Quiz 3 (Chapters 5 & 6) - Auditing

Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in A. A more efficient manner. B. A more thorough manner. C. Accordance with quality control standards. D. Accordance with generally accepted auditing standards.

A. A more efficient manner.

Which of the following would not necessarily be a related party transaction? A. A sale to another corporation with a similar name. B. A purchase from another corporation that is controlled by the corporation's chief shareholder. C. Loan from the corporation to a major shareholder. D. Sale of land to the corporation by the spouse of a director.

A. A sale to another corporation with a similar name.

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

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

What is the definition of fraud in an audit of financial statements? A. An intentional act that results in a material misstatement in financial statements that are the subject of an audit. B. The unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure. C. An intentional act that results in a material weakness in financial statements that are subject to an audit. D. Management's inability to design and implement programs and controls to prevent, deter, and detect material misstatement.

A. An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

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

A. Assurance provided by substantive procedures.

Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud? A. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion. B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud. C. The factors considered in assessing the risk of material misstatement indicated an increased risk of intentional misstatements, but only a low risk of errors in the financial statements. D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

A. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? A. Auditor judgement. B. Materiality. C. Audit risk. D. Reasonable assurance.

A. Auditor judgement.

An auditor's audit documentation will least likely show how the A. Client's schedules were prepared. B. Engagement was planned. C. Understanding of the client's internal control was obtained and the risks of material misstatement were assessed. D. Significant issues were resolved.

A. Client's schedules were prepared.

Analytical procedures used to form an overall audit conclusion generally include A. Considering unusual or unexpected account balances that were not previously identified. B. Performing tests of transactions to corroborate management's financial statement assertions. C. Gathering evidence concerning account balances that have not changed from the prior year. D. Retesting controls that appeared to be ineffective during the assessment of control risk.

A. Considering unusual or unexpected account balances that were not previously identified.

Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the A. Difficulty and cost involved in testing a particular item. B. Assessment of the risks of material misstatement at a low level. C. Inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness.

A. Difficulty and cost involved in testing a particular item.

Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? A. Earnings per share. B. Return on total assets before interest and taxes. C. Accounts receivable turnover. D. Operating cycle.

A. Earnings per share.

An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file? A. Economic order quantity. B. Warehouse location. C. Date of last purchase. D. Quantity sold.

A. Economic order quantity.

An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate A. Fictitious credit sales have been recorded during the year. B. Employees have stolen inventory just before year end. C. The client recently tightened its credit-granting policies. D. An employee has been lapping receivables in both years.

A. Fictitious credit sales have been recorded during the year.

Which of the following is an aspect of scheduling and controlling the audit engagement? A. Include in the audit plan a column for estimated and actual time. B. Perform audit work only after the client's books of account have been closed for the period under examination. C. Write a conclusion in the audit documentation indicating how the results of the audit will affect the auditor's report. D. Include in the engagement letter an estimate of the minimum and maximum audit fee.

A. Include in the audit plan a column for estimated and actual time.

The negative request form of accounts receivable confirmation may be used when the Risk of Material Misstatement is / Number of Small Balances is / Consideration by the Recipient is A. Low / Many / Likely B. Low / Few / Unlikely C. High / Few / Likely D. High / Many / Likely

A. Low / Many / Likely

Before accepting an engagement to audit a new client, an auditor is required to A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. Obtain the prospective client's signature to the engagement letter. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client's audit committee.

A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

An auditor's engagement letter most likely will include A. Management's acknowledgement of its responsibility for maintaining effective internal control. B. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. C. A reminder that management is responsible for illegal acts committed by employees. D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments.

A. Management's acknowledgement of its responsibility for maintaining effective internal control.

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

A. Materiality.

Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls? A. Observing an entity's employee prepare the schedule of past due accounts receivable. B. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable. C. Inspecting an entity's analysis of accounts receivable for unusual balances. D. Comparing an entity's uncollectible accounts expense with actual uncollectible accounts receivable.

A. Observing an entity's employee prepare the schedule of past due accounts receivable.

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

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

An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client's financial statements include a note on related party transactions A. Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties. B. Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from that used in the prior period. C. Explaining the business purpose of the sale of real property to a related property. D. Disclosing compensating balance arrangements maintained for the benefit of related parties.

A. Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties.

In the confirmation of accounts receivable, the auditor would most likely A. Request confirmation of a sample of the inactive accounts. B. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivable. C. Require confirmation of all receivables from agencies of the federal government. D. Require that confirmation requests be sent within 1 month of the fiscal year end.

A. Request confirmation of a sample of the inactive accounts.

Which of the following statements about the auditor's response to assessed risks of material misstatement in a financial statement audit is true? A. Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls. B. When the risks of material misstatement are high, an auditor should reduce the amount of substantive testing. C. Reliance on internal control may be sufficient to allow the auditor to eliminate substantive testing for significant transaction classes. D. When assessing the risks of material misstatement, an auditor should not consider evidence obtained in prior audits about the operation of controls.

A. Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls.

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

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

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? A. Test the operating effectiveness of such controls in the current audit. B. Document that reliance and proceed with the original audit strategy. C. Inquire of management as to the effectiveness of the controls. D. Report the reliance in the report on internal controls.

A. Test the operating effectiveness of such controls in the current audit.

The two requirement crucial to achieving audit efficiency and effectiveness with a personal computer are selecting A. The appropriate audit tasks for personal computer applications and the appropriate software to perform the selected audit tasks. B. The appropriate software to perform the selected audit tasks and audit procedures that are generally applicable to several clients in a specific industry. C. Client data that can be accessed by the auditor's personal computer and audit procedures that are generally applicable to several clients in a specific industry. D. Audit procedures that are generally applicable to several clients in a specific industry and the appropriate audit tasks for personal computer applications.

A. The appropriate audit tasks for personal computer applications and the appropriate software to perform the selected audit tasks.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? A. The entity's industry is experiencing declining customer demand. B. Employees who handle cash receipts are not bonded. C. Bank reconciliations usually include in-transit deposits. D. Equipment is often sold at a loss before being fully depreciated.

A. The entity's industry is experiencing declining customer demand.

A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation? A. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements. B. The financial statements are not in accordance with the applicable financial reporting framework. C. The financial statements contain uncorrected misstatements that should result in a qualified opinion. D. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.

A. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of A. Transactions. B. Authorizations. C. Costs. D. Cutoffs

A. Transactions.

The objective of performing analytical procedures in planning an audit is to identify the existence of A. Unusual transactions and events. B. Noncompliance with laws and regulations that went undetected because of internal control deficiency. C. Related party transactions. D. Recorded transactions that were not properly authorized.

A. Unusual transactions and events.

Which of the following factors has the least influence on an auditor's consideration of the reliability of data for purposes of analytical procedures? A. Whether the data were processed in a computer system or in a manual accounting system. B. Whether sources within the entity were independent of those who are responsible for the amount being audited. C. Whether the data were subjected to audit testing in the current or prior year. D. Whether the data were obtained from independent sources outside the entity or from sources within the entity.

A. Whether the data were processed in a computer system or in a manual accounting system.

After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on A. Whether the financial statements are consistent with the auditor's understanding of the entity. B. Fraud involving the client's management and its employees. C. The materiality of the adjusting entries proposed by the audit staff. D. The communication of internal control weaknesses to those charged with governance.

A. Whether the financial statements are consistent with the auditor's understanding of the entity.

For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as Risk Assessment Procedures / Substantive Procedures / In The Review Stage A. Yes / No / Yes B. No / Yes / No C. No / No / Yes D. Yes / Yes / No

A. Yes / No / Yes

In assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Business Risk / CPA's Business Risk A. Yes / Yes B. Yes / No C. No / Yes D. No / No

A. Yes / Yes

Ordinarily, the predecessor auditor permits the auditor to review the predecessor's audit documentation relating to Contingencies / Balance Sheet Accounts A. Yes / Yes B. Yes / No C. No / Yes D. No / No

A. Yes / Yes

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

A. Yes / Yes / Yes

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? A. A high turnover of senior management. B. A lack of independent checks. C. A strained relationship between management and the predecessor auditor. D. An inability to generate cash flow from operations.

B. A lack of independent checks.

A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult with for this information? A. AICPA Codification of Statements on Auditing Standards. B. AICPA Accounting Trends and Techniques C. PCAOB Inspection Reports. D. SEC Statement 10-K Guide.

B. AICPA Accounting Trends and Techniques

For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn? A. Accounts receivable turnovers are 10.0 and 6.6, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance. B. Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance. C. Accounts receivable turnovers are 14.3 and 8.0, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance. D. Accounts receivable turnovers are 14.3 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.

B. Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance.

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

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

Which of the following presumptions is least likely to relate to the reliability of audit evidence? A. The more effective internal control is, the more assurance it provides about the accounting data and financial statements. B. An auditor's opinion is formed within a reasonable time to achieve balance between benefit and cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

B. An auditor's opinion is formed within a reasonable time to achieve balance between benefit and cost.

Which of the following statements is true concerning analytical procedures used as risk assessment procedures? A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by management. B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level. C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk. D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level.

Using personal computers in auditing may affect the methods used to review the work of staff assistants because A. Supervisory personnel may not have an understanding of the capabilities and limitations of personal computers. B. Audit documentation may not contain readily observable details of calculations. C. The audit standards for supervision may differ. D. Documenting the supervisory review may require assistance of consulting services personnel.

B. Audit documentation may not contain readily observable details of calculations.

An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by the A. Availability of data aggregated at a high level. B. Auditor's determination about whether audit risk can be sufficiently reduced. C. Timing of tests performed after the balance sheet date. D. Auditor's familiarity with industry trends.

B. Auditor's determination about whether audit risk can be sufficiently reduced.

An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is A. Appropriate for the environment in which the entity operates. B. Consistently applied from prior periods. C. Evaluated and appropriately applied based on generally accepted accounting principles. D. Appropriate for the debt security being valued.

B. Consistently applied from prior periods.

When planning an audit, an auditor should A. Consider whether substantive procedures may be reduced based on the results of the internal control questionnaires. B. Determine materiality for the financial statements as a whole. C. Conclude whether changes in compliance with prescribe controls require a change in the reliance on controls. D. Prepare a preliminary draft of the management representation letter.

B. Determine materiality for the financial statements as a whole.

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer record contains the name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether the credit limits are being exceeded. The best procedure for the auditor to follow is 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 they can be manually checked against the credit limits. D. Request a printout of a sample of account balances so they can be individually checked against the credit limits.

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.

Which of the following circumstances most likely will cause an auditor to suspect that material misstatements exist in a client's financial statements? A. The assumptions used in developing the prior year's accounting estimates have changed. B. Differences between reconciliations of control accounts and subsidiary records are not investigated. C. Negative confirmation requests yield fewer responses that in the prior year's audit. D. Management consults with another CPA firm about complex accounting matters.

B. Differences between reconciliations of control accounts and subsidiary records are not investigated.

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to A. Refer the disagreement to the AICPA's Peer Review Board. B. Document the details of the disagreement with the conclusion reached. C. Discuss the disagreement with the entity's management or its audit committee. D. Report the disagreement to an impartial peer review monitoring team.

B. Document the details of the disagreement with the conclusion reached.

Which of the following tasks can be achieved using generalized audit software? A. Determining acceptable risk levels for substantive testing of account balances. B. Filtering data based on accounts receivable data recording. C. Detecting transactions that may be suspicious due to alteration of data input. D. Assessing likelihood of fraud based on input of fraud risk factors.

B. Filtering data based on accounts receivable data recording.

The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants A. That immaterial fraud is not to be reported to the client's audit committee. B. How the results of various auditing procedures performed by the assistants should be evaluated. C. What benefits may be attained by the assistants' adherence to established time budgets. D. Why certain documents are being transferred from the current file to the permanent file.

B. How the results of various auditing procedures performed by the assistants should be evaluated.

Which of the following steps should an auditor perform first to determine the existence of related parties? A. Examine invoices, contacts, and purchasing orders. B. Inquire about the existence of related parties from management. C. Review the company's business structure. D. Review proxy and other materials filed with the SEC.

B. Inquire about the existence of related parties from management.

The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that A. Tests of controls may fail to identify controls relevant to assertions. B. Material misstatements may exist in the financial statements. C. Specified controls requiring segregation of duties may be circumvented by collusion. D. Entity policies may be overridden by senior management.

B. Material misstatements may exist in the financial statements.

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

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

An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A. Confirmation and observation. B. Observation and inquiry. C. Analytical procedures and confirmation. D. Inquiry and analytical procedures.

B. Observation and inquiry.

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

B. Obtaining and evaluating audit evidence.

To obtain an understanding of a consulting client in planning an audit, an auditor most likely would A. Perform tests of details of transactions and balances. B. Read internal audit reports. C. Read specialized industry journals. D. Reevaluate the risks of material misstatement.

B. Read internal audit reports.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the A. Auditor's system of quality control has been maintained at a high level. B. Results are consistent with the conclusions to be presented in the auditor's report. C. Audit procedures performed are approved in the professional standards. D. Audit has been performed by persons having appropriate competence and capabilities.

B. Results are consistent with the conclusions to be presented in the auditor's report.

Ajax, Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor of the client to obtain assurance that all guarantees of the affiliate's indebtedness have been detected? A. Send the standard bank confirmation request to all the client's lender banks. B. Review client minutes and obtain a representation letter. C. Examine supporting documents for all entries in intercompany accounts. D. Obtain written confirmation of indebtedness from the auditor of the affiliate.

B. Review client minutes and obtain a representation letter.

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed? A. Physical inspection of a sample of inventory. B. Search for unrecorded cash receipts. C. Obtaining a client representation letter. D. Confirmation of accounts receivable.

B. Search for unrecorded cash receipts.

Which of the following statements is most accurate regarding sufficient and appropriate documentation? A. Accounting estimates are not considered sufficient and appropriate documentation. B. Sufficient and appropriate documentation should include evidence that it has been reviewed. C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. D. Audit documentation is the property of the client, and the sufficient and appropriate copies should be retained by the auditor for at least 5 years.

B. Sufficient and appropriate documentation should include evidence that it has been reviewed.

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? A. The audit plan. B. The auditor's judgement. C. Auditing standards. D. The audit documentation.

B. The auditor's judgement.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgement about materiality for the financial statements as a whole? A. The anticipated sample size of the planned substantive procedures. B. The entity's year-to-date financial results and position. C. The results of the internal control questionnaire. D. The contents of the representation letter.

B. The entity's year-to-date financial results and position.

Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use A. The positive form to confirm all balances regardless of size. B. The negative form for small balances. C. A combination of the two forms, with the positive form used for trade balances and the negative form for other balances. D. The positive form when the assessed risk of material misstatement is acceptably low and the negative form when it is unacceptably high.

B. The negative form for small balances.

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

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

Which of the following statements about audit evidence is true? A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B. The sufficiency and appropriateness of audit evidence is a matter of professional judgement. C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. D. A client's accounting records can be sufficient audit evidence to support the financial statements.

B. The sufficiency and appropriateness of audit evidence is a matter of professional judgement.

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? A. Staff will need to be rescheduled to cover this new client. B. There will be a client-imposed scope limitation. C. The firm will have to hire a specialist in one audit area. D. The client's financial reporting system has been in place for 10 years.

B. There will be a client-imposed scope limitation.

Auditors sometimes use comparisons of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities? A. Unrecorded purchases. B. Unrecorded sales. C. Merchandise purchases being charged to selling and general expense. D. Fictitious sales.

B. Unrecorded sales.

Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud? A. Property and equipment are usually sold at a loss before being fully depreciated. B. Unusual discrepancies between the entity's records and confirmation replies. C. Monthly bank reconciliations usually include several in-transit items. D. Clerical errors are listed on a computer-generated exception report.

B. Unusual discrepancies between the entity's records and confirmation replies.

Which of the following is the most reliable analytical approach to verification of the year-end financial statement balances of a wholesale business? A. Verify depreciation expense by multiplying the depreciable asset balances one divided by the depreciation rate. B. Verify commission expense by multiplying sales revenue by the company's standard commission rate. C. Verify interest expense, which includes imputed interest, by multiplying noncurrent debt balances by the year-end prevailing interest rate. D. Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year.

B. Verify commission expense by multiplying sales revenue by the company's standard commission rate.

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

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

Tests of controls are concerned primarily with each of the following questions except A. How were the control applied? B. Were the controls approved by the board of directors? C. Were the necessary controls consistently performed? D. By whom were the controls applied?

B. Were the controls approved by the board of directors?

Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient? A. "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope." B. "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records." C. "If you do not report any differences within 15 days, it will be assumed that this statement is correct." D. "The following invoices have been selected for confirmation and represent amounts that are overdue."

C. "If you do not report any differences within 15 days, it will be assumed that this statement is correct."

Which of the following documentation is not required for an audit in accordance with auditing standards? A. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives. B. An indication that the accounting records agree or reconcile with the financial statements. C. A client letter that details the auditor's planned field work. D. The basis for the auditor's conclusions about the assessed risks of material misstatement.

C. A client letter that details the auditor's planned field work.

Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that A. Misstatements exist in the relevant account balances. B. Internal control activities are not operating effectively. C. Additional audit procedures are required. D. The communication with the audit committee should be revised.

C. Additional audit procedures are required.

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

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

An auditor referred to the findings of an auditor's external specialist in the auditor's report. This may be an appropriate reporting practice if the A. Auditor is not familiar with the professional certification, personal reputation, or particular competence of the specialist. B. Auditor, as a result of the specialist's findings, adds a paragraph emphasizing a matter regarding the financial statements. C. Auditors report contains a qualified opinion. D. Auditor, as a result of the specialist's findings, decided to indicate a division of responsibility with the specialist for the audit opinion.

C. Auditors report contains a qualified opinion.

When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below? A = Tests of controls B = Preparation of a flowchart documenting the understanding of the client's internal control C = Substantive procedures. A. ABC. B. ACB. C. BAC. D. BCA.

C. BAC.

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

C. Both I and II.

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including A. Inquiry and analytical procedures. B. Reperformance and observation. C. Comparison and confirmation. D. Inspection and verification.

C. Comparison and confirmation.

Which of the following factors would most likely cause an auditor not to accept a new audit engagement? A. An inadequate understanding of the entity's internal controls. B. The close proximity to the end of the entity's fiscal year. C. Concluding that the entity's management probability lacks integrity. D. An inability to perform preliminary analytical procedures before assessing control risk.

C. Concluding that the entity's management probability lacks integrity.

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should A. Obtain audit evidence about the operating effectiveness of controls. B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. D. Obtain written representations from management that all financial records and related data will be made available.

C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Audit documents that record the procedures used by the auditor to gather evidence should be A. Considered the primary support for the financial statements being audited. B. Viewed as the connecting link between the books of account and the financial statements. C. Designed to meet the circumstances of the particular engagement. D. Destroyed when the audited entry ceases to be a client.

C. Designed to meet the circumstances of the particular engagement.

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

C. Engagement letter.

The objective of analytical procedures performed as risk assessment procedures is to A. Evaluate the adequacy of evidence gathered in response to unusual balances identified during the audit. B. Test individual account balances that depend on accounting estimates. C. Enhance the auditor's understanding of the client's business. D. Identify material weaknesses in internal control.

C. Enhance the auditor's understanding of the client's business.

After identifying a significant related party transaction outside the entity's normal course of business, an auditor should A. Add an emphasis-of-matter paragraph to the auditor's report to explain the transaction. B. Perform analytical procedures to identify similar transactions that were not recorded. C. Evaluate the business purpose of the transaction. D. Substantiate that the transaction was consummated on terms equivalent to those of an arm's-length transaction.

C. Evaluate the business purpose of the transaction.

The risks of material misstatement (RMMs) should be assessed in terms of A. Specific controls. B. Types of potential fraud. C. Financial statement assertions. D. Control environment factors.

C. Financial statement assertions.

Which of the following is a step in an auditor's decision to rely on internal controls? A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B. Perform tests of details of transactions and account balances to identify potential fraud and error. C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls. D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls.

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

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

Which of the following is not considered an auditor's specialist? A. Actuary. B. Appraiser. C. Internal auditor. D. Tax attorney.

C. Internal auditor.

When performing procedures to identify and assess the risks of material misstatement for accounting estimates, the auditor should A. Review transactions occurring prior to the date of the auditor's report that indicate variations from expectations. B. Compare independent expectations with recorded estimates to assess management's process. C. Obtain an understanding of how management developed its estimates. D. Analyze historical data used in developing assumptions to determine whether the process is consistent.

C. Obtain an understanding of how management developed its estimates.

Analytical procedures are most appropriate when testing which of the following type of transactions? A. Payroll and benefit liabilities. B. Acquisitions and disposals of fixed assets. C. Operating expense transactions. D. Noncurrent debt transactions.

C. Operating expense transactions.

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation? A. Discrete phases of planning, interim, and year-end fieldwork. B. Increased effort to search for evidence of management fraud. C. Performance of audit tests on a continuous basis. D. Increased emphasis on the completeness assertion.

C. Performance of audit tests on a continuous basis.

Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of A. Objective judgement. B. Integrity. C. Professional skepticism. D. Impartial conservatism.

C. Professional skepticism.

An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for A. Cash flow increases and decreases. B. Risk assessments and assertions. C. Reclassifications and adjustments. D. Reconciliations and tick marks.

C. Reclassifications and adjustments.

Two assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation. B. Valuation and rights and obligations. C. Rights and obligations and existence. D. Existence and completeness.

C. Rights and obligations and existence.

Which of the following is an auditor least likely to perform in planning a financial statement audit? A. Coordinating the assistance of entity personnel in data preparation. B. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. C. Selecting a sample of vendors invoices for comparison with receiving reports. D. Reading the current year's interim financial statements.

C. Selecting a sample of vendors invoices for comparison with receiving reports.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? A. Turnover of personnel in the accounting department. B. Objectivity of audit committee members. C. Square footage of selling space. D. Management's plans to repurchase stock.

C. Square footage of selling space.

Regardless of the assessed risks of material misstatement, an auditor should perform some A. Tests of controls to determine their effectiveness. B. Analytical procedures to verify the design of controls. C. Substantive procedures to restrict detection risk for significant transaction classes. D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

C. Substantive procedures to restrict detection risk for significant transaction classes.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? A. Substantive procedures and analytical procedures. B. Substantive analytical procedures and tests of controls. C. Tests of controls and tests of details. D. Tests of details and substantive procedures.

C. Tests of controls and tests of details.

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement must likely should include A. A statement that the specialist assumes no responsibility to update the specialist's report for future events or circumstances. B. The conditions under which a division of responsibility may be necessary. C. The applicability of the same confidentiality requirements to the auditor and the specialist. D. The auditor's disclaimer as to whether the specialist's findings corroborate the representations in the financial statements.

C. The applicability of the same confidentiality requirements to the auditor and the specialist.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A. A majority of recipients usually lack the willingness to respond objectively. B. Some recipients may report incorrect balances that require extensive follow-up. C. The auditor cannot infer that all nonrespondents have verified their account information. D. Negative confirmations do not produce evidence that is statistically quantifiable.

C. The auditor cannot infer that all nonrespondents have verified their account information.

When a management's specialist's has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if A. The auditor is satisfied with the competence of the specialist. B. Circumstances made it impractical or impossible for the auditor to test the work done by the specialist. C. The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory. D. The auditor's report contains a reference to the assumption of full responsibility by the specialist.

C. The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes A. The auditor's responsibility for determining the preliminary judgements about materiality and audit risk factors. B. Management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. C. The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. D. Management's responsibility for providing the auditor with an assessment of the risks of material misstatement due to fraud.

C. The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention.

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

C. Tour the client's facilities.

Auditors often make use of computer programs the perform routine processing functions, such as sorting and merging. These programs are made available by computer companies and others and are specifically referred to as A. Compiler programs. B. Supervisory programs. C. Utility programs. D. User programs.

C. Utility programs.

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor's Understanding of the Entity's Control Environment / Overall Responses to Assessed Risks A. Yes / No B. No / Yes C. Yes / Yes D. No / No

C. Yes / Yes

Which of the following statements about evidence is true? A. Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive. B. Effective internal control contributes little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.

D. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter? A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct. B. A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent. C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the client. D. A client-prepared statement of account showing the details of the customer's account balance.

D. A client-prepared statement of account showing the details of the customer's account balance.

Which of the following is usually included or shown in the audit documentation? A. The procedures used by the auditor to verify the personal financial status of members of the client's management team. B. Analyses that are designed to be a part of, or a substitute for, the client's accounting records. C. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements. D. A summary of how significant findings were addressed.

D. A summary of how significant findings were addressed.

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer 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 or required tests of controls to a relatively small amount. D. Access information stored on computer files while having limited understanding of the client's hardware and software features.

D. Access information stored on computer files while having limited understanding of the client's hardware and software features.

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

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

Which of the following statements reflects an auditor's responsibility for detecting fraud or errors? A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employees collusion or management override. B. An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework. C. An auditor is not responsible for detecting fraud unless the application of GAAS would result in such detection. D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.

Although the quantity and content of audit documentation 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 confirmation that were classified as exceptions. C. Documentation indicating that the audit work was adequately planned and supervised. D. Analyses of capital stock and other owners' equity accounts.

D. Analyses of capital stock and other owners' equity accounts.

Which of the following in a predecessor's audit documentation is the auditor least likely to be interested in reviewing? A. Analysis of noncurrent balance sheet accounts. B. Analysis of current balance sheet accounts. C. Analysis of contingencies. D. Analysis of income statement accounts.

D. Analysis of income statement accounts.

Which of the following statements about analytical procedures is true? A. Analytical procedures may be omitted entirely for some financial statement audits. B. Analytical procedures used as risk assessment procedures should not use nonfinancial information. C. Analytical procedures usually are effective and efficient for tests of controls. D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

An auditor would least likely use computer software to A. Construct parallel simulations. B. Access data files. C. Prepare spreadsheets. D. Assess risk.

D. Assess risk.

An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in communication to the A. PCAOB. B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Board of directors.

D. Board of directors.

Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether inadequate provisions for the safeguarding of assets have been corrected. D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.

The objective of tests of details of transactions performed as tests of controls is to A. Monitor the design and use of entity documents such as prenumbered shipping forms. B. Determine whether internal controls have been implemented. C. Detect material misstatements in the account balances of the financial statements. D. Evaluate whether internal controls operated effectively.

D. Evaluate whether internal controls operated effectively.

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be dissociated form the resolution of the matter. The audit documentation would probably be A. Silent on the matter because it is an internal matter of the auditing firm. B. Expanded to note that the assistant auditor is completely dissociated from responsibility for the auditor's opinion. C. Expanded to record the additional work required because all disagreements of this type will require expanded substantive testing. D. Expanded to detail the assistant auditor's position and how the difference of opinion was resolved.

D. Expanded to detail the assistant auditor's position and how the difference of opinion was resolved.

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the A. Timing of the audit. B. Costs and benefits of gathering evidence. C. Financial statements as a whole. D. Financial statements assertions.

D. Financial statements assertions.

Disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist? I. To the SEC when the client reports an auditor change II. To a successor auditor when the successor makes appropriate inquiries III. To a government funding agency from which the client receives financial assistance A. I and II. B. I and III. C. II and III. D. I, II, and III.

D. I, II, and III.

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

D. Identify areas of audit emphasis.

Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of prenumbered client purchase orders filed in the vouchers payable department. C. Analytical procedures performed by the auditor on the entity's trial balance. D. Inspection of bank statements obtained directly from the client's financial institution.

D. Inspection of bank statements obtained directly from the client's financial institution.

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

D. It is an acceptable practice to carry out parts of the examination at interim dates.

The audit working paper that reflects the major components of an amount reported in the financial statements is the A. Interbank transfer schedule. B. Carryforward schedule. C. Supporting schedule. D. Lead schedule.

D. Lead schedule.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold their shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

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

D. Perform risk assessment procedures.

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates the CPA should A. Reduce audit risk by lowering initial levels of materiality. B. Design special substantive procedures to compensate for the lack of industry expertise. C. Engage financial experts familiar with the nature of the industry. D. Perform risk assessment procedures.

D. Perform risk assessment procedures.

A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical levels of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuation. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

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

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

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

D. Results of performing substantive procedures.

Which of the following procedures will most likely assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? A. Inquire about the existence of related party transactions. B. Determine whether the outcomes of accounting estimates differ from the amounts originally recognized. C. Confirm inventories at locations outside the entity. D. Review the lawyer's letter for information about litigation.

D. Review the lawyer's letter for information about litigation.

Which of the following statements is true about related party transactions? A. In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business. B. An auditor should determine whether a particular transaction would have occurred if the parties had not been related. C. An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arms-length transactions. D. The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

D. The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

Which of the following statements is true about the use of the work of an auditor's specialist? A. The specialist need not agree to the auditor's use of the specialist's findings. B. The auditor is required to perform substantive procedures to verify the specialist's assumptions and findings. C. The auditor must keep client information confidential, but the specialist is not obligated to do so. D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because A. This may permit the audit of interentity account balances to be performed as of concurrent dates. B. Interentity transactions may have been consummated on terms equivalent to arm's-length transactions. C. This may reveal whether particular transactions would have taken place if the parties had not been related. D. The business structure may be deliberately designed to obscure related party transactions.

D. The business structure may be deliberately designed to obscure related party transactions.

Based on an understanding of internal control completed at an interim date, the auditor assessed the risks of material misstatement at the relevant assertion level and performed interim substantive procedures. The records will most likely be tested again at year end if A. Tests of controls were not performed by the internal auditor during the remaining period. B. Internal control provides a basis for limiting the extent of substantive testing. C. The auditor used nonstatistical sampling during the interim period testing of controls. D. The remaining period is long.

D. The remaining period is long.

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? A. Management fails to modify prescribed internal controls for changes in information technology. B. Internal control activities requiring segregation of duties are rarely monitored by management. C. Management is dominated by one person is also the majority shareholder. D. There is a substantial risk of intentional misapplication of accounting principles.

D. There is a substantial risk of intentional misapplication of accounting principles.

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

D. Timing of inventory observation procedures to be performed.

Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity's financial statements? A. Management places little emphasis on meeting earnings projections of external parties. B. The board of directors oversees the financial reporting processes and internal control. C. Control deficiencies previously communicated to management are not corrected. D. Transactions selected for testing are not supported by proper documentation.

D. Transactions selected for testing are not supported by proper documentation.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely A. Determine whether any changes in the account occurred between January 1 and January 9, Year 2. B. Determine whether a customary trade discount was taken by the customer. C. Reconfirm the zero balance as of January 10, Year 2. D. Verify that the amount was received.

D. Verify that the amount was received.