Auditors have a responsibility to evaluate whether financial statements properly reflect
all known events through the
A. date of the financial statements.
B. date of the auditors’ report.
C. audit report release date.
D. subsequent year’s date of the financial statements.
The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an
account receivable. An independent audit is being carried out and the auditors send a
positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive
confirmation rather than a negative confirmation was used here?
A. Control risk was particularly low for accounts receivable.
B. Inherent risk was particularly high for accounts receivable.
C. Mr. Dennis’s account was not yet due.
D. Mr. Dennis’s account was not with a related party.
In a fraud investigation, the first objective is
A. identify possible motives to commit a fraud.
B. inspect documentation for tampering.
C. establish who the perpetrators are.
D. to determine if a fraud has been committed.
A client’s inventory is recorded at $600,000 and is comprised of 1,000 items. The
auditors examined a sample of items with a recorded balance of $100,000 and
determined an audited value of $90,000. What is the estimated audited value for
inventory?
A. $90,000
B. $540,000
C. $590,000
D. $666,666
While performing an audit of accounts receivable, Allen, CPA, found that the sample
results supported the conclusion that the accounts receivable balance was materially
misstated. However, the balance was, in fact, not materially misstated. This situation
illustrates the risk of
A. incorrect rejection.
B. incorrect acceptance.
C. assessing control risk too low.
D. assessing control risk too high.
Which of the following is the most likely outcome when the upper limit rate of
deviation is less than the tolerable rate of deviation?
A. The auditor would be exposed to the risk of assessing control risk too low.
B. The auditor would decide to reduce the planned degree of reliance on internal
control.
C. The auditor would increase the extent of further audit procedures.
D. The auditor would be exposed to a potential efficiency loss.
An auditor would most likely be use word processing software for what purpose?
A. Performing analytical procedures
B. Preparing a trial balance
C. Preparing an audit plan
D. Obtaining a sample selection
While performing interim audit procedures of accounts receivable, numerous
unexpected errors are found resulting in a change of risk assessment. Which of the
following audit responses would be most appropriate?
A. Move detailed analytical procedures from year end to interim.
B. Increase the dollar threshold of vouching customer invoices.
C. Send negative accounts receivable confirmations instead of positive accounts
receivable confirmations.
D. Use more experienced audit team members to perform year-end testing.
The appropriate separation of duties does not include
A. authorization to execute transactions.
B. recording of transactions.
C. custody of assets involved in the transactions.
D. data preparation.
The amount at which an item would be recorded assuming no mistakes in judgment or
incorrect applications of generally accepted accounting principles were made is the
A. audited value.
B. expected misstatement.
C. recorded value.
D. tolerable misstatement.
Jones was engaged to examine the financial statements of Gamma Corporation for the
year ended June 30. Having completed an examination of the investment securities,
which of the following is the best method of verifying the accuracy of recorded
dividend income?
A. Tracing recorded dividend income to cash receipts records and validated deposit
slips.
B. Performing analytical procedures and statistical sampling.
C. Comparing recorded dividends with amounts appearing on federal information Form
1099.
D. Comparing recorded dividends with a standard financial reporting service’s record of
dividends.
Which of the following pieces of information discovered by an auditor when
performing substantive tests of account balances would most likely raise red flags about
the possible existence of material fraudulent financial reporting?
A. Paper copies of paid invoices and cancelled checks are microfiched and then
destroyed.
B. The controller requires that you schedule any audit inquiries for after lunch each day,
not in the morning.
C. The petty cash fund custodian never takes a vacation.
D. The client’s estimate of the allowance for doubtful accounts is lower than the
auditor’s independent evaluation of the allowance.
The auditors include an emphasis-of-matter paragraph in an otherwise unmodified
report on the entity’s financial statements to emphasize that the entity being reported on
had significant transactions with related parties. The inclusion of this separate
paragraph
A. is considered a qualification of the opinion.
B. violates generally accepted auditing standards if this information is already disclosed
in footnotes to the financial statements.
C. necessitates a revision of the opinion paragraph to include the phrase “with the
foregoing explanation.”
D. is appropriate and would not otherwise affect the unmodified opinion.
The primary source of information auditors use to obtain information about litigation,
claims, and assessments is the
A. client’s attorney.
B. court records.
C. client’s management.
D. independent auditors.
When evaluating inventory controls, an auditor would be least likely to
A. inspect documents.
B. make inquiries.
C. observe procedures.
D. consider policy and procedure manuals.
Smith Manufacturing Company’s accounts receivable clerk has a friend who is also
Smith’s customer. The accounts receivable clerk, on occasion, has issued fictitious
credit memorandums to his friend for goods supposedly returned (these returns did not
exist). The most effective control for preventing this activity is to
A. prenumber and account for all credit memorandums.
B. require receiving reports to support all credit memorandums before they are
approved.
C. have the sales department independent of the accounts-receivable department.
D. mail monthly statements to the customer.
In the revenue and collection cycle, the order of the activities in the cycle is best
illustrated by
A. delivering goods, billing customer, granting credit, and performing collection
activities.
B. customer ordering, delivering goods, granting credit, and billing customers.
C. processing customer orders, granting credit, delivering goods, and billing customers.
D. granting credit, billing customers, delivering goods, and processing cash receipts.
Tests of controls in an advanced computerized processing system
A. can be performed using only actual transactions because testing simulated
transactions does not provide relevant evidence.
B. can be performed using actual transactions or simulated transactions.
C. is impractical because many procedures within the computerized processing system
leave no visible evidence of having been performed.
D. is inadvisable because it may distort the evidence in real-time systems.
Pujols, CPA, performed a nonstatistical sampling plan to examine the inventory
balances of Wieserbud Brewing Inc., and estimated the account balance based on the
ratio of audited value to recorded balances. He audited 120 items from a sample and
found an audited value of $24,600. The sample had a recorded value of $30,000. If the
entire inventory contained 2,400 items and the total recorded value of the inventory was
$480,000, the estimated account balance using nonstatistical methods is
A. $393,600.
B. $474,500.
C. $480,000.
D. $500,000.
An auditor selected a product maintained in the finished goods warehouse. The auditor
counted the product and compared this amount with the amount in the finished goods
perpetual inventory subsidiary account. Which ASB balance assertion is the auditor
most likely testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation
Auditors try to achieve independence in appearance in order to
A. maintain public confidence in the profession.
B. become independent in fact.
C. comply with the responsibilities principle.
D. maintain an unbiased mental attitude.
Computer controls that are pervasive and apply to all applications of a computerized
processing system are referred to as
A. computer controls.
B. environment controls.
C. automated application controls.
D. general controls.
Internal evidence
A. is obtained directly from third parties independent of the client.
B. originates outside of the client’s system but has been received and processed by the
client.
C. consists of documents that are produced, used, and stored within the client’s
information system.
D. consists of representations made by the client’s officers, directors, owners, and
employees.
Which of the following areas can external auditors rely on internal auditors’ work in
auditing internal controls?
A. Evaluation of the auditing environment
B. Testing of low risk internal control activities
C. All testing of the operating effectiveness of internal control activities
D. As providing the principle evidence for the external auditors’ opinion
In a variables sampling application, which of the following would not ordinarily be
documented by the audit team?
A. A description of the substantive procedures performed on each item selected
B. Information on how the audit team verified the completeness of the identified
population
C. The method and parameters used to determine sample size
D. The audit team’s rationale for the use of monetary unit sampling as opposed to other
sampling techniques
The U.S. Government Accountability Office is an agency of
A. the U.S. Congress.
B. the Executive Office of Management and Budget.
C. the U.S. Supreme Court.
D. the Federal Accounting Standards Board.
Auditors ordinarily send a standard confirmation request to all banks with which the
client has done business during the year under audit, regardless of the year-end
balances. A purpose of this procedure is to
A. provide the data necessary to prepare a proof of cash.
B. request that a cutoff bank statement and related checks be sent to the audit.
C. detect questionable bank activities that may otherwise not be discovered.
D. seek information about contingent liabilities and security agreements.
When qualifying an opinion because of an insufficiency of audit evidence, an auditor
should refer to the situation in the
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following is not true with respect to the risk of incorrect rejection?
A. Incorrect rejection occurs when the auditor concludes that the account balance is not
fairly stated.
B. The risk of incorrect rejection has an inverse relationship with sample size.
C. The risk of incorrect rejection exposes the auditor to an efficiency loss.
D. Incorrect rejection occurs when the true (but unknown) account balance is materially
misstated.
When the auditor concludes that the account balance is not materially misstated when,
in fact, it is materially misstated, the auditor has committed the
A. risk of assessing control risk too high.
B. risk of assessing control risk too low.
C. risk of incorrect acceptance.
D. risk of incorrect rejection.
If financial statements contain a material but non-pervasive departure from generally
accepted accounting principles, the auditors should render a(n)
A. qualified opinion with reference to departure.
B. adverse opinion with scope limitation reference.
C. adverse opinion with reference to departure.
D. disclaimer of opinion.
Which of the following paragraphs references the conduct of the audit in accordance
with PCAOB standards?
A. Introductory paragraph
B. Scope paragraph
C. Opinion paragraph
D. Internal control paragraph
Compensating controls in the finance and investment cycle
A. feature separation of duties by upper management.
B. feature involvement of two or more persons handling all important responsibilities.
C. include involvement by the external auditor.
D. include all the above.
Documentation of a count of equity securities should include all of the following except
A. interest rate.
B. serial numbers.
C. number of shares.
D. market value.
The purpose of segregating the duties of hiring personnel and distributing payroll
checks is to separate the
A. human resources function from the controllership function.
B. administrative controls from the internal accounting controls.
C. authorization of transactions from the custody of related assets.
D. operational responsibility from the record keeping responsibility.