1) Expulsion from the
A) True
B) False
2) Which of the following is the most effective control procedure to detect vouchers
that were prepared for the payment of goods that were not received?
A) Count goods upon receipt in storeroom
B) Match purchase order, receiving report, and vendor’s invoice for each voucher in
accounts payable department
C) Compare goods received with goods requisitioned in receiving department
D) Verify vouchers for accuracy and approval in internal audit department
3) The Independence Standards Board was formed to provide a conceptual framework
for independence issues related to audits of public companies.
A) True
B) False
4) Which of the following auditing procedures is ordinarily performed last?
A) reading minutes of the board of directors’ meetings
B) confirming accounts payable
C) obtaining a client representation letter
D) testing the purchasing function
5) Which of the following expenses is not typically evaluated as part of the audit of the
acquisition and payment cycle?
A) Depreciation expense
B) Insurance expense
C) Estimated Liability for Warranties
D) Property tax expense
6) For good internal control, the payroll function should be independent of the human
resources department.
A) True
B) False
7) Which of the following best defines fraud in a financial statement auditing context?
A) Fraud is an unintentional misstatement of the financial statements
B) Fraud is an intentional misstatement of the financial statements
C) Fraud is either an intentional or unintentional misstatement of the financial
statements, depending on materiality
D) Fraud is either an intentional or unintentional misstatement of the financial
statements, depending on consistency
8) The audit and accounting concern addressed in a monthly proof of cash is with:
A) adjusting account balances
B) reconciling the amounts per books and bank
C) determining the month-end balance
D) identifying cash transfers
9) The Credit Alliance approach to the concept of foreseen users states that to be liable
to third parties, an auditor (1) must know and intend that the work product would be
used by the third-party for a specific purpose, and (2) the knowledge and intent must be
evidenced by the auditor’s conduct.
A) True
B) False
10) When an auditor believes that an illegal act may have occurred, the first step he or
she should take is to gather additional evidence to determine the extent of the illegality.
A) True
B) False
11) The balance in the property tax expense account is most similar to:
A) depreciation expense
B) insurance expense
C) compensation expense
D) utilities expense
12) Prospective financial statements are for general use or for limited use. General use
refers to use by any third party, whereas limited use refers to use by third parties with
which the responsible party is negotiating directly. Which of the following statements is
not correct?
A) Forecasts can be provided for general use
B) Forecasts can be provided for limited use
C) Projections can be provided for general use
D) Projections can be provided for limited use
13) A proof of cash includes a reconciliation of cash receipts deposited in the bank with
the cash disbursements records for a given period.
A) True
B) False
14) Typically, analytical procedures are the primary means of verifying income
statement accounts resulting from allocations.
A) True
B) False
15) The auditor is concerned with the audited value rather than the error amount of each
item in the sample when using:
A) difference estimation
B) mean-per-unit estimation
C) ratio estimation
D) monetary-unit sampling
16) A common inventory observation procedure is to be alert for items that are
damaged, rust- or dust-covered, or located in inappropriate places. The balance-related
audit objective being achieved by this procedure is:
A) classification
B) cutoff
C) realizable value
D) rights
17) A vendor invoice is normally prepared at the time tangible goods are received and
indicates the description of goods, the quantity received, the date received, and other
relevant data.
A) True
B) False
18) For a private company audit, tests of controls are normally performed only on those
internal controls the auditor believes have not been operating effectively during the
period under audit.
A) True
B) False
19) To determine that sales are accurately recorded, the unit prices on the duplicate
sales invoices are normally compared with:
A) the original invoices
B) an approved master price list
C) the amounts recorded in the sales journal for that transaction
D) the amounts posted to the customer’s account in the accounts receivable master file
20) An important characteristic of IT is uniformity of processing. Therefore, a risk
exists that:
A) auditors will not be able to access data quickly
B) auditors will not be able to determine if data is processed consistently
C) erroneous processing can result in the accumulation of a great number of
misstatements in a short period of time
D) all of the above
21) Which of the following best expresses the requirement to establish with the client
an understanding of the responsibilities the auditor and company is taking for the audit
engagement?
A) Management asserts there are no material misstatements in the financials
B) Auditors assert that the primary audit goal is audit efficiency
C) Auditors assert that their primary responsibility is to plan and perform the audit in
order to provide reasonable assurance as to the detection of material misstatement due
to error or fraud
D) Management’s assertion that they will provide the auditor with a risk assessment as
to material misstatements due to errors or fraud in the company’s financial statements
22) The most important means of verifying account balances in the payroll and
personnel cycle are:
A) tests of controls and substantive tests of transactions
B) analytical procedures and tests of controls
C) analytical procedures and substantive tests of transactions
D) tests of controls and tests of details of balances
23) Which of the following statements is not correct?
A) There are many ways an auditor can accumulate evidence to meet overall audit
objectives
B) Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility
C) It is appropriate to minimize the cost of accumulating evidence
D) Gathering evidence and minimizing costs are equally important considerations that
affect the approach the auditor selects
24) Both sampling and nonsampling risks are associated with:
A)
B)
C)
D)
25) The “Red Book” specifies all auditing standards issued by the U.S. General
Accounting Office.
A) True
B) False
26) What documents do auditors routinely obtain to aid in their understanding of a
client’s governance system? Briefly discuss each of these documents.
27) List and briefly describe the three conditions for fraud arising from fraudulent
financial reporting and misappropriation of assets as described in SAS No. 99.
28) Identify each of the seven factors that influence sample size for nonstatistical tests
of details of balances, and state whether each factor is directly or inversely related to
sample size.
29) Internal controls over year-end cash balances in the general account can be divided
into two categories. List the two below.
30) Two types of attestation services provided by CPA firms are audits and reviews.
Discuss the similarities and differences between these two types of attestation services.
Which type provides the least assurance?
31) Discuss the internal controls related to owners’ equity that are of concern to the
auditor.
32) Describe how the auditor tests the accuracy objective for accounts receivable.
33) Describe the audit procedures used to verify the accuracy and detail tie-in
objectives for prepaid insurance.
34) The most common fraud in the acquisition and payment cycle is for the fraudster to
issue payments to fictitious vendors and deposit the cash in fictitious accounts. What
procedures could the company take to prevent this type of fraud?
35) The following is a portion of an adverse audit report issued for a public company.
(Note: A separate report was issued on the effectiveness of internal control over
financial reporting.)
Independent Auditor’s Report
To the shareholders of Wallace Corporation
We have audited the accompanying balance sheet of Wallace Corporation as of
December 31, 2012, and the related statements of income, retained earnings, and cash
flows for the year then ended. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these financial
statements 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 the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
The company has excluded from property and debt in the accompanying balance sheet
certain lease obligations that, in our opinion, should be capitalized in order to conform
with generally accepted accounting principles. If these lease obligations were
capitalized, property would be increased by $14,500,000, long-term debt by
$13,200,000, and retained earnings by $1,300,000 as of December 31, 2012, and net
income and earnings per share would be increased by $1,300,000 and $2.25,
respectively, for the year then ended.
Required:
Complete the above adverse audit report by preparing the opinion paragraph. Do not
date or sign the report.