When auditing contingent liabilities, which of the following procedures would be least
effective?
A. Reading the minutes of the board of directors.
B. Reviewing the bank confirmation letter.
C. Examining customer confirmation replies.
D. Examining invoices for legal services.
Which of the following would an auditor most likely use in determining the auditor’s
overall materiality?
A. The anticipated sample size for planned substantive procedures.
B. The entity’s annualized interim (i.e. quarterly) financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.
When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the
predecessor may be able to provide the successor with information that will assist the
successor in determining
A. Whether the predecessor’s work should be utilized.
B. Whether, in the predecessor’s opinion, the financial statements are materially correct.
C. Whether, in the predecessor’s opinion, the company’s internal controls have been
satisfactory.
D. Whether the engagement should be accepted.
Which of the following show the detailed general ledger accounts that make up a
financial statement category on the auditor’s working trial balance?
A. Account analyses.
B. Supporting schedules.
C. Control accounts.
D. Lead schedules.
Which of the following items should an auditor communicate to those charged with
governance in a publicly traded company?
A. Significant audit adjustments recorded by the company and management’s
consultation with other accountants about significant accounting matters.
B. Significant audit adjustments recorded by the company but not management’s
consultation with other accountants about significant accounting matters.
C. Management’s consultation with other accountants about significant accounting
matters but not significant audit adjustments recorded by the company.
D. Neither significant audit adjustments recorded by the company nor management’s
consultation with other accountants about significant accounting matters.
Of the following, the most reliable type of evidence typically is:
A. Confirmation.
B. Inspection of records and documents.
C. Reperformance.
D. Observation.
Which of the following is a question that the auditor would expect to find on the
production process section of an internal control questionnaire?
A. Are vendors’ invoices for raw materials approved for payment by an employee who
is independent of the cash disbursements function?
B. Are signed checks for the purchase of raw materials mailed directly after signing
without being returned to the person who authorized the invoice processing?
C. Are all releases by storekeepers of raw materials from storage based on approved
requisition documents?
D. Are details of individual disbursements for raw materials balanced with the total to
be posted to the appropriate general ledger account?
Which of the following questions would an auditor least likely include on an internal
control questionnaire concerning the initiation and execution of equipment
transactions?
A. Are requests for major repairs approved at a higher level than the department
initiating the request?
B. Are prenumbered purchase orders used for equipment and periodically accounted
for?
C. Are requests for purchases of equipment reviewed for consideration of soliciting
competitive bids?
D. Are procedures in place to monitor and properly restrict access to equipment?
In connection with the examination of financial statements by an independent auditor,
management suggests that members of the internal audit staff be utilized to minimize
audit costs. Which of the following tasks could most appropriately be delegated to the
internal audit staff?
A. Selection of accounts receivable for confirmation, based upon the internal auditor’s
judgment as to how many accounts and which accounts will provide sufficient
coverage.
B. Preparation of schedules for negative accounts receivable responses.
C. Evaluation of the internal control for accounts receivable and sales.
D. Determination of the adequacy of the allowance for doubtful accounts.
Which set of standards was created by the AICPA to cover services relating to
unaudited financial statements?
A. Standards on Selective Audits and Review Services (SSARS).
B. Statement on Auditing Standards (SAS).
C. Statements on Compilation and Review Standards (SCRS).
D. Statements on Standards for Accounting and Review Services (SSARS).
Assertions about account balances at the period end include
A. existence, completeness, and accuracy.
B. existence, completeness, and classification.
C. existence, rights and obligations, and completeness.
D. existence, rights and obligations, and classification.
Which of the following best describes the concept of risk assessment on which auditors
can provide independent assurance?
A. The risk that financial statements are misstated because of fraud.
B. The risk that financial statements are misstated because of error or fraud.
C. Whether management has systems in place to evaluate and effectively manage the
entity’s business risks.
D. Developing client acceptance and continuance practices that minimize the likelihood
of lawsuits against the auditor.
In an interview with the plant manager regarding operations, the auditor is most likely
to obtain evidence that raises concerns regarding
A. the capitalization vs. expensing policy.
B. the allocation of fixed and variable costs.
C. the need to write-off equipment that has become obsolete.
D. the adequacy of depreciation expense.
After obtaining an understanding of internal controls and assessing control risk of an
entity, an auditor decided not to perform tests of controls for purposes of the audit. The
auditor most likely decided that
A. The available evidential matter obtained through tests of controls would not support
an increased level of control risk.
B. A reduction in the assessed level of control risk is justified for certain financial
statement assertions.
C. It would be inefficient to perform tests of controls that would result in a reduction in
planned substantive procedures.
D. The assessed level of inherent risk exceeded the assessed level of control risk.
An internal auditor is likely to be more concerned with _________________ than the
external auditor.
A. Internal administrative procedures
B. Cost accounting procedures
C. The efficiency of operations
D. Internal control
An examination of a financial forecast is a professional service that involves
A. compiling or assembling a financial forecast that is based on management’s
assumptions.
B. limiting the distribution of the accountant’s report to management and the board of
directors.
C. assuming responsibility to update management on key events for one year after the
report’s date.
D. evaluating the preparation of a financial forecast and the support underlying
management’s assumptions.
Which of the following test(s) of details of transactions can be used as a dual-purpose
test in conjunction with tests of controls?
A. Test a sample of purchase requisitions for proper authorization.
B. Obtain selected vendors’ statements and reconcile to vendor accounts.
C. Obtain listing of accounts payable and compare total to general ledger.
D. Review results of confirmations of selected accounts payable.
Which of the following control activities is not usually performed in the accounts
payable department?
A. Determining the mathematical accuracy of the vendor’s invoice.
B. Having an authorized person approve the voucher.
C. Controlling the mailing of the check and remittance advice.
D. Matching the receiving report with the purchase order.
Which of the following procedures is not usually performed by the accountant during a
review engagement of a nonpublic entity?
A. Inquiry about actions taken at meetings of the board of directors that may affect the
financial statements.
B. Issuance of a report stating that the review was performed in accordance with
standards established by the AICPA.
C. Reading of the financial statements to determine if they conform with generally
accepted accounting principles.
D. Communication of any material weaknesses discovered during the consideration of
internal control.
In a review engagement, the accountant must make all of the following inquiries except
those to:
A. Identify subsequent events having a material effect on the statements.
B. Understand internal controls.
C. Identify actions taken at stockholders’ meetings.
D. Ascertain whether statements are in accordance with GAAP.
Which of the following statements is false?
A. The PCAOB focuses on the financial reporting objective of internal controls.
B. Management is required to base internal controls on a recognized control framework.
C. Most U.S. companies use the internal control framework developed by COSO.
D. All controls relevant to financial reporting are accounting controls.
The normal sequence of documents and operations on a well-prepared systems
flowchart is
A. Top to bottom and left to right.
B. Bottom to top and left to right.
C. Top to bottom and right to left.
D. Bottom to top and right to left.
Tracing bills of lading to sales invoices provides evidence that
A. chipments to customers were properly authorized.
B. recorded sales were shipped.
C. billed sales were shipped.
D. shipments to customers were billed.
A control which ensures that long-term borrowing is properly initiated by appropriate
individuals addresses the control assertion of
A. occurrence.
B. authorization.
C. completeness.
D. valuation.
In which of the following circumstances would a CPA be bound by ethics to refrain
from disclosing any confidential information obtained during the course of a
professional engagement?
A. The CPA is issued a summons enforceable by a court order that orders the CPA to
present confidential information.
B. A major stockholder of a client company seeks accounting information from the CPA
after management declined to disclose the requested information.
C. Confidential client information is requested as part of a quality review of the CPA’s
practice by a review team authorized by the AICPA.
D. An inquiry by a disciplinary body of a state CPA society requests confidential client
information.
In a manufacturing company, which one of the following audit procedures would give
the least assurance for the existence of the general ledger balance of investment in
stocks and bonds at the audit date?
A. Confirmation from the broker.
B. Inspection and count of stocks and bonds.
C. Vouching all changes during the year to brokers’ advices and statements.
D. Examination of canceled checks issued in payment of securities purchased.
An entity’s IT infrastructure refers to
A. Hardware components.
B. Programmers.
C. Software.
D. Data provided by the system.
An auditor was unable to obtain audited financial statements or other evidence
supporting an entity’s investment in a large foreign subsidiary. Between which of the
following reports should the auditor choose?
A. Adverse and unqualified with an explanatory/emphasis-of-matter paragraph added.
B. Disclaimer and unqualified with an explanatory/emphasis-of-matter paragraph
added.
C. Qualified and adverse.
D. Qualified and disclaimer.
What organization is responsible for setting auditing standards for audits of
publicly-traded companies in the U.S.?
A. AICPA.
B. FASB.
C. GASB.
D. PCAOB.
A violation of the profession’s ethical standards would most likely have occurred when
a CPA
A. purchased a bookkeeping firm’s practice of monthly write-ups for a percentage of
fees received over a three-year period.
B. made arrangements with a bank to collect notes issued by a client in payment of fees
due.
C. named Smith formed a partnership with two other CPAs and used “Smith & Co.” as
the firm name.
D. issued an unqualified opinion on the 2011 financial statements when fees for the
2010 audit were unpaid.
For a particular audit, the sample size for testing controls over the revenue cycle is
relatively large. What can you infer about the desired confidence level, the tolerable
deviation rate, and the expected population deviation rate?
In the planning stages of an audit, what information does an auditor gain through
analytical procedures?
Describe three categories of expenses outlined in FASB Concept Statement No. 5.
What kind of information would typically be found on an income statement account
analysis working paper? What kind of tests can an auditor perform using this
information? Why would an auditor conduct additional analysis on an income statement
account?
Who is responsible for the financial statements? What does the term “assertions” mean?
Identify the assertion categories and the specific assertions for each category.
In deciding to implement analytical procedures, what are some factors the auditor will
consider in determining a tolerable difference between the expectation and the recorded
amount?
Internal auditors fall into two primary categories-assurance services and consulting
services. Briefly explain these two categories in relation to internal auditors.
Identify the four major assertions made regarding stockholders’ equity and describe one
control activity for each.
What is wrong with the following report on internal control over financial reporting for
AB Corporation? The auditor believes an unqualified opinion on the effectiveness of
internal control over financial reporting is warranted.
Report of Registered Public Accounting Firm
We have audited AB Corporation’s internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). AB’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
the entity’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
An entity’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. An entity’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the entity; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the entity are
being made only in accordance with authorizations of management and directors of the
entity; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the entity’s assets that could have a
material effect on the financial statements.
In our opinion, AB Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2013, based on criteria established
in Internal Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements of
AB Corporation, and our report dated February 20, 2014 expressed an unqualified
opinion.
Protzman & Hull
Morgan Hill, CA
February 10, 2014
The audit of the inventory management process is affected by the audit results from
multiple other processes. Identify the processes, other than the inventory management
process, that affect the audit of inventory and explain how each affect the audit of
inventory.
Indicate which of the following audit procedures, used as tests of controls, do not
involve audit sampling.
1) Observing and evaluating segregation of duties.
2) Testing of whether sales invoices are supported by authorized customer orders and
shipping documents.
3) Reviewing entity’s procedures for accounting for the numerical sequence of shipping
documents.
4) Examining sales orders for proper credit approval.
5) Recomputing the information on copies of sales invoices.
6) Comparing the average days outstanding in accounts receivable with industry
averages.
Why must an auditor use sampling? What tradeoffs occur when an auditor uses
sampling?
Jane Goodperson performed an audit on the Quagmire Corporation and issued an
unqualified opinion. Jane performed the audit with due professional care and in
accordance with generally accepted auditing standards. Two months after the report is
issued, Jane discovers on the news that the CEO of Quagmire, Johnny Best, had been
stealing small amounts of inventory. The amount, however, is immaterial compared to
the overall inventory of the corporation. Jane soon receives a call from Quagmire’s
CFO, Mark Beastly. Mark wants Jane to refund her audit fees. Mark thinks Jane did not
properly perform the audit, as she did not discover this fraud. Further, he feels that now
Quagmire’s financial statements are not fairly stated because of Jane. How should Jane
respond to this claim?
One of the greatest sources of liability for auditors under the 1934 Act is Section 10(b)
and the related Rule 10b-5, which states that it is unlawful for any person to defraud,
make any untrue statement of a material fact, or engage in any act in connection with
the purchase or sale of a security. Once a plaintiff has established that he or she can sue
under Rule 10b-5, there are four elements that must be proven. List the four elements.
Assume you are working on a 12/31 year-end audit. It is now March 31st and the 12/31
accounts receivable aging shows a large receivable that was outstanding on 12/31 for
120 days. Further, the entity’s receivables are typically collected in less than 45 days.
You anticipate that the entity’s allowance for doubtful account should be increased and
inform the entity about your disposition. Management disagrees. Is there an alternative
substantive procedure that you could perform that would provide convincing evidence
that this balance is collectible? If so, explain.
Identify the primary purposes of the General Standards Rule, the Compliance with
Standards Rule and the Accounting Principles Rule of the Rules of Conduct.
Suits are often brought against auditors that allege that the auditors did not detect some
type of fraud or defalcation. List the six defenses that the auditors could mount against
client negligence claims.