ACCT 4420 Comprehensive Final Exam: Practice Questions

Financial Statement Assertions

-Existence/Occurrence: existence of assets and liabilities, occurrence of recorded transactions -Completeness: inclusion of all transactions and accounts in financial statements -Rights/Obligations: assets being the right of an organization, liabilities being the obligations of an organization -Valuation/Allocation: inclusion of accounts in financial statements at appropriate amounts -Presentation/Disclosure: components of financial statements being properly classified , described, and disclosed

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertions related to: a. Existence b. Completeness. c. Valuation and allocation. d. Classification and understandability.

Classification and understandability.

An auditor's review of the repair expense to identify any capital expenditures is a test related to which management assertion? a. Existence. b. Completion. c. Valuation. d. Rights and obligations.

Completion.

Under the AICPA code of professional conduct which of the following individuals would not be a covered member? a) A partner in another office who provides 8 hours of non-audit services to the audit client b) A manager, who is in another office provides 110 hours of non-audit services to the audit client c) A partner in the same office as the lead engagement partner who primarily practices in connection with the engagement d) An individual in a position to influence the engagement

a) A partner in another office who provides 8 hours of non-audit services to the audit client

To substantiate the completeness of the allowance for bad debt estimate, the auditor obtains evidence from which of the following? a) Accounts receivable aging schedule b) Copies of checks received from customers c) Confirmations returned without exception d) Stock prices of customer companies

a) Accounts receivable aging schedule

To exercise due professional care, an auditor should: a) Carefully and critically review the judgement exercised by those assisting in the audit b) Design the audit to help the engagement team members detect all instances of illegal acts c) Attain the proper balance of professional experience and formal education d) Examine all available evidence supporting managements assertions

a) Carefully and critically review the judgement exercised by those assisting in the audit

The following types of controls are considered to be entity-wide controls except: a) Controls regarding the company's annual meeting with stockholders b) Controls to monitor results of operations c) Policies that address significant business control and risk management practices d) Controls over the period-end financial reporting process

a) Controls regarding the company's annual meeting with stockholders

Under the provisions of the Sarbanes-Oxley Act of 2002, the lead audit or coordinating partner and the reviewing partner must rotate off the audit: a) Every five years b) Each year c) Every three years d) Every seven years

a) Every five years

An auditor examines subsequent collections to which of the following management's assertions? a) Existence/occurrence b) Completeness c) Rights and obligations d) Valuation

a) Existence/occurrence

Which of the following is a rationalization/attitude to justify a fraud? a) Management and employees do not place a high priority on the entity's value or ethical standards b) Pressure to meet market expectations and profit targets c) A high turnover of staff with accounting or internal control responsibilities d) Planning to raise debt or renegotiate a loan

a) Management and employees do not place a high priority on the entity's value or ethical standards

The purpose of an auditors' assessment of control risk is to evaluate the risk that: a) Material misstatements may exist in the financial statements b) Tests of controls may fail to identify procedures relevant to assertions c) Entity policies may be overridden by senior management d) Specified controls requiring segregation of duties may be circumvented by collusion

a) Material misstatements may exist in the financial statements

When the auditor is assessing management's competence and ethics, which of the following is the most relevant phase of the audit opinion formulation process? a) Phase I: making client acceptance and continuance decisions b) Phase II: performing risk assessment c) Phase III: Obtaining evidence about internal control operating effectiveness d) Phase IV: obtaining substantive evidence about accounts, disclosures, and assertions e) Phase V: completing the audit and making reporting decisions

a) Phase I: making client acceptance and continuance decisions

Which of the following options is the best description of misstatements that is identified throughout the audit and will be considered at the end of the audit in determining whether the financial statements overall are materially correct? a) Posting materiality b) Performance materiality c) Overall materiality d) Tolerable error

a) Posting materiality

All of the following are reasons why users demand audited financial statements except: a) Remoteness b) Complexity c) Costs d) Reliability

a) Reliability

Identify the least reliable audit evidence: a) Sales invoice b) Accounts receivable information c) Bank statement d) Vendor invoice

a) Sales invoice

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

a) Shipping documents and receiving reports

An auditor can test the completeness assertion of revenues by selecting a sample of : a) Shipping documents and tracing them to the sales journal b) Accounts receivable and tracing them to cash receipts c) Recorded sales transactions and tracing them to the general ledger d) Inventory records and tracing them to shipping documents

a) Shipping documents and tracing them to the sales journal

Which of the following is the primary reason for an auditor to conduct directional testing? a) Some accounts are more likely to be misstated by overstatement than others b) The auditor must remain organized when conducting an audit c) The primary concern of the auditor is the understatement of asset and revenue accounts d) If tests for existence and completeness simultaneously

a) Some accounts are more likely to be misstated by overstatement than others

Please identify an example of non-sampling risk among the following options: a) The auditor does not carry out the appropriate audit procedures b) The auditor uses a sample that does not represent the population c) The auditor uses a random sample selection d) The auditor uses non-statistical sampling

a) The auditor does not carry out the appropriate audit procedures

In auditing accounts receivable, the negative form of confirmation request most likely would be used when: a) The combined assessed level of inherent and control risk relative to accounts receivable is low b) The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence c) Recipients are likely to return positive confirmation requests without verifying the accuracy of the information d) A small number of accounts receivable are involved but a relatively large number of errors are expected

a) The combined assessed level of inherent and control risk relative to accounts receivable is low

Accounts receivable confirmations are strong evidence about: a) The existence of receivables b) The completeness of receivables c) The rights and obligations of receivables d) The presentation and disclosure of receivables

a) The existence of receivables

Which of the following is a description of sampling risk? a) The risk that the sample will not contain characteristics representative of the population, which leads o incorrect inferences made about that population b) The risk that the results of the test will be misinterpreted by the auditor c) The risk that can be eliminated by taking a random sample d) The risk that applies on to samples for substantive testing

a) The risk that the sample will not contain characteristics representative of the population, which leads o incorrect inferences made about that population

Identify the situation that represents a risk factor relating to misstatements arising from misappropriation of assets: a) There is a high turnover of senior management b) There is a lack of independent checks c) A strained relationship between management and the predecessor auditor d) An inability to generate cash flow from operations

a) There is a lack of independent checks

Which of the following statements is a false statement? a) There is an inverse relationship between inherent risk and control risk b) There is a direct association between inherent risk and the quantity of evidence obtained c) The level of inherent risk refers to the situation in which the financial statements are susceptible to material misstatements, but not a failure of internal controls d) Both inherent risk and control risk are assessed by the auditor but controlled by the client

a) There is an inverse relationship between inherent risk and control risk

What is the audit purpose of obtaining an understanding of the entity's business? a) To assist the auditor to accurately interpret information obtained during an audit b) To decide whether it will be necessary to perform analytical procedures c) To enable the auditor to accurately identify significant deficiencies d) To allow the auditor to more accurately perform tests of controls

a) To assist the auditor to accurately interpret information obtained during an audit

Identify the situation in which the auditor will use attribute sampling: a) To test the rates of deviations of controls b) To test the reasonableness of account balances c) To test accuracy of estimates in accounts d) Both A and B

a) To test the rates of deviations of controls

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) valuation and allocation b) completeness c) rights and obligations d) existence

a) valuation and allocation

Which of the accounting changes would require the auditor to issue a qualified or adverse opinion? a. A change in accounting principle from a GAAP to a non-GAAP principle. b. A correction of an error in previously issued financial statements for which the auditor had issued an unqualified opinion. c. A change in entity. d. A change in estimate.

a. A change in accounting principle from a GAAP to a non-GAAP principle.

Assume that a U.S. nonpublic company made changes which had a material effect on the financial statements that were properly justified, accounted for, and disclosed. Which of the following is not a change for which the auditor should add a paragraph to the audit report to alert the readers? a. A change in an accounting estimate not affected by a change in accounting principle. b. A change from non-GAAP to GAAP. c. A correction of a material misstatement in previously issued financial statements. d. A change from one GAAP to another GAAP.

a. A change in an accounting estimate not affected by a change in accounting principle.

Which one of the following represents a control deficiency? a. A missing control that is required for achievement of objectives. b. A control that operates as designed. c. A control that ensures the reliability of financial reporting. d. A control that does not prevent immaterial errors.

a. A missing control that is required for achievement of objectives.

Which statement is false? a. A misstatement is an error, only intentional, that exists in a transaction or financial statement account balance. b. Characteristics that would make a misstatement material include: The misstatement makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. c. Characteristics that would make a misstatement material include: The relative size of the misstatement. d. Characteristics that would make a misstatement material include: The misstatement would have been viewed by a reasonable investor to have significantly altered the total mix of information available.

a. A misstatement is an error, only intentional, that exists in a transaction or financial statement account balance.

Which of the following is not a change included in PCAOB's new reporting standard AS 3101? a. A new report title, "Report of Independent Registered Public Accounting Firm." b. Specific mention of comprehensive income and notes to the financial statements. c. A new disclosure that includes the year in which the audit firm began serving consecutively as the client's auditor. d. An affirmative statement that the audit firm is registered with the PCAOB.

a. A new report title, "Report of Independent Registered Public Accounting Firm."

Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor's family is most likely to impair the auditor's independence? a. A spouse's employment with the client. b. A parent's immaterial investment in a client. c. A first cousin's loan from a client. d. A siblings' loan to a director of a client.

a. A spouse's employment with the client.

Which of the following accounts is not part of the acquisition and payment cycle? a. Accounts Receivable. b. Accounts Payable. c. Inventory. d. Cost of Goods Sold.

a. Accounts Receivable.

What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate? a. Accounts receivable aging schedule. b. Copies of checks received from customers. c. Confirmations returned without exception. d. Stock prices of customer companies.

a. Accounts receivable aging schedule.

Which of the following analytical procedures would be most likely to detect a problem with accounting for fully depreciated equipment? a. Accumulated depreciation by class as a percentage of gross assets each year. b. Current depreciation expense as a percentage of the previous years' depreciation expense. c. Fixed assets by class as a percentage of the assets each year. d. Depreciation expense by asset class as a percentage of assets each year.

a. Accumulated depreciation by class as a percentage of gross assets each year.

Prepared under U.S. auditing standards, an auditor's report that refers to a material misstatement contains the words, "In our opinion, because of the significance of the matter . . . the consolidated financial statements referred to above do not present fairly the financial position . . . ." This is considered a(n): a. Adverse opinion b. Disclaimer of opinion c. Qualified opinion d. Example of inappropriate wording

a. Adverse opinion

Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses. b. Obtaining knowledge of the client business. c. Reviewing the business plan related to major acquisitions. d. Reviewing the minutes of board of directors' meetings.

a. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.

Which of the following statements reflects an auditor's responsibility for detecting fraud? a. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. b. The audit should be planned to detect only fraud caused by departures from GAAP. c. An auditor is only responsible for detecting fraudulent financial reporting. d. An auditor is not responsible for discovering fraudulent acts involving employee collusion.

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

. In order to test the valuation assertion related to the client's stockholders' equity (transactions), the auditor may complete which of the following substantive procedures? a. Analyze the client's retained earnings account by reviewing the propriety of the direct entries to the retained earnings account starting with the date of the previous audit. b. Perform inquiries of management regarding any appropriations of retained earnings. c. Vouch stock transactions recorded in the current period to the board minutes. d. Send third-party confirmations to the stock transfer agent.

a. Analyze the client's retained earnings account by reviewing the propriety of the direct entries to the retained earnings account starting with the date of the previous audit.

Which of these parties involved in preparing and auditing financial statements provides oversight of the reporting process and other parties? a. Audit committee. b. External auditor. c. Management. d. Internal auditor.

a. Audit committee.

What is the primary reason that an auditor must add a paragraph to the audit report when the client has changed an accounting principle or method of application? What is the primary reason that an auditor must add a paragraph to the audit report when the client has changed an accounting principle or method of application? a. Because the change may affect the comparability of this year's financial statements with those of previous years. b. To clarify that the client is in compliance with GAAP. c. Because substantive misstatements are likely to result during the period of transition from one accounting principle to another. d. To alert financial statement readers that the company is complying with the most recent FASB statements

a. Because the change may affect the comparability of this year's financial statements with those of previous years.

Which of the following is not a substantive test of details for dividends? a. Calculation of the dividend payout ratio. b. Examination of the minutes of the board of directors' meetings for authorization of the dividend per share amount. c. Examination of the minutes of the board of directors' meetings for the dividend record date. d. Agreement of the dividend amount with the payment in the cash disbursements journal.

a. Calculation of the dividend payout ratio.

Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk? a. Client has cash holdings in foreign currency in a politically unstable country. b. Client has cash holdings in multiple U.S. financial institutions over a wide geographic area. c. Client holds investments in complex financial instruments. d. All of the above.

a. Client has cash holdings in foreign currency in a politically unstable country.

Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk? a. Client has cash holdings in foreign currency in a politically unstable country. b. Client has cash holdings in multiple U.S. financial institutions over a wide geographic area. c. Client holds investments in complex financial instruments. d. All of the above.

a. Client has cash holdings in foreign currency in a politically unstable country.

Which of the following management assertion is most closely related to the audit objective that verifies all sales have been recorded? a. Completeness b. Occurrence. c. Accuracy. d. Cutoff

a. Completeness

Which assertion relates cash balances including all cash transactions that have taken place during the period? a. Completeness. b. Existence/occurrence. c. Valuation or allocation. d. Rights and obligations. e. Presentation and disclosure.

a. Completeness.

Which assertion relates to the fact that inventory balances include all inventory transactions that have taken place during the period? a. Completeness. b. Existence/occurrence. c. Valuation or allocation. d. Rights and obligations

a. Completeness.

To conduct an audit, what must an auditor do? a. Comply with relevant ethical standards. b. Exercise perfect judgment. c. Obtain sufficient appropriate evidence to provide absolute assurance. d. All of the above.

a. Comply with relevant ethical standards.

To conduct an audit, what must an auditor do? a. Comply with relevant ethical standards. b. Exercise perfect judgment. c. Obtain sufficient appropriate evidence to provide absolute assurance. d. All of the above

a. Comply with relevant ethical standards.

For which of the following audit procedures would sampling be most appropriate? a. Confirmation. b. Observation. c. Inquiry. d. Analytics.

a. Confirmation.

What must an auditor do in an audit? a. Consider how the economic activity is portrayed in the financial statements. b. Disregard independence in order to find the underlying truth of the evidence. c. Establish new criteria by which financial statements may be compared. d. Force management to make operational decisions that will improve the company's financial performance

a. Consider how the economic activity is portrayed in the financial statements.

Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system? a. Electronic payments. b. Periodic internal audits. c. Authorization of transactions. d. Segregation of duties.

a. Electronic payments.

Which of these is not a purpose of an audit program? a. Ensuring standardization according to professional standards of risk factors such as accounts receivable. b. Recording the audit work performed and those responsible for performing the work. c. Organizing and distributing audit work. d. Monitoring the audit process and progress, as well as reviewing the completeness and persuasiveness of procedures performed.

a. Ensuring standardization according to professional standards of risk factors such as accounts receivable.

Which of these is not a potential fraud risk in the revenue cycle? a. Excessive cash flow from operating activities when income from operating activities has been reported. b. Sales to customers in the last month of the fiscal period at terms more favorable than previous months. c. Large or unusual adjustments to sales accounts just prior to or just after the fiscal year-end. d. Customer complaints and discrepancies in accounts receivable confirmations.

a. Excessive cash flow from operating activities when income from operating activities has been reported.

Which of these statements is false? a. If expected misstatement is smaller than tolerable misstatement, sampling is not appropriate unless it is used to estimate the size of the required adjustment to the account balance. b. A factual misstatement is a misstatement that has been specifically identified and about which there is no doubt. c. A tolerable misstatement is a monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. d. A misstatement is a dollar amount of misstatement, either intentional or unintentional, that exists in a transaction or financial statement account balance.

a. If expected misstatement is smaller than tolerable misstatement, sampling is not appropriate unless it is used to estimate the size of the required adjustment to the account balance.

As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work? a. Increases. b. Decreases. c. Stays the same. d. Becomes less reliable.

a. Increases

Which of the following is not an important element of internal control as defined by COSO's Internal Control-Integrated Framework? a. Intentional misapplication of accounting principles. b. Achievement of multiple objectives. c. Process. d. Providing reasonable assurance.

a. Intentional misapplication of accounting principles.

Which one of the following factors is not an inherent risk associated with long-lived assets? a. Lack of physical controls over the long-lived assets. b. Incomplete recording of disposals. c. Obsolescence of assets. d. Impairment of assets

a. Lack of physical controls over the long-lived assets.

What are some of the various risk assessment procedures that the auditor can perform to obtain evidence about inherent risk relating to the operations of a company? a. Make management inquiries and tour the client's plant and operations. b. Prepare Excel templates for statements of cash flow. c. Prepare an audit risk model template. d. Conduct horizontal and vertical analysis of the Balance sheet and Income Statement.

a. Make management inquiries and tour the client's plant and operations.

Which of the following statements is false? a. Performance materiality is the materiality amount that the auditor uses in in determining whether the financial statements overall are materially correct. b. Posting materiality is the materiality amount that signifies the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct. c. An auditor should use the result of the calculation as a starting point for planning materiality and then adjust as necessary for qualitative characteristics of the particular audit client. d. Quantitative materiality is based on a specific numeric cutoff, like 5% of net income or 1% of total assets.

a. Performance materiality is the materiality amount that the auditor uses in in determining whether the financial statements overall are materially correct.

Which of the following is considered to be a transaction control? a. Physical controls to safeguard assets. b. Centralized processing controls. c. Controls to monitor other controls. d. Policies that address significant business control practices

a. Physical controls to safeguard assets.

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would: a. Request the senders to mail the original forms to the auditor. b. Examine subsequent cash receipts for the accounts in question. c. Consider the e-mail responses to the confirmations to be exceptions. d. Mail second requests to the e-mail respondents.

a. Request the senders to mail the original forms to the auditor.

Which of these guidelines helpful to maximizing the effectiveness of a brainstorming session is defined as, "Participants are encouraged to exchange ideas, further develop those ideas during the session, and to respect the opinions of others"? a. Respectful communication. b. Quantity of idea generation. c. Freedom of expression. d. Suspension of criticism.

a. Respectful communication.

Which of these is the definition of client business risk? a. Risks affecting the business operations and potential outcomes of an organization's activities. b. The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. c. The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. d. The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

a. Risks affecting the business operations and potential outcomes of an organization's activities.

What is simple random sampling? a. Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order. b. It involves systematic sampling in which the first item is selected randomly from the interval. c. A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week. d. A nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias or special reason for including or omitting certain items from the sample.

a. Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.

Which of these would be not be considered a factor outside the control of the external auditor that affects audit quality? a. Systems for making client acceptance decisions b. The regulatory environment c. Organizational corporate governance d. The legal environment

a. Systems for making client acceptance decisions

Attributes sampling is used in which of the following situations? a. Testing rates of deviations of controls. b. Testing the reasonableness of account balances. c. Testing accuracy of estimates in accounts. d. Both A and B.

a. Testing rates of deviations of controls.

Which of the following occurs if the risk of material misstatement decreases? a. The auditor can accept a higher detection risk and still achieve an acceptable level of audit risk. b. Detection risk is lower, and audit risk is reduced to an acceptable level. c. The auditor can accept a lower detection risk and still achieve an acceptable level of audit risk. d. None of these.

a. The auditor can accept a higher detection risk and still achieve an acceptable level of audit risk.

Which one of the following is a requirement of the reporting standards included in the generally accepted auditing standards? a. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. b. The auditor will identify in the auditor's report, those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period. c. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate, the auditor must so state in the auditor's report. d. The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an opinion can be expressed.

a. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.

When examining a common-sized income statement, in which of these situations can an auditor's expectation for an expense account be confirmed? a. The balance is in line with prior years, industry information, and the auditor's knowledge of the business. b. The total expenses are in line with industry data, even if there are substantial differences from account to account. c. The percentage difference between the auditor's expectations and the actual balance is positive. d. The vendor statements confirm the account's balance.

a. The balance is in line with prior years, industry information, and the auditor's knowledge of the business.

The cash account is significant to the auditor for which of the following reasons? a. The cash account is the culmination of a large volume of transactions. b. The cash account is not as susceptible to fraud as most other accounts. c. Cash is the only account that provides opportunity for fraud. d. Automated systems do not possess the capability to maintain strong internal controls over cash.

a. The cash account is the culmination of a large volume of transactions.

Which of the following best represents an example of fraudulent financial reporting? a. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations. b. The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. c. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization. d. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

a. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations.

Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. The financial statements fail to contain adequate disclosure of related party transactions. b. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry. c. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. d. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management.

a. The financial statements fail to contain adequate disclosure of related party transactions.

Which of the following is not a principle associated with risk assessment? a. The organization holds individuals accountable for their risk assessment responsibilities. b. The organization identifies and assesses changes that could significantly impact the system of internal control. c. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives. d. The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed.

a. The organization holds individuals accountable for their risk assessment responsibilities.

Which of the following is not considered to be nonsampling risk? a. The sample does not represent the population. b. Use of improper audit procedure. c. Misinterpretation of information. d. Carelessness of the auditor.

a. The sample does not represent the population.

Which of the following describes sampling risk? a. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect. b. The auditor incorrectly applies sampling methodology. c. The sample size will be larger than needed. d. The population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect

a. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Which of the following factors will result in control risk being assessed at a higher level? a. There is a lack of supervision of accounting personnel. b. The control environment is operating effectively. c. Accounting staff are well trained and educated. d. Controls are well designed.

a. There is a lack of supervision of accounting personnel.

Which of the following is the level at which the control's failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor's planned assessment of control risk in performing tests of account balances? a. Tolerable failure rate. b. Allowable risk of assessing control risk too low. c. Expected failure rate. d. Allowance for sampling error.

a. Tolerable failure rate.

What kind of opinion will an auditor issue when there are no material violations of GAAP, disclosures are adequate, the auditor is independent and was able to perform the necessary procedures, there was no change in accounting principles that had a material effect on the statements, and the auditor deems that the client remains a going concern? a. Unqualified opinion. b. Qualified opinion. c. Adverse opinion. d. Disclaimer opinion.

a. Unqualified opinion.

Which of the following statements is correct concerning the use of negative confirmation requests? a. Unreturned negative confirmation requests rarely provide significant explicit evidence. b. Negative confirmation requests are effective when detection risk is low. c. Unreturned negative confirmation requests indicate that alternative procedures are necessary. d. Negative confirmation requests are effective when understatements of account balances are suspected.

a. Unreturned negative confirmation requests rarely provide significant explicit evidence.

What is the best way an auditor can detect fraud in the financial statements? a. Use professional skepticism. b. Understand Generally Accepted Accounting Standards. c. Brainstorm with the client to find the types of fraud occurring. d. Actively search for errors in the financial statements.

a. Use professional skepticism.

An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of: a. Valuation and allocation. b. Completeness. c. Existence. d. Rights and obligations.

a. Valuation and allocation.

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment? a. Valuation. b. Cutoff. c. Existence. d. Rights.

a. Valuation.

In deciding to perform analytical procedures as a substantive audit procedure, the auditor considers which of the following most often? a. Whether the relationships among the data are logical and justified by current economic conditions. b. Lack of support between analytical procedures and internal controls. c. Irrelevant and unreliable data. d. High enough risk of material misstatement.

a. Whether the relationships among the data are logical and justified by current economic conditions.

Which type of account is used to process most cash transactions, including regular cash receipts and disbursements? a. general checking account b. petty cash account c. cash management account d. savings account

a. general checking account

An example of an incentive or pressure to commit fraud is: a) Poor corporate governance mechanisms b) A significant decline in demand for client's products or services c) Reliance on complex transactions d) Significant adjusting entries and reversals after year-end

b) A significant decline in demand for client's products or services

The account receivable confirmations can be considered to be reliable audit evidence if they are controlled by: a) A client employee responsible for accounts receivable b) An external auditor c) A client's internal audit department d) A client's controller or CFO

b) An external auditor

Identify the most persuasive audit evidence among the following: a) Prenumbered client purchase order forms b) Bank statements obtained from the client c) Client work sheets supporting cost allocations d) Client representation letter

b) Bank statements obtained from the client

Which of the following parties is responsible for approving corporate strategy? a) Management b) Board of directors c) Audit committee d) Shareholders

b) Board of directors

Which of the following accounts would be included in the acquisitions and payments for inventory, goods, and services cycle? a) Accounts payable b) Bonds payable c) Inventory d) Cash

b) Bonds payable

During an audit engagement, the auditor found out that the client failed record various accrued liabilities due to an error or an attempt to improve reported financial ratios for the period. Which of the following assertions is relevant to this situation? a) Existence or Occurrence b) Completeness c) Rights and obligations d) Valuation or allocation

b) Completeness

Which of the following circumstances will prevent an auditor from being independent? a) Litigation with a client relating to billing for consulting services for which the amount is immaterial b) Employment of the CPA's spouse as a client's internal auditor c) Obtaining collateralized automobile loan from a financial institution client d) Acting as an honorary trustee for a not-for-profit organization client

b) Employment of the CPA's spouse as a client's internal auditor

Please identify the test of control that helps an auditor to check whether all goods shipped are properly billed: a) Scanning the sales journal for sequential and unusual entries b) Examining shipping documents for matching sales invoices c) Inspecting unused sales invoices for consecutive prenumbering d) Comparing the accounts receivable ledger to daily sales summaries

b) Examining shipping documents for matching sales invoices

In the United States, which of the following is the most common standards/principles against which the auditor evaluates the fairness of financial statements? a) Auditing standards b) Generally accepted accounting principles c) Generally accepted accounting standards d) Governmental accounting principles

b) Generally accepted accounting principles

When the auditor concludes that the book value of sales revenue is correct when it is materially misstated is an example of which of the following? a) Incorrect rejection b) Incorrect acceptance c) Insufficient sample size d) None of the above

b) Incorrect acceptance

When an auditor performs sampling, he/she is most likely to be concerned with which of the following? a) The risk of incorrect rejection b) Incorrect acceptance risk c) Risk of excess sample size d) Risk of error in the population

b) Incorrect acceptance risk

Auditors of publicly traded companies are required to perform a(n) __________ for their clients: a) Compliance audit b) Integrated audit c) Internal audit d) Operational audit

b) Integrated audit

Which of the following is the limitation of observation? a) Observation of processing is rarely unobtrusive b) Observation of processing on one day does not necessarily indicate how transactions were processed on a different day c) All of the above d) None of the above

b) Observation of processing on one day does not necessarily indicate how transactions were processed on a different day

Haphazard sampling can be an appropriate sampling method if the sample is: a) Statistically sound b) Representative of the population c) Representative of the sample d) In the upper stratum

b) Representative of the population

Which of the following is a good example of control over the accuracy of recorded sales? a) Online input of transactions and independent logging are done b) Sales price comes from authorized sales price list maintained on the computer c) Computer program is tested before implementation d) Transactions are reviewed and compared with budgets and differences are investigated

b) Sales price comes from authorized sales price list maintained on the computer

Please choose the factor leading an auditor to assess the inherent risk at a higher level: a) The preparer of financial statements can determine easily the account balance without estimation b) The account balance is made up of complex transactions c) The account balance is made up of a high volume of routine transactions d) All of the above

b) The account balance is made up of complex transactions

How can the auditors introduce unpredictability into the audit? a) The auditor can assess high-risk accounts b) The auditors can perform audit procedures without announcing the audit client c) The auditors can perform the audit in the same location annually d) Selecting items that would normally be tested

b) The auditors can perform audit procedures without announcing the audit client

In an integrated audit, each of the following is an entity-wide control except: a) Controls of the board of directors to monitor the audit committee's activities b) The external auditor's assessment process of internal auditor competence and objectivity c) The process of the executive committee to assess business risk d) Controls established by management to monitor results of operations

b) The external auditor's assessment process of internal auditor competence and objectivity

What can users of the audit report reasonably expect from the audited financial statements? a) The financial statements are complete and contain many of the important financial disclosures b) The financial statements are presented fairly according to the substance of GAAP c) The financial statements are free from all errors d) All of the above

b) The financial statements are presented fairly according to the substance of GAAP

Please identify the true statement about management assertions a) All assertions are equally important for all accounts b) The importance of an assertion depends upon the account c) Assertions are nor related to accounts d) None of the above

b) The importance of an assertion depends upon the account

When an audit determines the adequacy of the allowance for doubtful accounts, which of the following is the most relevant assertion? a) Existence b) Valuation c) Rights and obligations d) Presentation and disclosure

b) Valuation

The risk of material misstatement represents the following types of risk: a) audit risk and inherent risk b) control risk and inherent risk c) detection risk and control risk d) audit risk and control risk

b) control risk and inherent risk

The activity of overstating cash assets through the record of deposits in transit in both the account from which the cash is withdrawn and the account in which it is transferred is called: a) lapping of cash b) kiting of cash c) embezzlement of cash d) restrictive endorsements of cash

b) kiting of cash

Which of the following factors is not an example of a risk relevant to the client continuance decision? a. Independence risk factors. b. Advocacy threat. c. Third party/due diligence risk factors. d. Client entity characteristics.

b. Advocacy threat.

The first general standard of the PCAOB requires that an audit be performed by which type of person? a. An auditor with seasoned judgment in varying degrees of supervision and review. b. An auditor with appropriate technical training and proficiency. c. An auditor with adequate knowledge of the standards of field work and reporting. d. An auditor satisfying the independence standards.

b. An auditor with appropriate technical training and proficiency.

Which of the following is not a matter that auditors would choose to emphasize when issuing an unqualified opinion? a. A change in the fiscal year end. b. An inability to gather sufficient appropriate evidence during the engagement period. c. Important subsequent events, such as a board of directors' decision to divest a segment of the business. d. Significant transactions with related entities.

b. An inability to gather sufficient appropriate evidence during the engagement period.

If the auditor has no reservations about the fairness of the financial statements but believes there is a remote possibility that resolution of an uncertainty will have a material effect on the financial statements, which of the following would the auditor issue? a. A disclaimer of opinion. b. An unqualified opinion with no report modifications. c. An adverse opinion. d. An unqualified opinion with explanatory paragraphs.

b. An unqualified opinion with no report modifications.

Which explanation best describes how inherent risk relates to internal controls? a. Controls exist to address the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. b. Controls exist to address the inherent risk of material misstatement. Therefore, it would be impossible to evaluate the effectiveness of controls without first knowing the risks, or bad outcomes, that the controls are designed to mitigate. c. Controls exist to address the risk of material misstatement including control risk, which is dependent upon client business risk. d. Controls exist to address the risk potential for loss to the auditor because of being associated with the client.

b. Controls exist to address the inherent risk of material misstatement. Therefore, it would be impossible to evaluate the effectiveness of controls without first knowing the risks, or bad outcomes, that the controls are designed to mitigate.

Which of the following is considered to be an entity-wide control? a. Segregation of duties. b. Controls over management override. c. Authorization procedures for purchasing. d. Adequately documented transaction trails.

b. Controls over management override.

When auditing debt, which of the following is the primary substantive analytical procedure? a. Reading loan agreements. b. Developing an independent expectation of interest expense. c. Tracing bond proceeds to cash receipts. d. Confirming transactions with outside parties.

b. Developing an independent expectation of interest expense.

Which of these is a safeguard to independence created by the audit firm as articulated in the AICPA's independence conceptual framework? a. Policies and procedures to ensure accurate financial reporting. b. Disciplinary mechanisms to promote compliance with independence policies and procedures. c. Professional certifications. d. Mandatory partner rotation after five years of service

b. Disciplinary mechanisms to promote compliance with independence policies and procedures.

Which type of fraud would be suspected if an expense is charged directly to retained earnings rather than to the appropriate expense account? a. Debt fraud. b. Equity fraud. c. Revenue and expense fraud. d. Tax Fraud.

b. Equity fraud.

Which of the following is not an indicator of fraud in the acquisition and payment cycle? a. Large manual adjustments to inventory accounts. b. Excess inventory because of a production slowdown. c. Theft of inventory by employees. d. Inventory shrinkage

b. Excess inventory because of a production slowdown.

Which of the following is not an account related to equity? a. Dividends. b. Gains (losses) of sale of equipment. c. Retained earnings. d. Stock accounts.

b. Gains (losses) of sale of equipment.

In which of the following situations will auditors typically rely on internal controls over financial reporting? a. If control risk is assessed at a high level. b. If the controls are determined to be designed and operating effectively. c. If the clients asks the auditor to test controls. d. If the controls are sufficient to increase control risk to an acceptable level.

b. If the controls are determined to be designed and operating effectively.

In which of these situations would an auditor examine a sample of the cash disbursements made by the client after the year end? a. If fraudulent transactions were delayed until a subsequent period. b. If the liabilities were recorded in the year being audited and were properly recorded in that year. c. If vendor agreements are being properly observed. d. If the current year's disbursements are greater than the previous year's disbursements

b. If the liabilities were recorded in the year being audited and were properly recorded in that year.

Internal control benefits the organization in all of the following ways except: a. Improves the quality of information. b. Increases the number of surprises faced by the market concerning the company's stock. c. Provides reasonable assurance regarding the reliability of the company's financial information. d. Allows for more informed decisions by internal and external users of the financial information.

b. Increases the number of surprises faced by the market concerning the company's stock.

Which of these is an audit document that lists all transfers between client bank accounts starting a short period before year end and continuing for a short period after year end? a. Bank confirmation. b. Interbank transfer statement. c. Cutoff bank statement. d. Bank deposit slip

b. Interbank transfer statement.

Which of these correctly represents Phase I of the audit opinion formulation process? a. Completing the audit and making reporting decisions. b. Making client acceptance and continuance decisions. c. Obtaining evidence about internal control operating effectiveness, if applicable. d. Obtaining substantive evidence about accounts, disclosures, and assertions

b. Making client acceptance and continuance decisions.

Which of the following is a common incentive or condition that increases the likelihood for fraudulent financial reporting? a. Ineffective segregation of assets. b. Management bonuses based on reported earnings. c. Access to undeposited cash. d. Significant related party transactions

b. Management bonuses based on reported earnings.

With whom does the tone of internal control typically originate? a. Auditors. b. Management. c. Stockholders. d. Employees

b. Management.

What should an audit team do when it discovers that fraud risk factors are present on an audit engagement? a. Retract from the client and inform regulatory bodies. b. Modify procedures to actively search for the existence of fraud. c. Reduce the amount of evidence required and resort to management inquiry. d. Turn the audit over to forensic accountants.

b. Modify procedures to actively search for the existence of fraud.

What is the scope of applicability of the auditing standards of the AICPA? a. Nonpublic companies traded in non-U.S. markets. b. Nonpublic companies in the U.S. c. Public companies traded in non-U.S. markets. d. Public companies traded in the U.S.

b. Nonpublic companies in the U.S.

Which of the following creates an opportunity for fraud to be committed in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules.

b. Poor internal control.

Which of the following is a method of reducing nonsampling risk? a. Proper supervision and instruction of the client's employees. b. Proper supervision and instruction of the audit team. c. The use of attributes sampling rather than variables sampling. d. Controls to ensure that the sample drawn is random and representative.

b. Proper supervision and instruction of the audit team.

To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would a. Perform tests of details of transactions and balances. b. Review prior-year audit documentation and the permanent file for the client. c. Read specialized industry journals. d. Reevaluate the client's internal control environment.

b. Review prior-year audit documentation and the permanent file for the client.

Which assertion relates to the fact that the company actually owes a liability for the accounts payable as of the balance sheet date? a. Valuation or allocation. b. Rights and obligations. c. Completeness. d. Existence/occurrence.

b. Rights and obligations.

Which of these is the correct definition of sampling units? a. Sampling units refer to the group of transactions or the items that make up an account balance for which the auditor wants to estimate some characteristic. b. Sampling units refer to the individual items making up the population. c. Both of these are correct. d. Neither of these is correct.

b. Sampling units refer to the individual items making up the population.

An auditor suspects that a client is fraudulently overstating revenue by recording fictitious sales. Which of the following audit procedures would most likely be used to identify this situation? a. Select a sample of shipping documents and trace to the related sales invoices. b. Select a sample of sales invoices and trace to the related shipping documents. c. Select a sample of sales invoices and trace into the sales journal. d. Select a sample of entries in the sales journal and trace to the related sales invoices.

b. Select a sample of sales invoices and trace to the related shipping documents.

Tracing shipping documents to prenumbered sales invoices provides evidence that: a. No duplicate shipments or billings occurred. b. Shipments to customers were properly invoiced. c. All goods ordered by customers were shipped d. All prenumbered sales invoices were accounted for

b. Shipments to customers were properly invoiced.

Why is fraud detection an important part of the audit? a. Auditors expect that management will make them aware of any fraud in the financial statements. b. Society expects that financial statements have not been materially misstated due to fraud. c. Auditors are required to seek out and find all fraud, regardless of its magnitude. d. Society realizes that some fraud was not intended to be discovered by auditors.

b. Society expects that financial statements have not been materially misstated due to fraud.

Which of the following would be the best example of the first principle associated with monitoring? a. A policies and procedures manual that all company employees are aware of. b. Software to automate the review of all payment transactions and identify anomalies. c. Brainstorming sessions to determine how or where fraud could occur. d. Prenumbered paper documents

b. Software to automate the review of all payment transactions and identify anomalies.

Which statement best explains the factors that affect evidence sufficiency? a. Sufficiency is a measure of the quality of assertions. b. Sufficiency is the measure of the quantity of audit evidence. c. Evidence sufficiency is a measure of relevancy. d. The lower the assessed risk, the more audit evidence is likely to be required.

b. Sufficiency is the measure of the quantity of audit evidence.

Assume that an audit client declared a 5% stock dividend. Which of the following is not evidence that the auditor would use to determine that the dividend was properly accounted for? a. A review of the stock issuances to make sure that the fair market value is considered. b. The Wall Street Journal or other financial reporting service to determine the fair market value at the date the dividend was paid. c. A review of the board of directors minutes to ensure that the dividend was properly authorized. d. A review of the general ledger to determine if the amounts were properly accounted for.

b. The Wall Street Journal or other financial reporting service to determine the fair market value at the date the dividend was paid.

Which of the following factors would lead an auditor to assess inherent risk at a higher level? a. The account balance is easily determined without estimation. b. The account balance is composed of a high volume of nonroutine transactions. c. The account balance is composed of simple transactions. d. All of the above would lead the auditor to assess a higher level of inherent risk

b. The account balance is composed of a high volume of nonroutine transactions.

What can a user of financial statements infer from an unqualified opinion on the financial statements? a. The auditor found no instances of error or fraud. b. The auditor has no reservations about the fairness of presentation. c. The auditor is satisfied that management is both credible and competent. d. All of the above can be inferred by the user.

b. The auditor has no reservations about the fairness of presentation.

What can a user of financial statements infer from an unqualified opinion on the financial statements? a. The auditor found no instances of error or fraud. b. The auditor has no reservations about the fairness of presentation. c. The auditor is satisfied that management is both credible and competent. d. All of the above can be inferred by the user.

b. The auditor has no reservations about the fairness of presentation.

Which of the following best represents fraud related to financial reporting? a. The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. b. The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts' expectations this quarter. c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris. d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

b. The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts' expectations this quarter.

The information and communication component of internal control includes which of the following? a. The organization deploys control activities through policies that establish what is expected and in procedures that put policies into action. b. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control. c. The organization identifies and assesses changes that could significantly impact the system of internal control. d. All of the above.

b. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control.

Which of the following statements about bonds is false? a. They may be issued to refinance existing debt. b. They account for many of the organization's transactions. c. They are generally highly material to the financial statements. d. They may be issued to finance major expansions.

b. They account for many of the organization's transactions.

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives? a. To ensure customer satisfaction. b. To minimize credit losses. c. To determine revenue recognition policies. d. To prevent lapping by the accounts receivable department.

b. To minimize credit losses.

Which one of the following is the primary reason for documenting audit work? a. To prevent litigation by other parties that question the audit performance. b. To provide a stand-alone medium that gives audit conclusions and supports the opinion. c. To give the client a full reporting of all work performed on their behalf. d. To supply a point of reference for all auditors performing the work subsequently.

b. To provide a stand-alone medium that gives audit conclusions and supports the opinion.

Authorization of debt is one inherent risk auditors face. Which of the following is an example of this inherent risk? a. Interest expense is not properly accrued. b. Unapproved debt extinguishments. c. Unreviewed debt covenants. d. Debt that is not classified according to GAAP.

b. Unapproved debt extinguishments.

Which of the following is the auditor's primary objective when auditing debt? a. Proper valuation of bond premium or bond discount, including amortization valuation. b. Understatement of the debt obligation focusing on the completeness assertion. c. Proper presentation and disclosure, including important restrictions contained in the debt. d. Valuation of gains or losses on refinancing debt.

b. Understatement of the debt obligation focusing on the completeness assertion.

Please Identify a formal document that conveys responsibility for shipped merchandise to the shipper: a) Sales invoice b) Receiving report c) Bill of lading d) Purchase order

c) Bill of lading

Which of the following is an example of weaknesses in the operation of controls? a) Inadequate controls over access to computer systems, data, and files b) Absence of appropriate reviews and approvals of transactions, accounting entries, or systems output c) Computerized controls leading to items identified for non-processing that are systematically overridden by employees to process the transactions d) Inadequate processes to develop significant estimates affecting the financial statements, for example, estimates for pensions, warranties, and other reserves

c) Computerized controls leading to items identified for non-processing that are systematically overridden by employees to process the transactions

Identify the most reliable audit evidence: a) Evidence from the client's organization b) Evidence from a poorly controlled system c) Directly observable evidence d) Facsimiles of documents

c) Directly observable evidence

Which is generally the most reliable form of evidence? a) Internally generated evidence based on discussion with upper management b) Internally generated evidence from the client's IT system c) Evidence externally generated from independence outside sources d) Externally generated evidence held by the client

c) Evidence externally generated from independence outside sources

Which of the following would be most effective audit procedures in reducing audit engagement risk? a) Analytical procedures b) Inquiries of senior management c) Examination of evidence d) Discussion with responsible individuals

c) Examination of evidence

Detection risk is different from inherent risk and control risk because: a) Inherent risk and control risk exist as a result of the auditor's judgment about materiality b) Inherent risk and control risk are controlled by the auditor c) Inherent risk and control risk exist independently of the audit d) Inherent risk and control risk are calculated by the client

c) Inherent risk and control risk exist independently of the audit

Which of the following is a good example of control over the completeness of revenue transactions? a) Monthly statements are sent to customers b) Credit is approved before shipment c) Prenumbered shipping documents and invoices which are periodically accounted for d) Sales recorded only with valid customer order and shipping documents

c) Prenumbered shipping documents and invoices which are periodically accounted for

When there is a high risk of material misstatement, the auditor will: a) Increase tests of controls b) Perform substantive tests as of an interim date c) Select more effective substantive tests d) Use smaller, rather than larger sample sizes

c) Select more effective substantive tests

Which of the following factors creates an opportunity for fraud to be committed in an organization? a) Rapid growth b) An excessive focus on maximization of profits and stock prices c) Significant related-party transactions d) The organization is about to enter into a significant new contract

c) Significant related-party transactions

An external auditor must have which of the following? a) A background in many different disciplines b) A pre-existing and well-informed point of view with respect to the audit c) Technical training that is adequate to meet the requirements of a professional d) Experience in taxation that is sufficient to comply with generally accepted accounting principles

c) Technical training that is adequate to meet the requirements of a professional

Which of the following factors would lead the auditor to assess inherent risk at a higher level? a) The account balance represents an asset that is not easily stolen b) The account balance is made up of simple transactions c) The account balance requires a high level of management's judgement or estimation d) The account balance is composed of a high volume of routine transactions

c) The account balance requires a high level of management's judgement or estimation

Audit sampling refers to the situation in which: a) The auditor tests a subset of the population to draw a conclusion about the subset of the population b) The auditor looks at less that 100% of the population to identify a subset of the population with particular risk traits c) The auditor tests a subset of the population to draw a conclusion about the entire population d) The auditor screens 100% of the population to identify a subset of the population with particular risk traits

c) The auditor tests a subset of the population to draw a conclusion about the entire population

Please identify the true statement relating to the concept of segregation of duties when cash processing systems become more automated and integrated: a) Segregation of duties becomes less important b) Segregation of duties becomes more important c) The importance of segregation of duties does not change d) Segregation of duties becomes completely computerized without human involvement

c) The importance of segregation of duties does not change

Vouching helps auditors establish which of the following regarding recorded contractions: a) Transactions have been recorded b) Transactions are complete c) Transactions are valid d) Transactions are presented fairly

c) Transactions are valid

The auditor's review of a firm's sales cutoff is likely to help the auditor detect which of the following? a) Kiting b) Lapping of accounts receivable c) Unrecorded sales for the year d) Excessive sales discounts

c) Unrecorded sales for the year

On auditing of the revenue cycle of a company, the auditor calculates an estimate of the company's allowance for doubtful accounts and then compares it to the estimate provided by the company's management. This procedure is used to test which assertion? a) Existence of receivables b) Cutoff of receivables c) Valuation of receivables d) Rights to receivables

c) Valuation of receivables

When an auditor tests whether preauthorized sales prices are entered into to computer pricing table by authorized individuals, the auditor is testing which of the following assertions: a) Existence or occurrence b) Completeness c) Valuation or allocation d) Presentation and disclosure

c) Valuation or allocation

When there is a decrease in the acceptable level of detection risk, assurance obtained from: a) tests of controls should decrease b) substantive tests should decrease c) substantive test should increase d) tests of controls should increase

c) substantive test should increase

hich of the following is an example of the contents of an opinion paragraph found in an unqualified audit report? a. "Nothing came to our attention..." b. "An audit includes examining, on a test basis..." c. "The financial statements referred to above present fairly..." d. "We have audited...."

c. "The financial statements referred to above present fairly..."

Which one of the following is not a management expectation for independent auditors? a. An outside source of expertise on accounting matters. b. Individuals who perform tests and draw conclusions on assertions. c. A participant in management decision making. d. A provider of a written communication.

c. A participant in management decision making.

Which of the following statistical sampling methods is most commonly used to test control procedures? a. Variable sampling. b. Ratio estimation sampling. c. Attributes sampling. d. Dollar unit sampling.

c. Attributes sampling.

Management has developed cash management techniques for which of the following reasons? a. Increase the time to collect billings. b. Reduce the amount of volume of cash transactions. c. Automate the cash management process. d. Increase the liquidity of cash balances.

c. Automate the cash management process.

Which substantive audit procedure would be most likely to detect expired or worthless assets left on a company's books? a. By comparing depreciation expense over time. b. By tracing acquisitions of long-lived assets to their original source documents. c. By noting the relative age of assets and idle equipment during a tour of the facilities and tracing the idle assets to the books. d. By comparing current earnings with future expected earnings

c. By noting the relative age of assets and idle equipment during a tour of the facilities and tracing the idle assets to the books.

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for? a. Occurrence. b. Presentation and Disclosure.. c. Completeness. d. Valuation or allocation.

c. Completeness.

Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included? a. Existence. b. Valuation. c. Completeness. d. Rights and Obligations

c. Completeness.

Which of these is not a control over the shipment and recording of sales transactions that an auditor might examine to assess whether all transactions are recorded correctly, and in the correct period. a. Supervisory review of transactions before recording. b. Signed authorization of transaction before recorded. c. Distribute monthly statements. d. Use and reconciliation of pre-numbered documents.

c. Distribute monthly statements.

Which of these is a control related to existence or occurrence? a. Use of prenumbered shipping documents and sales invoices. b. Printing a list of changed prices for review by the department that authorized the changes. c. Distributing monthly statements. d. Limiting access to the files to authorized individuals

c. Distributing monthly statements.

Which of the following is not a potential fraud related to debt? a. Long-term or short-term debt is misclassified. b. Entire loan payments are charged to either principal or interest. c. Dividends are paid in violation of restrictive covenants. d. Debt is not properly authorized.

c. Dividends are paid in violation of restrictive covenants.

The purpose of the bill of lading is to provide which of the following? a. The warehouse personnel with the product that must be shipped to customers. b. Invoices to customers for proper collection. c. Evidence of title transfer of goods to customers. d. A credit application for customer approval.

c. Evidence of title transfer of goods to customers.

Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? a. Completeness. b. Rights and obligations. c. Existence. d. Valuation.

c. Existence.

Which statement is false? a. The auditor will not perform tests of controls; instead, the auditor must plan for substantive procedures, without relying on the client's internal controls. b. Assessing control risk as high means the auditor does not have confidence that internal controls will prevent or detect material misstatements; assessing control risk as low has the opposite implication. c. If control risk is assessed as low, the auditor cannot plan on relying on the controls to increase substantive procedures for account balances. d. Based on obtaining an understanding through risk assessment procedures, the auditor assesses control risk ranging from high (weak controls) to low (strong controls).

c. If control risk is assessed as low, the auditor cannot plan on relying on the controls to increase substantive procedures for account balances.

Which of the following would the auditor consider as part of the control environment related to debt? a. Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments. b. Recalculation of the underwriter's commission. c. Independence of the board of directors with respect to long-term financing. d. Inspection of documentation to confirm refinancing of debt.

c. Independence of the board of directors with respect to long-term financing.

Which of the following is not typically included in the audit of debt? a. Interest expense. b. Notes payable. c. Interest income. d. Bonds payable

c. Interest income

Which of the following is an example of a physical control to safeguard assets? a. Hiring only trustworthy cashiers. b. Separation of duties. c. Locks on the warehouse doors. d. Safety audits on the production-line.

c. Locks on the warehouse doors.

Under which of the following circumstances would the expression of an adverse opinion be inappropriate? a. The company issues financial statements that purport to present financial position and results of operations, but it refuses to include the related statement of cash flows. b. Management does not provide reasonable justification for a change in accounting principles. c. Management refuses to allow the auditor to contact legal counsel. d. The financial statements do not adequately disclose litigation that is probable to result in a material loss.

c. Management refuses to allow the auditor to contact legal counsel.

. If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested? a. Existence. b. Completeness. c. Presentation and disclosure. d. Rights and obligations.

c. Presentation and disclosure.

Which assertion is generally the most relevant when auditing the restrictions contained in debt? a. Existence. b. Valuation. c. Proper presentation and disclosure. d. Completeness.

c. Proper presentation and disclosure.

Which of the following is a significant risk related to purchasing? a. Competitive bids are not required for purchases below a specified dollar amount. b. Purchase orders are generated electronically. c. Purchasing agents may enter into kickback arrangements with vendors. d. All of the above are significant risks.

c. Purchasing agents may enter into kickback arrangements with vendors.

When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is guilty of which of the following? a. Performing kiting. b. Committing embezzlement. c. Receiving kickbacks. d. Stealing company assets.

c. Receiving kickbacks.

The financial statements of Henley Co. contain a material departure from GAAP. Henley effectively argues that, due to unusual circumstances, the financial statements would have been misleading if they were prepared in conformity with GAAP. Based solely on this information, the auditor should: a. Render an unmodified opinion with no additional paragraphs of explanation. b. Render a qualified (except for) opinion with an added paragraph preceding the opinion paragraph explaining the reason for the qualification. The paragraph is titled "Basis for Qualified Opinion." c. Render an unmodified opinion with a separate paragraph explaining the unusual situation. d. Render a disclaimer of opinion based on lack of sufficient appropriate audit evidence.

c. Render an unmodified opinion with a separate paragraph explaining the unusual situation

Which of these describes management's need for reliable financial statements? a. Assess the financial position of a company in litigation. b. Evaluate loan decisions, considering interest rates, terms, and risk. c. Review performance, make operational decisions, and report results to capital markets. d. Buy or sell stock or bonds

c. Review performance, make operational decisions, and report results to capital markets.

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations? a. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors. b. Gross margin is equivalent in the current period to previous periods and is below that of the industry. c. Sales are higher in the month preceding each quarter end. d. Sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

c. Sales are higher in the month preceding each quarter end.

The audit engagement team is in the process of planning the upcoming audit for a new client. As part of the planning phase, the auditors would perform all of the following activities with the exception of: a. Developing an audit strategy. b. Performing risk assessment procedures. c. Sampling a small number of client transactions for planned audit procedures. d. Obtaining knowledge of the client's business and industry

c. Sampling a small number of client transactions for planned audit procedures.

Why is fraud detection an important part of the audit? a. Auditors are required to seek out and find all fraud, regardless of its magnitude. b. Auditors expect that management will make them aware of any fraud in the financial statements. c. Society expects that financial statements have not been materially misstated due to fraud. d. Society realizes that some fraud was not intended to be discovered by auditors.

c. Society expects that financial statements have not been materially misstated due to fraud.

Which of these relates to the PCAOB standards? a. Standards apply to audits in countries for which international standards are required. b. Standards apply to audits of most U.S. nonpublic entities. c. Standards apply to audits of U.S. public companies. d. All of these relate to the PCAOB.

c. Standards apply to audits of U.S. public companies.

Which of the following is a management assertion made about the valuation and allocation of long-lived assets? a. That the assets existed before the balance sheet date. b. That the organization had ownership rights on the balance sheet date. c. That the balances of long-lived assets are in accordance with GAAP. d. That long-lived account balances indicate all the transactions that have taken place during the period.

c. That the balances of long-lived assets are in accordance with GAAP.

Which of the following is not a basic principle described by the AICPA related to audit reporting? a. The auditor can express an opinion that the financial statements are free of material misstatements. b. By expressing an opinion on the financial statements the degree of confidence that users can place in the statements is enhanced. c. The auditor must state if the financial statements are in full compliance with GAAP. d. The auditor can state that an opinion cannot be expressed.

c. The auditor must state if the financial statements are in full compliance with GAAP.

Which one of the following has the most affect on the reliability of financial statements? a. The size of the client b. The industry of the client c. The client's internal control structure. d. The client's trend of earnings.

c. The client's internal control structure.

Which of the following is the description of an allocation assertion? a. Marketable securities exist at the balance sheet date. b. Marketable securities are properly classified on the balance sheet and disclosed in the notes to the financial statements. c. The recorded balances reflect the true underlying economic value of those assets. d. The marketable securities balances include all securities transactions that have taken place during the period. e. The company has title to marketable securities accounts as of the balance sheet date.

c. The recorded balances reflect the true underlying economic value of those assets.

Which of the following is not considered to be nonsampling risk? a. Misinterpretation of information. b. Use of improper audit procedure. c. The sample does not represent the population. d. Carelessness of the auditor.

c. The sample does not represent the population.

Which of the following is not a major fraud finding provided in COSO studies? a. The most common fraud involved revenue recognition. b. The amount and incidence of fraud remains high. c. There is low involvement in frauds by CEOs and/or CFOs. d. Many of the companies committing fraud changed auditors

c. There is low involvement in frauds by CEOs and/or CFOs.

How are most bonds marketed? a. Through the board of directors. b. Through employees. c. Through an underwriter. d. Through auditors.

c. Through an underwriter.

What is the main reason to establish guidelines for brainstorming sessions? a. To clearly identify lines of authority. b. To comply with SEC requirements. c. To encourage interactive and constructive group dialogue and idea exchange. d. To pass information up to top-level management efficiently.

c. To encourage interactive and constructive group dialogue and idea exchange.

What is the primary objective of the independent auditor's report on financial statements? a. To assist the board in evaluating management's effectiveness. b. To report on all instances of fraud. c. To give credibility to management's prepared financial statements. d. To attest to the credit-worthiness of the client.

c. To give credibility to management's prepared financial statements.

Under AICPA code of professional conduct, which of the following is required to be independent when performing professional responsibilities? a) A CPA not in public practice b) A CPA in public practice providing tax and management advisory services c) All CPAs d) A CPA in public practice providing auditing and other attestation services

d) A CPA in public practice providing auditing and other attestation services

Please identify the accounts receivable customer population that would be more appropriate to use negative confirmations: a) A retail truck and trailer sales company that has a high level of inherent risk and moderate level of control risk over the revenue cycle b) A utility company with control risk over the revenue cycle assessed high c) A mortgage banking company with excellent risk over the purchasing cycle d) A cable company with control risk over the revenue cycle assessed low

d) A cable company with control risk over the revenue cycle assessed low

Identify the most reliable audit evidence: a) A comparison of beginning and ending retained earnings b) A scanning of trial balances c) An inquiry of client personnel d) A recalculation of bad debt expense

d) A recalculation of bad debt expense

To assess the reliability and relevance of information provided by a management's specialist, the auditor should consider the following factor: a) Competence, capabilities, and objectivity of that specialist b) Work performed by that specialist c) Appropriateness of that specialist's work as audit evidence for the relevant assertion d) All of the above

d) All of the above

Which of the following options are guidelines for common brainstorming sessions? a) Participants are free to express opinions b) Communication among participations should be respectful c) There should be no criticism d) All of the above

d) All of the above

Which of the following is NOT a management's estimate that requires significant auditor judgement and skepticism? a) Obligations for pension plans b) Valuation of goodwill c) Allowance for bad debt d) Common stock and related additional paid in capital

d) Common stock and related additional paid in capital

What is the determinant of the appropriateness and sufficiency of audit evidence? a) The client's risk of material misstatement b) The risk of material weakness in internal controls c) The tone at the top d) Either A or B

d) Either A or B

All of the following questions are relevant for an auditor's analysis of opportunities to commit fraud except: a) Does the company conduct background checks and credit checks on employees with access to cash? b) Is cash physically available to employees? c) Is cash physically available to employees? d) Is there insufficient segregation of duties related to the revenue cycle?

d) Is there insufficient segregation of duties related to the revenue cycle?

In the audit planning stage, an auditor is most likely to: a) Obtain written representations from management that there are no unrecorded transactions b) Confirm a sample of the entity's accounts payable with known creditors c) Communicate management's initial selection of accounting policies to the audit committee d) Make a preliminary judgement about materiality

d) Make a preliminary judgement about materiality

Firms have credit approval policies to achieve which of the following? a) Determining policies of revenue recognition b) Ensuring customer satisfaction c) Preventing lapping by the accounts receivable department d) Minimizing credit losses

d) Minimizing credit losses

An auditor may provide an audit client any of the following non-audit services without impairing independence except: a) Non-audit services with revenues in aggregate of less that 5% of the total revenues paid by the issuer to the auditor during the fiscal year in which the non-audit services are provided b) Services that the issuer did not recognize as non-audit services at the engagement c) Non-audit services that were promptly brought to the attention of, and approved by, the audit committees prior to the completion of the audit d) Non-audit services to perform financial information system design and implementations

d) Non-audit services to perform financial information system design and implementations

Which of the following ultimately influence the sufficiency and appropriateness of audit evidence? a) Professional requirements b) Professional experience c) Professional standards d) Professional judgement

d) Professional judgement

Which of the following is the most rigorous test of controls? a) Inquiry b) Observation c) Inspection of documentation d) Reperformance

d) Reperformance

Please identify the proper control to detect unusual sales transactions that are recorded in the general ledger: a) Electronic authorization prior to posting b) Use of sequentially numbered sales documents c) Random statements to customers d) Review of transactions by upper management or the board

d) Review of transactions by upper management or the board

Which of the following must exist before a company can recognize revenue from the sale of a product? a) Cash is realized on the sale of the product b) A price is discussed based upon the customer's resale of the product c) The customer is given the option to return the product at any time d) Th product is transferred to the customer

d) Th product is transferred to the customer

Identify the most probable reason for the lack of reliability of external documentation: a) The external party ma be competent in performing duties b) The documentation may be properly understood by the clint in the response c) The author may decide not to use the documentation and replace it with other documents d) The documentation may have been altered if the process is not controlled from inception

d) The documentation may have been altered if the process is not controlled from inception

Which of the following is a COSO principle associated with the information and communication of COSO's internal control framework? a) The firm demonstrates a commitment to integrity and ethical values b) The firm holds individuals accountable for their internal control responsibilities in the pursuit of objectives c) The firm identifies and assesses changes that could significantly impact the system of internal control d) The firm obtains or generates and uses relevant, quality information to support the function of internal control

d) The firm obtains or generates and uses relevant, quality information to support the function of internal control

If the auditor uses 1% level of detection risk, please select the option below: a) The level of audit risk is low, and the level of detection risk is high b) The level of detection risk is high, and the level of audit risk is high c) The level of detection risk is low, and the level of audit risk is high d) The level of detection risk is low, and the level of audit risk is low

d) The level of detection risk is low, and the level of audit risk is low

Please choose the correct statement relating to the risk of material misstatement: a) There is an increase in the risk of material misstatement arises because of the misapplication of audit procedures b) The auditor can change and control the risk of material misstatement c) The risk of material misstatement is assessed at only the financial statement level d) The risk of material misstatement originates with the audit client

d) The risk of material misstatement originates with the audit client

Please identify the primary objective of an external auditor's report on financial statements a) To report on all instances of fraud b) To assist the board in evaluating management's effectiveness c) To attest to the credit worthiness of the client d) To give credibility to management's prepared financial statements

d) To give credibility to management's prepared financial statements

The purpose of an auditor taking samples to test internal controls is: a) To conclude whether the financial statements are materially misstated b) To conclude that the risk of incorrect acceptance is too high c) To conclude whether the materiality for planning purposes is at a sufficiently low level d) To test whether the controls are operating effectively

d) To test whether the controls are operating effectively

The procedure of auditors determining the reasonableness of the cost of sales through the comparison of the gross margin in the current year and the prior year is called: a) test of details b) test of controls c) test of transactions d) analytical procedures

d) analytical procedures

If an auditor set risk at 5% (rather than 1%), the audit will: a) obtain more appropriate evidence from substantive procedures b) not need to perform substantive tests c) not change the level of substantive testing d) obtain less appropriate evidence from substantive procedures

d) obtain less appropriate evidence from substantive procedures

Tracing recorded sales to invoices, sales orders, and shipping documents is used to test: a) Cutoff b) Completeness c) Legality d) occurrence

d) occurrence

Which of the following evidences delivery of product to customers sufficient for company recording as revenues? a. A check received from the customer. b. An agreement to purchase product signed by the customer. c. A pick ticket in the warehouse. d. A bill of lading and tracking number with the shipper.

d. A bill of lading and tracking number with the shipper.

Which of the following is not a common incentive for fraudulent financial reporting? a. Debt covenants. b. Management compensation schemes. c. Pending retirement option expirations. d. A new car to be purchased solely with sufficient personal funds.

d. A new car to be purchased solely with sufficient personal funds.

Which of the following is not a change included in PCAOB's new reporting standard AS 3101? a. Specific mention of comprehensive income and notes to the financial statements. b. An affirmative statement that the audit firm is registered with the PCAOB. c. A new disclosure that includes the year in which the audit firm began serving consecutively as the client's auditor. d. A new report title, "Report of Independent Registered Public Accounting Firm."

d. A new report title, "Report of Independent Registered Public Accounting Firm."

Which of the following is not a management assertion relevant to inventory? a. Completeness. b. Existence or occurrence. c. Rights and obligations. d. Accuracy

d. Accuracy

Which one of the following is a decision the auditor makes when using attributes sampling? a. The sampling unit. b. Period covered by testing. c. Completeness of the population. d. All of the above are auditor decisions.

d. All of the above are auditor decisions.

Which of the following factors is not an inherent risk related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, effective controls, and professional judgment. d. All of the above are inherent risk factors

d. All of the above are inherent risk factors

Which of the following statements is true regarding audit reporting? a. The auditor should provide an opinion based on the audit evidence obtained. b. Auditing standards require auditors to provide positive assurance. c. The auditor's opinion should state whether the financial statements are presented fairly. d. All of the above statements are true.

d. All of the above statements are true.

A method used by companies to fraudulently inflate revenues includes which of the following? a. Use of hidden "side letters" giving the customer an irrevocable right to return the product. b. Recording of fictitious sales. c. Shipment of product not ordered by customers. d. All of the above.

d. All of the above.

Which of the following are limitations of using the MUS sampling method? a. MUS is not very useful in testing for understatement. b. MUS is not very useful in testing for zero and negative amounts. c. MUS is not very useful in testing if the auditor expects numerous misstatements. d. All of the above.

d. All of the above.

Which of the following is a driver of audit quality? a. Audit firm culture. b. Engagement team skills and attributes. c. Factors outside control of auditors. d. All of the above.

d. All of the above.

In a financial statement audit, what controls will an auditor test? a. The risk of material misstatement. b. Both entity-wide and transaction controls for testing. c. Risks associated with significant accounts, disclosures, and relevant assertions. d. All of these are controls an auditor will test

d. All of these are controls an auditor will test

Which of the following represent possible audit documentation? a. The record of audit procedures performed (example: analyses prepared by the client or auditor). b. A memorandum of understanding (example: summary of findings). c. Correspondence (including email) concerning significant findings or issues (example: checklists). d. All of these are examples of audit documentation

d. All of these are examples of audit documentation

Which of these is not a factor that influences the reliability of data used in planning analytical procedures in the revenue cycle? a. The source of the data and the nature of information available about the data. b. The comparability of the data. c. The controls over the preparation of the data. d. All of these are factors that influence the reliability of this data

d. All of these are factors that influence the reliability of this data

Which of the following is not a principle associated with the information and communication component of internal control? a. The organization obtains or generates and uses relevant, quality information to support the functioning of internal control. b. The organization communicates with external parties regarding matters affecting the functioning of internal control. c. The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control. d. All of these are principles associated with the information and communication component of internal control.

d. All of these are principles associated with the information and communication component of internal control.

How can ratio analysis and industry comparisons help the auditor plan the audit? a. Both types of analyses may identify areas where the auditor needs to give special audit attention. b. This information helps the auditor determine the nature, timing, and extent of planned audit procedures. c. This analysis forces the auditor to understand the "bigger picture" of the operations of the client, and helps put into context other audit findings. d. All of these correctly describe how ratio analysis and industry comparisons help the auditor plan the audit.

d. All of these correctly describe how ratio analysis and industry comparisons help the auditor plan the audit.

Which of these statements is correct regarding internal and external documentation? a. All things being equal, external documentary evidence is considered more reliable than internally generated evidence. b. External documentary evidence is generally more reliable when provided by independent, knowledgeable external parties. c. Examples of external documentation are original vendor invoices that are in the client's possession and confirmations sent directly to the auditors by third parties. Internal documentary evidence can be very reliable when it is developed within a strong internal control environment. d. All of these statements are correct

d. All of these statements are correct

Which of the following statements is true of the tolerable rate of deviation? a. It is a rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set is not exceeded by the actual rate of deviation in the population. b. This term is sometimes referred to as the tolerable failure rate. c. The auditor's tolerable rate of deviation is the level at which the control's failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor's planned assessment of control risk in performing tests of account balances. d. All of these statements are true.

d. All of these statements are true.

Which of the following statements is true regarding the PCAOB? a. The PCAOB is a nonprofit corporation, not an agency of the U.S. government. b. The PCAOB will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to the interests of investors and the public. c. The PCAOB has authority to set standards related to public company audit reports and to conduct inspections of registered external audit firms. d. All of these. e. None of these

d. All of these.

Which of the following statements is true? a. Unless an independent audit can provide reasonable assurance that financial information has not been materially misstated because of fraud, it has little, if any, value to society. b. Repeated revelations of accounting scandals and audit failures related to undetected frauds have seriously damaged public confidence in external auditors. c. A strong ethical tone at the top of an organization that permeates corporate culture is essential in mitigating the risk of fraud. d. All of these. e. None of these

d. All of these.

Assume a client is using commercial accounting software to keep its books. Which type of entry to the retained earnings account would most likely cause an auditor to determine if the entry was made in accordance with relevant accounting standards? a. An entry related to net income or loss. b. An entry related to dividends c. Accounting software is already properly aligned to relevant accounting standards. d. An entry related to a correction of a prior period error.

d. An entry related to a correction of a prior period error.

Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper? a. Sales invoice. b. Receiving report. c. Purchase order. d. Bill of lading

d. Bill of lading

When performing planning analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B.

d. Both A and B.

Who are the users of the financial statements? a. Management. b. Auditors. c. Taxing Authorities. d. Both A and C

d. Both A and C

Reducing the risk of understated payables can be accomplished by focusing on which assertion? a. Presentation and disclosure. b. Rights. c. Existence. d. Completeness

d. Completeness

Which of the following types of audit evidence generally is the most reliable? a. Inquiries made of management. b. Analytical procedures. c. Review of prior-year audit procedures. d. Confirmation of account information.

d. Confirmation of account information.

Which of the following is not part of the control environment? a. Management philosophy and operating style. b. Methods of assigning authority and responsibility. c. Personnel policies and practices. d. Control activities.

d. Control activities.

To exercise due professional care, an auditor should: a. Design the audit to detect all instances of illegal acts. b. Attain the proper balance of professional experience and formal education. c. Examine all available corroborating evidence supporting management's assertions. d. Critically review the judgment exercised by those assisting in the audit.

d. Critically review the judgment exercised by those assisting in the audit.

Which of the following is not an inherent risk typically associated with recording debt transactions? a. Interest expense not being properly recorded. b. Failure to accrue interest expense. c. Debt not being properly classified. d. Debt not being properly authorized.

d. Debt not being properly authorized.

Which of these is not a true statement with regard to asset impairment? a. Much of the inherent risk associated with long-lived assets relates to management estimates, such as estimating useful lives and residual values and determining whether asset impairment has occurred. b. Management normally does not have any incentive to identify and write down assets. c. Sometimes management wants to write down every potentially impaired asset to its minimum realizable value. d. Disclosures related to asset impairment require management to obtain a verifiable statement of expected economic value.

d. Disclosures related to asset impairment require management to obtain a verifiable statement of expected economic value.

. Which of the following is NOT an example of fraud in the acquisition and payment cycle? a. Theft of inventory by employees. b. Inventory shrinkage. c. Large manual adjustments to inventory accounts. d. Excess inventory because of a production slowdown.

d. Excess inventory because of a production slowdown.

An auditor determines that there is an inherent risk that dividends may be recorded and paid before being declared. This determination is most likely tied to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence.

d. Existence.

Which of these is not a common control for petty cash? a. Limiting access to petty cash funds. b. Requiring receipts for all petty cash disbursements. c. Reconciling the petty cash fund before replenishing it. d. Having internal audit conduct regular audits of the petty cash fund

d. Having internal audit conduct regular audits of the petty cash fund

Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased. Which of the following would be of greatest concern to the auditor? a. Inappropriate depreciation calculation for new equipment. b. Inappropriate book value of new equipment. c. Impaired value of new equipment. d. Impaired value of old equipment.

d. Impaired value of old equipment.

What is the nature of the relationship between risk of material misstatement and audit risk? a. Direct. b. None. c. Correlational. d. Inverse.

d. Inverse.

In management's assessment of controls, a sample revealed that there was no required approval to procure material. For about 62% of a company's procured materials, 17% had no authorization. The reason given: The lack of approval was the rush to procure material in a timely fashion to meet a contract requirement. If these unauthorized procurements have a material balance, all of the following are possible deficiencies, except: a. It may be an exposed major departure from the approved process. b. Some of those purchases could be shipped elsewhere (like an employee's secondary business.) c. It could lead to inferior products or potential obsolescence. d. It may lead to incorrect cash balances

d. It may lead to incorrect cash balances

. Which of the following would not be included as part of the documentation related to the substantive procedures for marketable securities? a. A schedule of marketable securities prepared by the client. b. Reports of any outside valuation experts. c. Calculation of any potential impairments. d. Policies over purchase or sale of marketable securities.

d. Policies over purchase or sale of marketable securities.

Which of the following creates an opportunity for fraud to be committed in an organization? a. Management demands financial success. b. Management is aggressive in its application of accounting rules. c. Commitments tied to debt covenants. d. Poor internal control

d. Poor internal control

When determining sampling size in attribute sampling, which of the following is usually true? a. Sampling risk will be too high. b. Tolerable misstatement amount is determined. c. A failure rate is not to be expected. d. Population size is not a major factor.

d. Population size is not a major factor.

According to the standards of the profession, which of the following activities would most likely not impair a CPA's independence? a. Accepting a luxurious gift from a client. b. Signing a client's checks in emergency situations. c. Contracting with a client to supervise the client's office personnel. d. Providing extensive advisory services for a client.

d. Providing extensive advisory services for a client.

What must audit firms do to perform financial statement audits for public companies? a. Register with the American Institute of Certified Public Accountants. b. Register with the Institute of Internal Auditors. c. Register with the U.S. General Accounting Office. d. Register with the Public Company Accounting Oversight Board.

d. Register with the Public Company Accounting Oversight Board.

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger? a. Electronic authorization prior to posting. b. Use of sequentially numbered sales documents. c. Random statements to customers. d. Review of transactions by upper management or the board.

d. Review of transactions by upper management or the board.

Which statement is false regarding the use of sampling and data analytics tools by auditors? a. Auditors use sampling in testing controls. b. Sampling techniques would be appropriate when an auditor wants to perform procedures such as examining documents, reperforming calculations, or sending confirmations. c. Auditors use sampling in testing account balances and assertions. d. Sampling involves looking at all of the transactions that occurred during the period under audit.

d. Sampling involves looking at all of the transactions that occurred during the period under audit.

Which of the following processes are not included in the revenue cycle? a. Obtaining credit approval. b. Preparing and sending monthly statements to customers. c. Shipping products to customers. d. Sending payments to suppliers

d. Sending payments to suppliers

Which of the following statements is false about the testing selection by auditors? a. The auditor usually chooses a test that is independent of that of management. b. The auditor usually selects some items that were not tested by management. c. The auditor may choose to rely on the work completed by management and thus reduce the external auditor's own testing. d. The auditor usually chooses the same test items as management.

d. The auditor usually chooses the same test items as management.

The cash account is significant to the auditor for which of the following reasons? a. The cash account is not as susceptible to fraud as most other accounts. b. Automated systems do not possess the capability to maintain strong internal controls over cash. c. Cash is the only account that provides opportunity for fraud. d. The cash account balance is the culmination of a large volume of transactions.

d. The cash account balance is the culmination of a large volume of transactions.

Who is most often involved in perpetrating fraudulent financial reporting? a. The shareholders and the chief operating officer. b. The treasurer and the board of directors. c. The auditors and the attorneys. d. The chief executive and chief financial officer.

d. The chief executive and chief financial officer.

Which of the following is not one of the underlying principles of an effective control environment as developed by COSO? a. The organization demonstrates a commitment to integrity and ethical values. b. The board of directors demonstrates independence from management and exercises oversight for the development and performance of internal control. c. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in pursuit of objectives. d. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

d. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

Which of the following correctly defines nonsampling risk? a. The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective (also referred to as the risk of assessing control risk too high). b. The risk that the auditor's conclusion based on a sample might be different from the conclusion he or she would reach if the test were applied in the same way to the entire population. c. The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective (also referred to as the risk of assessing control risk too low). d. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

d. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

Which of the following is a reason why an auditor needs an understanding of internal controls? a. To provide individual comments on internal control non-compliance. b. To become comfortable that the client will pay its audit bills. c. To assess materiality. d. To assess the risk of possible misstatements in the financial statements.

d. To assess the risk of possible misstatements in the financial statements.

Which of these is not a reason why management might decide to fraudulently overstate revenue? a. To be able to negotiate a higher price in a merger. b. To achieve bonuses or stock options tied to revenue. c. Bankruptcy is imminent. d. To discourage investors from investing in the company

d. To discourage investors from investing in the company

Which of these is not a substantive procedure for auditing leases? a. Develop a schedule of future lease obligations or verify that the client's schedule matches the underlying lease agreements. b. Review the client's disclosure of lease obligations for consistency with GAAP. c. Obtain and read copies of lease agreements and develop a schedule of leases. d. Verify that the client has recorded the assets and lease obligations at their appropriate value.

d. Verify that the client has recorded the assets and lease obligations at their appropriate value.

The tour of the manufacturing plant may best assist the auditor in determining which of the following? a. Whether all purchases are authorized. b. Management's strategy for assessing impairment. c. Estimates of depreciation expense. d. Whether any machinery is inoperative in the production cycle

d. Whether any machinery is inoperative in the production cycle

Which of the following is/are the public's expectations for auditors? a) Understand and enforce principles that best portray the spirit of FASB concepts b) Be neutral to preparers and users of financial information c) Recognize that the investing public is the primary user of audit services d) Take responsibility for the discovery of fraud e) All of the above are expectations of the public

e) All of the above are expectations of the public

Which of these is not a principle representing the fundamental concepts of the control environment component? a. The organization demonstrates a commitment to integrity and relevant values. b. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives. c. The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives. d. The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control. e. All of these are principles representing the fundamental concepts of the control environment component.

e. All of these are principles representing the fundamental concepts of the control environment component.

Which of these is not a procedure an audit firm performs in making a decision to accept a potential client? a. Review regulatory filings and inquire of management about any internal control deficiencies. b. Analyze client and industry financial statements to assess the possibility of business failure. c. Inquire of client and audit firm personnel whether there are any potential independence-impairing relationships. d. Assess the background and experience of the potential client's accounting personnel. e. All of these are procedures an audit firm performs in making a decision to accept a potential client?

e. All of these are procedures an audit firm performs in making a decision to accept a potential client?

Which of these describes the audit procedure(s) to be performed to test the client's bank reconciliation at year-end for a customer note collected by the bank? a. Confirm directly with the bank b. Trace to cash disbursements journal; inquire of client as to the reason for the delay; trace items to a bank cutoff statement c. Trace cash receipts to cash journal; inquire of client as to the reason for the delay; trace items to a bank cutoff statement d. Agree balance on reconciliation with the amount recorded on the client's general ledger e. Inspect documentation related to the bank's credit memo

e. Inspect documentation related to the bank's credit memo