The need for assurance services arises because the interests of the users of information
may be different from that of the interests of those responsible for providing
information.
The tolerable failure rate is the level at which the control’s failure to operate would
cause the auditor to conclude that the control is not effective and would likely change
the auditor’s planned assessment of control risk in performing tests of account
balances..
Regarding interim financial statement reviews, the standards do not require auditors to
understand the client’s accounting and financial reporting practices and its related
internal controls over the preparation of annual and quarterly reports, since they are not
expressing an opinion.
The usual length of a brainstorming session is about four hours.
An example of fraudulent financial reporting is the treasurer’s diversion of hundreds of
thousands of dollars into a personal money market account.
The audit of the cash account is inherently risky due to volume of activity, liquidity and
the account’s susceptibility to fraud.
Preventive controls are designed to provide reasonable assurance that the correct
program is used for processing, all transactions are processed, and the transactions
update appropriate files.
A justified departure from GAAP will result in the issuance of an adverse opinion.
The auditor should apply a basic three-step process for using analytical procedures
during the final review.
The auditor must communicate significant audit adjustments to the audit committee.
Increasing the expected failure rate will cause the sample size to increase.
The direction of testing from the source documents to recorded amounts provides
evidence regarding the completeness of liabilities and expenses.
The auditor’s tolerable failure rate for attribute sampling is the point in which control
failures support the planned assessment of audit risk.
It is likely in the acquisition and payment cycle that audit evidence from substantive
analytical procedures alone will be sufficient enough for the auditor.
Auditing is the process of attesting to assertions about economic actions and events.
The auditor would examine a sample of sales transactions throughout the entire period
to determine if sales were recorded in the proper period when performing a sales cutoff
test.
An indication of potential inventory fraud is that inventory levels are growing faster
than sales.
The onslaught of fraud in financial statements over the recent decade has been the first
of its kind in history.
There are guidelines that can be followed in brainstorming sessions to promote
productivity and creativity.
Commercial paper is the term applied to notes issued by those major corporations with
poor credit ratings.
Statistical sampling is used when an auditor chooses to examine all purchases of
equipment exceeding $1,000.00 and to test the remaining items by analytical
procedures.
A method of testing for the completeness of sales is to test the sequence of sales
invoices used during the period under audit.
The decision about whether to make reference to another auditor in the report on the
audit of ICFR does not differ from the corresponding decision as it relates to the audit
of the financial statements.
The audit report delineates the responsibility of client management and that of the audit
firm.
The ending price of securities can be verified through reliable publications and websites
such as the Wall Street Journal.
Negative confirmations are considered to be more persuasive than positive
confirmations.
The auditor considers materiality only at the overall financial statement level.
Auditors routinely review the MD&A to provide reasonable assurance that it does not
contain information that is factually inaccurate or inconsistent with the audited portion
of the financial statements and accompanying footnotes.
Performance materiality is used for assessing the risks of material misstatement and
determining the nature, timing, and extent of audit procedures to perform during the
audit opinion formulation process.
Major threats to the independence of the auditor include compensation schemes,
familiarity with the client, and time pressures.
The performance of inquiry and analytical review procedures to provide a reasonable
basis for expressing limited assurance is required for a review service.
If the firm auditing a company realizes that it is not independent with respect to the
client, it will issue disclaimer of opinion based on the inherent GAAP violation imposed
by the audit firm.
The quick ratio is useful for analyzing inventory accounts.
Uncertainties, such as doubt about the going concern of a client, may result in an
adverse opinion.
Professional skepticism is required on audit engagements that have a high risk of fraud
but can be disregarded for all other engagements.
Significant changes in the competitive market and a decrease in the competitiveness of
the client’s products are potential indicators of going-concern problems.
An organization’s control environment is established and maintained by the internal
auditing department.
When a lockbox is used, the financial institution records the deposit and then forwards
customer transaction data to the client to update cash and accounts receivable records.
The Center for Audit Quality was started by the International Federation of
Accountants.
Tolerable misstatement is always less than or equal to performance materiality.
Which of the following controls is not a typical internal control over fixed assets?
A.Reconcile physical inventory with the property ledger.
B.Periodically reassess the appropriateness of depletion categories.
C.Identify obsolete or scrapped equipment and write it down to scrap value.
D.Periodically review management strategy and systematically assess the impairment
of assets.
Which of the following is not a cash management technique frequently used by
management?
A.Imprest funds.
B.Lockboxes.
C.Electronic funds transfers.
D.Cash management agreement with financial institutions.
E.All of the above.
In determining auditor independence, the SEC considers which of the following as an
independence impairment?
A.An auditor performs the accounting work and then audits it.
B.An auditor has no conflicting interest with the client.
C.An auditor does not act as an advocate for the audit client.
D.An auditor does not act as an employee of the audit client.
Which one of the following procedures is not a standard procedure when performing a
review?
A.Assess the internal control over financial reporting.
B.Read the financial statements to determine whether they appear to conform to GAAP.
C.Obtain or prepare a trial balance of the general ledger and foot and reconcile it to the
general ledger.
D.Trace the financial statement amounts to the trial balance.
If the audit team encounters difficulties in performing an audit, who should the audit
team communicate these matters to?
A.The SEC.
B.The audit committee.
C.Management.
D.The PCAOB.
As natural resources are used up the client has to recognize which of the following
types of expense?
A.Depreciation expense.
B.Depletion expense.
C.Amortization expense.
D.Reclamation expense.
Sales transactions should be documented at initiation in order to accomplish which of
the following objectives?
A.To provide the customer a copy of the transaction.
B.To provide evidence of authorization and recording.
C.To offer credit to customers.
D.To generate back orders.
A client has implemented a policy requiring the establishment and enforcement of
property management training for all personnel involved in the use, stewardship, and
management of equipment. Which of the following is not a test that could be used in
testing the control?
A.Inquiry.
B.Observation.
C.Inspection of documentation.
D.Review financial statements.
When there is a restriction on the scope of the internal control over financial reporting
(ICFR) engagement, what should the auditor do?
A.The auditor will either withdraw from the engagement or disclaim an opinion.
B.The auditor will issue an adverse opinion.
C.The auditor will issue an opinion on the ICFR based on another audit firm’s work.
D.The auditor will report this directly to the Treadway Commission.
If the auditor is testing long-lived asset account balances to see if they include all
relevant transactions that have taken place during the period, what is the primary
assertion being tested?
A.Presentation and Disclosure.
B.Existence.
C.Completeness.
D.Valuation.
Which one of the following is not an audit procedure used when testing restructuring
charges?
A.Review current and proposed financial accounting standards to determine if changes
have occurred in accounting for restructuring.
B.Evaluate the qualifications of management.
C.Mathematically test the estimates.
D.Review and independently test the estimates by reviewing (a) contracts, (b)
appraisals for property or estimates from investment bankers, and (c) severance
contracts.
In a standard audit program for goodwill impairment testing, if the original reporting
unit no longer exists because operations have been fully integrated into operations of
the parent company, which approach should the auditor take?
A.Compare market value with carrying value. A market value less than carrying value is
presumptive evidence that goodwill has been impaired.
B.Compare fair value with realizable value. A fair value less than realizable value is
presumptive evidence that goodwill has been impaired.
C.Compare book value with realizable value. A book value less than realizable value is
presumptive evidence that goodwill has been impaired.
D.Compare book value with market value. A market value less than book value is
presumptive evidence that goodwill has been impaired.
Under the AICPA definition, who among the following would not be considered a
covered member?
A.An individual on the attest engagement team.
B.An individual in a position to influence the attest engagement.
C.A partner in the office of the lead engagement partner.
D.All would be considered covered members.
Rather than keeping the ten standards, what did the AICPA develop?
A.Seven Standards.
B.Seven Concepts.
C.Seven Fundamental Principles.
D.Seven Governing Principles.
Which one of the following issues need not be addressed when planning an audit
sample to test control procedures?
A.Audit objective of the test.
B.Minimum failure rate.
C.Expected population deviation rate.
D.Auditor’s allowable risk of assessing control risk too low.
Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville
(FNBW) while attending the University of Wellville. Julie graduates one year later and
is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement
is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit
assistant, Julie continues to pay her automobile loan payments each month. Which of
the following best describes Julie’s independence status?
A.Impaired because Julie has a direct financial interest in FNBW.
B.Impaired because Julie has a material indirect financial interest in FNBW.
C.Not impaired because Julie has an immaterial indirect financial interest in FNBW.
D.Not impaired because Julie is permitted to take normal loans from FNBW.
Who should the auditors first notify if they discover a material fraud?
A.The PCAOB.
B.The SEC.
C.The management of the company.
D.The audit committee of the company.
Which of the following is not a typical communication between the auditor and the
audit committee?
A.The auditor should clearly communicate the auditor’s responsibility under Generally
Accepted Auditing Standards (GAAS).
B.The auditor should clearly communicate the planned scope of the audit engagement
with the audit committee and discuss its adequacy.
C.The auditor and management should discuss issues related to the retention of both
client staff and audit firm staff during the period of audit.
D.All major accounting disagreements with management, even if eventually resolved,
should be discussed with the audit committee.
Which of the following activities is not part of the examination of prospective financial
statements?
A.Evaluating the support underlying the assumptions.
B.Evaluating the preparation of the prospective financial statements.
C.Evaluating the presentation of the prospective financial statements for conformity
with AICPA presentation guidelines.
D.Assembling the prospective financial statements.
Which of the following evidences delivery of product to customers sufficient for
company recording as revenues?
A.A check received from the customer.
B.An agreement to purchase product signed by the customer.
C.A pick ticket in the warehouse.
D.A bill of lading and tracking number with the shipper.
In which one of the following cases would an auditor most likely issue a qualified
opinion?
A.There is a highly material, and very pervasive departure from SFAS No. 141 and No.
142.
B.There is a change in accounting principles promulgated by the FASB.
C.There is an immaterial dollar misstatement on the financial statements.
D.There is one material departure from GAAP that is affects only two accounts.
MUS is designed to test for which of the following?
A.Overstatements.
B.Understatements.
C.Neither understatements nor overstatements.
D.Either understatements or overstatements.
When evaluating accounting estimates, the auditor would not concentrate on which of
the following key factors and assumptions?
A.Those that are within budgetary expectations.
B.Those that are subjective and susceptible to misstatement and bias.
C.Those that are inconsistent with current economic trends.
D.Those that are sensitive to variations.
When obtaining an understanding of internal controls, what is the independent external
auditor primary concerned with?
A.Detecting all errors.
B.Determining the effectiveness of operations.
C.Determining whether the internal controls can be relied upon.
D.Determining whether the controls promote efficiency.
Which of the following is not a reason why an auditor obtains an understanding of
internal controls?
A.Understanding the entity’s internal control is a requirement of GAAS.
B.The auditor must use the information to assess the risk of material misstatements
arising from the lack of internal control.
C.It is the primary basis for the audit report.
D.It assists the auditor in designing the nature, timing and extent of further audit
procedures.
Which of the following is not a potential fraud indicator in the acquisition cycle?
A.Expenses that are significantly above or below industry norms.
B.Expense accounts that have significant debit entries.
C.Unexpected increases in gross margin.
D.Capital assets that seem to be growing faster than the business.
For which of the following special purpose financial statements is a description of
purpose for which special purpose financial statements are prepared not required?
A.Cash basis.
B.Regulatory basis for use by management and the regulator only.
C.Regulatory basis for general use.
D.Contractual basis.
Which of the following statements is false regarding responsibilities associated with
agreed-upon procedures engagements?
A.The responsibility of the practitioner is to conduct the procedures and report the
findings in accordance with applicable professional standards.
B.The practitioner must have adequate knowledge of the subject matter.
C.The practitioner is required to determine if there exists a difference between the
agreed-upon procedures requested by the specified parties and the procedures that the
practitioner would have decided to conduct if the practitioner would have been engaged
to perform another form of engagement.
D.The practitioner should not agree to perform agreed-upon procedures that are overly
subjective.
Which of the following activities is not a step in the process for using analytical
procedures?
A.Define when the difference between the auditor’s expectation and the client’s balance
would be considered significant.
B.Compute the difference between the auditor’s expectation and the client’s balance.
C.Perform appropriate followup on all material and immaterial differences.
D.Develop an expectation.
Which one of the following procedures would be considered improper by the auditor in
the process of confirming receivables?
A.The auditor allows the client’s staff to prepare the confirmation letters after the
auditor has chosen the items to be confirmed.
B.The auditor allows the client to sign the confirmations after they are prepared.
C.The auditor allows the client’s staff to mail the confirmation letters after he or she has
proofed the typing of the letters.
D.The auditor asks the addressee to return the confirmation to the audit firm’s office.
The auditor in making inquiries regarding the standard cost systems normally does not
make which of the following inquiries?
A.The method for developing standard costs.
B.The method for identifying components of overhead and of allocating overhead to
products.
C.The method for identifying sales cutoff.
D.The method used for identifying variances, following up on their causes, and
allocating them to inventory and cost of goods sold.
Which one of the following would be considered the most reliable type of audit
evidence?
A.Purchase orders from vendors.
B.Customer accounts receivable files.
C.Computerized general ledger.
D.Confirmations from banks.