Inventory turnover is often calculated by the auditor for proper disclosure in client
financial statements.
The cutoff statement is mailed to the client for an agreed upon-date and then copied for
the audit files.
When testing controls, the use of haphazard selection of a sample allows for random,
statistical evaluation.
Transaction oriented controls are designed to operate on every transaction throughout
the year.
Using attribute sampling the auditor can test for multiple attributes using the same
source documents.
Planning materiality helps the auditor determine the extent of audit evidence needed in
order to provide an opinion on the financial statements.
When assessing fair value of Level 2 assets, auditors will use information on the sale of
identical items in active or inactive markets as a source of audit evidence.
A compilation performed in accordance with AICPA standards may be performed by
CPAs or accountants who are not certified or licensed.
PCAOB AS 14 provides important insight that auditors must consider as they decide
whether management’s refusal to correct a detected misstatement is indicative of
intentional bias.
Long-lived assets only include the tangible assets of an organization.
It is important that the external auditor have a constructive and detailed dialogue with
the audit committee on important aspects of the audit.
The most common statistical approaches for substantive testing are classical variables
sampling and MUS.
Ratio analysis performed by the audit team may include the comparison of gross sales
to industry averages and previous periods.
The auditor’s concern for potential fraud in the financial statements will most likely
result in increased testing for the overstatement of revenues.
If the auditor concludes that the financial statements taken as a whole are not fairly
presented, the auditor should issue an adverse opinion.
The AICPA may revoke a member’s CPA license for violations of its Code of
Professional Conduct.
Confirmations of bank accounts may help the auditor to determine if material amounts
of accounts receivable have been pledged or discounted.
It is common for an auditor to issue a compilation report on financial statements that
omit all of the disclosures required by GAAP.
The auditor should consider the historical experience of the client in making past
estimates.
Review reports issued by auditors give positive assurance as to the fair presentation of
financial statements.
Inspection of tangible assets generally provides reliable evidence with the respect to the
completeness of the assets, but not necessarily about the existence of the assets.
Detection risk is measured on a scale of 0% to 5%.
If an experienced reviewer who was not a part of the audit team, but who has
appropriate competence, independence, integrity, and objectivity, performs an
independent quality review, this is referred to as a reoccurring partner review.
Auditors are only concerned with materiality for the financial statements as a whole.
BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as
though it were its subsidiary. BruceCo. has probably committed fraud because of its
misapplication of consolidation principles.
Auditors request the client to book all known misstatements, even if the recording cost
is very high so that there are no carryovers from year to year.
The use of prenumbered sales invoices is the primary control procedure to satisfy the
objective of authorization.
In a reasonable test, the auditor develops an expected value of an account by using data
wholly or partly independent of the client’s accounting information system.
The use of analytical review procedures applied to related expense accounts would not
be used to determine if accounts payable were understated.
Clearly trivial and not material are terms that can be used interchangeably.
Auditors are not responsible for making judgments regarding the fair value of
securities.
In the U.S. a CPA firm can provide both internal and external audit services for the
same public company client.
Statistical sampling combines the theory of probability and statistical inference with
audit judgment and experience.
Analytical procedures conducted during the final review phase of the audit should
corroborate conclusions formed during the audit, which enables the auditor to draw
conclusions upon which to base the audit opinion.
An audit opinion is a guarantee that the business is a going concern.
The PCAOB’s second fieldwork standard requires auditors develop an understanding of
the client’s controls as an important prerequisite to developing specific audit tests.
Rules are standardized internationally in terms of mandatory partner rotation and
mandatory audit firm rotation.
Internal auditors can perform both consulting services and assurance services.
The audit objective of attribute sampling is to test the correctness of an account balance.
Which of the following will the auditor will not consider when making a materiality
determination?
A.Potential default on loan covenants.
B.Changes in segment earnings or trends in earnings.
C.Factors that would affect the market’s perception of future growth and cash flow for
the company.
D.All of these insights would be considered.
Which of the following is a proper control for the detection of unusual sales
transactions recorded in the general ledger?
A.Electronic authorization prior to posting.
B.Use of sequentially numbered sales documents.
C.Random statements to customers.
D.Review of transactions by upper management or the board.
The Standards of the PCAOB can be broken up in to three categories, i.e., general,
fieldwork, and reporting. Which of the following standards is one of the general
standards?
A.Training and proficiency.
B.Internal control.
C.Sufficient appropriate evidence.
D.Consistency.
Which of the following represents the size of company that has historically committed
fraudulent financial reporting or that has experienced asset misappropriation by its
employees?
A.Large corporations.
B.Middle-market corporations.
C.Small and start-up companies.
D.All companies.
Independence in mental attitude is required of auditor on all audit engagements. What
does this independence require?
A.A sympathetic attitude towards management.
B.An attitude of judicial neutrality.
C.An advocacy attitude towards shareholders.
D.An immovable neutrality regardless of the evidence.
Which of the following is an example of circumstances that would not limit the audit
scope?
A.An inadequacy in the accounting records.
B.The inability to gather sufficient competent evidence.
C.Emphasis of an important matter.
D.The timing of the fieldwork.
Which of the following expense accounts is associated with intangible assets with a
definite life?
A.Depletion expense.
B.Depreciation expense.
C.Amortization expense.
D.None of the above.
Which of the following is a cause of action against the auditor for breach of contract?
A.Violating client confidentiality.
B.Providing the audit report on time.
C.Failing to discover an immaterial error or employee fraud.
D.Withdrawing from an audit engagement with justification.
The auditor’s consideration of internal control over financial reporting affects which of
the following?
A.The nature, timing, and extent of substantive testing to perform.
B.Inherent risk in the account balance.
C.An acceptable level of control risk for an account balance.
D.Both B and C.
Which of the following statements about the Bernie Madoff ponzi scheme is false?
A.Madoff too advantage of his unique ties to the investment community (he was the
former Chair of the NASDAQ) to create trust and encourage further investments.
B.Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley
Act, and the provisions of that Act ultimately led to discovery of the fraud.
C.Madoff was sentenced to 150 years in prison.
D.The estimated amount missing from client accounts, including fabricated gains, was
almost $65 billion.
The use of another CPA firm by an audit firm to perform part of the engagement on a
client’s subsidiary will require the audit firm to do which of the following?
A.Merge with the other CPA firm.
B.Perform a peer review on the other CPA firm.
C.Ensure the independence of the other CPA firm of the client.
D.List the other firm in the footnotes to the client’s financial statements.
Which of the following best describes a fraudulent cash scheme to overstate cash assets
at year end by recording deposits in transit in both the account from which the cash is
withdrawn and the account to which it is transferred?
A.Lapping of cash.
B.Kiting of cash.
C.Embezzlement of cash.
D.Restrictive endorsements of cash.
To learn more about a company and its inherent risks, auditors can use which of the
following resources?
A.Management inquiries.
B.Economic statistics.
C.Online searches.
D.Any of the above could be used.
What is the auditor’s responsibility for testing internal controls when the auditor
believes that the internal controls are effective and intends to rely upon them?
A.The auditor is required to test the controls.
B.The auditor may test the controls.
C.The auditor does need not to test the controls.
D.The auditor never has any responsibility for testing internal controls.
The results of MUS sampling will be unacceptable when the total estimated
misstatement exceeds which of the following?
A.Greater than tolerable misstatement.
B.Less than tolerable misstatement.
C.Equal to tolerable misstatement.
D.Either A or C.
Which one of the following is not a control activity implemented in most accounting
systems?
A.Segregation of duties.
B.Competent, trustworthy employees.
C.Authorization procedures.
D.All of these activities are normally implemented.
Which of the following groups are committed to the convergence of the auditing
standards?
A.IAASB.
B.PCAOB.
C.AICPA.
D.Both A and C.
E.All of the above.
When management chooses to include information in its report on ICFR that is in
addition to the information required to be provided, what should the auditor do?
A.The auditor must endorse the information.
B.The auditor must include the information as part of the opinion.
C.The auditor will disclaim an opinion on that additional information.
D.The auditor will present the information in a separate schedule in the footnotes.
When auditing Global Alliance Industries, Inc., the auditor performed extensive
analytical procedures and found the following:
(a) The commission expenses as a percentage of sales has stayed constant for several
years, but has increased significantly in the current year. However, commission rates
have not changed.
(b) The rate of inventory turnover has steadily decreased for the past four years.
(c) The inventory as a percentage of current assets has steadily increased for the past
four years.
(d) The number of days’ sales in accounts receivable has steadily increased for three
years.
(e) The allowance for uncollectible accounts as a percentage of accounts receivable has
steadily decreased for three years.
(f) The absolute amounts of depreciation expense and depreciation expense as a
percentage of gross fixed assets are significantly smaller than in the preceding year.
REQUIRED:
(1) Evaluate the significance of not disclosing or adjusting these items, if material, in
the fair presentation of financial statements.
(2) When assessing disclosures, what criteria do auditors use?
Which of the following is the primary reason the auditor obtains and reviews a cutoff
bank statement?
A.Verify the balance of cash per the bank’s general ledger at the balance sheet date.
B.Verify the reconciling items on the year-end bank reconciliation.
C.Test for intentional lapping of bank transfers.
D.Foot the cutoff bank statement for completeness.
A risk to the auditor due to the complexity of physical inventory includes the possibility
of which of the following?
A.Overstatement of individual items across multiple locations for cutoff testing.
B.Utility of the items exceeding their cost for existence testing.
C.Movement of goods during existence testing.
D.Stocking of only one type of inventory in the warehouse for presentation and
disclosure testing.
When evaluating the MUS sample results, the auditor calculates the total estimated
misstatement in the account balance based on the sampling process using which of the
following components?
A.Basic Precision.
B.Projected misstatement for items in lower-stratum.
C.Incremental Allowance for Sampling Error.
D.All of the above.
Audit committees are required to include which of the following types of professionals?
A.A CPA.
B.A public regulator.
C.A financial expert.
D.An attorney-at-law.
Which of the following is an inherent limitation of internal controls?
A.Lack of auditor independence.
B.Collusion.
C.Separation of duties.
D.Employee peer review.
Assume a situation in which an attorney who provided significant litigation counsel to a
client to refuses to furnish information requested in an audit. Which of the following
descriptions best describes this situation from the auditor’s perspective?
A.A departure from GAAP.
B.A scope limitation.
C.A violation of the attorney-client privilege.
D.A contingent liability.
Which of the following situations is least likely to initiate a forensic accounting
engagement?
A.Where management suspects a fraud is occurring within the organization.
B.Where strong internal controls exist.
C.Where an auditor recommends a separate forensic engagement due to hints of fraud
uncovered during an audit.
D.Where auditors deem there are situations of heightened fraud risk.
Which one of the following would be the most reliable type of evidence?
A.Photocopies.
B.Indirectly obtained evidence.
C.Observation of assets.
D.Inquiry with the in-house attorney.
What is the first phase in an audit?
A.Client acceptance or client continuance.
B.Understanding the client.
C.Understanding internal controls.
D.Testing of account balances.
If an acquired company remains intact after it has been acquired, it is defined as which
of the following types of segments?
A.Financing segment.
B.Investing segment.
C.Operating segment.
D.Non-operating segment.
What does the effectiveness of internal controls influence?
A.Inherent risk.
B.Control risk.
C.Risk of material misstatement.
D.Both B and C.
Most audit firms use a schedule to accumulate the known and projected misstatements
and the carryover effects of prior-year uncorrected misstatements. Which of the
following statements regarding this process is false?
A.Adjustments made to correct the financial statements are referred to as booked.
B.Possible adjustments to the financial statements that are left uncorrected are referred
to as waived.
C.Tax effects are not shown on schedules of correcting errors.
D.The nature of the misstatement, as well as the quantitative amount, is considered in
the judgment of materiality.
Which of the following best describes how corporate governance influences an
organization?
A.To exert control over management.
B.To hold management accountable for its actions.
C.To exert control over management and hold management accountable for its actions.
D.To neither exert control over management or hold management accountable for its
actions.