Audit Quiz #3
A
A CPA is conducting the first audit of a nonissue's financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's audit documentation. This procedure is: a) Acceptable if the client and the predecessor auditor agree to it b) Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work as part of the basis for the CPA's own opinion c) Required if the CPA is to express an unmodified opinion d) Unacceptable because the CPA should bring an independent viewpoint to a new engagement
B
A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information? a) AICPA Codification of Statements on Auditing Standards b) AICPA Accounting Trends and Techniques c) PCAOB Inspection Reports d) SEC Statement 10-K Guide
A
A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation? a) The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements b) The financial statements are not in accordance with the applicable financial reporting framework c) The financial statements contain uncorrected misstatements that should result in a qualified opinion d) The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements
A
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about: a) Suspense debits that management believes will benefit future operations b) Suspense debits that the auditor verifies will have realizable value to the client c) Suspense credits that management believes should be classified as "current liability" d) Suspense credits that the auditor determines to be customer deposits
D
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The audit documentation would probably be: a) Silent on the matter because it is an internal matter of the auditing firm b) Expanded to note that the assistant auditor is completely dissociated from responsibility for the auditor's opinion c) Expanded to record the additional work required because all disagreements of this type will require expanded substantive testing d) Expanded to detail the assistant auditor's position and how the difference of opinion was resolved
D
A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may: a) Consider increasing the use of substantive tests of transactions in place of analytical procedures b) Substantiate the accuracy of data through self-checking digits and hash totals c) Reduce the level of required tests of controls to a relatively small amount d) Access information stored on computer files while having a limited understanding of the client's hardware and software features
C
A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? a) Substantive procedures and analytical procedures b) Substantive analytical procedures and tests of controls c) Tests of controls and tests of details d) Tests of details and substantive procedures
C
AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations? a) The auditor has obtained greater assurance about the balance of sales at Plant A, where (s)he has made limited tests of details because of effective internal control, than at Plant B, where (s)he has made extensive tests of details because of ineffective internal control b) The auditor's computation of interest payable on outstanding bonds provides greater assurance than reliance on the client's calculation c) The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings d) The schedule of insurance coverage obtained from the company's insurance agent provides greater assurance than one prepared by the internal audit staff
A
After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on: a) Whether the financial statements are consistent with the auditor's understanding of the entity b) Fraud involving the client's management and its employees c) The materiality of the adjusting entries proposed by the audit staff d) The communication of internal control weaknesses to those charged with governance
D
Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include: a) Schedules that support the current year's adjusting entries b) Prior years' accounts receivable confirmations that were classified as exceptions c) Documentation indicating that the audit work was adequately planned and supervised d) Analyses of capital stock and other owners' equity accounts
A
An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following? a) One of the cashiers have been covering a personal embezzlement by lapping b) One of the sales clerks has not been preparing charge slips for credit sales to family and friends c) One of the computer control clerks has been removing all sales invoices applicable to his account from the data file d) The credit manager has misappropriated remittances from customers whose accounts have been written off
D
An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered> a) Textbooks and periodicals related to the industry b) AICPA Audit and Accounting Guides c) Financial statements of other entities in the industry d) Results of performing substantive procedures
C
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes: a) The auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors b) Management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern c) The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention d) Management's responsibility for providing the auditor with an assessment of the risks of material misstatement due to fraud
D
An auditor most likely obtains an understanding of a new client to: a) Make constructive suggestions concerning improvements to the client's internal control b) Develop an attitude of professional skepticism concerning management's financial statement assertions c) Evaluate whether the aggregation of known misstatements cause the financial statements taken as a whole to be materially misstated d) Identify areas of audit emphasis
C
An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for: a) Cash flow increases and decreases b) Risk assessments and assertions c) Reclassifications and adjustments d) Reconciliations and tick marks
A
An auditor using audit software probably would be at least interested in which of the following fields in a computerized perpetual inventory file? a) Economic order quantity b) Warehouse location c) Date of last purchase d) Quantity sold
B
An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: a) Confirmation and observation b) Observation and inquiry c) Analytical procedures and confirmation d) Inquiry and analytical procedures
D
An auditor would least likely use computer software to: a) Construct parallel simulations b) Access data files c) Prepare spreadsheets d) Assess risk
A
An auditor's audit documentation will least likely show how the: a) Client's schedules were prepared b) Engagement was planned c) Understanding of the client's internal control was obtained and the risks of material misstatement were assessed d) Significant issues were resolved
A
An auditor's engagement letter most likely will include: a) Management's acknowledgement of its responsibility for maintaining effective internal control b) The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting c) A reminder that management is responsible for illegal acts committed by employees d) A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments
C
Analytical procedures used as risk assessment procedures should: a) Focus on forming an overall conclusion b) Provide a basis for the opinion c) Address the risk of material misstatement of revenue due to fraudulent financial reporting d) Assist in evaluating controls
B
As the acceptable level of detection risk decreases, an auditor may change the: a) Timing of substantive tests by performing them at an interim date rather than at year-end b) Nature of substantive procedures from a less effective to a more effective procedure c) Timing of tests of controls by performing them at several dates rather than at one time d) Assessed level of inherent risk to a higher amount
B
Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed? a) Physical inspection of a sample of inventory b) Search for unrecorded cash receipts c) Obtaining a client representation letter d) Confirmation of accounts receivable
C
Audit documentation that records the procedures used by the auditor to gather evidence should be: a) Considered the primary support for the financial statements being audited b) Viewed as the connecting link between the books of account and the financial statements c) Designed to meet the circumstances of the particular engagement d) Destroyed when the audited entity ceases to be a client
C
Audit planning for an initial audit most likely includes: a) Determining the opinion to be expressed b) Obtaining an engagement letter prepared by the auditee c) Performing procedures involving opening balances d) Selecting a sample of invoices for comparison with shipping reports
A
Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true? a) Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft b) The risk that material misstatement will not be timely prevented or detected by internal control can be reduced to zero by effective controls c) Detection risk is a function of the efficiency of an auditing procedure d) The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor
A
Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to: a) Permit cross-referencing and simplify supervisory review b) Support the audit report c) Eliminate the need for follow-up reviews d) Determine that working papers adequately support findings, conclusions, and reports
B
Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use: a) The positive form to confirm all balances regardless of size b) The negative form for small balances c) A combination of the two forms, with the positive form used for trade balances and the negative form for other balances d) The positive form when the assessed risk of material misstatement is acceptably low and the negative form when it is unacceptably high
C
Auditors often make use of computer programs that perform routine processing functions, such as sorting and merging. These programs are made available by computer companies and others and are specifically referred to as: a) Compiler programs b) Supervisory programs c) Utility programs d) User programs
D
Based on an understanding of internal control completed at an interim date, the auditor assessed the risks of material misstatement at the relevant assertion level and performed interim substantive procedures. The records will most likely be tested again at year end if: a) Tests of controls were not performed by the internal auditor during the remaining period b) Internal control provides a basis for limiting the extent of substantive testing c) The auditor used non statistical sampling during the interim period testing of controls d) The remaining period is long
A
Before accepting an engagement to audit a new client, an auditor is required to: a) Make inquiries of the predecessor auditor after obtaining the consent of the prospective client b) Obtain the prospective client's signature to the engagement letter c) Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan d) Discuss the management representation letter with the prospective client's audit committee
C
Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should: a) Obtain audit evidence about the operating effectiveness of controls b) Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole c) Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable d) Obtain written representations from management that all financial records and related data will be made available
B
Computer technology makes it possible to perform paperless audits. For example, in an audit of computer-processed customer accounts receivable balances, an auditor might use a personal computer to access the accounts receivable files directly and copy selected customer records into the computer for audit analysis. Which of the following is an advantage to this type of paperless audit of accounts receivable balances? a) It reduces the amount of substantive testing required b) It allows immediate processing of audit data on a spreadsheet working paper c) It increases the amount of technical skill required by the auditor d) It allows direct confirmation of customer account balances
C
Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is than an auditor will request confirmation of accounts receivable. Confirmation is necessary when: a) Based on prior years' audit experience, response rates will be inadequate b) Based on experience with similar engagements, responses are expected to be unreliable c) The combined assessed level of inherent and control risk is high d) The accounts receivable are immaterial
D
During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely: a) Determine whether any changes in the account occurred between January 1 and January 9, Year 2 b) Determine whether a customary trade discount was taken by the customer c) Reconfirm the zero balance as of January 10, Year 2 d) Verify that the amount was received
A
Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the: a) Difficulty and cost involved in testing a particular item b) Assessment of the risks of material misstatement at a low level c) Inherent risk involved d) Relationship between the cost of obtaining evidence and its usefulness
A
Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in: a) A more efficient manner b) A more thorough manner c) Accordance with quality control standards d) Accordance with generally accepted auditing standards
B
Financial statement audit plans usually should be developed: a) Prior to performing risk assessment procedures b) After the auditor has established the overall audit strategy c) After obtaining an understanding of the information and communication and control activities components of internal control d) When the engagement letter is prepared
A
If an auditor conducts an audit of financial statements in accordance with applicable auditing standards, which of the following will the auditor most likely detect? a) Misposting of recorded transactions b) Unrecorded transactions c) Forgery d) Collusive fraud
A
In assessing whether to accept a client for an audit engagement, a CPA should consider the: 1) Client's Business Risk and/or 2) CPA's Business Risk: a) Yes and Yes b) Yes and No c) No and Yes d) No and No
D
In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter? a) An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct b) A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent c) An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the client d) A client-prepared statement of account showing the details of the customer's account balance
D
In developing an audit plan, an auditor should: a) Determine whether the allowance for sampling risk exceeds the achieved upper precision limit b) Evaluate findings from substantive procedures performed at interim dates c) Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements d) Perform risk assessment procedures
D
In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the: a) Timing of the audit b) Costs and benefits of gathering evidence c) Financial statements as a whole d) Financial statement assertions
B
In gathering evidence in the performance of substantive procedures, the auditor most likely: a) Uses the test month approach b) Relies on persuasive rather than conclusive evidence in the majority of cases c) Considers the client's documentary evidence less reliable than evidence gathered orally by inquiry of management d) Expresses an adverse opinion if (s)he has substantial doubt as to any assertion of material significance
B
In performing tests of controls, the auditor will normally find that: a) The level of inherent risk is directly proportional to the rate of error b) The rate of deviations in the sample exceeds the rate of error in the accounting records c) The rate of error in the sample exceeds the rate of deviations d) All unexamined items result in errors in the accounting records
D
In planning the audit engagement, the auditor should consider each of the following except: a) The auditor's independence b) Risks of material misstatement due to fraud c) Anticipated levels of audit risk and materiality d) The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed
A
In the confirmation of accounts receivable, the auditor would most likely: a) Request confirmation of a sample of the inactive accounts b) Seek to obtain positive confirmations for at least 50% of the total dollar amounts of the receivables c) Require confirmation of all receivables from agencies of the federal government d) Require that confirmation requests be sent within 1 month of the fiscal year end
C
In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to: a) Point out the responsible entity officials the errors made by various entity personnel b) Summarize the corrections that must be made before the entity can prepare and submit its federal tax return c) Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered d) Summarize the misstatements made by the entity so that corrections can be made after the audited financial statements are released
A
Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of: a) Materiality b) Comparative analysis c) Reasonable assurance d) Audit risk
B
Most of the auditor's work in forming an opinion on financial statements consists of: a) Understanding internal control b) Obtaining and evaluating audit evidence c) Examining cash transactions d) Comparing recorded accountability with assets
C
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: a) A majority of recipients usually lack the willingness to respond objectively b) Some recipients may report incorrect balances that require extensive follow-up c) The auditor cannot infer that all nonrespondents have verified their account information d) Negative confirmations do not produce evidence that is statistically quantifiable
C
Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique? a) It is the most effective audit methodology to use in filling out internal control questionnaires b) It is the most persuasive methodology to learn how transactions are really processed during the period under audit c) It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place d) It is the most persuasive audit technique for determining if fraud has occurred
A
One of the primary roles of an engagement work program is to: a) Serve as a tool for planning and conducting engagement work b) Document an internal auditor's evaluations of controls c) Provide for a standardized approach to the engagement d) Assess the risks associated with the activity under review
A
Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to 1) Contingencies and/or 2) Balance Sheet Accounts: a) Yes and Yes b) Yes and No c) No and Yes d) No and No
D
Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should: a) Reduce audit risk by lowering initial levels of materiality b) Design special substantive procedures to compensate for the lack of industry expertise c) Engage financial experts familiar with the nature of the industry d) Perform risk assessment procedures
C
Regardless of the assessed risks of material misstatement, an auditor should perform some: a) Tests of controls to determine their effectiveness b) Analytical procedures to verify the design of controls c) Substantive procedures to restrict detection risk for significant transaction classes d) Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk
B
Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer record contains the name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow is to: a) Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations b) Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit c) Request a printout of all account balances so they can be manually checked against the credit limits d) Request a printout of a sample of account balances so they can be individually checked against the credit limits
D
Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as: a) Audit risk b) Detection risk c) Sampling risk d) Inherent risk
D
Specialized audit software: a) Is written to interface with many different client systems b) May be written while its purposes and users are being defined c) Requires the auditor to have less computer expertise than generalized audit software d) May be written in a procedure-oriented language
A
Standardized working papers are often used chiefly because they allow audit documentation to be prepared more: a) Efficiently b) Professionally c) Neatly d) Accurately
B
Tests of controls are concerned primarily with each of the following questions except: a) How were the controls applied? b) Were the controls approved by the board of directors? c) Were the necessary controls consistently performed? d) By whom were the controls applied?
C
Tests of controls in a financial statement audit are least likely to be omitted with regard to: a) Accounts believed to be subject to ineffective controls b) Account representing few transactions c) Accounts representing many transactions d) Subsequent events
B
The PCAOB's AS 1215, Audit Documentation, requires that a complete and final set of audit documentation be assembled for retention as of a date not more than 45 days after the audit report release date. After that date, audit documentation may: a) Be deleted or discarded, but no information may be added b) Be added, but no audit documentation may be deleted or discarded c) Not be deleted, discarded, or added d) Be deleted, discarded, or added as necessary
A
The acceptable level of detection risk is inversely related to the: a) Assurance provided by substantive procedures b) Risk of misapplying auditing procedures c) Preliminary judgment about materiality levels d) Risk of failing to discover material misstatements
D
The appropriateness of evidence available to an auditor is least likely to be affected by the: a) Relevance of such evidence to the financial statement assertion being investigated b) Relationship of the preparer of such evidence to the entity being audited c) Timeliness of such audit evidence d) Sampling method employed by the auditor to obtain a sample of such evidence
B
The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that: a) The auditor will reject a correct account balance as incorrect b) Material misstatements that occur will not be detected by the audit c) The auditor will apply an inappropriate audit procedure d) The auditor will apply an inappropriate measure of audit materiality
B
The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the: a) Auditor's system of quality control has been maintained at a high level b) Results are consistent with the conclusions to be presented in the auditor's report c) Audit procedures performed are approved in the professional standards d) Audit has been performed by persons having appropriate competence and capabilities
D
The audit working paper that reflects the major components of an amount reported in the financial statements is the: a) Interbank transfer schedule b) Carryforward schedule c) Supporting schedule d) Lead schedule
D
The auditor should establish an overall audit strategy. Which one of the following statements is most consistent with this requirement? a) The auditor should have appropriate proficiency to perform the audit b) The auditor must be independent of the client c) The auditor should communicate certain issues to those charged with governance d) The auditor should plan the audit so that it will be performed effectively
A
The auditor should perform tests of controls when the auditor's assessment of the risks of material misstatement includes an expectation of the operating effectiveness of internal control or when: a) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level b) Tests of details and substantive analytical procedures provide sufficient appropriate audit evidence to support the assertion being evaluated c) The auditor is not able to obtain an understanding of internal controls d) The owner-manager performs virtually all the functions of internal control
B
The auditor should perform tests of controls when the auditor's risk assessment includes an expectation: a) Of a low level of inherent risk b) Of the operating effectiveness of internal control c) That the controls are not suitably designed d) That the controls are not being applied
B
The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results fo an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to: a) Refer the disagreement to the AICPA's Peer Review Board b) Document the details of the disagreement with the conclusion reached c) Discuss the disagreement with the entity's management or its audit committee d) Report the disagreement to an impartial peer review monitoring team
B
The components of internal control include: a) Monitoring of controls that sets the tone of the organization b) A process of managing risks relevant to preparing financial statements c) A control environment consisting of policies and procedures to help ensure that management directives are carried out d) Control activities that identify, capture, and exchange information
B
The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true? a) Audit risk is the risk that the auditor may unknowingly express a modified opinion when, in fact, the financial statements are fairly stated b) The phrase in the auditor's report "present fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America" indicates the auditor's belief that the financial statements as a whole are not materially misstated c) If misstatements are not important individually but are important in the aggregate, the concept of materiality does not apply d) Material fraud but not material errors cause financial statements to be materially misstated
D
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the: a) Evidence to be gathered to provide a sufficient basis for the auditor's opinion b) Procedures to be undertaken to discover litigation, claims, and assessments c) Pending legal matters to be included in the inquiry of the client's attorney d) Timing of inventory observation procedures to be performed
B
The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants: a) The immaterial fraud is not to be reported to the client's audit committee b) How the results of various auditing procedures performed by the assistants should be evaluated c) What benefits may be attained by the assistants' adherence to established time budgets d) Why certain documents are being transferred from the current file to the permanent file
D
The most reliable forms of documentary evidence are those documents that are: a) Prenumbered b) Internally generated c) Easily duplicated d) Authorized by a responsible official
A
The negative request form of accounts receivable confirmation may be used when the: 1) Risk of Material Misstatement is: 2) Number of Small Balances is: 3) Consideration by the Recipient is: a) Low, Many, Likely b) Low, Few, Unlikely c) High, Few, Likely d) High, Many, Likely
A
The objective of performing analytical procedures in planning an audit is to identify the existence of: a) Unusual transactions and events b) Noncompliance with laws and regulations that went undetected because of internal control deficiency c) Related party transactions d) Recorded transactions that were not properly authorized
D
The objective of tests of details of transactions performed as tests of controls is to: a) Monitor the design and use of entity documents such as renumbered shipping forms b) Determine whether internal controls have been implemented c) Detect material misstatements in the account balances of the financial statements d) Evaluate whether internal controls operated effectively
A
The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of: a) Transactions b) Authorizations c) Costs d) Cutoffs
C
The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the: a) Management representation letter b) Scope paragraph of the auditor's report c) Engagement letter d) Introductory paragraph of the auditor's report
A
The two requirements crucial to achieving audit efficiency and effectiveness with a personal computer are selecting: a) The appropriate audit tasks for personal computer applications and he appropriate software to perform the selected audit tasks b) The appropriate software to perform the selected audit tasks and audit procedures that are generally applicable to several clients in a specific industry c) Client data that can be accessed by the auditor's personal computer and audit procedures that are generally applicable to several clients in a specific industry d) Audit procedures that are generally applicable to several client in a specific industry and the appropriate audit tasks for personal computer applications
B
To obtain an understanding of a continuing client in planning an audit, an auditor most likely would: a) Perform tests of details of transactions and balances b) Read internal audit reports c) Read specialized industry journals d) Reevaluate the risks of material misstatement
B
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would: a) Examine the shipping documents that provide evidence for the existence assertion b) Verify the sources and contents of the faxes in telephone calls to the senders c) Consider the faxes to be nonresponses and evaluate them as unadjusted differences d) Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted
C
To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including: a) Inquiry and analytical procedures b) Reperformance and observation c) Comparison and confirmation d) Inspection and verification
C
Two assertions for which confirmation of accounts receivable balances provides primary evidence are: a) Completeness and valuation b) Valuation and rights and obligations c) Rights and obligations and existence d) Existence and completeness
C
Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should: a) State that (s)he found material misstatements that the client would not revise b) Suggest that the auditor ask the client c) Suggest that the auditor obtain the client's permission to discuss the reasons d) Indicate that a misunderstanding occurred
B
Using personal computers in auditing may affect the methods used to review the work of staff assistants because: a) Supervisory personnel may not have an understanding of the capabilities and limitations of personal computers b) Audit documentation may not contain readily observable details of calculations c) The audit standards for supervision may differ d) Documenting the supervisory review may require assistance of consulting services personnel
C
When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps 1 through 3 below? 1) Tests of Controls, 2) Preparation of a flowchart documenting the understanding of the client's internal control, 3) Substantive procedures a) 1, 2, 3 b) 1, 3, 2 c) 2, 1, 3 d) 2, 3, 1
A
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? a) Test the operating effectiveness of such controls in the current audit b) Document that reliance and proceed with the original audit strategy c) Inquire of management as to the effectiveness of the controls d) Report the reliance in the report on internal controls
B
When expressing an unmodified opinion, the auditor who evaluates the audit findings should determine whether: a) The amount of identified misstatement is documented in the management representation letter b) Uncorrected misstatements are material c) The amount of identified misstatement is acknowledged and recorded by the client d) Estimates of total misstatement include the amounts of adjusting entries already recorded by the client
B
When planning an audit, an auditor should: a) Consider whether substantive procedures may be reduced based on the results of the internal control questionnaire b) Determine materiality for the financial statements as a whole c) Conclude whether changes in compliance with prescribed controls require a change in the reliance on controls d) Prepare a preliminary draft of the management representation letter
A
Which of the following audit risk components may be assessed in non quantitative terms? 1) Control Risk, 2) Detection Risk, and/or 3) Inherent Risk a) Yes, Yes, Yes b) No, Yes, Yes c) Yes, Yes, No d) Yes, No, Yes
D
Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year? a) Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of the acceptance of the engagement b) An expectation of the effectiveness of internal control c) Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern d) Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory
A
Which of the following concepts distinguishes the retention of computerized audit documentation from the traditional hard copy form? a) Analyses, conclusions, and recommendations are filed on electronic media are are therefore subject to computer system controls and security procedures b) Evidential support for all findings is copied and provided to local management during the closing conference and to each person receiving the final report c) Computerized data files can be used in computer audit procedures d) Audit programs can be standardized to eliminate the need for a preliminary survey at each location
B
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? a) Staff will need to be rescheduled to cover this new client b) There will be a client-imposed scope limitation c) The firm will have to hire a specialist in one audit area d) The client's financial reporting system has been in place for 10 years
C
Which of the following documentation is not required for an audit in accordance with auditing standards? a) A written audit plan setting forth the procedures necessary to accomplish the audit's objectives b) An indication that the accounting records agree or reconcile with the financial statements c) A client letter that details the auditor's planned field work d) The basis for the auditor's conclusions about the assessed risks of material misstatement
A
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? a) Auditor judgment b) Materiality c) Audit risk d) Reasonable assurance
C
Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? 1) Financial statement accounts likely to contain a misstatement and/or 2) Conditions that require extension of audit tests a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 or 2
C
Which of the following factors would most likely cause an auditor not to accept a new audit engagement? a) An inadequate understanding of the entity's internal controls b) The close proximity to the end of the entity's fiscal year c) Concluding that the entity's management probably lacks integrity d) An inability to perform preliminary analytical procedures before assessing control risk
D
Which of the following in a predecessor's audit documentation is the auditor least likely to be interested in reviewing? a) Analysis of concurrent balance sheet accounts b) Analysis of current balance sheet accounts c) Analysis of contingencies d) Analysis of income statement accounts
A
Which of the following is a false statement about the relationship of financial statement assertions and audit procedures? a) The relationship between financial statement assertions and audit procedures should be one-to-one b) Audit procedures should be developed in light of financial statement assertions about the financial statement components c) Selection of tests of financial statement assertions should depend upon the understanding of internal control d) The auditor should resolve any substantial doubt about any of management's relevant financial statement assertions
A
Which of the following is an aspect of scheduling and controlling the audit engagement? a) Include in the audit plan a column for estimated and actual time b) Perform audit work only after the client's books of account have been closed for the period under examination c) Write a conclusion in the audit documentation indicating how the results of the audit will affect the auditor's report d) Include in the engagement letter an estimate of the minimum and maximum audit fee
C
Which of the following is an auditor least likely to perform in planning a financial statement audit? a) Coordinating the assistance of entity personnel in data preparation' b) Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity c) Selecting a sample of vendors' invoices for comparison with receiving reports d) Reading the current year's interim financial statements
C
Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? a) Make copies of those client supporting documents examined by the auditor for inclusion in the audit documentation b) Provide the client with copies of the audit plans to be used during the audit c) Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information d) Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing
C
Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation? a) Discrete phases of planning, interim, and year-end fieldwork b) Increased effort to search for evidence of management fraud c) Performance of audit tests on a continuous basis d) Increased emphasis on the completeness assertion
B
Which of the following is required documentation in an audit in accordance with auditing standards? a) A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting b) An audit plan documenting the procedures to be used to reduce audit risk c) A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel d) An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved
D
Which of the following is usually included or shown in the audit documentation? a) The procedures used by the auditor to verify the personal financial status of members of the client's management team b) Analyses that are designed to be a part of, or a substitute for, the client's accounting records c) Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements d) A summary of how significant findings were addressed
B
Which of the following presumptions is least likely to relate to the reliability of audit evidence? a) The more effective internal control is, the more assurance it provides about the accounting data and financial statements b) An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost c) Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity d) The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly
A
Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls? a) Observing an entity's employee prepare the schedule of past due accounts receivable b) Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable c) Inspecting an entity's analysis of accounts receivable for unusual balances d) Comparing an entity's uncollectible accounts expense with actual uncollectible accounts receivable
C
Which of the following procedures is not used in tests of controls over procedures? a) Examine vouchers and supporting documents for authorization b) Trace vouchers to entries in the vouchers register c) Confirm inventory held in public warehouses d) Reperform calculations on some supporting documentation
C
Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? a) Prepare a rough draft of the financial statement and of the auditor's report b) Assess control risk for the assertions embodied in the financial statements c) Tour the client's facilities d) Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management
D
Which of the following procedures would provide the most reliable audit evidence? a) Inquiries of the client's internal audit staff held in private b) Inspection of prenumbered client purchase orders filed in the vouchers payable department c) Analytical procedures performed by the auditor on the entity's trial balance d) Inspection of bank statements obtained directly from the client's financial institution
D
Which of the following represents a limitation on the use of generalized audit software (GAS)? a) It requires lengthy detailed instructions in order to accomplish specific tasks b) It has limited application without significant modification c) It requires significant programming knowledge to be used effectively d) It can only be used on hardware with compatible operating systems
B
Which of the following statements about audit evidence is true? a) To be appropriate, audit evidence should be either persuasive or relevant but need not be both b) The sufficiency and appropriateness of audit evidence is a matter of professional judgment c) The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test d) A client's accounting records can be sufficient audit evidence to support the financial statements
D
Which of the following statements about evidence is true? a) Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive b) Effective internal control contributes little to the reliability of the evidence created within the entity c) The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained d) A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion
B
Which of the following statements about materiality is most likely to be true? a) Materiality requires that relatively more time be directed to those areas that are more susceptible to fraud b) Performance materiality is less than materiality for the financial statements as a whole c) Materiality at the assertion level is larger than for the financial statements as a whole d) Materiality is measured according to specific AICPA standards
A
Which of the following statements about the auditor's response to assessed risks of material misstatement in a financial statement audit is true? a) Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls b) When the risks of material misstatement are high, an auditor should reduce the amount of substantive testing c) Reliance on internal control may be sufficient to allow the auditor to eliminate substantive testing for significant transaction classes d) When assessing the risks of material misstatement, an auditor should not consider evidence obtained in prior audits about the operation of controls
C
Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient? a) "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope" b) "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records" c) If you do not report any differences within 15 days, it will be assumed that this statement is correct" d) "The following invoices have been selected for confirmation and represent amounts that are overdue"
B
Which of the following statements is most accurate regarding sufficient and appropriate documentation? a) Accounting estimates are not considered sufficient and appropriate documentation b) Sufficient and appropriate documentation should include evidence that is has been reviewed c) If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers d) Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least 5 years
B
Which of the following statements is true concerning analytical procedures used as risk assessment procedures? a) Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by management b) Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level c) Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk d) Analytical procedures are more efficient, but not more effective, than tests of details and transactions
D
Which of the following statements would least likely appear in an auditor's engagement letter? a) Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses b) Management is responsible for making all financial records and related information available to us c) Our engagement is subject to the risk that material fraud or errors, if they exist, will not be detected d) After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement
B
Which of the following tasks can be achieved using generalized audit software? a) Determining acceptable risk levels for substantive testing of account balances b) Filtering data based on accounts receivable data recording c) Detecting transactions that may be suspicious due to alteration of data input d) Assessing the likelihood of fraud based on input of fraud risk factors
B
Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? a) The audit plan b) The auditor's judgment c) Auditing standards d) The audit documentation
B
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? a) The anticipated sample size of the planned substantive procedures b) The entity's year-to-date financial results and position c) The results of the internal control questionnaire d) The contents of the representation letter
D
With respect to the auditor's planning of a year-end audit, which of the following statements is always true? a) An engagement should not be accepted after the fiscal year-end b) An inventory count must be observed at the balance sheet date c) Those charged with governance should not be told of the specific audit procedures that were performed d) It is an acceptable practice to carry out part of the audit at interim dates
A
You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence? a) Notes on discussions with mechanics in the maintenance operation b) A schedule comparing actual maintenance expenses with budgeted expenses and those of the prior period and disclosing important differences c) A narrative covering review of user reports on maintenance service d) An analysis of changes in certain maintenance department ratios
