An entity erroneously recorded a large purchase twice. Which of the following internal
controls would be most likely to detect this error in a timely and efficient manner?
A. Footing the purchases journal.
B. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts.
C. Tracing totals from the purchases journal to the ledger accounts.
D. Sending written quarterly confirmations to all vendors.
To determine whether accounts payable are complete, an auditor performs a test to
verify that all merchandise received is recorded. The population of documents for this
test consists of all
A. payment vouchers.
B. receiving reports.
C. purchase requisitions.
D. vendors’ invoices.
The fourth PCAOB reporting standard requires the auditor’s report to contain either an
expression of opinion regarding the financial statements taken as a whole or an
assertion to the effect that an opinion cannot be expressed. The objective of the fourth
standard is to prevent
A. An auditor from reporting on one basic financial statement and not the others.
B. An auditor from expressing different opinions on each of the basic financial
statements.
C. Management from reducing its final responsibility for the basic financial statements.
D. Misinterpretations regarding the degree of responsibility the auditor is assuming.
Which of the following is the best defense a CPA firm can assert in a suit for common
law fraud based on its unqualified opinion on materially false financial statements?
A. Contributory negligence on the part of the client.
B. A disclaimer contained in the engagement letter.
C. Lack of privity.
D. Lack of scienter.
In the context of agency theory, information asymmetry refers to the idea that
A. Information can vary in its reliability.
B. Information can vary in its relevance.
C. Management has more information about the entity’s true financial position than do
the absentee owners (i.e. stockholders).
D. Management likely will not act in the best interests of the absentee owners.
Which of the following pairs of accounts would an auditor most likely analyze on the
same working paper?
A. Notes receivable and interest income.
B. Accrued interest receivable and accrued interest payable.
C. Notes payable and notes receivable.
D. Interest income and interest expense.
Which assertions may be tested for the “account balances” category of management
assertions?
A. Existence, accuracy, rights and obligations, completeness.
B. Existence, rights and obligations, completeness, valuation and allocation.
C. Occurrence, rights and obligations, completeness, valuation and allocation.
D. Occurrence, accuracy, rights and obligations, completeness.
An auditor usually obtains evidence of stockholders’ equity transactions by reviewing
the entity’s
A. minutes of the board of directors’ meetings.
B. transfer agent’s records.
C. canceled stock certificates.
D. treasury stock certificate book.
When documenting an entity’s internal control, the independent auditor sometimes uses
a systems flowchart, which can best be described as a
A. Pictorial presentation of the flow of instructions in an entity’s internal computer
system.
B. Diagram which clearly indicates an organization’s internal reporting structure.
C. Graphic illustration of the flow of operations which is used to replace the auditor’s
internal control questionnaire.
D. Symbolic representation of a system or series of sequential processes.
In applying classical variables sampling, an auditor attempts to
A. estimate a qualitative characteristic of interest.
B. determine various rates of occurrence for specified attributes.
C. discover at least one instance of a critical deviation.
D. predict a monetary population value within a range of precision.
Which of the following is the least persuasive documentation in support of an auditor’s
opinion?
A. Schedules of details of physical inventory counts conducted by the entity.
B. Notation of auditor’s inferences drawn from ratios and trends.
C. Notation of appraisers’ conclusions documented in the auditor’s working papers.
D. Lists of negative confirmation requests for which no response was received by the
auditor.
When an accountant is not independent of an entity and is requested to perform a
compilation of the entity’s financial statements, the accountant
A. is precluded from accepting the engagement.
B. may accept the engagement and need not disclose the lack of independence.
C. may accept the engagement and should disclose the lack of independence, but need
not indicate the reason for the lack of independence.
D. may accept the engagement and should disclose both the lack of independence and
the reason for the lack of independence.
When performing a test of controls with respect to control over cash receipts, an auditor
may use a systematic sampling technique with a start at any randomly selected item.
The biggest disadvantage of this type of sampling is that the items in the population
A. must be systematically replaced in the population after sampling.
B. may systematically occur more than once in the sample.
C. must be recorded in a systematic pattern before the sample can be drawn.
D. may occur in a systematic pattern, thus destroying the sample randomness.
An auditor knows that an audit client operating in an industry in which common stock
is valued based on the price-earnings ratio will soon make an initial public offering. All
of the following are true except:
A. Materiality should be reduced.
B. Risk of material misstatement should increase.
C. Detection risk should decrease.
D. Audit risk should increase.
The first PCAOB general standard recognizes that regardless of how capable an
individual may be in other fields, the individual cannot meet the requirements of the
auditing standards without the proper
A. Business and finance courses.
B. Quality control and peer review.
C. Education and experience in auditing.
D. Supervision and review skills.
Which of the following describes a permanent difference?
A. A difference that will be corrected in an amended tax return.
B. A difference arising from an uncertain tax position.
C. A fundamental difference in what constitutes revenue or expense for GAAP and tax
purposes.
D. A timing difference between the recognition of revenue or expense under GAAP and
tax purposes.
Which of the following factors most likely would lead a CPA to conclude that a
potential audit engagement should be rejected?
A. The details of most recorded transactions are not available after a specified period of
time.
B. Internal control activities requiring segregation of duties are subject to management
override.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion
on the financial statements.
D. Management has a reputation for consulting with several accounting firms about
significant accounting issues.
Proper segregation of functional responsibilities in an effective system of internal
control calls for separation of the functions of
A. Authorization, execution, and payment.
B. Authorization, recording, and custody.
C. Custody, execution, and reporting.
D. Authorization, payment, and recording.
FASB ASC Topic 715 requires specific disclosures regarding human resources, which
of course must be verified and audited by the CPA. What are those disclosures?
For a large population of cash disbursement transactions, Smith, CPA is testing controls
by using attribute sampling techniques. Anticipating an expected deviation rate of 3
percent, Smith found from a table that the required sample size is 400 with a tolerable
deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith
anticipated an expected deviation rate of only 2 percent but wanted to maintain the
same tolerable deviation rate and confidence level, the sample size would be closest to
A. 200.
B. 400.
C. 533.
D. 800.
Which of the following audit procedures would be least likely to disclose the existence
of related party transactions of a client during the period under audit?
A. Reading “conflict-of-interest” statements obtained by the client from its
management.
B. Scanning accounting records for large transactions at or just prior to the end of the
period under audit.
C. Reading minutes of the Board of Directors meetings for authorization or discussion
of material transactions.
D. Confirming purchases and sales transactions with the vendors and/or customers
involved.
Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
A. Repairs and maintenance expense.
B. Depreciation expense.
C. Gain on disposal of equipment.
D. Accounts payable.
Tracing copies of sales invoices to shipping documents will provide evidence that all
A. shipments to customers were recorded as receivables.
B. billed sales were shipped.
C. accounts receivable ledger is complete.
D. shipments to customers were billed.
Accounts payable confirmations are used to test
A. both the existence and completeness audit assertions.
B. only the existence audit assertion.
C. only the completeness audit assertion.
D. either existence or completeness, depending upon the response rate.
For an attributes sampling plan, the tolerable deviation rate is 4.5%, the computed
upper deviation rate is 7%, the sample deviation rate is 3%, and the desired confidence
level is 95%. What is the allowance for sampling risk included in the computed upper
deviation rate?
A. 1.5%.
B. 3%.
C. 4%.
D. 5%.
The International Professional Practices Framework developed by the IIA includes all
of the following types of guidance, except:
A. Standards.
B. Interpretations of Standards.
C. Practice advisories.
D. Practice guides.
Accepting an engagement to compile a financial projection for a public company most
likely would be inappropriate if the projection were to be distributed to
A. a bank with which the entity is negotiating for a loan.
B. a labor union with which the entity is negotiating a contract.
C. the principal stockholder, to the exclusion of the other stockholders.
D. all stockholders of record as of the report date.
When third party use of prospective financial statements is expected, an accountant may
not accept an engagement to
A. perform a review.
B. perform a compilation.
C. perform an examination.
D. apply agreed-upon procedures.
A CPA will most likely be negligent when the CPA fails to
A. correct errors discovered in the CPA’s previously issued audit reports.
B. detect all of a client’s fraudulent activities.
C. include a negligence disclaimer in the CPA’s engagement letter.
D. warn a client’s customers of embezzlement by the client’s employees.
Client risk as defined in the text is
A. The auditor’s risk of loss from events arising in connection with financial statements
audited and reported upon.
B. The overall risk of material misstatement.
C. The risk that audit procedures will fail to detect material misstatements.
D. The risk of the entity’s financial failure.