492 midterm

Generally accepted auditing standards require that auditors always prepare and use a) A written audit plan. b) A written planning memorandum explaining the auditors' understanding of the client's business. c) The written time budgets and schedules for performing each audit. d) A written client consent to discuss audit matters with prospective auditors.

a) A written audit plan.

Which of the following communications is most likely to be written before the balance-sheet date? a) An engagement letter. b) A report to the audit committee on the results of testing of internal control over cash receipts. c) An attorney's letter regarding contingent liabilities. d) Confirmation letters to vendors confirming the amounts they owe to the client.

a) An engagement letter. Confirmation letters to vendors confirming the amounts they owe to the client are part of substantive procedures performed on balance sheet account amounts.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by a) An error in recording amortization of the excess of the investor's cost over the investment's underlying book value. b) A substantial fluctuation in the price of the investee's common stock on a national stock exchange. c) The investee's decision to reduce cash dividends declared per share of its common stock. d) An error in recording the unrealized gain from an increase in the fair value of available for sale securities in the income account for trading securities.

a) An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

It is acceptable under generally accepted auditing standards for an audit team to a) Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. b) Assess inherent risk at zero and perform a minimum of detection work. c) Decide that audit risk can be 40 percent. d) Assess control risk at zero and perform a minimum of detection work.

a) Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.

Fair values can be evaluated by comparing to prices on _______ markets.

existing As a means to test fair value, auditors compare prices to those on existing markets.

An opinion indicates that the financial statements are presented ___________.

fairly The auditor's opinion indicates that the financial statements are presented fairly.

______is another term for misappropriation of assets.

fraud Defalcation is a type of fraud also known as misappropriation of assets.

In _______, the financial statements are intentionally misleading.

fraud Fraud exists when financial statements are intentionally misrepresented.

Financial statements can be misstated due to errors, ______, or noncompliance with laws or regulations.

fraud Misstatements result from errors, fraud, or noncompliance with regulations.

The primary source of evidence about pending litigation is the attorney ______.

letter A letter, or confirmation, from an attorney is the primary source of audit evidence.

________ assessment procedures are performed when obtaining an understanding of the client.

risk Risk assessment procedures are used to gather information when obtaining an understanding of the client.

The amount appearing as an asset on a financial statement is usually the accumulation of many ________ items.

smaller The amount listed on a financial statement (i.e., inventory) is usually comprised of many smaller items (parts).

Auditors may use audit ______ to test clerical accuracy.

software Oftentimes auditors use software to test schedules for clerical accuracy.

______ may be involved in some testing of calculations.

specialists Specialists may be needed in some testing of calculations, like post-retirement calculations.

An audit report indicates that the audit evidence we have obtained is _______ to provide a basis for the opinion.

sufficient The evidence must be sufficient to provide for the basis of the opinion.

A cutoff test that relates to plant assets typically affects __________.

the balance sheet As plant assets acquired at year end are not depreciated in the first year, cutoff issues typically affect the balance sheet.

______ risk is the risk of material misstatement of an assertion without considering internal control.

Inherent Inherent risk is the risk that exists independent of internal control consideration.

Ask client personnel about accounting events.

Inquiry and written representations

Complete an internal control questionnaire.

Inquiry and written representations

Obtain written client representation letter.

Inquiry and written representations

Verify existence of fixed assets by locating them.

Inspection of tangible assets

The auditors' report is the ________ of an audit.

end product The result of an audit is the issuance of the auditors' report.

Which of the following is not a way in which auditors use the concept of overall materiality? A) As a guide for assessing control risk B) As a guide to the evaluation of evidence C) As a guide for making decisions about the audit report D) As a guide to planning the audit plan

A) As a guide for assessing control risk

Which of the following types of transactions would be routine and computerized? A) Credit sales and billings B) Income tax expense and liability C) Capital stock sales and repurchases D) Bank loan transactions

A) Credit sales and billings

Which of the following types of transactions would be routine and computerized? A) Credit sales and billings B) Capital stock sales and repurchases C) Bank loan transactions D) Income tax expense and liability

A) Credit sales and billings

Which of the following is the essential purpose of the audit function? A) Determination of whether the client's financial statement assertions are fairly state B) Examination of individual transactions to certify as to their validity C) Assurance of the consistent application of correct accounting procedures D) Detection of fraud

A) Determination of whether the client's financial statement assertions are fairly state

Which of the following best describes the primary role and responsibility of independent external auditor? A) Express an opinion on the fairness of a company's annual financial statements and footnotes. B) Produce a company's annual financial statements and notes. C) Provide business consulting advice to audit clients. D) Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.

A) Express an opinion on the fairness of a company's annual financial statements and footnotes.

Inherent risk and control risk differ from detection risk in which of the following ways? A) Inherent risk and control risk exist independently of the audit. B) Inherent risk and control risk are calculated by the client. C) Inherent risk and control risk exist as a result of the auditor's judgment about materiality. D) Inherent risk and control risk are controlled by the auditor.

A) Inherent risk and control risk exist independently of the audit.

Compare financial information to industry statistics.

Analytical procedures

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? A) Questioning B) Judgmental C) Presumptive D) Criticizing

A) Questioning

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? A) Questioning B) Presumptive C) Judgmental D) Criticizing

A) Questioning

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit? A) Reviewing prior year audit documentation and the permanent file for the client B) Reading specialized industry journals C) Reevaluating the client's internal control environment D) Performing tests of details of transactions and balances

A) Reviewing prior year audit documentation and the permanent file for the client

Which of the following is not a concept from the performance principle under generally accepted auditing standards? A) The auditor must express an opinion in accordance with the auditor's findings. B) The auditor must determine and apply an appropriate materiality level throughout the audit. C) The auditor must plan the work and properly supervise any assistants. D) The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.

A) The auditor must express an opinion in accordance with the auditor's findings.

Which of the following is not true with respect to the auditors' report for a public entity? A) The report provides a detailed listing of major auditing procedures performed during the examination. B) The report title should contain the word "independent." C) The opinion assesses the financial statements against an applicable financial reporting framework. D) The report specifically identifies the financial statements and years examined by the auditor.

A) The report provides a detailed listing of major auditing procedures performed during the examination.

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is A) detection risk. B) inherent risk. C) audit risk. D) control risk.

A) detection risk.

Compare financial information with budgets and forecasts.

Analytical procedures

Compare financial information with that of prior periods.

Analytical procedures

Study financial information in relation to nonfinancial information.

Analytical procedures

An attestation engagement is one in which a CPA is engaged to A) issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party. B) provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. C) testify as an expert witness in accounting, auditing or tax matters, given certain stipulated facts. D) assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.

A) issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party.

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) discuss the management representation letter with the prospective client's audit committee. C) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D) obtain the prospective client's signature to the engagement letter.

A) make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

In determining whether transactions have been recorded, the direction of the audit testing should start from the A) original source documents. B) adjusted trial balance. C) general ledger balances. D) general journal entries.

A) original source documents.

The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as A) professional skepticism. B) due care. C) independence in appearance. D) professional judgment.

A) professional skepticism

The concept of ________ recognizes that a GAAS audit may fail to detect all material misstatements. A) reasonable assurance B) risk of material misstatement C) due care D) absolute assurance

A) reasonable assurance

Audit evidence is usually considered sufficient when A) there is enough quantity to afford a reasonable basis for an opinion on financial statements. B) it is reliable. C) it has the qualities of being relevant, objective, and free from unknown bias. D) it has been obtained through random selection methods.

A) there is enough quantity to afford a reasonable basis for an opinion on financial statements.

Study predictable financial information patterns (e.g., ratio analysis).

Analytical procedures

PCAOB Assertion: Valuation and Allocation Corresponding ASB Assertion (Nature of Assertion):

Accuracy (Transactions, Disclosures) Valuation (Balances, Disclosures)

Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A) The client provides financial support to a number of charitable causes that also receive support from the accounting firm. B) An auditor on the engagement owns a financial interest in the stock of the client. C) The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. D) An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.

B) An auditor on the engagement owns a financial interest in the stock of the client.

Which of the following matters does an auditor usually include in the engagement letter? A) Indications of negative cash flows from operating activities B) Arrangements regarding fees and billing C) Analytical procedures that the auditor plans to perform D) Identification of working capital deficiencies

B) Arrangements regarding fees and billing

Which of the following statements is generally correct about the appropriateness of audit evidence? A) Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements. B) Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources. C) To be reliable, audit evidence must be either valid or relevant, but need not be both. D) Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

B) Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit? A) Recalculate the prior year's accruals and deferrals. B) Compare financial information with nonfinancial operating data. C) Make inquiries of the client's lawyer concerning pending litigation. D) Perform cutoff tests of cash receipts and disbursements.

B) Compare financial information with nonfinancial operating data.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit? A) Recalculate the prior year's accruals and deferrals. B) Compare financial information with nonfinancial operating data. C) Make inquiries of the client's lawyer concerning pending litigation. D) Perform cutoff tests of cash receipts and disbursements.

B) Compare financial information with nonfinancial operating data.

Which of the following is the essential purpose of the audit function? A) Examination of individual transactions to certify as to their validity B) Determination of whether the client's financial statement assertions are fairly state C) Detection of fraud D) Assurance of the consistent application of correct accounting procedures

B) Determination of whether the client's financial statement assertions are fairly state

What is the term used to identify the risk that the client's financial statements may be materially false and misleading? A) Risk assessment B) Information risk C) Client risk D) Business risk

B) Information risk

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit? A) Reading specialized industry journals B) Reviewing prior year audit documentation and the permanent file for the client C) Reevaluating the client's internal control environment D) Performing tests of details of transactions and balances

B) Reviewing prior year audit documentation and the permanent file for the client

Which of the following questions would be inappropriate for an auditor to ask a client when exhibiting an appropriate level of professional skepticism while completing an audit procedure related to the internal control system? A) What else is important to know about this process? B) Which of your employees is a fraudster? C) What can go wrong in this process? D) What happens when a key employees goes on vacation?

B) Which of your employees is a fraudster?

The particular and specialized actions that auditors undertake to obtain evidence in a specific audit engagement are known as A) Interpretive Publications. B) audit procedures. C) Interim Auditing Standards. D) Statements on Auditing Standards.

B) audit procedures.

An engagement letter is used primarily to A) express an opinion on the financial statements. B) ensure a clear contractual understanding of the services to be provided by the CPA. C) provide management representations to be included in the audit evidence. D) disclaim liability.

B) ensure a clear contractual understanding of the services to be provided by the CPA.

An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to A) give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions. B) give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). C) certify the correctness of Camden's financial statements. D) make a complete examination of Camden's records and verify all of Camden's transactions.

B) give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).

Management fraud generally refers to A) unintentional mistakes. B) intentional distortions of financial statements. C) noncompliance. D) violations of GAAS.

B) intentional distortions of financial statements.

The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of A) supervision. B) planning. C) information evaluation. D) quality assurance.

B) planning.

The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of A) quality assurance. B) planning. C) supervision. D) information evaluation.

B) planning.

When testing the completeness assertion for a liability account, an auditor ordinarily works from the A) financial statements to the potentially unrecorded items. B) potentially unrecorded items to the financial statements. C) accounting records to the supporting evidence. D) trial balance to the subsidiary ledger.

B) potentially unrecorded items to the financial statements.

Inherent risk is the A) probability that the auditor may not detect material misstatements in the financial statements. B) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. C) probability that the client's internal control policies and procedures will fail to detect material misstatements. D) probability that some accounts are more susceptible to misstatement than others.

B) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.

Audit evidence is usually considered sufficient when A) it has the qualities of being relevant, objective, and free from unknown bias. B) there is enough quantity to afford a reasonable basis for an opinion on financial statements. C) it is reliable. D) it has been obtained through random selection methods.

B) there is enough quantity to afford a reasonable basis for an opinion on financial statements.

Auditors use brainstorming A) to set materiality. B) to heighten the audit team's awareness of fraud potential. C) to heighten management's awareness of fraud potential. D) to determine detection risk.

B) to heighten the audit team's awareness of fraud potential.

The purpose of an audit strategy is A) to provide a defense against litigation. B) to set the scope, timing, and direction for auditing each relevant assertion. C) to gain an understanding of the client. D) to comply with securities law.

B) to set the scope, timing, and direction for auditing each relevant assertion.

PCAOB Assertion: Completeness Corresponding ASB Assertion (Nature of Assertion):

Completeness (Transactions, Balances, Disclosures) Cutoff (Transactions)

Which of the following is not a way in which auditors use the concept of overall materiality? A) As a guide to the evaluation of evidence B) As a guide for making decisions about the audit report C) As a guide for assessing control risk D) As a guide to planning the audit plan

C) As a guide for assessing control risk

The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions? A) Valuation B) Existence C) Completeness D) Rights and obligations

C) Completeness

The confirmation of an account payable balance selected from the general ledger provides primary evidence regarding which management assertion? A) Completeness B) Valuation C) Existence D) Allocation

C) Existence

Which of the following is not included in The American Accounting Association (AAA) definition of auditing? A) Systematic process B) Assertions about economic actions C) Potential conflict of interest D) Established criteria

C) Potential conflict of interest

Which of the following best describes the main reason independent auditors report on management's financial statements? A) The management that prepares the statements may have a poorly designed system of internal control. B) Management fraud may exist and it is likely to be detected by independent auditors. C) The management that prepares the statements and the persons who use the statements may have conflicting interests. D) Misstated account balances may be corrected as the result of the independent audit work.

C) The management that prepares the statements and the persons who use the statements may have conflicting interests.

Which of the following is not true with respect to the auditors' report for a public entity? A) The opinion assesses the financial statements against an applicable financial reporting framework. B) The report title should contain the word "independent." C) The report provides a detailed listing of major auditing procedures performed during the examination. D) The report specifically identifies the financial statements and years examined by the auditor.

C) The report provides a detailed listing of major auditing procedures performed during the examination.

The probability that an audit team will give an inappropriate opinion on financial statements best describes A) control risk. B) inherent risk. C) audit risk. D) detection risk.

C) audit risk.

Managing Business Risk is the responsibility of A) the SEC. B) the auditors. C) management. D) the PCAOB.

C) management.

Managing Business Risk is the responsibility of A) the auditors. B) the PCAOB. C) management. D) the SEC.

C) management.

In determining whether transactions have been recorded, the direction of the audit testing should start from the A) general ledger balances. B) general journal entries. C) original source documents. D) adjusted trial balance.

C) original source documents.

Inherent risk is the A) probability that some accounts are more susceptible to misstatement than others. B) probability that the client's internal control policies and procedures will fail to detect material misstatements. C) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. D) probability that the auditor may not detect material misstatements in the financial statements.

C) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the A) degree of management estimation involved in determining the proper account balance. B) liquidity of the account. C) related internal control policies and procedures. D) complexity of calculations involved.

C) related internal control policies and procedures.

Generally accepted auditing standards are A) standards used by entities in deciding whether to engage or retain the services of auditors. B) legal requirements auditors must observe during the audits of public entities. C) standards that guide the conduct of an audit examination. D) specific actions performed by auditors during an examination.

C) standards that guide the conduct of an audit examination.

The primary purpose of the auditors' study of internal control for a nonpublic entity is A) to identify and detect fraud and irregularities perpetrated by client personnel. B) to provide constructive suggestions to the client for improving its internal control. C) to determine the nature, timing, and extent of further audit procedures. D) to report on internal control as required by Auditing Standard No. 5.

C) to determine the nature, timing, and extent of further audit procedures.

PCAOB Assertion: Presentation and Disclosure Corresponding ASB Assertion (Nature of Assertion):

Classification (Transactions, Disclosures) Understandability (Disclosures)

The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions? A) Completeness B) Rights and obligations C) Valuation D) Existence

Completeness

Obtain accounts receivable confirmations.

Confirmation

Obtain client's lawyer's letter.

Confirmation

An omission of amount or disclosure is considered a(n) ________.

error Errors are mistakes; an erroneous omission is unintentional.

Which of the following presumptions is correct about the reliability of audit evidence? A) To be reliable, audit evidence should be convincing rather than persuasive. B) Information obtained indirectly from outside sources is the most reliable form of audit evidence. C) Reliability of audit evidence refers to the amount of corroborative evidence obtained. D) An effective system of internal control provides more assurance about the reliability of audit evidence.

D) An effective system of internal control provides more assurance about the reliability of audit evidence.

The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions? A) Occurrence B) Accuracy C) Completeness D) Classification

D) Classification

The responsibilities principle under generally accepted auditing standards does not include which of the following? A) Independent attitude B) Due care C) Competence and capabilities D) Planning and supervision

D) Planning and supervision

Which of the following is not included in The American Accounting Association (AAA) definition of auditing? A) Assertions about economic actions B) Systematic process C) Established criteria D) Potential conflict of interest

D) Potential conflict of interest

The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as A) due care. B) independence in appearance. C) professional judgment. D) professional skepticism.

D) professional skepticism.

To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process? A) Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes. B) Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality. C) Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes. D) Recognize the financial assertions made in management's financial statements and footnotes.

D) Recognize the financial assertions made in management's financial statements and footnotes.

The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions? A) Completeness B) Valuation C) Existence D) Rights and obligations

D) Rights and obligations

The concept of ________ recognizes that a GAAS audit may fail to detect all material misstatements. A) absolute assurance B) due care C) risk of material misstatement D) reasonable assurance

D) reasonable assurance

The Public Company Accounting Oversight Board was established by which of the following? A) The American Institute of Certified Public Accountants B) The International Accounting Standards Board C) The Financial Accounting Standards Board D) The Sarbanes-Oxley Act of 2002

D) The Sarbanes-Oxley Act of 2002

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted? A) The entity has no formal written code of conduct. B) Procedures requiring separation of duties are subject to management override. C) Management fails to modify prescribed controls for changes in conditions. D) The integrity of entity's management is suspect.

D) The integrity of entity's management is suspect.

Which of the following questions would be inappropriate for an auditor to ask a client when exhibiting an appropriate level of professional skepticism while completing an audit procedure related to the internal control system? A) What can go wrong in this process? B) What happens when a key employees goes on vacation? C) What else is important to know about this process? D) Which of your employees is a fraudster?

D) Which of your employees is a fraudster?

An auditor assesses the risk of material misstatement because it A) provides assurance that the auditor's overall materiality levels are appropriate. B) indicates to the auditor where inherent risk may be the greatest. C) is relevant to the auditor's understanding of the control environment. D) affects the level of detection risk that the auditor may accept.

D) affects the level of detection risk that the auditor may accept.

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is A) control risk. B) audit risk. C) inherent risk. D) detection risk.

D) detection risk.

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A) income would be overstated. B) accounts receivable would be understated. C) income would be understated. D) income would not be misstated.

D) income would not be misstated.

The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of A) supervision. B) quality assurance. C) information evaluation. D) planning.

D) planning.

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the A) degree of management estimation involved in determining the proper account balance. B) liquidity of the account. C) complexity of calculations involved. D) related internal control policies and procedures.

D) related internal control policies and procedures.

Generally accepted auditing standards states that analytical procedures A) should be applied in the planning and final review stages of the audit and as a substantive test during the audit. B) should be applied in the planning stage and can be applied as a substantive test and in the final review stage. C) should be applied in the final review stage, and can be applied as a substantive test and in the planning stage. D) should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.

D) should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.

Scan expense accounts for credit entries.

Document inspection (scanning)

Scan payroll check lists for unusually large checks.

Document inspection (scanning)

Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger.

Document inspection (tracing)

Find brokers' invoices and canceled checks showing agreement with record amounts for securities investments.

Document inspection (vouching)

Which of the following is an underlying condition that in part creates the demand by users for reliable information? A) Economic transactions that are numerous and complex B) Users separated from accounting records by distance and time C) Financial decisions that are important to investors and users D) Decisions are time-sensitive E) All of these

E) All of these

Which of the following is an underlying condition that in part creates the demand by users for reliable information? A) Economic transactions that are numerous and complex B) Users separated from accounting records by distance and time C) Financial decisions that are important to investors and users D) Decisions are time-sensitive E) All of these

E) All of these

PCAOB Assertion: Existence or Occurrence Corresponding ASB Assertion (Nature of Assertion):

Existence (Balances) Occurrence (Transactions, Disclosures)

Analytical procedures are the primary way to test data _______.

Interrelationships Data dependencies, or interrelationships, can be tested via analytical procedures.

_________ is (are) responsible for the financial statements.

Management The financial statements belong to the company; therefore, management is responsible.

Observe test counting of client's physical inventory taking.

Observation

Mistakes in data processing can easily result in _______.

errors Errors are mistakes; an erroneous omission is unintentional.

Recompute the client's calculation of depreciation expense.

Recalculation

Analyze valuation of receivables by re-aging them by due date.

Reperformance

PCAOB Assertion: Rights and Obligation Corresponding ASB Assertion (Nature of Assertion):

Rights and Obligations (Balances, Disclosures)

Which of the following best describes the focus of the following engagements? Auditing Engagement - Financial Statement Attestation Engagement - Financial Information Assurance Engagement - Any Information Consulting Services Engagement - Advice and Decision Support

This is correct as an auditing engagement refers to an examination of the financial statements to determine whether the information has been presented in accordance with GAAP and an attestation engagement can include a financial statement audit. In addition, An assurance engagement can apply to all types of information and a consulting engagement is one where the professional provides advice and decision support.

Which of the following categories of principles is most closely related to gathering audit evidence? a) Performance. b) Responsibilities. c) Reasonable assurance. d) Reporting.

a) Performance.

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation? a) Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected. b) Auditors must design tests to detect all noncompliance that directly affects the financial statements. c) The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. d) Auditors must design tests to detect all material noncompliance that indirectly affects the financial statements.

a) Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would a) Be considered as exercising proper due care. b) Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement. c) Not be considered a violation of GAAS because GAAS does not apply to not-for-profit entities. d) None of the other answer choices are correct.

a) Be considered as exercising proper due care. Consultation with an appraiser demonstrates due care if auditors do not have expertise in the area in question.

Enterprise risk management is the responsibility of: a) Company management. b) The external auditors. c) The company's insurance providers. d) All of the other answers are correct.

a) Company management.

Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a) Develop Auditing Standards for the audits of public entities. b) Develop Auditing Standards for the audits of nonpublic entities. c) Develop Statements on Auditing Standards for the audits of public entities. d) Develop Statements on Auditing Standards for the audits of nonpublic entities.

a) Develop Auditing Standards for the audits of public entities.

The evidence considered most appropriate by auditors is best described as a) Direct personal knowledge obtained through physical observation and mathematical recalculation. b) Internal documents such as sales invoice copies produced under conditions of strong internal control. c) Written representations made by the president of the entity. d) Documentary evidence obtained directly from independent external sources.

a) Direct personal knowledge obtained through physical observation and mathematical recalculation. Direct, personal knowledge of auditors is the most appropriate form of evidence.

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a) Evidence of a conservative systematic bias. b) Measurements that are objective and not susceptible to bias. c) Assumptions that are similar to industry guidelines. d) Key factors that are consistent with prior periods.

a) Evidence of a conservative systematic bias.

An auditor's permanent file audit documentation most likely will contain a) Excerpts of the corporate charter and bylaws. b) The most recent engagement letter. c) Internal control analysis for the current year. d)Memoranda of conference with management.

a) Excerpts of the corporate charter and bylaws. The latest engagement letter would likely be in the current file.

Which of the following combinations would provide the auditor the most reliable evidence? Source of Evidence Effectiveness of Internal control a) External More effective b) Internal Less effective c) Internal More effective d) External Less effective

a) External More effective Evidence is most reliable when the source of the evidence is external and when the evidence is developed under more effective internal control.

When auditing the existence assertion for an asset, auditors proceed from the a) General ledger back to the supporting original transaction documents. b) Supporting original transaction documents to the general ledger. c) Financial statement amounts back to the potentially unrecorded items. d) Potentially unrecorded items forward to the financial statement amounts.

a) General ledger back to the supporting original transaction documents.

Which of the following procedures would provide the most reliable audit evidence? a) Inspection of bank statements obtained directly from the client's financial institution. b) Inspection of prenumbered client purchase orders filed in the vouchers payable department. c) Inspection of vendor sales invoices received from client personnel. d) Inquiries of the client's internal audit staff.

a) Inspection of bank statements obtained directly from the client's financial institution. Because the statements were received directly from outside parties, this is a more reliable form of evidence than internal forms of evidence (which include inquiries of the client's internal audit staff and inspection of pre-numbered client purchase orders) or external evidence received indirectly by the auditor (which includes inspection of vendor sales invoices received from client personnel).

Auditors are not responsible for accounting estimates with respect to a) Making the estimates. b) Determining that estimates are presented in conformity with GAAP. c) Determining the reasonableness of estimates. d) Determining that estimates are adequately disclosed in the financial statements.

a) Making the estimates. Management is responsible for making the estimates in the first place, just as management is primarily responsible for all the financial statement elements.

Auditors' understanding of the internal control in an entity provides information for a) Planning the nature, timing, and extent of substantive procedures on an audit. b) Ascertaining the independence in mental attitude of members of the audit team. c) Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. d) Determining whether members of the audit team have the required competence and capabilities to perform the audit.

a) Planning the nature, timing, and extent of substantive procedures on an audit.

Analytical procedures are generally used to produce evidence from a) Relationships among current financial balances and prior balances, forecasts, and nonfinancial data. b) Confirmations mailed directly to the auditors by client customers. c) Physical observation of inventories. d) Detailed examination of external, external-internal, and internal documents.

a) Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Which of the following principles is most closely associated with the auditors' conclusion as to the fair presentation of the entity's financial statements? a) Reporting principle. b) Responsibilities principle. c) Communication principle. d) Performance principle.

a) Reporting principle. The reporting principle is related to the contents of the auditors' report, which expresses an opinion on the entity's financial statements (or indicates that an opinion cannot be expressed).

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date? a) Scanning the minutes for significant transactions with members of the board of directors. b) Inspecting communications with the client's legal counsel regarding recorded contingent liabilities. c) Reviewing accounting records for recurring transactions occurring near year-end. d) Interviewing internal auditors about their reporting responsibilities.

a) Scanning the minutes for significant transactions with members of the board of directors.

Which of the following is most closely related to the responsibilities principle? a) The auditors' compliance with relevant ethical requirements of independence and due care. b)The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements. c) The auditors' responsibility to issue a report as a result of their examination. d) The auditors' responsibility to plan the audit and properly supervise assistants.

a) The auditors' compliance with relevant ethical requirements of independence and due care.

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? a) There will be a client-imposed scope limitation. b) The firm will have to hire a specialist in one audit area. c) The client's financial reporting system has been in place for 10 years. d) Staff will need to be rescheduled to cover this new client.

a) There will be a client-imposed scope limitation. This is a major risk factor and is likely to be enough for an auditor to not accept an audit engagement. Why is there a scope limitation required? Is the potential client trying to hide a material fact (or a material misstatement) from the auditor? Given that there is a scope limitation, the auditor would have to think long and hard about whether to accept the engagement.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a) They typically use financial and nonfinancial data aggregated at a high level. b) They are often used to develop an auditor's preliminary judgment about materiality. c) They often replace the tests of controls that are performed to assess control risk. d) They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.

a) They typically use financial and nonfinancial data aggregated at a high level.

Suppose management estimated the market valuation of some obsolete inventory at $99,000; this inventory was recorded at $120,000, which resulted in recognizing a loss of $21,000. The auditors obtained the following information: The inventory in question could be sold for an amount between $78,000 and $92,000. The costs of advertising and shipping could range from $5,000 to $7,000. a) Would you propose an audit adjustment to the management estimate? b) If management's estimate of inventory market (lower than cost) had been $80,000, would you propose an audit adjustment?

a) Yes- Loss (or cost of goods sold) 12,000 Inventory 12,000 Selling price $78,000$92,000 Advertising and shipping expenses (7,000)(5,000 ) Auditors' estimate of the range for the inventory valuation $71,000$87,000 Write down the inventory to the nearest end of the auditors' range ($99,000 client valuation minus $87,000, the "high" end of the auditors' valuation). b) no

Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management's assertion of a)Completeness. b)Existence. c)Rights and Obligations. d)Presentation and Disclosure.

a)Completeness. This test is not related to presentation and disclosure. A cutoff test is clearly a test of the completeness assertion as the test is designed to insure that all transactions that should have been included in accordance with GAAP have been recorded.

In an attestation engagement, a CPA practitioner is engaged to a)Prepare a written report containing a conclusion about the reliability of a management assertion. b)Prepare a tax return using information the CPA has not audited or reviewed. c)Compile a company's financial forecast based on management's assumptions without expressing any form of assurance. d)Give expert testimony in court on particular facts in a corporate income tax controversy.

a)Prepare a written report containing a conclusion about the reliability of a management assertion. While work on a forecast would potentially be covered by the attestation standards, the auditors must provide assurance about some type of management assertion in an attestation engagement.

Representation letters are dated as of the date of the ________.

audit report Audit standards require that the representation letter is dated the same day as the audit report.

Which of the following topics is not addressed in the auditors' report for a public entity? a)A description of an audit engagement. b) Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP. c) Responsibilities of the auditor and management in the financial reporting process. d) A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.

b) Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP.

A primary objective of analytical procedures used in the final review stage of an audit is to a) Gather evidence from tests of details to corroborate financial statement assertions. b) Assist the auditor in evaluating the overall financial statement presentation. c) Detect fraud that may cause the financial statements to be misstated. d) Identify account balances that represent specific risks relevant to the audit.

b) Assist the auditor in evaluating the overall financial statement presentation.

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

b) Comparing inventory balances to recent sales activities.

Which of the following relationships between types of analytical procedures and sources of information are most logical? Type of Analytical Procedure Source of Information a) Evaluation of current account balances in relation to nonfinancial information; Company's own comparative financial statements b) Comparison of current account balances with expected balances; Company's budgets and forecasts c) Comparison of current account balances with prior periods; Physical production statistics d) Evaluation of current account balances with relation to predictable historical patterns; Published industry ratios

b) Comparison of current account balances with expected balances; Company's budgets and forecasts

An audit committee is a) A committee composed of persons not associating in any way with the client or the board of directors. b) Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company. c) Composed of internal auditors. d) Composed of members of the audit team.

b) Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is a) Inherent risk. b) Detection risk. c) Control risk. d) Audit risk.

b) Detection risk.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a) Control. b) Detection. c) Inherent. d) Sampling.

b) Detection.

Confirmations of accounts receivable provide evidence primarily about which two assertions? a) Completeness and valuation. b) Existence and rights and obligations. c) Valuation and rights and obligations. d) Existence and completeness.

b) Existence and rights and obligations.

Which of the following procedures would most likely be performed during planning? a) Performing a search for unrecorded liabilities. b) Identifying related parties. c) Surprise counts of the client's petty cash fund. d) Reporting internal control deficiencies to the audit committee.

b) Identifying related parties.

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

b) Identifying unusual conditions that deserve more auditing effort.

Ordinarily, what source of evidence should least affect audit conclusions? a) Inquiry of entity legal counsel. b) Inquiry of management. c) External documentary evidence. d) Documentation prepared by the audit team.

b) Inquiry of management. Inquiry of management is a form of internal evidence, which is the least reliable form of evidence.

Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of rights and obligations for the inventory account? a) Trace test counts noted during physical count to the summarization of quantities. b) Inspect agreements for evidence of inventory held on consignment. c) Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. d) Inspect the open PO file for significant commitments to consider for disclosure.

b) Inspect agreements for evidence of inventory held on consignment. This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that the inventory reported as assets really is owned by the company. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? a) Studying management's selection and application of accounting principles more carefully. b) Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis. c) Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud. d) Exercising more professional skepticism.

b) Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.

Which of the following concepts is least related to the standard of due care? a) Independence in fact. b) Reasonable assurance. c) Prudent auditor. d) Professional skepticism.

b) Reasonable assurance.

Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements? a) Professional judgment. b) Reasonable assurance. c) Absolute assurance. d) Reliability of audit evidence.

b) Reasonable assurance.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a) Specification of litigation in progress against the client. b) Schedules and analyses to be prepared by the client's employees. c) Methods of statistical sampling the auditor will use. d) Client representations about availability of all minutes of meetings of the board of directors.

b) Schedules and analyses to be prepared by the client's employees.

Which of the following best describes the relationship between auditing and attestation engagements? a)Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement. b)Auditing is a subset of attestation engagements that focuses on the certification of financial statements. c)Attestation is a subset of auditing that improves the quality of information or its context for decision makers. d)Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support.

b)Auditing is a subset of attestation engagements that focuses on the certification of financial statements. Auditing is a subset of attestation engagements that focuses on the certification of financial statements. The subject matter is the set of financial statements from management and the criteria is GAAP in the United States

When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion? a)Rights and obligations. b)Cutoff. c)Existence. d)Occurrence. e)Valuation and allocation.

b)Cutoff. This is not an occurrence test. This is clearly a test of the completeness as the assertion always includes any issues of transaction cutoff, which means that the recording of all revenue, expense, and other transactions must be included in the proper period in accordance with GAAP

Prior to accepting a new audit engagement, a public accounting firm should a) Attempt to contact the predecessor auditors. b) Evaluate the integrity of management. c) Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement. d) All of the above.

d) All of the above.

A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of a)Environmental auditing. b)Operational auditing. c)Financial auditing. d)Compliance auditing.

b)Operational auditing. Operational auditing refers to the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies.

Substantial equivalency refers to a)The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization. b)Permitting a CPA to practice in another state without having to obtain a license in that state. c)Providing consulting work for another firm's audit client in exchange for the other firm's providing consulting services to one of your clients. d)An auditor's tendency not to believe management's assertions without sufficient corroboration.

b)Permitting a CPA to practice in another state without having to obtain a license in that state. Substantial equivalency does not refer to the financial statement auditing process. The term relates to the practice of public accountancy in states other than a CPA's state of licensure.

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because a)They are too far away from company headquarters to perform accounting and auditing themselves. b)They generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements. c)The consequences of making a bad loan are very undesirable. d)Financial statements are too complex for the bankers to analyze themselves.

b)They generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements. The potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. Consider for example a company that was desperate for cash in order to survive. Would it be possible that the management team would present unreliable financial statements to the bank in order to get a desperation loan? Because of this possibility, a financial statement audit is needed to add credibility to the financial statements.

Performance audits usually include (Select all that apply.) a-Financial audits. b-Economy and efficiency audits. c-Compliance audits. d-Program audits.

b-Economy and efficiency audits. d-Program audits. Financial audits and compliance audits are typically not included as part of a performance audit. The two categories of performance audits are economy and efficiency audits and program audits.

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? a) 0.20. b) 0.75. c) 0.10. d) 0.00.

c) 0.10. DR = AR/ (IR x CR) = 0.05/0.50 = 0.10.

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? a) Inventory. b) Bad debt expense. c) Accounts receivable. d) Cost of goods sold.

c) Accounts receivable.

Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? a) Independence. b) Adequate competence and capabilities. c) Adequate planning and supervision. d) Gathering sufficient appropriate evidence.

c) Adequate planning and supervision. Initials of the preparer and reviewer provide evidence that the documentation was reviewed, which relates to planning and supervision

Which of the following statements is not true with respect to the performance principle? a) Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements. b) In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements. c) Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits. d) Auditors are required to consider both the relevance and reliability of evidence in evaluating whether the evidence they have gathered is appropriate.

c) Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? a) Avoiding the problem of doing more work than necessary (overauditing). b) Avoiding the problem of doing too little work (underauditing). c) Being able to decide early what type of audit opinion to issue. d) Being able to fine-tune the audit work for effectiveness and efficiency.

c) Being able to decide early what type of audit opinion to issue.

Failure to meet company objectives is a result of a) Information risk. b) Inherent risk. c) Business risk. d) Audit risk.

c) Business risk.

In auditing the accrued liabilities account on the Balance Sheet, an auditor's procedures most likely would focus primarily on management's assertion of a) Existence or occurrence. b) Presentation and disclosure. c) Completeness. d) Valuation or allocation.

c) Completeness. Management is far more likely to understate liabilities than to overstate them. As a result, when auditing the accrued liabilities account, existence or occurrence is not as likely to be violated. Rather, the most relevant assertion is likely to be completeness.

Which of the following is most closely related to the relevance of audit evidence? a) Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. b) Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period. c) In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. d) In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year.

c) In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. The aging of accounts receivable will evaluate valuation, which is not directly evaluated through confirmation. Therefore, aging provides relevant evidence with respect to the valuation assertion.

With respect to the concept of materiality, which of the following statements is correct? a) Materiality depends only on the dollar amount of an item relative to other items in the financial statements. b) Materiality depends on the nature of a transaction rather than the dollar amount of the transaction. c) Materiality is a matter of professional judgment. d) Materiality is determined by reference to AICPA guidelines.

c) Materiality is a matter of professional judgment.

Which of the following is not related to ethical requirements of auditors? a) Independence in fact. b) Due care. c) Professional judgment. d) Independence in appearance.

c) Professional judgment.

Under the Private Securities Litigation Reform Act, independent auditors are required to first a) Report clearly inconsequential noncompliance with the Act to the audit committee of the client's board of directors. b) Report in writing all instances of noncompliance with the Act to the client's board of directors. c) Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC. d) Resign from the audit engagement and report the instances of noncompliance with the Act to the SEC.

c) Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

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 a) Control risk. b) Inherent risk. c) Risk of material misstatement. d) Detection risk.

c) Risk of material misstatement.

Which of the following best describes the general contents of the introductory paragraph of the auditors' report? a) The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting. b) The auditors' conclusion with respect to the fairness of the entity's financial statements. c) Statements identifying the responsibility of auditors and management in the financial reporting process. d) A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB.

c) Statements identifying the responsibility of auditors and management in the financial reporting process. The responsibility of auditors and management in the financial reporting process is described in the introductory paragraph.

When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? a) The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings. b) The use of an audit specialist need not be mentioned if the auditors decide not to take responsibility for the audit specialist's findings. c) The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions. d) Yes, the auditors' report should mention the fact that an audit specialist was used.

c) The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? a) The entity's financial statements are generated at an outside service center. b) The entity's financial data is available only in computer-readable form. c) The entity enters into significant derivative transactions as hedges. d) The entity's fiscal year ends on June 30.

c) The entity enters into significant derivative transactions as hedges. By their very nature, derivative transactions are designed to be used as hedges for exposure on existing contracts are quite complex. The accounting rules that provide the basis for GAAP in this area are also complex. As a result of this complexity, the inherent risk of material misstatement is higher.

Which of the following is an advantage of computer-assisted audit techniques (CAATs)? a) The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures. b) The CAATs programs are all written in one computer language. c) The software can be used for audits of clients that use differing computer equipment and file formats. d) The use of CAATs can be substituted for a relatively large part of the required testing.

c) The software can be used for audits of clients that use differing computer equipment and file formats. CAATs can be transported and used on different types of clients that utilize different types of computing systems.

The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is a) To make consulting suggestions to the entity's management. b) To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. c) To determine the nature, timing, and extent of substantive procedures to be performed. d) To determine whether the entity has changed any accounting principles.

c) To determine the nature, timing, and extent of substantive procedures to be performed.

One of the typical characteristics of management fraud is a) Illegal acts committed by management to evade laws and regulations. b) Conversion of stolen inventory to cash deposited in a falsified bank account. c) Victimization of investors through the use of materially misleading financial statements. d) Falsification of documents in order to misappropriate funds from an employer.

c) Victimization of investors through the use of materially misleading financial statements.

According to the AICPA, the purpose of an audit of financial statements is to a)Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission. b)Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board. c)Enhance the degree of confidence that intended users can place in the financial statements. d)Obtain systematic and objective evidence about financial assertions and report the results to interested users.

c)Enhance the degree of confidence that intended users can place in the financial statements. The AICPA definition does not focus on the SEC as an appropriate reporting framework to be used as a benchmark when completing an audit. The definition is focused on the "applicable" financial reporting framework, such as GAAP or IFRS. The reference to the SEC is wrong.

During an audit of a company's cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion? a)Rights and Obligations. b)Occurrence. c)Existence. e)Valuation or Allocation.

c)Existence. Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of cash and the fact that is no foreign currency translation calculation, the existence assertion is clearly the most important assertion.

When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion? a)Completeness. b)Valuation and allocation. c)Rights and obligations. d)Existence. e)Occurrence.

c)Rights and obligations. This is not an occurrence test. This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that amounts reported as assets of the company represent true assets that it really does own and that the amounts reported as liabilities truly represent its obligations. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

The primary difference between operational auditing and financial auditing is that in operational auditing a)The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them. b)The operational auditor can use analytical skills and tools that are not necessary in financial auditing. c)The operational auditor is seeking to help management use resources in the most effective manner possible. d)The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards.

c)The operational auditor is seeking to help management use resources in the most effective manner possible. While analytical tools and skills may be used during an operational audit, they are also a very important aspect of financial auditing

The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about a)Occurrence. b)Existence. c)Valuation and allocation. d)Completeness. e)Rights and obligations.

c)Valuation and allocation. A review of credit ratings of customers' gives indirect evidence of the collectability of accounts receivable. Because GAAP requires the accounts receivable balance to be valued at the amount expected to be collected from customers, the review of credit ratings relates to valuation.

Inventory can be observed as it is ______ by client personnel.

counted Inventory can be observed as it is counted during physical inventory procedures.

Analytical procedures used when planning an audit should concentrate on a) Weaknesses in the company's internal control activities. b) Management assertions in financial statements. c) Predictability of account balances based on individual significant transactions. d) Accounts and relationships that can represent specific potential problems and risks in the financial statements.

d) Accounts and relationships that can represent specific potential problems and risks in the financial statements. With preliminary analytical procedures, the auditors are looking for signs of accounts and relationships that may represent specific potential problems and risks in the financial statements.

Which of the following opinions would be issued if auditors believed that the entity's financial statements were not presented in conformity with GAAP? a) Qualified opinion b) Disclaimer of opinion c) Unmodified opinion. d) Adverse opinion.

d) Adverse opinion.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may a) Allow the internal auditor to audit a major subsidiary of the company. b) Not assign any task to the internal auditor because of the internal auditor's lack of independence. c) Allow the internal auditor to perform analytical procedures but not be involved with any tests of details. d) Allow the internal auditor to perform tests of internal controls.

d) Allow the internal auditor to perform tests of internal controls. If the internal auditor is evaluated as both competent and objective; the professional auditing standards allow the independent auditor to perform relatively low risk tests. As long as they are competent and objective, their lack of independence would not prevent the independent auditor from assigning tasks to the internal auditor

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

d) Assess the potential for material misstatement due to fraud. 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. This is the primary objective of the session, according to professional standards (i.e., SAS No. 99).

The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as a) Audit standards. b) Interpretive publications. c) Statements on Auditing Standards. d) Audit procedures.

d) Audit procedures. Audit procedures are particular and specialized actions that auditors take to obtain evidence during a specific engagement.

The revenue cycle of a company generally includes which accounts? a) Inventory, accounts payable, and general expenses. b) Inventory, general expenses, and payroll. c) Cash, notes payable, and capital stock. d) Cash, accounts receivable, and sales.

d) Cash, accounts receivable, and sales

Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a) Recalculate the prior-years' accruals and deferrals. b) Perform cutoff tests of cash receipts and disbursements. c) Make inquiries of the client's lawyer concerning pending litigation. d) Compare financial information with nonfinancial operating data.

d) Compare financial information with nonfinancial operating data.

Which of the following best demonstrates the concept of professional skepticism? a) Relying more extensively on external evidence rather than internal evidence. b) Focusing on items that have a more significant quantitative effect on the entity's financial statements. c) Evaluating potential financial interests held by auditors in the client. d) Critically assessing verbal evidence received from the entity's management.

d) Critically assessing verbal evidence received from the entity's management.

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the a) Administrative audit documentation in the current file. b) Permanent file audit documentation. c) Planning memorandum in the current file. d) Current file audit documentation.

d) Current file audit documentation.

When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will a) Not be able to be determined with the information provided. b) Remain unchanged. c) Increase. d) Decrease.

d) Decrease.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to a) Determine whether other similar acts could have occurred. b) Determine whether to contact law enforcement officials. c) Recommend remedial actions to the audit committee. d) Evaluate the effect of the noncompliance on the financial statements.

d) Evaluate the effect of the noncompliance on the financial statements.

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? a) Key factors that are consistent with prior periods. b) Assumptions that are similar to industry guidelines. c) Measurements that are objective and not susceptible to bias. d) Evidence of a conservative systematic bias.

d) Evidence of a conservative systematic bias.

The risk of material misstatement is composed of which audit risk components? a) Inherent risk and detection risk. b) Inherent risk, control risk, and detection risk. c) Control risk and detection risk. d) Inherent risk and control risk.

d) Inherent risk and control risk.

Which of the following is true with respect to PCAOB inspections of accounting firms? a) Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection. b) All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. c) All results of PCAOB inspections are made available to the public following the inspection. d) PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.

d) PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.

The most reliable evidence regarding the existence of newly-acquired computer equipment is a) Evaluation of the client's procedures. b) Documentation prepared externally. c) Inquiry of management. d) Physical observation.

d) Physical observation. Auditors' personal knowledge through physical observation provides the most reliable form of evidence; in addition, unlike evaluation of client procedures, this relates directly to verifying the existence of newly-acquired equipment.

Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? a) Acceptance and continuance of client relationships and specific engagements. b) Engagement performance. c) Monitoring. d) Relevant ethical requirements.

d) Relevant ethical requirements. Independence confirmations would ensure that all firm personnel are independent with respect to that firm's clients, which is related to the "Relevant Ethical Requirements" element of a system of quality control. It would not relate to acceptance and continuance of client relationships and specific engagements, engagement performance, or monitoring.

Auditing standards do not require auditors of financial statements to a) Understand the nature of errors and frauds. b) Assess the risk of occurrence of errors and frauds. c) Design audits to provide reasonable assurance of detecting errors and frauds. d) Report all errors and frauds found to police authorities.

d) Report all errors and frauds found to police authorities.

An audit strategy memorandum contains a) Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. b) Specifications of auditing standards relevant to the financial statements being audited. c) Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. d) Specifications of procedures the auditors believe appropriate for the financial statements under audit.

d) Specifications of procedures the auditors believe appropriate for the financial statements under audit. An audit strategy contains specifications of procedures the auditors believe appropriate for the financial statements under audit.

An audit plan contains a) Specifications of audit standards relevant to the financial statements being audited. b) Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. c) Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. d) Specifications of procedures the auditors believe appropriate for the financial statements under audit.

d) Specifications of procedures the auditors believe appropriate for the financial statements under audit. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached describe audit documentation found in the current file, not audit plans.

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? a) The auditors' need to verify the existence of new sales contracts important for the client's business. b) The auditors' judgments about materiality. c) The auditors' need to document compliance with generally accepted auditing standards. d) The auditors' judgment about their independence with regard to the client.

d) The auditors' judgment about their independence with regard to the client.

Which of the following circumstances would most likely cause an audit team to perform extended procedures? a) Supporting documents are produced when requested. b) The company maintains several different petty cash funds. c) The company has recently hired a new chief financial officer after the previous one retired. d) The client made several large adjustments at or near year-end.

d) The client made several large adjustments at or near year-end.

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that a)In audits of financial statements, the auditor acts exclusively in the capacity of an auditor. b)Financial statements and financial data are verifiable. c)The professional status of the independent auditor imposes commensurate professional obligations. d)A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.

d)A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. The management team is generally trying to put its "best foot forward" when reporting their financial statement information. The auditor must make sure that the management team does not violate the accounting rules when doing so. In essence, this statement characterizes why professional skepticism is required to be exercised by auditors.

When initiating communications with predecessor auditors, prospective auditors should expect a) To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. b)To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement. c)To obtain copies of some or all of the predecessor auditors' audit documentation. d)All of the above.

d)All of the above.

What requirements are usually necessary to become licensed as a certified public accountant? a)Successful completion of the Uniform CPA Examination. b)Experience in the accounting field. c)Education. d)All of the above.

d)All of the above. A candidate requires the successful completion of the Uniform CPA, proper experience and proper education to be licensed as a CPA.

The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client? a)Bookkeeping services. b)Internal audit services. c)Valuation services. d)All of the above.

d)All of the above. According to Section 201 of the Sarbanes-Oxley Act, bookkeeping services are prohibited.

Which of the following is a reason to obtain professional certification? a) Obtaining certification is often monetarily rewarded by an individual's employer. b)Certification often is a necessary condition for advancement and promotion within a professional services firm. c)Certification provides credibility that an individual is technically competent. d)All of the above.

d)All of the above. Credibility, advancement, and monetary rewards are all reasons to become certified.

The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from a)Acting in a managerial decision-making role for an audit client. b)Auditing the firm's own work on an audit client. c)Providing tax consulting to an audit client without audit committee approval. d)All of the above.

d)All of the above. Sarbanes-Oxley prevents public accounting firms from engaging in any of the preceding listed capacities. Thus, "all of the above" is correct.

Analytical procedures can be used in which of the following ways? a) As a means of overall review near the end of the audit. b) As "attention-directing" methods when planning an audit at the beginning. c) As substantive audit procedures to obtain evidence during an audit. d)All of the other answers are correct.

d)All of the other answers are correct.

The primary objective of compliance auditing is to a)Perform a study of effective and efficient use of resources. b)Develop a basis for a report on internal control. c)Give an opinion on financial statements. d)Determine whether client personnel are following laws, rules, regulations, and policies.

d)Determine whether client personnel are following laws, rules, regulations, and policies. A compliance audit refers to procedures that are designed to ascertain that the company's personnel are following laws, rules, regulations, and policies.

When an auditor reviews additions to the equipment (fixed asset) account to make sure that repair and maintenance expenses are not understated, she wants to obtain evidence as to management's assertion regarding a)Valuation and allocation. b)Rights and obligations. c)Completeness. d)Existence. e)Occurrence.

d)Existence. This is not a test of valuation. This is a test of existence which is completed by auditors to answer the question as to whether the transactions recorded as an asset really represent assets that exist and did add value to the company's equipment as compared to routine repair and maintenance expenses under GAAP. Management's existence assertion states that the reported assets actually exist. If an addition to the equipment account cannot be located or identified as adding value to the equipment balance, it is possible that the amount should have been classified as repair and maintenance expenses under GAAP.

The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the a)Central Internal Auditors (CIA). b)Governmental Internal Audit Agency (GIAA). c)Securities and Exchange Commission (SEC). d)Government Accountability Office (GAO).

d)Government Accountability Office (GAO). The SEC is not responsible for monitoring the use of public funds by public officials. This is the responsibility of the GAO.

Independent auditors of financial statements perform audits that reduce a)Timeliness of financial statements. b)Complexity of financial statements. c)Business risks faced by investors. d)Information risk faced by investors.

d)Information risk faced by investors. After completing a financial statement audit, information risk has been reduced for investors.

The risk to investors that a company's financial statements may be materially misleading is called a)Business risk. b)Moral hazard. c)Client acceptance risk. d)Information risk.

d)Information risk. By definition, information risk is the probability that the information circulated by a company will be false or misleading.

Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard a)Should be disregarded because it is not in writing. b)Is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses. c)Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion. d)Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

d)Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded. Rhonda's assertions are nice. However, to be considered as sufficient to conclude that all expenses have been recorded, they will need corroboration with documentary evidence.

When auditing an investment in another company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion? a)Inspect the stock certificates evidencing the investment. b)Examine the audited financial statements of the investee company. c)Review the broker's advice or canceled check for the investment's acquisition. d)Obtain market quotations from The Wall Street Journal or another independent source.

d)Obtain market quotations from The Wall Street Journal or another independent source. This evidence would provide evidence about management's assertion about rights and obligations and perhaps existence. However, this evidence would not help to value the investment in accordance with GAAP.

Which of the following would be considered an assurance engagement ? a) Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past. b)Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles. c)Giving an opinion on the fair presentation of a newspaper's circulation data. d)Giving assurance about the average drive length achieved by golfers with a client's golf balls. e)All of the above.

e) All of the above Because attestation and audit engagements are subsets of assurance engagements, all of the responses are examples of assurance engagements.

Tests of controls are performed to determine whether key controls operate __________.

effectively Control tests are performed to determine whether key controls operate effectively.

Because documents like checks, shipping documents, and receiving reports are usually _______, it is easier for auditors to verify cutoff.

numbered Because these documents are usually numbered and sequential, it is easier for auditors to determine proper cutoff.

An auditors' report includes an introduction, the auditor's and management's responsibility, and a(n) __________.

opinion The opinion is the auditor's view on the adequacy of the financial statement.

Audit _______ begins with determining the requirements for the engagement.

planning The first step of audit planning is to determine the requirements of the engagement.

The final step of an audit is issuing the audit ________.

report The auditors' report is the last step in the audit process.