
A) subsequent events
B) completeness of information
C) recognition, measurement, and disclosure
D) materiality
More than one modification should be included in the audit report when
A) the auditor is not independent and the auditor knows that the company has not
followed generally accepted accounting principles.
B) there is substantial doubt about the going concern of the company and information
about the causes of the uncertainties is not adequately disclosed in the footnotes.
C) there is a scope limitation and there is substantial doubt about the company’s ability
to continue as a going concern.
D) all of the above
Which of the following statements is true regarding the distinction between general
audit objectives and specific audit objectives for each class of transactions?
A) The specific audit objectives are applicable to every class of transactions.
B) The general audit objectives are applicable to every class of transactions.
C) Once the specific transaction-related audit objectives are established, they can be
used to develop the general transaction-related objectives.
D) For any given class of transactions, usually only one audit objective must be met to
conclude the transactions are properly recorded.
When making audit evidence decisions,
A) the auditor decides which items in the population to test before determining the
sample size.
B) the sample size for any given procedure must remain constant from audit to audit.
C) audit engagement software can assist the auditor in making evidence decisions.
D) the auditor is required to use the sample sizes that are determined by the PCAOB.