Which of the following would be the best protection for a company that wishes to
prevent the “lapping” of trade accounts receivable?
A. Separate duties so that the bookkeeper in charge of the general ledger has no access
to incoming mail.
B. Separate duties so that no employee has access to both checks from customers and
currency from daily cash receipts.
C. Have customers send payments directly to the company’s depository bank.
D. Request that customer’s payment checks be made payable to the company and
addressed to the treasurer.
When counting cash on hand the auditor must exercise simultaneous control over all
cash and other negotiable assets to prevent
A. theft.
B. irregular endorsement.
C. replacement or substitution of stolen assets.
D. deposits in transit.
Computer operations controls are typically implemented for files and data used in
processing. The major objectives of these controls include each of the following except
for
A. ensure that appropriate files are used in computerized processing.
B. ensure restricted access to the computing environment.
C. ensure that files are appropriately secured and protected from loss.
D. ensure that files can be reconstructed from earlier versions of information used in
processing.
Kerry CPA is the auditor for Sammy Corp. During the audit, Kerry discovers a material
misstatement in Sammy’s financial statements. Sammy’s management tells Kerry that if
the misstatement is corrected or if Kerry issues an opinion that indicates there is a
material misstatement, Sammy Corp. will likely have to declare bankruptcy and
thousands of employees will lose their jobs. Which of the following statements is true if
the misstatement is not corrected and Kerry issues an unqualified opinion on Sammy’s
financial statements?
A. Kerry is liable only to third parties in privity of contract.
B. Kerry is liable only to known users of the financial statements.
C. Kerry is likely liable to any person who suffered a loss as a result of the fraud.
D. Kerry is likely liable to third parties even if the third parties were aware of the fraud
and did not rely on the opinion.
Which of the following factors most likely would cause an auditor not to accept a new
audit engagement?
A. An inadequate understanding of the entity’s internal controls
B. The close proximity to the end of the entity’s fiscal year
C. Concluding that the entity’s management probably lacks integrity
D. The inability to perform preliminary analytical procedures before assessing control
risk
Which of the following would be a step in an internal control program?
A. Obtain an aged trial balance of the accounts receivable.
B. Prepare and send confirmations on a sample of customers’ accounts receivable.
C. Assess the control risk for sales and collections.
D. Read sales contracts for evidence of customers’ rights of return or price allowance
terms.
An unrecorded check issued during the last week of the year would most likely be
discovered by the auditor when the
A. check register for the last month is reviewed.
B. cutoff bank statement is reconciled.
C. bank confirmation is reviewed.
D. search for unrecorded liabilities is performed.
Which of the following is not a reason that the Class Action Fairness Act of 2005 will
benefit auditors in class action lawsuits?
A. Federal courts provide a higher level of scrutiny for class action lawsuits than state
courts.
B. Federal courts have more resources at their disposal for managing class action
lawsuits.
C. State courts may discriminate against defendants from other jurisdictions.
D. Verdicts in state courts are normally more appropriate to apply to multiple
jurisdictions than verdicts in federal courts.
Analytical procedures consist of evaluations of financial information made by a study
of plausible relationships among both financial and nonfinancial data. They range from
simple comparisons to the use of complex models involving many relationships and
elements of data. They involve comparisons of recorded amounts, or ratios developed
from recorded amounts, to expectations developed by auditors.
Computer-assisted audit techniques (CAATs) could not be used for which of the
following audit tasks?
A. Testing calculations and making computations
B. Evaluating control risk assessment
C. Summarizing, resequencing, and reformatting data
D. Comparing audit evidence from manual audit procedures to company needs
An audit plan to examine long-term debt most likely would include steps that require
A. comparing the carrying amount of held-to-maturity securities with their year-end
market values.
B. correlating interest expense recorded for the period with outstanding debt.
C. verifying the existence of the holders of the debt by direct confirmation.
D. inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
To statistically evaluate an attributes sampling application, the auditor would not need
to know
A. the acceptable risk of overreliance.
B. the actual deviations in the sample.
C. the actual population size.
D. the upper limit rate of deviation.
Which of the following types of audit evidence provides the least assurance of
reliability?
A. Receivable confirmations from the client’s customers
B. Prenumbered receiving reports completed by the client’s employees
C. Prior months’ bank statements obtained from the client
D. Municipal property tax bills prepared in the client’s name
Which of the following is typically not included in the inquiry letter sent to the client’s
attorneys?
A. A disclaimer regarding the likelihood of settlement of pending litigation
B. A listing of pending or threatened litigation, claims, or assessments
C. An evaluation of the likelihood of an unfavorable outcome
D. An estimate of the range of potential loss
Which of the following factors is most likely to affect the extent of the documentation
of the auditor’s understanding of a client’s system of internal controls?
A. The industry and the business and regulatory environments in which the client
operates
B. The degree to which information technology is used in the accounting function
C. The relationship between management, the board of directors, and external
stakeholders
D. The degree to which the auditor intends to use internal audit personnel to perform
substantive tests
Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and
tested Elm Tree’s internal control procedures over the sales recording process and finds
the controls to be effective. At a minimum, the auditor’s year-end procedures for testing
internal control procedures must include
A. confirmations of year-end accounts that were examined on October 15.
B. test the client’s internal control procedures from October 15 through the year end.
C. tests of compliance with internal control for a random sample of transactions
throughout the audit period.
D. a comparison of the responses to the auditor’s internal control questionnaire with a
detailed flowchart of control procedures at year end.
As payments are received, one mailroom employee is assigned the responsibility of
prelisting receipts and preparing the deposit slip prior to forwarding the receipts,
deposit slip, and remittance advices to accounts receivable for posting. Accounts
receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the
back of each check, and then forward the receipts and deposit slip to the treasury
department. Evaluate the internal control of the described process. Which of the
following is a reasonable assessment of internal control in this process?
A. Adequate internal control
B. Inadequate internal control because mailroom employees should not have access to
cash
C. Inadequate internal control because treasury employees should prepare the deposit
slip
D. Inadequate internal control because of a lack of separation of duties
Selecting the first five sales orders processed each month for examination is an example
of which of the following types of selection method?
A. Unrestricted random selection
B. Systematic random selection
C. Haphazard selection
D. Block selection
Computer controls that might be found in an advanced on-line acquisition and
expenditure system would not include
A. all vendor invoices are prenumbered and the numbers accounted for.
B. each terminal performs only designated functions.
C. an identification number and password are required to enter the nonautomatic
purchase orders.
D. the check signature is printed using a signature plate that is installed on the computer
printer only when checks are printed.
Generally accepted auditing standards are
A. specific actions performed by auditors during an examination.
B. standards that guide the conduct of an audit examination.
C. legal requirements auditors must observe during the audits of public entities.
D. standards used by entities in deciding whether to engage or retain the services of
auditors.
When auditing merchandise inventory at year-end, the auditor performs a purchase
cutoff test to obtain evidence that
A. all goods purchased before year-end are received before the physical inventory
count.
B. no goods held on consignment for customers are included in the inventory balance.
C. no goods observed during the physical count are pledged or sold.
D. all goods owned at year-end are included in the inventory balance.
A partner of the accounting firm who has not been involved in the audit performs an
engagement quality review of documentation. This review usually focuses on
A. the fair presentation of the financial statements in conformity with GAAP.
B. irregularities involving the client’s management and its employees.
C. the materiality of the adjusting entries proposed by the audit staff.
D. the communication of internal control deficiencies to the client’s audit committee (or
those charged with governance).
Which of the following statements concerning the Ultramares Corp. v. Touche case is
not true?
A. This case was brought under common law liability.
B. This case provided a test to determine whether a third party qualified as a primary
beneficiary and could bring suit for ordinary negligence.
C. This case established the rights of third parties to bring suits against auditors under
common law liability.
D. This case concluded that auditors’ liability to third parties would be generally limited
to gross negligence or fraud.
Reports on an entity’s internal control over financial reporting
A. is required for all companies whether they report to the SEC or not.
B. is optional for all companies whether they report to the SEC or not.
C. is required by the PCAOB for large public companies and may be performed by a
CPA for nonpublic companies.
D. is limited to inquiry and analytical procedures for reports for non-SEC companies.
Which of the following represent audit quality guides that remain stable over time and
are applicable for all audits?
A. Auditing procedures
B. Auditing standards
C. Due care
D. System of quality control
Auditors who are reporting on financial statements that contain a material departure
from generally accepted accounting principles should include an additional paragraph
and
A. express a qualified or adverse opinion.
B. not modify the opinion paragraph as long as the departure is adequately disclosed in
a footnote.
C. disclaim an opinion on the financial statements.
D. express a qualified opinion or disclaimer of opinion.
When assessing internal auditors’ objectivity, an independent auditor should
A. consider the policies that prohibit the internal auditors from auditing areas where
they were recently assigned.
B. review the internal auditors’ reports to determine that their conclusions are consistent
with the work performed.
C. verify that the internal auditors’ assessment of control risk is comparable to the
independent auditor’s assessment.
D. evaluate the quality of the internal auditors’ working paper documentation and their
recent audit recommendations.
In the audit of notes payable, an auditor testing the ASB balance assertion of accuracy
and valuation most likely would
A. read directors’ and finance committee’s minutes for authorization of financing
transactions.
B. select a sample of paid notes and trace interest expense to the general ledger account.
C. select a sample of paid notes and recalculate interest expense for the period under
audit.
D. select a sample of notes payable and vouch cash receipt to the bank statement.
Which of the following best describes an engagement to report on an entity’s internal
control over financial reporting for a nonpublic company?
A. An attestation engagement to examine and report on management’s written assertions
about the effectiveness of its internal control structure
B. An audit engagement to render an opinion on the entity’s internal control structure
C. A prospective engagement to project, for a period of time not to exceed one year, and
report on the expected benefits of the entity’s internal control structure
D. A consulting engagement to provide constructive advice to the entity on its internal
control structure
Which of the following is true with respect to the PCAOB inspection process?
A. All firms performing audits of public entities are inspected every year.
B. PCAOB inspections are conducted by partners of other CPA firms.
C. PCAOB inspection teams review a sample of audit engagements conducted by the
firm as well as the firm’s system of quality control.
D. Deficiencies from sample audit engagements reviewed by the inspection team and
deficiencies in the firm’s system of quality control are publicly disclosed on the
PCAOB’s website.
The fundamental principles developed by the Auditing Standards Board are best
described as
A. ten basic standards underlying an audit.
B. standards that apply only to audits of public entities.
C. industry-specific guidance on how audit procedures should be conducted.
D. guidelines for the general conduct of audit engagements.
For which of the following objectives would auditors be least likely to use analytical
procedures near the end of the audit?
A. Obtaining evidence about assertions related to account balances or classes of
transactions
B. Evaluating the adequacy of evidence gathered in response to unexpected account
balances
C. Identifying unusual or unexpected account balances or relationships among account
balances that were not previously identified during the audit
D. Evaluating the adequacy of evidence gathered in response to unexpected
relationships among account balances