Applied Audit Midterm

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of: Classification and Understandability and Existence

No; Yes

An auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's Engagement Letter; Audit Documentation

No; Yes

Which of the following are considered control environment factors? Detection Risk; HR Policies and Practices

No; Yes

Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? a. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information. b. Provide the client with copies of the audit plans to be used during the audit. c. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing. d. Make copies of those client supporting documents examined by the auditor for inclusion in the audit documentation.

a. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

Which of the following types of audit evidence is the most persuasive? a. Bank statements obtained from the client. b. Client worksheets supporting cost allocations. c. Prenumbered client purchase order forms. d. Client representation letter.

a. Bank statements obtained from the client.

Supervision is a major responsibility of those in charge of performing an audit. For example, a supervisor's consideration of the competence of team members includes whether they a. Carry out the work in accordance with the audit plan. b. Prepare source documents for client transactions. c. Carry out the work in accordance with the company's procedures. d. Are permitted to authorize client transactions.

a. Carry out the work in accordance with the audit plan

An auditor most likely requires an understanding of IT in an attest engagement to a. Determine the effect of IT on the audit. b. Perform evaluations of control as part of the entity's monitoring activities. c. Design the entity's IT system. d. Manage the entity's internal audit services.

a. Determine the effect of IT on the audit.

What type of evidence would provide the highest level of assurance in an attestation engagement? a. Evidence obtained from independent sources. b. Evidence obtained from multiple internal inquiries. c. Evidence secured solely from within the entity. d. Evidence obtained indirectly.

a. Evidence obtained from independent sources.

Internal control cannot be designed to provide reasonable assurance that a. Fraud will be eliminated. b. Access to assets is permitted only in accordance with management's authorization. c. Transactions are executed in accordance with management's authorization. d. The recorded accountability for assets is compared with the existing assets at reasonable intervals

a. Fraud will be eliminated.

Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post? a. Hill, the auditor. b. The chair of Monday's board of directors. c. Monday's controller or CFO. d. Post, the predecessor auditor.

a. Hill, the auditor.

In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to a. Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered. b. Point out to the responsible entity officials the errors made by various entity personnel. c. Summarize the corrections that must be made before the entity can prepare and submit its federal tax return. d. Summarize the misstatements made by the entity so that corrections can be made after the audited financial statements are released.

a. Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? a. Incompatible duties. b. Faulty judgment. c. Management override. d. Collusion among employees.

a. Incompatible duties.

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that a. Involves an estimate. b. Arises from a routine calculation. c. Exists because of nonstatistical sampling performed by the auditor. d. Arises from a flaw in the accounting system.

a. Involves an estimate.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? a. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements. b. The details of most recorded transactions are not available after a specified period of time. c. Internal control activities requiring the segregation of duties are subject to management override. d. Management has a reputation for consulting with several accounting firms about significant accounting issues.

a. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

To test for unsupported entries in the ledger, the direction of audit testing should be from the a. Ledger entries. b. Journal entries. c. Externally generated documents. d. Original source documents.

a. Ledger entries.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if a. Management fails to take the appropriate remedial action. b. The payments violated the client's policies regarding the prevention of illegal acts. c. The client receives financial assistance from a federal government agency. d. Documentation that is necessary to prove that the bribes were paid does not exist.

a. Management fails to take the appropriate remedial action.

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

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

Which of the following would an auditor most likely consider in evaluating the control environment of an audit client? a. Management's operating style. b. Overall employee satisfaction with assigned duties. c. Management review of monthly financial statements. d. The number of CPAs in the accounting department.

a. Management's operating style.

The ultimate purpose of assessing control risk in a financial statement audit is to contribute to the auditor's evaluation of the risk that a. Material misstatements may exist in the financial statements. b. Tests of controls may fail to identify activities relevant to assertions. c. Specific internal control activities are not operating as designed. d. The collective effect of the control environment may not achieve the control objectives.

a. Material misstatements may exist in the financial statements.

Which of the following elements underlies the development of an overall audit strategy? a. Materiality and audit risk. b. Relevant internal controls. c. Corroborating evidence. d. Quality control.

a. Materiality and audit risk.

As the acceptable level of detection risk decreases, an auditor may change the a. Nature of substantive procedures from a less effective to a more effective procedure. b. Assessed level of inherent risk to a higher amount. c. Timing of substantive tests by performing them at an interim date rather than at year-end. d. Timing of tests of controls by performing them at several dates rather than at one time.

a. Nature of substantive procedures from a less effective to a more effective procedure.

Which of the following procedures would an auditor most likely perform before auditing the balance sheet? a. Obtain an understanding of the client's internal control activities. b. Determine whether there are any liens or encumbrances on assets that have been pledged as collateral. c. Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations. d. Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor.

a. Obtain an understanding of the client's internal control activities.

Which of the following procedures is an auditor most likely to include in the planning phase of a financial statement audit? a. Obtain an understanding of the entity's risk assessment process. b. Identify specific controls designed to prevent fraud. c. Evaluate the reasonableness of the entity's accounting estimates. d. Perform cutoff tests of the entity's sales and purchases.

a. Obtain an understanding of the entity's risk assessment process.

A financial statement audit is designed to a. Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. b. Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material. c. Obtain absolute assurance on the financial statements and express an opinion on the financial statements. d. Provide assurance on internal control and to identify significant deficiencies and material weaknesses.

a. Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.

A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would a. Perform tests several times during the year, rather than only at year end. b. Decrease the assessed risk of material misstatement for the existence or occurrence assertion. c. Increase the sample of EDI transactions to be selected for cutoff tests. d. Plan to make a 100% count of the entity's inventory at or near year end.

a. Perform tests several times during the year, rather than only at year end.

The primary reason for an audit by an independent, external audit firm is to a. Provide increased assurance to users as to the fairness of the financial statements. b. Relieve management of responsibility for the financial statements. c. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. d. Satisfy governmental regulatory requirements.

a. Provide increased assurance to users as to the fairness of the financial statements.

If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should a. Raise or lower the materiality level as appropriate to the situation. b. Lower the materiality level, but not raise it. c. Raise the materiality level, but not lower it. d. Not change the materiality level once it has been established.

a. Raise or lower the materiality level as appropriate to the situation.

To obtain an understanding of a continuing client in planning an audit, an auditor most likely would a. Read internal audit reports. b. Read specialized industry journals. c. Reevaluate the risks of material misstatement. d. Perform tests of details of transactions and balances.

a. Read internal audit reports.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both a. Record and conceal fraudulent transactions in the normal course of assigned tasks. b. Adopt new accounting pronouncements and authorize the recording of transactions. c. Monitor internal controls and evaluate whether the controls are operating as intended. d. Journalize cash receipts and disbursements and prepare the financial statements.

a. Record and conceal fraudulent transactions in the normal course of assigned tasks.

An auditor performs a test of details on the cash balance to test management's related assertions regarding existence. This test of details is a a. Substantive procedure. b. Risk assessment procedure. c. Substantive analytical procedure. d. Test of controls.

a. Substantive procedure.

Prior to the audit, an auditor usually discusses the overall audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time? a. The coordination of the assistance of the client's personnel in data preparation. b. The control weaknesses to be included in the communication with those charged with governance. c. The appropriateness of the entity's plans for dealing with adverse economic conditions. d. The determination of the fraud risk factors that exist within the client's operations.

a. The coordination of the assistance of the client's personnel in data preparation.

Which of the following is least likely to influence the sufficiency of audit evidence? a. The information exists only in electronic form. b. Evaluating the effectiveness of internal control systems. c. An assessment of the risks associated at both the transaction and financial statement levels. d. The auditor's knowledge of and experience in the business and industry.

a. The information exists only in electronic form.

Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of the risks of material misstatement? a. The suitability of the client's lines of reporting. b. The organization's recruiting and hiring practices. c. Physical proximity of the accounting function to upper management. d. Management's attitude toward information processing and accounting departments.

a. The suitability of the client's lines of reporting.

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? a. The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls. b. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. c. The risk that the internal control system will not detect a material misstatement of a financial statement assertion. d. The internal audit department's objectivity in reporting to the audit committee a material misstatement of a financial statement assertion it detects.

a. The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of a. Transactions. b. Costs. c. Cutoffs. d. Authorizations.

a. Transactions.

An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? a. Two employees, who work in different departments, are circumventing an internal control. b. Someone erroneously disables edit checks in a software program designed to identify control exceptions. c. The technology department writes a program that does not properly implement the control due to a lack of understanding. d. The accounting staff neglects the control due to increased transactions to be processed.

a. Two employees, who work in different departments, are circumventing an internal control.

Which of the following factors affecting the risk associated with a control is not a consideration when designing the current-year audit procedures in an audit of internal control over financial reporting for an issuer? a. Whether the control has been documented in flowchart or narrative form. b. The nature, timing, and extent of procedures performed in previous audits. c. Whether there have been changes in the operation of a key control since the previous audit. d. The results of the previous years' testing of the control.

a. Whether the control has been documented in flowchart or narrative form.

When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except a. Whether there has been any turnover of the component's board members. b. Whether a separate audit report is to be issued on the component. c. The degree of independence of the component's management from the parent entity. d. The legal requirements regarding the appointment of the auditor.

a. Whether there has been any turnover of the component's board members.

The following statements were made in a discussion of audit evidence between two CPAs. Which statement about evidence is not valid? a. "I am seldom convinced beyond all doubt, with respect to all aspects of the statements being audited." b. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence." c. "I evaluate the usefulness of the evidence I can obtain against the cost to obtain it." d. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."

b. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."

Independent auditing can best be described as a. A branch of accounting. b. A discipline that enhances the degree of confidence that users can place in financial statements. c. A regulatory function that prevents the issuance of improper financial information. d. A professional activity that measures and communicates financial and business data.

b. A discipline that enhances the degree of confidence that users can place in financial statements.

The primary purpose of obtaining an understanding of the entity and its environment, including its internal control, is to provide an auditor with a. Information necessary to prepare flowcharts. b. A frame of reference within which to plan the audit. c. Evidence to use in reducing detection risk. d. A basis for modifying tests of controls.

b. A frame of reference within which to plan the audit.

A CPA is conducting the first audit of a nonissuer's financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's audit documentation. This procedure is a. Unacceptable because the CPA should bring an independent viewpoint to a new engagement. b. Acceptable if the client and the predecessor auditor agree to it. c. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work as part of the basis for the CPA's own opinion. d. Required if the CPA is to express an unmodified opinion.

b. Acceptable if the client and the predecessor auditor agree to it.

Which of the following is required documentation in an audit in accordance with auditing standards? a. A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting. b. An audit plan documenting the procedures to be used to reduce audit risk. c. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved. d. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.

b. An audit plan documenting the procedures to be used to reduce audit risk.

In an audit of a nonissuer's financial statements, projected misstatement is a. The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. b. An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. c. An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit. d. The only amount that the auditor considers in evaluating materiality and fairness of the financial statements.

b. An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

Which of the following matters does an auditor usually include in the engagement letter? a. Indications of negative cash flows from operating activities. b. Arrangements regarding fees and billing. c. Analytical procedures that the auditor plans to perform. d. Identification of working capital deficiencies.

b. Arrangements regarding fees and billing.

The acceptable level of detection risk is inversely related to the a. Preliminary judgment about materiality levels. b. Assurance provided by substantive procedures. c. Risk of failing to discover material misstatements. d. Risk of misapplying auditing procedures.

b. Assurance provided by substantive procedures.

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? a. Reasonable assurance. b. Auditor judgment. c. Materiality. d. Audit risk.

b. Auditor judgment.

Proper segregation of functional responsibilities to achieve effective internal control calls for separation of the functions of a. Custody, execution, and reporting. b. Authorization, recording, and custody. c. Authorization, payment, and recording. d. Authorization, execution, and payment.

b. Authorization, recording, and custody.

The most reliable forms of documentary evidence are those documents that are a. Prenumbered. b. Authorized by a responsible official. c. Internally generated. d. Easily duplicated.

b. Authorized by a responsible official.

Notes that are included with financial statements are the responsibility of the a. Internal auditor. b. Company's management. c. Securities and Exchange Commission. d. Independent auditor.

b. Company's management.

Although planning continues throughout the audit, it initially involves a. Testing the effectiveness of the client's internal control system. b. Developing an overall audit strategy. c. Requesting management to sign an engagement letter. d. Gathering evidence.

b. Developing an overall audit strategy

Each of the following is a type of known misstatement, except a. A difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles. b. Differences between management and the auditor's judgment regarding estimates. c. An inaccuracy in processing data. d. The misapplication of accounting principles.

b. Differences between management and the auditor's judgment regarding estimates.

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by a. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each. b. Direct participation by the owner of the business in the recordkeeping activities of the business. c. Engaging a CPA to perform monthly write-up work. d. Employment of temporary personnel to aid in the segregation of duties.

b. Direct participation by the owner of the business in the recordkeeping activities of the business.

K, the external auditor for B Co., is planning an initial audit engagement with the management of B. During the course of planning, K most likely should not a. State the objective and scope of the audit. b. Discuss the nature and timing of detailed procedures. c. Describe the expected form and content of audit reports. d. Ask for management's permission to speak to the predecessor auditor.

b. Discuss the nature and timing of detailed procedures.

Which of the following presumptions is correct about the reliability of audit evidence? a. Information obtained indirectly from outside sources is the most reliable audit evidence. b. Effective internal control provides more assurance about the reliability of audit evidence. c. To be reliable, audit evidence should be convincing rather than persuasive. d. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained.

b. Effective internal control provides more assurance about the reliability of audit evidence.

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the a. Notes to the financial statements fail to disclose the employees' actions. b. Employees' actions affect the auditor's ability to rely on management's representations. c. Client receives financial assistance from a federal government agency. d. Audit evidence that is necessary to prove that the illegal acts were committed does not exist.

b. Employees' actions affect the auditor's ability to rely on management's representations.

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the a. Introductory paragraph of the auditor's report. b. Engagement letter. c. Management representation letter. d. Scope paragraph of the auditor's report.

b. Engagement letter.

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? a. The complexity of the information processing system. b. Human judgment in the decision making process. c. The lack of management incentives to improve the control environment. d. The ineffectiveness of the board of directors.

b. Human judgment in the decision making process.

Which of the following is a component part of the COSO's internal control framework? a. Audit strategy and planning. b. Information systems. c. Event identification. d. Audit risk.

b. Information systems.

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? a. Analytical procedures and reperformance. b. Inquiry and inspection of records. c. External confirmation and reperformance. d. Observation and inspection of records.

b. Inquiry and inspection of records.

With respect to the auditor's planning of a year-end audit, which of the following statements is always true? a. An engagement should not be accepted after the fiscal year-end. b. It is an acceptable practice to carry out part of the audit at interim dates. c. Those charged with governance should not be told of the specific audit procedures that were performed. d. An inventory count must be observed at the balance sheet date.

b. It is an acceptable practice to carry out part of the audit at interim dates.

For the audit of a nonissuer, the primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with a. A basis for modifying tests of controls. b. Knowledge necessary to plan the audit. c. Information necessary to prepare flowcharts. d. Evidence to use in reducing audit risk to an acceptably low level.

b. Knowledge necessary to plan the audit.

According to AU-C 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, not all controls are relevant to a financial statement audit. Which one of the following would most likely be considered in an audit? a. Marketing analysis of sales generated by advertising projects. b. Maintenance of control over unused checks. c. Timely reporting and review of quality control results. d. Maintenance of statistical production analyses.

b. Maintenance of control over unused checks.

A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if a. The entity is subject to legal or regulatory requirements also found in larger entities. b. Management is closely involved in operations. c. The entity is involved in complex transactions. d. Financial reporting objectives have been established.

b. Management is closely involved in operations.

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? a. Facts known to the predecessor auditor that might bear on the integrity of management. b. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years. c. Disagreements between the predecessor auditor and management about significant accounting policies and principles. d. The predecessor auditor's understanding of the reasons for the change of auditors.

b. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Which of the following procedures most likely will provide an auditor with sufficient evidence about whether an entity's controls are suitably designed and have been implemented to prevent, or detect and correct, material misstatements? a. Performing analytical procedures using data aggregated at a high level. b. Observing the entity's personnel applying the controls. c. Inquiring of entity personnel about the controls. d. Vouching a sample of transactions from the general ledger to the general journal.

b. Observing the entity's personnel applying the controls.

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. Apply the planned substantive procedures prior to the balance sheet date. b. Perform the planned auditing procedures closer to the balance sheet date. c. Decrease the extent of auditing procedures to be applied to the class of transactions. d. Increase the assessed level of control risk for relevant financial statement assertions.

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

Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility and duty. Which of the following is one of the overriding principles of internal control? a. Responsibility for accounting and financial duties should be assigned to one responsible officer. b. Responsibility for the performance of each duty must be fixed. c. Responsibility for the accounting duties must be borne by the audit committee of the company. d. Responsibility for accounting activities and duties must be assigned only to employees who are bonded.

b. Responsibility for the performance of each duty must be fixed.

Which of the following is a component of internal control? a. Operating effectiveness. b. Risk assessment. c. Financial reporting. d. Organizational structure.

b. Risk assessment.

In an initial audit, planning considerations include quality control procedures that determine a. The opinion to be expressed. b. The acceptance and continuance of clients and engagements. c. The risk assessment procedures to be performed. d. The tests of controls to be performed.

b. The acceptance and continuance of clients and engagements.

Which of the following factors is least likely to affect the extent of the auditor's understanding of the entity's internal controls? a. The size and complexity of the entity. b. The amount of time budgeted to complete the engagement. c. The inherent limitations of an audit. d. The nature of specific relevant controls.

b. The amount of time budgeted to complete the engagement.

Which statement about audit evidence is false? a. The auditor is seldom convinced beyond all doubt with respect to all aspects of the statements being audited. b. The auditor should not perform a procedure that provides persuasive evidence rather than conclusive evidence. c. The auditor balances the benefits of the evidence and the cost to obtain it. d. The auditor evaluates the degree of risk involved in deciding the kind of evidence to gather.

b. The auditor should not perform a procedure that provides persuasive evidence rather than conclusive evidence.

An auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes a. Management's responsibility for errors and the illegal activities of employees that may cause material misstatement. b. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. c. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. d. The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors.

b. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention.

Internal control can provide only reasonable assurance of achieving an entity's control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to internal control? a. The auditor's primary responsibility is the detection of fraud. b. The cost of internal control should not exceed its benefits. c. Management monitors internal control. d. The board of directors is active and independent.

b. The cost of internal control should not exceed its benefits.

The understanding with the client regarding a financial statement audit generally includes which of the following matters? a. The preliminary judgment about materiality. b. The responsibilities of the auditor. c. The expected opinion to be issued. d. The contingency fee structure.

b. The responsibilities of the auditor.

Mary, a staff auditor, selects a sample of recorded sales. To test the assertion that recorded sales actually occurred, she a. Confirms accounts receivable. b. Vouches recorded sales to shipping documents. c. Traces shipping documents to sales. d. Traces sales to the financial statements.

b. Vouches recorded sales to shipping documents.

Upon discovering fraudulent data in a client's tax return that the client would not correct, a CPA withdraws from the engagement. How should the CPA respond if asked by the successor CPA why the relationship was terminated? a. "It was a misunderstanding." b. "I suggest you ask the client." c. "I suggest you get the client's permission for us to discuss all matters freely." d. "I found fraudulent data in the tax return that the client would not correct."

c. "I suggest you get the client's permission for us to discuss all matters freely."

A CPA auditing CBX Co.'s 12/31/2017 financials determined performance materiality for current liabilities should be calculated at 1/4 of total materiality (3% of total current liabilities) and noncurrent liabilities should be calculated at 1/3 of total materiality (7% of total noncurrent liabilities). Calculate performance materiality for current liabilities based on the following: Accounts payable $900,000 Loan payable (due 3/17/2019) 400,000 Interest payable (due 3/31/2018) 20,000 Reserve for returns 50,000 Note payable (due 1/1/2019) 150,000 a. $22,633 b. $9,625 c. $7,275 d. $5,500

c. $7,275

Which of the following statements correctly defines the term "reasonable assurance"? a. An absolute level of assurance to allow an auditor to detect a material misstatement. b. A substantial level of assurance to allow an auditor to detect a material misstatement. c. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. d. A significant level of assurance to allow an auditor to detect a material misstatement.

c. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.

Which of the following procedures would yield the most reliable evidence? a. An inquiry of client personnel. b. A scanning of trial balances. c. A recalculation of credit loss expense. d. A comparison of beginning and ending retained earnings.

c. A recalculation of credit loss expense.

Which of the following statements would least likely appear in an auditor's engagement letter? a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. b. Our engagement is subject to the risk that material fraud or errors, if they exist, will not be detected. c. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement. d. Management is responsible for making all financial records and related information available to us.

c. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement.

Which of the following actions should be taken by a CPA who has been asked to audit the financial statements of a company whose fiscal year has ended? a. Request a signed management representation letter before accepting the engagement. b. Inform the client of the need to express an adverse opinion because of the late engagement date. c. Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion. d. Inform the client of the need to express a qualified opinion because of the late engagement date.

c. Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion.

When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure? a. By comparing the PCAOB standard with related AICPA auditing standards. b. By evaluating whether the audit is likely to be subject to inspection by the PCAOB. c. By exercising professional judgment in the circumstances. d. By soliciting input from the issuer's audit committee.

c. By exercising professional judgment in the circumstances.

Which of the following is not a component of internal control? a. Monitoring of controls. b. Information system. c. Control risk. d. The control environment.

c. Control risk.

An auditor has determined a materiality threshold of $100,000 for a client. The auditor has accumulated audit evidence that supports an allowance for credit losses in the range of $1.5 million to $1.8 million. The client recorded $800,000 as the allowance for credit losses and declines to record any additional allowance. What proposed adjustment will the auditor include in the summary of unadjusted differences? a. Debit credit loss expense $750,000; credit allowance for credit losses $750,000. b. Debit credit loss expense $1,100,000; credit allowance for credit losses $1,100,000. c. Debit credit loss expense $700,000; credit allowance for credit losses $700,000. d. Debit credit loss expense $850,000; credit allowance for credit losses $850,000.

c. Debit credit loss expense $700,000; credit allowance for credit losses $700,000.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risks of material misstatement from those originally planned. To achieve an overall audit risk that is substantially the same as the planned audit risk, the auditor would a. Decrease inherent risk. b. Increase materiality levels. c. Decrease detection risk. d. Increase inherent risk.

c. Decrease detection risk.

In obtaining an understanding of controls that are relevant to audit planning, an auditor is required to obtain knowledge about the a. Effectiveness of the controls that have been implemented. b. Controls related to each principal transaction class and account balance. c. Design of the controls included in the internal control components. d. Consistency with which the controls are currently being applied.

c. Design of the controls included in the internal control components.

he risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is a. Inherent risk. b. Control risk. c. Detection risk. d. Audit risk.

c. Detection risk.

Which of the following types of risks most likely would increase if accounts receivable are confirmed 3 months before year end? a. Control. b. Inherent. c. Detection. d. Business.

c. Detection.

The primary objective of an auditor when considering the acceptance of an initial audit engagement of a nonissuer is to a. Agree with management on the timing of tests at interim and year end. b. Specify the degree to which management intends to rely on the auditor's testing of internal controls. c. Establish whether the preconditions for an audit are present. d. Limit the auditor's responsibility if management fails to provide written representations.

c. Establish whether the preconditions for an audit are present.

A conceptually logical approach to the auditor's consideration of relevant controls consists of the following four steps: I. Determine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented. II. Evaluate the operating effectiveness of relevant controls. III. Assess the risks of material misstatement. IV. Design further audit procedures. What is the most logical order in which these four steps are performed? a. III, I, II, IV. b. II, IV, I, III. c. I, III, IV, II. d. I, II, III, IV.

c. I, III, IV, II.

An auditor should design the audit plan to a. Perform either tests of controls or tests of transactions on each account balance. b. Select all material transactions for substantive testing. c. Implement the audit strategy. d. Minimize substantive testing prior to the balance sheet date.

c. Implement the audit strategy.

An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large dollar investment in heavy machine tools? a. Having all dispositions approved by the vice president of sales. b. Placing security guards at every entrance 24 hours a day. c. Imprinting a controlled identification number on each tool. d. Conducting a weekly physical inventory.

c. Imprinting a controlled identification number on each tool.

Which of the following statements would most likely appear in an auditor's engagement letter? a. We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements. b. Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets. c. Management is responsible for making all financial records and related information available to us. d. Management agrees to correct all deficiencies in internal control activities identified by us.

c. Management is responsible for making all financial records and related information available to us.

Evidence supporting the financial statements consists of the accounting records and all other information available to the auditor. Which of the following is an example of other information? a. General and subsidiary ledgers. b. Reconciliations. c. Minutes of meetings. d. Worksheets supporting cost allocations.

c. Minutes of meetings.

At the conclusion of an audit, an auditor is reviewing the audit evidence obtained. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's assertions. Which of the following actions is the auditor most likely to take? a. Consult with the audit committee and issue a qualified opinion. b. Obtain a statement from management supporting the inventory valuation. c. Obtain additional evidence regarding the valuation of inventory. d. Consult with the audit committee and issue a disclaimer of opinion.

c. Obtain additional evidence regarding the valuation of inventory.

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan? a. Issues with management integrity that could affect the decision to continue the audit engagement. b. Procedures performed to assess independence and the ability to perform the engagement. c. Other audit procedures to be performed to comply with generally accepted auditing standards. d. The understanding of the terms of the engagement, including scope, fees, and resource allocation.

c. Other audit procedures to be performed to comply with generally accepted auditing standards.

Audit planning for an initial audit most likely includes a. Determining the opinion to be expressed. b. Selecting a sample of invoices for comparison with shipping reports. c. Performing procedures involving opening balances. d. Obtaining an engagement letter prepared by the auditee.

c. Performing procedures involving opening balances.

Risks relevant to financial reporting can arise due to which of the following circumstances? a. Board of directors' commitment to competence. b. Performance reviews of employees. c. Rapid growth in the entity's operations. d. Corrective actions implemented by management.

c. Rapid growth in the entity's operations.

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

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

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year? a. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of the acceptance of the engagement. b. An expectation of the effectiveness of internal control. c. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory. d. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.

c. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

Internal control has five components: the control environment, risk assessment, information and communication, monitoring, and control activities. Control activities relevant to an audit may be categorized as policies and procedures that pertain to a. Developing a proper organizational structure. b. Making a commitment to competence. c. Reviewing actual performance. d. Maintaining effective human resource policies.

c. Reviewing actual performance.

In order to obtain an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures? a. Expanded substantive testing to identify relevant controls. b. Tests of key controls to determine whether they are effective. c. Risk-assessment procedures to evaluate the design of relevant controls. d. Analytical procedures to determine the need for specific controls.

c. Risk-assessment procedures to evaluate the design of relevant controls.

The appropriateness of evidence available to an auditor is least likely to be affected by the a. Relevance of such evidence to the financial statement assertion being investigated. b. Timeliness of such audit evidence. c. Sampling method employed by the auditor to obtain a sample of such evidence. d. Relationship of the preparer of such evidence to the entity being audited.

c. Sampling method employed by the auditor to obtain a sample of such evidence.

Which of the following represents an example of an inherent limitation of internal controls? a. Customer credit checks are not performed. b. Shipping documents are not matched to sales invoices. c. The CEO can override a control and request a check with no purchase order. d. Bank reconciliations are not performed on a timely basis.

c. The CEO can override a control and request a check with no purchase order.

An independent auditor must have which of the following? a. A background in many different disciplines. b. A pre-existing and well-informed point of view with respect to the audit. c. The ability to exercise sound professional judgment. d. Experience in taxation that is sufficient to comply with generally accepted auditing standards.

c. The ability to exercise sound professional judgment.

For which one of the following purposes does an internal auditor not evaluate the risks and the adequacy and effectiveness of controls? a. Compliance with laws. b. The safeguarding of assets. c. The opinion expressed on financial information. d. The reliability and integrity of financial information.

c. The opinion expressed on financial information.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? a. The prospective client has already completed its physical inventory count. b. The CPA lacks an understanding of the prospective client's operations and industry. c. The prospective client is unwilling to make all financial records available to the CPA. d. The CPA is unable to review the predecessor auditor's audit documentation.

c. The prospective client is unwilling to make all financial records available to the CPA.

Which of the following is correct regarding the communication between successor and predecessor auditors? a. The successor auditor should contact the predecessor auditor prior to proposing an audit engagement. b. The successor and predecessor auditors should communicate with each other in writing regarding potential problems. c. The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor. d. The client should be present during the communications between the predecessor auditor and the successor auditor.

c. The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.

An auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's a. Opinion on subsequent events that have occurred since the balance sheet date. b. Methodology used in applying sampling techniques. c. Understanding of the reasons for the change in auditors. d. Perception of the competency of and reliance on the client's internal audit function.

c. Understanding of the reasons for the change in auditors.

t is important for the auditor to consider the competence of the audit client's employees, because their competence bears directly and importantly upon the a. Timing of the tests to be performed. b. Comparison of recorded accountability with assets. c. Relationship of the costs of internal control and its benefits. d. Achievement of the objectives of internal control.

d. Achievement of the objectives of internal control.

Audit risk is a. Beyond the auditor's control. b. The risk that internal control will not prevent a material misstatement of an assertion on a timely basis. c. Substantially controlled by the auditor. d. An aggregate of the risk of material misstatement and detection risk.

d. An aggregate of the risk of material misstatement and detection risk.

Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? a. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor's responsibilities. b. An auditor's responsibility for audited financial statements are not confined to the expression of the auditor's opinion. c. Making suggestions that are adopted about the form and content of an entity's financial statements impairs an auditor's independence. d. An auditor may draft an entity's financial statements based on information from management's accounting system.

d. An auditor may draft an entity's financial statements based on information from management's accounting system.

Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? a. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence. b. An auditor may not draft an entity's financial statements based on information from management's accounting system. c. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities. d. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

d. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

Control activities constitute one of the five components of internal control described in the COSO model. Control activities do not encompass a. Information processing. b. Physical controls. c. Performance reviews. d. An internal auditing function.

d. An internal auditing function.

In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result? a. Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed. b. Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company's profitability. c. Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions. d. Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

d. Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

Which of the following is true regarding audit evidence? a. An auditor typically relies on conclusive evidence. b. Accounting records alone provide sufficient appropriate audit evidence. c. Reliable evidence includes photocopies obtained directly by the auditor. d. Appropriate evidence may include data about competitors.

d. Appropriate evidence may include data about competitors.

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

d. Approval of a detailed construction budget for a warehouse.

Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests. a. Neither I nor II. b. II only. c. I only. d. Both I and II.

d. Both I and II.

Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true? a. Detection risk is a function of the efficiency of an auditing procedure. b. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor. c. The risk that material misstatement will not be timely prevented or detected by internal control can be reduced to zero by effective controls. d. Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.

d. Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it a. Arises from a transaction cycle with controls that were determined to be operating effectively. b. Is the first time a misstatement has arisen from the relevant transaction cycle. c. Decreases management's incentive compensation for the period. d. Changes the company's operating results from a net loss to a net income.

d. Changes the company's operating results from a net loss to a net income.

Which of the following components of internal control would be considered the foundation for the other components? a. Information and communication. b. Control activities. c. Risk assessment. d. Control environment.

d. Control environment.

It would not be appropriate for the auditor to initiate discussion with the audit committee concerning a. Details of potential problems that the auditor believes might cause a qualified opinion. b. The extent to which the work of internal auditors will influence the scope of the audit. c. The extent to which change in the company's organization will influence the scope of the audit. d. Details of the procedures that the auditor intends to apply.

d. Details of the procedures that the auditor intends to apply.

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? a. Examining documents to detect noncompliance with laws and regulations having a material effect on the financial statements. b. Obtaining a written representation letter from the client's management. c. Considering whether the client's accounting estimates are reasonable in the circumstances. d. Determining the extent of involvement of the client's internal auditors.

d. Determining the extent of involvement of the client's internal auditors.

Which of the following procedures should an auditor most likely include in the planning of an audit of financial statements? a. Obtaining a written representation letter from management of the client. b. Inquiring of the client's lawyer about litigation, claims, and assessments. c. Determining whether necessary controls have been implemented. d. Determining the need for specialized skills.

d. Determining the need for specialized skills.

During the initial planning phase of an audit, a CPA most likely would a. Evaluate the reasonableness of the client's accounting estimates. b. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion. c. Identify specific internal control activities that are likely to prevent fraud. d. Discuss the timing of the audit procedures with the client's management.

d. Discuss the timing of the audit procedures with the client's management.

Which of the following communications between the auditor with final responsibility for an engagement and the audit engagement team regarding the susceptibility of a client's financial statements to material misstatements due to error or fraud is required by auditing standards? a. Discussing the firm's policy for allocating budgeted audit hours to detect fraud. b. Explaining all procedures to be performed on the engagement to detect significant errors or fraudulent activity. c. Explaining the firm's strategy for managing and controlling legal liability due to fraud. d. Discussing the need to maintain a questioning mind and to exercise professional skepticism throughout the audit.

d. Discussing the need to maintain a questioning mind and to exercise professional skepticism throughout the audit.

An auditor must obtain professional experience primarily to a. Earn a specialty designation by the AICPA. b. Receive a positive employment evaluation. c. Receive a favorable peer review. d. Exercise professional judgment.

d. Exercise professional judgment.

Which of the following best characterizes an auditor's exercise of professional skepticism? a. Conducting all fraud-related inquiries in a nonconfrontational manner. b. Obtaining adequate conclusive evidence in support of the fairness of the financial statements. c. Taking into account past relationships and experiences with management. d. Having an attitude that includes a questioning mind.

d. Having an attitude that includes a questioning mind.

An auditor most likely obtains an understanding of a new client to a. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. b. Develop an attitude of professional skepticism concerning management's financial statement assertions. c. Make constructive suggestions concerning improvements to the client's internal control. d. Identify areas of audit emphasis.

d. Identify areas of audit emphasis.

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances, the auditor most likely would a. Issue a disclaimer of opinion about the internal controls as part of the auditor's report. b. Issue a qualified opinion of this finding as part of the auditor's report. c. Withdraw from the audit because the internal controls are ineffective. d. Increase the assessment of control risk and increase the extent of substantive tests.

d. Increase the assessment of control risk and increase the extent of substantive tests.

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

d. Inherent risk and control risk exist independently of the audit.

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

d. Knowledge necessary for audit planning.

Users of an issuer's financial statements demand independent audits because a. Users demand assurance that fraud does not exist. b. Management relies on the auditor to improve internal control. c. Users expect auditors to correct management errors. d. Management may not be objective in reporting.

d. Management may not be objective in reporting.

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. Management's plans have not been circumvented by worker collusion. c. Management's planning, organizing, and directing processes are properly evaluated. d. 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.

d. 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. Audit risk. b. Comparative analysis. c. Reasonable assurance. d. Materiality.

d. Materiality.

Auditing Interpretations are issued by the Audit Issues Task Force of the Auditing Standards Board (ASB) to provide timely guidance on the application of pronouncements of the ASB. They are a. Equally as authoritative as Statements on Auditing Standards. b. Nonauthoritative opinions that are expressed without consulting the ASB. c. More authoritative than Statements on Auditing Standards. d. Not auditing standards

d. Not auditing standards

Most of the auditor's work in forming an opinion on financial statements consists of a. Comparing recorded accountability with assets. b. Understanding internal control. c. Examining cash transactions. d. Obtaining and evaluating audit evidence.

d. Obtaining and evaluating audit evidence.

In developing an audit plan, an auditor should a. Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. b. Evaluate findings from substantive procedures performed at interim dates. c. Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. d. Perform risk assessment procedures.

d. Perform risk assessment procedures.

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would a. Plan for a large measure of tolerable misstatement in substantive procedures. b. Compare a sample of paid vendors' invoices to the receiving records at year end. c. Increase the sample of transactions to be selected for cutoff tests. d. Perform tests several times during the year, rather than only at year end.

d. Perform tests several times during the year, rather than only at year end.

Which of the following types of audit evidence provides the least assurance of reliability? a. Receivable confirmations received from the client's customers. b. Prior months' bank statements obtained from the client. c. Municipal property tax bills prepared in the client's name. d. Prenumbered receiving reports completed by the client's employees.

d. Prenumbered receiving reports completed by the client's employees.

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity? a. Observation of client personnel. b. Inquiry of client personnel. c. Inspection of documents and reports. d. Preparation of system flowcharts.

d. Preparation of system flowcharts.

The auditor should document the understanding of internal control. For example, a narrative memorandum may be used to a. Represent the specific steps in a program and the order in which they will be carried out. b. Ask a series of interrelated questions about internal control. c. Identify the contingencies considered in the description of a problem and the appropriate actions to be taken relative to those contingencies. d. Provide a written description of the process and flow of documents and of the control points.

d. Provide a written description of the process and flow of documents and of the control points.

Each of the following types of controls is considered to be an entity-level control, except those a. Pertaining to the company's risk assessment process. b. Addressing policies over significant risk management practices. c. Relating to the control environment. d. Regarding the company's annual stockholder meeting.

d. Regarding the company's annual stockholder meeting.

An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered? a. AICPA Audit and Accounting Guides. b. Financial statements of other entities in the industry. c. Textbooks and periodicals related to the industry. d. Results of performing substantive procedures.

d. Results of performing substantive procedures.

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

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

Which of the following documents are examples of audit evidence generated by the client? a. Vendor invoices and packing slips. b. Bills of lading and accounts receivable confirmations. c. Customer purchase orders and bank statements. d. Shipping documents and receiving reports.

d. Shipping documents and receiving reports.

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about a. Suspense credits that management believes should be classified as "current liability." b. Suspense debits that the auditor verifies will have realizable value to the client. c. Suspense credits that the auditor determines to be customer deposits. d. Suspense debits that management believes will benefit future operations.

d. Suspense debits that management believes will benefit future operations.

Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions? a. There are significant differences between the entity's forecasted financial statements and the financial statements to be audited. b. The CPA becomes aware of the existence of related party transactions while reading the draft financial statements. c. There have been substantial inventory write-offs just before the year end in each of the past 4 years. d. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

d. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.

Which of the following best describes the reason an independent auditor reports on financial statements? a. The company preparing the statements may have poorly designed internal control. b. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work. c. A management fraud may exist, and it is more likely to be detected by independent auditors. d. The company preparing the statements and the persons using the statements may have different interests.

d. The company preparing the statements and the persons using the statements may have different interests.

When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except a. The effect of uncorrected misstatements related to prior periods. b. The size and nature of the misstatements. c. The particular circumstances of each misstatement. d. The cost of correcting the misstatements.

d. The cost of correcting the misstatements.

Which of the following statements about internal control is correct? a. Exceptionally effective internal control is enough for the auditor to eliminate substantive procedures on a significant account balance. b. Internal control should provide reasonable assurance that collusion among employees cannot occur. c. The establishment and maintenance of internal control are important responsibilities of the internal auditor. d. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

d. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? a. The degree to which the auditor intends to use internal audit personnel to perform substantive procedures. b. The industry and the business and regulatory environments in which the client operates. c. The relationship between management, the board of directors, and external stakeholders. d. The degree to which information technology is used in the accounting function.

d. The degree to which information technology is used in the accounting function.

Which of the following auditor concerns usually is so serious that the auditor might conclude that a financial statement audit cannot be conducted? a. Management fails to modify prescribed controls for changes in conditions. b. The entity has no formal written code of conduct. c. Procedures requiring separation of duties are subject to management override. d. The integrity of the entity's management is suspect.

d. The integrity of the entity's management is suspect.

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the a. Pending legal matters to be included in the inquiry of the client's attorney. b. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. c. Procedures to be undertaken to discover litigation, claims, and assessments. d. Timing of inventory observation procedures to be performed.

d. Timing of inventory observation procedures to be performed.

Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? a. Assess control risk for the assertions embodied in the financial statements. b. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management. c. Prepare a rough draft of the financial statement and of the auditor's report. d. Tour the client's facilities.

d. Tour the client's facilities.

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of Rights and Observations Valuation and Allocation

no; yes