Auditors are most likely to ensure that no production activity is scheduled prior to
A. determining standard costs.
B. observing physical inventory.
C. completing the book to physical adjustment.
D. determining the amount of consigned inventory.
Which of the following procedures most likely would provide an auditor with evidence
about whether an entity’s internal control is suitably designed to prevent or detect
material misstatements?
A. Scanning the journals produced by the internal control system.
B. Performing analytical procedures using data aggregated at a high level.
C. Vouching a sample of transactions directly related to the controls.
D. Observing the entity’s personnel applying the controls.
Audit documentation
A. Must be in electronic form.
B. Must be in paper form only.
C. Is not required, but is strongly recommended.
D. May be in paper, electronic, or some other form.
If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most
likely to
A. have a large sample size.
B. set control risk at the maximum without sampling.
C. set control risk at the minimum without sampling.
D. pick a lower risk of assessing control risk too low to increase sample size.
Statistical sampling provides a technique for
A. exactly defining materiality.
B. greatly reducing the amount of substantive testing.
C. eliminating judgment in testing.
D. measuring the sufficiency of evidential matter.
Which of the following ratios would an engagement partner most likely calculate when
reviewing the balance sheet in the overall review stage of an audit?
A. Quick assets divided by accounts payable.
B. Accounts receivable divided by inventory.
C. Interest payable divided by interest receivable.
D. Total debt divided by total assets.
The fieldwork for the December 31, 2013 audit of Pumpkin Corporation ended on
March 13, 2014. The financial statements and auditor’s report were issued and mailed to
stockholders on March 23, 2014. In each of the situations below, select from the list at
the end of the problem the appropriate action to be taken by the auditor. Assume all
situations are material.
Situations:
1) On April 5, 2014, you discovered that on February 16, 2014, a flood destroyed the
entire uninsured inventory in one of Pumpkin’s warehouses.
2) On February 17, 2014, you discovered that on February 16, 2014, a flood destroyed
the entire uninsured inventory in one of Pumpkin’s warehouses.
3) On February 17, 2014, you discovered that on November 30, 2013, a flood destroyed
the entire uninsured inventory in one of Pumpkin’s warehouses.
4) On April 5, 2014, you discovered that on March 30, 2014, a fire destroyed one of
Pumpkin’s 10 plants.
5) On April 7, 2014, you discovered that a debtor of Pumpkin went bankrupt on January
6, 2014.
6) On January 16, 2014, a lawsuit was filed against Pumpkin for a patent infringement
action that allegedly took place in early 2001. In the opinion of Pumpkin’s attorneys,
there is a reasonable (but not probable) danger of a significant loss to Pumpkin.
7) On February 19, 2014, Pumpkin settled a lawsuit out of court that had originated in
2000 and is currently listed as a contingent liability.
Possible Actions:
a. Adjust the December 31, 2013 financial statements.
b. Disclose the information in a footnote in the December 31, 2013 financial statements.
c. Request the entity revise and reissue the December 31, 2013 financial statements.
The revision should involve an adjustment to the December 31, 2013 financial
statements.
d. Request the entity revise and reissue the December 31, 2013 financial statements.
The revision should involve the addition of a footnote, but no adjustment, to the
December 31, 2013 financial statements.
e. No action is required.
Purchase cutoff activities should be designed to test that merchandise is included in the
inventory of the entity company if the company
A. has paid for the merchandise.
B. has physical possession of the merchandise.
C. holds legal title to the merchandise.
D. holds the shipping documents for the merchandise issued in the company’s name.
As a result of tests of controls, an auditor incorrectly assessed control risk too low and
decreased substantive testing. This assessment occurred because the true deviation rate
in the population was
A. more than the risk of assessing control risk too low based on the auditor’s sample.
B. more than the deviation rate in the auditor’s sample.
C. less than the risk of assessing control risk too low based on the auditor’s sample.
D. less than the deviation rate in the auditor’s sample.
Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on management integrity.
Which of the following characteristics most likely would heighten an auditor’s concern
about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low.
B. Insiders recently purchased additional shares of the entity’s stock.
C. Management places substantial emphasis on meeting earnings projections.
D. The rate of change in the entity’s industry is slow.
Which of the following describes a temporary difference?
A. A difference that will be corrected in an amended tax return.
B. A difference arising from an uncertain tax position.
C. A fundamental difference in what constitutes revenue or expense for GAAP and tax
purposes.
D. A timing difference between the recognition of revenue or expense under GAAP and
tax purposes.
The computed upper deviation rate is
A. the maximum rate of deviations that the auditor is willing to accept before deciding
not to rely on the control.
B. the rate of deviations that the auditor expects to occur in the population.
C. a point estimate of the population deviation rate.
D. the sum of the sample deviation rate and an appropriate allowance for sampling risk.
Under which of the following circumstances would the independence of a CPA be
considered impaired if the CPA, who also is an attorney, serves as auditor and provides
legal services to the same client?
A. When the CPA, as legal agent, consummates a business acquisition for the client.
B. When the CPA’s audit fees and legal fees are not billed separately.
C. When the CPA uses legal expertise to research a question of income tax law.
D. When the legal services consist of an analysis of the terms of an existing lease
agreement.
When auditing a public company, which of the following impairs an auditor’s
independence?
A. Offering audit services as well as preparing the tax return for the same client.
B. The auditor’s spouse works in the assembly line of an audit client.
C. Lack of fee disclosure in the client’s annual report.
D. The auditor has been a partner on the engagement for ten years.
Analytical procedures used in planning an audit should focus on identifying
A. Material weaknesses in internal control.
B. The predictability of financial data from individual transactions.
C. The various assertions that are embodied in the financial statements.
D. Areas that may represent specific risks relevant to the audit.
When an auditor is unable to inspect and count an entity’s investment securities until
after the balance sheet date, the bank where the securities are held in a safe-deposit box
should be notified on or before the balance sheet date that it will be asked to
A. verify any differences between the contents of the box and the balances in the
entity’s subsidiary ledger.
B. provide a list of securities added and removed from the box between the balance
sheet date and the security-count date.
C. confirm that there has been no access to the box between the balance sheet date and
the security-count date.
D. count the securities in the box so that the auditor will have an independent direct
verification.
Which of the following procedures would an auditor most likely include in the initial
planning of an examination of financial statements?
A. Assess the need for the use of specialists in the audit.
B. Inquiring of the client’s attorney as to any claims that are likely to be asserted.
C. Perform detailed testing of the individual financial statement accounts.
D. Determining whether necessary internal controls procedures are being applied as
prescribed.
For monetary-unit sampling, the number of items tested is
A. always equal to sample size.
B. always greater than sample size.
C. always greater than or equal to sample size.
D. always less than or equal to sample size.
For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper
deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control
risk too low is 5%. Which of the following is true?
A. The auditor must increase control risk because the risk of assessing control risk too
low is greater than the tolerable deviation rate.
B. The auditor is likely to increase control risk because the risk of assessing control risk
too low is greater than the tolerable deviation rate.
C. The auditor must increase control risk because the computed upper deviation rate is
greater than the tolerable deviation rate.
D. The auditor is likely to increase control risk because the computed upper deviation
rate is greater than the tolerable deviation rate.
The current audit file usually includes
A. Working trial balance.
B. Organizational chart.
C. Accounting manual.
D. Copies of important contracts.
After completing the preliminary phase of the review of internal control, the auditor
decides not to rely on the system to restrict substantive procedures. Documentation may
be limited to the auditor’s
A. Understanding of the internal control.
B. Reasons for deciding not to extend the review.
C. Basis for concluding that errors and fraud will be prevented.
D. Completed internal control questionnaire.
When an entity uses a trust company as custodian of its marketable securities, the
possibility of concealing fraud most likely would be reduced if the
A. trust company has no direct contact with the entity employees responsible for
maintaining investment accounting records.
B. securities are registered in the name of the trust company, rather than the entity itself.
C. interest and dividend checks are mailed directly to an entity employee who is
authorized to sell securities.
D. trust company places the securities in a bank safe-deposit vault under the custodian’s
exclusive control.
Which of the following relatively small misstatements most likely would have a
material effect on an entity’s financial statements?
A. An illegal payment to a foreign official that was not recorded.
B. A piece of obsolete office equipment that was not retired.
C. A petty cash fund disbursement that was not properly authorized.
D. An uncollectible account receivable that was not written-off.
Cravens was asked to perform the first audit of a wholesale business that does not
maintain perpetual inventory records. Cravens has observed the current inventory but
has not observed the physical inventory at the previous year-end date and concludes
that the opening inventory balance, which is not auditable, is a material factor in the
determination of cost of goods sold for the current year. Cravens will probably
A. decline the engagement.
B. express an unqualified opinion on the balance sheet and income statement except for
inventory.
C. issue a disclaimer of opinion.
D. issue an adverse opinion.
To determine whether the system of internal control operated effectively to minimize
errors of failure to invoice a shipment, the auditor would select a sample of transactions
from the population represented by the
A. customer order file.
B. bills of lading file.
C. open invoice file.
D. sales invoice file.
An auditor wishes to perform tests of controls on an entity’s cash disbursements
procedures. If the control activities leave no audit trail of documentary evidence, the
auditor most likely will test the procedures by
A. inquiry and analytical procedures.
B. confirmation and observation.
C. observation and inquiry.
D. analytical procedures and confirmation.
An auditor who is engaged to examine the financial statements of a business enterprise
will request a cutoff bank statement primarily to
A. verify the cash balance reported on the bank confirmation inquiry form.
B. verify reconciling items on the entity’s bank reconciliation.
C. detect lapping.
D. detect kiting.
The audit of year-end physical inventories should include steps to verify that the entity’s
purchases and sales cutoffs were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a
A. sale in the subsequent period.
B. purchase in the current period.
C. sale in the current period.
D. purchase return in the subsequent period.
A major customer of an entity suffers a fire after year-end, but just prior to completion
of audit fieldwork. The entity believes that this event could have a significant direct
effect on the financial statements. The auditor should
A. advise management to disclose the event in the notes to the financial statements.
B. disclose the event in the auditor’s report.
C. withhold submission of the auditor’s report until the extent of the direct effect on the
financial statements is known.
D. advise management to adjust the financial statements.
Which of the following controls most likely would be effective in offsetting the
tendency of sales personnel to maximize sales volume at the expense of high bad debt
write-offs?
A. Employees responsible for authorizing sales and bad debt write-offs are denied
access to cash.
B. Shipping documents and sales invoices are matched by an employee who does not
have authority to write-off bad debts.
C. Employees involved in the credit-granting function are separated from the sales
function.
D. Subsidiary accounts receivable records are reconciled to the control account by an
employee independent of the authorization of credit.
An auditor would consider a cashier’s job description to contain compatible duties if the
cashier receives remittances from the mailroom and also
A. records the journal entry to recognize the cash receipt.
B. prepares the monthly bank reconciliation.
C. prepares the daily deposit slip.
D. approves customer discounts.
Which of the following is not a misstatement related to the occurrence assertion for
inventory?
A. Consigned goods are included as part of inventory.
B. Unauthorized production activity.
C. Fictitious inventory.
D. Recorded inventory is not on hand because of theft.
Which of the following material events occurring subsequent to the balance sheet date
would require an adjustment to the financial statements before they could be issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business that is expected to double sales volume.
D. Settlement of litigation, in excess of the previously recorded liability.
An auditor has taken a large sample from an audit population that is skewed in the sense
that it contains a large number of small dollar balances. The auditor can conclude
A. the sampling distribution is not normal; therefore MUS sampling will more
accurately define the nature of the population.
B. the sampling distribution is normal; therefore the confidence coefficient value can be
used to evaluate the sample results.
C. the sampling distribution is not normal; thus attribute sampling is the only alternative
statistical tool that can be appropriately used.
D. none of the other answers is correct.