Examples of entity-level controls include
A. Management’s risk assessment process.
B. Controls to monitor results of operations.
C. The period-end financial reporting process.
D. All of these are examples of entity-level controls.
Which of the following statements is correct about an auditor’s required communication
with management and those charged with governance?
A. Any matters communicated to those charged with governance are also required to be
communicated to the entity’s management.
B. The auditor is required to inform those charged with governance about significant
errors discovered by the auditor and subsequently corrected by management.
C. The auditor does not have any requirement to communicate with anyone outside of
management.
D. Weaknesses in internal control previously reported to those charged with governance
are required to be communicated to those charged with governance after each
subsequent audit until the weaknesses are corrected.
The four PCAOB standards of reporting are concerned with all of the following except
A. The presentation of the financial statements based on GAAS.
B. The presentation of the financial statements based on GAAP.
C. Whether principles are consistently applied, whether all informative disclosures have
been made, and the degree of responsibility the auditor is taking.
D. The degree of responsibility the auditor is taking.
While conducting an audit, Larson Associates, CPAs, failed to detect material
misstatements included in its client’s financial statements. Larson’s unqualified opinion
was included with the financial statements in a registration statement and prospectus for
a public offering of securities made by the client. Larson knew that its opinion and the
financial statements would be used for this purpose. In suit by a purchaser against
Larson for common-law fraud, Larson’s best defense would be that
A. larson did not have actual or constructive knowledge of the misstatements and the
auditor followed PCAOB Auditing Standards in the audit.
B. larson’s client knew or should have known of the misstatements.
C. larson did not have actual knowledge that the purchaser was an intended beneficiary
of the audit.
D. larson was not in privity of contract with its client.
Which of the following procedures most likely would not be an internal control activity
designed to reduce the risk of errors in the billing process?
A. Comparing control totals for shipping documents with corresponding totals for sales
invoices.
B. Using computer programmed controls on the pricing and mathematical accuracy of
sales invoices.
C. Matching shipping documents with approved sales orders before invoice preparation.
D. Reconciling the control totals for sales invoices with the accounts receivable
subsidiary ledger.
Under which of the following circumstances would an auditor be most likely to
intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?
A. Reimbursement vouchers are not prenumbered.
B. Reimbursement of the fund from the general cash account occurs twice or more each
week.
C. The custodian occasionally uses the cash fund to cash employee checks.
D. The custodian endorses reimbursement checks.
Key segregations of duties in the inventory management process include all of the
following except separating:
A. cost accounting from review of variance reports.
B. inventory management from cost accounting.
C. cost accounting from the general ledger function.
D. supervision of physical inventory from inventory management.
The main goal of auditing internal control is
A. To allow the auditor to fix any internal control deficiencies.
B. To form an opinion on the ability of internal controls to prevent fraud.
C. To assure management that internal control is preventing all material misstatements
on the financial statements.
D. To evaluate the effectiveness of controls over all relevant financial statement
disclosures in the financial statements.
Which of the following types of audit evidence is the most persuasive?
A. Prenumbered internal purchase order forms.
B. Auditee worksheets supporting cost allocations.
C. Bank statements obtained from the auditee.
D. Auditee personnel responses to auditor inquiries.
Which of the following questions would most likely be included in an internal control
questionnaire concerning the completeness assertion for purchases?
A. Is an authorized purchase order required before the receiving department can accept
a shipment or the vouchers payable department can record a voucher?
B. Are purchase requisitions prenumbered and independently matched with vendor
invoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an
employee who does not have access to purchase requisitions?
D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically
accounted for?
Which of the following ratios is least likely to assist the auditor in determining whether
the entity is experiencing financial difficulties?
A. Net worth/total liabilities.
B. Cash/total assets.
C. Total liabilities/total assets.
D. Net income before taxes/net sales.
In examining cash disbursements, an auditor plans to choose a sample using systematic
selection with a random start. The primary advantage of such a systematic selection is
that population items
A. that include fraud will not be overlooked when the auditor exercises compatible
reciprocal options.
B. may occur in a systematic pattern, thus making the sample more representative.
C. may occur more than once in a sample.
D. do not have to be prenumbered in order for the auditor to use the technique.
Which of the following would be least likely to be comparable between similar
corporations in the same industry or line of business?
A. Earnings per share.
B. Return on total assets before interest and taxes.
C. Accounts receivable turnover.
D. Operating cycle.
In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that
a selected account receivable with a recorded amount of $10,000 has an audit amount of
$8,000. If this were the only error discovered by the auditor, the projected misstatement
for this sample would be
A. $5,000.
B. $4,000.
C. $2,000.
D. $1,000.
An entity maintains perpetual inventory records in both quantities and dollars. If the
assessed level of control risk is high, an auditor would probably
A. increase the extent of tests of controls for the inventory cycle.
B. request that the entity schedule the physical inventory count at the end of the year.
C. insist that the entity perform physical counts of inventory items several times during
the year.
D. apply gross profit tests to ascertain the reasonableness of the physical counts.
An auditor concluded that no excessive costs for an idle plant were charged to
inventory. This conclusion most likely related to the auditor’s objective to obtain
evidence about the financial statement assertions regarding inventory, including
presentation and disclosure, and
A. valuation and allocation.
B. completeness.
C. existence.
D. rights and obligations.
From the list below, select the procedures that an auditor would use to test for
contingent liabilities.
a. Inquire of SEC officials regarding reported violations by the entity that create claims.
b. Read the entity’s contracts, loan agreements, leases, and other documents.
c. Read the entity’s minutes of meetings of shareholders, directors, and committees.
d. Request a representation letter from all the entity’s employees.
e. Read the legal briefs of all suits filed against the entity’s competitors.
f. Request the entity’s management to prepare a letter of inquiry to the entity’s attorney
regarding pending litigation against the entity.
Vouching is used primarily to test which of the following assertions about classes of
transaction?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Classification.
The Foreign Corrupt Practices Act requires that
A. auditors engaged to examine the financial statements of public companies report all
illegal payments to the SEC.
B. public companies establish independent audit committees to monitor the
effectiveness of their system of internal control.
C. U.S. firms doing business abroad report sizable payments to non-U.S. citizens to the
Justice Department.
D. public companies devise and maintain an adequate system of internal control.
Why are plaintiffs motivated to bring actions under RICO?
A. It pertains exclusively to auditors’ actions.
B. It guarantees that cases will be heard in state courts.
C. It provides for treble damages.
D. It holds auditors to standards that exceed reasonable assurance.
Which of the following conditions is necessary for a practitioner to accept an attest
engagement to examine and report on an entity’s internal control over financial
reporting?
A. The practitioner anticipates relying on the entity’s internal control in a financial
statement audit.
B. Management accepts responsibility for the effectiveness of internal control.
C. The practitioner is a continuing auditor who previously has audited the entity’s
financial statements.
D. Management agrees not to present the practitioner’s report in a general-use document
to stockholders.
During consideration of internal control in a financial statement audit of a nonpublic
company, an auditor is not obligated to
A. Search for significant deficiencies in the operation of internal control.
B. Understand the internal control environment and the information system.
C. Determine whether the controls relevant to audit planning have been placed in
operation.
D. Perform procedures to understand the design of internal control.
Before expressing an opinion concerning the results of operations, the auditor would
most likely proceed with the examination of the income statement by
A. applying a rigid measurement standard designed to test for understatement of net
income.
B. analyzing the beginning and ending balance sheet inventory amounts.
C. making net income comparisons to published industry trends and ratios.
D. examining income statement accounts concurrently with the related balance sheet
accounts.
An accountant’s compilation report on a financial forecast should include a statement
that the
A. compilation does not include evaluation of the assumptions underlying the forecast.
B. hypothetical assumptions used in the forecast are reasonable.
C. range of assumptions selected is one in which one end of the range is less likely to
occur than the other.
D. prospective statements are limited to presenting, in the form of a forecast,
information that is the accountant’s representation.
A customer intended to order 100 units of product Z96014, but incorrectly ordered 100
units of a nonexistent product Z96015. Which of the following controls most likely
would detect this error?
A. Check digit verification.
B. Record count.
C. Hash total.
D. Redundant data check.
The predecessor auditor, after properly communicating with the successor auditor, has
reissued a report because the entity desires comparative financial statements. The
predecessor auditor’s report should make
A. no reference to the report or the work of the successor auditor.
B. reference to the work of the successor auditor in the scope paragraph.
C. reference to both the work and the report of the successor auditor in the opinion
paragraph.
D. reference to the report of the successor auditor in the scope paragraph.
In connection with a lawsuit, a third party attempts to gain access to the auditor’s
working papers. The client’s defense of privileged communication will be successful
only to the extent it is protected by the
A. auditor’s acquiescence in use of this defense.
B. common law.
C. aICPA Code of Professional Conduct.
D. state law.
Reports on service organizations typically
A. Provide reasonable assurance that their financial statements are free of material
misstatements.
B. Ensure that the entity will not have any misstatements in areas related to the service
organization’s activities.
C. Ensure that the auditee is billed correctly.
D. Assess whether the service organization’s controls are suitably designed to achieve
internal control objectives.
Which of the following control activities would most likely be used to maintain
accurate perpetual inventory records?
A. Independent storeroom count of goods received.
B. Periodic independent reconciliation of control and subsidiary records.
C. Periodic independent comparison of records with goods on hands.
D. Independent matching of purchase orders, receiving reports, and vendors’ invoices.
Auditors will examine the insurance register primarily to
A. ensure that dollar coverage amounts are adequate.
B. examine policy expiration dates to verify that prepaid insurance is properly stated.
C. ensure that insurance agents are not related parties.
D. ensure that all assets are insured.
Why do auditors generally use a sampling approach to evidence gathering?
A. Auditors are experts and do not need to look at much to know whether the financial
statements are correct or not.
B. Auditors must balance the cost of the audit with the need for precision.
C. Auditors must limit their exposure to their auditee to maintain independence.
D. The auditor’s relationship with the auditee is generally adversarial, so the auditor will
not have access to all of the financial information of the company.
Budd, the purchasing agent for Lake Hardware Wholesalers, has a relative who owns a
retail hardware store. Budd arranged for hardware to be delivered by manufacturers to
the retail store on a C.O.D. basis, thereby enabling his relative to buy at Lake’s
wholesale prices. Budd was probably able to accomplish this because of Lake’s poor
internal control over
A. purchase requisitions.
B. cash receipts.
C. perpetual inventory records.
D. purchase orders.