ACTG 135: Midterm

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

a) Hill, the successor auditor

Which of the following statements concerning illegal acts by clients is correct? a) an auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud b) an audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements c) an auditor considers illegal acts from the perspective of the reliability of management's representations rather than their d) an auditor has no responsibility for illegal acts that have an indirect effect on the financial statements

a) an auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud

When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the a) extent of substantive tests of details b) level of inherent risk c) extent of tests of controls d) level of detection risk

a) extent of substantive tests of details

The purpose of tests of controls is to determine that a) internal control policies and procedures are functioning as prescribed b) substantive procedures can be eliminated c) errors and irregularities are prevented or detected in a timely manner d) the auditor has an understanding of internal controls

a) internal control policies and procedures are functioning as prescribed

After obtaining an understanding of the internal controls and assessing control risk, an auditor decided to perform tests of controls. The auditor most likely decided that a) it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests b) additional evidence to support a further reduction in control risk is not available c) an increase in the assessed level of control risk is justified for certain financial statement assertions d) there were many internal control weaknesses that could allow errors to enter the accounting system

a) it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests

Before accepting an engagement to audit a new client, an auditor is required to a) make inquiries of the predecessor auditor after obtaining the consent of the prospective client b) obtain the prospective client's signature to the engagement letter c) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan d) discuss the management representation letter with prospective client's audit committee

a) make inquiries of the predecessor auditor after obtaining the consent of the prospective client

When auditors do not mention consistency in the auditors' report, a reader of the financial statements may infer a) that GAAP have been consistently observed in the current period in relation to the preceding period b) that no material departure from GAAP has been detected c) that no reclassification of items or change in classifications has occurred d) nothing about application of accounting principles within the period

a) that GAAP have been consistently observed in the current period in relation to the preceding period

Control risk is a) the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures b) the probability that a material misstatement could occur and not be detected by auditors' procedures c) the risk that auditors will not be able to complete the audit on a timely basis d) the risk that auditors will not properly control the staff on the audit engagement

a) the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure a) reflects management's philosophy and operating style b) affects management's financial statement assertions c) provides adequate safeguards over access to assets d) enhances management's decision making process

b) affects management's financial statement assertions

Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? a) auditors would be required to rely on external (rather than internal) forms of evidence b) auditors would be required to perform procedures at interim periods, rather than at year end c) auditors would be required to confirm a larger number of customer accounts receivable balances d) auditors would be required to obtain more evidence through direct personal observation

b) auditors would be required to perform procedures at interim periods, rather than at year end

Which of the following procedures would an auditor most likely perform in planning a financial statement audit a) inquiring of the client's legal counsel concerning pending litigation b) comparing the financial statements to anticipated results c) examining computer-generated exception reports to verify the effectiveness of internal controls d) searching for unauthorized transactions that may aid in detecting unrecorded liabilities

b) comparing the financial statements to anticipated results

ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. Select the assertion that is most likely being tested. The auditor reviewed the shipping documents to ensure that all product included in the sales revenue to XYZ had been shipped a) occurrence b) completeness c) cutoff d) accuracy e) classification

b) completeness

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of a) presentation b) completeness c) rights d) existence

b) completeness

Which of the following components of the audit risk model is most closely associated with attribute sampling a) audit risk b) control risk c) detection risk d) inherent risk

b) control risk

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (SAS 99) is on: a) employee misappropriation of assets b) management fraud c) client fraud on customers d) employee embezzlement

b) management fraud

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit? a) performing test of details of transactions and balances b) reviewing prior year audit documentation and the permanent file for the client c) reading specialized industry journals d) reevaluation the client's internal control environment

b) reviewing prior year audit documentation and the permanent file for the client

Auditor's reporting decisions on financial statements depend primarily on the a)four standards of reporting b) sufficiency and appropriateness of evidence c) application of GAAP d) integrity of management

b) sufficiency and appropriateness of evidence

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if a) the illegal act is a violation of generally accepted accounting principles b) the client does not take the remedial action that the auditor considers necessary c) the illegal act was committed during a prior year that was not audited d) the auditor has already assessed control risk at the maximum level

b) the client does not take the remedial action that the auditor considers necessary

Which of the following best describes the main reason independent auditors report on management's financial statements? a) management fraud may exist, and it is likely to be detected by independent auditors b) the management that prepares the statements and the persons who use the statements may have conflicting interests c) misstated account balances may be corrected as a result of the independent audit work d) the management that prepares the statements may have a poorly designed system of internal control

b) the management that prepares the statements and the persons who use the statements may have conflicting interests

ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. Select the assertion that is most likely being tested. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been properly billed. a) occurrence b) completeness c) cutoff d) accuracy e) classification

d) accuracy

In testing the existence assertion, an auditor ordinarily works from the a) financial statements to the potentially unrecorded items b) potentially unrecorded items to the financial statements c) accounting records to the supporting evidence d) supporting evidence to the accounting records

c) accounting records to the supporting evidence

ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. Select the assertion that is most likely being tested. The auditor reviewed the shipping documents to check the date that product was shipped to XYZ Company a) occurrence b) completeness c) cutoff d) accuracy e) classification

c) cutoff

Analytical procedures used in planning an audit should focus on a) reducing the scope of tests of controls and substantive tests b) providing assurance that potential material misstatements will be identified c) enhancing the auditor's understanding of the client's business d) assessing the adequacy of the available evidential matter

c) enhancing the auditor's understanding of the client's business

Which of the following is a step in an auditor's decision to assess control risk at below the maximum? a) apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls b) perform tests of details of transactions and account balances to identify potential errors and fraud c) identify specific internal control policies and procedures that are likely to detect or prevent material misstatements d) document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing

c) identify specific internal control policies and procedures that are likely to detect or prevent material misstatements

When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements: a) perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness b) determine whether the company's control policies are designed well enough to prevent material errors c) prepare auditing working papers documenting the understanding of the company's internal control d) design procedures to search for significant deficiencies in the actual operation of the company's internal control

c) prepare auditing working papers documenting the understanding of the company's internal control

Regardless of the assessed level of control risk, an auditor of a non public company would perform some a) tests of controls to determine the effectiveness of internal control policies b) analytical procedures to verify the design of internal control procedures c) substantive tests to restrict detection risk for significant transaction classes d) dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk

c) substantive tests to restrict detection risk for significant transaction classes

Which of the following is not an attestation standard? a) the practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report b) the practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement c) the practitioner must adequately plan the work and must properly supervise any assistants d) a sufficient understanding of the client's internal controls shall be obtained to plan the engagement

d) a sufficient understanding of the client's internal controls shall be obtained to plan the engagement

Which of the following presumptions is correct about the reliability of audit evidence? a) information obtained indirectly from outside sources is the most reliable form of audit evidence b) to be reliable, audit evidence should be convincing rather than persuasive c) reliability of audit evidence refers to the amount of corroborative evidence obtained d) an effective system of internal control provides more assurance about the reliability of audit evidence

d) an effective system of internal control provides more assurance about the reliability of audit evidence

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the a) timing of audit procedures b) cost-benefit of gathering techniques c) selected audit techniques d) financial statement assertions

d) financial statement assertions

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the a) timing of audit procedures b) cost-benefit of gathering techniques c) selected audit techniques d) financial statement assertions

d) financial statement assertions

Inherent risks and control risk differ from detection risk in that inherent risk and control risk are a) elements of audit risk whereas detection risk is not b) changed at the auditor's discretion whereas detection risk is not c) considered at the individual account balance level whereas detection risk is not d) functions of the client and its environment whereas detection risk is not

d) functions of the client and its environment whereas detection risk is not

Which of the following procedures would provide the most reliable audit evidence? a) inquiries of the client's internal audit staff held in private b) inspection of prenumbered client purchase orders filled in the vouchers payable department c) analytical procedures performed by the auditors on the client's trial balance d) inspection of bank statements obtained directly from the client's financial institution

d) inspection of bank statements obtained directly from the client's financial institution

Experience has shown that the many large fraudulent transactions (e.g., WorldCom) can be found in: a) systematic processing of large volumes of day-to-day ordinary transactions b) payroll fraudsters' mistakes in using unissued Social Security numbers c) petty cash embezzlements d) nonroutine, nonsystematic journal entries

d) nonroutine, nonsystematic journal entries

As part of understanding the internal control, an auditor is not required to a) consider factors that affect the risk of material misstatement b) ascertain whether internal control policies and procedures have been placed in operation c) identify the types of potential misstatements that can occur d) obtain knowledge about the operating effectiveness of the client's internal control procedures

d) obtain knowledge about the operating effectiveness of the client's internal control procedures

Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should a) reduce audit risk by lowering the preliminary levels of materiality b) design special substantive tests to compensate for the lack of industry experience c) engage financial experts familiar with the nature of the industry d) obtain knowledge of matters that relate to the nature of the entity's business

d) obtain knowledge of matters that relate to the nature of the entity's business

The role of the Public Company Accounting Oversight Board (PCAOB) is to oversee the a) issuance of statements by the Financial Accounting Standards Board b) preparation and grading of the Uniform CPA Examination c) peer review of member firms of the Private Companies Practice Section d) regulation of firms that audit entities registered with the SEC

d) regulation of firms that audit entities registered with the SEC

If the auditor were interested in ensuring that all sales have been recorded, the population would be defined as a) entries in the cash receipts journal b) entries in the general journal c) remittance advices d) shipping documents

d) shipping documents

Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the ASB balance assertion of a) completeness b) existence c) presentation d) valuation e) rights and obligations

d) valuation