Audit Final Exam
Accounts payable confirmations are used to test
A. Both the existence and completeness audit assertions.
Which of the following is not included in the broad category of assurance services?
Accounting or review services
Which of the following presumptions is correct about the reliability of audit evidence?
An effective internal control system provides more reliable audit evidence.
Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?
Assessing the allowance for uncollectible accounts for reasonableness.
What is the Audit risk model?
Audit Risk= inherent risk x control risk x detection risk.
Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?
Auditor judgement
Which of the following is NOT a requirement of the Sarbanes- Oxley Act?
A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement
What is channel stuffing?
A company induces distributors to buy substantially more inventory than they can promptly resell.
Which of the following is allowable for a CPA?
A used car loan from a banking client where the client has a lien on the car.
An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether:
Cash balances were overstated because of kiting.
Which of the following procedures would ordinarily be expected to best reveal improper cutoff sales at the balance sheet date?
Compare shipping documents with sales records
If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated?
Completeness
Tracing is used primarily to test which of the following assertions about classes of transactions?
Completeness
Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with?
Completeness
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees involved in the credit-granting function are separated from the sales function.
Which of the following parties is responsible for the fairness of the representations made in financial statements?
Entity's management
The 4 E's required to obtain your CPA license are:
Exam, Experience, education, and ethics
Which assertion may be tested for the "account balances" category of management assertions?
Existence, rights and obligations, completeness, accuracy, valuation, allocation, classification, and presentation
A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor. (T/F)
False
Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.
False
Materiality is based only on a quantitative analysis of the financial statements.
False
The AICPA and PCAOB can revoke the CPA license of a professional if they do not abide by certain standards.
False
The classification assertion refers to transactions and events being recorded in the correct accounting period?
False
The first phase of audit planning is risk assessment
False
The general cash account is normally the principal account used to disburse payroll. (T/F)
False
Which of the following is not explicitly a part of the IIA's definition of internal auditing?
Internal auditors should help external auditors complete the annual financial statement audit.
Which of the following matters generally is included in an auditor's engagement letter?
Management's responsibility for the entity's compliance with laws and regulation.
According to PCAOB AS 1305 discussing Internal Control deficiencies, a ___________ is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
Material weakness
Tolerable misstatement is:
Materiality allocated to a specific account
Audit documentation:
May be in paper, electronic, or some other form.
NASBA stands for
National Association of state boards of accountancy
Which of the following misstatements is not related to the completeness assertion for revenue?
Next year's revenue is recorded this year
An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose?
Qualified and disclaimer
Footing is an example of
Recalculation
Which of the following is a general audit test?
Test of Controls
In which of the following circumstances would a CPA who audits XM Corporation lack independence?
The CPA and XM's president each owns 25 percent of FOB corporation, a closely-held company.
What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB?
The auditor is required to read the pother information and consider whether such information is consistent with the information in the financial statements
The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of:
The company's management
Which elements are pervasive to the application of the Principle underlying an Audit Conducted in Accordance with GAAS particularly the Performance and Reporting sections?
The elements of materiality and audit risk./
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?
The financial statements fail to disclose information that is required by generally accepted accounting principles.
Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time?
The official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid."
According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement?
The partner in another office in a nearby city who regularly plays golf with the engagement partner and does not work on the engagement or have any interaction with the client
FASB ASC Topic 820 defines Fair Value as:
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date,.
Which of the following best describes audit risk?
The risk that the auditor will provide a "clean" opinion on financial statements that are, in fact, materially misstated
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting.
The state board of accountancy
An auditor would issue an adverse opinion if:
The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
Which of the following statements about the study of auditing is NOT true?
The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.
What is true about the CPA exam
There are no blackout dates for the CPA exam, each exam section has a 4 hour time limit, if I don't complete all the sections of the CPA exam that i'm registered for in my NTS before my NTS expires I forfeit the fees paid and will have to pay them again.
Which of the following statements is not true with respect top assurance, attest, and audit services.
These services are applied only to financial statement accounts.
The main difference between SAS and AU is
They are the same except that SAS are organized chronologically and the AU are organized by topical area.
Which of the following options contains 4 of the 8 key elements of a standard unqualified audit reports for a public company?
Title containing the word "Independent", scope paragraph, opinion paragraph; Name of the auditor.
Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the shareholders?
To enhance auditor independence from the management of the corporation.
A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconcilliation
True
Accounts payable confirmations are used less frequently by auditors than accounts receivable confirmations
True
Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model. (T/F)
True
The PCAOB makes it clear that the CEO and CFO are responsible for the internal control over financial reporting and the preparation of the statements
True
The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any accounting firm employed by a public company
True
The auditor's use of analytical procedures for auditing cash is limited
True
The cash account is affected by all of the entity's business processes
True
The concept of internal control includes IT systems and manual systems
True
A confirmation is used to:
Verify a representation from a third party.
Match the following states with the length of their NTS window
Virgina, North Dakota, South dakota- 12 months Utah, CA- 9 months Texas- 90 days from application state. all other- 4 months
Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who is also an attorney, serves as auditor and provides legal services to the same private client?
When the CPA, as legal agent, consummates a business acquisition for the client.
auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?
Whether management has any knowledge of fraud that has been perpetrated on or within the entity.
Which of the following internal controls most likely would reduce risk of diversion of customer receipts by an entity's employees?
a bank lockbox system
According to the profession's ethical standards, a CPA auditor would be considered independent in which of the following instances?
a client has not paid CPA fees from a 3rd quarter review just prior to the annual audit
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?
a combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
Engagement letters include all of the following except:
a list of adjusting journal entries.
Which of the following is a source of detection risk?
a nonrepresentative sample
If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the:
accounting records to shipping documents.
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?
accounts receivable confirmation requests yield significantly fewer responses than expected.
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of
accuracy, valuation, allocation
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
accuracy, valuation, allocation
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:
additional tests of details are required.
In general, revenue is recognized when:
an entity satisfies a performance obligation
An investor is reading the financial statements of the stankey corporation and observes that the statements are accompanied by an auditor's unqualified report. From this the investor may conclude that:
any disputes over significant accounting issues have been settled to the auditors satisfaction.
A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion.
Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of
authorization, recording, and custody
All of the following are typically in the current file except:
chart of accounts
Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
completeness
If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated?
completeness
Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and:
compliance
Assessing control risk at a lower level involves all of the following except
concluding that controls are ineffective
Which of the following is not an audit procedure that is commonly used in performing tests of controls?
confirming
As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
consider the possibility of an error in the financial statements
A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.
control risk
disbursements have occurred without proper approval
control risk
there is inadequate segregation of duties
control risk
In general, material frauds perpetuated by which of the following are most difficult to detect?
controller
What are entity level controls
controls to monitor results of operations, management's risk assessment process, and the period-end financial reporting process.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would
decrease detection risk
a necessary substantive audit procedure is omitted
detection risk
confirmation of receivables by an auditor fails to detect a material misstatement
detection risk
Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?
different interests may exist between the company preparing the statements and the parties using the statements.
When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an):
disclaimer of opinion
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably
disclose the fraud to the appropriate level of client's management.
A primary purpose of the proof of cash is to:
ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
The accounts payable department receives the purchase order form to accomplish all of the following except to
ensure that the goods had been received by the party requesting the goods.
During the first phase of an audit, a CPA most likely would:
evaluate the integrity of management.
Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?
examine shipping documents
Due professional care requires auditors to:
exercise professional skepticism during the audit.
Assertions about account balances at the period end include
existence, rights and obligations, and completeness
When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the:
extent of substantive testes
The risk of material misstatement includes inherent risk and sampling risk
false
Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?
fictitious sales
If fraud is suspected, auditors may complete all of the following procedures except.
footing the bank reconciliation and the outstanding checks listing.
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except
general ledger
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:
general ledger
An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee
has not been paid and will not be paid for at least twelve months
Which of the following best describes the role of corporate governance?
holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.
The auditor generally finds more predictability in the ratio and trend analysis in the examination of the
income statement
A substantive strategy differs from a reliance strategy in that a substantive strategy includes:
increased implementation of detailed tests of transactions and balances.
The auditor can respond to an increased risk of fraud by doing all of the following except:
increasing detection risk.
XYZ Company, a client, lacks sufficient working capital to continue operations.
inherent risk
cash is more susceptible to theft than an inventory of coal
inherent risk
notes receivable are susceptible to material misstatements, assuming there are no related internal controls
inherent risk
technological developments make a major product obsolete
inherent risk
the client is very close to violating debt covenants
inherent risk
A dual purpose test:
is both a substantive test of transactions and a test of controls.
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:
is responsible for mailing the checks
A violation of the profession's ethical standards would most likely have occurred when a CPA:
issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid
Valuations based on management's best judgement that involve management's assumptions about unobservable inputs and how the market would price the asset or liability is the definition of which type of Fair Value Measurement?
level 3 measurements
The largest public accounting firms typically are structured as:
limited liability partnerships
In designing written audit programs, an auditor should plan specific audit procedures to test
management assertions
Who bears ultimate responsibility for the financial statements?
management of the organization
A primary purpose of internal controls is to
meet objectives of maintaining reliable documents and records and accurate financial reporting.
Under auditing standards, which of the following would be classified as an error?
misinterpretation by management of facts that existed when the financial statements were prepared.
As the acceptable level of detection risk decreases, an auditor may change the
nature of substantive procedures from less effective to more effective procedures.
The basic definition of auditing states that it is a process to
objectively obtain and evaluate evidence regarding assertions
A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is:
observation
An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:
observation and inquiry
An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should:
obtain a knowledge of matters that relate to the nature of the entity's business.
Vouching is used primarily to test which of the following assertions about classes of transaction?
occurence
Which of the following would best be described as an assurance service?
offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies.
Preliminary engagement activities include:
performing background checks on top management.
The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?
preparing and detail testing a bank transfer schedule.
Which of the following accounts is not affected by cash disbursement transactions?
purchase returns
"The auditor must prepare audit documentation in connection with each engagement conducted pursuant to the standards of the PCAOB. Audit documentation should be prepared in sufficient detail to provide a clear understanding of its _________, __________ and the _______ reached"
purpose, source, and conclusions.
With respect to ethics, the utilitatian theory
recognize that decisions involve trade-offs between costs and benefits.
a debit memo
reduced the amount of accounts payable due to a vendor
Auditing standards define special purpose financial statements as including those prepared under the following base:
regulatory basis, tax basis, and contractual basis
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?
reimbursement of the fund from the general cash account occurs twice or more each week.
The most reliable type of evidence typically is
reperformance
Walkthroughs usually involve all of the following audit procedures except:
reperformance
Which of the following arranges the general types of audit tests in the order they are normally performed in an audit?
risk assessment procedures, tests of controls, and substantive procedures.
An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure
seeks information about indebtedness to the bank
Substantive procedures to examine the cutoff assertion for accounts payable include:
selecting a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases journal.
Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely:
send negative confirmations
An "in-charge" auditor typically holds the rank of
senior
In a properly designed internal control system, the same employee may be permitted to
sign checks and also cancel supporting documents.
AU-C 265 and PCAOB AS 1305 define a __________ as a deficiency, or a combination of deficiencies, in internal control, that is less severe than a material weakness yet important enough to merit attention by those charged with governance
significant deficiency
The auditor's report is generally addressed to the
stockholders of the company
analytical procedures may be classified as being primarily which of the following?
substantive procedures
All of the following are inherent risk factors that are pervasive to the financial statements except:
supplies inventory is difficult to count.
Which of the following audit tests would be regarded as a test of controls?
tests of the signatures on canceled checks to the board of directors' authorizations
The auditing work papers belong to
the audit firm
An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes
the auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.
An internal auditor is likely to be more concerned with ___________ than the external auditor
the efficiency of operations
The risk assessment component of internal control refers to
the entity's identification and analysis of risks relevant to achievement of its objectives
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements.
the opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
the prospective client's unwillingness to permit inquiry of its legal counsel.
An independent auditor might consider the procedures performed by the internal audit function because:
they are employees whose work might be relied upon
External auditors are referred to as "external" because
they are not employees of the entity being audited.
As the acceptable level of detection risk increases, an auditor may change the
timing of substantive procedures from year-end to an interim date.
A receiving report is used to document the ordering of goods
true
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped that are not invoiced. The inadequate controls could cause an
understatement of revenues and receivables and an overstatement of inventory.
Unrecorded liabilities are most likely to be found during the review of which of the following documents?
unpaid vendor invoices and receiving reports.
Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an)
unqualified report with an explanatory paragraph
To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivables, an auditor most likely would:
validate the sender of electronic information.
an auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to
verify reconciling items on the entity's bank reconciliation
