Audit final
An auditors review of the repair expense to identify any capital expenditures is a test related to which management assertion? A. Existence B. Completion C. Valuation D. Rights and obligations
B. Completion
In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets? A. Completeness B. Existence C. Rights D. Presentation and disclosure
B. Existence
Which of the following is an example of circumstances that would not limit the audit scope? A. An inadequacy in the accounting records B. The inability to gather sufficient competent evidence C. Emphasis on important matter
C. Emphasis on important matter
Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? A. Completeness B. Rights and obligations C. Existence D. Valuation
C. Existence
An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion? A. Existence B. Completeness C. Rights and obligations D. Valuation
C. Rights and obligations
Which of the following is not a management assertion relevant to inventory? A. Existence of occurrence B. Completeness C. Rights and obligations D. Reporting
D. Reporting
Which of the following is not a management assertion relevant to long-lived assets? A. Existence B. Completeness C. Valuation D. Reporting
D. Reporting
Which of the following is required by accounting standards for the presentation and disclosure of investments in marketable securities? a. By classification as trading, available-for-sale or held-to maturity. b. For an analyst's determination of liquidity. c. For the company's physical possession of the security versus agent holdings. d. For the expected success of the organization of investment.
a. By classification as trading, available-for-sale or held-to maturity.
Which of the following would meet the need for additional control procedures when using computer-generated purchase orders? a. Establishment of a maximum quantity limits that can be ordered within a given time period. b. Automated acceptance for high dollar levels. c. Purchase order copies sent by purchasing to receiving. d. Accounts payable department entering new vendors into the system.
a. Establishment of a maximum quantity limits that can be ordered within a given time period.
The allowance for doubtful accounts will not be precise by either the client or the auditor because of which of the following reasons? a. It is an accounting estimate based upon judgment. b. GAAP is not clear on the calculation of the allowance. c. It is merely a reserve that is reversed by the client as income is needed for profitable results. d. The precision is determined by the results of confirmation responses.
a. It is an accounting estimate based upon judgment.
Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following? a. Roles and activities falling within appropriate segregation of duties. b. Identification cards with picture identification. c. Encrypted passwords memorized by employees. d. The principle of "absolute knowledge".
a. Roles and activities falling within appropriate segregation of duties.
Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following? a. Shipping documents and tracing them to the sales journal. b. Accounts receivable and tracing them to cash receipts. c. Recorded sales transactions and tracing them to the general ledger. d. Inventory records and tracing them to the shipping documents.
a. Shipping documents and tracing them to the sales journal.
Which one of the following is an instance where the auditor would add a paragraph after the opinion paragraph? a. There is serious doubt that the client can continue as a going concern. b. Management's disclosures are not adequate. c. There are significant uncertainties that are not properly disclosed in the footnotes. d. There is a material dollar misstatement in the financial statements.
a. There is serious doubt that the client can continue as a going concern.
When evaluating accounting estimates, the auditor would not concentrate on which of the following key factors and assumptions? a. Those that are within budgetary expectations. b. Those that are subjective and susceptible to misstatement and bias. c. Those that are inconsistent with current economic trends. d. Those that are sensitive to variations.
a. Those that are within budgetary expectations.
A management letter is not required. a. True b. False
a. True
According to the Foreign Corrupt Practices Act of 1977 (FCPA), companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and design and maintain an adequate system of internal accounting controls. a. True b. False
a. True
An independent bank reconciliation provides evidence of the correctness of the year-end cash balance. a. True b. False
a. True
An inherent risk related to asset impairment is management is not typically interested in writing down the asset value. a. True b. False
a. True
If the auditor continues to have substantial doubt about the client continuing as a going concern, the auditor should evaluate the adequacy of the client's related disclosures. a. True b. False
a. True
If unusual or unexpected relationships related to long-lived assets are identified during preliminary analytical procedures, the planned audit procedures (tests of controls, substantive procedures) would be adjusted to address the risk of material misstatement. a. True b. False
a. True
Management's refusal to sign the management representation letter is considered a scope limitation sufficient to preclude the issuance of an unqualified opinion. a. True b. False
a. True
The auditor generally reports things that management could do better in a management letter as a constructive part of the audit. a. True b. False
a. True
The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory. a. True b. False
a. True
The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation. a. True b. False
a. True
When planning the audit procedures related to long-lived assets, the auditor is required to perform preliminary analytical procedures. a. True b. False
a. True
Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low. a.True b. False
a.True
Which of the following best describes kiting? a. Theft of cash for personal use and cover-up using the bank statement. b. A fraudulent cash scheme to overstate cash assets at year end by manipulating year-end transfers between cash accounts. c. Manipulation of financial reporting by increasing both cash and debt by the same amount. d. Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments.
b. A fraudulent cash scheme to overstate cash assets at year end by manipulating year-end transfers between cash accounts.
The emphasis in verifying petty cash is normally on which of the following? a. Year-end balance. b. Controls over petty cash. c. Transactions for the period. d. Balance sheet classification.
b. Controls over petty cash.
Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system? a. Segregation of duties b. Electronic payments c. Authorization of transactions d. Periodic internal audits
b. Electronic payments
Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions? a. Existence of related party transactions. b. Existence of accounts receivable. c. Obligation of debt. d. Cutoff of the allowance for bad debt.
b. Existence of accounts receivable.
Which of the following situations would normally be discovered as part of the test of the bank reconciliation? a. Failure to bill a customer. b. Failure to include a deposit in transit on the bank reconciliation. c. Duplicate payment of a vendor's invoice. d. Payment to an employee for more hours than she worked.
b. Failure to include a deposit in transit on the bank reconciliation.
A management letter is the same as a management representation letter. a. True b. False
b. False
Bank reconciliations should be performed by the individual who makes bank deposits. a. True b. False
b. False
If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client from government officials, this is not considered a violation of the Foreign Corrupt Practices Act of 1977 (FCPA). a. True b. False
b. False
If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA), the auditor should notify the CFO about the violations, their circumstance, and the effect on the financial statements. a. True b. False
b. False
It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient enough for the auditor. a. True b. False
b. False
The use of analytical review procedures applied to related expense accounts would not be used to determine if accounts payable were understated. a. True b. False
b. False
Which of the following items is not typically requested from the lawyer of a company regarding contingencies? a. Any limitations on the lawyer's response such as not devoting substantial attention to the item or that the amounts are not material. b. Information about the attorney's other clients with similar contingencies. c. A description of each contingency, as well as progress and action that the company plans to take. d. A comment on the completeness of management's list of contingencies and an evaluation.
b. Information about the attorney's other clients with similar contingencies.
In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment provided by management to the auditor, which of the following is the client's lawyer not requested to provide? a. Information on the completeness of management's list. b. Information on the compliance of the disclosures with GAAP. c. Information on the likelihood and range of possible losses. d. Information on any limitations on the lawyer's response.
b. Information on the compliance of the disclosures with GAAP.
Which of the following best describes a fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred? a. Lapping of cash. b. Kiting of cash. c. Embezzlement of cash. d. Restrictive endorsements of cash.
b. Kiting of cash.
What should an auditor do when becoming aware of violations of the FCPA? a. Contact foreign officials in the country where the client has business operations. b. Notify the audit committee about the violations, their circumstance, and the effect on the financial statements. c. Contact the U.S. marshals. d. Design internal controls to deter improper payments.
b. Notify the audit committee about the violations, their circumstance, and the effect on the financial statements.
Which of the following items would not normally appear on bank reconciliations? a. Balance per bank. b. Outstanding deposits list. c. Balance per books. d. Outstanding checks list.
b. Outstanding deposits list.
Which of the following would not result in an unqualified audit report with an explanatory paragraph? a. Going concern issue. b. Scope limitation. c. Emphasis of a matter. d. Consistency of presentation.
b. Scope limitation.
Which of the following correctly states the period for which the auditor is responsible for subsequent events? a. The balance sheet date to the date the audit report is issued. b. The balance sheet date to the end of field work. c. The balance sheet date to the date of subsequent discovery of omitted procedures. d. All of the above.
b. The balance sheet date to the end of field work.
Audit reports are designed to promote clear communication between the auditor and the financial statement user. Which of the following is not delineated in the audit report? a. What was audited and the relative responsibilities of the client and the auditor. b. The experience level of the audit team. c. The nature of the audit opinion formulation process. d. The auditor's opinion on the fairness of the financial statements.
b. The experience level of the audit team.
In which of the following circumstances would an auditor be most likely to express an adverse opinion on a company's financial statements? a. The client has had significant transactions with related entities that the auditor wants to emphasize. b. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases. c. The auditor is not independent. d. There is substantial doubt about the entity's ability to continue as a going concern.
b. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases.
Which statement is true about a company's choice of capitalization policy? a. All assets with a useful life of more than one year must be capitalized. b. The company's policy must meet the minimum capitalization amounts established by GAAP. c. The company's policy is determined relative to materiality and the cost of maintaining asset records. d. The company may elect to capitalize operating expenses which exceed the minimum threshold for asset capitalization.
c. The company's policy is determined relative to materiality and the cost of maintaining asset records.
How would the auditor categorize a situation when the financial statements do not contain a footnote the auditor believes is necessary for fair presentation? a. A scope limitation. b. An uncertainty. c. A departure from GAAP. d. An act discreditable.
c. A departure from GAAP.
During the course of an audit, misstatements that are individually immaterial may be detected. What should the auditor do with these? a. Permanently pass on these immaterial misstatements as they do not individually impact the financial statements. b. Request that management footnote the immaterial misstatements in the financial statements for fair presentation. c. Accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate. d. Roll them forward for three years when they will become material enough to adjust.
c. Accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate.
During which of the following phases of the audit are analytical review procedures required by the auditing standards? a. The planning phase of the audit. b. The final review phase of the audit. c. Both the planning and final review phases of the audit. d. Performance of tests of controls.
c. Both the planning and final review phases of the audit.
What is the primary reason for management's ability to easily overvalue inventory without rapid detection by auditors? a. The limited volume of transactions in the inventory accounts. b. The auditor's assessment of inventory as a low-risk area. c. Complexity in the valuation of inventory. d. Consideration by the auditor of non-financial indicators of inventory fraud.
c. Complexity in the valuation of inventory.
Which of the following is not a main provision of the Foreign Corrupt Practices Act of 1977 (FCPA)? a. No U.S. person or companies that have securities listed on U.S. markets may make a payment to a foreign official for the purpose of obtaining or retaining business. b. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company. c. Designing and maintaining internal accounting controls is the role of internal auditors when management conducts business in a foreign country. d. Certain payments made to an official to expedite the performance of the duties that the official would already be bound to perform are acceptable.
c. Designing and maintaining internal accounting controls is the role of internal auditors when management conducts business in a foreign country.
Which one of the following is false regarding the adequacy of disclosures in a financial statement audit? a. The auditor should consider matters for disclosure while gathering evidence during the course of the audit, not just at the end of the audit. b. One of the key disclosures is a summary of significant accounting policies used by the company. c. Disclosures should be limited to only checklist items. d. The auditor's report does not specifically cover the statements made by management in the "Management Discussion and Analysis" (MD&A) section of the annual report.
c. Disclosures should be limited to only checklist items.
The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will require the audit firm to do which of the following? a. Merge with the other CPA firm. b. Perform a peer review on the other CPA firm. c. Ensure the independence of the other CPA firm of the client. d. List the other firm in the footnotes to the client's financial statements.
c. Ensure the independence of the other CPA firm of the client.
The cutoff bank statement is used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Omitting outstanding checks on reconciliations. d. All of the above.
c. Omitting outstanding checks on reconciliations.
Which one of the following would be the most effective procedure for discovering material Type II subsequent events? a. Updating the search for unrecorded liabilities. b. Resending all bank confirmations returned. c. Reading of the minutes of board of directors' meetings d. Surprise cash count at random locations.
c. Reading of the minutes of board of directors' meetings
The major risk associated with receivables is related to which of the following? a. They may be sold to a bank with recourse. b. They may be recorded as long-term when in fact they will be realized in the current period. c. They will not be realized for the entire amount due. d. They are pledged as collateral as disclosed in the footnotes to financial statements.
c. They will not be realized for the entire amount due.
The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is to substantiate which assertion? a. Existence of receivables. b. Cutoff of receivables. c. Valuation of receivables. d. Rights to receivables.
c. Valuation of receivables.
Which of the following is NOT an example of fraud in the acquisition and payment cycle? a. Theft of inventory by employees. b. Inventory shrinkage. c. Large manual adjustments to inventory accounts. d. Excess inventory because of a production slowdown.
d. Excess inventory because of a production slowdown.
For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate? a. A retail truck and trailer sales company with high inherent risk and moderate control risk over the revenue cycle. b. A utility company with control risk over the revenue cycle assessed high. c. A mortgage banking company with excellent control over the purchasing cycle. d. A cable company with control risk over the revenue cycle assessed low.
d. A cable company with control risk over the revenue cycle assessed low.
Which of the following would be a Type II subsequent event? a. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year end. b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end. c. A stock dividend or split that takes place during the subsequent period should be disclosed. In addition, earnings-per-share figures should be adjusted to show the retroactive effect of the stock dividend or split. d. A material change occurs in the value of investment securities after the balance sheet date.
d. A material change occurs in the value of investment securities after the balance sheet date.
Which of the following factors is not an inherent risk factor related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, goods controls, and professional judgment. d. All of the above are inherent risk factors.
d. All of the above are inherent risk factors.
Which of the following accounts is NOT a major account in the acquisition and payment cycle? a. Inventory. b. Cost of goods sold. c. Accounts payable. d. All of the above are major accounts.
d. All of the above are major accounts.
In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following? a. All material accounting estimates have been developed properly. b. The estimates are reasonable. c. The estimates are presented in accordance with GAAP. d. All of the above are true.
d. All of the above are true.
n the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following? a. All material accounting estimates have been developed properly. b. The estimates are reasonable. c. The estimates are presented in accordance with GAAP. d. All of the above are true.
d. All of the above are true.
A method used by companies to fraudulently inflate revenues includes which of the following? a. Use of hidden "side letters" giving the customer an irrevocable right to return the product. b. Recording of fictitious sales. c. Shipment of product not ordered by customers. d. All of the above.
d. All of the above.
Investments in securities are classified as which of the following? a. Held-to-maturity. b. Trading securities. c. Available-for-sale securities. d. All of the above.
d. All of the above.
When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? a. Rights. b. Valuation. c. Existence. d. All of the above.
d. All of the above.
Which of the following is a reason why an automated purchasing system is beneficial? a. It applies preloaded specifications and materials lists to the system. b. It automatically flags invoices that do not reconcile with purchase orders. c. It creates change orders and analyzes variances from purchase orders. d. All of the above.
d. All of the above.
Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. Obtaining knowledge of the client business. b. Reviewing the business plan related to major acquisitions. c. Reviewing the minutes of board of directors' meetings. d. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.
d. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.
Which of the following are not included in a fixed-asset ledger? a. List of all the assets. b. Estimated useful life. c. Salvage value. d. All the above are included.
d. All the above are included.
Which of the following is not a technique that auditors can use when performing preliminary analytical procedures related to long-lived assets? a. Perform an overall estimate of depreciation expense. b. Review and analyze gains/losses on disposals of equipment. c. Compare depreciable lives used by the client for various asset categories with those of the industry. d. All the above are techniques that auditors can use.
d. All the above are techniques that auditors can use.
An emphasis of a matter may result in which of the following? a. A disclaimer of an audit opinion. b. A qualified audit opinion. c. An adverse opinion. d. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.
d. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.
Which of the following is not true regarding accounting estimates? a. Accounting estimates are based on management's knowledge and experience of past and current events. b. Accounting estimates are based on management's assumptions about conditions that are expected to exist and courses of action the company expects to take. c. Accounting estimates are based on both subjective and objective factors d. Because accounting estimates are based, in part, on management's knowledge and experience, they are not biased.
d. Because accounting estimates are based, in part, on management's knowledge and experience, they are not biased.
When performing preliminary analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B.
d. Both A and B.
Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures? a. Management representation letter. b. GAAS. c. Inquiry of the CFO. d. Checklists.
d. Checklists.
What form of evidence is used by the auditor to verify bank reconciliation items? a. Cash counting observation. b. General ledger. c. Bank confirmation d. Cutoff statement.
d. Cutoff statement.
Which of the following is NOT an example of fraud in the acquisition and payment cycle? a. Theft of inventory by employees. b. Inventory shrinkage. c. Large manual adjustments to inventory accounts. d. Excess inventory because of a production slowdown.
d. Excess inventory because of a production slowdown.
The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate which assertion? a. Cutoff. b. Completeness. c. Legality. d. Occurrence.
d. Occurrence.
How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash? a. The auditor sends the reconciliation to the bank for independent verification. b. The auditor performs the reconciliation for the client to record the proper cash balance. c. The auditor traces the book balance of the reconciliation to the cutoff bank statement. d. The auditor tests deposits-in-transit and outstanding items to other corroborating evidence.
d. The auditor tests deposits-in-transit and outstanding items to other corroborating evidence.
During the testing of a year end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end had not cleared the bank. Which of the following is a likely explanation? a. A high probability of kiting. b. A high probability of lapping. c. The year-end cash disbursements records had been closed prior to year-end. d. The year-end cash disbursements records had been held open past year-end.
d. The year-end cash disbursements records had been held open past year-end.
In which one of the following instances would an auditor most likely issue a standard unqualified opinion without explanatory language? a. Management's disclosures are missing or inadequate. b. There is substantial doubt about the entity's ability to continue as a going concern. c. There is a significant limitation on the scope of the engagement. d. There is an immaterial deviation from GAAP related to capitalizing repairs.
d. There is an immaterial deviation from GAAP related to capitalizing repairs.