Audit - Chapter 01-20 QUIZ

A material weakness that exists at year end will result in what type of audit report on internal control?

A. Adverse.

The framework most likely to be used by the client in its internal control assessment is the

A. COSO internal control framework.

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?

A. Cash

When a client engages in transactions involving derivatives, the auditor should

A. Develop an understanding of the economic substance of each derivative

An advantage of using statistical sampling techniques is that such techniques

A. Mathematically measure risk.

To test for unsupported entries in the journals, the direction of audit testing should be to the

C. Original source documents.

Internal control is ineffective when computer department personnel

C. Originate changes in master files.

Analytical procedures are required as a part of the

C. Overall review at the conclusion of the audit.

An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of:

C. Overall system of quality control.

A CPA who wishes to perform a WebTrust engagement need not

C. Pass an examination on WebTrust principles and criteria.

Which of the following would be least likely to be considered an audit planning procedure?

C. Perform the risk assessment.

Which of the following procedures is least likely to be completed before the balance sheet date?

C. Search for unrecorded liabilities.

Each page of the financial statements compiled by an accountant should include a reference such as

C. See accountant's compilation report.

An auditor's report on internal control ordinarily includes negative assurance on the effectiveness of internal control. True False

FALSE

Analytical procedures are seldom used for planning an audit engagement because they are substantive procedures. True False

FALSE

Attestation risk, like audit risk consists of three components--inherent risk, control risk, and substantiation risk. True False

FALSE

Attestation services are similar, but go beyond assurance services in scope of procedures and reporting. True False

FALSE

Preliminary arrangements with clients should be set forth in the management letter. True False

FALSE

Signed checks should be returned to the cash disbursements clerk for mailing. True False

FALSE

Which of the following best illustrates the concept of sampling risk?

A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

Which of the following is not explicitly included in an audit report for a nonpublic company?

A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance

Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity?

A. A statement that the review was in accordance with generally accepted auditing standards.

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job?

A. A surprise observation of a paycheck distribution.

When a practitioner examines projected financial statements, the practitioner's report should include a separate paragraph that

A. Describes the limitations on the usefulness of the presentation.

A service auditor's report on a service center should include a(n)

A. Detailed description of the service center's internal control.

Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements. True False

FALSE

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

A. Accounts receivable are overstated at December 31, 20X0.

SysTrust engagements relate only to database systems. True False

FALSE

Accrued liabilities generally differ from accounts payable in that accrued liabilities

A. Accumulate over time.

The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors. True False

FALSE

The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the

A. Actual fee would be substantially higher.

Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain

A. A standard unqualified opinion.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is

A. $0

The 4000 accounts receivable of GHI Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,600. Using the mean-per-unit estimation technique, Smith has properly estimated a projected misstatement of a $8,000 overstatement for the entire population. The audited value of Smith's sample is:

A. $1,300

Using difference estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population?

A. $160,000

The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. -Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:

A. $37,500

The 3000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of a $9,000 overstatement for the entire population. The estimated total audited value of the population is:

A. $51,000

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

A. A bank lockbox system.

Which of the following is correct relating to compiled financial statements when third party reliance upon those statements is anticipated?

A. A compilation report must be issued.

In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuing its prompt detection?

A. A control total for hours worked, prepared from time cards collected by the timekeeping department.

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of

A. A disclaimer of opinion.

Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of professional conduct and to establish a mechanism for enforcing observation of the code?

A. A distinguishing mark of a profession is its acceptance of responsibility to the public.

The Parmalat fraud case apparently involved

A. A fraudulent cash confirmation.

In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?

A. A price for a similar asset obtained from an active market.

An auditor identified a material weakness in internal control in December. The client was informed and the client corrected the material weakness shortly after year-end (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is

A. Adverse.

A summary of findings rather than assurance is most likely to be included in a(n):

A. Agreed-upon procedures report.

Under PCAOB internal control reporting standards, what are the auditor's communication requirements to the audit committee with respect to material weaknesses?

A. All must be communicated in written form.

A CPA firm may not designate itself as "members of the AICPA" unless:

A. All of its partners or shareholders are members of the Institute.

Which of the following is least likely to be accurate statement concerning characteristics of an audit?

A. An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied.

Which of the following is not necessarily an attest engagement?

A. An elder care engagement.

Which of the following is most likely to be considered a material weakness in internal control?

A. An ineffective control environment.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect

A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:

A. An unrecorded deposit made at the bank at the end of the month.

Which of the following is used to obtain evidence that the client's equipment accounts are not understated?

A. Analyzing repairs and maintenance expense accounts.

An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unqualified auditors' report. From this the investor may conclude that:

A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction.

A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true?

A. Appearance of independence may be lacking.

Which of the following is considered an interpretive publication in the GAAS Hierarchy?

A. Appendices to Statements on Auditing Standards.

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?

A. Are all financial reporting operations at one location?

When performing an attestation examination engagement, which of the following is not always required?

A. Assertion.

Which of the following is the least likely to be considered subject matter of an attestation engagement?

A. Assertion.

The organization established to identify, develop and communicate new assurance service opportunities is the

A. Assurance Services Executive Committee.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first

A. Attempt to determine whether their report is still being relied upon by third parties.

The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is

A. Attributes sampling.

When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate?

A. Attributes.

To accept an engagement to examine a client's MD&A for annual financial statements, the practitioners ordinarily must have

A. Audited the most recent financial statement period to which the MD&A applies.

The Statements on Auditing Standards have been issued by the:

A. Auditing Standards Board.

Which of the following has the highest level of accounting authority within the "GAAP Hierarchy"?

A. Authoritative body pronouncements.

Which of the following statements is correct regarding accounts payable and the auditor's procedures?

A. Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances.

The risk associated with a company's survival and profitability is referred to as:

A. Business Risk.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all

A. Cash disbursements.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the

A. Check Clearing for the 21st Century Act

Which of the following circumstances generally results in the issuance of a report that is other than unqualified?

A. Circumstances have significantly limited the scope of the auditors' procedures.

Which of the following is not one of the criteria for revenue recognition?

A. Collectibility is certain.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the

A. Collection of receivables.

Which of the following is an example of fraudulent financial reporting?

A. Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.

Which of the following is the best audit procedure for the detection of lapping?

A. Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following is not considered to be an analytical procedure?

A. Comparisons of financial statement amounts with source documents.

If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures, they should consider the internal auditors'

A. Competence and objectivity.

In which of the following types of reports do accountants provide no explicit assurance?

A. Compilations.

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations

A. Complement, but do not replace, substantive procedures designed to support the assertion.

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?

A. Completeness.

The assertion most directly addressed when performing the search for unrecorded liabilities is:

A. Completeness.

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries

A. Completeness.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations, and

A. Compliance with applicable laws and regulations.

Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?

A. Confirmation of amounts.

Providing assurance using a series of reports provided simultaneously or shortly after the related information is released is referred to as

A. Continuous auditing.

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a

A. Control deficiency.

An auditor's purpose for performing tests of controls is to provide reasonable assurance that:

A. Controls are operating effectively.

Which of the following is least likely to be considered a risk assessment procedure relating to internal control?

A. Counting marketable securities at year-end.

What is the general character of the three generally accepted auditing standards classified as general standards?

A. Criteria for competence, independence, and professional care of individuals performing the audit.

Which of the following would be least likely to be considered a desirable attribute of a database management system?

A. Data redundancy.

The date of the management representation letter should coincide with the:

A. Date of the auditor's report.

The advent of personal computers has resulted in a(n)

A. Decentralization of data processing activities.

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect

A. Deliveries for which no purchase order was issued.

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should

A. Disclose that the income tax basis is a comprehensive basis of accounting other than generally accepted accounting principles.

During a review of the financial statements of a non-public entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should

A. Disclose the departure in a separate paragraph of the report.

During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should

A. Disclose the departure in a separate paragraph of the report.

An example of an internal control weakness is to assign the personnel department responsibility for

A. Distribution of paychecks.

Which of the following is not an element of quality control?

A. Documentation.

A control feature in a computer system requires the central processing unit (CPU) to send signals to the printer to activate the print mechanism for each character. The print mechanism, just prior to printing, sends a signal back to the CPU verifying that the proper print position has been activated. This type of data transmission is referred to as

A. Echo control.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the

A. Efficiency of the audit.

Which of the following would be least likely to be considered a benefit of effective internal control?

A. Eliminating all employee fraud.

Which of the following is not one of the auditors' objectives in auditing depreciation?

A. Establishing the reasonableness of the client's replacement policy.

What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances?

A. Estimation.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

A. Examine cash receipts received after year-end.

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations the best alternative procedure the auditors might resort to would be

A. Examining subsequent receipts of year-end accounts receivable.

When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample?

A. Exceed.

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should

A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion.

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to

A. Extend auditing procedures.

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?

A. Fictitious revenues

An example of an analytical procedure is the comparison of

A. Financial information with similar information regarding the industry in which the entity operates.

As planning materiality is decreased, the auditor should plan more work on individual accounts to.

A. Find smaller misstatements.

A form filed with the SEC when a company changes auditors is a

A. Form 8-K.

Which of the following is correct concerning requirements about auditor communications about fraud?

A. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to

A. Fraud.

Operational auditing is primarily oriented toward:

A. Future improvements to accomplish the goals of management.

To best test existence, an auditor would sample from the:

A. General Ledger to source documents.

Which of the following types of matters do not generally require disclosure in the financial statements?

A. General risk contingencies.

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor

A. May accept the engagement because such engagements merely involve limited reporting objectives.

The use of fidelity bonds protects a company from embezzlement losses and also

A. Minimizes the possibility of employing persons with dubious records in positions of trust.

The generally accepted auditing standards established by the AICPA:

A. Have been accepted as interim standards by the Public Company Accounting Oversight Board.

To qualify as "generally accepted," an accounting principle must:

A. Have substantial authoritative support.

When using sampling for tests of controls, which of the following audit consequences may follow?

A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low.

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?

A. Inability to generate positive cash flows from operations, while reporting large increases in earnings.

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size?

A. Increase.

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size?

A. Increase.

An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk?

A. Increases.

The risk that information is misstated is referred to as:

A. Information risk.

Which of the following testing techniques is more commonly used by internal auditors than by independent auditors?

A. Integrated test facilities.

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the

A. Internal auditor's compliance with professional internal auditing standards.

The first paragraph of a standard unqualified audit report for a nonpublic client is referred to as the

A. Introductory paragraph.

The first paragraph of the standard unqualified audit report is referred to as the:

A. Introductory paragraph.

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for

A. Investigation of variances within a formal budgeting system.

The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language

A. Is appropriate and would not negate the unqualified opinion.

When compared to an audit performed prior to 1900, an audit today:

A. Is more likely to include tests of compliance with laws and regulations.

The review of a company's financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit.

Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting?

A. It applies equally to a complete set of financial statements and to each individual financial statement.

Which of the following is correct concerning a "fraud risk factor"?

A. It may affect the auditor's assessment of fraud risk.

Which of the following best describes the problem with the use of published industry averages for analytical procedures?

A. Lack of comparability.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a

A. Letter of audit inquiry to the client's lawyer.

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a

A. Letter of audit inquiry to the client's lawyer.

In which of the following types of reports do the auditors express negative assurance?

A. Letters for underwriters.

Which of the following matters is generally included in an auditor's engagement letter?

A. Limitations of the engagement.

If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the

A. Magnitude of the portion of the financial statements examined by the other auditor.

The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

A. Management fails to take appropriate corrective action.

The existence of a material weakness led to an adverse opinion in the internal control audit report of a publicly traded company. Which of the following statements is correct if management believes that it has remediated the weakness?

A. Management may engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit.

A compilation report is not required when compiled financial statements are expected to be used by

A. Management only.

Which of the following is least likely to be considered a financial statement audit risk factor?

A. Management operating and financing decisions are dominated by top management.

A continuing audit client's property, plant and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment one would normally expect the audit of accounts receivable to require

A. More audit time.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

A. No reply to a positive confirmation request is received.

Auditing by testing the input and output of a computer system instead of the computer program itself will

A. Not detect program errors which do not show up in the output sampled.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to

A. Observe physical counts of the inventory items.

When conducting field work for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software package?

A. Observing inventory.

A data warehouse is an example of

A. On-line analytical processing.

Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued:

A. Only to persons qualified to practice public accounting.

An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to

A. Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.

Purchase cutoff procedures should be designed to test whether all inventory

A. Owned by the company was recorded.

Which of the following would not necessarily be considered a related party transaction?

A. Payment of a bonus to the president.

An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):

A. Peer Review Engagement.

The AICPA allows an auditor to perform which of the following services for an audit client:

A. Performance of bookkeeping services for the client.

Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by

A. Performing substantive procedures.

Which of the following is not a programmed control?

A. Private lines.

Historically, which of the following has the AICPA been most concerned with providing?

A. Professional standards for CPAs.

Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under Rule 501 of the AICPA Code of Professional Conduct?

A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.

Internal control over accounts payable is improved when

A. Purchase orders show approved prices.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

A. Quantities ordered are excluded from the receiving department copy of the purchase order.

Which of the following is an advantage of describing internal control through the use of a standardized questionnaire?

A. Questionnaires highlight weaknesses in the system.

Which of the following is not one of the assertions made by management about an account balance?

A. Relevance.

When performing an audit of the property, plant and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles?

A. Repairs have been capitalized to repair equipment that had broken down.

For a CPA, a client imposed scope limitation during a review of financial statements is most likely to result in

A. Resignation from the engagement.

When performing a review of a nonpublic company, the auditors must obtain in a representation letter acknowledgement of management for its responsibility for reach of the following except

A. Responsibility for identifying illegal acts committed by employees.

Which of the following is a strong indicator that a material weakness in internal control exists?

A. Restatement of previously issued financial statements to reflect a correction.

Which of the following procedures is not a procedure that is completed near the end of the engagement?

A. Review cash transactions.

Which of the following is the best control procedure to prevent the payment of an invoice twice?

A. Review of supporting documentation by the person signing the check.

The auditors are least likely to learn of retirements of equipment through which of the following?

A. Review of the purchase returns and allowances account.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period.

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?

A. Salaried sales personnel.

For effective internal control, the billing function should not be performed by the:

A. Sales department.

Based on the previous information, which of the following preliminary conclusions can the auditor use as a basis for further investigations?

A. Sales per store are directly related to the size of the store.

In testing for unrecorded retirements of equipment, an auditor might.

A. Select items of equipment from the accounting records and then attempt to locate them during the plant tour.

Which of the following is not a universal rule for achieving internal control over cash?

A. Separate recordkeeping from accounting for cash to the extent possible.

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?

A. Separation of payroll duties is less than adequate for effective internal control.

In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the

A. Shipping documents.

Which of the following must the auditor communicate to the audit committee?

A. Significant deficiencies and material weaknesses.

Tests for unrecorded assets typically involve tracing from

A. Source documents to recorded journal entries.

Which of the following types of employees must be independent of an audit client?

A. Staff assistants assigned to the engagement.

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is

A. Standard unqualified.

Many new services assurance services are performed in accordance with Statements on

A. Standards for Attestation Services.

The right to practice as a CPA is given by which of the following organizations?

A. State Boards of Accountancy

Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling?

A. Statistical samples are more representative of the population.

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on

A. Substantive procedures.

Which of the following best describes the auditors' approach to the audit of accrued liabilities?

A. Test computations.

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a

A. Test of a control.

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?

A. Testing the entity's computation of standard overhead rates.

Which of the following would be least likely to be regarded as a test of a control?

A. Tests of the additions to property by physical inspection.

The auditors' report for a nonpublic company should indicate:

A. That the audit was made in accordance with auditing standards generally accepted in the United States of America.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?

A. The account balances as of year end will generally be confirmed.

The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct?

A. The adjusted allowance for sampling risk will be smaller than had been planned.

Which of the following is generally true about the sufficiency of audit evidence?

A. The amount of evidence that is sufficient varies inversely with the risk of material misstatement.

Auditors must communicate internal control "significant deficiencies" to

A. The audit committee.

Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?

A. The auditor is not independent.

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

Which of the following statements is generally correct about audit evidence?

A. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

A. The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.

Which of the following topics is not normally included in an engagement letter?

A. The auditors' preliminary assessment of internal control.

When a conflict exists between an accounting principle supported by a pronouncement of an authoritative body and an accounting principle supported by widely recognized practice, which standard prevails?

A. The authoritative body pronouncement.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

A. The confirmations are sent on the client's letterhead.

The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify

A. The introductory, scope, and opinion paragraphs of the report.

Which of the following is a software component of a computer system?

A. The operating system.

Which of the following statements is correct concerning statistical sampling in tests of controls?

A. The population size has little effect on determining sample size except for very small populations.

Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests?

A. The projected misstatement exceeds the tolerable misstatement.

Which of the following types of risk is of critical importance to auditors in performing tests of controls?

A. The risk of assessing control risk too low.

Which of the following would be most likely to be an appropriate addressee for an audit report?

A. The shareholders of the corporation whose financial statements were examined.

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion?

A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases.

When a company has changed auditors, according to the Professional Standards:

A. The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.

Which of the following personnel is responsible for the proper functioning of the security features built into the operating system?

A. The systems programmer.

In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit?

A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.

Consider a company whose sales are initiated by customers either through the Internet, or in a retail store. Which of the following is correct?

A. These types of sales represent two major classes of transactions within the sales process.

In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size?

A. This year's sample is larger than last year's sample.

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:

A. Trace a sample of the bills of lading to sales invoices.

The capability for computers to communicate with physically remote terminals is an important feature in the design of modern business information systems. Which of the following risks associated with the use of telecommunications systems is minimized through the use of a password control system?

A. Unauthorized access to system program and data files.

When the auditors discover an understatement of liabilities, they would most likely also expect to find an

A. Understatement of assets.

Auditors should be aware that a voucher system may result in which of the following at year-end

A. Understatement of liabilities.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

A. Understatement of outstanding checks.

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

A. Unpaid bills.

An independent auditor has concluded that a substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an)

A. Unqualified opinion with an appropriate explanatory paragraph.

Which of the following is correct relating to an engagement to apply agreed-upon procedures to prospective financial statements?

A. Use of the report is restricted to the specified users.

Which of the following is a password security problem?

A. Users are assigned passwords when accounts are created, but do not change them.

After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to

A. Verify that the controls have been implemented (placed in operation).

An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as

A. Vertical analysis.

CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so:

A. Violates professional standards.

A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final amount that will appear in the financial statement, is referred to as a

A. Working trial balance.

A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client?

A. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.

The American Institute of Certified Public Accountants has the primary authority to establish accounting standards. True False

FALSE

The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice. True False

FALSE

The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business. True False

FALSE

The Miscellaneous Revenue account should only be analyzed if it is material in amount. True False

FALSE

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

B. Analytical procedures.

Which of the following is not a responsibility that should be assigned to a company's internal audit department?

B. Approving disbursements.

A circumstance caused scope limitation in a Sarbanes/Oxley 404 internal control audit is most likely to result in a(n)

B. Disclaimer of opinion.

The 10,000 accounts receivable of DEF Company have a total book value of $120,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $1,000 and an audited value of $1,200. - Using the mean-per-unit estimation technique, the estimated total audited value of the population is:

B. $120,000.

Using ratio estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population?

B. $161,538.

The 1000 accounts receivable of Winco Company have a total book value of $20,000 (Average book value = $20). Bob Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values: 1. Book value of $19. 2. Audited value of $19.60. - What is the estimated total audited value using mean per unit sampling?

B. $19,600.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is

B. $30,000

The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. - Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:

B. $38,462

Using the mean-per-unit estimation method an auditor has properly calculated the estimated total audited value of a population as $200,000. Her sample included 200 of the population's 40,000 items. She found that, in her sample the average audited value was $1 less than the average book value. What was the average audited value in the sample?

B. $5.

Which of the following audit procedures is least likely to detect an unrecorded liability?

B. Analysis and recomputation of depreciation expense.

A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a

B. Lead schedule.

A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is

B. $60,000

The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable?

B. 12.5%

Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when

B. A book value for each sample item is unknown.

Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements?

B. A change from an unacceptable accounting principle to a generally accepted one.

Which of the following is an appropriate form of report for auditors who have audited the financial statements of a company when they are not independent?

B. A disclaimer of opinion, with an indication of the lack of independence.

When reporting upon a review engagements on an entity's management discussion and analysis, the report is ordinarily:

B. A restricted use report.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect

B. A second payment of an account payable which had already been paid in full two months earlier.

An auditor's report on comparative financial statements should be dated as of the date of the

B. Accumulation of sufficient appropriate audit evidence.

When designing the physical layout of a data processing center, which of the following would be least likely to be a necessary control that is considered?

B. Adequate physical layout space for the operating system.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

B. Aging of accounts receivable.

Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client?

B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

Independence is required of a CPA performing:

B. All attestation services, but not other professional services.

Which of the following is correct with respect to control deficiencies discovered during an audit?

B. All material weaknesses in internal control should be reported to the audit committee.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

B. Allowance for doubtful accounts.

The audit time budget is an example of:

B. An administrative working paper.

ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard?

B. An audit partner in the Eloi office.

Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in

B. An engagement letter.

AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that:

B. An unacceptable risk of non-independence exists.

An auditor is reporting on cash basis financial statements. These statements are best referred to in his opinion by which of the following descriptions?

B. Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.

Under a PCAOB standards for an internal control audit, which of the following is least likely to indicate a significant deficiency relating to a client's antifraud programs?

B. Audit committee active engagement in discussions on the topic of fraud.

When a threat to independence arises an auditor should consider

B. Available safeguards to independence.

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

B. Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm.

A "comfort letter" to an investment banking firm will normally not

B. Be included with the registration statement for the securities.

Tracing copies of sales invoices to shipping documents will provide evidence that all

B. Billed sales were shipped.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of

B. Canceled checks.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

B. Canceling supporting documentation after payment.

When an accountant compiles a financial forecast, the accountant's report should include a(an)

B. Caveat that the prospective results of the financial forecast may not be achieved.

On receiving the bank cutoff statement, the auditor should trace

B. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

The auditors use a bank cutoff statement to compare

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Which of the following manipulations would understate receivables on the financial statements?

B. Closing the sales journal prior to year-end.

The underwriter of a securities offering may request that an auditor perform specified procedures and supply certain assurances concerning unaudited information contained in a registration statement. The auditor's response to such a request is commonly called a

B. Comfort letter.

This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations:

B. Committee of Sponsoring Organizations.

Kiting would least likely be detected by

B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

A practical and effective audit procedure for the detection of lapping is

B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of

B. Completeness.

Which of the following assertions is of principle concern to the auditors in the examination of accounts payable?

B. Completeness.

The accountants' compilation report should be dated as of the date of

B. Completion of the compilation.

In a client/server environment, the "client" is most likely to be the

B. Computers of various users.

The Government Accountability Office (GAO):

B. Conducts operational audits and reports the results to Congress.

The five principles of a reliable system considered in a Trust Services engagement include, availability, security, processing integrity, online privacy, and

B. Confidentiality.

Which of the following is not true about the confirmation of accounts receivable?

B. Confirmation requests should be signed by the auditors.

Which of the following is least likely to be evidence of operating effectiveness of controls?

B. Confirmations of accounts receivable.

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?

B. Confirming accounts payable.

The completeness of computer-generated sales figures can be tested by comparing the number of items listed on the daily sales report with the number of items billed on the actual invoices. This process uses

B. Control totals.

Which statement is correct concerning the relevance of various types of controls to a financial statement audit?

B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

The best method of achieving internal control over advanced IT systems is through the use of:

B. Controls written into the computer system.

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into

B. Cost of good sold.

Changing from a sampling plan using random selection with replacement to random selection without replacement has what effect on the required sample size?

B. Decreases

Increases in the planned allowance for sampling risk have what effect on required sample size?

B. Decreases.

What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk?

B. Decreases.

If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll computer application?

B. Department numbers.

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to

B. Design further audit procedures.

During financial statement audits, auditors seek to restrict which type of risk?

B. Detection risk.

The confirmation of accounts payable is most closely associated with

B. Detection risk.

The confirmation of accounts receivable is most closely associated with

B. Detection risk.

In determining the scope and nature of services to be performed in public practice, a CPA firm should:

B. Determine that the performance of all services is consistent with the firm's members' role as professionals.

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each account in the customer file contains name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to

B. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

Which of the following best describes the reason why independent auditors report on financial statements?

B. Different interests may exist between the company preparing the statements and the persons using the statements.

When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an)

B. Disclaimer of opinion.

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be

B. Disclosed in the notes to the financial statements of the current year.

A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for

B. Distributing payroll checks to employees.

The date on which no information may be deleted from audit documentation is the

B. Documentation completion date.

A system in which the end user is responsible for the development and execution of the computer application that he or she uses is referred to as

B. End-user computing.

A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of:

B. Engagement performance.

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will:

B. Equal the preliminary assessed level of control risk.

Which of the following is the best evidence of continuous ownership of property?

B. Examination of rent receipts from lessees of the property.

Attestation risk is limited to a low level in which of the following engagement(s)?

B. Examinations, but not reviews.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

B. Examine shipping documents for matching sales invoices.

Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control?

B. Examining physical controls over assets.

Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable

B. Examining underlying documentation for cash disbursements in the period after year-end.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

B. Extreme degree of competition within the industry.

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit?

B. Factors whose presence often have been observed in circumstances where frauds have occurred.

Given one or more hypothetical assumptions, a responsible party may prepare an entity's expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as

B. Financial projections.

The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over

B. Financial reporting.

Which of the following types of services is generally provided only by CPA firms?

B. Financial statement audits.

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?

B. For subsequent comparison with the completed inventory listing.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?

B. Form S-1.

Controls are not designed to provide assurance that

B. Fraud will be eliminated.

A dual purpose test simultaneously.

B. Functions as a substantive test and as a test of controls.

The standard auditors' report for the audit of a nonpublic company generally includes an introductory paragraph, a scope paragraph, and an opinion paragraph. In the report the auditors refer to both accounting principles generally accepted in the U.S. and auditing standards generally accepted in the U.S. In which of the paragraphs are these terms used?

B. GAAS in the scope paragraph and GAAP in the opinion paragraph.

Requirements for training, independence and due professional care are included in which group of the generally accepted auditing standards?

B. General.

In their consideration of a client's IT controls, the auditors will encounter general controls and application controls. Which of the following is an application control?

B. Hash total.

Which is least likely to be a question asked of employee personnel during a walkthrough?

B. Have you assessed the operating effectiveness of the system?

An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as

B. Horizontal analysis.

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?

B. Human judgment in the decision making process.

Which of the following best describes a portion of the auditors' responsibility regarding illegal acts by clients?

B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.

An audit firm has been engaged to report on whether a material weakness that previously resulted in an adverse opinion on internal control has been remediated. Which of the following statements is correct?

B. If there has been an auditor change, the successor auditor may issue such a report.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?

B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements.

Tests of controls are most likely to be performed when:

B. Inadequate substantive procedures exist to restrict audit risk to an acceptable level.

An attestation engagement:

B. Includes a report on subject matter, or on an assertion about subject matter.

As compared with the US nonpublic company audit report, the international audit report:

B. Includes enhanced explanation of the audit process.

The attest function:

B. Includes the preparation of a report of the CPA's findings.

Which of the following is an auditor least likely to consider a departure from generally accepted accounting principles?

B. Including in inventory items that are consigned out to vendors, but not yet sold.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations?

B. Inclusion of the information in the engagement letter.

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of

B. Incorrect rejection.

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist?

B. Increase the assessed level of detection risk.

When compared to the consideration of internal control for purposes of an audit, an examination of management's assertion about the effectiveness of an entity's internal control for a nonpublic company may be expected to require a(n)

B. Increased scope of tests of controls.

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?

B. Independence.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if

B. Information about the entity's ability to continue as a going concern is not disclosed.

Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's financial statements include

B. Inquiries concerning actions taken at meetings of the stockholders and the board of directors.

Which of the following is not true about the auditors' verification of notes receivable?

B. Inspecting the notes is sufficient evidence of existence of the notes.

Which of the following groups are not considered a specialist by AICPA Professional Standards:

B. Internal auditors.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if

B. Internal control over receivables is good.

The scope of substantive procedures as compared to the scope of tests of controls generally vary

B. Inversely.

The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the

B. Investigation of significant variations and unusual relationships.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the

B. Iron curtain approach.

When the auditors are associated with the financial statements of a public company, but have not audited the financial statements, they should

B. Issue a disclaimer of opinion.

When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should

B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action.

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)?

B. It is recognized in the Statements on Auditing Standards.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of

B. Kiting.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n)

B. Known misstatement.

It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an)

B. Limitation in the scope of the audit.

Which of the following forms of organization is most likely to protect the personal assets of any partner or shareholder who has not been involved on an engagement resulting in litigation?

B. Limited liability partnership.

With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion of field work is

B. Limited to the specific event referred to.

Arel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modit Co. regarding Modit's written assertion about its compliance with contractual requirements to pay royalties. Arel's report on these agreed-upon procedures should contain a (an).

B. List of the procedures performed (or reference thereto) and Arel's findings.

Which of the following subsequent events might require an adjustment to the client's financial statements?

B. Loss on the sale of a closely-held investment.

Which of the following is least likely to be required on an audit?

B. Make a legal determination of whether fraud has occurred.

When planning an audit, an auditor should:

B. Make preliminary judgments about materiality levels for audit purposes.

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the:

B. Management of the company.

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?

B. Management's disregard for internal control.

The objective of a review of interim financial information is to provide the accountant with a basis for reporting whether

B. Material modifications should be made to conform with generally accepted accounting principles.

Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?

B. Material related party transactions must be disclosed in the notes to the financial statements.

A material weakness involves a reasonable possibility that what size misstatement will not be prevented or detected?

B. Material.

When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population

B. May occur in a systematic pattern and destroy the sample randomness.

Which of the following best describes what is meant by generally accepted auditing standards?

B. Measures of the quality of the auditors' performance.

The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent

B. Misinterpretations regarding the degree of responsibility that the auditor is assuming.

Interim information of public companies.

B. Must be reviewed by CPAs before it is filed with the Securities and Exchange Commission.

When a Statement Auditing Standards uses the word "should" relating to a requirement, it means that the auditor:

B. Must comply with requirements unless the auditor demonstrates and documents that alternative actions were sufficient to achieve the objectives of the standards.

An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

B. Observation and inquiry.

General controls over IT systems are typically tested using:

B. Observation, inspection, and inquiry.

Which of the following procedures is usually the first step in reviewing the financial statements of a nonpublic entity?

B. Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should:

B. Obtain a knowledge of matters that relate to the nature of the entity's business.

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the

B. Occurrence of sales transactions.

A successor auditor has accepted an engagement that was previously performed by a predecessor auditor and, prior to accepting the engagement, has communicated with the predecessor. When the successor believes that the predecessor has performed satisfactory previous audits, which of the following is correct?

B. Ordinarily the successor auditors may be able to accept the opening balances of the current year with a minimum of verification work.

Which of the following is not a type of auditors' opinion?

B. Ordinary.

Auditors may choose not to confirm accounts payable because:

B. Other reliable external evidence to support the balances is likely to be available.

An example of an access control is a

B. Password.

The effectiveness of controls is not generally tested by

B. Performance of analytical procedures.

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations?

B. Physically examine items sold.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely?

B. Plant assets were retired during the year.

An explanatory paragraph relating to a scope limitation in the audit of the financial statements of a nonpublic company should be placed

B. Prior to the opinion paragraph.

Which of the following would the auditors consider to be a weakness in an IT system?

B. Programmers are allowed access to the file library.

Which of the following is not a function of working papers?

B. Provide support for the accounting records.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should

B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the

B. Purchase cutoff procedures.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in

B. Qualification of the audit report.

In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient?

B. Ratio estimation.

The minimum likelihood of loss involved in the consideration of a possible material weakness is

B. Reasonably possible.

The minimum likelihood of loss involved in the consideration of a possible significant deficiency is

B. Reasonably possible.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?

B. Receive a cutoff statement directly from the client's bank.

The use of a "blind" purchase order is designed to prevent errors by the

B. Receiving department.

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with

B. Receiving reports.

A client recorded a payable for a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner?

B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

A "bill and hold" scheme is most likely to include

B. Recording as sales items that the company retains as of year-end.

After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Under these circumstances the auditors would most likely

B. Reduce substantive procedures in areas where the internal control was found to be effective.

A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management

B. Refuses to permit its lawyer to respond to the letter of audit inquiry.

An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of:

B. Related party transactions.

Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store?

B. Reliance placed upon a specialist to evaluate the diamonds.

Which of the following will not result in qualification of the auditors' report due to a scope limitation?

B. Reliance placed upon the report of other auditors.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items

B. Represented by inventory tags are included in the listing.

Which of the following is not a control that should be established for purchases of equipment?

B. Requiring that the department in need of the equipment order the equipment.

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts?

B. Review accounts which have been written off as uncollectible prior to year-end.

When an accountant is not independent, the accountant is precluded from issuing a

B. Review report.

Which of the following is not currently an acceptable form of association with prospective financial statements?

B. Review.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:

B. Treasurer

Whenever special reports, filed on a printed form designed by authorities, call upon the independent auditors to make an assertion that the auditors believe is not justified, the auditors should

B. Reword the form or attach a separate report.

Which of the following is not a component of the control environment?

B. Risk assessment.

The individual looking for guidance on revenue recognition is most likely to appropriately review

B. SAB 104.

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States

B. SEC registrants.

Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence?

B. Safeguards created to assure proper training within both the client and attest environment.

Which of the following is not a broad category of threat to auditor independence?

B. Safeguards implemented by the client.

Which of the following is not considered one of the five major components of internal control?

B. Segregation of duties.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error

B. Send a bank confirmation as of year-end.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

B. Sending accounts receivable confirmations.

Which of the following statistical sampling techniques involves taking samples in a series of stages?

B. Sequential sampling.

An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the

B. Standard deviation.

Which of the following is not an assertion relating to classes of transactions?

B. Sufficiency.

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

B. Supervising the taking of the annual physical inventory.

Which of the following is intended to detect deviations from prescribed controls?

B. Tests of controls designed specifically for the client.

In the consideration of internal control, the operating effectiveness of controls is tested by

B. Tests of controls.

Which of the following is correct when a company is issuing condensed financial statements developed from audited financial statements?

B. The CPA may issue a report on whether the condensed information is fairly stated in all material respects in relation to the basic financial statements.

A problem for a CPA associated with advanced IT systems is that:

B. The audit trail is sometimes generated only in machine readable form.

The unqualified standard audit report of a nonpublic company does not explicitly state that

B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits?

B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows

B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles.

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

B. The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

The first standard of field work recognizes that early appointment of the independent auditors has many advantages to the auditors and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditors?

B. The auditors will be able to complete substantive procedures prior to year-end.

Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion

B. The auditors' judgment.

Which of the following statements is correct regarding the auditor's determination of materiality?

B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is

B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.

An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?

B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmations indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that

B. The cash receipts journal was held open after year-end.

The party responsible for assumptions identified in the preparation of prospective financial statements is usually

B. The client's management.

Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests?

B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.

When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that

B. The costs of training staff may be higher.

In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3?

B. The covered member continues to hold an immaterial indirect financial interest in the client.

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?

B. The existence of inventories is inherently difficult to substantiate.

Well-designed internal control that is functioning effectively is most likely to detect an fraud arising from

B. The fraudulent action of an individual employee.

Which of the following is not a factor that is considered a part of the client's overall control environment?

B. The information system.

Which of the following statements is not correct regarding the auditor's further analysis?

B. The other regions all generate higher sales per square foot than the Mid-Central Region.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

B. The positive form used for large balances and the negative form for the small balances.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except

B. The principal amount paid on a direct liability.

Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration?

B. The rate of technological change is moderate in the industry.

Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?

B. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.

Which of the following is correct concerning financial statements prepared in the United States for use in another country?

B. The type of audit report issued depends upon whether it is for use primarily outside the United States.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

B. There was an improper cutoff of sales at the end of the year.

The independent auditors might consider the procedures performed by the internal auditors because

B. They are employees whose work might affect the independent auditors' work.

Which of the following is not a control that generally is established over cash receipts?

B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

B. To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold.

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

B. Tour the manufacturing plant or production facility.

An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and

B. Treat the missing check as a deviation for the purpose of evaluating the sample

Which of the following engagements is most likely to consider availability, security, integrity, and maintainability of a company's computer systems?

B. Trust Services.

The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report on the financial statements will probably contain a(an)

B. Unqualified opinion and an explanatory paragraph.

An auditor identified a material weakness in internal control in August. The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminates the material weakness prior to year-end. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is

B. Unqualified.

An auditor identified a significant deficiency in internal control in December. The client was informed and the client corrected the significant deficiency shortly before year-end (December 31); the auditor agrees that the correction eliminates the significant deficiency as of December 31. The appropriate audit report on internal control under a PCAOB Standard No. 2 audit of internal control is

B. Unqualified.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that

B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment?

B. Using a budget to forecast and control acquisitions and retirements.

A company's labor distribution report requires extensive corrections each month because of labor hours charged to inactive jobs. Which of the following data processing input controls appears to be missing?

B. Validity test.

There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate", respectively, are

B. Variables and attributes.

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all

B. Vendor's invoices.

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including

B. Whether it has been implemented (placed in operation).

When the auditors express an opinion on financial statements their responsibilities extend to:

B. Whether the results of their client's operating decisions are fairly presented in the financial statements.

The auditors' understanding established with a client should be established through a(an)

B. Written communication with the client.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should

C. Issue an "except for" qualification or an adverse opinion.

Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also:

C. Compliance.

Which of the following is an example of general computer control?

C. Operations manual.

Financial statements that are developed from and summarize the overall information presented in audited financial statements are referred to as

C. Condensed financial statements.

The 3000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is:

C. $1,900

The 10,000 accounts receivable of DEF Company have a total book value of $120,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $1,000 and an audited value of $1,200. - Using the difference estimation technique, estimated total audited value of the population is:

C. $140,000.

Using mean-per-unit estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population?

C. $168,000.

The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. - Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be

C. $38,500

Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $640,000. The projected misstatement based on this sample is:

C. $60,000

A client company has not paid its 20X3 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X4 audit, the 20X3 audit fees must be paid before the

C. 20X4 report is issued.

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by

C. A CPA-shareholder of the client corporation.

Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to

C. A bank with which the entity is negotiating for a loan.

The auditors may expect a proper debit to goodwill due to

C. A business combination.

Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report?

C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.

An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that

C. A compilation is limited to presenting in the form of financial statements information that is the representation of management.

Which of the following requires modification of a review report

C. A departure from generally accepted accounting principles.

Which of the following best describes a voucher prepared under good internal control?

C. A document prepared by Accounts Payable authorizing a cash disbursement.

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by.

C. A manager or partner who has a comprehensive knowledge of the client's business and industry.

Analytical procedures are required at the planning stage of all audits and as

C. A part of the final overall review.

Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic audit client in the Oklahoma City office of a national CPA firm?

C. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client.

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to

C. A separate paragraph which discusses the basis for the opinion rendered.

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain

C. A statement of restrictions on the use of the report.

Which of the following is required documentation in an audit?

C. A written audit program.

Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control?

C. Acceptable level of risk of assessing control risk too low.

To test the existence assertion for recorded receivables, an auditor would select a sample from the.

C. Accounts receivable subsidiary ledger.

Which of the following best describes the specific accounts payable that are selected for confirmation?

C. Accounts with a large amount of activity regardless of their balance.

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the

C. Adequacy of replacement funds.

Which of the following may be used to reduce the risk of nonsampling errors?

C. Adequately planning audit samples.

A scope restriction is least likely to result in a(an)

C. Adverse opinion.

Which of the following forms of advertising would most likely to be considered to be a violation of Rule 502 of the AICPA Code of Professional Conduct?

C. Advertising including an indication that the firm has a close relationship with several tax court judges.

Most of the audit work on accounts payable is typically performed

C. After the balance sheet date.

Which of the following types of services is most likely to result in a restricted use report?

C. Agreed-upon procedures.

The provisions of the Foreign Corrupt Practices Act apply to:

C. All corporations that must file under the Securities Exchange Act of 1934.

After the CPAs have selected particular accounts receivable for confirmation

C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.

To determine sample size in an attribute sampling application, what must be specified?

C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.

An auditor's report on financial statements prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles should include all of the following except

C. An opinion as to whether the basis of accounting used is appropriate under the circumstances.

Which of the following procedures is not performed as a part of planning an audit engagement?

C. Confirmation of all major accounts.

Which of the following statements is not correct?

C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

An auditor performs analytical procedures that involve comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on the above information, the most likely cause of the increase in gross margin would be

C. An overstatement of year-end inventory.

In an audit opinion on financial statements, the expression "accounting principles generally accepted in the United States of America":

C. Appears in the opinion paragraph of the auditors' report.

If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors

C. Are assuming full responsibility for the work of the other auditors.

The auditors who become aware of an internal control significant deficiency are required to communicate this to the

C. Audit committee.

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the

C. Audit committee.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

An example of an internal control weakness is to assign the payroll department the responsibility for

C. Authorizing increases in pay.

Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on financial statement audits?

C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern.

Which of the following is not a distinctive characteristic of advanced IT systems?

C. Batch processing of transactions.

Which of the following statistical selection techniques is least desirable for use by an auditor?

C. Block selection.

The auditors' report may be addressed to the company whose financial statements are being examined or to that company's:

C. Board of Directors.

Parallel simulation programs used by the auditors for testing programs:

C. Can use live data or test data.

When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited?

C. Cash

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?

C. Client records include a large number of relatively small balances.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud?

C. Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following would be used on a review engagement?

C. Comparison of current-year to prior-year account balances.

Which of the following is not a typical analytical procedure?

C. Comparison of recorded amounts of major disbursements with appropriate invoices.

Which of the following is least likely to be directly examined in an inspection performed by the PCAOB?

C. Compilation engagements.

An assertion that is particularly difficult to audit with respect to personal financial statements is

C. Completeness.

Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?

C. Compliance audit.

Which of the following generally provides the least evidence regarding the valuation of accounts receivable?

C. Confirming current (0-30 day) year-end accounts receivable.

While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and

C. Consider the likelihood that the risks could result in material misstatements.

If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence the auditor should:

C. Consider the threat from the perspective of a reasonable an informed third party who has knowledge of all the relevant information.

A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is:

C. Considered discreditable to the profession.

When management presents a written assertion on internal control effectiveness, it evaluates the company's internal control using reasonable criteria for internal control, referred to as.

C. Control criteria

Which of the following testing techniques minimizes the possibility that the auditors will contaminate a client's financial records?

C. Controlled programs.

The auditors' count of the client's cash should be coordinated to coincide with the

C. Count of investment securities.

An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as

C. Cross-sectional analysis.

When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an exception report. The exception report should most probably be reviewed and followed up on by the

C. Data control group.

If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to

C. Decrease.

A primary purpose for establishing a code of conduct within a professional organization is to

C. Demonstrate acceptance of responsibility to the interests of those served by the profession.

To minimize the opportunities for fraud, unclaimed cash payroll should be

C. Deposited in a special bank account.

Working papers that record the procedures used by the auditor to gather evidence should be

C. Designed to meet the circumstances of the particular engagement.

When using a statistical sampling plan, the auditors would probably require a smaller sample if the

C. Desired risk of incorrect acceptance increases.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

C. Detection risk.

If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do not disclose the basis of accounting used, the accountant should

C. Disclose the basis of accounting in the accountant's report.

The inspection of a vendor's invoice by the auditors is

C. Documentary evidence about occurrence of a transaction.

Which of the following is not a control over cash disbursements?

C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor

C. Organizational status within the company.

Which of the following revenue related transactions is not linked to the accounts indicated?

C. Don't write off uncollectible receivables--sales returns, sales discounts.

Which of the following is most likely to include user group development and execution of certain computer applications?

C. End user computing.

Which of the following is one of the elements of AICPA quality control?

C. Engagement performance.

An audit should be designed to achieve reasonable assurance of detecting material misstatements due to:

C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.

Which of the following is not a general objective for the audit of asset accounts?

C. Establishing proper liabilities relating to assets.

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to

C. Estimate credit losses.

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee?

C. Evidence of a lack of objectivity by those responsible for accounting decisions.

Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable?

C. Examination of January receiving reports prepared for goods shipped FOB destination in December to the client.

Which attest engagement aligns most directly with a financial statement audit in terms of assurance provided?

C. Examination.

A plant manager would be most likely to provide information on which of the following?

C. Existence of obsolete inventory.

Which of the following is not a data transmission control?

C. File labels.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company

C. Holds legal title to the merchandise.

A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of:

C. Human resources.

Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. The lower number of stores in the Mid-Central Region. II. Sales employees are not as productive in generating sales as those in other regions. III. The Mid-Central Region has a lower gross margin.

C. II and III only.

Which of the following computer system risks would be increased by the installation of a database system?

C. Improper data access.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to

C. Increase ownership equity.

Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work?

C. Independence

Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management?

C. Independence.

Comfort letters are ordinarily signed by the

C. Independent auditor.

Which of the following information must be reported on in the auditors' report?

C. Information accompanying financial statements in auditor-submitted documents.

The major components of internal control include all of the following, except:

C. Internal auditing.

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and

C. Internal control over financial reporting.

The body that issues international pronouncements providing auditing procedural and reporting guidance is the:

C. International Auditing and Assurance Standards Board.

Confirmation would be most effective in addressing the existence assertion for the:

C. Inventory held on consignment.

Which of the following conditions identified during the audit increases the risk of employee fraud?

C. Inventory items of small size, but high value.

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system which of the following is most likely to be overstated relating to the year XX financial statements?

C. Inventory.

Which of the following is not correct relating to the Sarbanes-Oxley Act?

C. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.

After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that

C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with:

C. Knowledge required to fulfill assigned responsibilities and to progress within the firm.

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate

C. Known, projected and other estimated misstatements in the financial statements.

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

C. Lease rather than purchase operating facilities.

Statistical sampling generally may be applied to test internal control when the client's internal control procedures:

C. Leave an audit trail in the form of evidence of compliance.

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?

C. Legality.

The auditor will most likely perform extensive tests for possible understatement of

C. Liabilities.

Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report?

C. Limited assurance on the information presented.

A typical objective of an operational audit is for the auditor to:

C. Make recommendations for improving performance.

Which of the following expressions is least likely to be included in a client's representation letter?

C. Management acknowledges responsibility for illegal actions committed by employees.

Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan

C. May refer to the audit of the other CPA.

Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA?

C. Members, regardless of whether they are in public practice, are required to meet such requirements.

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that

C. Misstatements have been prevented or detected.

Deficiencies in internal control identified by the auditor that are lesser than significant deficiencies

C. Must be communicated to management, with the audit committee only informed of the communication to management.

The review of audit working papers by the audit partner is normally completed

C. Near the completion of field work.

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?

C. Negative cash flows from investing.

According to PCAOB standards for reporting on internal control, calculating depreciation expense or adjusting for foreign currencies is referred to as

C. Nonroutine transactions.

When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample?

C. Number of deviations in the population.

Which of the following is least likely to be considered a risk assessment procedure?

C. Observation of the counting of inventory.

Which of the following auditing procedures is ordinarily performed last?

C. Obtaining a management representation letter.

Tracing recorded sales transactions to the bills of lading provides evidence about the

C. Occurrence of sales transactions.

The term "special reports" may include all of the following except reports on financial statements

C. Of an organization that has limited the scope of the auditor's examination.

Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)?

C. Performance of substantive procedures.

End-user computing is most likely to occur on which of the following types of computers?

C. Personal computers.

Which of the following is not generally used for selecting samples?

C. Physical representation numbers.

It would be appropriate for the payroll accounting department to be responsible for which of the following functions?

C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

C. Prepare a schedule of bank transfers.

With properly designed internal control, the same employee should not be permitted to

C. Prepare disbursement vouchers and sign checks.

An auditor's report would be designated as a special report when it is issued in connection with financial statements that are

C. Prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered?

C. Prior-year working papers of the predecessor auditors.

Auditing through the computer is most likely to be used when

C. Processing is primarily on line and updating is real-time.

Contingency fee based pricing of accounting services is:

C. Prohibited for clients for whom attestation services are provided.

Passage of the Sarbanes-Oxley Act led to the establishment of the:

C. Public Company Accounting Oversight Board.

A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record

C. Purchases.

A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to

C. Purchases.

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness?

C. Reasonable possibility.

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client

C. Recomputation.

When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that

C. Recorded obligations occurred prior to year-end.

The purpose of using generalized computer programs is to test and analyze a client's computer

C. Records.

To present fairly in conformity with generally accepted accounting principles the financial statements must:

C. Reflect transactions and events within a range of reasonable limits.

Assertions that have a meaningful bearing on whether an account balance, transaction class or disclosure is fairly stated are referred to as

C. Relevant assertions.

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

C. Repairs and maintenance expense.

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the

C. Report release date.

Which of the following is least likely to result in modification of an opinion on management's assertion about the effectiveness of an entity's internal control?

C. Reportable conditions that are not also material weaknesses in internal control

Concerning retention of working papers, the Sarbanes-Oxley Act:

C. Requires retention for at least 7 years.

The form typically used to confirm accounts payable

C. Requires the vendor to indicate the amount of the payable.

Which of the following is not a required source of information for the auditors' assessment of fraud risk?

C. Results of tests of controls.

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?

C. Reviewing subsequent events or transactions.

Assertions with high inherent risk are least likely to involve:

C. Routine transactions.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?

C. Sales and Bad Debt Expense.

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that

C. Sales billed to customers were actually shipped.

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record

C. Sales.

Johnson is engaged in the audit of a utility which supplies power to a residential community. All accounts receivable balances are small and internal control is effective. Customers are billed bi-monthly. In order to determine the validity of the accounts receivable balances at the balance sheet date, Johnson would most likely

C. Send negative confirmation requests.

For effective internal control, which of the following functions should not be assigned to the company's accounting department?

C. Signing payroll checks.

Which of the following statements is correct with respect to explanatory paragraphs in reports on audits of the financial statements of nonpublic companies?

C. Sometimes they precede and sometimes they follow the opinion paragraph.

The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as:

C. Statements on Auditing Standards (SASs).

Which of the following are not enforceable under the AICPA Code of Professional Conduct?

C. Statements on Responsibilities in Tax Practice.

An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to

C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately.

The auditors' search for unrecorded liabilities is completed

C. Subsequent to the balance sheet date.

During an audit engagement pertinent data are prepared and included in the audit working papers. The working papers primarily are considered to be:

C. Support for the auditors' representations as to compliance with generally accepted auditing standards.

Which of the following statements is correct?

C. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs

C. Tests of controls and limited tests of current year property and equipment transactions.

Which of the following audit tests would be regarded as a test of a control?

C. Tests of the signatures on canceled checks to board of director's authorizations.

Which of the following is an auditor least likely to inquire about when performing a review of a nonpublic company?

C. That financial statements are prepared in conformity with a special basis of accounting.

A report on internal control performed in accordance with PCAOB Standard No. 2 includes an opinion on internal control for

C. The "as of date."

Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"?

C. The CPA's father is president of the audit client.

Which of the following modifications of the auditors' report does not include an additional paragraph?

C. The audit report indicates a division of responsibility between two CPA firms.

An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue?

C. The auditor should not make management decisions for an audit client.

Which of the following statements is correct concerning the understanding of internal control needed by auditors?

C. The auditors must have a sufficient understanding to assess the risks of material misstatement.

Which of the following is true about the auditors' consideration of internal control in a financial statement audit?

C. The auditors must obtain an understanding of the steps in processing major types of transactions.

Which of the following is true about the auditors' observation of the client's physical inventory?

C. The auditors should evaluate the adequacy of the client's counting procedures.

Which of the following is true about the auditors' observation of the client's physical inventory?

C. The auditors' observation addresses the existence assertion.

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has

C. The authority to make purchases of requisitioned materials and services.

Which of the following is consistent with effective internal control over sales transactions?

C. The billing department accounts for all shipping documents.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

C. The cashier posts the receipts to the accounts receivable subsidiary ledger.

The auditors must obtain written client representations that normally should be signed by

C. The chief executive officer and the chief financial officer.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

Which of the following is not a difference between the audit report of a nonpublic and public company?

C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures.

Which of the following computer related employees should not be allowed access to program listings of application programs?

C. The operator.

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to

C. The purchase order.

Which of the following statements is correct with respect to an audit report issued for financial statements to be used primarily outside of the United States?

C. The report may follow either the U.S. format, modified as appropriate, or may follow the format of the other country.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

C. The request was mailed by the assistant treasurer.

If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?

C. The risk is high that the account is materially misstated.

In which of the following circumstances would an adverse opinion be appropriate?

C. The statements are not in conformity with generally accepted accounting principles regarding pension plans.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

C. The storekeeper is responsible for maintenance of perpetual inventory records.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

C. They are authoritative statements, enforced through the Code of Professional Conduct.

Auditors should perform audit procedures relating to subsequent events?

C. Through the last day of field work.

In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule?

C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.

A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is:

C. To minimize the likelihood of association with clients whose managements lack integrity.

Which of the following is not a primary purpose of audit working papers?

C. To support the financial statements.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by

C. Tracing sales invoices to shipping documents to test the occurrence of reported sales.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?

C. Travel expense.

A control deficiency that is less than a significant deficiency is most likely to result in what form of audit opinion on internal control?

C. Unqualified.

Assume that an auditor is focusing on two weaknesses in internal control. Although neither is by itself a material weakness, the two significant deficiencies in combination represent a material weakness. The client effectively remediates one of them prior to year-end but does not have time to remediate the other prior to year-end. What type of audit report on internal control is appropriate?

C. Unqualified.

The term "except for" in an audit report is

C. Used in a qualified opinion

Determining that receivables are presented at net-realizable value is most directly related to which management assertion?

C. Valuation.

Competence as a certified public accountant includes all of the following except

C. Warranting the infallibility of the work performed.

Which of the following is true about analytical procedures?

D. Analytical procedures are used in planning, as a substantive procedure for specific accounts, and in the final review of the audited financial statements.

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of

D. Analytical procedures.

Which of the following would be least likely to be included in an auditor's tests of controls?

D. Analytical procedures.

In variables estimation sampling, the sample standard deviation is used to calculate the

D. Adjusted allowance for sampling risk.

A CPA should maintain objectivity and be free of conflicts of interest when performing:

D. All professional services.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

D. An overly complex organizational structure involving unusual lines of authority.

Which of the following is a control procedure that is usually applied to accounts payable?

D. Reconciliation of vendor statements with accounts payable.

A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is

D. $140,000

The 10,000 accounts receivable of DEF Company have a total book value of $120,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $1,000 and an audited value of $1,200. - Using the ratio estimation technique, the estimated total audited value of the population is:

D. $144,000

The 1000 accounts receivable of Winco Company have a total book value of $20,000 (Average book value = $20). Bob Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values: 1. Book value of $19. 2. Audited value of $19.60. - What is the estimated total audited value using difference estimation sampling?

D. $20,600.

Which of the following acts by a CPA would be most likely to be a violation of the AICPA Code of Professional Conduct?

D. A "covered member" owns an immaterial amount of stock in an audit client.

Which of the following is least likely to be tested with generalized audit software?

D. A computer operations manual.

Which of the following is least likely to be a general control over computer activities?

D. A control total.

During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this change?

D. A decrease in the required sample size.

Which of the following does not result in a modification of a compilation report?

D. A lack of consistent application of generally accepted accounting principles.

Which of the following would indicate the need to use positive accounts receivable confirmations?

D. A large number of accounts receivable are in dispute.

Jones & Company CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client?

D. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

Under the attestation standards, in which of the following circumstances is a review report least likely to be issued?

D. A significant limitation on the scope of the engagement has occurred.

Which of the following should not be included in an accountant's standard report based upon the compilation of an entity's financial statements?

D. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

A successor auditor is required to attempt communication with the predecessor auditor prior to

D. Accepting the engagement.

According to PCAOB standards, determining the allowance for doubtful accounts is referred to as a(n):

D. Accounting estimate transaction.

Which of the following fits most directly under the control activities components of the COSO IC framework?

D. Accounting for shipping documents to ensure that all sales are recorded.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to

D. Acknowledge the receipt of securities returned.

In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year?

D. At least every third audit.

Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include the

D. Auditing procedures followed and the testing performed in obtaining audit evidence.

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected

D. Be applied on a basis consistent with those followed in the prior year.

Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $650,000. Based on these results, the auditor would:

D. Because the total audited value +/- adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.

The risk that a company will not be able to meet its obligations when they become due is referred to as:

D. Business risk.

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?

D. Collection of receipts on account and maintaining accounts receivable records.

Which of the following is an analytical procedure that should be applied to the income statement?

D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

It is the end of his client's first quarter and Bill Smith, CPA is performing a compilation of his client's interim financial statements. He has discovered that the client does not wish to present notes to the financial statements. The appropriate CPA report includes

D. Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?

D. Confirmation.

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes

D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Of the following statements about internal control, which one is not valid?

D. Control activities reasonably insure that collusion among employees can not occur.

Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse?

D. Corresponding with the state agency regarding the authenticity of the public warehouse.

Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with

D. Corroborative audit evidence.

The auditors will not ordinarily initiate discussion with the audit committee concerning the

D. Details of the procedures which the auditors intend to apply.

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

D. Determine the expected day of collection of each of the receivables.

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?

D. Develop an estimate of the total likely misstatement in the financial statements.

The program flow charting symbol representing a decision is a

D. Diamond.

Which of the following is not a data transmission control?

D. Distributed data processing.

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to

D. Each of the years in the two-year period.

The concept of materiality would be least important to an auditor when considering the

D. Effects of a direct financial interest in the client upon the CPA's independence.

The WebTrust engagement relates most directly to

D. Electronic commerce systems.

Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level?

D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that

D. Employees worked the number of hours for which their pay was computed.

Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement?

D. Establish the basis for depreciable assets and verify the depreciation expense.

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

D. Examination of deeds and title guaranty policies on hand.

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date?

D. Examination of paid checks issued in payment of securities purchased.

In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditors examining Lowell's financial statements would most likely detect this when

D. Examining the construction work orders supporting items capitalized during the year.

The generally accepted auditing standards adopted by the AICPA include a requirement that the CPAs:

D. Exercise due professional care in the performance of the examination and the preparation of the report.

Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to

D. Expand tests of collectibility.

Which of the following are issued by the Securities and Exchange Commission?

D. Financial Reporting Releases.

Which of the following is a prospective financial statement for general use upon which a practitioner may appropriately report?

D. Financial forecast.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except

D. General ledger.

Which of the following must be included in management's report internal control under section 404 of the Sarbanes/Oxley Act of 2002?

D. Identification of the framework used for evaluating internal control.

An auditor will ordinarily examine invoices from lawyers primarily in order to

D. Identify possible unasserted litigation, claims and assessments.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows

D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

A modification of the CPA's report on a review of the interim financial statements of a publicly-held company would be necessitated by which of the following?

D. Inadequate disclosure.

The auditors will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are

D. Included in the final inventory schedule.

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:

D. Inherent risk.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

To which of the following matters would materiality limits not apply when obtaining written client representations?

D. Instances of fraud involving management.

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the

D. Integrity of management.

Which of the following situations would most likely require special audit planning by the auditors?

D. Inventory is comprised of precious stones.

A significant deficiency:

D. Is less severe than a material weakness.

Which of the following is an advantage of systematic selection over random number selection?

D. It does not require establishment of correspondence between random numbers and items in the population.

With respect to the auditor's planning of a year-end audit, which of the following statements is always true?

D. It is an acceptable practice to carry out parts of the examination at interim dates.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except

D. It overstates assets.

When there are a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if the combination of inherent risk and control risk is

D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Which of the following constitutes a weakness in the internal control of a computer system?

D. Machine operators are supervised by the programmer.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

A CPA should not normally refer to which one of the following subjects in a "comfort letter" to underwriters?

D. Management's determination of line of business classifications.

Which of the following is correct concerning "window dressing" for cash?

D. Many forms of it require no action by the auditors

A material weakness involves an amount that could result in a misstatement that is

D. Material.

A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level?

D. Maximum.

An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the:

D. Measurement date (ordinarily the date of the financial statements).

If the auditor believes that financial statements prepared on the entity's income tax basis are not suitably titled, the auditor should

D. Modify the auditor's report to disclose any reservations.

A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element?

D. Monitoring

The permanent file section of the working papers that is kept for each audit client most likely contains

D. Narrative descriptions of the client's accounting procedures and controls.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements?

D. Net income is overstated.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both

D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that

D. No discrepancies exist between the data on the checks and the data in the journal.

The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is

D. None, as sampling does not seem appropriate in this situation.

In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of

D. Nonsampling error.

The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a

D. Nonsampling error.

An audit performed in accordance with generally accepted auditing standards generally should:

D. Not be relied upon to provide absolute assurance that all illegal acts will be detected.

The minimum likelihood of loss involved in the consideration of a control deficiency that is less than a significant deficiency is

D. Not considered.

Which of the following is not a procedure normally performed while completing the audit?

D. Obtain confirmation of capital stockholdings from shareholders.

Which of the following is not a control that generally is established over cash transactions?

D. Obtaining a receipt for every disbursement.

Which of the following manipulations would understate accounts payable on the financial statements?

D. Overstating purchase returns.

The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee was:

D. Payable if the audit of the financial statements led to a loan.

Management has centralized purchasing and uses a model based upon previous year's sales with adjustments for trends in the market place, e.g., the trend to more casual shoes. A staff auditor has suggested that the centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region. Which of the following would be the best single audit procedure to address the staff auditor's assertion?

D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice

D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most?

D. Presentation and Disclosure

When a CPA is associated with a forecast, all of the following should be disclosed except the

D. Probability of achieving estimates.

Which of the following would be least likely to address control over the initiation and execution of equipment transactions?

D. Procedures exist to restrict access to equipment.

Which of the following is an example of an accrued liability?

D. Product warranty liability.

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date?

D. Property, plant and equipment.

When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most?

D. Property, plant and equipment.

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to

D. Read and consider the manner of presentation of the "other financial information."

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are

D. Reasonable in the circumstances.

The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists?

D. Reasonably informed third party.

If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should

D. Refer to the report of the predecessor auditors.

In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy?

D. Relevant ethical requirements.

If an illegal act is discovered during the audit of a publicly held company, the auditors should first:

D. Report the act to high level personnel within the client's organization and to the audit committee.

Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the audit?

D. Responsibility for losses because of errors of judgment.

Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests?

D. Results will be projected to the population.

Which of the following is not a procedure that auditors typically perform to search for significant events during the subsequent period?

D. Review changes in internal control during the period subsequent to the balance sheet date.

Inquiries and analytical procedures ordinarily form the basis for which type of engagement?

D. Review.

Which of the following is not one of the six elements of AICPA quality control?

D. Review.

If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except:

D. Revoke the offending member's CPA certificate.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the

D. Rollover approach.

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

D. Sales expense.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?

D. Sales.

The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:

D. Securities and Exchange Commission.

Internal control over marketable securities is enhanced when

D. Securities are held under joint control of two or more officials.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions?

D. Securities held for the client by the financial institution.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

D. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness?

D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to

D. Separate the authorization of transactions from the custody of related assets.

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

D. Settlement of litigation in excess of the recorded liability.

For good internal control, a copy of a receiving report should be sent to all of the following departments except

D. Shipping.

The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures:

D. Should compare the deviation rate of the sample to the tolerable rate.

Properly designed internal control will permit the same employee to:

D. Sign checks, and also cancel supporting documents.

A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n)

D. Significant deficiency.

Which of the following is a weakness in internal control that allows a reasonable possibility that a significant (but less than material) misstatement may occur and not be detected?

D. Significant deficiency.

Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?

D. Smaller measure of tolerable misstatement.

Which of the following procedures would an entity most likely include in its disaster recovery plan?

D. Store duplicate copies of files in a location away from the computer center.

A peer review in which the peer reviewers study and appraise a CPA firm's system of quality control to perform accounting and auditing work is referred to as a(n):

D. System review.

Which of the following is not a basic procedure used in an audit?

D. Tests of direct evidence.

Independence of a CPA with respect to a client is not impaired if

D. The CPA has an immaterial joint, closely held business investment with the client.

Which of the following is least likely to render material a quantitatively small misstatement material?

D. The Transaction involves a related party.

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit is that

D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Which of the following statements relating to audit evidence is the most accurate statement?

D. The auditor must obtain sufficient appropriate audit evidence.

Which of the following best describes the auditors' typical observation of plant and equipment?

D. The auditors observe major additions to plant and equipment made during the year.

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

An auditor may decide not to perform tests of controls related to the control activities within the computer portion of the client's internal control. Which of the following would not be a valid reason for choosing to omit such test

D. The controls appear adequate.

Tests of controls do not ordinarily address

D. The cost effectiveness of the way a control was applied.

Which of the following is likely to be of least importance to an auditor in considering the internal control in a company with computer processing?

D. The cost/benefit of data processing operations.

An inventory turnover analysis is useful to the auditor because it may detect

D. The existence of obsolete merchandise.

Consider the following computer applications: (1) At a catalog sales firm, as phone orders are entered into their computer, both inventory and credit are immediately checked. (2) A manufacturer's computer sends the coming week's production schedule and parts orders to a supplier's computer. Which statement below is true for these applications?

D. The first application is an example of on-line real-time and the second is an example of EDI.

Which of the following is the best argument against the use of negative accounts receivable confirmations?

D. The inference drawn from receiving no reply may not be correct.

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan?

D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

Which of the following professionals has primary responsibility for the performance of an audit?

D. The partner in charge of the engagement.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

D. The prospective client is unwilling to make financial records available to the CPA.

The tolerable deviation rate in sampling for tests of controls is:

D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from

D. The shipping clerk's file of duplicate copies of bills of lading.

Which of the following personnel is responsible for determining the computer processing needs of the various users?

D. The systems programmer.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report

D. The type of opinion expressed by the predecessor auditor.

Under which of the following set of circumstances might the auditors disclaim an opinion?

D. There are significant scope limitations on the audit.

Which statement is correct with respect to accounts payable confirmations?

D. They are more frequently used in situations in which some vendors don't send monthly statements.

If the auditors do not perform tests of controls for certain assertions:

D. They must assess control risk at the maximum level for those assertions.

Which of the following is not correct relating to representation letters?

D. They often serve as a substitute for the application of other procedures.

Which of the following is most likely to be considered a risk assessment procedure relating to internal control?

D. Trace a transaction through the information system relevant to financial reporting.

Passwords for microcomputer software programs are designed to prevent

D. Unauthorized use of the software.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

D. Understanding as to the reasons for the change of auditors.

One reason why the independent auditors perform analytical procedures on the client's operations is to identify

D. Unusual transactions.

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for

D. Updating the report on the previous financial statements regardless of the opinion previously issued.

Which is most likely when the assessed level of control risk increases?

D. Use larger sample sizes for substantive procedures.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

D. Use less predictable audit procedures.

After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should

D. Use the date of the previous report.

Which of the following is not a financial statement assertion relating to account balances?

D. Valuation and allowances.

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the

D. Vendors' invoices.

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?

D. Verifying that all inventory owned by the client is on hand at the time of the count.

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?

D. Vouching retirements of plant and equipment.

Which of the following is not used by auditors to establish the completeness of recorded assets?

D. Vouching transactions.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?

D. Writeoff of trade accounts receivable.

The Rules portion of the AICPA Code of Professional Conduct must be followed by only those members in private practice. True False

FALSE

An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements. True False

FALSE

An audit should be designed to provide reasonable assurance of detecting all illegal acts. True False

FALSE

Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements? Conformity with PCAOB Standards: Explicitly Implicitly Adequacy of Diclosure: Explicitly Implicitly

Explicitly Implicitly

A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors. True False

FALSE

A CPA may receive a commission for recommending a particular computer system to an audit client. True False

FALSE

A WebTrust seal assures consumers that they will be satisfied with their purchases. True False

FALSE

A client imposed scope limitation relating to the audit of internal control ordinarily results in a qualified report. True False

FALSE

A company is either audited by the GAO or internal auditors, but not both. True False

FALSE

A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset. True False

FALSE

A compilation of financial statement provides limited assurance regarding the financial statements. True False

FALSE

A major control procedure related to plant and equipment is a budget for depreciation. True False

FALSE

A peer review is generally performed by employees of the AICPA. True False

FALSE

A proof of cash is an audit procedure that is performed on almost every engagement. True False

FALSE

A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board. True False

FALSE

A typical procedure in the audit of property is examination of public records to verify the ownership of the property. True False

FALSE

Accounts payable generally present the auditors with difficult valuation problems. True False

FALSE

Accounts receivable that are written-off should not be turned over to a collection agency. True False

FALSE

An annual peer review is a requirement of the AICPA. True False

FALSE

Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company. True False

FALSE

Audit reports should be dated the date on which the financial statements are issued. True False

FALSE

Auditors project the misstatements found in the sample to the population when using statistical sampling, but not when using nonstatistical sampling. True False

FALSE

Auditors should not review the client's planning of the physical inventory. True False

FALSE

Auditors usually begin their consideration of IT systems with tests of application controls. True False

FALSE

CPAs can advertise the fees only for their nonattest services. True False

FALSE

CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax. True False

FALSE

CPAs use negative accounts receivable confirmations more frequently than positive accounts receivable confirmations. True False

FALSE

Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end. True False

FALSE

Confirmation of accounts payable is a required generally accepted auditing procedure. True False

FALSE

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. True False

FALSE

Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. True False

FALSE

Confirming a bank account establishes existence but not rights to the cash balance. True False

FALSE

Distributive data processing eliminates the need for data security. True False

FALSE

Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements. True False

FALSE

Financial interests of a CPA's nondependent children are attributed directly to the CPA. True False

FALSE

For effective internal control over accounts payable, the purchasing department should approve invoices for payment. True False

FALSE

For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods. True False

FALSE

For good internal control, programmers should not be given access to complete program documentation for the programs they work on. True False

FALSE

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments. True False

FALSE

Idle equipment will generally need to be reclassified as a current asset. True False

FALSE

If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements. True False

FALSE

If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement. True False

FALSE

If the auditors' assessment of the design of internal control reveals that it cannot be relied upon, the auditors are not required to prepare any documentation of internal control for their working papers. True False

FALSE

In a compilation report on a prescribed form, the accountants should take exception to all departures from generally accepted accounting principles. True False

FALSE

In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls. True False

FALSE

Internal auditors should preferably report to the chief accounting officer of the company. True False

FALSE

Internal control over payroll is enhanced when the personnel department distributes payroll checks. True False

FALSE

Internal file labels are designed to prevent errors by programmers. True False

FALSE

It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable. True False

FALSE

Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. True False

FALSE

Letters to underwriters should not contain negative assurances. True False

FALSE

Magnetic tape drives have the advantage of direct access to stored data. True False

FALSE

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. True False

FALSE

Most advanced computer systems do not have audit trails. True False

FALSE

Observation of inventories is a generally accepted auditing standard. True False

FALSE

PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to routine transactions in their consideration of internal control. True False

FALSE

Personal financial statements may be compiled or reviewed, but they should not be audited. True False

FALSE

The Sarbanes-Oxley Act changed auditor association with a client's internal control from the review to the audit form of association. True False

FALSE

The Sarbanes-Oxley Act requires that auditors of publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations. True False

FALSE

The amount involved with a significant deficiency is at least a material amount. True False

FALSE

The attestation standards prohibit the examination of prospective financial statements. True False

FALSE

The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards. True False

FALSE

The auditors have a responsibility to report on all FASB-required supplementary information. True False

FALSE

The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. True False

FALSE

The auditors should propose an adjusting journal entry for all material related-party transactions. True False

FALSE

The auditors should take exception to assets presented at their estimate current values in personal financial statements. True False

FALSE

The auditors typically observe all major items of property, plant and equipment every year. True False

FALSE

The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company. True False

FALSE

The auditors' report on a corporation's financial statements usually is addressed to the president of the company. True False

FALSE

The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts. True False

FALSE

The communications between CPAs and their clients are privileged under federal law. True False

FALSE

The definition of a "deviation" for a test of a control should include only those deviations that result in misstatements in the financial statements. True False

FALSE

The department approving a sales transaction should be the shipping department. True False

FALSE

The lack of effective antifraud programs is always considered a material weakness. True False

FALSE

The most reliable form of documentary evidence generally is considered to be documents created by the client. True False

FALSE

The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis. True False

FALSE

The primary purpose of a letter of representations is to obtain additional evidence about specific accounts. True False

FALSE

The primary purpose of internal control over plant and equipment is to safeguard the assets from theft. True False

FALSE

The professional standards consider calculating depreciation expense a "routine" transaction. True False

FALSE

The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders. True False

FALSE

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible. True False

FALSE

The use of lead schedules is designed to increase the detail of the working trial balance. True False

FALSE

Trust Services are a part of the AICPA's vision that increased trust in annual historical financial statements is necessary. True False

FALSE

Using ratio and difference estimation for a sample is an example of a dual purpose test. True False

FALSE

Well-designed internal control will prevent all fraud by top management. True False

FALSE

When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report. True False

FALSE

When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement. True False

FALSE

Working papers of continuing audit interest usually are filed with the administrative working papers. True False

FALSE

An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on: Financial Statements: Yes or No Internal Control: Yes or No

Financial Statements: Yes Internal Control: Yes

The mean book value of the items included in a mean-per-unit sample is not directly used in the evaluation of sample results. True False

TRUE

The operating system is an example of system software. True False

TRUE

A material weakness because the oversight of the external financial reporting function by the audit committee is ineffective will ordinarily result in communication to: PCAOB: YES NO The Stock Exchange that the company is listed on: YES NO

NO NO

A predecessor auditor is required to attempt to initiate communication with the successor auditor: Prior to the Successor's Acceptance of the Engagement: YES NO Subsequent to the Successor's Acceptance of the Engagement: YES NO

NO NO

When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified: YES NO Disclaimer: YES NO

NO NO

When an auditor issues an unqualified report on financial statements, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? Introductory: YES NO Scope: YES NO Opinion: YES NO

NO NO NO

When the auditor of a nonpublic company issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory: YES NO Scope: YES NO Opinion: YES NO

NO NO YES

Bill Pan, CPA, has posted the general ledger and has maintained the financial records of Zorko Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired? AICPA: YES NO SEC: YES NO

NO YES

Further audit procedures include: Risk Assessment Procedures: YES NO Test of Control: YES NO

NO YES

Primary responsibility for the financial statements lies with: Auditors: YES NO Management: YES NO

NO YES

When a financial forecast fails to disclose a significant assumption used to prepare that forecast, which of the following reports become appropriate? Qualified: YES NO Adverse: YES NO

NO YES

When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualifies: YES NO Adverse: YES NO

NO YES

Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of publicly held entity? Inconsistent Accounting Principle Application: YES NO Inadequate Disclosure: YES NO

NO YES

While performing an audit an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed through: CPA Direct Communication with Shareholders: YES NO The Process of Filing a Form 8-K: YES NO

NO YES

When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory: YES NO Scope: YES NO Opinion: YES NO

NO YES YES

When auditing the statement of cash flows of a profitable, growing company which combination is most likely? Cash Flows from operations: Positive Negative Cash flows from investing: Positive Negative

Positive Negative

A client imposed scope limitation will generally result in a disclaimer of opinion. True False

TRUE

A practitioner may be engaged to perform a review of management's discussion and analysis for an annual or an interim period. True False

TRUE

A vendor's invoice is an example of documentary evidence created by a third party and held by the client. True False

TRUE

Accounts payable from an officer should be classified separately from other accounts payable. True False

TRUE

Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded. True False

TRUE

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. True False

TRUE

An audit is more likely to detect tax evasion than violations of antitrust laws. True False

TRUE

An audit opinion on cash basis financial statements is an example of a special report. True False

TRUE

An immaterial loan from the CPA to an officer of a client impairs the independence of the CPA. True False

TRUE

Analytical procedures are often used for verification of income statement accounts. True False

TRUE

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. True False

TRUE

Assurance services improve the quality of information or its context for decision makers. True False

TRUE

At least a portion of the auditors' consideration of internal control usually is performed at an interim date rather than at the balance sheet date. True False

TRUE

Auditing is frequently only a small part of the practice of local CPA firms. True False

TRUE

Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable. True False

TRUE

CPA firms may use written narratives to describe internal control in their audit working papers. True False

TRUE

Compiled financial statements may omit note disclosures. True False

TRUE

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. True False

TRUE

Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on. True False

TRUE

Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction. True False

TRUE

Data encryption is an example of data transmission control. True False

TRUE

Discovery sampling is equivalent to an attributes sampling plan with a specified expected deviation rate of 0 percent. True False

TRUE

Even when internal control is weak, a significant portion of the audit work on property, plant and equipment may be performed at an interim date. True False

TRUE

Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee. True False

TRUE

For auxiliary storage when the computer is operating, personal computers use hard disk drives. True False

TRUE

Generalized audit software may be used for substantive tests or for tests of controls. True False

TRUE

If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion. True False

TRUE

If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission. True False

TRUE

If management's report on internal control discloses a material weakness, the auditors (who agree that it is a material weakness) will issue a report that includes a qualified opinion. True False

TRUE

If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification. True False

TRUE

In performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages. True False

TRUE

In the audit of depletion the auditors must often rely on the work of specialists. True False

TRUE

Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud. True False

TRUE

Increases in the number of deviations in an attributes sample results in an increase in the achieved upper deviation rate of the attributes sample. True False

TRUE

Increases in the tolerable misstatement result in a decreased sample size when using mean-per-unit estimation. True False

TRUE

Independence is required for the performance of all assurance services. True False

TRUE

Independent audits of today place more emphasis on sampling than did the audits of the 19th century. True False

TRUE

Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories. True False

TRUE

Internal control is concerned with the reliability of financial information. True False

TRUE

Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit. True False

TRUE

Material accounts receivable from related parties should be stated separately from other receivables. True False

TRUE

Material purchases of assets from an affiliated company should be disclosed in the financial statements. True False

TRUE

Normally, general risk contingencies need not be disclosed in the financial statements. True False

TRUE

Overstatement of financial results can involve failure to record a transaction. True False

TRUE

Partners in CPA firms usually have the responsibility for signing the audit report. True False

TRUE

Practitioners may report on either an assertion about the subject matter, or on the subject matter for most attestation engagements. True False

TRUE

Regulation S-X governs the form and content of financial statements filed with the SEC. True False

TRUE

Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting requirements for both management and auditors. True False

TRUE

Statements on Accounting and Review Services are enforceable under the AICPA Code of Professional Conduct. True False

TRUE

Statistical sampling cannot be used to test all control activities. True False

TRUE

Stratification of the population generally results in a more efficient sampling plan. True False

TRUE

Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries. True False

TRUE

Tests of operating effectiveness ordinarily include reperformance of the application of controls. True False

TRUE

The "as of date" for internal control reporting is ordinarily the last day of the fiscal year. True False

TRUE

The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA. True False

TRUE

The SEC does not pass on the merits of the securities that are registered with the agency. True False

TRUE

The attestation standards do not supersede any of the generally accepted auditing standards. True False

TRUE

The auditors must issue a compilation report if they prepare a client's financial statements and submit them to a client who intends to use them for external purposes. True False

TRUE

The auditors' approach to the audit of property, plant and equipment largely results from the fact that relatively few transactions occur. True False

TRUE

The balance sheet for an individual may be titled a Statement of Financial Condition. True False

TRUE

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry. True False

TRUE

The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable. True False

TRUE

The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses. True False

TRUE

The generally accepted auditing standards of field work include a requirement that the auditors obtain sufficient appropriate audit evidence. True False

TRUE

The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values. True False

TRUE

The pronouncements of the International Auditing Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company. True False

TRUE

The receiving department should accept only goods for which there is an approved purchase order on hand. True False

TRUE

The substantive approach to an audit is appropriate for many small businesses. True False

TRUE

The use of a tagging system for inventory taking is designed to prevent double counting of goods. True False

TRUE

To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory. True False

TRUE

Verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another. True False

TRUE

Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets. True False

TRUE

When a U.S.-based organization prepares financial statements which are for use in another country, a U.S. report, modified to reflect the accounting principles of the other country, may be issued. True False

TRUE

When evaluating the results of a variables sampling plan, the projected misstatement is calculated and compared to the tolerable misstatement. True False

TRUE

When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item. True False

TRUE

When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures. True False

TRUE

When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level. True False

TRUE

When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph. True False

TRUE

Which of the following would most likely be included in a SEC 10K filing in which a material weakness in internal control exists?

Unqualified, Adverse

Suitable criteria in an attestation engagement may be available: Publicly: YES NO In CPA's Report: YES NO

YES YES

The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies? Attestation Standards: YES NO Ethics Standards: YES NO

YES YES

The report of a service auditor may provide assurance on whether: Controls are implemented: YES NO Operating Effectiveness of Controls: YES NO

YES YES

A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale? Sale: YES NO Inventory: YES NO

YES NO

An audit provides reasonable assurance of detecting which of the following types of important illegal acts? Direct Effect : YES NO Indirect Effect: YES NO

YES NO

An auditor may obtain information on the December 31 month end balance per bank in which of the following? December 31 Bank Statement: YES NO Schedule of Bank (Cash) Transfer: YES NO

YES NO

An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s) Must: YES NO Should: YES NO

YES NO

Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination performed following the attestation standards. The CPA's conclusion may be on: Subject Matter: YES NO Written Assertion: YES NO

YES NO

In which paragraph of an audit report are auditing standards generally accepted in the United States explicitly mentioned in an audit report of a nonpublic company? Scope: YES NO Opinion: YES NO

YES NO

Walkthroughs provide the auditors with evidence to: Confirm their understanding effectiveness of controls: YES NO Substantiate account balances: YES NO

YES NO

Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances: -The Financial Statement should be adjusted: YES NO -The Event requires Financial Statement disclosure, but no adjustment: YES NO -The Auditor's report should be modified for the lack of consistency. YES NO

YES NO NO

A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale? Sale: YES NO Inventory: YES NO

YES YES

A practitioner's unqualified opinion based upon an examination may ordinarily be on: Subject Matter: YES NO Assertion: YES NO

YES YES

An auditor may obtain information on the December 31 month end balance per bank in which of the following? Standard Confirmation Form: YES NO January 1-10 Cutoff Statement: YES NO

YES YES

Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts. Which procedure(s) would possibly identify these transactions? Trace from source document to Journal: YES NO Vouch from Journals to source documents: YES NO

YES YES

Assurance services performed for decision makers may address the: Quality of information: YES NO Context of Information: YES NO

YES YES

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: Errors: YES NO Misappropriation of Assets: YES NO

YES YES

Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: Fraudulent Financial Reporting: YES NO Misappropriation of Asset: YES NO

YES YES

Financial statement assertions are established for classes of transactions, Account Balances: YES NO Disclosures: YES NO

YES YES

Independence is required when performing: Attest Service: YES NO Assurance Services : YES NO

YES YES

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: Incentive: YES NO Opportunity: YES NO

YES YES

Of the following, which are current types of peer review? System Review: YES NO Engagement Review: YES NO

YES YES

Walkthroughs provide evidence that helps the auditor to: Evaluate design effectiveness of controls: YES NO Confirm whether controls have been in operation: YES NO

YES YES

When performing an audit of internal control under PCAOB requirements, auditors: Design Effectiveness: YES NO Operating Effectiveness: YES NO

YES YES

Which communication option(s) may be used when an accountant submits compiled financial statements to be used only by management? Compilation Report: YES NO Written Engagement Letter: YES NO

YES YES

Which measure of materiality (or both) considers quantitative considerations? Planning: YES NO Evaluation: YES NO

YES YES

Which must management communicate to the audit committee? Know Material Weaknesses: YES NO Know Significant Deficiencies: YES NO

YES YES

Which must the auditor communicate to management? Know Material Weaknesses: YES NO Know Significant Deficiencies: YES NO

YES YES

Which of the following are Trust Services principles? Security: YES NO Availability: YES NO

YES YES

Which of the following are required on all attestation engagements? Suitable Criteria: YES NO Subject Matter: YES NO

YES YES

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? Substantive Tests of Details: YES NO Substantive Analytical Procedures: YES NO

YES YES

The components of the risk of misstatement are: Inherent Risk: YES NO Control Risk: YES NO Detection Risk: YES NO

YES YES NO

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7?

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