Audit Final

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14) The General Standards Rule requires a member to comply with standards and interpretations. Which of the following is not a standard covered by this Rule? A) Independence B) Due professional care C) Planning and supervision D) Sufficient relevant data

17. An interpretation of the Acts Discreditable Rule would not include A) membership in an activist political party. B) withholding a client's books until a professional fee is paid. C) failure to follow government audit standards in government audits. D) permitting others to make misleading entries in records.

4 Types of Audit Reports

(SQAD) • Standard unqualified (unmodified): F/S are fair ○ Unqualified opinion with explanatory language: F/S are fair and note the following... • Qualified: F/S are okay except for... • Adverse: F/S do not present fairly • Disclaimer: no opinion

1 Audit report that captures what we did, what we found, and what rules we followed

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1.When confirming accounts payable, emphasis should be put on what kind of accounts? A) Accounts with small or zero balances, particularly those with a history of significant activity B) All accounts should be equally emphasized. C) Accounts with large balances D) Accounts listed in the accounts payable subsidiary

Search for Unrecorded Liabilities ???

1. Scan the open purchase order file at year end for indications of material purchase commitments at fixed prices. Obtain current prices and determine whether any adjustments for loss and liability for purchase commitments are needed. 2. List the unmatched vendor invoices and determine when the goods were received, focusing on the unmatched receiving reports and receiving reports prepared after the year end. Determine which invoices, if any, should be recorded. 3. Review the year-end unmatched receiving reports and determine whether entries are recorded in the proper accounting period. 4. Select a sample of cash disbursements from the accounting period following the balance-sheet date. Vouch them to supporting documents (invoice, receiving report) to determine whether the related liabilities were recorded in the proper accounting period. 5. Study IRS examination reports for evidence of income or other taxes in dispute, and decide whether actual or estimated liabilities need to be recorded. 6. Confirm accounts payable with vendors, especially regular suppliers showing small or zero balances in the year end accounts payable. These are the ones most likely to be understated. (Vendors' monthly statements controlled by the auditors also may be used for this procedure.) Be sure to verify the vendors' addresses so that confirmations will not be misdirected, perhaps to conspirators in a scheme to understate liabilities. 7. Study the accounts payable trial balance for indications of dates showing fewer payables than usual recorded near the year end. (A financial officer may be delaying the recording of vendor invoices.) 8. Use a checklist of accrued expenses to determine whether the company has been conscientious about expense and liability accruals including accruals for wages, interest, utilities, sales and excise taxes, payroll taxes, income taxes, real property taxes, rent, sales commissions, royalties, and warranty and guarantee expense. 9. When auditing the details of sales revenue, pay attention to the terms of sales to determine whether any amounts should be deferred as unearned revenue. Inquiries directed to management about terms of sales can be used to obtain initial information, such as inquiries about customers' rights of cancellation or return. The terms may signal the need for deferred revenue accounting. 10. Perform analytical procedures appropriate in the circumstances. Calculate and compare the gross margin percent of the current year to that of prior year(s), and compare important expense account balances to those of prior years to notice any that this year appear to be too low.

10 Basic Generally Accepted Auditing Standards

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2 Regulatory Bodies that Set the Rules for Auditing in the US

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3 Factors Associated with Fraud

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5 COSO Components of Internal Control

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8 Audit Procedures for Gathering Evidence/Testing Management Assertions

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18 A client has omitted a significant disclosure from the financial statements. The auditor has asked the client to include the information, but the client refuses and claims the information is confidential. The position of the CPA should be that the information A) cannot be considered confidential if it is necessary to the completeness of the financial statements. B) cannot be considered confidential unless it can be covered by the attorney-client privilege. C) is confidential and will only be disclosed under subpoena or for a regulatory investigation. D) should be discussed with the audit committee to determine if the information should be disclosed.

22. The audit procedures used in an observation of the client's physical inventory taking are designed primarily to A) test and observe the client's physical count of inventory. B) verify independently the physical counts obtained by the client. C) assist the client in taking test counts of year-end inventory. D) determine whether inventory contains obsolete goods.

29. Which of the following steps would not normally be included in a program for a physical inventory observation? A) Vouch unit prices to vendors' invoices or other cost records. B) Obtain the client's inventory counting instructions and review them for completeness. C) Inspect the tags used and unused and record the tag numbers used. D) Obtain the numbers of the last five receiving reports and last five shipping documents.

32. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of A) valuation or allocation. B) rights and obligations. C) existence or occurrence. D) presentation and disclosure.

4.When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be A) vendors with whom the entity has previously done business. B) amounts recorded in the accounts payable subsidiary ledger. C) payees of checks drawn in the month after the year-end. D) invoices filed in the entity's open invoice file.

53) The issuance of a disclaimer of opinion generally indicates A) the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole. B) the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole. C) the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion. D) the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

33) From the auditors' point of view, inventory counts are more acceptable prior to the year end when A) internal control is weak. B) accurate perpetual inventory records are maintained. C) inventory is slow moving. D) significant amounts of inventory are held on a consignment basis.

12.54 Audit Report Deficiencies. On Sept. 23, 2018, Betsy Ross drafted the following report on Continental Corporations' FS. (see screenshot of letter) Required: List and explain the deficiencies and omissions in the report prepared by Ross on Continental Company's FS.

Audit Report Deficiencies 1. The report needs a title, such as "Independent Auditor's Report". 2. The auditors should address the report to the body that has engaged them (the Continental Corporation Board of Directors). While the report may be read and used by others who are indirect beneficiaries of the audit, it is not appropriate to address the report to the unknown class of users. 3. The statement of cash flows is not referenced in the introductory paragraph, yet an opinion is provided in the opinion paragraph on cash flows. 4. The "sentence that identifies the auditors' responsibility for issuing an opinion on the financial statements is missing from the Auditor's Responsibility section. 5. The report uses inappropriate language in the Auditor's Responsibility section; instead of referencing "auditing standards generally accepted in the United States of America", it indicates that the audit was performed "in accordance with instructions by Continental's management" and that a "complete audit" was conducted, both of which are inappropriate. 6. The sentence in the Auditor's Responsibility section related to obtaining reasonable assurance about whether the financial statements are free from material misstatement is not included. 7. The opinion paragraph should not be modified with the phrase "with the explanation given below." 8. The opinion paragraph should not mention "minor errors we consider immaterial," but it should contain the phrase "present fairly in all material respects." 9. The opinion paragraph should not include reference to cash flows because the introductory paragraph did not state that the cash flow statement was audited. This may be a deficiency in the identification of the financial statements that were actually audited. (See earlier deficiency related to the introductory paragraph). 10. The opinion paragraph refers improperly to FASB pronouncements. It should refer to "accounting principles generally accepted in the United States of America". 11. The date of Ross's report should be September 23 (the audit completion date) and not Continental Corporation's fiscal year end date (July 31). 12. The inclusion of the emphasis-of-matter paragraph describing the economy and the strike is questionable. Assuming that its inclusion is appropriate, the reference to negative assurance (concerning the recording of sales) is not appropriate.

11.Which of the following would not typically be a specific relevant assertion about fixed asset accounts? A) Fixed assets in the accounts exist and are in productive use. B) Net carrying book values in the accounts are reflected at current market values. C) Depreciation has been calculated properly using accepted methods and reasonable estimates of useful life and other factors. D) Fixed assets are properly classified in the balance sheet under appropriate descriptive captions.

12.Which of the following is NOT one of the AICPA Principles of Professional Conduct? A) Responsibilities B) Reliability C) Objectivity D) Due care

16.An interpretation of the Independence Rule allows members to A) hold a material indirect interest in a client. B) have loans from a client that are collateralized by cash deposits held by the client. C) have home mortgages with a client even if they are on the engagement. D) be a trustee of a client pension or profit sharing trust.

19.In which of the following circumstances would a CPA who audits XZ Corporation lack independence? A) The CPA and XZ's president are both on the board of directors of COD Corporation. B) The CPA and XZ's president each own 25 percent of FOB Corporation, a closely held company. C) The CPA has an automobile loan from XZ, a financial institution. The loan is collateralized by the automobile. D) The CPA reduced XZ's usual audit fee by 40 percent prior to the audit because XZ's financial condition was unfavorable.

23. An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and A) trace additions to the general ledger. B) vouch additions to receiving reports. C) vouch additions to sales invoices. D) trace receipts to receiving reports.

25.Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? A) Complete recounts by independent teams are performed. B) Perpetual inventory records are maintained. C) Unit cost records are integrated with production accounting records. D) Inventory balances are rarely at low levels.

3.Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure? A) Purchase orders are not prepared for services acquired directly under authorization of department heads. B) The same person authorizes voucher packages and signs checks. C) Unacceptable goods are not scheduled on receiving reports. D) The same person signs checks and stamps vouchers PAID.

31. Auditors record the last bill of lading used at the time of the inventory count to A) search for unrecorded sales. B) test cutoff. C) verify ownership. D) All of the choices.

34) Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? A) Trace test counts noted during the entity's physical count to the entity's summarization of quantities. B) Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. C) Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales. D) Inspect the open purchase order file for significant commitments that should be considered for disclosure.

36) Which of the following would be considered an analytical procedure? A) Testing purchasing, shipping, and receiving cutoff activities. B) Comparing inventory balances to recent sales activities. C) Projecting the deviation rate of a statistical sample to the population. D) Reconciling physical counts to perpetual records and general ledger balances.

42) What is the primary purpose of obtaining written representations? A) To provide auditors with substantive evidence of important assertions B) To impress upon management its primary responsibility for the financial statements C) To allow auditors to communicate important internal control deficiencies to management D) To allow auditors to communicate important suggestions for improvement to management

43) Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events? A) Reviewing the latest interim financial statements B) Performing cut-off testing near year end C) Inquiring of officers and other client executives D) Obtaining written representations

45) The Orange Corporation was audited for the year ended December 31. The audit was completed on January 25; prior to the release of the report, auditors learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the auditors' reports? A) December 31 and January 25 B) January 25 and February 1 C) January 25 and February 15 D) February 1 and February 15

5. When auditing PP&E, the auditor's approach is generally to A) examine evidence supporting the amounts in the ending balance. B) examine evidence supporting additions and disposals during the year. C) follow a reliance strategy, testing internal controls and analytical procedures. D) concentrate on finding unrecorded assets.

50) Which of the following scope limitations would ordinarily be of most concern to the auditors? A) The inability to observe inventories because auditors were appointed following the date of the financial statements. B) Management's refusal to provide auditors with written representations. C) The inability to obtain confirmation of year-end balances from customers because of different billing dates. D) The use of the work of component auditors in the audit of group financial statements.

51) The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n) A) unmodified opinion. B) qualified opinion citing a departure from generally accepted accounting principles. C) qualified opinion citing a scope limitation and lack of specific evidence. D) disclaimer of opinion.

52) Auditors will issue an adverse opinion when A) a severe scope limitation has been imposed by the entity. B) a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified. C) a qualified opinion cannot be rendered because the auditors lack independence. D) the entity's ability to continue as a going concern is subject to substantial doubt.

61) In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements? A) The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures. B) The financial statements fail to disclose information that is required by generally accepted accounting principles. C) The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements. D) Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

62) Auditors would not normally issue a qualified opinion on the entity's financial statements when A) an accounting principle at variance with generally accepted accounting principles is used. B) the auditors lack independence with respect to the audited entity. C) a scope limitation prevents the auditors from completing an important auditing procedure. D) the entity has undertaken a change in accounting principle with which the auditor does not agree.

9.The inherent risk that accounts payable may be omitted or otherwise understated typically is A) low. B) high. C) moderate. D) indeterminate.

110. An audit plan for accounts payable would not include which of the following procedures? A) Obtaining a trial balance of recorded accounts payable B) Sending confirmation to accounts with zero balances C) Reviewing cash receipts for the period after year-end D) Obtaining written client representations about related-party payables and pledges of assets as collateral for liabilities

15) Maralee has been approached by J. Fox Entertainment to perform an audit of her theatre company. Maralee has never audited a theatre company before. Maralee can A) not accept the engagement because she does not have the specialized industry knowledge. B) recommend another auditor and receive a fee for the referral. C) accept the engagement if she can obtain the required knowledge before the end of the engagement. D) accept the engagement with the understanding that additional hours will be required for Maralee to learn and understand the nature of the business.

2.An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to A) identify usually large purchases that should be investigated further. B) verify that cash disbursements were for goods actually received. C) determine that purchases were properly recorded. D) test whether payments were for goods actually ordered.

24. An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of A) existence. B) valuation. C) completeness. D) rights and obligations.

27. To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace A) inventory tags noted during the auditor's observation to items in the inventory listing schedule. B) inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. C) items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets. D) items in receiving reports and vendors' invoices to the inventory listing schedule.

30. Inventory count tags are controlled A) to prevent counting errors. B) to test cutoff. C) to prevent subsequent addition of goods to the inventory. D) for reasons specified in all of the choices.

37) Which of the following is the assertion with the highest inherent risk in auditing inventory? A) Completeness. B) Rights. C) Existence. D) Properly classification on the balance sheet.

39) Interim testing normally occurs between the ________ and the ________. A) beginning of the year under audit; audit report release date B) date of the financial statements; audit report release date C) beginning of the year under audit; date of the financial statements D) end of the year under audit; date of the auditors' report

41) Which party should request (must sign) the letter regarding litigation, claims, and assessments to the client's attorney? A) Attorney B) Auditors C) Client D) Securities and Exchange Commission or other regulatory body

44) Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements? A) Settlement of long outstanding litigation B) Collection of a past due accounts receivable C) Loss of inventory as a result of a flood D) An additional tax assessment on prior income

48) Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments? A) Request the client's attorney to evaluate whether the client's pending litigation claims, and assessments indicate a going concern problem. B) Examine the legal documents in the client's attorney's possession concerning litigation, claims, and assessments to which the attorney has devoted substantive attention. C) Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. D) Confirm directly with the client's attorney that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.

56) In which of the following circumstances would a qualified opinion not be appropriate? A) A scope limitation prevents the auditors from completing an important auditing procedure. B) The entity has failed to properly disclose going-concern uncertainties. C) An accounting principle at variance with generally accepted accounting principles is used. D) The auditors lack independence with respect to the audited entity.

58) 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.

59 When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should A) refer to the change in an emphasis-of-matter paragraph. B) explicitly concur that the change is preferred. C) not refer to consistency in the report. D) refer to the change in the opinion paragraph.

6. Failure to record a liability generally results in A) an understatement of profit. B) an understatement of current ratio. C) an overstatement of profit. D) an overstatement of assets.

60) In which of the following circumstances would auditors be most likely to express an adverse opinion? A) The chief executive officer refuses to provide the auditors access to minutes of board of directors' meetings. B) Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon. C) The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases. D) Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.

63) Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure? A) "Subject to the departure from generally accepted accounting principles, as described above." B) "With the foregoing explanation of these omitted disclosures." C) "Except for the omission of the information discussed in the emphasis of matter paragraph." D) "Does not present fairly in all material respects."

64) The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would A) document in the engagement letter that the group auditors assume no responsibility for the component auditors' work. B) obtain written permission from the component auditors to omit the reference in the group auditors' report. C) contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary. D) add an additional paragraph to the group auditors' report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

65) For a public company, issuing F/S in 2018, in which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant but in accordance with GAAP? A) The Auditor's Responsibility section. B) The opinion paragraph. C) An emphasis-of-matter paragraph following the opinion paragraph. D) The management responsibility section.

67) During the year under audit, Forrest Corporation experienced significant losses due to a pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue? A) Qualified or adverse opinion. B) Disclaimer or adverse opinion. C) Disclaimer or qualified opinion. D) Unmodified opinion with an other-matter paragraph.

7. Improperly capitalizing an expense item results in. A) understatement of profit in the current year and overstatement in future years. B) understatement of profit in the current year and in future years. C) overstatement of profit in the current year and understatement in future years. D) overstatement of profit in the current year and in future years.

8.To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all A) vendors' invoices. B) purchase orders. C) receiving reports. D) canceled checks.

13.Dara & Co. Audit Hill Corporation. Ellie is the engagement partner on the audit with an office in Buffalo Grove. Which of the following would NOT be considered a covered member? A) Jason, who is a member of the attest engagement team with an office in Elmhurst. B) Adam, who is a tax partner and provided 50 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst. C) Ben, a partner in Dara & Company, with an office in Buffalo Grove. D) Julie, a partner in Dara & Company, with an office in Elmhurst.

26. While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record A) purchase discounts. B) purchase returns. C) sales. D) sales returns.

28. Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe? A) Observe all counts at all locations by using the required number of auditors. B) Insist the inventory be counted on separate days so the auditor can be present at all locations. C) Work with the client to determine which locations to observe. D) Observe a sample of locations on a surprise basis.

35) 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.

38) Which of the following events or activities may occur following the audit report release date? A) Interim testing B) Roll-forward work C) Subsequent events D) Subsequently discovered facts

40) Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments? A) Obtaining a description and evaluation of litigation, claims, and assessments from management B) Examining documentary evidence regarding litigation, claims, and assessments C) Reading minutes of meetings of stockholders, directors, and appropriate committees D) Performing analytical procedures

46) Small and Tall, CPAs, completed the December 31, 2017 audit of Big Company on February 10, 2018. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2017 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should A) determine whether persons are currently relying on the auditors' reports. B) advise the client to make appropriate changes in the financial statements and reissue them. C) notify each member of the board of directors of Big Company. D) take no action since the event took place after the audit report release date.

47) Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity? A) Auditors are required to specifically gather evidence with respect to going-concern status and separately report on the entity's ability to continue as a going concern. B) Auditors are required to specifically gather evidence with respect to going-concern status and modify their report on the financial statements if substantial doubts exist. C) Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and separately report on the entity's ability to continue as a going concern. D) Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

49) What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist for the next 12 months? A) Modify their report on the financial statements to describe management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. B) Prepare a separate report that describes management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. C) Require financial statement disclosure of management's plan to mitigate going-concern uncertainties with no modification to the auditors' report on the financial statements or no separate report on going concern. D) Conclude that substantial doubt about going concern does not exist for 12 months from the date of the F/S and not require financial statement disclosure or modification of the auditors' report.

54) In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements? A) The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows. B) The auditors wish to emphasize a matter regarding the financial statements. C) The auditors reference component auditors who examined a subsidiary of group financial statements. D) The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

57) When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation in an additional paragraph and modify the A) introductory paragraph. B) introductory paragraph and Auditor's Responsibility section. C) introductory paragraph, Auditor's Responsibility section, and opinion paragraph. D) Auditor's Responsibility section and opinion paragraph.

66) When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the Auditor's Responsibility Notes to the financial section statements A. Yes Yes B. Yes No C. No Yes D. No No A) Option A B) Option B C) Option C D) Option D

9.62 Detection of Errors and Fraud. For each of the following independent events, indicate the (1) effect of the error or fraud on the FS and (2) what auditing procedures could have detected the misstatement resulting from error or fraud. a. The physical inventory count of J. Payne Enterprises, which has a Dec 31 year-end, was conducted on Aug 31 without incident. In Sept. the perpetual inventory was not reduced for the cost of sales. b. Holmes Drug Stores counted its inventory on Dec 31, which is its fiscal year-end. The auditors observed the count at 20 of Holmes's 86 locations. The company falsified the inventory at 20 of the locations not visited by the auditors by including fictitious goods in the counts. c. Pope Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers. d. Peffer Electronics Inc. overstated its inventory by pricing wiring at $200 per hundred feet instead of $200 per thousand feet. e. Goldman Sporting Goods counted boxes of baseballs as having one dozen baseballs per box when they had only six per box.

Detecting Errors and Fraud Effect on Financial Statements Auditing Procedures That Might Have Detected the Misstatement a. Total assets overstated; net income overstated. As part of the roll-forward procedure, auditors would examine the entries to reduce inventory for the cost of sales. b. Total assets overstated; net income overstated. Locations should be visited for an inventory count on a surprise basis. c. Total assets overstated; net income overstated. Examination of purchase records should reveal that the automobiles were not purchased. Inquiry of the client about consignments should also alert auditors to the presence of consigned goods. d. Total assets overstated; net income overstated. Examination of purchase invoices should indicate that the pricing is by thousand feet. Also, comparison to prior periods should show the large increase in the value of wiring. e. Total assets overstated; net income overstated. During the observation of the physical inventory, auditors should request that some boxes be opened. Also, purchase records should indicate that each box has only six baseballs.

20. For each situation (1-5), identify the most applicable AICPA rule of conduct and whether there is a violation or no violation of the rule (A-F). One or more letters may not be used. A. Independence Rule; no violation B. Independence Rule; violation C. Integrity and Objectivity Rule; no violation D. Integrity and Objectivity Rule; violation E. Accounting Principles Rule; no violation F. Accounting Principles Rule; violation _____ 1. Sterling Stevens, CPA, was auditing Global Services Company. Global Services used an accounting principle that was not in conformity with GAAP. Nevertheless, Stevens rendered a standard unqualified audit report. _____ 2. Christina Hall, CPA, provided expert testimony for a plaintiff. The defendant in the case was a client of Hall's. _____ 3. Sam Miller, CPA, owned 100 shares of Johnson Drilling, Inc., his audit client.

F, B, B

9 Revenue Misstatement Considerations

Fundamentals of FASB Concept Statement 5 • Revenue is recognized when it is: ○ Earned (revenue earning process is complete) ○ Realized or realizable (amounts recognized are likely to be realized) Methods used to misstate revenues • Bill and hold transactions • Hidden side letter agreements • Shipments to controlled destinations • Improper cut-off • Sales returns • Percentage of completion manipulation Fictitious revenues (channel stuffing, fictitious journal entries, etc.)

B.47 Independence, Integrity and Objectivity Cases. Read the following cases. Required: For each case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct, explain why is it does, and cite the relevant rule. a. CPA Ellen Stout performs the audit of the local symphony society. Because of her good work, she was elected on honorary member of the BOD. b. CPA Darcy Wolfe practices management consulting in the area of computerized info systems under the firm name of Wolfe & Associates. The "associates" are not CPAs, and the firm is not an accounting firm. However, Wolfe shows "CPA" on business cards and uses these credentials when dealing with clients. c. CPA Alex Goodwin performs significant day-to-day bookkeeping services for Harper Corporation and supervises the work of the one part-time bookkeeper employed by Hadley Harper. This year, Harper wants to engage CPA Goodwin to perform an audit. d. CPA H. Poirot bought a home in 1989 and financed it with a mortgage loan from Farraway Savings and Loan. Farraway was merged into Nearby S&L, and Poirot became the manager in charge of the Nearby audit. e. Poirot inherited a large sum of money a large sum of money from old Mr. Giraud in 2000. Poirot sold his house, paid off the loan to Nearby S&L, and purchased a much larger estate. Nearby S&L provided the financing. f. Poirot and Mala Lemon (a local real estate broker) formed a partnership to develop apartment buildings. Lemon is a 20% owner and managing partner. Poirot and three partners in the accounting firm are limited partners. They own the remaining 80% of the partnership but have no voice in everyday management Lemon obtained permanent real estate financing from Nearby S&L. g. Lemon won the lottery and purchased part of the limited partners' interests. She now owns 90% of the partnership and remains general partner while the CPAs remain limited partners with 10% interest h. CPA Justin Shultz purchased a variable annuity insurance contract that offered the option to choose the companies in which this contract will invest. As directed, the insurance company purchased common stock in one of Shultz's audit clients

Independence, Integrity, and Objectivity Cases The author team would like to gratefully acknowledge Jeanie Folk's additional explanations in parts b and g which clarify the given interpretations. a. The Independence Rule. Honorary Directorships and Trusteeships. While independence is ordinarily impaired if a CPA serves on an organization's board of directors, members can be honorary directors of organizations such as charity hospitals, fund drives, symphony orchestra societies, and similar not-for-profit organizations so long as: (1) The position is in fact purely honorary. (2) Listings of directors show she is an honorary director. (3) She restricts participation strictly to the use of her name. (4) She does not vote or participate in management functions. b. Form of Organization and Name Rule. This is not a violation, but students should note that Wolfe is holding himself out to be a CPA and performing the types of services normally performed by CPA firms. However, Wolfe can call himself a CPA (that is, include that designation after his name on his business card). He uses the terminology "and Associates" in the name of his firm but does not indicate that it is a CPA firm. As such, there is no violation of the Code of Conduct. c. The Independence Rule. This rule prohibits a covered member from acting in the capacity of a manager, employee, promoter, or trustee of a client. Generally, independence is impaired if the public accounting firm even appears to outside observers to be working in the capacity of management or employee of the client. So, this is likely that this would be a situation that would impair independence. d. The Independence Rule. Independence is not impaired. Poirot's loan is "grandfathered" because it was acquired before 1992 and it was obtained from a financial institution for which independence was not required (Farraway was not a client before merger with Nearby) but later became part of an audit client's portfolio. e. The Independence Rule. Independence is impaired. Not even home loans made under normal lending conditions are exempt from the prohibition. Paying off the old grandfathered loan does not matter. f. The Independence Rule. Independence is impaired. Because the accounting firm and its partners own more than 50 percent of the partnership, the loan is considered to be a prohibited loan from a client. g. The Independence Rule. Independence is not impaired. The CPAs own less than 50 percent of the partnership. Note that it is generally important to distinguish between direct and indirect financial interests. As stated in an interpretation to the code of conduct, "the financial interests held by a limited partnership are considered to be indirect financial interests of a covered member who is a limited partner as long as the covered member does not control the partnership or supervise or participate in the partnership's investment decisions." As such, because this is an indirect investment, if the investment of the CPA's was material to their net worth, they could not audit the partnership. However (and perhaps this is the tricky part), this case does not indicate that the CPAs do (or intend to) audit the partnership (as is the case with item h). h. The Independence Rule. Independence is impaired. Because Schultz can order the investment under the insurance contract, the financial interest is a prohibited "direct" financial interest.

21 For each of the following cases indicate if the action by a member CPA is a violation of the AICPA Code of Professional Conduct and cite the relevant rule. A. Disclosed client information to another CPA firm during the discussion of a merger of the two firms. B. Allow a company to change the way it values inventory to a method that is not GAAP because following GAAP would be misleading. C. Had a new car loan from a bank that is a client when the bank holds the title to the car. D. Based fee on approval of a bank loan dependent upon audited financial statements. E. Did not comply with "Government Auditing Standards on a government audit." Letter Relevant Rule Violation? (Yes/No)

Letter Relevant Rule Violation? (Yes/No) A. Confidential Client Information Rule Yes B. Accounting Principles Rule No C. Independence Rule No D. Fees and Other Types of Remuneration Rule Yes E. Acts Discernable Rule Yes

4.60 Auditing Standards Review. Management fraud (fraudulent financial reporting) is not the expected norm but is happens from time to time. In the US, several cases have been widely publicized. They happen when motives and opportunities overwhelm managerial integrity. a. What distinguishes management fraud from a defalcation? b. What are an auditor's responsibilities under auditing standards to detect management fraud? c. What are some characteristics of management fraud that an audit team should consider to fulfill the responsibilities under auditing standards? d. What factors might an audit team notice that should heighten the concern about the existence of management fraud? e. Under what circumstances might an audit team have a duty to disclose management's frauds to parties other than the company's management and its BOD?

Management fraud is deliberate fraud committed by management that injures investors and creditors through materially misleading financial statements. The class of perpetrators is management, the class of victims is investors and creditors, and the instrument of perpetration is the financial statement. Sometimes management fraud is called fraudulent financial reporting, defined as "intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements." Defalcation is another name for employee fraud, embezzlement, and larceny. Employee fraud is the use of fraudulent means to take money or other property from an employer. It usually involves falsifications of some kind—false documents, lying, exceeding authority, or violating an employer's policies. Embezzlement is a type of fraud involving employees' or nonemployees' wrongfully taking money or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and cover-up. Larceny is simple theft—for example, an employee taking an employer's money or property that has not been entrusted to the custody of the employee. b. Auditors are responsible for assessing the risk of material misstatements due to management fraud and due to misappropriation of assets (employee fraud). They should (1) consider this assessment when designing procedural responses (overall response and specific procedural response), (2) ask management about its understanding of fraud risk in the company, (3) pay attention to fraud risk factors, (4) document the risk assessment and management knowledge in the audit documentation, (5) determine whether the company has specific controls to mitigate fraud risks, (6) consider the effectiveness of the company's prevention, detection, and deterrence programs, and (7) perform procedures to provide a reasonable assurance of detecting material misstatements due to fraud. c. Characteristics of management fraud important for consideration: materiality of the effect on financial statements, the level of management involved, the extent and skillfulness of concealment, the relationship to control activities, the specific accounts affected. d. Concern-heightening factors: • Management decisions are dominated by an individual or small group. • Managers' accounting attitudes are unduly aggressive. • Managers place much emphasis on meeting earnings projections. • Management's business reputation is poor. • Management has engaged in opinion shopping. • Managers are evasive responding to auditors' inquiries. • Managers engage in frequent disputes with auditors. • Managers display significant disrespect for regulatory bodies. • Company has a weak internal control environment. • Company accounting personnel are lax or inexperienced in their duties. • Company employs inexperienced managers. • Company is in a period of rapid growth. • Company profit lags the industry. • Company has going concern problems (near bankruptcy). • Company is decentralized without adequate monitoring. • Company has many difficult accounting measurement and presentation issues. • The company may be offered for sale. • The company makes acquisitions using its stock. These next "red flags" have more to do with employee frauds (misappropriations of assets) than management fraud, but auditors are supposed to know about them: • Missing documents. • Second endorsements on checks. • Unusual endorsements. • Unexplained adjustments to inventory balances. • Unexplained adjustments to accounts receivable. • Old items in bank reconciliations. • Old outstanding checks. • Customer complaints. • Unusual patterns in deposits in transit. • Cash shortages and overages. • Excessive voids and credit memos. • Customer complaints. • Common names or addresses for refunds. • Adjustments to receivables and payables. • General ledger does not balance. • Increased past due receivables. • Inventory shortages. • Increased scrap. • Alterations on documents. • Duplicate payments. • Employees cannot be found. • Second endorsements on checks. • Documents photocopied. • Dormant accounts become active. e. Auditor disclosure might be required: (1) To comply with legal and regulatory requirements (including reporting a change of auditors on SEC Form 8 K, control matters and disagreements according to Item 304 of SEC Regulation S-K). (2) To report to the SEC under the requirements of the Private Securities Litigation Reform Act (when illegal acts material to the financial statements are not reported to the SEC by the company's board of directors). (3) To respond to new auditors' inquiries. (4) To respond to a subpoena. (5) To communicate with a funding or other agency when required in audits of entities that receive governmental financial assistance.

If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report? Report on Financial Statements Report on Internal Control over Financial Reporting a. Yes Yes b. Yes No c. No Yes d. No No Multiple Choice Option B Option D Option A Option C

Option A Both the report on the financial statements and the report on internal control over financial reporting would be modified to reference the other report.

8.55 PP&E Assertions and Substantive Procedures. This question contains 3 items that are management assertions about property and equipment. Following them are several substantive procedures for obtaining evidence about management's assertions. Assertions 1. The entity has legal right to property and equipment acquired during the year. 2. Recorded property and equipment represent assets that actually exist at the balance-sheet date. 3. Net property and equipment are properly valued at the balance-sheet date Substantive Procedures a. Trace opening balances in the summary schedules to the prior-year audit documentation b. Review the provision for depreciation expense and determine whether depreciable lives and methods used in the current year are consistent with those used in the prior year c. Determine whether the responsibility for maintaining the property and equipment records is separated from the responsibility for custody of property and equipment d. Examine deeds and title insurance certificates e. Perform cutoff tests to verify that property and equipment additions are recorded in the proper period f. Determine whether property and equipment are adequately insured g. Physically examine all major property and equipment additions Required: For each of the 3 assertions (1, 2 and 3) select the one best substantive audit procedure (a-g) for obtaining competent evidence. A procedure may be selected only once or not at all.

PP&E Assertions and Substantive Procedures 1. Rights evidence: d. Examine deeds and title insurance certificates. 2. Existence evidence: g. Physically examine all major property and equipment additions. 3. Valuation evidence: b. Review the provision for depreciation expense and determine whether depreciable lives and methods used in the current year are consistent with those used in the prior year.

B.45 SEC Independence Rules. Is independence impaired for the individual or the public accounting firm on these SEC filing audits according to the SEC independence rules? a. CPA Yolanda is the Best & Co engagement partner on the Casa Construction Company (CCC) audit supervised from the Santa Fe office of the firm. Yolanda owns 100 shares of CCC. b. CPA Yolanda sold the 100 CCC shares to CPA Javier, who is another partner in the Santa Fe office but who is not involved in the CCC audit c. CPA Javier transferred ownership of the 100 CCC shares to his wife d. CPA Javier's wife gave the shares to their 12 year old son e. CPA Javier's son sold the shares to Javier's father f. CPA Javier's father was happy to combine the 100 CCC shares with shares he already owned because now he owns 25% of CCC and can control many decisions of the board of directors g. CPA Javier's father declared personal bankruptcy and sold his CCC stock. CCC then hired him to fill the newly created position of director of financial reporting.

SEC Independence Rules In these solutions, the following responses do not try to contemplate all exception conditions cited in the text related to the SEC independence rule exceptions. The solution focuses on the primary conditions. a. Yes. A member of the engagement team cannot hold a direct financial interest. b. Yes. No other partner in the Santa Fe office (covered persons) can own direct financial interest in CCC. c. Yes. Immediate family members of covered persons in the firm cannot hold direct financial interest in CCC. d. Yes. The son (presumed a dependent) is also an immediate family member. e. No. According strictly to the definition, the father is a close family member (not an immediate family member), so the financial interest in CCC does not impair independence. f. Yes. Controlling interests in audit clients when held by close family members of covered persons in the firm impair independence. g. Yes. Independence is impaired when close family members of a covered person in the firm (Javier) holds a job with a client in an accounting or financial reporting role.

11.64 Subsequent Events and Subsequently Discovered Facts. Michael Ewing is auditing the FS of Dallas Company for the year ended Dec 31, 2017. In concluding the process of gathering sufficient appropriate evidence, Ewing has asked to meet with his supervisor on the audit (John Ross) to discuss responsibility for events occurring after the date of the FS. Required: a. What is the subsequent event? During what time period is Ewing responsible for subsequent event? b. List some procedures that Ewing mat perform to assist him in identifying subsequent events. c. What are the two types of subsequent events? How should information related to these types of subsequent events be reflected in Dallas's FS? d. Assume that on Jan 8 2018, Dallas Company agreed to acquire Houston Inc. in a significant transaction. The date of Ewing's report was Feb 7 2018, and Dallas issues its FS (and Ewing's reports on its FS and internal control over financial reporting) on Feb 14, 2018. How would Ewing proceed if he became aware of this subsequent event on the following dates? 1. Jan 10, 2018 2. Feb 10, 2018 3. Feb 20, 2018 e. On March 2, 2018, Dallas announced that it also will acquire San Antonio Company in a significant transaction. What is Ewing's responsibility with respect to this acquisition in the audit of Dallas's FS for the year ended Dec 31, 2017?

Subsequent Events and Subsequently Discovered Facts a. A subsequent event is an event or transaction that occurs after the date of the financial statements but prior to the date of the auditor's report. Therefore, Michael Ewing is responsible for subsequent events occurring up to the date of the auditor's report. b. Procedures that Michael can perform to assist him in identifying subsequent events include: • Obtaining an understanding of the procedures performed by management to identify subsequent events. • Inquiring of management and those charged with governance as to the existence of subsequent events (and subsequently corroborate this inquiry through written representations). • Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements. • Reviewing the entity's latest interim financial statements (if applicable). c. The two types of subsequent events are: Events that provide additional evidence about conditions that existed at the date of the financial statements. Because the condition existed at the date of the financial statements, this type of subsequent event requires adjustment of amounts included in the financial statements. Events that provide evidence of conditions that arose following the date of the financial statements. These events should be disclosed in the financial statements. d. Michael should proceed as follows: • He could evaluate the disclosure of this event without additional considerations because he became aware of the transaction prior to the date of the auditor's report. • This is an example of a subsequently discovered fact. In this situation, Michael could evaluate the disclosure of this event because his reports (and the financial statements) have not been issued. However, because he became aware of the subsequent event following the date of the auditor's report, he would ordinarily dual date the auditor's report to limit his responsibility beyond the date of the auditor's report to the disclosure related to the subsequent event. • This is an example of a subsequently discovered fact. In this situation, Michael became aware of the transaction after the audit report release date. Assuming that these facts affect the financial statements or Michael's report and persons are continuing to rely on the financial statements, Michael should request that Dallas Company's management disclose the facts, their impact on the financial statements, and issue revised financial statements. f. Because the announced acquisition of San Antonio Company did not exist at the date of Michael's report, Michael has no responsibility with respect to this acquisition in the 2017 audit.

9.57 Tracing the Inventory Count. You have been assigned to trace the results of the observation of Brightware China's physical inventory count to its pricing and compilation. You note the following conditions. 1. The last inventory tag documented by Mark Hulse, the auditor who observed the inventory, was 1732, but you notice a number of items with count ticket numbers higher than 1732. You contact the client's controller, Marcia Vines, who tells you the client found a storage room full of a new produce that Brightware had just produced and added it to the inventory. 2. The count tickets recorded by Hulse agree to the inventory list, but some of the other count tickets you select are substation ally different from it. Vines tells you these are input errors and she will have them corrected. 3. Hulse described several boxes of goods as being dusty and even broken. They were included in the inventory at cost. Vine's explanation is that chine never "goes bad" and the goods themselves were not broken. Required: a. Prepare an audit plan for tracing the information from the inventory count to the compilation. b. What might have caused the conditions you found? What effect might they have on the FS? c. What steps will you take to follow up on Vines's explanations?

Tracing the Inventory Count a. Inventory plan steps for tracing inventory count information. (1) Obtain client's listing of final inventory count. (a) Use CAATs to foot listing and check for numeric sequence of inventory tags. (b) Agree total to final inventory in general ledger. (c) Agree test counts obtained during the count to the listing for quantity and description. (2) Follow up on any unusual items noted during the count. b. Possible causes of items noted. (1) It may be that the client did discover additional items. However, the client may be attempting to fraudulently inflate inventory. (2) These may be honest errors, or, again, this may indicate possible fraud. (3) These items are clearly obsolete. Even if the goods aren't broken, they aren't being sold. c. Follow-up procedures 1. Request to see the items and the documentation of when they were received. Inquire of count personnel about why they were missed and how they were found. 2. Select a large sample of additional tickets and agree them to the listing. Consider having client re-input all the tickets. Determine whether there is a pattern to the errors (all inventory increasing, all in one area, all by one employee). 3. Determine client's plans for selling. Include these items in the lower of cost or market testing, incorporating any planned discounts or other costs of disposing. Ask about any other slow-moving items.

11.58 Uncorrected Misstatements and Performance Materiality. Aaron Rivers, CPA, is auditing the FS of Charger Company, a client for the past 5 years. During past audits of Charger, Rovers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2012, the misstatements would have reduced net income by $13,200 if corrected:) (see table on desktop) During the most recent audit, Rivers concluded that sales totaling $11,000 were recognized as of Dec 31, 2017, that did not meet the criteria for recognition until 2018. When Rivers discussed these sales with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry...it's not a material amount. Why should we bother with this item?" Required: a. How does the misstatement identified in 2017 affect net income, assets, liabilities and equity in 2017? (Assume a 35% tax rate for Charger.) b. Comment upon Turner's remark to Rivers. Is Turner's reasoning correct? c. Upon doing some research, Rivers learned of the rollover method and iron curtain method for evaluating the performance materiality of misstatements. Briefly define each of these methods. d. How would Rivers evaluate the performance materiality of the $11,000 sales cutoff error in 2017 under the rollover method and iron curtain method? e. Based on your response to part (d), what adjustments (if any) would Rivers propose to Charger Company's FS under the rollover method and iron curtain method?

Uncorrected Misstatements and Performance Materiality a. The misstatement would have the following financial statement effects: • Overstatement of net income by $7,150 (assume taxes of $3,850). • Overstatement of assets by $11,000. • Overstatement of liabilities by $3,850 (taxes payable). • Overstatement of equity by $7,150. b. Turner's comment is incorrect. While this misstatement is not material by itself, it might result in material misstatements when considered along with previously identified (but not corrected) misstatements. c. The rollover method considers only the current-period income effect(s) of a misstatement when evaluating its materiality; the iron curtain method considers the aggregate balance sheet effects of the current misstatement along with previously identified misstatements when evaluating materiality. d. Under the iron curtain method, Rivers would consider both the current misstatement as well as the previous misstatements. Summarizing the misstatements from 2009-2013 reveals an uncorrected misstatement (net balance sheet effect) from prior audits of $18,450; including the current misstatement of $7,150 would result in a cumulative effect of $25,600. Under the rollover method, Rivers would only consider the amount of the current period misstatement ($7,150) in evaluating performance materiality. e. Under the iron curtain method, because the cumulative effect noted in (d) of $25,600 exceeds the materiality level of $25,000, Rivers should propose an adjustment to Chargers' financial statements. Ordinarily, Rivers would recommend an adjustment of the entire $25,600 of uncorrected misstatements (assuming that these misstatements were actual misstatements, not projections of identified misstatements). If a projection of identified misstatements, the minimum adjustment would be $601, which would result in an adjusted cumulative effect of $24,999 ($25,600 - $601 = $24,999), which is less than performance materiality. Under the rollover method, because the amount of the misstatement ($7,150) is less than the materiality level ($25,000), Rivers would not require an adjustment to the financial statements.

Auditors perform analytical procedures in the planning stage of an audit for the purpose of: Multiple Choice a. Identifying unusual conditions that deserve more auditing effort. b. Determining the nature, timing, and extent of further audit procedures for auditing the inventory. c. Deciding the matters to cover in an engagement letter. d. Determining which of the financial statement assertions are the most important for the client's financial statements.

a Significant assertions are determined by understanding the company, not by analytical procedures.

12.53 Various Reporting Situations. For each of the following situations, indicate the type of opinion(s) that auditors could issue (more than one opinion may be appropriate in each circumstance). Unless otherwise notes, assume that no departures from GAAP were identified in the audit engagement. In addition, indicate how the standard (unmodified) report would be modified, if appropriate. 1. Auditors have identified an immaterial departure from GAAP in their examination, but the entity has not adjusted its FS for their departure or disposed this departure in its FS or related disclosures 2. Because they were appointed to the engagement after the date of the FS, the auditor have experienced a significant scope limitation and were unable to perform standard auditing procedures used in their engagements. The account(s) affected by this scope limitation were material and pervasive. However, the auditors have been able to completely satisfy themselves as to the fairness of the related account balances and classes of transaction by performing alternative procedures 3. During the year, the entity changed its method of accounting for inventories from FIFO to LIFO and has disclosed this change in the footnotes to the FS and accounted for the change properly. However, the auditors do not agree with the rationale for the change and believe that it was made to report a higher level of earnings. 4. Subsequent to accepting the audit engagement, the auditors determined that they are not independent with respect to the client because of the financial interest in the client held by a newly admitted partner to the audit firm 5. Evidence gathered during the audit examination and inquiry of the client's management revealed substantial doubt about the client's ability to continue in existence. The auditors believe that the client has appropriately disclosed the going-concern uncertainties in its FS and footnotes. 6. The auditors wish to emphasize the company's acquisition of two large subsidiaries during the most recent year. 7. The auditors have engaged component auditors to conduct a portion of the audit but do not wish to assume responsibility for their work. The auditors have no approached the component auditors about presenting their reports with the company's FS and do not plan to do so. 8. The client has not recognized a material loss related to a decline in the market value of its investments. Because the auditors believe this decline in value is not temporary, they believe the FS do not present the client's financial position and results of operations in accordance with GAAP. 9. The auditors have experiences a significant scope limitation and are unable to satisfy themselves as to the fairness of the affected account balances through alternative procedures.

Various Reporting Situations (not on Syllabus list, but if you want more practice with identifying types of opinions) 1. Because the departure is not material, the auditors could issue an unmodified opinion without modifying the standard (unmodified) report or referencing the departure. 2. Because the auditors were able to perform alternative procedures, a standard report (unmodified opinion) could be issued without any reference to the scope limitation or alternative procedures performed by the auditors. The fact that the scope limitation is circumstance-imposed rather than client-imposed is not relevant with respect to this reporting decision; however, the fact that it is circumstance-imposed does not raise other potentially negative issues associated with client-imposed scope limitations. 3. Because the auditors do not agree with the rationale for the change in accounting principle, this would be treated as a departure from GAAP and a qualified or adverse opinion would be appropriate. The opinion paragraph of the standard (unmodified) report would be modified to reflect the auditors' opinion and an additional paragraph would be added discussing the departure from GAAP, its effects on the financial statements, and the auditors' disagreement with the rationale for the change. 4. The auditors would issue a one-paragraph disclaimer of opinion indicating that they are not independent with respect to the client. 5. The auditors would issue an unmodified opinion and add an emphasis-of-matter paragraph referencing the entity's disclosure of going-concern uncertainties. (If these going-concern uncertainties were extremely serious, a disclaimer of opinion would be a reporting option). 6. The auditors would issue an unmodified opinion and add an emphasis-of-matter paragraph to the standard (unmodified) report describing the acquisitions. 7. The auditors would issue an unmodified opinion and modify the Auditor's Responsibility section and opinion paragraphs of the standard (unmodified) report on the group financial statements to indicate the involvement of component auditors. 8. The auditors could issue either a qualified or adverse opinion, depending upon the materiality of the misstatement and the pervasiveness of its impact on the financial statements. The opinion paragraph of the standard (unmodified) report would be modified to reflect the auditors' opinion and an additional paragraph would be added discussing the departure from GAAP and its effects on the financial statements. 9. The auditors could issue either a qualified opinion or a disclaimer of opinion, depending upon the materiality and pervasiveness of the accounts impacted by the scope limitation. The report modifications would depend upon the type of opinion selected, as noted below: Qualified Disclaimer Introductory paragraph No modification Indicate that auditors were "engaged to audit" (and not that they "audited") the financial statements Auditor's Responsibility section No modification Modify the first paragraph to note that auditor was not able to obtain sufficient appropriate evidence Delete paragraphs describing an audit and indicating that the audit provides a basis for the opinion Opinion paragraph Reference scope limitation and express qualified opinion Reference scope limitation and disclaim opinion Additional paragraph Describe scope limitation and its effects Describe scope limitation and its effects

Which of the following would not be considered confidential information obtained in the course of an engagement for which the client's consent would be needed for disclosure? Multiple Choice a. Information about material contingent liabilities relevant for audited financial statements. b. Management's strategic plan for next year's labor negotiations. c. Information about whether a consulting client has paid the CPA's fees on time. d. The actuarial assumptions used by a tax client in calculating pension expense.

a. An audit team member cannot even tell a credit agency about the client's payment record.

Which of the following agencies issues independence rules for the auditors of public companies? Multiple Choice a. Public Company Accounting Oversight Board (PCAOB). b. Government Accountability Office (GAO). c. Financial Accounting Standards Board (FASB). d. AICPA Accounting and Review Services Committee (ARSC).

a. FASB makes accounting principles (not independence rules).

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about Multiple Choice a. Valuation and allocation. b. Existence. c. Completeness. d. Rights and obligations.

a. Assertions about valuation or allocation concern whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts. An examination of inventory turnover pertains to the audit objective of identifying slow-moving, excess, defective, and obsolete items included in inventories. This audit objective relates to the valuation or allocation assertion.

A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system? Multiple Choice a. Accounts payable are not materially understated. b. Acquisition of materials is not made from one vendor or one group of vendors. c. Commitments for all purchases are made only after established competitive bidding procedures are followed. d. Authority to incur liabilities is restricted to one designated person.

a. Auditors are normally not concerned with whom the client's vendors are.

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Responsibility Clerk 1 Reviews vendor invoices for proper signature approval. Clerk 2 Enters vendor invoices into the accounting system and verifies payment terms. Clerk 3 Posts entered vendor invoices to the accounts payable ledger for payment and mails checks. Treasurer Reviews the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal control? Multiple Choice a. Clerk 3 mails the checks and remittances after they have been signed. b. Clerk 1 opens all of the incoming mail. c. Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. d. The treasurer uses a stamp for signing checks.

a. Clerk 1 reviews vendor invoices, therefore clerk 1 has access to the vender invoices. Opening the mail would not provide any additional access or violate the separation of duties that already exist.

When reporting under GAAS, certain statements are required in all auditors' reports ("explicit") and others are required only under certain conditions ("implicit"). Which combination that follows correctly describes the auditors' responsibilities for reporting? (a) (b) (c) (d) 1. GAAP Explicit Explicit Implicit Implicit 2. Consistency Implicit Explicit Explicit Implicit 3. Going concern Implicit Implicit Explicit Explicit 4. Opinion Explicit Explicit Implicit Implicit Multiple Choice Option A Option B Option C Option D

a. Consistency is implicitly (and not explicitly) reported upon.

Which of the following would probably not be considered an "act discreditable to the profession"? Multiple Choice a. Numerous moving traffic violations. b. Failing to file the CPA's own tax return. c. Refusing to hire Asian Americans in an accounting practice. d. Filing a fraudulent tax return for a client in a severe financial difficulty.

a. Employment discrimination is discreditable.

Auditors are interested in having independence in appearance because Multiple Choice a. They want the public at large to have confidence in the profession. b. They need to comply with the fundamental principles of GAAS. c. They want to impress the public with their independence in fact. d. Audits should be planned and properly supervised.

a. Fundamental principles do not mention independence in appearance.

During an audit of cash, the auditor is most concerned with the management assertion of Multiple Choice a. Existence. b. Occurrence. c. Rights and obligations. d. Valuation or allocation.

a. It is possible that a firm could borrow money to include in a cash count and, therefore, not have the rights to the cash. However, such a scheme is of less concern then if the company claimed cash that did not exist.

Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? Multiple Choice a. Qualified opinion or adverse opinion. b. Unmodified opinion or disclaimer of opinion. c. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion. d. Unmodified opinion or qualified opinion.

a. Neither unmodified opinions or disclaimers of opinion are appropriate for material departures from GAAP.

Which of the following is true? Multiple Choice a. The public accounting firm must discuss with the audit client's board or its audit committee the independence implications of the client's having hired the audit engagement team manager as its financial vice president. b. Audit team partners who leave the public accounting firm for employment with audit clients can retain variable annuity retirement accounts established in the person's former firm retirement plan. c. Members of an audit engagement team cannot speak with audit client officers about matters outside the scope of the audit while the audit engagement is in progress. d. Audit team members who leave the public accounting firm for employment with audit clients can provide audit efficiencies (next year) because they are very familiar with the firm's audit plans.

a. The public accounting firm must discuss with the audit client's board or its audit committee the independence implications of the client's hiring the audit engagement team manager as its financial vice president.

Which of the following is not included in the standard (unmodified) report on the financial statements? Multiple Choice a. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity. b. An opinion that the financial statements present financial position in accordance with GAAP. c. A general description of an audit. Incorrect d. An identification of the financial statements that were audited.

a. The standard (unmodified) report provides a general description of an audit.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of Multiple Choice a. Completeness. b. Valuation and allocation. c. Existence. d. Rights and obligations.

a. Tracing the details of test counts to the final inventory schedule assures the auditor that items in the observed physical inventory are included in the inventory records. The auditor should compare the inventory tag sequence numbers in the final inventory schedule to those in the records of his or her test counts made during the client's physical inventory.

Which of the following is not required by generally accepted auditing standards? Multiple Choice a. Management letter. b. Engagement letter. c. Written representations. d. Attorney letter.

a. Written representations are required under generally accepted auditing standards.

A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to Multiple Choice a. Require reconciliations of all accounts to be reviewed by a supervisor. b. Establish employee assistance programs. c. Require a fidelity bond on all employees. d. Ensure that all accounts with high inherent risk of fraud are audited.

b Problems due to debt, addictions, or family problems motivate employees to commit frauds. Establishing an employee assistance program addresses these issues and ultimately may reduce the motivation to commit fraud for some employees.

Which of these arrangements of duties could most likely lead to an embezzlement or theft? Multiple Choice a. The accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers' accounts receivable subsidiary accounts. b. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records. c. The cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash and checks to the bank for deposit (no other bookkeeping duties). d. The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks.

b The inventory warehouse manager could steal inventory and then manipulate the records to cover up the theft. This arrangement would violate proper segregation of duties because the manager has custody of assets and access to the records. The manager can steal and then conceal!

Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud? Multiple Choice a. Understating interest expense and understating accrued interest payable. b. Overstating sales revenue and overstating bad debt expense. c. Omitting the disclosure information about related-party sales to the president's relatives at below-market prices. d. Overstating sales revenue and overstating customer accounts receivable balances.

b Omitting the disclosure information about related-party sales to the president's relatives at below-market prices is a way to misstate financial statements for management fraud.

Which of the following statements is not true with respect to written representations? Multiple Choice a. They should address management's responsibility for designing internal control to prevent and detect fraud. b. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. c. They are dated the same date as the auditor's reports. d. Auditors use them to corroborate information received during the audit from the client and its employees.

b. The failure of management to furnish representations would result in either a qualified opinion (not an adverse opinion) or a disclaimer of opinion.

An auditor's independence would not be considered impaired if she or he had Multiple Choice a. Served as the company's treasurer for six months during the year covered by the audit but resigned before the company became a client. b. Owned common stock of the audit client but sold it before the company became a client. c. Performed the bookkeeping and financial statement preparation for the company, which had no accounting personnel and for which the president had no understanding of accounting principles. d. Sold short the common stock of an audit client while working on the audit engagement.

b. A short sale creates the commitment to acquire the client's stock and impairs independence.

Which of the following accounts does not appear in the acquisition and expenditure cycle? Multiple Choice a. Purchases returns. b. Sales returns. c. Prepaid insurance. d. Cash.

b. Although similar to purchases because they require a receiving report, sales returns are considered part of the revenue and collection cycle because they affect accounts receivable.

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? Multiple Choice a. Storm damage of $1 million to the entity's buildings on March 1. b. Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements. c. Settlement of a damage lawsuit for a customer's injury sustained February 15 for $10,000. Incorrect d. Sale of an issue of new stock for $500,000 on January 30.

b. An injury related to the lawsuit was sustained after December 31.

Auditors have a responsibility related to management's disclosure of new information related to subsequent events until Multiple Choice a. The date of the financial statements. b. The audit report release date. c. The date of the auditor's report. d. The following year's date of the financial statements.

b. Because auditors have not yet released their reports, the responsibility for information related to subsequent events exists until the audit report release date. This response would be correct if the subsequent events were discovered following the audit report release date.

A public accounting firm's independence is not impaired when members of the audit engagement team does which of the following for a public company audit client? Multiple Choice a. Prepares special purchase orders for active plutonium in secure national defense installations. b. Completes operational internal audit assignments under the directions of the client's director of internal auditing. c. Prepares outsourced internal audit work on the client's financial accounting control monitoring. d. Prepares actuarial assumptions used by the client's actuaries for life insurance actuarial liability determination. e. All of the above would impair the public accounting firm's independence.

b. Independence is not impaired for nonfinancial statement-related internal audit services when the client has its own director of internal auditing in charge.

In what way can audit procedures be modified to address assessed fraud risks? Multiple Choice a. Obtain more reliable information. b. All of the choices are valid modifications. c. Perform procedures close to year-end. d. Apply computer-assisted techniques to all items.

b. Performing procedures closer to year end would be an appropriate modification to address assessed fraud risks. However, the other two choices are also correct responses. As a result, the answer choice 'All of the choices are valid modifications' is the correct response.

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? Multiple Choice a. Trace test counts noted during the entity's physical count to the entity's summarization of quantities. b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. c. Inspect the open purchase order file for significant commitments that should be considered for disclosure. d. Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.

b. Physical presence does not necessarily imply ownership. The goods may be pledged or on consignment.

Under Sarbanes-Oxley and PCAOB rules, ensuring that the auditor is independent in appearance is the responsibility of Multiple Choice a. The public accounting firm. b. The audit committee. c. The PCAOB. d. Senior management.

b. The PCAOB sets standards for the auditing profession and serves at the regulator for audit firms. The PCAOB is not responsible for the auditor's independence.

What is the primary objective of the fraud brainstorming session? Multiple Choice a. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives. b. Assess the potential for material misstatement due to fraud. c. Identify whether analytical procedures should be applied to the revenue accounts. d. Determine audit risk and materiality.

b. The fraud brainstorming session is primarily focused on fraud risk assessment, which is the potential for material misstatement due to fraud in the financial statements. While information may come to light during the session that relates to the application of analytical procedures on the revenue account, it is not the primary objective of the session, according to professional standards (i.e., SAS No. 99).

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment? Multiple Choice a. The copy of the purchase order sent to the furniture company's receiving department should not have shown an expected quantity. b. Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order. c. Personnel in the furniture company's cash disbursements department should compare the check that is prepared to all of the backup documentation. d. Personnel in the furniture company's accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher.

b. The purchase order and requisition would both show 84 tables.

Audit independence in fact is most clearly lost when Multiple Choice a. A public accounting firm issues a standard unmodified report, but the reviewing partner fails to notice that the assistant's observation of inventory was woefully incomplete. b. An auditor agrees to the argument made by the client's financial vice president that deferring losses on debt refinancing is in accordance with generally accepted accounting principles. c. An audit team fails to discover the client's misleading omission of disclosure about permanent impairment of asset values. d. A public accounting firm audits competitor companies in the same industry (e.g., Coca-Cola and Pepsi).

b. This statement implies that the auditor subordinated judgment to the client's officer.

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? Multiple Choice a. Require a manager's signature for the removal of any inventory item with a value of more than $50. b. Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records. c. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record. d. Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.

b. This would account for legitimately moved inventory, but those people stealing inventory would not file proper forms.

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except Multiple Choice a. None of the choices is correct. b. Sending attorney letters to every attorney listed under the legal expense account. c. Varying the timing of the audit procedures. Incorrect d. Performing audit procedures on an unannounced basis. e. Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters.

b. Varying the timing of audit procedures would be an example of incorporating unpredictability into the selection of auditing procedures. As a result, this is not the correct response.

The audit committee's responsibility for auditor independence concerns Multiple Choice a. Reporting on auditor independence to the PCAOB. b. Ensuring that nonaudit services provided by the auditor do not impair independence. c. Ensuring that all nonaudit services are provided by auditors who do not perform the financial statement audit. d. Ensuring that partners of the public accounting firm are not stockholders in the company.

b. While Sarbanes-Oxley and the PCAOB have placed the responsibility for auditors' independence on the audit committee, the audit committee does not have to report to the PCAOB.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments? Multiple Choice a. Verifying attorney-client privilege through interviews. b. Reviewing the written representation letter obtained from management. c. Reviewing the response from the client's lawyer to a letter of audit inquiry. d. Examining legal invoices sent by the client's attorney.

c. An attorney's letter is the primary method used to corroborate information on litigation, claims, and assessments.

Which of the following internal control activities most likely addresses the completeness assertion for inventory? Multiple Choice a. Employees responsible for custody of finished goods do not perform the receiving function. b. The work-in-process account is periodically reconciled with subsidiary inventory records. c. Receiving reports are prenumbered, and the numbering sequence is checked periodically. d. There is a separation of duties between the payroll department and inventory accounting personnel.

c. This ensures that goods will not be stolen (existence assertion).

When auditing inventories, an auditor would least likely verify that Multiple Choice a. The financial statement presentation of inventories is appropriate. b. Damaged goods and obsolete items have been properly accounted for. c. All inventory owned by the client is on hand at the time of the count. d. The client has used proper inventory pricing.

c. An audit of inventory would include procedures to ensure that inventory is properly presented and all required information is disclosed.

Which of the following is considered a close relative (but not an immediate family member) as defined by the AICPA? Multiple Choice a. Uncle. b. Spouse. c. Parent. d. Spousal equivalent.

c. An uncle is neither an immediate family member nor a close relative.

Under which of the following conditions can a disclaimer of opinion never be issued? Multiple Choice a. The auditors own stock in the entity. b. The entity does not allow the auditors access to evidence about important accounts. c. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method. d. The entity's going-concern problems are highly material and pervasive.

c. Auditors cannot disclaim an opinion when departures from GAAP exist and they have conducted a GAAS audit (qualified or adverse opinions are appropriate).

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? Multiple Choice a. The entity has rights to the inventory. b. Inventory is properly presented in the financial statements. c. Inventory is complete. d. Inventory is properly valued.

c. Determining that the entity has the rights to the inventory does not provide evidence that all inventory items have been recorded in the ending balance.

CPA Kara Rambo is the auditor of Ajax Corporation. Her audit independence will not be considered impaired if she Multiple Choice a. Has a sister who is the financial vice president of Ajax. b. Owns $1,000 worth of Ajax stock. c. Owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax's ownership of 40 percent of Pericles' stock, and Pericles contributes 3 percent of its total assets and income in Ajax's financial statements. d. Has a husband who owns $1,000 worth of Ajax stock.

c. Independence is impaired by the attribution of the financial interest of the spouse.

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as: Multiple Choice a. Inherent risk. b. Detection risk. c. Risk of material misstatement. d. Control risk.

c. Inherent risk is one component of the risk of material misstatement (the correct answer).

Budd, the purchasing agent of 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 cash-on-delivery (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? Multiple Choice a. Cash receipts. b. Perpetual inventory records. c. Purchase orders. d. Purchase requisitions.

c. No inventory is ordered for Lake or entered into Lake's inventory records.

Which of the following would not overstate current-period net income? Multiple Choice a. Capitalizing an expenditure that should be expensed. b. Failing to record a liability as an expense. c. Failing to record a check paying an item in Vouchers Payable. d. All of the choices would overstate net income.

c. Overstates net income.

Which of the following is ordinarily performed last in the audit examination? Multiple Choice a. Performing a review for subsequent events. b. Securing a signed engagement letter from the client. c. Obtaining signed written representations. d. Performing tests of controls.

c. Tests of controls would be performed prior to the date of the financial statements.

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about Multiple Choice a. Rights and obligations. b. Existence. c. Valuation. d. Completeness.

c. The first inclination is to choose existence because the auditor is vouching, and vouching usually implies a test for existence. However, in this case, a vendor invoice would provide evidence about only the amount that is being billed (valuation) but would not provide information regarding the fact that the goods were received and appropriately included in the inventory status report. Vouching for existence and tracing for completeness are good guidelines, but should not replace the students thought process on what evidence is being gathered.

To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis Multiple Choice a. For the company as a whole. b. By division. c. By product. d. All of the choices are correct.

c. The most meaningful analytical procedures are performed at the most disaggregated level, in this case, the product level.

Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by Multiple Choice a. Comparison of the company name to the approved vendor list by the check signer. b. Recognition of the excess maintenance costs by Curtis's supervisor. c. Refusal by the purchasing department to approve the vendor. d. All of the choices are correct.

c. This is possible, but the maintenance costs may not have been unusual (i.e., the costs before the fraud were below budget).

An auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are Multiple Choice a. Owned by the client. b. Physically present at the time of the preparation of the final inventory schedule. c. Included in the final inventory schedule. d. Not obsolete.

c. This step would not provide evidence of whether the items are owned.

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time? Multiple Choice a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. b. Disbursement vouchers should be approved by at least two responsible management officials. c. The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents. d. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

c. This would not necessarily prevent a duplicate payment.

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items Multiple Choice a. Included on the listing were properly counted. b. Included in the listing were properly valued. c. Represented by tags were included on the listing. d. Represented by tags were reduced to the lower of cost or market.

c. To collect evidence of that items on the inventory sheet were counted the auditor would determine if the items of the listing were counted by vouching to the inventory tags. This is the opposite of determine whether the inventory items "represented by tags were included on the listing" and provides evidence of existence (items on the list exist), not completeness.

Which of the following best describes the role of analytical procedures near the end of the audit engagement? Multiple Choice a. To identify possible deficiencies in the client's internal control over financial reporting. b. To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures. c. To gather evidence to support one or more assertion(s) related to the account balance or class of transactions. d. To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.

d. Gathering evidence to support assertions is the purpose of performing analytical procedures during substantive testing.

The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives? Multiple Choice a. Standard (unmodified) report or a disclaimer of opinion. b. Standard (unmodified) report or adverse opinion. c. Qualified opinion or adverse opinion. d. Unmodified opinion with a reference to going-concern or disclaimer of opinion.

d. An unmodified opinion with reference to going-concern matters or a disclaimer of opinion would be appropriate reporting options; therefore, neither a standard (unmodified) report or adverse opinion would be appropriate.

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? Multiple Choice a. Inspection. b. Observation. c. Calculation. d. Confirmation.

d. Inspection is an evidence term usually reserved for the examination of documents and would not provide better evidence of existence than a confirmation.

When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that Multiple Choice a. Names the component auditors, describes their work, and presents only the group auditors' report. b. Does not consider or evaluate the component auditors' work but expresses an unmodified opinion in a standard report. c. Places primary responsibility for the reporting on the component auditors. d. Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion.

d. Modification of the report to indicate the work of component auditors with an unmodified opinion is a viable reporting option.

For which of the following accounts would the matching concept be the most appropriate? Multiple Choice a. Depreciation expense. b. Sales. c. Research and development. d. Cost of goods sold.

d. Sales are recorded when earned.

From the auditors' point of view, inventory counts are more acceptable prior to the year-end when Multiple Choice a. Inventory is slow moving. b. Internal control is weak. c. Significant amounts of inventory are held on a consignment basis. d. Accurate perpetual inventory records are maintained.

d. Slow-moving inventory is easier to roll-forward.

A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form? Multiple Choice a. December 31, 2017, except as to Note X, which is dated February 5, 2018. b. February 5, 2018, except for the date of the auditor's report, for which the date is January 30, 2018. c. December 31, 2017, except as to Note X, which is dated January 30, 2018. d. January 30, 2018, except as to Note X, which is dated February 5, 2018.

d. The report date is the audit completion date, not the date of the subsequent event.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? Multiple Choice a. Perpetual inventory records are maintained only for items of significant value. Incorrect b. The cycle basis is used for physical counts. c. Supplies of relatively little value are expensed when purchased. d. The warehouse manager is responsible for maintenance of perpetual inventory records.

d. This is a common practice that enhances efficiency.

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference? Multiple Choice a. No journal entry had been made on the retailer's books for several items returned to its suppliers. b. Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets. c. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records. d. Credit memos for several items returned by customers had not been recorded.

d. This would make the perpetual records higher than the physical count

Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true? Multiple Choice a. II and III are fraud risk factors. b. I and II are fraud risk factors. Incorrect c. I is a fraud risk factor. d. I, II, and III are fraud risk factors. e. None of the choices is a fraud risk factor.

d. I, II, and III are all fraud risk factors.

7 Steps in Identifying the Risk of Fraud

• Audit team discussions/brainstorming • Identification of information needed to assess fraud risk factors • Assessment of risk factors • Response to fraud risk assessment (by tailoring audit procedures) • Evaluation of audit evidence obtained for indication of fraud • Communication of fraud matters Documentation of fraud matters

6 Principles of Professional Conduct

• Responsibilities • Public interest • Integrity • Objectivity and independence • Due care • Scope and nature of services AICPA identifies six threats to independence; SEC presents four guiding principles

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