Final (Ch. 1-17, 19, 20)

b

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable is most likely violated? a. existence b. completeness c. rights and obligations d. classification

lien

when a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligation of a loan contract

statutory law

written law enacted by the legislative branch of federal and state governments

dual dated

The auditor's report is ________ _________ when a subsequent event occurs after the date on which the auditor has obtained sufficient appropriate audit evidence but before the financial statements are issued

a

The best procedure for an auditor to test whether credit limits are being exceeded would be to a. develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations b. develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit c. request a printout of all account balances so that they can be manually checked against the credit limits d. request a printout of a sample of account balances so that they can be individually checked against the respective credit limits

c

The current file of the auditor's working papers should generally include (a) flowchart of the accounting system (b) organization charts (c) copy of the financials (d) copies of bond and note indentures

expected tainting factor

auditor's expectation of how large any misstatements that are not uncovered by the audit procedure are likely to be

materiality, risk, evidence

What are the building blocks of auditing?

to meet requirements under GAAP and GAAS, valid subpoena, to allow a review of a member's professional practice, investigative or disciplinary proceeding, to allow review because of purchase, sale, or merger

What are the five scenarios in which a CPA can disclose confidential information without the entity's consent?

internal control, compliance, operational, forensic, financial statement

What are the five types of audits?

classification and understandability, completeness, occurrence and rights and obligations, accuracy and valuation

What are the management assertions about presentation and disclosure?

determine audit engagement team requirements, ensure ethics and independence, understand entity

What are the steps involved in the preliminary engagement activities?

analytical procedures, tracing, vouching, confirmation, physical examination

What are the substantive tests?

commencement of litigation, possible intention by management to commence litigation, commence of litigation by the CPA against management for fraud

What are the three guidelines for assessing independence when actual or threatened litigation exists between the audited entity and the CPA?

audit shouldn't audit own work, auditor should not function in role of management, auditor should not service in an advocacy role for the entity

What are the three principles of auditor objectivity and independence of the SEC's rules with respect to services provided by auditors?

substantive, reliance

What are the two audit strategies?

entity's organizational structure, its methods of assigning authority and responsibility

What are the two important factors to consider over the control environment and purchasing process?

close relative has a financial interest in the client that is material and the CPA is aware, close relative could exercise significant influence over the financial policies of the client

What are the two major situations with close relatives that can impair independence?

fraudulent financial reporting, theft

What are the two types of fraud?

independence, quality, context

What aspects are we trying to improve through assurance services?

a

What assertion is tested by vouching stock repurchases to the canceled stock certificates? A) Occurrence. B) Valuation. C) Completeness. D) Disclosure.

inquiry, inspection, observation, reperformance, walkthrough (combination of 2 or more)

What audit procedures are tests of controls?

materiality and audit risk

What concepts are pervasive in the application of GAAS, particularly the standards of field work and reporting?

tests of controls

What is the most common use of attribute sampling?

control deficiency

exists when the design or operations of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis

assertions

expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures

assurance services

independent professional services that improve the quality of information, or its context, for decision makers

PCAOB

is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies

Securities Exchange Act of 1934

statute that regulates documents filed with the SEC and is concerned primarily with ongoing reporting by companies whose securities are listed and traded on a stock exchange

criminal law

statutory law that defines the duties citizens owe to society and prescribes penalties for violations

dual purpose test

tests of transactions that both evaluate the effectiveness of controls and detect monetary errors

trend analysis

the examination of changes in an account over time

management; audit committee and management; externally, audit committee, and management

Control deficiencies are reported to _________________. Significant deficiencies are reported to ________________. Material weaknesses are reported to ________________.

inherent

Controls are specifically designed based on _____________ risk.

completeness

Customers are more likely to complain to the entity if which of the assertions for cash receipts is violated?

unqualified, unqualified, adverse

For a control deficiency, an ___________ opinion can be issued. For a significant deficiency, an ___________ opinion can be issued. For a material weakness, an _________ opinion will be issued.

material weakness

a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis

deviation

a departure from what the auditor determines to be a sufficient signal that the controls being tested are working properly

contingent fee

a fee that depends on the finding or result attained as a result of the member's work

relevant assertion

a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated

Type 2

events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose subsequent to that date; require disclosure in the notes to the financial statements

revenue

inflows or other enhancements of assets of an entity or settlements of its liabilities from delivery or producing goods, rendering services, or other activities that constitute the entity's major or central operations

confirmation

Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity is an example of what audit procedure?

variances

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for investigation of _______________ within a formal budgeting system.

c

Property, plant, and equipment transactions include all of the following, except: A) Self-construction of a new office building. B) Acquiring capital assets in exchange for stock. C) Recording operating leases. D) Abandoning capital assets.

1, underreliance, high

The risk of incorrect rejection (aka Type ___ error) is referred to as the risk of _______________ and the risk of assessing control risk too ______.

efficiency, effectiveness

The risk of incorrect rejection relates to the ______________ of the audit, while the risk of incorrect acceptance relates to the _______________ of the audit.

b

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does exist, is known as: A) Audit risk. B) Detection risk. C) Inherent risk. D) Business risk.

moral hazard, adverse selection

There are two types of information asymmetry: __________ ___________ (hidden action) and ______________ _____________ (hidden type).

inverse

There is a ___________ relationships between the sufficiency and appropriateness of audit evidence.

inverse, direct

There is an ____________ relation between sample size and materiality, and a ___________ relation between sample size and desired level of assurance.

revenue

Three types of transaction are typically processed through the _____________ process: sale of goods or services for cash, receipt of cash from the customer in payment for goods/services, and the return of goods by the customer.

purchasing

Three types of transaction that are processed through the ______________ process are purchase of goods and services for cash, payment of the liabilities arising from purchases, and return of goods to suppliers for cash.

receiving reports

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this tests consists or all ______________ ____________.

b

To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or a. relies on the entity's internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed b. confirms the number of shares owned that are held by an independent custodian c. determines the market price per share at the balance sheet date from published quotations d. confirms the number of shares owned with the issuing company

minutes of the board of directors

To obtain evidence on the authorization assertion, an auditor should trace corporate stock issuances and treasury stock transaction to what?

duty, breached, duty, causal, damages

To recover against an auditor in a negligence case, the client must prove: the auditor had a __________ to the client, the auditor __________ that _______ by failing to act with due professional care, there was a direct __________ connection between the auditor's negligence and the client's damage, and the client suffered __________ as a result.

b

To strengthen control over the custody of equipment, the entity would most likely institute a policy requiring a periodic a. increase in insurance b. inspection of equipment and reconciliation with accounting records c. verification of liens, pledges, and collateralizations d. accounting for work orders

false representation, knowledge, intended, relied, damages

To sue for fraud, the plaintiff must prove: a _______________ ____________ by the accountant, _______________ by the accountant that the representation was false, that the accountant __________ to induce the third party to rely on false representation, that the third party ________ on the false representation, and that the third party suffered ___________.

d

To test the assertion of existence for long-term debt, the auditor could complete which of the following procedures? A) Recompute accrued interest payable. B) Obtain an analysis of notes payable and reconcile to the general ledger. C) Review interest expense for payments to debt holders not listed on the debt analysis schedule. D) Examine copies of debt agreements and contracts.

c

To which of the following matters would an auditor not apply materiality limits when obtaining specific written management representations? A) Disclosure of compensating balance arrangements involving restrictions on cash balances. B) Information concerning related-party transactions and related amounts receivable or payable. C) Fraud involving employees with significant roles in the internal control system. D) The absence of errors and unrecorded transactions in the financial statements.

a

Tracing a sample of entries in the cash receipts journal to daily deposit slips tests which of the following assertions for cash? A) Occurrence. B) Completeness. C) Valuation. D) Cutoff.

inspection or reperformance

Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list is an example of what audit procedure?

true

True or False: A bank reconciliation is a type of internal control.

false

True or False: A reliance strategy eliminates the need to gather substantive evidence.

true

True or False: Accounts payable confirmations are used less frequently than accounts receivable confirmations.

false (it is the property of the auditor)

True or False: All audit documentation is the property of management.

true

True or False: Auditing standards indicate the sample sizes for statistical and non-statistical sampling should be approximately the same.

false (more likely to overstate sales)

True or False: Auditors are concerned about the occurrence assertion for revenue transactions because clients are more likely to understate sales than to overstate them.

true

True or False: Covered members must be independent.

true

True or False: Indirect financial interests are permissible only if the amount involved is immaterial with respect to the covered member's income and wealth.

false

True or False: Inquiry is an audit procedure.

true

True or False: Management may decide to accept the consequences of a possible risk because the costs to remediate may exceed the benefit.

true

True or False: Population size does influence sampling computations when testing monetary account balances.

false (burden of proof shifts to the auditor)

True or False: Section 11 of the 1933 Act is more favorable for auditors than plaintiffs because the burden of proof is shifted to the plaintiff.

false

True or False: Technology will eliminate the need for auditors to rely on sampling.

false (the SEC does)

True or False: The AICPA requires additional communication between auditors and their entities' audit committees and in requiring public company audit entities to reveal information regarding the fees paid to the auditors.

false (the PCAOB does)

True or False: The SEC conducts regular inspections of public accounting firms that are required to register with them.

true

True or False: The amount of tolerable difference is always less than planning materiality.

false (depends on potential for misstatement)

True or False: The assessment of the significance of a control deficiency depends on whether a misstatement actually occurred.

true

True or False: The auditor must always accept some sampling risk because he or she is not examining all items in a population.

true

True or False: The auditor must conduct the auditors of financial statements and ICFR in an integrated way because each audit provides the auditor with information relevant to the evaluation of the results of the other.

true

True or False: The auditor should not use negative confirmation requests as the sole substantive auditor procedure.

false

True or False: The auditor's standard unqualified report is addressed to management.

true

True or False: The independence of a CPA is impaired if the CPA performs a managerial or other significant role for an entity's organization during the time period covered by an attest engagement.

true

True or False: The measure of the reliability of audit evidence lies in the auditor's judgment.

true

True or False: The title of the auditor's standard unqualified report always contains the word independent.

false (low risk)

True or False: There is a huge risk related to rights and obligation assertion because entities have an incentive to record liabilities that are not obligations of the entity.

false

True or False: Third parties can sue for breach of contract.

1, 2

Type ____ events require adjustment of the numbers in the financial statements, while type ____ events usually only require disclosure in the notes to the financial statements.

misstatement, reliance, damages, scienter

Under Rule 10b-5 of the 1934 Act, the plaintiff must prove: a material _________________, _____________ by the plaintiff on the financial statements, _________ suffered, and _____________.

common

Under ___________ law, auditors can be held civilly, but not criminally, liable.

loss, misstatement

Under the 1933 Act, the plaintiff only need to prove that there was a _________ by investing in the registered security, and the audited financial statement contained a ________________.

must report to the SEC within one business day

Under the Private Securities Litigation Reform Act, what responsibility does the CPA firm have in reporting illegal acts?

external audit fees, audit related fees, tax fees, and fees for other nonaudit services performed by the audit firm

Under the SEC's rules regarding independence, what must an entity disclose?

existence, completeness

Vouching tests for ________________. Tracing tests for ________________.

existence/occurrence, completeness

Vouching tests the ____________________ assertion, while tracing tests the ________________ assertion.

observation

Watching the entity's warehouse personnel count the raw materials inventory is an example of what audit procedure?

custody, authorization, recording

What 3 duties is it important to segregate?

when large number of differences sample size will be smaller, effective for both over and understatements, zero balances don't require special considerations

What are some advantages of classical variable sampling?

efficient sample, measure the sufficiency of evidence obtained, quantify sampling risk

What are some advantages of statistical sampling?

no assumptions made, when little or no misstatement smaller sample size, automatically stratifies sample

What are some advantages to monetary unit sampling?

simplify judgments required, improve consistency

What are some advantages to nonstatistical sampling?

size, composition, volume, complexity, homogeneity, nature, exposure to losses, changes from prior period

What are some characteristics to identify significant accounts?

don't work well when little or no misstatement, must estimate standard deviation, if few misstatements will underestimate variance

What are some disadvantages of classical variable sampling?

additional costs to training auditors, designing and conducting the sampling application, lacking consistent application across audit teams due to complexity

What are some disadvantages of statistical sampling?

zero/negative balances requires special design, lots of errors may cause an overstatement of the allowance for sampling risk

What are some disadvantages to monetary unit sampling?

cannot quantify sampling risk

What are some disadvantages to nonstatistical sampling?

CPA performance view, CPA trust services, CPA risk advisory, PrimePlus services

What are some examples of assurance services?

non audit reports on internal controls, financial forecasts

What are some examples of attest services?

tax preparation and planning services, management advisory services, compilation services

What are some examples of non-assurance services?

understand flow of transaction, identify points within the process where misstatement could arise, identify controls that management has implemented to address these misstatements

What are some likely sources of misstatements?

override by management, human error, collusion

What are some limitations of an entity's internal controls?

random unintentional errors, systematic unintentional errors, fraud

What are the 3 categories of errors?

inherent risk, control risk, detection risk

What are the 3 components of audit risk?

incentive, opportunity, rationalize

What are the 3 components of the fraud triangle?

look at market, look for similar instruments, valuation expert

What are the 3 levels of fair value valuation?

held to maturity, available for sale, trading

What are the 3 types of debt investments?

performance reviews, physical controls, segregation of duties, information processing controls

What are the 4 categories of control activities?

equity method, trading, available for sale, consolidation

What are the 4 types of equity investments?

plan, identify, scope, evaluate, report

What are the 5 steps performing an audit of ICFR?

sales to fictitious accounts, recording revenue when goods have not been shipped

What are the auditor's two primary concerns for revenue transactions?

control environment, entity's risk assessment, control activities, information and communication, monitoring activities

What are the five components of the COSO Framework that define internal controls?

financing, purchasing, human resource management, inventory management, revenue

What are the five components of the business processes model?

industry related, complexity of revenue recognition, difficulty of auditing transactions and balances, misstatements detected in prior audits

What are the four inherent risk factors that may affect the revenue process?

privity, near privity, foreseen third parties, reasonably foreseeable third parties

What are the four third parties that can successfully sue auditors for ordinary negligence?

external, internal, government, forensic

What are the four types of auditors?

requisitioning, purchasing, receiving, invoice processing, disbursements, accounts payable, general ledger

What are the functions of the purchasing process?

client acceptance/continuance, preliminary engagement activities, plan the audit, consider and audit internal controls, audit business processes and related accounts, complete the audit, evaluate results and issue audit report

What are the major phases of an audit?

completeness, classification, accuracy, authorization, cutoff, occurrence

What are the management assertions about classes of transactions?

completeness, existence, rights and obligations, valuation and allocation

What are the management assertions about end of the period account balances?

bookkeeping, financial information systems design and implementation, valuation services, actuarial services, internal audit outsourcing services, management/human resources, investment adviser, legal services, expert services

What are the nine categories of nonaudit services that are considered to impair independence if provided to a public company audit entity?

done in accordance with standards, independent auditor, no limitations imposed on the auditor's procedures, client's financial statements must be free of material departures from GAAP

What are the requirements for an audit report to be unqualified?

leadership responsibilities, relevant ethical requirements, acceptance and continuance of entity relationships, human resources, engagement performance, monitoring

What are the six elements of quality control?

changes in the operating environment, corporate restructuring, new personnel, new technology, international growth, rapid growth, new accounting pronouncements, new information systems, new business activities

What circumstances can cause client business risk to arise or change?

receiving goods

What event leads to recognition of the liability by the entity?

don't test the controls

What happens if EPDR exceeds TDR?

segregation of duties

What internal control would most likely deter the lapping of collections from customers?

how much work is to be performed by others; evaluate nature of controls, evaluate competence and objectivity of individuals, test some of the work performed by others

What is a major consideration for the external auditor? How should the auditor combat this?

direct knowledge of the auditor

What is considered the strongest evidence?

private company

What is implied by using a substantive strategy when auditing a company?

it is the quality of an expectation; need to lower the tolerable difference in order to be more precise

What is meant by the "precision of the expectation"? In applying this notion to an analytical procedure, how might an auditor calculate a tolerable difference?

performing walkthroughs

What is often the best way to identify potential sources of misstatements?

cutoff

What is one of the most common errors concerning transaction level assertions?

gains/losses for available for sale securities are reported in OCI

What is the difference between accounting for available for sale and trading securities?

= R/P (where P = TDR-EPDR)

What is the equation to calculate sample size using attribute sampling?

= BV x R x ETF/P (where P = TM-EM)

What is the equation to calculate sample size using unit sampling?

inform, direct, review

What is the importance of supervision to the planning and conduct of the audit?

confirmation

What is the most common audit procedure for accounts receivable?

shipping documents

What is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue?

valuation

What is the primary concern when auditing intangible assets?

the industry or business of the audit client

What is the primary context with which an auditor is concerned?

inverse

What is the relationship between sample size and tolerable deviation rate?

sales invoice

What is the source document that signals the recognition of revenue?

more substantive testing, larger sample size, revise TDR or ARO

What options does the auditor have if UDR>TDR?

aged trial balance

What report does the auditor use for much of the substantive audit work in accounts receivable?

a

When a company registers a public security offering in accordance with the provisions of the Securities Act of 1933, the law provides the investor with A) Audited financial information about the company. B) An SEC assurance that the information in the registration statement is true. C) FDIC Insurance against loss from the investment in the first thirty days of ownership. D) All of the above.

limited to the specific event referenced

When an auditor dual dates a report, their responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient evidence is?

b

When an entity does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning a. restrictions on the payment of dividends b. the number of shares issued and outstanding c. guarantees of preferred stock liquidation value d. the number of shares subject to agreements to repurchase

a

When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why (a) a recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded (b) deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions (c) deviations from pertinent control procedures at a give rate ordinarily would be expected to result in misstatements at a higher rate. (d) a recorded disbursement that is properly authorized may be a transaction that contains a material misstatement

cutoff

When auditing merchandise inventory at year end, the auditor performs a purchase __________ test to obtain evidence that all goods owned at year end are included in the inventory balance.

d

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? (a) any significant changes that occurred subsequent to the interim date (b) the length of the remaining period (c) the specific controls tested prior to the "as of" date (d) the walkthrough of the control system conducted at interim

low control risk, small balances, good chance they will respond

When can you use negative confirmations?

vendor shipping document, purchase order

When goods are received, the receiving clerk should match the goods with the ________ _________ __________ and the __________ __________.

top down, risk based

When identifying the controls to be tested, the auditor should use a ____-_______, _________-__________ approach.

c

When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist? (a) when the amount is material (b) when the fraud results from misappropriation of assets rather than fraudulent financial reporting (c) in response to inquiries from a successor auditor (d) when a line manager rather than a lower level employee commits the fraudulent act

b

When planning an audit, an auditor should (a) consider whether the extent of substantive procedures may be reduced based on the results of tests of controls (b) determine overall materiality (c) conclude whether changes in compliance with internal controls justify reliance on them (d) evaluate detected misstatements

RMM is low (specifically CR), small number of negative confirmations sent, low exception rate is expected, not of aware of conditions that would cause recipients to disregard requests

When should the auditor use negative confirmations?

c

Which of the following procedures is least likely to be performed before the balance sheet date? a. test of internal control over cash b. confirmation of receivables c. search for unrecorded liabilities d. observation of inventory

so users know what to expect and professionals know what behaviors are acceptable, and so discipline can be applied when needed

Why are ethical standard established in the public accounting profession?

can't infer that all nonrespondents have verified their account information

Why are negative confirmations less effective than positive confirmations?

to allocate more resources to investigate necessary accounts

Why does the auditor try to get a better understanding of the client's business and identifying where errors are likely to occur?

requires analytical and logical skills; much more conceptual in nature

Why is auditing different from other accounting courses?

fraud, error

________ involves intentional misstatement, while ________ involves unintentional misstatement.

attest, assurance, auditing, attest

_________ services are a subset of ____________ services, and ____________ is a type of _________ service.

greater

__________ risk of misstatement requires a higher quantity of audit evidence.

tracing, vouching

____________ starts with a source document and goes to the accounting records, while ____________ starts with the accounting records and goes to the source document.

control

_____________ activities include a range of activities, such as approvals, authorizations, verifications, reconciliations, reviews of operating performance, and segregation of duties.

positive

_____________ confirmations are used when an account's individual balances are large or if errors are anticipated .

permanent, current

______________ files contain historical data about the entity that are of continuing relevance for the audit. ___________ files include information and data related specifically to the current year's engagement.

attestation

______________ involves a professional issuing a written report that expresses a conclusion about the reliability of a written assertion that is the responsibility of a third party.

operational

_________________ auditing is oriented primarily toward efficiency and future improvements to accomplish the goals of management.

tracing

_________________ goes from the internal source documents to the accounting records.

management

_________________ has the responsibility to design and maintain a system of internal control that provides reasonable assurance that assets and records are properly safeguarded.

vouching

___________________ goes from the accounting records to the internal source documents.

reasonable assurance

______________________ _____________ implies some risk that a material misstatement could be present in the financial statements and the auditor will fail to detect it.

low (DR high)

A reliance strategy sets control risk _________.

appropriateness

a measure of the quality of audit evidence; must be relevant and reliable

fraud

actions taken with the knowledge and intent to deceive

one

A ______ year "cooling off" period is required for employees in a financial reporting oversight role who previously worked with the CPA firm performing the audit.

b

A CPA is aware that a sole proprietor client has "skimmed" unrecorded cash receipts and thus not reported them to the Internal Revenue Service. If the CPA signs the entity's tax return as a CPA after preparing the return, he/she would be violating which AICPA Rule of Conduct? A) Rule 1.200—Independence B) Rule 1.100—Integrity and Objectivity C) Rule 1.320—Accounting Principles D) Rule 1.700—Confidential Information

high (DR low)

A substantive strategy sets control risk _________.

a

A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor A) An overstatement of ending inventory. B) The existence of many open purchase orders. C) A change from FIFO to LIFO (assume prices are increasing). D) Duplicate payments on inventory orders.

objectives, components, structure

A direct relationship exists between _____________, ______________, and the ____________ of the entity, which is depicted in the framework cube.

quality control

A firm's system of _________ _________ should be designed to provide the firm with reasonable assurance that the firm and its personnel comply with professional, legal, and regulatory requirements and that the partners issue appropriate reports.

less, interim, smaller

A high detection risk requires ___________ reliable evidence, more audit work at ___________, and a ___________ sample size.

c

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the entity's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose? A) The auditor and the entity's management. B) The entity's audit committee and the lawyer. C) The lawyer and the auditor. D) The entity's management and the lawyer.

more, year end, larger

A low detection risk requires _________ reliable substantive evidence, more audit work at ____________, and a ___________ sample size.

d

A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may (a) consider increasing the use of substantive tests of transactions in place of analytical procedures (b) substantiate the accuracy of data through self-checking digits and hash totals (c) reduce the level of required tests of controls to a small amount (d) access information stored on computer files while having a limited understanding of the entity's hardware and software features

b

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is: A) Scanning. B) Recalculation. C) Observation. D) Confirmation

c

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is: A) Reperformance. B) Inspection. C) Observation. D) Analytical procedures.

b

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items a. included in the listing have been counted b. represented by inventory tags are included in the listing c. included in the listing are represented by inventory tags d. represented by inventory tags are bona fide

a

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because he or she (a) believes the internal controls are unlikely to be effective (b) determines that the pertinent internal control components are not well documented (c) performs tests of controls to restrict detection risk to an acceptable level (d) identifies internal controls that are likely to prevent material misstatements

inspection or reperformance

Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account is an example of what audit procedure?

d

All of the following are inherent risk factors for the purchasing process except: A) Whether the supply of raw materials is adequate. B) How volatile raw material prices are. C) Misstatements detected in prior audits. D) A new IT system placed in operation during the year.

c

All of the following are provisions of the Sarbanes-Oxley Act of 2002 except: A) Delegation of authority and responsibility to the SEC. B) Creation of the Public Company Accounting Oversight Board [PCAOB]. C) Elimination of the Auditing Standard Board's authority to set standards for the audit of non-public companies. D) Increased responsibilities to corporate officers and board members.

d

All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence except (a) information systems design and implementation (b) HR services (c) management functions (d) some specific tax services (e) all of the above are seen by the SEC as impairing independence

d

Although the quantity and content of audit working papers vary with each engagement, an auditor's permanent files most likely include a. schedules that support the current year's adjusting entries b. prior years' accounts receivable confirmations that were classified as exceptions c. documentation indicating that the audit work was adequately planned and supervised d. information regarding the different classes of stock and the number of shares of each class that are authorized to be issued

b

An "integrated audit" includes (A) A special audit related to management fraud. (B) A financial statement audit and an audit of internal control over financial reporting. (C) A financial statement audit and a special audit related to management fraud. (D) A special audit related to management fraud and an audit of internal control over financial reporting.

integrated

An ______________ audit is composed of the audits of internal control and the financial statements.

significant

An account or disclosure is ______________ if there is a reasonable possibility that the account or disclosure could contain a misstatement that, individually or when aggregated with others, has a material effect on the financial statements, considering the risks of both overstatement and understatement

c

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to (a) eliminate the risk of nonsampling errors (b) reduce audit risk and materiality to a relatively low level (c) measure the sufficiency of the evidential matter obtained (d) minimize the failure to detect errors and fraud

nonstatistical

An approach is considered _________________ is judgement is used to determine the sample size, a haphazard sample selection technique is used, and/or the sample results are evaluated judgmentally.

b

An audit program for long term debt would most likely include steps that require a. comparing the carrying amount of the debt to its year end market value b. correlating the interest expense recorded for the period with the debt outstanding for the period c. verifying the existence of the holders of the debt by direct confirmation d. inspecting the accounts payable subsidiary ledger for unrecorded long term debt

b

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all a. noncapitalizable expenditures for repairs and maintenance have been properly charged to expense b. expenditures for property and equipment have not been charged to expense c. noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period d. expenditures for property and equipment have been recorded in the proper period

d

An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? (a) data capture (b) application (c) output (d) general

b

An auditor compares the current year revenues and expenses with those of the prior year and investigates all changes exceeding 5%. By this procedure, the auditor would be most likely to learn that a. fourth-quarter payroll taxes in the current year were not paid b. the entity changed its capitalization policy for small tools in the current year c. a current year increase in property tax rates has not been recognized in the entity's accrual d. the current year provision for uncollectible accounts is inadequate because of worsening economic conditions

c

An auditor is most likely to perform substantive tests of details on payroll transactions and balances when a. cutoff tests indicate a substantial amount of accrued payroll expense b. the level of control risk relative to payroll transactions is set at low c. substantive analytical procedures indicate unusual fluctuations in recurring payroll entries d. accrued payroll expense consists primarily of unpaid commissions

classical variables sampling

An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which statistical sampling approach is best?

a

An auditor may conclude that depreciation expense charges are insufficient by noting A) Excessive recurring losses on the disposal of assets. B) Insured values in excess of book values. C) Continual trade-ins on relatively new assets. D) Large amounts of fully-depreciated assets remain in operation.

control

An auditor may reduce ____________ risk below high for a client that uses a service organization on the basis of a service auditor's SOC 1, Type 2 report.

interim

An auditor might test controls at _____________ because the assertion being tested may not be significant, the control has been effective in prior audits, or it may be more efficient to conduct the tests at that time.

d

An auditor ordinarily sends 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. One purpose of this procedure is to a. provide the data necessary to prepare a proof of cash b. request that a cutoff bank statement and related checks be sent to the auditor c. detect kiting activities that may otherwise not be discovered d. seek information about loans from the banks

positive

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when no reply to a _____________ confirmation request is received.

d

An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide a. the opinion of a specialist as to whether loss contingencies are possible, probable, or remote b. a description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome c. an objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters d. corroboration of the information furnished by management concerning litigation, claims, and assessments

completeness

An auditor testing long term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the __________________ of recorded investment income.

c

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as a. deductions not authorized by employees b. overtime not approved by supervisors c. time cards with invalid job numbers d. payroll checks with unauthorized signatures

c

An auditor would be most likely to identify a contingent liability by obtaining a a. accounts payable confirmation b. bank confirmation of the entity's cash balance c. letter from the entity's general legal counsel d. list of subsequent cash receipts

c

An auditor would most likely verify the interest earned on bond investments by a. vouching the receipt and deposit of interest checks b. confirming the bond interest rate with the issuer of the bonds c. recomputing the interest earned on the basis of face amount, interest rate, and period held d. testing the controls over cash receipts

b

An auditor's flowchart of an entity's accounting system is a diagrammatic representation that depicts the auditor's (a) program for tests of controls (b) understanding of the system (c) understanding of the types of fraud that are probable, given the present system (d) documentation of the study and evaluation of the system

d

An auditor's primary consideration regarding an entity's internal controls is whether they (a) prevent management override (b) relate to the control environment (c) reflect management's philosophy and operating style (d) affect the financial statement assertions

presentation and disclosure (classification)

An auditor's primary purpose in examining a letter received from the bank shortly after the balance sheet date that renews and extends an entity's note payable is most likely to obtain evidence concerning management's assertions about ______________________.

c

An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? A) Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger. B) Sending quarterly confirmations to all vendors. C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. D) Tracing the totals from the purchases journal to the various general ledger accounts.

bond trustee

An entity has established a bond sinking fund to repurchase a portion of the outstanding bonds each year. The auditor can best verify the entity's bond sinking fund transactions and year end bond balance by confirmation with the ________ ____________.

risk assessment

An entity's ________ ____________ process identifies and responds to business risks in relation to achieving business objectives. Auditors are most concerned with how management identifies risks relevant to the preparation of financial statements.

a

An example of a deferred charge is A) Trademarks. B) Prepaid interest. C) Prepaid insurance. D) Goodwill.

credibility

An independent audit adds value to the communication of financial information because the audit lends _________________ to the financial statements.

c

Analytical procedures performed at the overall review stage of an audit appear to indicate that several accounts have unexpected balances and/or relationships. The result of these procedures most likely would indicate that A) Internal control activities are not operating effectively. B) The communications with the audit committee should be revised. C) Additional detail tests of account balances are necessary. D) Fraud exists among the relevant account balances involved.

c

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this is that (a) the deviation rates of both the auditor's sample and the population exceed the tolerable deviation rate (b) the deviation rates of both the auditor's sample and the population are less than the tolerable deviation rate (c) the deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate (d) the deviation rate in the auditor's sample exceeds the tolerable deviation rate, but the deviation rate in the population is less than the tolerable deviation rate

smaller

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to find ___________ errors.

b

Assessing control risk below high involves all of the following except: (a) identifying specific controls to rely on (b) concluding that controls are ineffective (c) performing tests of controls (d) analyzing the achieved level of control risk after performing tests of controls

d

Audit risk is typically considered and assessed: A) At the assertion level. B) At the account balance level. C) For the financial statements as a whole. D) All of the above.

those charged with governance, matters pertaining to financial reporting

Auditing standards encourage conversation between the auditor and _________________________ about __________________.

b

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following is required? (a) whether management has ever intentionally violated the securities law (b) whether management has any knowledge of fraud that has been perpetrated on or within the entity (c) management's attitudes toward regulatory authorities (d) management's attitude about hiring ethical employees

direct, material

Auditing standards state that the auditor's responsibility for detecting illegal acts having a ___________ and ________ effect on the financial statements is the same as that for fraud or errors.

sampling

Auditors use a _______________ approach to examine a subset of the transactions based on previous audits, an understanding of the company's internal control system, and knowledge of the company's industry.

d

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's (a) awareness of the consistency in the application of GAAP (b) evaluation of all matters of continuing accounting significance (c) opinion of any subsequent events occurring since the predecessor's audit report (d) understanding as to the reasons for the change of auditors

completeness, occurrence

Cash disbursements made but not recorded deals with the _______________ assertion. Cash disbursements recorded but not made deal with the ________________ assertion.

a

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this and be least likely to be detected by an auditor? a. understating the sales journal b. overstating the accounts receivable control account c. overstating the accounts receivable subsidiary ledger d. understating the cash receipts journal

b

Dewey, Needham, & Howe accept an engagement to audit the 2013 financial statements of Syracuse Co. and begin fieldwork in September 2013. Syracuse (December 31st year-end) gives the unaudited financial statements to the auditors on 1/17/2014. The auditors completed the fieldwork on 3/12/2014 and distributed the audit report on 3/23/2014. The entity's letter of representation should be dated ________ and the audit report should be dated __________. A) March 23rd; March 12th. B) March 12th; March 12th. C) January 17th; March 23rd. D) March 23rd; March 23rd.

inquiry

Discussing the adequacy of the allowance for doubtful accounts with the credit manager is an example of what audit procedure?

b

Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue? A) Existence and occurrence. B) Completeness. C) Rights and obligations. D) Valuation.

a

Footing the shares outstanding in the stock register and comparing the total to shares outstanding in the general ledger stock account addresses the audit objective of A) Completeness B) Occurrence. C) Rights and obligations. D) Valuation.

b

Due to a weakness observed in an entity's control over recording retirement of equipment the auditor may decide to a. vouch additions to the other assets account to search for equipment that is still on hand but no longer being used b. select certain items of equipment from the accounting records and locate them in the plant c. inspect certain items of equipment in the plant and trace those items to the accounting records d. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year

c

During the initial planning phase of an audit, a CPA most likely would (a) identify specific internal control activities that are likely to prevent fraud (b) evaluate the reasonableness of the entity's accounting estimates (c) discuss the timing of the audit procedures with the entity's management (d) inquire of the entity's attorney if it is probable that any unrecorded claims will be asserted

b

During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change a. a generalized computer audit program must be used b. without paper clock cards, part of the audit trail is altered c. the potential for payroll-related fraud is diminished d. transactions must be processed in batches

b

Effective control activities over the payroll function may include a. reconciliation of totals on job time cards with job reports by employees responsible for those specific jobs b. verification of agreement of job time cards with employee clock card hours by a payroll department employee c. preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department d. custody of rate authorization records by the supervisor of the payroll department

external, internal

Evidence obtained from ___________ documents is more reliable than evidence obtained from __________ documents.

inspection of records/documents

Examining large sales invoices for a period of two days before and after year end to determine if sales are recorded in the proper period is an example of what audit procedure?

adverse

If the misstatement is considered so material that it pervasively affects the interpretation of the financial statements, the auditor will issue an ____________ opinion.

analytical procedures

Final _______________ ______________ are generally intended to provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

c

Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks' poor internal control regarding A) Perpetual inventory records. B) Processing of cash receipts. C) Processing of purchase orders. D) Processing of invoices.

unqualified, disclaim, withdraw

For a report modification based on a scope limitation with a minor effect, an _____________ opinion can be issued. For a report modification based on a scope limitation with a more than minor effect, the auditor will _________ opinion or __________.

general accounting

For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to ____________ ______________.

treasurer

For effective internal control purposes, who should be responsible for mailing signed checks?

c

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. employee overtime wages b. credit granted to customers c. write offs of customer accounts d. cash disbursements

to plan the audit and determine the nature, timing, and extent of audit procedures

For what primary purpose does the auditor obtain an understanding of the entity and its environment?

lower

Higher quality audit evidence results in a __________ quantity of audit evidence.

ongoing activities or separate evaluations

How can monitoring of controls be done?

= UDR - SDR

How do you calculate the actual allowance for sampling risk?

(BV - AV)/BV

How do you calculate the tainting factor?

= R actual/n

How do you calculate the upper deviation rate?

privity is not a necessary element of proof

How does the Securities Act of 1933 expand auditors' liability to purchasers of securities beyond that of common law?

lower of cost and market

How is inventory valued?

decreases, increases, decreases, stays the same, increases

If ARO/ARIA increases, then n _______________. If EPDR/EM increases, then n ________________. If TDR/TM increases, then n ________________. If population increases, then n _______________. If book value increases, then n ____________________.

less

If UDR is ______ than TDR, then the client's system is sufficiently reliable to support control risk assessment and the auditor's reliance on that control.

c

If a plaintiff succeeds in a Section 11 suit against the defendant, they will be entitled to (a) damages of 3 times the original public offering price (b) rescind the transaction (c) monetary damages comparable to the loss suffered (d) damages, but only if the shares were resold before the suit was started

year end

If the control risk were set at high, an auditor would request that the entity schedule the physical inventory count at _____________.

a

If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditor's (a) competence and objectivity (b) efficiency and experience (c) independence and review skills (d) training and supervisory skills

b

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and a. post the detailed accounts payable records b. recompute the calculations on vendors' invoices c. reconcile the accounts payroll ledger d. cancel vendors' invoices after payment

completeness (don't want to underestimate liabilities)

In accounts payable, you are most concerned with which assertion?

c

In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor's needs in a given situation? (a) the qualitative aspects of misstatements (b) the total dollar amount of the population (c) the acceptable level of risk (d) the estimated percentage of deviation in the population

a

In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except (a) performance evaluation (b) engagement performance (c) supervision responsibilities (d) review responsibilities

quantitative, qualitative

In establishing materiality for an audit, the auditor should consider both ________________ and ______________ aspects of the engagement.

b

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of a. existence b. valuation and allocation c. completeness d. rights and obligations

likelihood, magnitude

In judging the significance of a control deficiency, the auditor must consider what two dimensions of the deficiency?

d

In most cases, commitments A) Are likely to result in additional losses to the entity. B) Are found through the accounts payable search for unrecorded liabilities. C) Require adjustments to the financial statement amounts. D) Are disclosed in a footnote to the financial statements.

realized, earned

In order for revenue to be recorded, it must be _____________ and ___________.

c

In performing a search for unrecorded retirements of plant assets, an auditor most likely would A) Analyze the entity's repairs & maintenance account and then tour the plant facilities. B) Tour the facilities and then inspect the entity's plant asset ledger along with insurance and tax records. C) Inspect the entity's plant asset ledger along with insurance and tax records, and then tour the facilities. D) Tour the facilities and then analyze the repairs and maintenance account.

accounting records, source documents

In testing the existence assertion for an asset, an auditor ordinarily works from the ____________ _______ to the ____________ ______________.

b

Information regarding which of the following would normally not be included in an entity's financial statement disclosures related to plant assets? A) Capital leases. B) Depreciation expenses for tax purposes. C) Major acquisitions/disposals of operating assets. D) Depreciation methods and useful lives.

valuation

Inquiries of warehouse personnel concerning possibly obsolete or slow moving inventory items provide assurance about management's assertion of _______________.

receiving

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the ______________ department.

yes

Is is possible for the auditor to issue an adverse opinion on internal control while issuing an unqualified opinion on the financial statement audit?

b

It would be appropriate for the payroll department to be responsible for which of the following functions? a. approval of employee time records b. preparation of periodic governmental reports as to employees' earnings and withholding taxes c. maintenance of records of employment, discharges, and pay increases d. distribution of paychecks to employees

a

Key segregations of duties for investments include all of the following except: A) Whoever is responsible for investment activities should not also ensure that all dividend and interest income was received. B) Whoever initiates the purchase of investments should not also grant final approval. C) Whoever oversees security valuation should not also acquire securities. D) Whoever maintains custody of the securities should not also account for the securities.

overstatement

MUS is designed primarily to test for __________________ errors.

Type 2 report

Management and the auditor should obtain evidence that the controls of a service organization that are relevant to management's assessment and the auditor's opinion are operating effectively through a _______________.

nonsampling

Most errors come from _______________________ risk.

d

On 12/31/11, Hoover Co. erroneously credited accounts payable (Dr. Cash; Cr. Accounts Payable) for a transfer of funds between two bank accounts that resulted in an overstatement of both cash and accounts payable at year-end. The check was not recorded until it cleared the bank on 1/2/12. Which of the following procedures would be least effective in detecting this misstatement? A) Review of the 12/31/11 bank reconciliations for the 2 bank accounts. B) Review of the schedule of interbank transfers. C) Review of the accounts payable supporting documentation at 12/31/11. D) Review of the December check register for both accounts.

b

On receiving the cutoff bank statement, the auditor should vouch a. deposits in transit on the year end bank reconciliation to deposits in the cash receipts journal b. checks dated before year end listed as outstanding on the year end bank reconciliation to the cutoff statement c. deposits listed on the cutoff statement to deposits in the cash receipts journal d. checks dated after year end to outstanding checks listed on the year end bank reconciliation and to the cutoff statement

five

Partners are limited to __________ consecutive years.

reperformance

Performing test counts of the warehouse personnel's count of the raw material is an example of what audit procedure?

increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB

Place the following events in order: Sarbanes-Oxley Act, prohibition of most consulting work for auditees, increased consulting services to auditees, establishment of PCAOB, Enron and other scandals

cutoff

Purchase _______________ procedures should be designed to test whether all inventory purchased and received before the end of the year was recorded.

occurrence, completeness

Purchases recorded but goods not received deals with the _________________ assertion. Purchases made but not recorded deals with the _________________ assertion.

realized

Revenue is ______________ when a product or service is exchanged for cash, a promise to pay cash, or other assets that can be converted into cash.

earned

Revenue is ______________ when an entity has delivered a product or provided a service.

rights & obligations

Reviewing loan agreements and minutes of board of directors' meetings tests what assertion?

d

Reviewing the expenditures included in repairs and maintenance for unusually large items is used to test A) Completeness. B) Occurrence. C) Existence. D) Classification.

scanning

Reviewing the general ledger for unusual adjusting entries is an example of what audit procedure?

contingent

Rule 302 states that a member shall not perform professional services for a client or prepare tax returns for a ______________ fee.

a

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether (a) the controls are operating effectively (b) the financial statements are materially misstated (c) the risk of incorrect acceptance is too high (d) materiality for planning purposes is at a sufficiently low level

increases

Sampling risks decreases as the sample size ______________.

management

Section 404 of the Sarbanes-Oxley Act requires the __________________ of publicly traded companies to issue a report that accepts responsibility for establishing and maintaining adequate ICFR and to assert whether ICFR is effective as of the end of the fiscal year.

a

Segregation of duties for stockholders' equity transactions include all of the following except: A) The person who maintains the stockholders' ledger should be separate from the individual ensuring that dividend transactions comply with the corporate charter. B) Those responsible for issuing stock certificates should be separate from accounting. C) The person responsible for keeping detailed stockholder records should be separate from the general ledger function. D) The person responsible for keeping detailed stockholder records should be separate from processing cash disbursements.

confirmation

Sending a written request to the entity's customers requesting that they report the amount owed to the entity is an example of what audit procedure?

yes, yes

Should the auditor communicate to those charged with governance about significant audit adjustments? management's consultations with other accountants?

direct

Substantive testing provides _____________ evidence.

indirect, direct

Tests of controls provide __________ evidence, and substantive tests provide ______________ evidence.

7

The Sarbanes-Oxley Act of 2002 requires audit documentation to be retained for __ years.

fraud

The Securities Exchange Act of 1934 only covers for ___________.

2, 10

The TDR is usually between ___ and ____%.

ASB, PCAOB

The _______ has standard-setting authority over nonpublic company audits, while the _________ has authority over public company audits.

higher

The _______ our expectations are, the better our risk assessments will be.

lower

The __________ the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

smaller, larger

The ___________ the difference between tolerable and expected error, the more precise the sampling results must be and therefore the ___________ the sample size needed.

confidence level

The ____________ _________ is the complement of sampling risk and represents the probability that a given interval includes the true but unknown measure of the characteristic of interest.

existence, overstated

The _____________ of accounts receivable is one of the more important assertions because the auditor wants assurance that this balance is not ____________ through the inclusion of fictitious customer accounts.

voucher

The _____________ packet contains all the relevant documentation supporting a purchase transaction.

AICPA

The ______________ Code of Professional Conduct restricts the types of nonaudit services that can be provided to attest entities.

equity method, consolidation

The ______________ ______________ is used if ownership is between 20 and 50%, and _________________ is used if ownership is greater than 50%.

cutoff

The ___________________ assertion is the one that is most often conducted as a substantive procedure.

b

The assurance bucket is filled with all of the following types of evidence except (a) test of controls (b) audit report (c) substantive analytical procedures (d) tests of details

risk

The auditor correlates the amount of audit attention to the location or business unit with the level of __________ present.

error, fraud

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statement are free of material misstatement, whether caused by ________ or _________.

existence

The auditor is most concerned with which management assertion during the audit of cash?

c

The auditor must communicate several items to "those charged with governance" at the conclusion of the audit. Which of the following is not a typical communication? A) Significant audit adjustments. B) The auditor's responsibilities under GAAS. C) The planned audit procedures for the audit. D) The planned scope and timing of the audit.

manuals, organizational charts, flowcharts, questionnaires, narratives

The auditor must document their understanding of the internal control system through what documents?

internal control

The auditor obtains an understanding of ____________________ ____________ to help the auditor assess risk and identify areas where financial statements might be misstated.

b

The auditor typically uses the following procedures to detect fraud in the cash accounts: A) Bank confirmations. B) Bank transfer schedule. C) Normal bank reconciliation procedures. D) Inquiries of management

b

The auditor typically uses the following procedures to detect fraud in the cash accounts: A) Bank confirmations. B) Bank transfer schedule. C) Normal bank reconciliation procedures. D) Inquiries of management.

qualify

The auditor will likely ___________ the report, explaining that the financial statements are fairly stated except for the misstatement identified by the auditor.

existence

The auditor's major concern with the ______________ assertion is whether the recorded liabilities are valid obligation of the entity.

d

The engagement partner and manager review the work of engagement team members to evaluate which of the following? (a) the work was performed and documented (b) the objectives of the procedures were achieved (c) the results of the work support the conclusions reached (d) all of the above

design, implemented

The information gathered by performing risk assessment procedures is used to evaluate the ___________ of controls and to determine whether the controls have been _________________.

higher, lower

The larger the sample, the _________ the confidence level and the ________ the sampling risk.

credit approval

The main control that authorizes shipment of goods or performance of services is payment or proper ____________ ___________ for the transaction.

valuation

The major _____________ issue related to accounts receivable is concerned with the net realizable value of accounts receivable.

chart of accounts

The major control for preventing cash from being recorded in the wrong account is a ___________ ___ ____________.

completeness

The major misstatement related to the ___________________ assertion is that a cash disbursement is made but not recorded in the entity's records. `

low, high, likely

The negative request form of accounts receivable confirmation is useful particularly when the assessed level of CR is ________, the number of small balances is _______, and consideration by the recipient is _________.

d

The permanent file section of the working papers that is kept for each audit client most likely contains (a) review notes pertaining to questions (b) schedule of time spent on the engagement (c) correspondence with the entity's legal counsel (d) narrative descriptions of the entity's accounting system and control procedures

ethics

The primary purpose of professional _______ rules is to establish a minimum level of professionalism to help auditors remain independent of the entities they audit and to be objective and honest in their judgments.

d

The primary responsibility of a bank acting as a registrar of capital stock is to a. ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation b. account for stock certificates by comparing the total shares outstanding to the total in the shareholders' subsidiary ledger c. act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock d. verify that stock has been issued in accordance with the authorization of the board of directors and the articles of incorporation

unit

The probability of selection is proportional to size in ________ sampling.

scope

The purpose of setting tolerable misstatement is to establish a __________ for audit procedures.

2, overreliance, low

The risk of incorrect acceptance (aka Type ___ error) is referred to as the risk of _______________ and the risk of assessing control risk too ______.

b

When there are numerous plant asset transactions during the year, an auditor who plans to assess control risk at a high level for a non-public entity usually performs A) Extensive test of controls and limited tests of current year transactions. B) Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances. C) Primarily substantive analytical procedures on year end balances. D) Primarily substantive analytical procedures on current year transactions.

tests of control, limited

When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs ________________________ and ___________ tests of current year property and equipment transactions.

a

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. vendors with whom the entity has previously done business b. amounts recorded in the accounts payable subsidiary ledger c. payees of checks drawn in the month after year end d. invoices filed in the entity's open invoice file

standard bank confirmations

Where is the primary evidence regarding year end bank balances documented?

Type 2

Which error type do auditors typically focus on when determining sample sizes?

a

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded. B) Investigating payables recorded just before and after the balance sheet date to determine whether they are supported by receiving reports. C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D) Reconciling monthly vendor statements to the receiving report file to identify items received just before the balance sheet date.

d

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. examination of unusual relationships between monthly accounts payable balances and recorded cash payments b. reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date c. investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports d. review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

a

Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. review compliance with the terms of debt agreements b. review management's plans to dispose of assets c. evaluate management's plans to borrow money or restructure debt d. consider management's plans to reduce or delay expenditures

d

Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing? A) Send confirmations to selected vendors to verify amounts. B) Examine a random sample of inventory documents. C) Manually foot, or sum, several randomly-selected pages. D) Use generalized audit software to foot, or sum, the entire listing.

c

Which of the following audit procedures would not likely be performed when auditing stockholders' equity? A) Read over board of directors' minutes for authorization of equity transactions. B) Confirm outstanding common and preferred stock with the stock registrar. C) Compare valuation of stock accounts to published market prices. D) Obtain management representation about the number of shares issued and outstanding.

c

Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? a. trace a sample of time sheets to the payroll register b. recompute the mathematical accuracy of a sample of payroll checks c. vouch a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity d. test a sample of time sheets for the presence of authorization

c

Which of the following best describes the general character of the 3 GAAS classified as standards of field work? (a) description of the competence, independence, and professional care of persons performing the audit (b) criteria for the content of the auditor's report on financial statements and related footnote disclosures (c) criteria for audit planning and evidence gathering (d) the need to maintain an independence of mental attitude in all matters relating to the audit

b

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? (a) management fraud may exist and it is more likely to be detected by independent auditors (b) different interests may exist between the entity preparing the statements and the persons using the statements and outside assurance is needed to enhance the credibility of the statements (c) a misstatement of account balances may exist, and all misstatements are generally corrected as a result of the auditor's work (d) an entity may have a poorly designed internal control system

d

Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision? A) The company has several temporary differences. B) The company has several permanent differences. C) The company has deferred tax liabilities. D) The company does business overseas.

c

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? (a) turnover of senior accounting personnel is low (b) insiders recently purchased additional shares of the entity's stock (c) management places substantial emphasis on meeting earnings projections (d) the rate of change in the entity's industry is slow

a

Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed asset additions? a. inspecting documents and physically examining assets b. recomputing calculations and obtaining written management representations c. observing operating activities and comparing balances to prior period balances d. confirming ownership and corroborating transactions through inquiries of entity personnel

c

Which of the following comparisons would be most useful to an auditor in evaluating the overall financial results of an entity's operations? a. prior year accounts payable to current year accounts payable b. prior year payroll expense to budgeted current year payroll expense c. current year revenue to budgeted current year revenue d. current year warranty expense to current year contingent liabilities

c

Which of the following control activities could best prevent direct labor from being charged to manufacturing overhead? A) Examination of routine tickets from finished goods on delivery. B) Reconciliation of work-in-process inventory with cost records. C) Comparison of daily journal entries with factory labor summary. D) Recomputation of direct labor based on inspection of time cards.

d

Which of the following control activities is not usually performed in the accounts payable department? a. matching vendor's invoice with the related receiving report b. approving vouchers for payment by having an authorized employee sign the vouchers c. indicating the asset and expense accounts to be debited d. accounting for unused prenumbered purchase orders and receiving reports

a

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? a. inventory manager does not have ability to record inventory transactions b. summary of the receiving reports is independently compared to the inventory c. inventory is periodically reviewed for slow moving or obsolete items, which may require a write down d. subsidiary ledgers are periodically reconciled with inventory control accounts

a

Which of the following control activities would most likely allow for a reduction in the scope of the auditor's tests of depreciation expense? a. review and approval of the periodic equipment depreciation entry by a supervisor b. comparison of equipment account balances for the current year with the current year budget and prior year actual balance c. review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment d. authorization of payment of vendor's invoices by a designed employee who is independent of the equipment receiving function

d

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

d

Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? A) The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. B) Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department. C) Receiving reports require the signature of the individual who authorized the purchase. D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

d

Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained? a. direct access to securities in the safe deposit box is limited to one officer b. personnel who post investment transaction to the general ledger are not permitted to update the investment subsidiary ledger c. purchase and sale of investments are executed on the specific authorization of the board of directors d. the recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel

c

Which of the following controls would most likely be tested during an interim period? (a) controls over nonroutine transactions (b) controls over the period end financial reporting process (c) controls that operate on a continuous basis (d) controls over transactions that involve a high degree of subjectivity

b

Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? A) Product costs. B) Functional costs. C) Period costs. D) Allocable costs.

c

Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements? a. a technological development in the industry that could affect the entity's future ability to continue as a going concern b. the entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales c. the discovery of information regarding a contingency that existed before the financial statements were issued d. the final resolution of a lawsuit explained in a separate paragraph of the auditor's report

d

Which of the following factors is least likely to represent an opportunity to commit fraud? A) The audit committee is ineffective. B) Poor internal controls over cash transactions. C) The existence of highly complex transactions. D) Operating losses make a hostile takeover imminent.

d

Which of the following pairs of income statement and balance sheet accounts typically would not be audited in conjunction with each other? A) Discount on bonds payable and interest expense. B) Accounts receivable and bad debt expense. C) Prepaid insurance and insurance expense. D) Long-term debt and interest income.

b

Which of the following factors would an auditor least likely consider when assessing the inherent risk associated with sales transactions? (A) Billings are made using the percentage-of-completion method of revenue recognition. (B) The nature of the credit authorization process. (C) Some invoices are normally billed prior to shipments [which occur at a later date]. (D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

c

Which of the following internal control activities is most likely to address the completeness assertion for inventory? a. the work in process account is periodically reconciled with subsidiary records b. employees responsible for custody of finished goods do not perform the receiving function c. receiving reports are prenumbered and periodically reconciled d. there is a separation of duties between payroll department and inventory accounting personnel

a

Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions? a. periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff b. comparison of current year plant and equipment account balances with prior year actual balances c. review of prenumbered purchase orders to detect unrecorded trade ins d. approval of periodic depreciation entries by a supervisor independent of the accounting department

b (this is external auditor's responsibility)

Which of the following is NOT a part of the role of internal auditors? (a) assisting the external auditors (b) providing reports on the reliability of financial statements to investors and creditors (c) consulting activities (d) operational audits

b

Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities? a. trace deposits of dividend checks to the cash receipts book b. reconcile recorded earnings with the dividend earnings reported in the investment broker statement c. compare the amounts received with prior year dividends received d. recompute selected extensions and footings of dividend schedules and compare totals to the general ledger

a

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? a. unrecorded sales for the year b. lapping of year end accounts receivable c. excessive sales discounts d. unauthorized goods returned for credit

b

Which of the following is necessary if the auditor plans to observe inventory at interim dates? a. complete recounts are performed by independent teams b. perpetual inventory records are maintained c. unit cost records are integrated with production accounting records d. inventory balances are rarely at low levels

d

Which of the following is not a common internal control activity related to the acquisition of property, plant, and equipment? A) Using a budget to forecast and control acquisitions and retirements. B) Analyzing monthly variances between authorized expenditures and actual costs. C) Requiring acquisitions to be authorized in relevant departments by the appropriate level of management. D) Establishing a written company policy regarding the acquisition of raw material.

c

Which of the following is not a covered member according to Interpretation 101-1? A) An individual in a position to influence the attest engagement. B) The firm, including the firm's employee benefits plans. C) A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit. D) An individual on the attest engagement team

b

Which of the following is not a role of the inventory management function (not the inventory management process as a whole)? A) Authorization of production. B) Maintenance of the cost of manufacturing in cost records. C) Maintenance of inventory at appropriate levels. D) Issuance of purchase requisitions.

b

Which of the following is not a typical document included in the Inventory Management Process? A) Receiving report. B) Purchase order. C) Inventory status report. D) Shipping order.

b

Which of the following is not an activity that would take place during the legal process stage of the four general stages in the initiation and disposition of audit-related disputes (according to Chapter 20)? A) Filing of a complaint or suit. B) Hiring another public accounting firm to investigate potential fraud. C) Discovery or the investigation by the plaintiff attorneys to link user losses with material misstatements in the financial statements. D) Preparation for trial.

c

Which of the following is not an element of quality control as defined by the AICPA's Statement of Quality Control Standards No. 8? A) Monitoring. B) Human resources. C) Reliability. D) Acceptance and continuance of clients and engagements

c

Which of the following is not one of the auditor's objectives relating to the examination of inventories in a financial statement audit? A) Verifying that the entity has used proper inventory pricing. B) Verifying that the inventory counted is actually owned by the entity. C) Verifying that all inventory owned by the entity is on hand at the main warehousing location for the physical count. D) Ascertaining the physical quantities of inventory on hand.

a

Which of the following is the best defense a CPA firm can assert to a suit for common-law fraud based on its unqualified opinion on materially false financial statements? A) Lack of scienter. B) Lack of privity. C) Contributory negligence on the part of the client. D) A disclaimer contained in the engagement letter.

b

Which of the following is the most persuasive type of evidence? (a) bank statements obtained from the entity (b) computations made by the auditor (c) prenumbered entity sales invoices (d) vendors' invoices included in the entity's files

a

Which of the following most likely represents a weakness in internal control of an IT system? (a) the system analyst reviews output and controls the distribution of output from the IT department (b) the accounts payable clerk prepares data for computer processing and enters the data (c) the systems programmer designs the operating and control functions of programs and participates in testing system (d) the control clerk establishes control over data received by the IT department and reconciles control totals after processing

audit firm and audit committee

Who signs the engagement letter?

a

Which of the following procedures would an auditor most likely employ to determine that every name on an entity's payroll represents an actual employee that is presently employed? A) Make a surprise observation of the entity's regular distribution of paychecks. B) Examine personnel records for accuracy and completeness. C) Maintain control over the mailing of W-2 forms to employee addresses as listed in their personnel files. D) Compare names listed on payroll tax returns with those in the personnel files.

b

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report? a. review a fire insurance settlement during the subsequent period b. examine relevant internal audit reports issued during the subsequent period c. inquire of the entity's legal counsel concerning litigation, claims, and assessments arising after year end d. confirm bank accounts established after year end

b

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? (a) reviewing standard bank confirmations for indications of cash manipulations (b) comparing a sample of shipping documents to related sales invoices (c) observing the entity's distribution of payroll checks (d) confirming a sample of recorded receivables by direct communication with the debtors

c

Which of the following procedures would most likely be considered a weakness in an entity's internal controls over payroll? a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary b. Payroll checks are prepared by the payroll department and signed by the treasurer. c. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. d. The personnel department sends employees' termination notices to the payroll department.

b

Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions? A) Interview employees selected in a statistical sample of payroll transactions. B) Trace number of hours worked as shown on payroll to time cards and time reports signed by the foreman. C) Confirm amounts withheld from employees' salaries with proper governmental authorities. D) Examine signatures on paid salary checks.

d

Which of the following questions would an auditor most likely include on a control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity's continued existence? b. Are two or more authorized signatures required on checks that repay notes payable? c. Are the proceeds from notes payable used to purchase noncurrent assets? d. Are direct borrowings on notes payable authorized by the board of directors?

d

Which of the following questions would most likely be found on an auditor's internal control questionnaire related to notes payable? A) Are two or more signatures required on checks written on repayment of the notes? B) Are the proceeds from borrowing used solely to acquire non-current assets? C) Are the assets that serve as collateral on the debt reviewed monthly for possible impairment? D) Are all note payable borrowings authorized by the board of directors?

b

Which of the following represents a factual misstatement? A) A misstatement that management knows about, but the auditor does not. B) A misstatement found by the auditor that is due to incorrect pricing on a sales invoice. C) A misstatement arising from the differences between the auditor's estimate and management's estimate of the allowance for doubtful accounts. D) A misstatement based on an auditor's projection of an error found in a sample.

d

Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value? (a) random (b) numeric (c) attribute (d) variable

d

Which of the following situations would not support the auditor's decision to reduce control risk below maximum for the audit of intangible assets? a. the entity employs a qualified specialist who reviews the value of the intangible assets on an annual basis for impairment b. the auditor documented, tested, and developed an understanding of the acquisition process and found the key controls to be effective c. the IT system that maintains the records for intangible assets has adequate controls to prevent unauthorized access d. the company has made no acquisitions of other companies during the fiscal year under audit

d

Which of the following statements about internal control is correct? (a) a properly maintained internal control system reasonably ensures that collusion among employees cannot occur (b) the establishment and maintenance of internal control is an important responsibility of the internal auditor (c) an exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance (d) the cost-benefit relationship is a primary criterion that should be considered in designing an internal control system

c

Which of the following statements concerning monetary-unit sampling is correct? (a) the sampling distribution should approximate the normal distribution (b) overstated units have a lower probability of sample selection than units that are understated (c) the auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan (d) the sampling interval is calculated by dividing the number of physical units in the population by the sample size

a

Which of the following statements concerning the auditor's use of statistical sampling is correct? (a) an auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variable sampling (b) an assumption of monetary unit sampling is a normal distribution (c) a classical variables sample needs to be designed with special considerations to include negative balances in the sample (d) the selection of zero balances usually does not require special sample design considerations when using monetary unit sampling

c

Which of the following statements is correct in most jurisdictions regarding the liability of a CPA who negligently expresses an opinion on an audit of financial statements? A) The CPA is liable only to those third parties who are in privity of contract with the CPA. B) The CPA is liable only to the client. C) The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion. D) The CPA is liable to all possible foreseeable users of the CPA's opinion.

c

Which of the following statements is false as it relates to the auditor's responsibility to document the risk assessment? A) The documentation may include the use of questionnaires. B) Management's response to high-risk areas identified by the auditor should be included in the documentation. C) The level of risk must be set quantitatively (i.e., inherent risk is 60%). D) All of the above are false.

b

Which of the following statements is false concerning PCAOB and AICPA inspections of public accounting firms? A) The AICPA peer review program is mandatory for participating firms. B) The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines. C) These inspections focus on the system of quality controls put in place by the CPA firms. D) The "Big 4" CPA firms are a good example of a "registered" firm with the PCAOB.

c

Which of the following statements is false regarding a four-column bank reconciliation or "proof of cash"? A) It is generally prepared by auditors in situations where internal controls in the cash area are considered very weak. B) It can be effective in detecting kiting since cash receipts and disbursements are reconciled with those on the bank statement. C) It can be effective in detecting unrecorded checks that have not yet cleared the bank since cash disbursements per book and bank will not equal. D) It is often used by the auditor to detect certain types of fraud.

a

Which of the following types of audit evidence is the least reliable? (a) prenumbered purchase order forms prepared by the entity (b) bank statements obtained from the entity (c) test counts of inventory performed by the auditor (d) correspondence from the entity's attorney about litigation

b

Which of the following would an auditor most likely use in determining overall materiality when planning an audit? (a) anticipated sample size of the planned substantive tests (b) the entity's income before taxes for the period-to-date (c) the results of tests of controls (d) the contents of the engagement letter

d

Which of the following would be considered an internal control weakness associated with plant assets? A) The estimated useful lives used for financial reporting purposes in some cases are slightly different than IRS classifications used for tax purposes. B) Factory equipment acquisitions are initiated by the department head requesting the item, approved by the divisional manager, and sent to the purchasing department to acquire bids (estimates). C) Periodic physical examination of plant assets is made and independently compared to the plant asset subsidiary ledger. D) Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.

d

Which of the following would lead to a larger sample size? (a) greater reliance on internal controls (b) greater reliance on analytical procedures (c) smaller expected frequency of misstatements (d) smaller amount of tolerable misstatement

c

Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling? (a) an estimate of the standard deviation of the population's recorded amounts is not required (b) the auditor rarely needs the assistance of a computer program to design an efficient sample (c) inclusion of zero balances does not require special considerations (d) any amount that is significant is automatically identified and selected

c

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? a. periodic reconciliation of work in process with job cost sheets b. segregation of functions between general accounting and cost accounting c. independent comparisons of finished goods records with counts of goods on hand d. approval of inventory journal entries by the storekeeper

c

Which of the following would most likely indicate the existence of related parties? (A) Failing to write down inventory to market value just before year-end. (B) Depending on one or a few products for nearly all of a firm's operating revenues. (C) Borrowing money at an interest rate substantially below the prevailing market rate of interest. (D) Selling goods to a major customer of your main competitor.

b

Which of the following would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control? (a) inquiry of personnel (b) reperformance of the control by the auditor (c) observation of entity personnel (d) walkthrough

c

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? A) Evaluate proper segregation of duties. B) Confirm accounts receivable directly with customers. C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger. D) Review receipt of cash from customers in the period subsequent to the balance sheet date.

management, auditor

While _________________ is responsible for the financial statements, the ____________ must ensure that all necessary disclosures are made.

b

While observing an entity's annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record A) Purchase returns. B) Sales returns. C) Sales. D) Either sales or purchase returns.

small, large

While the basic concepts of the five components should be present in all entities, they are likely to be less formal in a ________ entity than in a __________ entity.

AICPA

Who established auditing standards and the Code of Professional Conduct?

management

Who is responsible for the financial statements?

board of directors, audit committee

Who makes up "those charged with governance"?

treasurer, treasurer

Who should be responsible for the distribution? Who should have custody of unclaimed paychecks?

significant deficiency

a deficiency, or a combination of deficiencies, in ICFR that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the entity's financial reporting

unqualified (unmodified) audit report

a "clean" audit report, indicating the auditor's opinion that a client's financial statements are fairly presented in accordance with agreed-upon criteria

imprest account

a bank account containing a stipulated amount of money used for limited purposes; frequently used for disbursing payroll and dividend checks

audit committee

a committee consisting of members of the board of directors, charged with overseeing the entity's system of internal control over financial reporting, internal and external auditors, and the financial reporting process

blank or zero balance (positive) confirmation

a confirmation request on which the recipient fills in the amount or furnishes the information requested

privity

a contract or specific agreement exists between two parties

management letter

a letter from the auditor to management making recommendations to the entity based on observations during the audit; the letter may include topics relating to organizational structure and efficiency issues

representation letter

a letter that corroborates oral representations made to the auditor by management or by other auditors and documents the continued appropriateness of such representations

engagement letter

a letter that formalizes the contract between the auditor and the entity and outlines the responsibilities of both parties

monitoring of controls

a process that assesses the quality of internal control performance over time

SOC 1 Type 1 report

a report on management's description of a service organization's system and the suitability of the design of controls

SOC 1 Type 2 report

a report on management's description of a service organization's system and the suitability of the design of controls and on the operating effectiveness of those controls

positive confirmation request

a request that the confirming party respond directly to the auditor by providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request

negative confirmation request

a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request

policy

a rule or guideline that calls for certain activities to take place in certain circumstances

Code of Professional Conduct

a set of principles, rules, and interpretations that establish guidance for acceptable behavior for accountants and auditors

independence

a state of objectivity in fact and in appearance, including the absence of any significant conflicts of interest

ethics

a system or code of conduct based on moral duties and obligations that indicates how an individual should behave

auditing

a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users

proof of cash

a technique used to reconcile the cash receipts and disbursements recorded on the entity's books with the cash deposited into and disbursed from the entity's bank account for a specific time period

walkthrough

a transaction being traced by an auditor from origination through the entity's information system until it is reflected in the entity's financial reports

prepaid expense

a type of asset that arises on a balance sheet as a result of a business making payments for goods and services to be received in the near future; their value is expensed over time as the benefit is received

Sarbanes-Oxley Act of 2002 (SOX)

act that led to the creation of the PCAOB, stricter independence rules, audits of internal controls, increased reporting responsibilities, extended statute of limitations, and made accounting go from a self-regulated to regulated profession

scienter

acting with intent to deceive, defraud, or with knowledge of a false representation

civil law

all law that does not relate to criminal matters

ordinary negligence

an absence of reasonable or due care in the conduct of an engagement

intangible asset

an asset that is not physical in nature; ex: patents, trademarks, copyrights, goodwill, brand recognition

property, plant, and equipment (PPE)

an asset that is vital to business operations but cannot be easily liquidated; ex: warehouse, equipment

lead schedule

an audit document that reflects the major components of an amount reported in the financial statements

legal letter

an audit inquiry sent to the entity's attorneys in order to obtain or corroborate information about litigation, claims, and assessments

integrated audit

an audit of both financial statements and internal control over financial reporting, provided by the external auditor

subsequent event

an event or transaction that occurs after the balance sheet date but prior to the issuance of the financial statements and the auditor's reports that may materially affect the financial statements

contingent liability

an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur

gross negligence (constructive fraud)

an extreme, flagrant, or reckless departure from professional standards of due care

misstatement

an instance where a financial statement assertion is not in accordance with the criteria against which it is audited

completeness

assertion about classes of transactions; all purchase and cash disbursement transaction and events that should have been recorded have been recorded

authorization

assertion about classes of transactions; all purchase and cash disbursement transactions and events are properly authorized

occurrence

assertion about classes of transactions; all purchase and cash disbursement transactions and events that have been recorded have occurred and pertain to the entity

accuracy

assertion about classes of transactions; amounts and other data relating to recorded purchase and cash disbursement transactions and events have been recorded appropriately

cutoff

assertion about classes of transactions; purchase and disbursement transactions and events have been recorded in the correct accounting period

risk assessment

assurance that an entity's profile of business risks is comprehensive and evaluation of whether the entity has appropriate systems in place to effectively manage those risks

monetary unit sampling

attribute-sampling techniques used to estimate the dollar amount of misstatement for a class of transaction or an account balance

nonstatistical sampling

audit sampling that relies on the auditor's judgment to determine sample size, select the sample, and/or evaluate the results for the purpose of reaching a conclusion about the population

application controls

controls that apply to the processing of specific computer applications and are part of the computer programs used in the accounting system

general controls

controls that relate to the overall information processing environment and have a pervasive effect on the entity's computer operations

kiting

can best be defined as a situation in which an employee fraudulently covers a cash shortage by transferring money from one bank account to another.

common law

case law developed over time by judges who issue legal opinions when deciding a case; the legal principles announced in these cases become precedent for judges deciding similar cases in the future

completeness

classes of transactions assertion; all transaction and events that should have been recorded have been recorded

occurrence

classes of transactions assertion; transactions and events that have been recorded have occurred and pertain to the entity

inquiry

consists of seeking information of knowledgeable persons within the entity or outside the entity; may range from formal written ones to informal; does NOT equal an audit procedure

random unintentional errors

errors that are not likely to recur so safe to draw conclusions about the account balance from the sample results

systematic unintentional errors

errors that indicate a basic flaw in the system and will occur whenever certain conditions are met; should be separated from random errors and subject to separate audit testing

analytical procedures

evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data

Type 1

events that provide additional evidence about conditions that existed at the date of the balance sheet and that affect the amounts or estimates involved in the financial statement preparation process; required adjustment of the numbers in the financial statements

compensatory damages

damages awarded to return the plaintiff to a position equivalent to where they would have been in the absence of the auditor's negligence

due professional care

degree of care expected given the typical levels of competence, learning, and experience possessed by members of the profession

shipping document

document that serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information; copy is sent to initiate the billing process

footing

means that each column of the trial balance is added and the column totals are then added to ensure that they agree with the total balance for the account

precision

measured by the difference between the expected and the tolerable deviation rate/misstatement

breach of contract

occurs when the client or auditor fails to meet the terms and obligations established in the contract

tests of controls

performed in order to provide evidence to support the lower level of control risk when using a reliance strategy; can be directed towards design or operating effectiveness

registrar

person responsible for ensuring that all stock issued complies with the corporate charter and for maintaining the control totals for total shares outstanding

transfer agent

person responsible for preparing stock certificates and maintaining adequate stockholders' records

dividend disbursing agent

person that prepares and mails dividend checks to the stockholders of record

Securities Act of 1933

regulates the disclosure of information in a registration statement for a new public offering of securities

confirmation

represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper form or by electronic or other medium

scanning

review of accounting data to identify significant or unusual items; NOT an audit procedure by itself

detection risk

risk that the auditor will not detect misstatements; determined by the effectiveness of the audit procedures and how well the procedures are applied by the auditor

statistical sampling

sampling the uses the laws of probability to select and evaluate the results of an audit sample, thereby permitting the auditor to quantify the sampling risk for the purpose of reaching a conclusion about the population

attribute sampling

sampling used to estimate the proportion of a population that possess a specified characteristic

attest services

services provided by a practitioner engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party

audit procedures

specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met

tolerable misstatement

the amount of planning materiality that is allocated to a financial statement account

classification

the assertion about classes of transactions; purchase and cash disbursement transactions and events have been recorded in the proper accounts

substantive strategy

the auditor's decision not to rely on the entity's controls and to audit the related financial statement accounts by relying more on substantive procedures

reliance strategy

the auditor's decision to rely on the entity's controls, test those controls, and reduce the direct tests of the financial statement accounts

reperformance

the auditor's independent execution of procedures or controls that were originally performed as part of the internal control system

audit strategy

the auditor's plan for the expected conduct, organization, and staffing of the audit

attribute

the characteristic being tested in the population

reasonable assurance

the concept that an audit done in accordance with auditing standards may fail to detect a material misstatement in a client's financial statements

information asymmetry

the concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does

expected population deviation rate

the deviation rate that the auditor expects to exist in the population

representative sample

the evaluation of the sample will result in conclusions that are similar to those that would be drawn if the same procedures were applied to the entire population

sampling unit

the individual items constituting a population being sampled

materiality

the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users

overall materiality

the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users

tolerable deviation rate

the maximum deviation rate from a prescribed control that the auditor is willing to accept without altering the planned assessed level of control risk

sufficiency

the measure of the quantity of audit evidence

internal control

the method by which an entity's board of directors, management, and other personnel provide reasonable assurance about the achievement of objectives in the following categories: reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations

corporate governance

the oversight mechanisms in place to help ensure the proper stewardship over an entity's assets

sampling risk

the possibility that the sample drawn is not representative of the population and that the auditor reaches an incorrect conclusion about the reliability of the control, the account balance, or class of transactions based on the sample

risk of material misstatement

the preaudit risk that the entity's financial statements contain a material misstatement whether caused by error or fraud

desired confidence level

the probability that the true but unknown measure of the characteristic of interest is within specified limits

remediation

the process of correcting a material weakness as part of management's assessment of the effectiveness of ICFR

lapping

the process of covering a cash shortage by applying cash from one customer's accounts receivable against another customer's accounts receivable

confirmation

the process of obtaining and evaluating direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions

observation

the process of watching a process or procedure being performed by others; useful in helping auditors understand the entity's processes

procedure

the review itself, performed in a timely manner and with attention given to factors set forth in the policy and their relation to furthering the entity's objectives

control risk

the risk that a misstatement that could occur in an assertion about an account and that could be material will not be prevented on a timely basis by the entity's internal controls

nonsampling risk

the risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation

audit risk

the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

engagement risk

the risk that the auditor is exposed to financial loss or damage to their reputation from litigation, adverse publicity, or other events arising in connection with the audited financial statements

acceptable risk of overreliance (ARO)

the risk that the auditor is willing to take of being wrong

risk of incorrect rejection

the risk that the sample supports the conclusion that the control is not operating effectively when it is or that the recorded account balance is materially misstated when it is not materially misstated

risk of incorrect acceptance

the risk that the sample supports the conclusion that the control is operating effectively when it is not or that the recorded account balance is not materially misstated when it is materially misstated

audit sampling

the selection and evaluation of less than 100% of the population of audit relevance such that the auditor expects the items selected to be representative of the population and likely to provide a reasonable basis for conclusions about the population

inherent risk

the susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material before consideration of any related controls

allowance for sampling risk

the uncertainty that results from sampling; the difference between the expected mean of the population and the tolerable deviation or misstatement

classical variables sampling

the use of normal distribution theory to estimate the dollar amount of misstatement for a class of transactions or an account balance