Concepts of Auditing Final

A nonissuer audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements? A. Adopt a substantive audit approach. B. Express a qualified opinion on the basis of scope limitation. C. Restrict the auditor's responsibility to assess the effectiveness of controls in the audit engagement letter. D. Document the auditor's understanding of internal control.

A. Adopt a substantive audit approach.

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

A. All inventory owned by the client is on hand at the time of the count.

Which of the following is NOT a component of internal control? A. Control risk. B. Monitoring of controls. C. Information system. D. The control environment.

A. Control risk.

Which of the following types of risks most likely would increase if accounts receivable are confirmed 3 months before year end? A. Detection. B. Inherent. C. Business. D. Control.

A. Detection.

An auditor expresses an adverse opinion if A. A severe scope limitation has been imposed by management. B. A misstatement is material and pervasive. C. A qualified opinion cannot be expressed because the auditor lacks independence. D. The company's ability to continue as a going concern is subject to substantial doubt.

B. A misstatement is material and pervasive.

An auditor selected items for test counts while observing a client's physical inventory count. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of A. Rights and obligations. B. Completeness. C. Existence. D. Valuation.

B. Completeness.

The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects A. Statistical risk. B. Nonsampling risk. C. Audit risk. D. Sampling risk.

B. Nonsampling risk.

In evaluating an attribute sample, the estimated range that is expected to contain the population characteristic is the A. Confidence level. B. Precision. C. Upper deviation level. D. Expected deviation rate.

B. Precision.

An advantage os using system flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts A. Identify internal control deficiencies more prominently. B. Provide a visual depiction of clients' activities. C. Indicate whether controls are operating effectively. D. Reduce the need to observe clients' employees performing routine tasks.

B. Provide a visual depiction of clients' activities.

Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco's December 31, Year 1, financial statements on March 6, Year 2, the date of the auditor's report. A subsequently discovered fact requiring revision of the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson's attention on April 24, Year 2. If the fact became known prior to the report release date, and the revision is made, Wilson's report ordinarily should be dated A. April 10, Year 2. B. Using dual-dating. C. April 24, Year 2. D. March 6, Year 2.

B. Using dual-dating.

Which of the following activities most likely would detect whether payroll data were altered during processing? A. Monitoring authorized distribution of data control sheets. B. Using test data to verify the performance of edit routines. C. Examining source documents for approval by supervisors. D. Segregating duties between approval of hardware and software specifications.

B. Using test data to verify the performance of edit routines.

The acceptable level of detection risk is inversely related to the A. Risk of failing to discover material misstatements. B. Risk of misapplying auditing procedures. C. Assurance provided by substantive procedures. D. Preliminary judgement about materiality levels.

C. Assurance provided by substantive procedures.

Which of the following types of sampling allows an auditor to quantify sampling risk? A. Stratified nonstatistical. B. Block. C. Haphazard. D. Attribute.

D. Attribute.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of A. Occurrence. B. Rights and obligations. C. Valuation and allocation. D. Completeness.

D. Completeness.

When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control's effectiveness by A. Recalculating the balance in related accounts. B. Analytical procedures. C. Inquiry and other procedures such as observation. D. Mailing confirmations.

C. Inquiry and other procedures such as observation.

Which of the following statements about audit sampling risks is correct for a nonissuer? A. Sampling risk is derived from the uncertainty in applying audit procedures to specific risks. B. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. C. Nonsampling risk can arise because an auditor failed to recognize misstatements. D. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.

C. Nonsampling risk can arise because an auditor failed to recognize misstatements.

The auditor should perform tests of controls when the auditor's risk assessment includes an expectation A. That the controls are not suitably designed. B. That the controls are not being applied. C. Of a low level of inherent risk. D. Of the operating effectiveness of internal control.

??? D. Of the operating effectiveness of internal control.

Kiting

A fraudulent cash scheme to overstate cash assets at year end by showing the same cash in two different bank accounts using an interbank transfer.

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. B) Approved vouchers. C) Receiving reports. D) Vendors' invoices.

A) Cash disbursements.

Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities? A. An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities. B. The internal auditor verifies the trading securities in the entity's safe each year on the balance sheet date. C. The independent auditor traces ll purchases and sales of trading securities through the subsidiary ledgers to the general elder. D. A designated member of the board of directors controls the securities in a bank safe-deposit box.

A. An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities.

Which of the following is an improper technique when using monetary-unit statistical sampling in an audit of accounts receivable? A. Combining negative and positive monetary misstatements in the appraisal of a sample. B. Using a sampling technique in which the same account balance could be selected more than once. C. Selecting a random starting point and then sampling every nth monetary unit (systematic sampling). D. Defining the sampling unit in the population as an individual mentally unit and not as an individual account balance.

A. Combining negative and positive monetary misstatements in the appraisal of a sample.

Which of the following characteristics distinguishes computer processing from manual processing? A. Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing. B. Errors or fraud in computer processing will be detected soon after their occurrence. C. The potential for systematic error is ordinarily grater in manual processing than in computerized processing. D. Most computer systems are designed so that transaction trails useful for audit purposes do not exist.

A. Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.

Trotman, Inc., a nonissuer manufacturing company, has engaged a CPA to audit its financial statements for the year ended June 30, Year 2. The CPA observed the physical inventory count at June 30, Year 2, but no physical inventory had been taken at June 30, Year 1. The CPA has not been able to become satisfied as to the value of the inventory at June 30, Year 1. Assuming that the financial statements are fairly presented in all other material respects, the CPA should A. Disclaim an opinion on the results of operations and cash flows but express an unmodified opinion on the balance sheet. B. Express an unmodified opinion on the financial statements as a whole but clearly indicate in an emphasis-of-matter paragraph of the report the limitations on the work. C. Express an unmodified opinion on the financial statements as a whole; no mention of the scope limitation is necessary. D. Disclaim an opinion on results of operations but express an unmodified opinion on the balance sheet and the statement of cash flows.

A. Disclaim an opinion on the results of operations and cash flows but express an unmodified opinion on the balance sheet.

Which of the following activities by small business clients best demonstrates management integrity in the absence of a written code of conduct? A. Emphasizing ethical behavior through oral communication and management example. B. Developing and maintaining formal descriptions of accounting procedures. C. Reporting regularly to the board of directors about operations and finances. D. Documenting internal control procedures using flowcharts rather than narratives.

A. Emphasizing ethical behavior through oral communication and management example.

An auditor's decision concerning whether to dual date the audit report is based upon the auditor's willingness to A. Extend auditing procedures. B. Permit inclusion of a note captioned "event (unaudited) subsequent to the date of the auditor's report." C. Accept responsibility for subsequent events. D. Assume responsibility for events subsequent to the issuance of the auditor's report.

A. Extend auditing procedures.

To obtain evidence about the operating effectiveness of controls, an auditor selects tests from a variety of methods, including A. Inquirires. B. External confirmations. C. Analytical procedures. D. Calculations.

A. Inquirires.

Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls? A. Inquiry. B. Reperformance. C. Inspection. D. Observation.

A. Inquiry.

Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions. A. Inspecting documents and physically examining assets. B. Recomputing calculations and obtain gin written management representations. C. Observing operating activities and comparing balances with prior-period balances. D. Confirming ownership and corroborating transactions through inquiries of client personnel.

A. Inspecting documents and physically examining assets.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A. Investigate changes in debt recorded after year end. B. Inquire about payroll checks that were recorded before year end but cashed after year end. C. Review tax returns prepared by management after year end. D. Determine whether inventory ordered before the year end was included in the physical count.

A. Investigate changes in debt recorded after year end.

The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with A. Knowledge necessary for audit planning. B. Evidence to use in assessing inherent risk. C. A basis for modifying tests of controls. D. An evaluation of the consistency of application of management's policies.

A. Knowledge necessary for audit planning.

In a well-designed internal control system, the same employee may be permitted to A. Mail signed checks and also cancel supporting documents. B. Prepare receiving reports and also approve purchase orders. C. Approve vouchers for payment and also have access to unused purchase orders. D. Mail signed checks and also prepare bank reconciliations.

A. Mail signed checks and also cancel supporting documents.

An auditor usually obtains evidence of a company's equity transactions by reviewing its A. Minutes of board of directors meetings. B. Transfer agent's records. C. Canceled stock certificates. D. Treasury stock certificate book.

A. Minutes of board of directors meetings.

Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include an additional paragraph that specifically uses the phrase(s) "Possible Discontinuance of Operations" / "Reasonable Period of Time, Not to Exceed One Year" A. No / No B. No / Yes C. Yes / Yes D. Yes / No

A. No / No

The possibility of the auditor's failure to recognize a misstatement in an amount or a deviation from a prescribed control arises from A. Nonsampling risk. B. Sampling risk. C. Statistical risk. D. The standard error of the mean.

A. Nonsampling risk.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following? A. One of the cashiers has been covering a personal embezzlement by lapping. B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. C. One of the computer control clerks has been removing all sales invoices applicable to his account from the data file. D. The credit manager has misappropriated remittances from customers whose accounts have been written off.

A. One of the cashiers has been covering a personal embezzlement by lapping.

An auditor judges that additional communication in the report of a nonissuer is needed to draw users' attention to an important matter. If the matter is appropriately presented and disclosed in the statements, the matter is referred to A. Only in an emphasis-of-matter paragraph. B. In the opinion paragraph and the basis for modification paragraph. C. Only in the management's responsibility for the financial statements paragraph. D. In the introductory paragraph and the opinion paragraph.

A. Only in an emphasis-of-matter paragraph.

Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions? A. Periodic physical inspection of plant and equipment by the internal audit staff. B. Comparison of current-year plant and equipment account balances with prior-year actual balances. C. The review of renumbered purchase orders to detect unrecorded trade-ins. D. Approval of periodic depreciation entries by a supervisor independent of the accounting department.

A. Periodic physical inspection of plant and equipment by the internal audit staff.

Which of the following controls most likely would assist in reducing the risks of material misstatement elated to the existence or occurrence of manufacturing transactions? A. Perpetual inventory records are independently compared with goods on hand. B. Forms used for direct materials requisition are renumbered and accounted for. C. Finished goods are store din locked limited-access warehouses. D. Subsidiary ledgers are periodically reconciled with inventory control accounts.

A. Perpetual inventory records are independently compared with goods on hand.

Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely will consider, as a mitigating factor, Zero's plans to A. Postpone expenditures for research and development projects. B. Purchase production facilities currently being leased from a related party. C. Discuss with lenders the terms of all debt and loan agreements. D. Strengthen internal controls over cash disbursements.

A. Postpone expenditures for research and development projects. (HW 7) 1 of 15 is wrong.

As the acceptable level of audit risk decreases, an auditor may A. Postpone the planned timing of substantive tests from interim dates to the year end. B. Lower the assessed level of control risk from a high level to a low level. C. Reduce substantive testing by relying on the assessment of the risks of material misstatement. D. Eliminate the assessed level of inherent risk from consideration as a planning factor.

A. Postpone the planned timing of substantive tests from interim dates to the year end.

An issuer who is an accelerated filer subject to the Securities Exchange Act of 1934 is required to include in its annual report an auditor's opinion on whether internal control over financial reporting was A. Properly designed and operated effectively. B. Adequate to eliminate fraud. C. Sufficient to meet the needs of the shareholders. D. Complete and fair.

A. Properly designed and operated effectively.

When financial statements are materially but not pervasively misstated, an auditor may express a A. Qualified opinion (YES); Disclaimer of Opinion (NO) B. Qualified opinion (YES); Disclaimer of Opinion (YES) C. Qualified opinion (NO); Disclaimer of Opinion (YES) D. Qualified opinion (NO); Disclaimer of Opinion (NO)

A. Qualified opinion (YES); Disclaimer of Opinion (NO)

A CPA engaged to audit financial statements observes that the accounting for a certain material but not pervasive item is not in conformity with the applicable financial reporting framework, although the matter is prominently disclosed in a note to the financial statements. The CPA should A. Qualify the opinion because of the misstatement. B. Not allow the accounting treatment for this item to affect the type of opinion because the misstatement was disclosed. C. Disclaim an opinion. D. Express an unmodified opinion but insert an emphasis-of-matter paragraph with a reference to the note.

A. Qualify the opinion because of the misstatement.

An auditor is performing tests of details of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate? A. Ratio or difference estimation. B. Monetary-unit. C. Unstratified mean-per-unit. D. Stop or go.

A. Ratio or difference estimation.

Which of the following procedures should an auditor ordinarily perform regarding subsequent events? A. Read the latest subsequent interim financial statements. B. Communicate material weaknesses in internal control to the client's audit committee. C. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests. D. Review the cutoff bank statements for several months after the year end.

A. Read the latest subsequent interim financial statements. (HW 7) 1 of 15 is wrong.

A proper segregation of duties requires that an individual A. Recording a transaction not compare the accounting record of the asset with the asset itself. B. Authorizing a transaction maintain custody of the asset that resulted from the transaction. C. Maintaining custody of an asset be entitled to access the accounting records for the asset. D. Authorizing a transaction records it.

A. Recording a transaction not compare the accounting record of the asset with the asset itself.

An auditor selected a random sample of 100 items from a population of 2,000 items. The total dollars in the sample were $10,000, and the standard deviation was $10. If the achieved precision based on this sample was plus or minus $4,000, the minimum acceptable value of the population would be A. $204,000 B. $196,000 C. $199,000 D. $199,800

B. $196,000

In a monetary-unit sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement of this sample would be A. $1,000 B. $2,000 C. $4,000 D. $5,000

B. $2,000

In an integrated audit, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations? A. The auditor was asked by the client to provide the report to another practitioner. B. A material weakness exists. C. The financial statements are misstated. D. The entity may not continue as a going concern.

B. A material weakness exists.

When assessing the tolerable population deviation rate, the auditor should consider that, although control deviations increase the risks of material misstatement, such deviations do not necessarily result in misstatements. This consideration explains why A. Deviations would result in misstatements in the accounting records only if the deviations and the misstatements occurred on different transactions. B. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded. C. Deviations at a given rate ordinarily would be expected to result in misstatements at a higher rate. D. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement.

B. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.

In an application of mean-per-sampling, the following information has been obtained: Reported carrying amount $600,000; Point estimate (estimated total value) 591,000; Allowance for sampling risk (precision) +/- 22,000; Tolerable misstatement +/- 45,000. The appropriate conclusion is that the reported carrying amount is A. Acceptable only if the risk of incorrect rejection is at least twice the risk of incorrect acceptance. B. Acceptable. C. Not acceptable. D. Acceptable only if the risk of incorrect acceptance is at least twice the risk of incorrect rejection.

B. Acceptable.

In an audit of financial statements, an auditor's primary consideration regarding an internal control is whether the control A. Reflects management's philosophy and operating style. B. Affects management's financial statement assertions. C. Provides adequate safeguards over access to assets. D. Relates to operational objectives.

B. Affects management's financial statement assertions.

Transaction authorization within an organization may be either specific or general. An example of specific transaction authorization is the A. Establishment of sales prices for products to be sold to any customer. B. Approval of a detailed construction budget for a warehouse. C. Establishment of requirements to be met in determining a customer's credit limits. D. Setting of automatic reorder points for material or merchandise.

B. Approval of a detailed construction budget for a warehouse. ???

Proper segregation of functional responsibilities to achieve effective internal control calls for separations of the functions of A. Authorization, execution, and payment. B. Authorization, recording, and custody. C. Custody, execution, and reporting. D. Authorization, payment, and recording.

B. Authorization, recording, and custody.

An auditor most likely would limit substantive audit test of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transaction and the auditor has already gathered evidence supporting A. Opening and closing inventory balances. B. Cash receipts and accounts receivable. C. Shipping and receiving activities. D. Cutoff of sales and purchases.

B. Cash receipts and accounts receivable.

In testing payroll transactions, an auditor discovers that 4 out of a statistical sample of 100 selected time cards were not signed by the appropriate supervisor. To evaluate the materiality or significance of this control deficiency, the auditor should A. Compare the tolerable deviation rate with the expected deviation rate. B. Compute an upper precision limit and compare with the tolerable deviation rate. C. Evaluate the dollar amount of the four time cards in relation to the financial statements. D. Report the deviations and let management assess the significance because they are in the best position to know.

B. Compute an upper precision limit and compare with the tolerable deviation rate.

The primary reason an auditor requests letters of inquiry be sent to a client's legal counsel is to provide the auditor with A. The probable outcome of asserted claims and pending or threatened litigation. B. Corroboration of the information furnished by management about litigation, claims, and assessments. C. Legal counsel's opinion of the client's historical experiences in recent similar litigation. D. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.

B. Corroboration of the information furnished by management about litigation, claims, and assessments. (HW 7) 1 of 15 is wrong.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that A. Payments to employees are computed at authorized rates. B. Employees work the number of hours for which they are paid. C. Segregation of duties exists between preparation and distribution of the payroll. D. Internal controls relating to unclaimed payroll checks are operating effectively.

B. Employees work the number of hours for which they are paid.

To test the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would A. Inspect the stock certificates evidencing the investment. B. Examine the audited financial statements of the invested company. C. Review the broker's advice or canceled check for the investment's acquisition. D. Obtain market quotations from financial newspapers or periodicals.

B. Examine the audited financial statements of the invested company.

After the date of the report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless A. Information about an event that occurred after the date of the report comes to the auditor's attention. B. Information, which existed at the report date and may affect the report, comes to the auditor's attention. C. Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements. D. The control environment changes after the date of the report.

B. Information, which existed at the report date and may affect the report, comes to the auditor's attention.

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control? A. Increase the sample size of tests of controls. B. Make inquiries to understand the potential consequence of the deviation. C. Report the matter to the next higher level of authority within the entity. D. Assume that the deviation is an isolated occurrence without audit significance.

B. Make inquiries to understand the potential consequence of the deviation.

When obtaining an understanding of an entity's internal control, an auditor should concentrate on their substance rather than their form because A. The controls may be operating effectively but may not be documented. B. Management may establish appropriate controls but not enforce compliance with them. C. The controls may be so inappropriate that no reliance is expected by the auditor. D. Management may implement controls whose costs exceed their benefits.

B. Management may establish appropriate controls but not enforce compliance with them.

Internal controls are designed to provide reasonable assurance that A. The internal auditing department's guidance and oversight of management's performance is accomplished economically and efficiently. B. Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties. C. Management's plans have not been circumvented by worker collusion. D. Management's planning, organizing, and directing processes are properly evaluated.

B. Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties.

Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of A. Reasonable assurance. B. Materiality. C. Comparative analysis. D. Audit risk.

B. Materiality

An auditor concludes that there is substantial doubt about an issuer entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s) "Except for the effects of such adjustments" / "Possible discontinuance of the entity's operations" A. Yes / Yes B. No / No C. No / Yes D. Yes / No

B. No / No

Matthews Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this change, A. A generalized computer audit program must be used. B. Part of the audit trail is altered. C. The potential for payroll-related fraud is diminished. D. Transactions must be processed in batches.

B. Part of the audit trail is altered.

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible misstatement in either direction. This statistical concept is known as A. Projected misstatement. B. Precision. C. Reliability. D. Standard deviation.

B. Precision.

When an issuer refuses to include in its audited financial statements any of the segment disclosures that the auditor believes are required, the auditor should express a(n) A. Unmodified opinion with an emphasis-of-matter paragraph. B. Qualified opinion because of inadequate disclosure. C. Adverse opinion because of a significant uncertainty. D. Disclaimer of opinion because of the significant scope limitation.

B. Qualified opinion because of inadequate disclosure.

If an issuer releases financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n) A. Disclaimer of opinion. B. Qualified opinion. C. Review report. D. Unmodified opinion with a separate emphasis-of-matter paragraph.

B. Qualified opinion.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation? A. Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test. B. Reevaluate the risk of fraud and design alternate tests for the related transactions. C. Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices. D. Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors.

B. Reevaluate the risk of fraud and design alternate tests for the related transactions.

Tracing shipping documents to prenumbered sales invoices provides evidence that A. No duplicate shipments or billings occurred. B. Shipments to customers were properly invoiced. C. All goods ordered by customers were shipped. D. All renumbered sales invoices were accounted for.

B. Shipments to customers were properly invoiced.

An auditor did not observe a client's taking of beginning physical inventory and was unable to become satisfied about the inventory by means of other auditing procedures. The possible effects are material. Assuming no other scope limitations or reporting problems, the auditor could express an unmodified opinion on the current year's financial statements for A. The income statement only. B. The balance sheet only. C. The income and retained earnings statements only. D. All of the financial statements.

B. The balance sheet only.

An auditor may decide to increase the risk of incorrect rejection when A. Initial sample results do not support the assessed risk of material misstatement. B. The cost and effort of selecting additional sample items are low. C. Many differences (audit amount minus recorded amount) are expected. D. Increased reliability from the sample is desired.

B. The cost and effort of selecting additional sample items are low.

Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, Year 1. That doubt has been removed in Year 2. What is Mead's reporting responsibility if Tech, a nonissuer, is presenting its financial statements for the year ended June 30, Year 2, on a comparative basis with those of Year 1? A. A different emphasis-of-matter paragraph describing Tech's plans for financial recovery should be included. B. The emphasis-of-matter paragraph included in the Year 1 auditor's report should not be repeated. C. A different emphasis-of-matter paragraph describing Mead's reasons for the removal of doubt should be included. D. The emphasis-of-matter paragraph included in the Year 1 auditor's report should be repeated in its entirety.

B. The emphasis-of-matter paragraph included in the Year 1 auditor's report should not be repeated.

Which of the following best describes what the auditor means by the rate of occurrence in an attribute sampling plan? A. The number of deviations that can be estimated to be contained in the sample. B. The estimated frequency with which a certain characteristic occurs within a population. C. The dollar range within which the true population total can be expected to fall. D. The degree of confidence that the sample is representative of the population.

B. The estimated frequency with which a certain characteristic occurs within a population. (HW 7) 1 of 15 is wrong.

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controlled signed it and mailed it to the bank. What was the major flaw in this procedure? A. The internal auditor did not sign the form. B. The form was mailed by the controller. C. The form was prepared by the internal auditor. D. The account was closed, so the balance was zero.

B. The form was mailed by the controller.

Which of the following internal control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name. B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments. C. The CO vouches the acquisition of securities by comparing brokers' advices with canceled checks. D. The controller compares the current market prices of recorded investments with the brokers' advices on file.

B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

An auditor's report included the following paragraph relative to substantial doubt about a client's ability to continue as a going concern: "The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. If the Company is not able to renew the contract described in Note X, there may be substantial doubt about the company's ability to continue as a going concern." Which of the following statements is true? A. The paragraph should not refer to a note to the financial statements. B. The report should not contain conditional language. C. The report should not use the phrase "substantial doubt." D. The report should refer to a qualification of the opinion.

B. The report should not contain conditional language.

An auditor is reporting on comparative financial statements for 3 years. Which of the following statements is correct regarding written representations from management? A. The representation letter needs to address only the most current year covered in the report. B. The representation letter needs to address all of the years being covered in the report. C. The representation letter needs to address the prior-year's financial statements not covered in the report. D. The representation letter needs to address only the 2 most recent years covered in the report.

B. The representation letter needs to address all of the years being covered in the report. (HW 7) 1 of 15 is wrong.

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(n) A. Qualified opinion because of a scope limitation. B. Unmodified opinion. C. Qualified opinion because of a departure from auditing standards. D. Unmodified opinion with an emphasis-of-matter paragraph.

B. Unmodified opinion.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would A. Examine the shipping documents that provide evidence for the existence assertion. B. Verify the sources and contents of the faces in telephone calls to the senders. C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences. D. Inspect the faxes for forgeries or alterations and consider them to be acceptable is none are noted.

B. Verify the sources and contents of the faces in telephone calls to the senders.

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate and no other issues prevail, the audit report may include a Disclaimer of Opinion / Qualified Opinion A. No / Yes B. Yes / No C. No / No D. Yes / Yes

B. Yes / No

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning relevant assertions about Existence / Classification and Understandability A. Yes / Yes B. Yes / No C. No / Yes D. No / No

B. Yes / No

Which of the following situations most likely could lead to an embezzlement? A. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger. B. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable clerk who personally approves the voucher for payment. C. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. D. Vouchers and supporting documentation are examined and then canceled by the CFO who personally mails the checks to vendors.

C. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.

The auditor's report may be addressed to the company whose financial statements are being audited or to that company's A. Chief operating officer. B. President. C. Board of directors. D. Chief financial officer.

C. Board of directors.

An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether A. The cash receipts journal was held open for a few days after year end. B. The last checks recorded before year end were actually mailed by year end. C. Cash balances were overstated because of kiting. D. Any unusual payments to or receipts from related parties occurred.

C. Cash balances were overstated because of kiting.

The primary source of information to be reported about litigation, claims, and assessments is the A. Client's legal counsel. B. Court records. C. Client's management. D. Independent auditor.

C. Client's management.

When an auditor concludes that substantial doubt exists about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Project future conditions and events for a period of time not to exceed 1 year following the date of the financial statements. B. Express a qualified or adverse opinion, depending on materiality, because of the possible effects on the financial statements. C. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern. D. Prepare prospective financial information to verify whether management's plans can be effectively implemented.

C. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entities operations? A. Prior-year accounts payable to current-year accounts payable. B. Prior-year payroll expense to budgeted current-year payroll expense. C. Current-year revenue to budgeted current-year revenue. D. Current-year warranty expense to current-year contingent liabilities.

C. Current-year revenue to budgeted current-year revenue.

In which of the following situations is attribute sampling likely to be used? A. Inquiring of the client the number of occurrences of fraud during the year. B. Examining invoices and canceled checks in support of recorded operating expenses. C. Determining the estimated number of occurrences of improperly authorized cash disbursements. D. Making selections from a cash disbursements journal to test liabilities for understatement.

C. Determining the estimated number of occurrences of improperly authorized cash disbursements.

Which of the following statements is true concerning statistical sampling in tests of controls? A. There is an inverse relationship between the expected population deviation rate and the sample size. B. As the population size increases, the sample size should increase proportionately. C. Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements. D. In determining the tolerable deviation rate, an auditor considers detection risk and the sample size.

C. Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements.

When an independent CPA is associated with the financial statements of an issuer but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(n) A. Qualified opinion. B. Unaudited association report. C. Disclaimer of opinion. D. Compilation report.

C. Disclaimer of opinion.

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate? A. Do not accumulate the uncorrected misstatements in the audit documentation, and do not document a conclusion about whether the uncorrected misstatements cause the financial statements to be misstated. B. Document the conclusion that the misstatements do not cause the financial statements to be misstated, but do not accumulate uncorrected misstatements in the audit documentation. C. Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material. D. Accumulate the uncorrected misstatements in the working papers, but do not document whether they cause the financial statements to be misstated.

C. Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material.

The use of monetary-unit sampling (MUS) is inefficient if A. Bank accounts are being audited. B. Statistical inferences are to be made. C. Each account is of equal importance. D. The number of sampling units is large.

C. Each account is of equal importance.

Internal control cannot be designed to provide reasonable insurance that A. Transactions are executed in accordance with management's authorization. B. The recorded accountability for assets is compared with the existing assets at reasonable intervals. C. Fraud will be eliminated. D. Access to assets is permitted only in accordance with management's authorization.

C. Fraud will be eliminated.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are A. Elements of audit risk, but detection risk is not. B. Changed at the auditor's discretion, but detection risk is not. C. Functions of the client and its environment, but detection risk is not. D. Considered at the assertion level, but detection risk is not.

C. Functions of the client and its environment, but detection risk is not.

In which of the following circumstances would an auditor usually choose between expressing a qualified opinion or disclaiming an opinion? A. Material misstatement. B. Inadequate disclosure of accounting policies. C. Inability to obtain sufficient appropriate audit evidence. D. Unreasonable justification for a change in accounting principle.

C. Inability to obtain sufficient appropriate audit evidence.

Which of the following most likely would be an advantage in using classical variables sampling rather that monetary-unit sampling? A. An estimate of the standard deviation of the population's recorded amounts is not required. B. The auditor rarely needs the assistance of a computer program to design an efficient sample. C. Inclusion of zero and negative balances usually does not require special design considerations. D. Any amount that is individually significant is automatically identified and selected.

C. Inclusion of zero and negative balances usually does not require special design considerations.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? A. Faulty judgment. B. Collusion among employees. C. Incompatible duties. D. Management override.

C. Incompatible duties.

While performing a 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 A. Overreliance. B. Incorrect acceptance. C. Incorrect rejection. D. Underreliance.

C. Incorrect rejection.

Which of the following combinations results in a decrease in sample size in an attribute sample? Allowable Risk of Over-reliance / Tolerable Rate / Expected Population Deviation Rate A. Increase/Decrease/Increase B. Decrease/Increase/Decrease C. Increase/Increase/Decrease D. Increase/Increase/Increase

C. Increase/Increase/Decrease

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for A. Segregation of duties for employees in the accounts payable department. B. Independent verification of invoices for disbursements recorded as equipment acquisitions. C. Investigation of variances within a formal budgeting system. D. Authorization by the board of directors of significant equipment acquisitions.

C. Investigation of variances within a formal budgeting system.

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

C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

An auditor expresses a qualified opinion because of a material misstatement related to specific amounts in the financial statements. Which of the following phrases should be included in the opinion paragraph? "When Read in Conjunction with Note X" / "With the Foregoing Explanation" A. Yes /Yes B. No / Yes C. No / No D. Yes / No

C. No / No

Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies? A. Performing appropriate analytical procedures. B. Checking arithmetic accuracy of the accounting records. C. Obtaining a letter of audit inquiry from the client's lawyer. D. Reading the financial statements, including notes.

C. Obtaining a letter of audit inquiry from the client's lawyer. (HW 7) 1 of 15 is wrong.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to A. Decrease the extent of auditing procedures to be applied to the class of transactions. B. Apply the planned substantive procedures prior to the balance sheet date. C. Perform the planned auditing procedures closer to the balance sheet date. D. Increase the assessed level of control risk for relevant financial statement assertions.

C. Perform the planned auditing procedures closer to the balance sheet date.

A limitation on the scope of the audit sufficient to preclude an unmodified opinion is most likely to result when management A. Knows that confirmation of accounts receivable is not feasible. B. Asks the auditor to report on the balance sheet and not on the other basic financial statements. C. Refuses to permit its lawyer to respond to the letter of audit inquiry. D. Discloses material related party transactions in the notes to the financial statements.

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

Auditors may need to plan and perform auditing procedures for financial statement assertions about derivatives and hedging activities. Which of the following substantive procedures most clearly tests the completeness assertion about derivatives? A. Assessing the reasonableness of the use of an option-pricing model. B. Determining whether changes in the fair value of derivatives designated and qualifying as hedging instruments have been reported in earnings or in other comprehensive income. C. Requesting counterparts to provide information about them, such as whether side agreements have been made. D. Physically inspecting the derivative contract.

C. Requesting counterparts to provide information about them, such as whether side agreements have been made.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end? A. Send confirmation requests for all new customer balances incurred from the interim date to year end. B. Resend confirmation requests for any significant customer balances remaining at year end. C. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end. D. Review cash collections subsequent to the interim date and the year end.

C. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would A. Analyze the liquidity and turnover ratios of the inventory. B. Perform analytical procedures designed to identify cost variances. C. Review the entity's descriptions of inventory policies and procedures. D. Perform test counts of inventory during the entity's physical count.

C. Review the entity's descriptions of inventory policies and procedures.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation. B. valuation and rights and obligations. C. Rights and obligations and existence. D. Existence and completeness.

C. Rights and obligations and existence.

When an auditor does not receive replies to positive requests for year end accounts receivable confirmations, the auditor most likely would A. Inspect the allowance account to verify whether the accounts were subsequently written off. B. Increase the assessed risks of material misstatement for the valuation and completeness assertions. C. Send the customer a second confirmation request. D. Increase the assessed risks of material misstatement for the revenue cycle.

C. Send the customer a second confirmation request.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion? A. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. B. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. C. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized in accordance with the equity method. D. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

C. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized in accordance with the equity method.

Under which of the following circumstances would an auditor's expression of an unmodified opinion for a nonissuer be inappropriate? A. The financial statements are prepared on the entity's income tax basis. B. Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances. C. The auditor is unable to obtain the audited financial statements of a significant subsidiary. D. There are significant deficiencies in the design and operation of the entity's internal control.

C. The auditor is unable to obtain the audited financial statements of a significant subsidiary.

If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures, A. No inferences can be drawn from the sample. B. The auditor will have to evaluate the results by reference to the principles of discovery sampling. C. The auditor may or may not achieve desired precision at the desired level of confidence. D. The auditor has caused nonsampling risk to increase.

C. The auditor may or may not achieve desired precision at the desired level of confidence.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly underrelies on controls. The most likely explanation for this situation is that A. The deviation rate in the auditor's sample is less than the tolerable population rate, but the deviation rate in the population exceeds the tolerable population rate. B. The deviation rates of both the auditor's sample and the population exceed the tolerable population rate. C. The deviation rate in the auditor's sample exceeds the tolerable population deviation rate, but the deviation rate in the population is less than the tolerable population deviation rate. D. The deviation rates of both the auditor's sample and the population are less than the tolerable population rate.

C. The deviation rate in the auditor's sample exceeds the tolerable population deviation rate, but the deviation rate in the population is less than the tolerable population deviation rate.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses the risk of over reliance is too low. The most likely explanation for this situation is that A. The deviation rates of both the auditor's sample and the population exceed the tolerable rate. B. The deviation rates of both the auditor's sample and the population are less than the tolerable rate. C. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate. D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

C. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

As the acceptable level of detection risk increases for a given audit risk, an auditor may change the A. Assurance provided by tests of controls by using a larger sample size than planned. B. Assessed level of control risk from a low level to a high level. C. Timing of substantive procedures from year end to an interim date. D. Nature of substantive procedures from a less effective to a more effective procedure.

C. Timing of substantive procedures from year end to an interim date.

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable? A. Investigating the opera purchase order file Ito ascertain that renumbered purchase orders are used and accounted for. B. Receiving the client's mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor's invoices. C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. D. Confirming accounts payable balances with known suppliers who have zero balances.

C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

Under which of the following circumstances may audited financial statements contain a note that is labeled "unaudited," disclosing an event occurring after the balance sheet date? A. When audit procedures with respect to the event were not performed by the auditor. B. When the subsequent event requires adjustment of the financial statements. C. When the event occurs after the date of the auditor's original report. D. When the event occurs after the date of the related financial statements.

C. When the event occurs after the date of the auditor's original report.

Green, CPA, is auditing JKL Co., a nonissuer. Green concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should Include a paragraph following the opinion paragraph / Specifically use the words "Going Concern" / Specifically use the words "Substantial Doubt" A. Yes / Yes / No B. Yes / No / Yes C. Yes / Yes / Yes D. No / Yes / Yes

C. Yes / Yes / Yes

Which of the following audit risk components may be assessed in nonquantitative terms? Control Risk / Detection Risk / Inherent Risk A. Yes / Yes / No B. Yes / No / Yes C. Yes / Yes / Yes D. No / Yes / Yes

C. Yes / Yes / Yes

An entity has the following invoices in a batch Invoice #: 201 202 203 204 Product: F10 G15 H20 K35 Quantity: 150 200 250 300 Unit Price: $5 $10 $25 $30 Which of the following most likely represents a hash total? A. FGHK80 B. 4 C. 204 D. 810

D. 810

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the A. Cash receipts journal to the sales journal. B. Sales journal with the cash receipts journal. C. Source documents to the accounting records. D. Accounting records to the source documents.

D. Accounting records to the source documents.

Which of the following statements ordinarily is included among the written management representations obtained by the auditor in an audit of a nonissuer? A. Sufficient appropriate evidence has been made available to permit the expression of an unmodified opinion. B. Management acknowledges that internal control has no material weaknesses. C. Instances of fraud involving management that exceeded the materiality limits have been acknowledged. D. All transactions have been recorded in the accounting records.

D. All transactions have been recorded in the accounting records.

Legal counsel's response to an auditor's request for information regarding litigation, claims, and assessments will ordinarily contain which of the following? A. A statement of concurrence with management's determination of which unasserted possible claims warrant specification. B. Confidential information that would be prejudicial to the entity's defense if publicized. C. An assertion that the unasserted possible claims identified by the client represent all such claims of the entity. D. An explanation regarding limitations on the scope of the response.

D. An explanation regarding limitations on the scope of the response.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable? A. Are assets that collateralize notes payable critically needed for the entity's continued existence? B. Are two or more authorized signatures required on checks that repay notes payable? C. Are the proceeds from notes payable used for the purchase of concurrent assets? D. Are direct borrowings on notes payable authorized by the board of directors?

D. Are direct borrowings on notes payable authorized by the board of directors?

The appropriate date for the client to specify as the effective date in the audit inquiry to legal counsel is A. The balance-sheet date. B. Seven working days after the request is received by legal counsel. C. The date of the audit inquiry itself. D. As close to the date of the auditor's report as possible.

D. As close to the date of the auditor's report as possible.

An auditor who is unable to form an opinion on a new client's opening inventory balances may express an unmodified opinion on the current year's A. Statement of cash flows only. B. Statement of shareholders' equity only. C. Income statement only. D. Balance sheet only.

D. Balance sheet only.

An auditor inspects a client's investment records to determine that any transfers between categories of investment shad been properly recorded. The primary purpose of this procedure is to obtain evidence concerning relevant financial statement assertions about A. Rights and obligations, and existence. B. Valuation and allocation, and and rights and obligations. C. Existence or occurrence, and classification and understandability. D. Classification and understandability, and valuation and allocation.

D. Classification and understandability, and valuation and allocation.

During an audit of a company's equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about A. Existence or occurence. B. Completeness. C. Valuation and allocation. D. Classification and understandability.

D. Classification and understandability.

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations A. Are not part of the evidence considered to support the assertion. B. Replace low assessed risks of material misstatement as evidence to support the assertion. C. Constitute sufficient appropriate evidence to support the assertion when considered in combination with sufficiently low assessed risks of material misstatement. D. Complement, but do not replace, substantive procedures designed to support the assertion.

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

A CPA is considered not associated with unaudited financial statements of a public entity when (s)he A. Received all input data from the client, analyzed it, and returned it to the client for processing by an independent computer service company. B. Assisted in the preparation of the unaudited financial statements for an issuer. C. Performed a review of an issuer's unaudited financial statements that are presented in a quarterly report to the shareholders. D. Completed an audit and reported on the financial statements that, without the CPA's consent, were part of a prospectus including unaudited financial statements.

D. Completed an audit and reported on the financial statements that, without the CPA's consent, were part of a prospectus including unaudited financial statements.

An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to A. Determine whether procedures and records concerning the safeguarding of assets are reliable. B. Determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. C. Modify the initial assessments of inherent risk and judgements about materiality levels for planning purposes. D. Determine the nature, timing, and extent of substantive procedures for financial statement assertions.

D. Determine the nature, timing, and extent of substantive procedures for financial statement assertions.

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor should A. Identify specific controls relevant to management's financial statement assertions. B. Perform tests of controls to evaluate the effectiveness of the entity's accounting system. C. Determine whether procedures are suitably designed to prevent, or detect and correct, material misstatement. D. Document the auditor's understanding of the entity's internal control.

D. Document the auditor's understanding of the entity's internal control.

An auditor would most likely be concerned with controls that provide reasonable assurance about the A. Efficiency of management's decision-making process. B. Appropriate prices the entity should charge for its products. C. Decision to make expenditures for certain advertising activities. D. Entity's ability to initiate, authorize, record, process, and report financial data.

D. Entity's ability to initiate, authorize, record, process, and report financial data.

Which of the following is an inherent limitation in internal control? A. Lack of segregation of duties. B. Incompatible duties. C. Lack of an audit committee. D. Faulty human judgment.

D. Faulty human judgement.

A client is concerned that a power outage or sister could impair the computer hardware's ability to function as designed. The client desires off-site backup hardware facilities that are fully configured and ready to operate within several hours The client most likely should consider a A. Cold site. B. Cool site. C. Warm site. D. Hot site.

D. Hot site.

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been A. Monitored. B. Tested. C. Authorized. D. Implemented.

D. Implemented.

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? A. Underreliance. B. Incorrect rejection. C. Overreliance. D. Incorrect acceptance.

D. Incorrect acceptance.

Which of the following might be detected by an auditor's review of the client's sales cutoff? A. Excessive goods returned for credit. B. Unrecorded sales discounts. C. Lapping of year-end accounts receivable. D. Inflated sales for the year.

D. Inflated sales for the year.

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was A. The only deviation discovered in the sample. B. Identical to a deviation discovered during the prior year's audit. C. Caused by an employee's misunderstanding of instructions. D. Initially concealed by a forged document.

D. Initially concealed by a forged document.

For which of the following audit tests would an auditor most likely use attribute sampling? A. Making an independent estimate of the amount of a LIFO inventory. B. Examining invoices in support of the measurement of fixed asset additions. C. Selecting accounts receivable for confirmation of account balances. D. Inspecting employee time cards for proper approval by supervisors.

D. Inspecting employee time cards for proper approval by supervisors.

For which of the following audit tests would an auditor most likely use attributes sampling? A. Making an independent estimate of the amount of LIFO inventory. B. Examining invoices in support of the valuation of fixed asset additions. C. Selecting accounts receivable balances for confirmation. D. Inspecting employee time cards for proper approval by supervisors.

D. Inspecting employee time cards for proper approval by supervisors.

Monetary-unit sampling (MUS) is most useful when the auditor A. Is testing the accounts payable balance. B. Cannot cumulatively arrange the population items C. Expects to find several material misstatements in the sample. D. Is concerned with overstatements.

D. Is concerned with overstatements.

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following? A. Management representations that the company's external auditors have examined its internal control over compliance with laws and regulations. B. Representations from the company's external auditors that the company has effective internal control over operations. C. Reasonable assurances that fraud will be identified before the issuance of the company's annual report. D. Management's assessment of the effectiveness of internal control over financial reporting.

D. Management's assessment of the effectiveness of internal control over financial reporting.

Which of the following is a factor in the control environment? A. Segregation of duties. B. Information processing. C. Performance reviews. D. Management's philosophy and operating style.

D. Management's philosophy and operating style.

In connection with the annual audit, which of the following is not a subsequent events procedure? A. Make inquiries with respect to the financial statements covered by the auditor's previously issued report if new information has become available during the current audit that might affect that report. B. Read available minutes of meetings of shareholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings. C. Discuss with officers the current status of items in the financial statements that were accounted for on the basis of preliminary or inconclusive data. D. Review the latest subsequent interim financial statements.

D. Review the latest subsequent interim financial statements.

In obtaining an understanding of internal control in a financial statement audit, an auditor is NOT obligated to A. Determine whether the controls have been implemented. B. Perform procedures to understand the design of internal control, C. Document the understanding of the entity's internal control components. D. Search for significant deficiencies in the operation of internal control.

D. Search for significant deficiencies in the operation of internal control.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to A. Provide the data necessary to prepare a proof of cash. B. Request that a cutoff bank statement and related checks be sent to the auditor. C. Detect kiting activities that may otherwise not be discovered. D. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

D. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

Which of the following describes a weakness in accounts payable procedures? A. The accounts payable clerk files invoices and supporting documentation after payment. B. The accounts payable clerk manually verifies arithmetic on the vendor invoice. C. The accounts payable system compares the receiving report to the vendor invoice. D. The accounts payable manager issues purchase orders.

D. The accounts payable manager issues purchase orders.

An auditor may not express a qualified opinion when A. A scope limitation prevents the auditor from completing an important audit procedure. B. The auditor's report refers to the work of a specialist. C. An accounting principle at variance with the applicable financial repotting framework is used. D. The auditor lacks independence with respect to the audited entity.

D. The auditor lacks independence with respect to the audited entity.

In selecting a sample using monetary-unit sampling, the dollar is the sampling unit. For example, if the 300th dollar of invoices is selected, A. Only that dollar is audited. B. Only an invoice with exactly $300 is audited. C. An invoice of less than $300 cannot be selected. D. The invoice containing the 300th dollar Is audited.

D. The invoice containing the 300th dollar Is audited.

In performing tests of controls, the auditor will normally find that A. The level of inherent risk is directly proportional to the rate of error. B. The rate of error in the sample exceeds the rate of deviations. C. All unexamined items result in errors in the accounting records. D. The rate of deviations in the sample exceeds the rate of error in the accounting records.

D. The rate of deviations in the sample exceeds the rate of error in the accounting records.

Which of the following is a true statement about statistical sampling in tests of controls? A. Deviations from controls at a given rate usually result in misstatements at a higher rate. B. As the population size doubles, the sample size also should double. C. The qualitative aspects of deviations are not considered by the auditor. D. The relationship between the sample size and the tolerable population deviation rate is inverse.

D. The relationship between the sample size and the tolerable population deviation rate is inverse.

An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's A. Assessment of the risks of material misstatement. B. Identification of weaknesses in the system. C. Assessment of the control environment's effectiveness. D. Understanding of the system.

D. Understanding of the system.

Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, Year 1. Park obtained sufficient appropriate audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, Year 1, inventory balances. Park's opinion on Tech's Year 1 financial statements most likely will be Balance Sheet / Income Statement A. Disclaimer / Disclaimer B. Unmodified / Adverse C. Disclaimer / Adverse D. Unmodified / Disclaimer

D. Unmodified / Disclaimer

An external auditor discovers that a payroll supervisor of the firm being audited has misappropriated $10,000. The firm's total assets and before-tax net income are $14 million and $3 million, respectively. Assuming no other issues affect the report, the external auditor's report will most likely contain a(n) A. Disclaimer of opinion. B. Adverse opinion. C. Scope qualification. D. Unmodified opinion.

D. Unmodified opinion.

In May Year 3, an auditor reissues the auditor's report on the Year 1 financial statements at a former client's request. The Year 1 financial statements are to be presented comparatively with subsequent audited statements. They are not restated, and the auditor does not revise the wording of the report. The auditor should A. Dual-date the reissued report. B. Use the current-period auditor's report date on the reissued report. C. Use the release date of the reissued report. D. Use the original report date on the reissued report.

D. Use the original report date on the reissued report.

An auditor most likely would analyze inventory turnover rates to obtain evidence about A. Existence. B. Rights and obligations. C. Classification and understandability. D. Valuation and allocation.

D. Valuation and allocation.

Which of the following factors are included in an entity's control environment? Audit Committee Participation / Integrity and Ethical Values / Organizational Structure A. Yes / Yes / No B. Yes / No / Yes C. No / Yes / Yes D. Yes / Yes / Yes

D. Yes / Yes / Yes

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A. Review the cash receipts journal for the month prior to year end. B. Intensify the study of internal control concerning the revenue cycle. C. Increase the assessed level of detection risk for the existence assertion. D. inspect the shipping records documenting the merchandise sold to the debtors.

D. inspect the shipping records documenting the merchandise sold to the debtors.

An audit plan for noncurrent debt should include steps that require A. Examining bond trust indentures. B. Inspecting the accounts payable subsidiary ledger. C. Investigating credits to the bond interest income account. D. Verifying the existence of the bondholders.

A. Examining bond trust indentures.

In a well designed internal control system, employees in the same department most likely would approve purchase orders, and also A. Reconcile the open invoice file. B. Inspect the goods upon receipt C. Authorize requisitions of goods. D. Negotiate terms with vendors.

D. Negotiate terms with vendors.

On September 30, Year 2, Miller was asked to reissue an auditor's report dated March 31, Year 2, on a client's financial statements for the year ended December 31, Year 1. Miller will submit the reissued report to the client in a document that contains information in addition to the client's basic financial statements. However, Miller discovered that the client suffered substantial losses on receivables resulting from conditions that occurred since March 31, Year 2. Miller should A. Request the client to disclose the event in a separate, appropriately labeled note to the financial statements and reissue the original report with its original date. B. Not reissue the original report but express a subject to qualified opinion that discloses the event in a separate explanatory paragraph. C. Request the client to restate the financial statements and reissue the original report with a dual date. D. Reissue the original report with its original date without regard to whether the event is disclosed in a separate note to the financial statements.

A. Request the client to disclose the event in a separate, appropriately labeled note to the financial statements and reissue the original report with its original date.

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may A. Require disclosure to keep the financial statements from being misleading. B. Have been recorded based on preliminary accounting estimates. C. Have been recorded based on year-end tests for asset obsolescence. D. Require adjustments to the financial statements as of the year end.

A. Require disclosure to keep the financial statements from being misleading. (HW 7) 1 of 15 is wrong.

An entity's financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by A. Scanning the general journal for unusual entries. B. Performing a revenue cutoff test at year-end. C. Tracing a sample of journal entries to the general ledger. D. Examining documentary evidence of sales returns and allowances recorded after year-end.

A. Scanning the general journal for unusual entries.

If all other sample size planning factors were exactly the same in attribute sampling, changing the confidence level from 95% to 90% and changing the desired precision from 2% to 5% would result in a revised sample size that is A. Smaller. B. Larger. C. Unchanged. D. Indeterminate.

A. Smaller.

Which of the following auditing procedures most likely would provide assurance regarding a manufacturing entity's relevant assertions about inventory valuation? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Reviewing shipping and receiving cutoff procedures for inventories. D. Tracing test counts to the entity's inventory listing.

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

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? A. The planned level of assurance at the relevant assertion level. B. The planned level of control risk. C. The effectiveness of internal controls. D. Management's assertions that internal controls exist and are operating efficiently.

A. The planned level of assurance at the relevant assertion level.

Which of the following circumstances most likely will cause an auditor to suspect an employee payroll fraud scheme? A. There are significant unexplained variances between standard and actual labor cost. B. Payroll checks are disbursed by the same employee each payday. C. Employee time cards are approved by individual departmental supervisors. D. A separate payroll bank account is maintained on a n imprest basis.

A. There are significant unexplained variances between standard and actual labor cost.

Fact Pattern: An audit was performed by Leo Gonzales, CPA, of the financial statements of Lectronic Leasing Company for the year ended December 31. A cash advance to Computer Credit Corporation is material to the presentation of Lectronic's financial position. Computer Credit's unaudited financial statements show negative working capital, negative equity, and losses in each of the 5 preceding years. Mr. Gonzales has suggested an allowance for the uncollectibility of the advance to Computer Credit. All of the stock of both Lectronic and Computer Credit is owned by Paul McRae and his family. Mr. McRae adamantly refuses to consider an allowance for uncollectibility. He insists that Computer Credit eventually will be profitable and be able to repay the advance. Mr. McRae proposes the following note to Lectronic's statements: Note to Financial Statements At December 31, the Company had advanced $500,000 to Computer Credit Corporation. We obtained written confirmation of this debt from Computer Credit Corporation and reviewed unaudited financial statements of Computer Credit Corporation. Computer Credit Corporation is not in a position to repay this advance at this time, but the Company has informed us that it is optimistic as to the future of Computer Credit Corporation. Computer Credit Corporation's stock is wholly owned by Lectronic Leasing Company's common shareholders. Assume that subsequent to the date of the auditor's report (but prior to issuance of the related financial statements) Mr. McRae and his family sell all of their stock in Computer Credit and the new owners repay the advance from Lectronic. Mr. Gonzales' opinion as to Lectronic's financial statements will be A. Unmodified because the issue of collectibility is now settled. B. Unaffected because the sale of Computer Credit stock occurred subsequent to the date of the auditor's report. C. Unaffected because the sale of Computer Credit stock occurred subsequent to the audit date. D. Qualified unless the repayment of the advance is recorded by Lectronic as a December 31 transaction.

A. Unmodified because the issue of collectibility is now settled.

Which of the following is the most serous password security problems? A. Users are assigned passwords when accounts are created, but they do not change them. B. Users have accounts on several systems with different passwords. C. Users copy their passwords on note paper, which is key in their wallets. D. Users select passwords that are not listed in any online dictionary.

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

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and A. Valuation and allocation. B. Completeness. C. Occurrence. D. Rights and obligations.

A. Valuation and allocation.

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

A. Vendors with whom the entity has previously done business.

Under which of the following circumstances may audited financial statements contain a note that is labeled "unaudited," disclosing an event occurring after the balance sheet date? A. When the event occurs after the date of the auditor's original report. B. When the event occurs after the date of the related financial statements. C. When the subsequent event requires adjustment of the financial statements. D. When audit procedures with respect to the event were not performed by the auditor.

A. When the event occurs after the date of the auditor's original report.

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if the tolerable rate is 7%, the expected rate is 5%, and the allowance for sampling risk is 2%. A. Modify the planned assessed risk of material misstatement because the tolerable deviation rate plus the allowance for sampling risk exceeds the expected population deviation rate. B. Accept the sample results as support for the assessed risk of material misstatement because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate. C. Accept the sample results as support for the assessed risk of material misstatement because the tolerable deviation rate minus the allowance for sampling risk equals the expected population deviation rate. D. Modify the assessed risk of material misstatement because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

D. Modify the assessed risk of material misstatement because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a nonissuer company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to A. 1st Federal Bank. B. Wall Corp., the entity audited by March. C. Both Monday Corp. and 1st Federal Bank. D. Monday Corp., the client that engaged March.

D. Monday Corp., the client that engaged March.

An auditor who has confirmed accounts receivable may discover that the sales journal was held open for the past year end if A. Positive confirmation requests sent to debtors are not returned. B. Negative confirmation requests sent to debtors are not returned. C. Most of the returned negative confirmations requests indicate that the debtor owes a larger balance than the amount being confirmed. D. Most of the returned positive confirmations requests indicate that the debtor owes a smaller balance than the amount being confirmed.

D. Most of the returned positive confirmations requests indicate that the debtor owes a smaller balance than the amount being confirmed.

As part of understanding internal control relevant to the audit of a nonissue, an auditor does NOT need to A. Consider factors that affect the risk of material misstatement. B. Determine whether controls have been implemented. C. Identify the risks of material misstatement. D. Obtain knowledge about the operating effectiveness of internal control.

D. Obtain knowledge about the operating effectiveness of internal control.

When an audit firm includes a report on compliance with aspects of contractual agreements in the auditor's report on the nonissuer's financial statements, in which paragraph of the audit report should the report on compliance be included? A. Opinion paragraph. B. Auditor's responsibility paragraph. C. Emphasis-of-matter paragraph. D. Other-matter paragraph.

D. Other-matter paragraph.

Proper segregation of duties reduces the opportunities to allow persons to be in positions both to A. Journalize entries and prepare financial statements. B. Record cash receipts and cash disbursements. C. Establish internal control and authorize transactions. D. Perpetrate and conceal fraud and error.

D. Perpetrate and conceal fraud and error.

An auditor generally tests the segregation of duties related to inventory by A. Analytical procedures and invoice recomputation. B. Document inspection and reconciliation. C. Test counts and cutoff procedures. D. Personal inquiry and observation.

D. Personal inquiry and observation.

In applying variables sampling, an auditor attempts to A. Estimate a qualitative characteristic of interest. B. Determine various rates of occurrence for specified attributes. C. Discover at leas one instance of a critical deviation. D. Predict a monetary population value within range of precision.

D. Predict a monetary population value within range of precision.

Some subsequent events provide evidence of conditions not in existence at the balance sheet date. Under U.S. GAAP, some of these events are of such a nature that disclosure is required to keep the financial statements from being misleading. Adequate disclosure of these events may include A. Notes to the auditor's report. B. Restatement of prior-period financial statements. C. Adjustment of the financial statements. D. Pro forma financial statement presentation.

D. Pro forma financial statement presentation.

An auditor's finding was stated as follows: "Twenty of one hundred randomly selected items tested revealed that $200 of cash discounts on purchases were lost." This variables sampling finding is deficient because the A. Recommendation specifies no action. B. Sampling methodology is not defined. C. Amount is not material. D. Probable effect on the entire population is not provided.

D. Probable effect on the entire population is not provided.

Which of the following controls is most effective in providing assurance that recorded purchases are free from material errors? A. The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. B. Vendors' invoices are compared with purchase orders by an employee who is independent of he receiving department. C. Receiving reports require the signature of the individual who authorized the purchase. D. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

D. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

The client includes in the determination of net income certain material items properly classifiable as other comprehensive income (OCI). In this situation, the auditor must express a(n) A. Unmodified opinion. B. Qualified opinion. C. Adverse opinion. D. Qualified or adverse opinion.

D. Qualified or adverse opinion.

An internal auditor is planning to use monetary-unit sampling for testing the monetary value of a large accounts receivable population. The advantages of using monetary-unit sampling (MUS) include all of the following except that it A. Is an efficient model for establishing that a low error rate population is not materially misstated. B. Does not require the normal distribution approximation required by variables sampling. C. Can be applied to a group of accounts because the sampling units are homogenous. D. Results in a smaller sample size than classical variables sampling for larger numbers of misstatements.

D. Results in a smaller sample size than classical variables sampling for larger numbers of misstatements.