According to the AICPA Interpretations of Rule 101, independence: During the period
of the professional engagement, auditor independence is NOT considered to be
impaired if the auditor:
A. had or was committed to acquire any direct or material indirect financial interest in
the client.
B. had a joint closely held investment that was immaterial to the covered member.
C. was a trustee of any trust or executor or administrator of any estate if such trust or
estate had or was committed to acquire any direct or material indirect financial interest
in a client.
D. except as specifically permitted, had any loan to or from the client.
Classical variables sampling can:
a. be applied to overstatements.
b. be applied to understatements.
c. is easier to use than other methods.
d. Both a and b.
In 2001, the SEC changed the rules defining the group of people in an audit firm to
whom the independence rules apply. The independence rules apply to:
A. all partners and staff who work for the audit firm.
B. partners who are not in the audit chain of command.
C. managers and partners who provide any nonaudit services to the audit client.
D. partners who are located in the same office as the lead partner on the audit
engagement.
Company A hired Q to perform its year-end audit. Subsequent to year-end, A discovers
that one of its customers, who owes Company A a material amount, has filed for
bankruptcy protection. Assume that the financial statements and audit report have
already been issued. Q should:
a. recall the financial statements.
b. inform regulators that the audit report can no longer be relied upon.
c. inform the client that the regulators should be notified that the audit report can no
longer be relied upon.
d. reissue a revised audit report.
Which of the following describes management’s responsibility for providing
documentation for its assessment of the effectiveness of ICFR?
(a) The documentation must follow strict SEC guidelines regarding its format and
length.
(b) The documentation must show the connection between significant financial
statement accounts, management assertions, and controls.
(c) The documentation must be updated monthly and updated via narrative reports.
(d) All of the above are true.
Computer-assisted audit techniques (CAAT) can be used to:
a. scan the cash disbursement ledger in search of unusual amounts.
b. scan the cash disbursement ledger in search of unusual times of posting.
c. scan the cash disbursement ledger in search of postings from unauthorized terminals.
d. All of the above.
The auditor normally issues a report to accompany reviewed interim financial
information. Such a report provides:
a. positive assurance.
b. negative assurance.
c. comfort.
d. an opinion.
e. litigation support.
An audit efficiency problems occurs when:
a. the auditor concludes there is no material misstatement when in fact there is.
b. the auditor concludes there is a material misstatement when in fact there is not.
c. the auditor concludes that the transactions need to be reperformed.
d. None of the above are audit efficiency problems.
An auditor may select a sample of items from the inventory records and inspect them
for consistency with the category of the records. The purpose of this test of controls is
to ensure that:
a. recorded inventory exists.
b. inventories are physically protected from theft or damage.
c. policies for assessing inventory valuation are appropriate.
d. proper procedures are followed for the process of the physical count.
Health-care providers in the United States are often paid by:
a. individuals with health insurance.
b. people paying a co-payment.
c. Medicare.
d. third-party payers.
e. other insurance companies.
Salvadore is a staff auditor assigned to the year-end audit of Yachts R” Us, a
manufacturer of high-end yachts based in Palm Beach, Florida. The senior assigned
Salvadore to audit the allowance for doubtful accounts. During his work, Salvadore
notices that the allowance for doubtful accounts was roughly 1% of the Accounts
Receivable balance, even though many large accounts were very old. He inquires of the
CFO about the low percentages. The CFO indicates that there is no problem with slow
payments because the company’s policy is to refinance slow-paying companies.
Generally, additional credit is not refused to a customer, regardless of the status of
payments on an existing account. The client maintains that this policy makes possible a
low allowance because f+ew accounts have to be written off.
(a) Salvadore is concerned about the small size of the allowance account. What
evidence can he gather to verify or alleviate his concerns?
(b)With accounts constantly being refinanced, what evidence can be gathered to
provide reasonable assurance that the accounts are collectible?
(c) Assume that the client and Salvadore continue to disagree on the appropriate amount
for the allowance for doubtful accounts. Given that the amount must be estimated, how
much should Salvadore be influenced by the client’s opinion?
The management assertion that is concerned with the separation between fiscal years is
the:
(a) classification assertion.
(b) valuation or allocation assertion.
(c) completeness assertion.
(d) cutoff assertion.
A customer will likely complain to the seller when the:
a. customer’s cash payment is not posted to the customer’s account.
b. customer is billed for the wrong amount, and the amount is too low.
c. customer is credited for a payment made by someone else.
d. All of the choices are correct.
Adopting the fair value option:
(a) must be disclosed.
(b) reasons for using it must be disclosed.
(c) effects from using it must be disclosed.
(d) All of the above.
Which of the following best describes an auditor’s responsibility regarding
whistleblower information?
(a) The auditor must evaluate the effectiveness of the audit committee’s processes for
receiving and evaluating whistleblower information.
(b) The auditor must establish a procedure for receiving tips and handling complaints
from client personnel.
(c) The auditor must complete a checklist identifying key points in the company’s
procedures for investigating whistleblower accusations.
(d) The auditor must require the company to prepare a Form 8-K to report any
whistleblower accusations to the SEC.
It is important for auditors to be on-location on the last day of the client’s fiscal year
when the client
(a) operates a restaurant that does a considerable amount of business on New Year’s
Eve.
(b) has significant inventory activities such that the receipts and shipments of
inventories at year-end should be observed.
(c) relies upon electronic verification to indicate the timing of transactions.
(d) refuses to pay overtime rates for the audit team during its busy season.
Who is responsible for oversight of the integrated audit function?
a. Shareholders.
b. Officers of the company.
c. The audit committee.
d. None of the above.
The auditor can rely on the ICFR for substantive testing:
(a) for certain accounts but not for others.
(b) for all accounts.
(c) for none of the accounts.
(d) All of the above.
The audit engagement team:
a. is chosen by the client.
b. is some combination of partners, managers, seniors and associates.
c. is a mix of CPA firm and client employees.
d. None of the above.
The Foreign Corrupt Practices Act of 1977:
a. Requires certain records be kept for a minimum amount of time.
b. Forbids the bribing of foreign officials.
c. Requires companies maintain a reasonable set of internal controls.
d. All of the above.
Which of the following organizations does not have authority over auditors?
A. PCAOB
B. AICPA
C. SEC
D. All of the above have authority over auditors.
Company A hired Q to perform its year-end audit. Subsequent to year-end, A discovers
that one of its customers has filed for bankruptcy protection. Q should:
a. perform additional audit work to satisfy itself that the amount receivable from the
customer is properly stated.
b. dual-date the audit report, noting the bankruptcy filing as the reason for the second
date.
c. change the date of the audit report to include the time needed for additional testing.
d. Impossible to determine given lack of specifics.
Indicate whether each of the following account balances is determined as a result of:
Routine (R) transaction processing,
Non-routine (N) transaction processing, or
Estimation (E).
TASK
(a) _____ Sales.
(b) _____ Allowance for doubtful accounts.
(c) _____ Inventory.
(d) _____ Cash.
(e) _____ Depreciation expense.
(f) _____ Warranty reserves.
(g) _____ Asset impairment losses.
(h) _____ Salaries and wages expense.
(i) _____ Sales returns and allowances.
Dual purpose tests:
a. are encouraged by AS #5.
b. require careful planning.
c. must be timed as close as possible to year-end.
d. Both a and b.
Professional skepticism means that the auditor:
(a) should not trust the client.
(b) should allow negative past opinions formed about the client to affect the current
year under audit.
(c) not be satisfied with less than persuasive evidence because of positive attitudes
towards the client.
(d) All of the above.
Typical transaction activities for sales, billing, and cash receipts include all of the
following except:
a. cash receipts.
b. sales returns and allowances.
c. cash disbursements.
d. estimating bad debt expense.
e. accounts receivable.
Which of the following procedures would you perform for an audit of cash and cash
equivalents at year-end?
a. Obtain the cut-off bank statement from the client.
b. Trace deposits in transit to the bank statement and to the books for proper recording.
c. Perform the bank reconciliation.
d. All of the above.
A client decides to change accounting procedures for certain types of transactions
which have a material impact on the financial statements. The client adopts accounting
treatment promulgated under GAAP. Prior to this, the client was not using GAAP; as
part of the change the prior year financial statements are restated. The auditor should
issue what type of opinion?
a. Unqualified opinion.
b. Qualified opinion.
c. Adverse opinion.
d. Depending on the circumstances, the auditor may choose any of the above.
An audit engagement letter sets forth the auditor’s responsibility for confirming its
responsibility to provide written communications to the client company for each of the
following items except:
Communication provided to:
Subject matter:
(a) Management and the shareholders All internal control deficiencies identified during
the audit and not previously communicated.
(b) Shareholders All adjustments required to correct the financial statements
(c) Management and the audit committee All significant deficiencies and material
weaknesses in ICFR identified during the audit.
(d) Board of directors The auditor’s overall conclusions concerning the effectiveness of
financial oversight and ICFR.
Which functions do audit reports serve for the capital markets?
a. Enhance confidence in financial statements.
b. Provide guarantees regarding the quality of investments.
c. Provide assurance that financial statements and management’s reports on internal
control over financial reporting provide reliable information.
d. Both a and c
In an ideal situation, internal auditors report to the Audit Committee.
The Government Accountability Office (GAO) does little more than issue generally
accepted government auditing standards (GAGAS).
Why would a service organization choose to hire an accountant to perform a SAS 70
engagement and issue a report? Would the clients of the service organization (in other
words, the user organizations) want the service organization to provide a SAS 70
report? Why or why not? What might the service organization consider when it
contracts for a SAS 70 engagement to make the resulting report the most useful for user
organizations and their auditors?
Physical vaulting refers to the control procedure involving the capture of transactions
that by-passed the firewall.
Auditors consider and examine ICFR for all of the same reasons, whether they are
auditing a public or a nonpublic company.
Arin Pate, CPA, is scheduled to work on the integrated audits of two client companies
in the coming month: Jacoh Industries and Morton Baxx, Ltd. Arin was assigned to
both of these audit engagements in the prior year. As she works on the preliminary audit
planning phase, Arin notes the following facts and features pertaining to each of these
client companies: Jacoh Industries is a manufacturer of medical imaging equipment.
Although Jacoh’s equipment is distributed worldwide, the company operates at a single
location. The equipment is promoted through sales teams, and sales are accepted
through an online ordering system. There is a significant investment in inventories, and
internal control in this area is strong. In fact, Arin’s firm has never had any significant
audit differences or disagreements with the client. Within the past year, however, a new
competitor has entered the market, and Jacoh is experiencing a decline in sales volume.
Although the company’s income statement still shows a slight profit, cash flow
challenges are now prevalent. Jacoh, however, has not suffered as much as several other
competitors, who are reporting losses for the first time. Morton Baxx publishes a
monthly fashion magazine. Subscription revenues and many of the advertising revenues
are deferred. Most subscriptions are sold on an annual basis, but advertising contracts
range from one month to one year. Publishing costs are typically recorded in the period
that they are incurred. MortonBaxx’s internal controls have been effective in the past. In
order to minimize audit risks on each of these audit engagements, what audit areas
should Arin emphasize?
The Government Accountability Office operates as an independent, nonpartisan body
and is headed by the Comptroller General.
Segregation of duties is achieved in an electronic environment by limiting access to
certain fields of a form.
Preventative controls are preferred over detective controls.
If a client is in violation of a debt covenant, the debt is shown as short-term.
Before compiling financial statements, an accountant must be knowledgeable about the
accounting principles and practices of the industry in which the entity operates.
When the mail is opened and checks are received, a document called a daily remittance
list is immediately prepared.
What is the value of auditors going through a formal process of linking management
assertions to audit procedures to collect evidence? How does this process improve the
audit?
The concept of independence is given significant attention in the AICPA Code of
Conduct. It is possible for a member to appear to be independent in appearance but not
independent in fact.
The auditor must consider internal control when considering whether to rely on
substantive analytical procedures.
Auditing the consolidation process is not required if the equity method is used.