The revenue process affects numerous accounts in the financial statements.
Monetary-unit sampling is commonly used by auditors to test controls.
An auditor can be sued by a client for negligence under common law.
Kiting is an audit procedure used to test the accuracy of the cash receipts.
A Type II error is the risk of incorrect acceptance.
Common law requires the auditor perform professional services with due care.
The size of the upper limit on misstatement is largely dependent on the sample size,
which is inversely related to the desired confidence level.
Reviewing capital budgets and comparing the amounts spent with amounts budgeted is
an example of a substantive analytical procedure for auditing prepaid accounts.
After the controls are tested, the auditor sets the achieved level of control risk.
Revenue must be realized (or realizable) and earned to be recognized.
The likelihood of an event is “more than remote” when it is “highly possible.”
The IAASB and the ASB collaborated on a replacement for the 10 GAAS standards
which include principles underlying an audit conducted in accordance with generally
accepted auditing standards.
A cutoff bank statement is used to verify the propriety of the reconciling items shown
on the bank reconciliation.
Assurance services are independent professional services that improve the quality of
information specifically for internal decision makers.
Tests of details of transactions are often conducted in conjunction with tests of controls.
The property, plant, and equipment records function should be segregated from the
custodial function.
If the results of the control tests do not support the planned level of control risk, the
detection risk will have to be set higher.
A change in reporting entity is an example of an accounting change that affects
comparability and requires an explanatory/emphasis-of-matter paragraph in the audit
report.
An example of a Type II event or condition is an uncollectible account receivable
resulting from deterioration in a customer’s financial condition prior to year end, about
which the entity is unaware. The customer declares bankruptcy after the balance sheet
date but prior to the issuance of the financial statements.
The auditor gathers audit evidence to test management’s assertions.
Testing all transactions that occurred during the period is cost prohibitive.
Tests of controls must be performed if control risk is set at a lower level.
The cutoff assertion relates to whether transactions and events have been recorded in
the correct accounting period.
Professional judgment must be used when evaluating business risk.
Employees must complete a W-4 form to authorize insurance deductions from his or her
pay.
The purchase journal is referred to as a check register.
The “cradle-to-grave” cycle for inventory begins when goods are purchased and stored
and ends when the finished goods are shipped to customers.
Three types of transactions usually occur in stockholders’ equity: issuance of stock,
repurchase of stock, and payment of dividends.
There are five general types of audit tests.
Disposition of capital assets through sale, exchange, retirement, or abandonment are
transactions that occur in the property management process.
Inquiry of entity personnel and a review of lease transactions for the same period can
provide evidence on proper cutoff for capital leases.
Inherent risk associated with officer compensation is frequently set high because
officers have motive and opportunity to take advantage of their high-ranking offices in
the form of excessive compensation.
Which of the following parties is responsible for the fairness of the representations
made in financial statements?
A. Entity’s management.
B. Independent auditor.
C. Audit committee.
D. AICPA.
Examining brokers’ advices for a sample of securities purchased during the year is a test
for the assertion of
A. completeness.
B. disclosure.
C. valuation and allocation.
D. rights and obligations.
This concept, while used by both internal and external auditors, is typically assessed
quite differently for each.
A. Competence.
B. Objectivity.
C. Integrity.
D. Materiality.
The authority to accept incoming goods in receiving should be based on a(an)
A. vendor’s invoice.
B. materials requisition.
C. bill of lading.
D. approved purchase order.
Identify whether the following tests are substantive analytical procedures, tests of
details of transactions, or tests of details of account balances:
1) Test a sample of purchase requisitions for proper authorization.
2) Test transactions around year-end to determine if they are recorded in the proper
period.
3) Review results of confirmation of selected accounts payable.
4) Compare payables turnover to previous years’ data.
5) Obtain selected vendors’ statements and reconcile to vendor accounts.
6) Compare purchase returns and allowances as a percentage of revenue or cost of sales
to industry data.
In auditing a privately held entity, an auditor must follow the professional standards
established by all of the following except:
A. The AICPA’s Auditing Standards Board.
B. The Professional Code of Conduct.
C. The Independence Standards Board.
D. The PCAOB.
If fraud is suspected, auditors may complete all of the following procedures except:
A. testing for kiting.
B. footing the bank reconciliation and the outstanding checks listing.
C. performing a proof of cash.
D. performing extended bank reconciliation procedures, including detailed examination
of reconciling items.
Which of the following risks is related to efficiency of testing?
A. The risk of incorrect rejection.
B. Inherent risk.
C. The risk of incorrect acceptance.
D. None of these.
Which of the following would not require an explanatory/emphasis-of-matter paragraph
in the auditor’s report?
A. Additional emphasis.
B. Lack of consistency in the financial statements due to accounting changes.
C. Going concern.
D. Opinion based in part on the report of another auditor.
Which of the following statements is correct concerning an auditor’s required
communication with those charged with governance?
A. This communication is required to occur before the auditor’s report on the financial
statements is issued.
B. This communication should include management changes in the application of
significant accounting policies.
C. Any significant matter communicated to those charged with governance also should
be communicated to management.
D. Significant audit adjustments proposed by the auditor and recorded by management
need not be communicated to those charged with governance.
On a high level, the accounting processes of a business consist of internal controls,
individual transactions, and account balances.
Required:
A. Describe the relationship between internal controls, individual transactions, and
account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor
determine if the financial statements are fairly stated.
As the acceptable level of detection risk increases, an auditor may change the
A. Assessed level of control risk from a lower level to a higher level.
B. Assurance provided by tests of controls by using a larger sample size than planned.
C. Timing of substantive procedures from year-end to an interim date.
D. Nature of substantive procedures from less effective to more effective procedures.
If a lawyer refuses to furnish corroborating information regarding litigation, claims, and
assessments, the auditor should
A. honor the confidentiality of the client-lawyer relationship.
B. consider the refusal to be a scope limitation.
C. seek to obtain the corroborating information from management.
D. disclose this fact in a footnote to the financial statements.
An auditor is about to commence a recurring annual audit engagement. The continuing
auditor’s independence would ordinarily be considered to be impaired if the prior year’s
audit fee
A. was unusually large.
B. has not been paid and will not be paid for at least twelve months.
C. has not been paid and the client has filed a voluntary petition for bankruptcy.
D. was renegotiated during the prior year audit based on the need for expanded testing.
In an audit of financial statements of a private company in accordance with generally
accepted auditing standards, an auditor is required to
A. Identify specific internal control activities relevant to management’s financial
statement assertions.
B. Perform tests of controls to evaluate the effectiveness of the entity’s accounting
system.
C. Determine whether procedures are suitably designed to prevent or detect material
misstatements.
D. Document the auditor’s understanding of the entity’s internal control.
Tennessee Company violated company policy by erroneously capitalizing the cost of
painting its warehouse. The CPA examining Tennessee’s financial statements would
most likely learn of this error by
A. discussing Tennessee’s capitalization policies with its controller.
B. reviewing the titles and descriptions for all construction work orders issued during
the year.
C. observing during the physical inventory observation that the warehouse has been
painted.
D. examining in detail a sample of construction work orders.
A compilation of prospective financial statements involves all of the following except:
A. Performing analytical procedures.
B. Assembling the statements based on the responsible party’s assumptions.
C. Issuing a compilation report.
D. Considering whether the statements appear to be not obviously inappropriate.
Which of the following is the best evidence of real estate ownership at the balance sheet
date?
A. Title insurance policy.
B. A duplicate of the original deed held in the entity’s safe.
C. Paid real estate tax bills.
D. Closing statements.
Which of the following procedures would an auditor most likely perform to verify
management’s assertion of completeness?
A. Compare a sample of shipping documents to related sales invoices.
B. Observe the entity’s distribution of payroll checks.
C. Confirm a sample of recorded receivables by direct communication with the debtors.
D. Review standard bank confirmations for indications of kiting.
A typical objective of an operational audit is for the auditor to
A. Determine whether the financial statements present fairly the entity’s operations.
B. Evaluate the feasibility of attaining the entity’s operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity’s relative success in attaining profit maximization.
In testing plant and equipment balances, an auditor may physically inspect new
additions listed on the summary of plant and equipment transactions for the year. This
procedure is designed to obtain evidence concerning management’s assertions about
classes of transactions and events, and specifically, which assertion?
A. Occurrence.
B. Cutoff.
C. Authorization.
D. Classification.
The refusal of an entity’s attorney to provide a representation on the legality of a
particular act committed by the entity is generally
A. sufficient reason to issue a ‘subject to” qualified opinion.
B. considered to be a scope limitation.
C. insufficient reason to modify the auditor’s report because of the attorney’s obligation
of confidentiality.
D. proper grounds to withdraw from the engagement without further consideration.
When audited financial statements are presented in a document containing other
information, the auditor
A. has an obligation to perform auditing procedures to corroborate the other
information.
B. is required to issue an “except for” qualified opinion if the other information has a
material misstatement of fact.
C. should read the other information to consider whether it is inconsistent with the
audited financial statements.
D. has no responsibility for the other information because it is not part of the basic
financial statements.
An auditor traced a sample of purchase orders and the related receiving reports to the
purchases journal and the cash disbursements journal. The purpose of this substantive
procedure most likely was to
A. identify unusually large purchases that should be investigated further.
B. verify that cash disbursements were for goods actually received.
C. determine that purchases were properly recorded.
D. test whether payments were for goods actually ordered.
If the auditor believes that there is minimal likelihood that resolution of an uncertainty
will have a material effect on the financial statements, the auditor would issue a(n)
A. “except for” opinion.
B. adverse opinion.
C. unqualified opinion.
D. disclaimer of opinion.
Compilation reports may include
A. compilations when the accountant is not independent.
B. compilations with full disclosure.
C. compilations that omits substantially all disclosures.
D. any of the items listed.
A predecessor auditor should complete the following before reissuing a report on
statements presented on a comparative basis:
A. read the financial statements of the current period.
B. read the financial statements of the past five years.
C. obtain a letter of representations from the current-year, successor auditor.
D. read the financial statements of the current period and obtain a letter of
representation from the current-year, successor auditor.
Which of the following auditing procedures most likely would assist an auditor in
identifying conditions and events that may indicate substantial doubt about an entity’s
ability to continue as a going concern?
A. Inspecting title documents to verify whether any assets are pledged as collateral.
B. Confirming with third parties the details of arrangements to maintain financial
support.
C. Reconciling the cash balance per books with the cut-off bank statement and the bank
confirmation.
D. Comparing the entity’s depreciation and asset capitalization policies to other entities
in the industry.
The primary reason an auditor requests letters of inquiry be sent to an entity’s attorneys
is to provide the auditor with
A. a description and evaluation of litigation, claims, and assessments that existed at the
date of the balance sheet.
B. an expert opinion as to whether a loss is possible, probable, or remote.
C. the opportunity to examine the documentation concerning litigation, claims, and
assessments.
D. corroboration of the information furnished by management concerning litigation,
claims, and assessments.
Evidence is reliable if it
A. Signals the true state of a management assertion.
B. Applies to the period being audited.
C. Relates to the audit assertion being tested.
D. Is consistent with management’s assertions.
An auditor can be held criminally liable for
A. illegal acts under common law.
B. illegal acts under statutory law.
C. negligent acts when the third party has privity status.
D. tort of contract for failing to follow due professional care.
“There are no violations or possible violations of laws or regulations whose effects
should be considered for disclosure in the financial statements or as a basis for
recording a loss contingency.” The foregoing passage most likely is from a(an)
A. entity engagement letter.
B. report on compliance with laws and regulations.
C. management representation letter.
D. attestation report on internal controls.
When expressing an opinion on a specified account or item in the financial statements,
the auditor need only consider that account or item. However, the auditor must have
audited the entire set of financial statements if this engagement requires a report on the
entity’s
A. net income.
B. retained earnings.
C. assets.
D. working capital.
Subsequent events for which the auditor has a responsibility to actively search are
defined as events that occur subsequent to the
A. balance sheet date.
B. date of the auditor’s report.
C. balance sheet date but prior to the date of the auditor’s report.
D. date of the auditor’s report and concern contingencies that are not reflected in the
financial statements.
Which one of the following statements is true regarding two random samples, drawn in
the same way, from the same population, one of size 30 and one of size 300?
A. The two samples are expected to have the same sample mean.
B. The larger sample is more likely to produce a large sample mean.
C. The smaller sample will have a smaller 95% confidence interval for the mean.
D. The smaller sample will, on average, produce a lower estimate of the variance of the
population.
Explain how revenue recognition is important to the audit of the revenue process.
When determining the sample size of accounts receivable to test, what are three factors
that are important for you to consider?
DATRIX, Inc., a Fortune 500 company, has been experiencing poor performance.
Industry analysts have been issuing negative reports and the company’s stock price has
been steadily declining. As an auditor, what would concern you about the audit
engagement of DATRIX, Inc.
What are the four key audit report enhancements for all entities, which are effective for
financial periods ending after December 15, 2016?
Why might an auditor decide to test controls at an interim date?
What is an unasserted claim and why would an attorney and/or entity be reluctant to
disclose an unasserted claim in the financial statements?
You have been assigned the duty of auditing long-term debt and retained earnings for
Keys, Inc. Describe the tests you would use to support management’s assertions
regarding disclosure for these accounts.
You are auditing cash for Moonbeam, Inc. In meeting with the CFO during the planning
stages of the audit, she indicated that there was a high risk of misstatement due to fraud
in the cash account, given the lack of proper segregation of duties. As the auditor, what
tests could you perform to detect fraudulent activities in the cash account?
Describe the types of information that should be included in the schedule of prepaid
insurance that is used by the auditor as the basis for auditing prepaid insurance.
Discuss entity-level controls and provide examples of these types of controls.
Identify indicators of a material weakness in internal control over financial reporting.
Internal control has become a very important focus for publicly traded and
privately-held companies alike. Internal control is intended to accomplish at least three
objectives and consists of five components of internal control. List the three objectives
and five components of internal control.
Objectives of internal control include:
1) reliability, timeliness, and transparency of internal and external, nonfinancial and
financial reporting,
2) effectiveness and efficiency of operations, including safeguarding of assets, and
3) compliance with applicable laws and regulations.
What is the difference between audit risk and engagement risk?
The textbook presented the concept of auditing through an analogy that involved
buying a house and hiring a house inspector. Name three desirable qualities of a house
inspector or an auditor and discuss how those qualities apply to an auditor and why
those qualities are important for an auditor to possess.
The text discusses three main purposes for performing audit procedures. List and
describe these three main categories of audit procedures and describe their purpose.
While auditing other business processes, an auditor may identify information about
contingent liabilities. What specific audit procedures relating to other business
processes could uncover these liabilities?
Define the engagement letter and discuss its importance.
Describe the organizations involved in standard setting for auditors in the United States
and what their respective roles are in setting current auditing standards for companies in
the United States.