Audit 401 ACC
In 2018, internal auditors discovered that Fay Inc., had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2015. The machine's useful life was expected to be five years with no residual value. Straight-line depreciation is used by Fay. the journal entry to correct the error will include a credit to accumulated depreciation for?
$420,000
On Jan. 1 2018 Jones Construction issued 800 of its 8 percent, $1,000 20-year bonds for 107. During the 2018 audit you discover that no accrual has been made for interest expense. What is the amount of interest expense for 2018?
$61,200
What year was the FICA law passed
1935
A contingency is:
A potential future obligation to an outside party for an UNKNOWN amount resulting from activities that have already taken place. Material contingent liabilities must be disclosed in the footnotes.
A client changed from FIFO to LIFO inventory valuation in the current year and reflected this change in their financial statement footnotes. How should this be reflected in the auditor's report?
A separate explanatory paragraph for the first year the change tool place
Audit of a us private company would be conducted under standards developed by?
AICPA
An auditor reviews procedure for determining standard cost to assure reasonable costs are used for inventory and COGS. Which transaction-related audit objective is tested?
Accuracy
Recorded payroll transactions are stated at the proper pay rates supports which transaction related audit objective for payroll.
Accuracy
The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which transaction related audit objective
Accuracy
Which transaction related audit objective is fulfilled by the question are sales unit prices obtained from a pre-approved master pricing file?
Accuracy
customer balances are stated at the correct amount pertains to which balance related audit objective
Accuracy
An entity's financial statements are materially misleading so that they do not present fairly the financial position of the entity. The auditor should issue a report with?
Adverse Opinion
A client has experienced a noticeable decline in demand for its products, which it is now selling significantly below cost. Management refuses to write off the products or to reserve for obsolescence, which would reduce operating income by 15%. The audit should issue a report with?
Adverse opinion
Four weeks after year-end, a major customer of your client declared bankruptcy. The client refuses to chart off the account since the customer confirmed the balance on the balance sheet date. The receivable represents approximately 5% of the accounts receivable and 15% of earnings before taxes. The audit opinion is?
Adverse opinion
analytical procedures used in planning an audit are performed to identify? a. the predictability of financial data from transactions b. material weaknesses in internal control c. the various assertions embodied in financial statements d. areas that may represent audit risks
Areas that may represent audit risks
The most important GL account included in and affecting several cycles is the:
Cash Account
Because of the WorldCom case, to which position should internal audit department report?
Chairman of the Audit Committee
year end accounts payable, determine whether there are any unrecorded liabilities supports which balance related objective
Completeness
During 2018, Creek Co. determined that an insurance premium paid and entirely expensed in 2017 was for the period January 1, 2017 through January 1, 2019. How should Creek classify and treat the above transaction on its financial statements?
Correction of an accounting error and restate its financial statements retrospectively.
If the auditor determines that a company has obsolete inventory that should be written off, which of the following journal entries would they propose?
D- COGS, C- Inventory
If a company uses accounting fraud to reduce their losses by over-stating inventory, which of the following journal entries would they use?
D-inventory, C-COGS
A five-year insurance casualty policy was purchased at the beginning of 2016 for $80,000; the full amount was debited to prepaid insurance at that time. By what amount should retained earnings be adjusted at the beginning of 2018?
Debit $32,000
The company has not established a reserve for obsolete inventory. Your tests indicate that such a reserve of $45,000 is appropriate. Your proposed entry includes? a. Debit Inventory $45,000 b. Credit Retained earnings $45,000 c. Debit Cost of Goods sold $45,000 d. Credit Unearned Revenue $45,000
Debit to Cost of Goods sold $45,000
select 10 customer accounts from the aged accounts receivable listing and trace to the accounts receivable master file for name and amount is a test of details of balances for which assertions
Detail tie in
Which of the following procedures would the CPA most likely perform during the planning stage? a. determine areas where there is a high risk of material misstatement b. evaluate the reasonableness of the allowance for uncollectible accounts c. confirm a sample of accounts receivable d. test a sample of credit memos to determine if these were approved by someone independent of the sales function
Determine areas where there is a high risk of material misstatement.
Which of the following best describes why an independent auditor reports on financial statements? a. a misappropriation of assets may exist and is more likely to be detected by independent auditors b. different interests may exist between the company prepared misstatements and the person using the statement c. a misstatement of account balances may exist and is generally corrected as the result of an independent auditor's work d. poorly designed internal controls may be in existence
Different interests may exist between the company and the person using the statement
If the auditor has determined that accounts receivable have increased as a result of slow collections in a tight money environment the CPA should? a. increase the balance in the allowance for bad debt account b. review the going concern ramifications c. review the credit and collection policy d. expand tests of collectability
Expand tests of collectibility
The company's board of directors has agreed to pay bonuses in March for the past year. Which is correct?
Expenses are understated
Your review of the allowance for uncollectible accounts indicates that it may be understated by $40,000, therefore?
Expenses are understated
Which of the following is NOT one of the six AICPA Code of Professional conduct rules? a. Integrity b. Independence c. The public interest d. Fairness
Fairness
What does FICA stand for?
Federal Insurance Contributions Act
Major reason an independent auditor gather evidence is to?
Form an opinion on the financial statements
Acquisition and Payment Cycle includes which of the following expense accounts? A. Interest exp B. Bad Debt Exp C. Salary Exp D. Insurance Exp`
Insurance Expense
The AICPA's Code of Professional Conduct states that a CPA should maintain integrity and objectivity. The term "objectivity" in the Code refers to a CPA's ability to:
Maintain an unbiased attitude on matters that come under the CPA's review
Audit of a US public company would be conducted under standards developed by?
PCAOB
Which of the following services can be offered to public company service clients under SEC requirements and SOX? a. Bookkeeping and other accounting services b. tax planning not involving aggressive tax shelters c. internal audit outsourcing d. tax services for executives involved in financial reporting
Tax planning not involving aggressive tax shelters
Examine supervisor approval of rates of pay and withholding is which type of audit procedure.
Test of Control
Obtain the year-end payroll liabilities and trace to the general is which audit procedure?
Test of details of balances
In addition to confirming bank balances of your audit client, a bank confirmation would normally contain: a. The client's bank loans with due date, interest rate, and collateral requested. b. the client's credit history as regards to paying back loans c. the client's managements bank account information d. the client's business prospects
The client's bank loans with due date, interest rate, and collateral requested.
Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with the AICPA auditing standards?
The signature of the engagement letter
Your client has a fleet of delivery trucks. In the past, their policy was to purchase all equipment. However, in the current year they decided to lease the trucks. The method of accounting for the trucks is therefore changed. The change in policy is disclosed in the footnotes. The audit opinion is?
Unmodified opinion
An entity had a number of material related party transactions. If the transactions are disclosed in the notes of the financial statements, the auditor should issue which report?
Unmodified opinion with an explanatory paragraph
A month after year-end, your client sold one of its 2 subsidiaries for a significant profit. The audit opinion is?
Unmodified opinion with explanatory paragraph
which of the following factors decreases audit risk? a. employees are paid bi-weekly b. auditor has previous experience with the client c. internal audit reports to the president d. insurance coverage have remained unchanged for 3 years
auditor has previous experience with client
For inventory purchases, select items for test counts while observing a clients physical inventory. The auditor traced the test counts to the client inventory listing. This procedure obtained evidence about which balance related audit objective for inventory?
completeness
The negative form of accounts receivable confirmations request is useful except when? a. internal control for accounts receivable is considered to be effective b. a large number of small balances are involved c. the auditor has reason to believe the persons receiving the confirmation requests are likely to give them consideration d. individual account balances are relatively large
individual account balances are relatively large
understanding the risks and accounting requirements unique to the clients industry is which element of strategic understanding of a clients business? a. management and governance b. client objectives and strategies c. measurement and performance d. industry and external environment
industry and external environment
substantive analytical procedures are most likely to be used to test which of the following accounts? a. cash b. interest income c. accounts payable d. treasury stock
interest income
to fraudulently conceal cash shortages by postponing receivable collection entries called?
lapping
In which audit phase would an auditor perform transaction related audit objectives
phase 2
The best internal control to prevent or detect fictitious payroll transactions is to? a. use pre-numbered payroll checks b. compare pay rates and gross pay amounts with the payroll register c. restricting hiring, firing, and changing pay rates to the human resources department. d. reconcile the impressed payroll account monthly
restricting hiring, firing, and changing pay rates to the human resources department.
When approached to perform an audit for the first time the CPA should inquire with the predecessor auditor. This could provide the new auditor to determine whether:
the engagement should be accepted
Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2007, when it was acquired at a cost of $36 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of 6 years rather than the 9-year life being used to amortize its cost. The decision was made at the end of 2011 (before adjusting and closing entries). The entry to reflect this change includes a debit to retained earnings of?
$0
Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2007, when it was acquired at a cost of $36 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of 6 years rather than the 9-year life being used to amortize its cost. The decision was made at the end of 2011 (before adjusting and closing entries). The entry to reflect this change includes a debit to amortization expense of?
$10 million
Galway Home Products introduced a new line of commercial awnings in 2017 that carry a 1-year warranty. Based on industry experience, warranty costs were expected to approximate 3% of sales. Sales were recorded in 2017. In late 2018, based upon the company's claims experience, 4% rather than 3% should be accrued for warranty expenditures. Awning sales were $4.2 million in 2018; warranty expenditures in 2018 totaled $120,000. By what amount would the warranty liability be adjusted?
$177,000
During your review of notes payable as of 2018 year-end, you discover that for its first two years of payments, the entire amount of the $20,000 payments (principal and interest) were recorded against the principal amount. The note was obtained on December 31, 2016 for $150,000, with a 12% rate. The journal entry to correct this error includes a debit to retained earnings of?
$18,000
In December 2017, Kojak Insurance Co. received $50,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. You discover the error during the 2018 audit. The journal entry to correct this error includes a debit to retained earnings of?
$25,000
The journal entry to correct the error will include a credit to retained earnings of:
$280,000
Gore Inc. recorded a liability in 2018 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers. The journal entry the record this includes a debit to retained earnings of?
$3 million
During your review of notes payable as of 2018 year-end, you discover that for its first two years of payments, the entire amount of the $200,000 payments (principal and interest) were recorded against the principal amount. The note was obtained on December 31, 2016 for $150,000, with a 12% rate. The journal entry to correct this error includes a credit to notes payable of?
$35,760
If a company pays Harry Smith a salary of $300,000, what is its payroll expense for Harry?
312,310
According to PCAOB standards audit documentation must be maintained for?
7 years
The capital acquisition and repayment cycle includes which of the following expense accounts? A. Interest exp B. Bad Debt Exp C. Salary Exp D. Insurance Exp`
A. Interest Expense
Garrett Co. recorded goods in transit purchased f.o.b. shipping point at year-end as purchases. The gods were excluded from ending inventory. What effect does this omission have on Garrett's assets and net income at year end?
Assets are understated and net income is not affected.
What is the meaning of the rule that requires the auditor to be independent?
Auditor must be without bias with respect to the audit client
Because cash is the most desirable asset for people to steal, it has a higher: A) control risk. B) inherent risk. C) detection risk. D) liquidity risk.
B) inherent risk
the sales and collection cycle includes which of the following expense accounts? A. Interest exp B. Bad Debt Exp C. Salary Exp D. Insurance Exp`
B. Bad Debt
the payroll and personnel cycle includes which of the following expense accounts A. Interest exp B. Bad Debt Exp C. Salary Exp D. Insurance Exp`
C. Salary Expense
reviewing sales returns and allowances after year end for significant activity is a test designed to find? a. check kiting b. lapping c. triangulation d. channel stuffing
Channel Stuffing
Time records are changed to the appropriate job supports which payroll transaction related audit objective.
Classification
audit of sales transactions recorded in the appropriate accounts during phase 2, focus upon which transaction related objective?
Classification
year end property plant and equipment additions an auditors procedures to determine whether there are any items capitalized that should have been expensed supports which balance related objective
Classification
Account for the numerical sequence of payroll checks supports which transaction related audit objective for payroll?
Completeness
An auditor accounts for the numerical sequence of shipping orders to ensure inventory shipments are recorded as sales. Which transaction-related audit objective is tested
Completeness
In the audit of Cash disbursements to determine that all such transactions are recorded during phase 2 an auditors procedures will focus upon which transaction-related audit objective
Completeness
select 10 customer accounts from the accounts receivable master file and trace to the aged accounts receivable listing to verify name and amount is a test of details of balances for which assertion?
Completeness
In connection with the audit of prepaid insurance, which of the following procedures is usually not performed by the auditor?
Confirm premium rates with an independent insurance broker
A management letter:
Contains client recommendations to improve its efficiency and effectiveness
In the AutoParts case, their change in the recording of tools was?
Correction of an error
If the auditor determines that a company has uncollectible accounts receivable that should be reserved, which of the following journal entries would they propose?
Debit- Bad Debt Expense, Credit - Allowance for uncollectible accounts
During your audit, you conclude there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your audit sufficiently to verify whether the balance is misstated. The audit opinion is?
Disclaimer
You complete the audit of your clients and in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in the client. Audit opinion?
Disclaimer
An auditor's principal objective in analyzing repairs and maintenance expense is to?
Discover expenditures that were expensed but should have been capitalized
factors that increase risk of material misstatement at the overall financial statement level include the following except: a. deficiencies in managements integrity or competence b. effective oversight by the BOD c. inadequate accounting systems and records d. declining economic conditions
Effective oversight by the board of directors
which of the following controls would be most effective in reducing bad debt write offs? a. employees involved in sales and bad-debt write offs are denied access to cash b. Employees involved in credit granting are separate from those in sales c. shipping documents are matched to sales invoices by someone who cannot write-off bad debts d. subsidiary accounts receivable are reconciled to the general ledger by someone who does not grant credit
Employees involved in credit granting are separate from those in sales
Social Security and Medicare are examples of which type of government programs?
Entitlement
Which of the following is the auditor least likely to consider when developing the overall audit strategy? a. evaluation of accounts receivable confirmations b. complexity of the company's operations c. preliminary judgement about materiality d. the economic conditions affecting the company's industry
Evaluation of accounts receivable confirmations
The auditor may observe that annual depreciation expense is too low for a class of assets by noting? a. insured values are greatly in excess of carrying amounts b. large numbers of fully depreciated assets are still in use c. continuous trade-ins are relatively new assets d. Excessive recurring losses on asset retirements
Excessive recurring losses on asset retirements
An auditor observes whether inventory held on consignment is stored in the same physical space as inventory, to test whether inventory in the client's records is valid. Which transaction related audit objective is tested?
Existence
Audit of cash disbursements to determine that goods or services were actually received during phase 2, which transaction related OBJ?
Existence
Review employee time cards for indication of the supervisor's approval of hours worked supports which transaction related audit objective for payroll?
Existence
The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number this control is most relevant to which transaction related audit objective
Existence
Which of the following balance-related audit objective typically is assessed as having high inherent risk for cash?
Existence
Which transaction related audit objective is fulfilled by the question are customers orders approved by someone independent of the sales department
Existence
which balance related audit objective is satisfied by selecting items form the clients perpetual inventory record and examining the items in the companys warehouse
Existence
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. review of the cash receipts journal for the month prior to year-end b. intensify the study of internal control concerning the revenue cycle c. inspect the shipping records documenting the merchandise sold to the debtors d. increase the assessed level of detection risk for the existence assertion
Inspect the shipping records documenting the merchandise sold to the debtors
preliminary analysis of accounts receivable turnover revealed that 2016 was 4.3 times per year compared to 6.2 and 7.3 for 2015 and 2014, respectively. Which of the following is the most likely cause of the turnover decline? a. increase in the cash discount offered b. liberalization of credit policy c. shortening of the due date forms d. increased cash sales
Liberalization of credit policy
Which of the following is not a required paragraph of a standard unmodified opinion audit report issued in accordance with the PCAOB auditing standards?
Management's responsibility paragraph
Accounting firm F&H CPA's provides bookkeeping and tax services for H corporatin a privately held company. F&H also performs the annual audit of H corp Does this violate Code of Professional Conduct
No violation, CPA firms may provide bookkeeping tax, and audit services to the same no public client
An inventory turnover analysis is useful to the auditor because it may detect? a. obsolete merchandise b. in adequate inventory pricing c. methods of avoiding cyclical holding costs d. the optimum automatic reorder points
Obsolete merchandise
An auditor performs a substantive analytical procedure by comparing the gross margin percentage with the previous year. Which of the following is the potential misstatement the auditor is addressing? a. errors exist in compilation or extensions b. obsolete inventory exists c. consignment inventory exists d. Overstatement or fake inventory amounts
Overstatement or fake inventory amounts
Expense accounts tested as part of the acquisition and payment cycle include the following except? a. Property tax expense b. repairs and maintenance expense c. Payroll expense d. rent expense
Payroll Expense
In which audit phase would an auditor review industry databases to assess the risk of material misstatements
Phase 1
in which audit phase would an auditor send letters to customers confirming outstanding accounts receivable balances?
Phase 3
in which audit phase would an auditor test interest expense by recalculating the rates on company's loans
Phase 3
in which audit phase would an auditor summarize misstatements during testing to assess whether the overall financial statements are fairly stated
Phase 4
The two common types of accounts receivable confirmations are?
Positive and Negatives
An auditor recalculates the inventory amounts and determined that the totals agree to the G/L is testing which transaction related audit objective?
Posting and Summarization
Which transaction related audit objective is fulfilled by the question are sales journal entries recorded in the accounts receivable master file
Posting and Summarization
Because of the risk of material misstatement, an audit should be planned and performed with an attitude of?
Professional Skepticism
What is the purpose of a representation letter?
Provides a formal acknowledgement regarding management's responsibility for the financial statements
One week after year-end, your client received notification from its primary supplier at effective immediately all also prices would be increased by 10%. Based on that notice, your clients revalued its year end inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase is disclosed in the footnotes. Audit opinion?
Qualified opinion
year end accounts receiveable to assess likelihood of collection to support which balance related objective?
Realizable Value
Accounts receivable are collectible pertains to which balance related audit objective
Realizable value
Compute days in accounts receivable and compared to the prior year is a substantive analytical procedure designed for which assertion
Realizable value
Which of the following is not required to be communicated to audit committees?
Recommendations for the client to improve its efficiency and effectiveness
The correction of a mathematical error in the calculation of prior years' depreciation should be:
Recorded as a prior-period adjustment
The company improperly capitalized $80,000 repairs and maintenance expenses as equipment during 2017. The journal entry to correct the error in 2018 includes a debit to which account?
Retained Earnings
Upon reviewing customer contracts, the company realizes it mistakenly reported $150,000 in revenue instead of the actual amount earned of $15,000. This mistake occurred two years ago and had a material effect on financial statements. The entry to correct this error includes a debit to?
Retained Earnings $135,000
Inventory cut-off tests indicate several sales invoices were recorded in 2016 for goods that were shipped in early 2017. The goods were included in inventory even though they were set aside in separate areas. Which is correct? a. current liabilities are overstated b. expenses are overstated c. current assets are understated d. revenues are overstated
Revenues are overstated
Several credit memos that were processed and recorded after 2018 year-end relate to sales and accounts receivable for 2018. Which item is correct for 2018?
Revenues are overstated
Which of the following subsequent events does not require adjustment to the financial statements? a. sale of raw materials at retail price b. bankruptcy of a major customer receivable c. settlement of a lawsuit for an account different than accrued d. disposal of equipment abandoned with a current book value
Sale of raw materials at retail price
In testing for unrecorded disposals of equipment, an auditor most likely will? a. Select items from the accounting records and then locate them during the plant tour b. compared depreciation journal entires with similar prior year entries in search of fully depreciated equipment c. inspect items of equipment observed during the plant tour and then traced them to the equipment master file d. scan general journal for unusual equipment additions and excessive debits to repairs and maintenance
Select items from the accounting records and then locate them during the plant tour
Why is an engagement letter important?
Specifies the responsibilities of both parties and can be helpful in the case of a lawsuit
Compare the balance in the payroll benefits expense account with the prior year and as a percent of salary expense. Which type of audit procedure?
Substantive analytical procedure
Select a sample of 20 payroll payments and trace to the payroll journal for name, date and amounts is which type of audit procedure?
Substantive test of transactions
select a sample of payroll checks and agree hours to employee time cards and hourly rate to their personnel file. which type of audit procedure?
Substantive test of transactions
Which of the following analytical procedure results might suggest that certain repairs and maintenance expenses have been inappropriately capitalized? a. the ratio of additions to equipment provided by the beginning balance in the equipment account is significantly lower than the same ratio from prior years b. The balance in the repairs and maintenance expense account is noticeably lower than the amounts recorded in the past several years c. the balance in the gross equipment account has decreased this year compared to the prior year d. the ratio of depreciation expense divided by gross equipment is higher in the current year compared to prior years
The balance in the repairs and maintenance expense account is noticeably lower than the amounts recorded in the past several years
All of the following increase fraud risk except: a. significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist b. the company's board of directors is comprised of individuals independent of management c. the company's controller works very hard, including evenings and weekends, and has not taken a vacation in 2 years d. the company is marginally able to meet loan debt covenant requirements
The companys board of directors is compromised of individuals independent of management.
According to the SEC a sale occurs when the following criteria are met except? a. delivery has occurred or services have been rendered b. collectability is reasonably assured c. the sellers price is not yet determined d. persuasive evidence of an arrangement exists
The sellers price is not yet determined.
The overall objective of an audit according to AICPA standards is?
To obtain reasonable assurance that financial statements are free from material misstatement thereby enabling the auditor to express an opinion
Which audit procedure would be used to determine if abandoned or replaced equipment has not been removed from the client's fixed asset listing?
Trace from equipment on the accounting records to equipment
Your non-profit client received land and building appraised at $100,000 and $400,000, respectively from a donor and did not record the assets because no cash was involved. Which audit procedure would be used to identify this issue?
Trace from fixed asset to the client's fixed asset listing
In December 2017, Kojak Insurance Co. received $50,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. You discover the error during the 2018 audit. The journal entry to correct this error includes a credit to which account?
Unearned revenue
A bus company client previously depreciated its buses over a 10-year life. During the current year the company determined that its buses have a 12-year life and computed the current year depreciation using the revised estimate. The CPA is satisfied that the 12-year life is reasonable. The audit opinion?
Unmodified opinion
A client has a material investment in a privately-held bio-sciences company. Your audit firm engaged a business valuation specialist to assist in evaluating the investment's fair value. You conclude the specialist's work provides sufficient audit evidence. The auditor should issue a report with?
Unmodified opinion
An entity changed from straight-line to the declining balance method of depreciation for all newly acquired assets, This change has no material effect on the current year's financial statements but is likely to have a substantial effect in later years. If the change is disclosed in the notes of the financial statements, the auditor's opinion is?
Unmodified opinion
Shortly before the completion of your fieldwork, you received notification about a lawsuit against your client for patent infringement. The legal letter describes the likelihood of success as possible, but the lawyers are unable to estimate the amount. The audit opinion is?
Unmodified opinion with an explanatory paragraph
An entity has experienced a noticeable decline in customer traffic over the past several months that has caused the auditor to have substantial doubt bout its ability to continue as a going concern. The audit opinion?
Unmodified opinion with explanatory paragraph
Approximately 20% of the audit of your client was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work. Audit opinion?
Unmodified with nonstandard wording
Your client is based in New York but has operations throughout Europe. Since users of the audited financial statements are international, your audit firm was engaged to conduct the audit in accordance with US auditing standards and international standards on auditing. The audit opinion is?
Unmodified with nonstandard wording
When should an auditor include an explanatory paragraph in an unmodified report?
When the audit is completed satisfactorily, and the financial statements are fairly presented, but the auditor believes it is important to draw attention to certain matters or is required to provide additional information
A non-audit public client requests Smith CPA's assistance with the installment of a local area network. Smith has no experience in this type of work or knowledge of the companys computer system. However, he has obtained assistance from a computer consultant and is confident of his professional skills; he cannot review the consultant's work. Is this an AICPA code of conduct violation?
Yes, Violation of the general standards rule.
properly prepared audit documentation provides all of the following except? a. a basis for planning the audit b. a record of evidence collected and results of tests c. a basis for the details included in the engagement letter d. a basis for determining the appropriate audit report
a basis for the details included in the engagement letter
A partial- period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips and other documents included in bank statements, mailed by the bank directly to the CPA firms office is called
a cutoff bank statement
The sales and collection cycle includes all the following accounts except
accounts payable
Which transaction related audit objective is satisfied by selecting a sample of payroll checks and agreeing hours to employer records
accuracy
auditor determining correct selling price was used for billing and quantity of goods shipped was the same as quantity billed, gathering evidence in phase 2 for which transaction related audit objective?
accuracy
The return of a positive confirmation of accounts receivable without an exception attests to? a. collectibility of the account b. accuracy of the allowance for uncollectible accounts c. accuracy of the aging of accounts receivable d. accuracy of the receivable balance
accuracy of the receivable balance
A common audit procedure in the audit of payroll transactions is to trace a sample of employees pay to their time cards approved by their supervisor. This procedure is designed to support? a. that only proper employees worked, and their pay was correctly computed b. all employees worked the number of hours for which their pay was computed c. jobs on which the employees worked were charged with the proper amount of hours d. internal controls over payroll disbursements are operating effectively
all employees worked the number of hours for which their pay was computed
which of the following would most likely indicate a related party transaction? a. writing down obsolete inventory prior to year end b. borrowing money at a rate significantly lower than market rate c. failing to correct internal control deficiencies d. an unexplained gross margin increase
borrowing money at a rate significantly lower than market rate
Which transaction related audit objective is fulfilled by the question, are on-line sales automatically recorded in the sales system?
completeness
cash received is recorded in the cash receipts journal pertains to which balance related audit objective
completeness
which balance related audit objective is satisfied by selecting items from the clients warehouse and tracing these to the companys perpetual inventory records.
completeness
in establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or a. obtain written representation from management confirming that the securities are properly classified as trading securities b. inspect the audited financial statements of the invest company c. confirm the number of shares owned that are held by an independent custodian d. determine that the investment carried at the lower of cost or market
confirm the number of shares owned that are held by an independent custodian
Which of the following documentary evidence is the most reliable? a. confirmation of an accounts payable balance mailed by and received by the auditor b. an audit schedule prepared by the client's controller and reviewed by the client's treasurer c. a check issued by the company, with the payee's endorsement, returned with the bank statement d. a sales invoice issued by the client and supported with the delivery receipt
confirmation of an accounts payable balance mailed by and received by the auditor
Which type of evidence is most appropriate for tests of details of balances?
confirmations
The confirmation of accounts receivable rarely provides reliable evidence about the completeness assertion because? a. customers may not report understatement errors in their accounts b. recipients usually respond only if they disagree with the information on the request c. many customers simply sign and return the confirmation without verifying details d. there is likely to be reliable third-party evidence available
customers may not report understatement errors in their accounts
The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of:
cutoff
Transactions are recorded in the proper period pertains to which balance related audit objective
cutoff
sales at year end to determine the transactions are recorded in the proper period supports which balance related audit objective
cutoff
The test of details of balance procedure that requires the auditor to trace the book balance on the rec to the G/L is an attempt to satisfy the audit objective of
detail tie-in
Which of the following is least likely to be included in an engagement letter? a. overview of the objectives of the engagement b. details about the preliminary audit strategy c. statement that management is responsible for the financial statements d. description of the level of assurance obtained when conducting the audit
details about the preliminary audit strategy
Which of the following is correct regarding materiality? a. is determined bu guidelines established by the AICPA b. id dependent only on dollar amounts relative to other financial statement items c. depends on the nature of an item rather than the dollar amount d. is a matter of professional judgement
is a matter of professional judgement
Which of the following misstatements would not be considered fraud? a. a material sale was recorded on the last day of the year even though the goods were not shipped until three days later b. merchandise was shipped to a customer but no bill of lading was prepared. Since bills are prepared from bills of lading c. approved a payment to a consulting firm owned by his sister. the consulting firm did not actually perform any services for the company d. cash payment on accounts receivable was stolen by the mail clerk, when the mail was opened.
merchandise was shipped to a customer but no bill of lading was prepared. since bills are prepared from bills of lading
Which of the following controls would be most effective in detecting a failure to record cash received from customers on their accounts? a. someone reconciles cash receipts to bank deposits b. transactions recorded in cash receipts are posted automatically to the accounts receivable master file c. monthly statements are mailed to all customers d. deposits of cash received are made daily
monthly statements are mailed to all customers
PCAOB provides oversight for auditors of public companies, including all the following except? a. establishing auditing standards for public company audit b. performing inspections of the quality controls at audit firms performing those audits c. establishing quality control standards for public company audits d. performing peer reviews of the SEC's inspections
performing peer reviews of the SEC's inspections
Which of the following internal control procedures most likely would be used to maintain accurate inventory records? a. perpetual inventory records are periodically compared with the correct cost of individual inventory items b. a just in time inventory ordering system keeps inventory levels to desirable minimums c. requisitions, receiving reports, and purchase orders are independently matched before payments are approved d. periodic inventory counts are used to adjust perpetual inventory records
periodic inventory counts are used to adjust perpetual inventory records
All the following are reasonable differences in the confirmation of accounts receivable except? a. post office returned confirmation as no such customer is at the address b. customer has already made payment but not received by client c. merchandise has been returned but not yet received by client d. merchandise has not been received yet by customer
post office returned confirmation as no such customer is at the address
which transactionrelated audit objective is satisfied by selecting a sample of entries in the cash disbursements journal and tracing to individual vendor accounts payable records
posting and summarization
Which of the following is one of the better auditing techniques to detect kiting: a. review composition of authenticated deposit slips b. review subsequent bank statements and canceled checks received directly from the banks c. prepare year end bank reconciliations d. prepare a schedule of bank transfers from the clients books
prepare a schedule of bank transfers from the clients books
Which of the following duties related to inventory causes the greatest concern about in adequate segregation of duties? a. individuals in charge of approving disbursements for inventory purchases have read only ability to view the list of vendors in the pre-approved vendor master file b. purchasing agents who arrange for shipments of raw materials from vendors are responsible for verifying actual receipts of inventory at the receiving dock c. the receiving department had access to copies of the purchase orders that exclude information about quantities ordered d. periodic comparisons of perpetual inventory records are made to physical quantities
purchasing agents who arrange for shipments of raw materials from vendors are responsible for verifying actual receipts of inventory at the receiving dock
prior to the information gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during these discussions a. questioning b. presumptive c. judgemental d. criticizing
questioning
The main techniques used to manipulate revenue include all of the following except: a. recording fake revenue b. premature revenue recognition including bill-and-hold sales and channel stuffing c. manipulation of adjustments to revenue such as sales returns and allowances d. recording fake inventory
recording fake inventory
An auditor's decision either to apply analytical procedures as substantive procedures or to perform substantial tests of transactions and account balances usually is determined by the? a. availability of data aggregated at a high level b. relative effectiveness and efficiency of the test c. timing of tests performed after the balance sheet date d. auditor's familiarity with industry trends
relative effectiveness and efficiency of the test
which type of evidence is applicable for substantive tests of transactions
reperformance
When an auditor obtains audit evidence during the audit that contradicts the origin risk assessment the auditor should? a. revise the risk assessment and modify planned audit procedures b. revise the client's fee c. contact the prior auditor to discuss newly emerged issues d. complete the audit procedures as planned
revise the risk assessment and modify planned audit procedures
examining sales invoice and contracts at year end to determine if any goods are on consignment supports which balance related audit objectives
rights and obligations
the tests an auditor performs to assess the risk of material misstatement in financial statements is?
risk assessment procedures
the characteristics of transactions and balances that might cause an auditor to determine that a risk of material misstatement is a significant risk include all the following except: a. non-routine transactions b. related party transactions c. matters requiring significant judgement to develop accounting estimates d. routine transactions
routine transactions
which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity's financial statements? a. management places no emphasis on meeting published earnings projections b. monthly bank reconciliations ordinarily include several large outstanding checks c. cash transactions are electronically processed and recorded leaving no paper audit trail d. significant differences between the physical inventory count and the accounting records are not investigated
significant differences between the physical inventory count and the accounting records are not investigated
Compute payroll tax expense as a percent of total salaries is which type of audit procedure?
substantive analytical procedure.
Reconcile the cash receipts from the pre-listing to the journal and the bank statement for a one month period is which type of audit procedure
substantive test of transactions
the auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk , the auditor relies primarily on? a. test of controls b. internal control c. statistical analysis d. substantive tests
substantive tests
Expense accounts that are commonly analyzed include the following except? a. legal expense b. travel and entertainment expense c. supplies expense d. repair and maintenance expense
supplies expense
risk assessment procedures include all the following except? a. inquires of management and others within the entity b. analytical procedures c. test controls over sales cutoff d. discussion among engagement team members
test controls over sales cutoff
Account for a sequence of checks in the cash disbursements journal. Which type of audit procedure.
test of controls
select a sample of customer orders for credit approval by the appropriate individuals which type of audit procedures?
test of controls
Foot the final accounts payable detailed listing and compare it to the general ledger. Which type of audit procedures
test of details of balance
audit procedures to test the operating effectiveness of internal controls are
tests of controls
On the bank cutoff statement, very few of the outstanding checks listed on the client's December 31 bank reconciliation cleared during the cutoff period. A probable cause for this? a. the client is engaged in kiting b. the client is engaged in lapping c. the client has overstated its year end bank balance d. the client mailed the checks to the payee after year-end
the client mailed the checks to the payee after year-end
A possible explanation for a increase in a clients inventory obsolescence reserve with a decrease in the reserve as a percent of inventory could be? a. The inventory turnover rate increased during the year b. the client repurchased a large block of inventory close to year end c. inventory was stored in an area that was not secured during the year d. the nature of the client's inventory is subject to frequent changes in style trends
the client purchased a large block of inventory close to year end
A possible explanation for a increase in a clients long term debt with a decrease in interest expense could be? a. the days sales in receivables declined during the year b. the client repurchased a large block of it's stock during the year c. the federal tax rate changed from 40% to 30% during the year d. the client refinanced short-term debt with long-term debt, having a lower rate
the client refinanced short term debt with long term debt having a lower rate
Which of the following represents fraudulent financial reporting? a. the accounts receivable clerk stole checks received in the mail and deposited them in an account that he controlled b. the company contacted a major customer and asked them to accept a major shipment of goods before year end the customer was told that they could return the goods without penalty if they were unable to sell the goods c. a cashier stole cash receipts that have been recorded in the cash register
the company contacted a major customer and asked them to accept a major shipment of goods before year end the customer was told that they could return the goods without penalty if they were unable to sell the goods
The auditor should ordinarily send confirmations to all banks with which the client has conducted business during the year, regardless of the year-end balance because a. this procedure will detect kiting activities that would otherwise not be detected b. the confirmation form also seeks information about indebtedness to the bank c. the sending of confirmations to banks is required by auditing standards d. this procedure relieves the auditor of any responsibility with respect to non-detection of forged checks
the confirmation form also seeks information about indebtedness to the bank
Inventory is often the most difficult and time-consuming part of an audit. Which of the following statements is incorrect? a. inventory is generally a major asset on the balance sheet and makes up a significant portion of working capital b. physical control and accounting of the inventory is difficult because organizations need to hold inventory in diverse locations c. inventory takes many different forms that are difficult for the auditor to fully understand d. the consistent application of different valuation methods can be easy.
the consistent application of different valuation methods can be easy.
Which of the following characteristics is most likely to heighten an auditors concern about the risk of material misstatements due to fraud? a. employees who handle cash receipts are not bonded b. the entity's industry is experiencing declining customer demand c. internal auditors have direct access to the board of directors and the entity management d. the board of directors is active in overseeing the entity's financial reporting policies
the entity's industry is experiencing declining customer demand
A possible explanation for a decrease in a clients operating income but an increase in net income could be? a. the days-sales in receivables declined during the year b. the client repurchased a large block of it's stock during the year c. the federal tax rate changed from 40% to 30% during the year d. the client decreased its dividend rate from 30 cents per share to 20 cents per share
the federal tax rate changed from 40 to 30%
tests of controls are most likely to be omitted when? a. an account balance reflects many transactions b. control risk is assessed at less than the maximum c. the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient d. the auditor wishes to increase the acceptable level of detection risk
the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient
Which of the following increases audit risk? a. There is a planned initial public offering (IPO) b. the loan officer is monitoring the bank loan monthly c. low turnover with key management personnel d. internal audit reports to the audit committee
there is a planned initial public offering
which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement? a. Staff will need to be rescheduled to cover the new client b. there will be a client imposed scope limitation c. the firm will have to hire a specialist in one audit area d. the client financial reporting system has been in place for 10 years
there will be a client imposed scope limitations
Which transaction related audit objective is fulfilled by the question are sales transactions recorded on the correct dates
timing
What is the purpose of risk assessment procedures?
to assess the risk of financial statement material misstatement by understanding the entity its environment and internal controls
