Audit Exam 3 Chapter Practice

gross margin percentage

(Revenue - COGS) / Revenue

The aggregated misstatement in the financial statements is made up of:

1. factual misstatements, 2. judgemental misstatements, & 3. projected misstatements

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company? Multiple Choice A consistency modification. An adverse opinion. A qualified opinion. Part of the audit has been performed by component auditors.

A consistency modification. A consistency modification results in an emphasis-of-matter paragraph. Qualified and adverse opinions include a basis for modification paragraph. When a report refers to component auditors no additional paragraph is added.

Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report? Multiple Choice The company is a component of a larger business enterprise. An unusually important significant event. A decision not to confirm accounts receivable. A risk or uncertainty.

A decision not to confirm accounts receivable. An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. An emphasis-of-matter paragraph is not appropriate since confirming accounts receivable relates to the scope of the audit.

In which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee? Multiple Choice A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing. A fee is to be established at a later date by the Bankruptcy Court. A fee is based upon the nature of the engagement rather than upon the actual time spent on the engagement. A fee is based on the fee charged by the client's former auditors.

A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing. A fee for audit clients which is dependent upon the results achieved by the CPA's efforts is a contingent fee and is prohibited for audit clients by the Contingent Fees Rule.

Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct? Multiple Choice An individual assigned to the attest engagement. A partner in the office of the partner in charge of the attest engagement. A manager who is in charge of providing tax services to the attest client. A partner in the national office of the firm that performs marketing services.

A partner in the national office of the firm that performs marketing services. A partner in the national office of the firm that performs marketing services is not considered a covered member as it is unlikely that this partner will be in a position to influence the attest engagement. Individuals assigned to the attest engagement, all partners in the office, and a manager who provides tax services to the client are all included as covered members.

Which of the following is an internal control weakness related to factory equipment? Multiple Choice Checks issued in payment of purchases of equipment are not signed by the controller. All purchases of factory equipment are required to be made by the department in need of the equipment. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. Proceeds from sales of fully depreciated equipment are credited to other income

All purchases of factory equipment are required to be made by the department in need of the equipment. The purchase of factory equipment should be made by the purchasing department regardless of which unit of the company will use the equipment. The purchasing department has the expertise and the established procedures and documents to ensure that all purchases are made in accordance with company policy.

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is: Multiple Choice An unmodified opinion. A disclaimer of opinion. An "except for" opinion. An improper type of reporting.

An improper type of reporting. This phrase does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the standard opinion paragraph, but is not forceful enough to constitute qualifying language.

The auditors' report should be dated as of the date the: Multiple Choice Report is delivered to the client. Auditors have accumulated sufficient appropriate evidence. Fiscal period under audit ends. Peer review of the working papers is completed.

Auditors have accumulated sufficient appropriate evidence. The audit report should be dated no earlier than when the auditors have accumulated sufficient appropriate evidence. This date is often the last day of fieldwork.

Auditors usually send confirmations to obtain evidence about accounts receivable and accounts payable. Required: b. Are accounts receivable requests, accounts payable requests, or both mailed by the auditors (as opposed to client personnel)?

Both forms of confirmation requests should be mailed by the auditors to ensure that such requests are not tampered with by client personnel.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? Multiple Choice Capitalization. Financing. Investing. Operations.

Capitalization. The three sections of a statement of cash flows relate to operations, financing, and investing. Capitalization is not one of the sections.

Ordinarily, the most significant assertion relating to accounts payable is: Multiple Choice Completeness. Existence. Presentation. Valuation.

Completeness. Because an understatement of liabilities overstates income, auditors are ordinarily most concerned with the completeness assertion for payables. Note, however, that in circumstances in which a client may be motivated to understate income (e.g., to minimize taxes), existence becomes a bigger concern.

Auditors usually send confirmations to obtain evidence about accounts receivable and accounts payable. Required: a. Is confirmation presumptively required for accounts receivable, accounts payable, or both?

Confirmation of accounts receivable is presumptively required, while confirmation of accounts payable is not.

In an audit, the valuation of year-end accounts payable is most likely addressed by: Multiple Choice Confirmation. Examination of cash disbursements immediately prior to year-end. Examination of cash disbursements immediately subsequent to year-end. Analytical procedures applied to vouchers payable at year-end.

Confirmation. The best procedure to determine valuation of payables is confirmation. Examination of cash disbursements in the subsequent period is more directed towards completeness of payables. Analytical procedures may be useful but would not be as effective as confirmation with respect to the valuation assertion.

e. On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.

Consider Disclosure. The sale of bonds or capital stock after the balance sheet date does not relate to conditions existing at the balance sheet date. However, such an event usually is significant enough that it should be disclosed to prevent the financial statements from being misleading.

e. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.

Consider disclosure. No adjustment is necessary as this is considered to have occurred subsequent to year-end—a Type 2 subsequent event that does not require an adjusting entry as of year-end. Also, as indicated in Part 2, analysts' reports are not ordinarily disclosed.

c. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.

Consider disclosure. No adjustment is necessary as this occurred after year-end and thus is a Type 2 subsequent event and, accordingly, does not require an adjusting entry as of year-end. Also, as indicated in Part 2, the reduced sales are unlikely to be disclosed.

Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related: Multiple Choice Deed. Canceled checks. Closing statement. Interest expense.

Deed.

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: Multiple Choice Notify the board of directors that the auditor's report must no longer be associated with the financial statements. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. Issue revised pro forma financial statements taking into consideration the newly discovered information.

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. When the auditor becomes aware of facts existing at the report date that would have affected the report, s/he should next determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. If such persons are believed to exist, the next step is to determine the best manner in which to disclose the information.

An audit report for a public client indicates that the FINANCIAL STATEMENTS were prepared in conformity with: Multiple Choice Generally accepted auditing standards (United States). Standards of the Public Company Accounting Oversight Board (United States). Generally accepted accounting principles (United States). Generally accepted accounting principles (Public Company Accounting Oversight Board).

Generally accepted accounting principles (United States). An audit report for a public client indicates that the financial statements are presented in conformity with generally accepted accounting principles (United States). The PCAOB does not issue accounting standards.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: Multiple Choice Authorized members of the audit committee. Accounting department. Individual who signs the checks. Chief executive officer.

Individual who signs the checks. The individual who signs the checks should ordinarily be provided with supporting documents that provide support for the disbursement. That individual should then manually or electronically "cancel" the documents so that the amount isn't paid a second time.

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: Multiple Choice Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. Not in accordance with generally accepted auditing standards. A qualification that lessens the collective responsibility of both CPA firms. An example of a dual opinion requiring the signatures of both auditors.

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.

Which of the following procedures is least likely to be completed before the balance sheet date? Multiple Choice Confirmation of receivables. Search for unrecorded liabilities. Observation of inventory. Review of internal accounting control over cash disbursements.

Search for unrecorded liabilities. Because a significant portion of the search for unrecorded liabilities deals with transactions recorded after year-end, it is least likely to be completed before the balance sheet date.

Which of the following is implied when a CPA signs the preparer's declaration on a federal income tax return? Multiple Choice The return is not misleading based on all information of which the CPA has knowledge. The return is prepared in accordance with generally accepted accounting principles. The CPA has audited the return. The CPA maintained an impartial mental attitude while preparing the return.

The return is not misleading based on all information of which the CPA has knowledge. The declaration requires the preparer to acknowledge that the return is "true, correct, and complete...based on all information of which the preparer has any knowledge."

When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions?

Unmodified with emphasis-of-matter, NOT qualified. Substantial doubt about a client's ability to continue as a going concern results in either an unqualified report with explanatory language (or, less frequently, a disclaimer of opinion). A qualified report is not appropriate.

The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.

Unmodified—standard. When no reference is made to the component auditors a standard unmodified report is issued.

A material departure from generally accepted accounting principles will result in auditor consideration of: Multiple Choice Whether to issue an adverse opinion rather than a disclaimer of opinion. Whether to issue a disclaimer of opinion rather than a qualified opinion. Whether to issue an adverse opinion rather than a qualified opinion. Nothing, because none of these opinions is applicable to this type of exception.

Whether to issue an adverse opinion rather than a qualified opinion. When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.

The audit of intangible assets typically involves: a. vouching the cost of assets and testing allocation methods b. vouching the cost of assets only c. testing the allocation methods only d. None of the above

a. vouching the cost of assets and testing allocation methods The audit of intangible assets typically involves both vouching the cost of assets and testing the allocation of that cost.

Depending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.

c. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off. e. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry. The key here is that Type 1 subsequent events, if material, result in adjustments to the financial statements and Type 2 subsequent events are disclosed in the financial statement notes if the statements would otherwise be misleading. Those less directly related to accounting matters ordinarily are less likely to be disclosed in the financial statements. Accordingly, (c) and (e) are least likely to be disclosed because they relate less directly to the the accounting matters in the financial statements than the other choices.

During an audit engagement, Robert Wong, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments. What are the audit procedures Wong should follow with respect to the existence of loss contingencies arising from litigation, claims, or assessments? Do not discuss reporting requirements.

(1) Inquire of and discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. (2) Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet being reported on, and during the period from the balance sheet date to the date the information is furnished, including an identification of those matters referred to legal counsel. Wong also would obtain assurances from management, ordinarily in the form of a representation letter, that they have disclosed all such matters required to be disclosed by generally accepted accounting principles (FASB ASC 450). (3) Examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. (4) Obtain assurance from management, ordinarily in the form of a client representation letter, that it has disclosed all unasserted claims that the lawyer has identified as probable of assertion that must be disclosed in accordance with generally accepted accounting principles (FASB ASC 450). In addition, the auditor, with the client's permission, should inform the lawyer that the client has given the auditor this assurance. This client representation may be communicated by the client in the inquiry letter or by the auditor in a separate letter. The auditor also should request the client's management to send a letter of inquiry to those lawyers with whom it consulted concerning litigation, claims, and assessments.Examples of other procedures undertaken for different purposes that might also disclose litigation, claims, and assessments are the following: (a) Reading minutes of stockholders', directors', and appropriate committee meetings held during and subsequent to the period being examined. (b) Reading contracts, loan agreements, leases, and correspondence from taxing or other governmental agencies. (c) Reviewing correspondence with financial institution regarding guarantees and accommodation endorsements. (d) Inspecting other documents for possible guarantees by the client.

The auditor's opinion on the fairness of financial statements may be affected by subsequent events. Required: a. Define what is commonly referred to in auditing as a subsequent event, and describe the two general types of subsequent events.

A "subsequent event" is an event or transaction that occurs subsequent to the balance sheet date, but prior to the issuance of the auditor's report. The subsequent event may have a material effect on the financial statements and therefore may require adjustments to or disclosure in, the financial statements. The first type of subsequent event includes those events that provide additional evidence with respect to conditions that existed at the balance sheet date and affect the estimates inherent in the process of preparing financial statements. This type of subsequent event requires that the financial statements be adjusted for any changes in estimates resulting from of such additional information. The second type of subsequent events includes those events that provide evidence with respect to conditions coming into existence after the balance sheet date. These events should not result in adjustment to the financial statements, but may be of such a nature to require disclosure to prevent the financial statements from being misleading.

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule may preclude a CPA from responding to an inquiry made by: Multiple Choice An investigative body of a state CPA society. The trial board of the AICPA. A CPA-shareholder of the client corporation. An AICPA quality review body.

A CPA-shareholder of the client corporation. CPAs in public practice are prohibited from disclosing confidential information without the consent of the client, except in certain specified circumstances. Answers (1), (2), and (4) are three of the circumstances in which disclosure of information is permitted.

A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances? Multiple Choice A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. A manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm. An attest client owes the firm fees for this and last year's annual engagements. A covered member's dependent son owns stock in an attest client.

A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. An auditor's independence would not be considered to be impaired with respect to a financial institution in which the auditor maintains a checking account which is fully insured.

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? Multiple Choice A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. Relatively few transactions occur in property, plant, and equipment during the year. The assets involved with property, plant, and equipment ordinarily have relatively longer lives. Property, plant, and equipment accounts typically have a higher dollar value.

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. A property, plant and equipment cutoff error has less of an effect, not more, on net income. This is because the only effect on income is the small amount of depreciation involved.

Assume that a continuing audit client has recorded Accounts Receivable and Equipment both in the amount of $1,000,000. In a typical audit, which account would take more time to audit?

Accounts receivable will ordinarily require more audit time because the account will have turned over multiple times during the year and the year-end total will be composed of different transactions (ordinarily current year sales for which collection has not been made yet) as compared to the beginning of the year balance. Ordinarily the equipment account will turn over slowly and the auditors will only need to verify acquisitions during the year and retirements, as contrasted to the entire balance.

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? Multiple Choice Accumulated depreciation. Cost of goods sold. Purchase returns and allowances. Purchase discounts.

Accumulated depreciation. Because the proper recording of a retirement requires elimination of the accumulated depreciation related to the retired equipment, review of this account is most likely to provide evidence about a recorded retirement.

In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items: a. January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.

Adjustment. The additional liability for the ore shipment would be handled by adjusting the financial statement amounts for purchases, ending raw material inventory, and accounts payable by the amount of the additional charge, $36,256. The adjustment reflects the fact that this is considered a Type 1 subsequent event in that the mineral content level of the shipment existed at the date of the financial statements.

b. On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.

Adjustment. Flowmeter's liability for the accident came into existence in March of 20X3 when the accident occurred. The reason that the liability had not been accrued in the accounts as of December 31, was merely that no reasonable estimate could be made of the dollar amount. The settlement of the litigation provides additional information permitting a reasonable estimate of the amount of the liability. Therefore, this additional information should be used to adjust the financial statements.

d. On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.

Adjustment. The condition is considered to have been in effect as of December 31, 20X3. Therefore an adjusting entry is appropriate. This area of the standards is a little difficult, and in some circumstances subjective. The argument for adjustment is that the fact that the customer's financial condition had been "degenerating over recent years" indicates that the condition was in effect prior to year-end. Related, this is used as an example of a Type 1 subsequent event in the professional standards.

In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28, 20X4, may affect the company's financial statements. a. On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.

Adjustment. The receipt of the shipment of raw materials by Flowmeter on January 3 provides additional evidence with respect to conditions that existed at the December 31 balance sheet date. The raw materials in transit at year end with terms of FOB shipping point were the property of Flowmeter. Consequently, the financial statements should be adjusted to take into account this new information becoming available after the balance sheet date. The adjustment consists of an increase in inventories and the recording of a related liability.

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

Adverse, not Qualified. When a misstatement is pervasive, an adverse opinion is appropriate.

The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.

Adverse. Because the auditor does not concur with the change it is a departure from GAAP. Because the amount is material and pervasive, an adverse opinion is appropriate.

Which of the following is not prohibited by the AICPA Code of Professional Conduct? Multiple Choice Advertising in newspapers. Payment of commission to obtain an audit client. Acceptance of a contingent fee for a review of financial statements. Engaging in discriminatory employment practices.

Advertising in newspapers. Advertising in newspapers is an acceptable practice. The other three options are all prohibited by the Code of Professional Conduct.

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: Multiple Choice An emphasis-of-matter paragraph to the auditors' report. A footnote to the financial statements. The body of the financial statements. The "summary of significant accounting policies" section of the financial statements.

An emphasis-of-matter paragraph to the auditors' report. The auditor communicates through the auditors' report. Note that the client will include a discussion of the related party transactions in a note to the financial statements.

Auditors usually send confirmations to obtain evidence about accounts receivable and accounts payable. Required: c. Which assertion do confirmation results most directly address—existence or completeness?

Confirmations most directly address existence in that they are sent to recorded accounts. They less directly address completeness since accounts may exist of which the auditor may be completely unaware, and therefore, not confirm.

d. On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.

Consider Disclosure. Losses attributable to floods occurring after the balance sheet date do not provide evidence as to conditions existing at the balance sheet date; thus, the financial statements should not be adjusted. However, disclosure of the damage caused by the flood is necessary to prevent the financial statements from being misleading.

b. January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.

Consider Disclosure. No adjustment is necessary. The details of the agreement to purchase the treasurer's stock would be disclosed in a note because the use of company cash for the repurchase of stock and the change in the amount of stock held by stockholders might have a significant impact on subsequent years' financial statements. Usually, a management change, such as the treasurer's resignation, does not require disclosure in the financial statements. The details underlying the separation (personal disagreements and divorce) ordinarily are not disclosed because they are personal matters. Also, the agreement concerning the purchase of the stock occurred after the date of the financial statements, thus making no journal entry necessary.

c. On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.

Consider Disclosure. The purchase of a new business does not provide evidence with respect to conditions existing at the balance sheet date; thus, it is not necessary to adjust the financial statements. However, such an event would usually be of such importance that its disclosure would be required to keep the financial statements from being misleading. If the acquisition is significant enough, the auditor should consider requesting the client to supplement the primary financial statements with pro-forma statements indicating the financial results if the two firms had been consolidated for the year ended December 31, 20X3.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: Multiple Choice Express an opinion that is qualified due to the inability of the client company to continue as a going concern. Evaluate management's performance in causing this decline. Require note disclosure. Consider the possibility of a misstatement in the financial statements.

Consider the possibility of a misstatement in the financial statements. The purpose of analytical procedures is to locate potential misstatements in the financial statements. The auditors should investigate this significant fluctuation to determine whether it results from a financial statement misstatement.

Which of the following is most likely to be considered a Type 1 subsequent event? Multiple Choice A business combination completed after year-end, but for which negotiations began prior to year-end. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago. Customer checks deposited prior to year-end but determined to be uncollectible after year-end. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

Customer checks deposited prior to year-end but determined to be uncollectible after year-end. A Type 1 subsequent event relates to a condition that came into effect before year-end; Type 1 subsequent events result in an adjusting journal entry. In this situation, the customer's check may be assumed to have been uncollectible at year-end, and therefore it would be considered to be a Type 1 subsequent event. The other three replies refer to events most ordinarily considered to be Type 2 events—the events came into existence after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: Multiple Choice Day the audit report is issued. End of the client's year. Date of the auditors' report. Date the report is filed with the SEC.

Date of the auditors' report. The search for unrecorded liabilities should be completed as of the last day possible—ordinarily near the date of the audit report.

An audit of the balance in the accounts payable account is ordinarily not designed to: Multiple Choice Detect accounts payable that are substantially past due. Verify that accounts payable were properly authorized. Ascertain the reasonableness of recorded liabilities. Determine that all existing liabilities at the balance sheet date have been recorded

Detect accounts payable that are substantially past due. The auditors do not have as an objective the determination of whether accounts payable are past due.

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive

Disclaimer. Because the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive, a disclaimer is appropriate.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? Multiple Choice Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. Examine unusual relationships between monthly accounts payable balances and recorded purchases. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. Examine selected cash disbursements in the period subsequent to year-end.

Examine selected cash disbursements in the period subsequent to year-end. Examining selected cash disbursements in the period subsequent to the year-end is the best audit procedure for determining the existence of unrecorded liabilities. All liabilities must eventually be paid, and will therefore be reflected in the accounts when paid if not when incurred. By close study of payments made subsequent to the balance sheet date, the auditors may find items that should have appeared in the balance sheet.

The auditors may conclude that depreciation charges are insufficient by noting: Multiple Choice Insured values greatly in excess of book values. Large amounts of fully depreciated assets. Continuous trade-ins of relatively new assets. Excessive recurring losses on assets retired.

Excessive recurring losses on assets retired. Excessive recurring losses on assets retired show that the depreciation expense recognized during the actual useful lives of the assets has been less than the real cost of using the assets.

The auditors are most likely to seek information from the plant manager with respect to the: Multiple Choice Adequacy of the provision for uncollectible accounts. Appropriateness of physical inventory observation procedures. Existence of obsolete machinery. Deferral of procurement of certain necessary insurance coverage.

Existence of obsolete machinery. The plant manager would be the most appropriate individual for inquiries about the existence of machinery that is no longer useable.

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to? Multiple Choice Existence. Completeness. Rights. Valuation.

Existence.

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test? Multiple Choice Completeness. Existence. Valuation. Rights.

Existence. Vouching from the purchases journal to the supporting documents provides evidence with respect to the existence assertion for purchases.

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: Multiple Choice December 31, 20X8. January 17, 20X9. February 10, 20X9. February 16, 20X9.

February 10, 20X9. The representation letter should be dated as of the date the audit was completed.

Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a publicly held company. During the course of the audit, Barber discovered that DGF has been making illegal bribes to foreign government officials to obtain business, and he reported the matter to senior management and the board of directors of DGF. Required: b. Describe Barber's appropriate response if management and the board of directors fail to take appropriate remedial action.

If management and the board of directors fail to take appropriate remedial action, the Private Securities Reform Act of 1995 requires auditor communication outside of the entity when the failure to take appropriate remedial action is reasonably expected to warrant a departure from a standard audit report or auditor resignation. In those circumstances, the auditors must, as soon as practicable, communicate their conclusions directly to the client's board of directors. Within one day, the management of the client must send a notification to the Securities and Exchange Commission of having received such a communication from the auditors, and a copy of the notification should be sent to the auditors. If the auditors do not receive the copy within a one-day period, they have one day to directly communicate the matter to the Securities and Exchange Commission.

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: Multiple Choice Increase in insurance coverage. Inspection of equipment and reconciliation with accounting records. Verification of liens, pledges, and collateralizations. Accounting for work orders.

Inspection of equipment and reconciliation with accounting records. Inspection of equipment and the reconciliation of the equipment with accounting records will strengthen internal control over custody of the equipment.

Which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees? Multiple Choice Jones performs consulting services for a percentage of the client's savings; these are the only services provided for the client. Jones names his firm Jones and Smith, CPAs. Jones advertises the services he provides in an Internet set of telephone "yellow pages." Jones, without client consent, makes available working papers for purposes of a peer review of his practice.

Jones names his firm Jones and Smith, CPAs. The Form of Organization and Name Rule requires that a firm practice under a firm name that is misleading. In this situation the name is misleading since it appears that Jones' firm is a partnership.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): Multiple Choice Analytical process. Loss contingency. Probable loss. Unasserted claim.

Loss contingency. A loss contingency is a possible loss stemming from past events that will be resolved in the future.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? Multiple Choice Examine human resources records for accuracy and completeness. Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. Make a surprise observation of the company's regular distribution of paychecks on a test basis. Visit the working areas and verify that employees exist by examining their badge or identification numbers.

Make a surprise observation of the company's regular distribution of paychecks on a test basis. The best procedure for the detection of a fictitious employee is a surprise observation of the distribution of paychecks. The fictitious employee's paycheck will ordinarily not be picked up, and further audit procedures performed by the auditors may reveal that this is a fictitious employee.

Which of the following procedures is most likely to be included near completion of an audit? Multiple Choice Obtaining an understanding of internal control. Confirmation of receivables. Observation of inventory. Performing analytical procedures.

Performing analytical procedures. The performance of analytical procedures is a required part near completion of the audit and is therefore most likely to be included in that stage of the audit.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? Multiple Choice The estimated remaining useful lives of plant assets were revised upward. Plant assets were retired during the year. The prior year's depreciation expense was erroneously understated. Overhead allocations were revised at year-end.

Plant assets were retired during the year.

Which of the following nonattest services may be performed by the auditors of a public company? Multiple Choice Internal audit outsourcing. Tax planning for all company officers. Bookkeeping services. Preparation of the company's tax return.

Preparation of the company's tax return. Auditors may currently prepare the company's tax return. The Sarbanes-Oxley Act as implemented by the PCAOB prohibits internal audit outsourcing, performing tax planning for the company's officers, and performing bookkeeping services.

A search for overstated property, plant, and equipment purchases would most likely include: Multiple Choice Accounts receivable. Property, plant, and equipment. Purchase discounts. Repairs and maintenance expense.

Property, plant, and equipment.

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? Multiple Choice Accumulated depreciation. Insurance expense. Property, plant, and equipment. Purchase returns and allowances.

Purchase returns and allowances.

A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions?

Qualified, NOT unmodified with emphasis-of-matter. When an unjustified change in accounting principles occurs, either a qualified or adverse opinion is appropriate as this represents a departure from generally accepted accounting principles. An adverse opinion is appropriate, but not a disclaimer of opinion.

The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements.

Qualified. A lack of disclosure leads to either a qualified opinion or an adverse opinion. Since the effect is material, but not pervasive, a qualified opinion is appropriate.

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: Multiple Choice Receiving report and the purchase order. Receiving report and the voucher. Vendor's packing slip and the purchase order. Vendor's packing slip and the voucher.

Receiving report and the purchase order. Each vendor's invoice should be compared with the receiving report (to determine that it was received) and the purchase order (to determine that it was ordered). (2) Receiving report and the voucher is incomplete because of the omission of the purchase order. (3) Vendor's packing slip and the purchase order and (4) Vendor's packing slip and the voucher are incorrect because the receiving report, prepared by the company itself, provides better evidence of what has been received than the vendor's packing slip.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? Multiple Choice Footing the purchases journal. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. Tracing totals from the purchases journal to the ledger accounts. Sending written quarterly confirmation to all vendors.

Reconciling vendors' monthly statements with subsidiary payable ledger accounts. The most efficient way in which the duplicate recording of a purchase transaction may be detected is by reconciling the related payable accounts with vendors' statements.

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? Multiple Choice Depreciation. Accounts Payable. Cash. Repairs.

Repairs. In recording expenditures on property, plant, and equipment, the logical choice usually is between a revenue expenditure and a capital expenditure. If the outlay is judged to be a revenue expenditure (rightly or wrongly), it will probably be recorded in the Repairs and Maintenance account. If items that should be capitalized are erroneously charged to Repairs and Maintenance, the result will be an understatement of property, plant, and equipment. Consequently, the auditors can gain evidence that additions to property, plant, and equipment are not understated by reviewing the Repairs and Maintenance account. The other alternatives suggested in the question are not plausible. An erroneous debit to cash would be disclosed quickly because of the disagreement between cash receipts and the cash being deposited daily in the bank. A debit to Accounts Payable would lead to protests from creditors. A debit to Depreciation Expense would be a conspicuous error because of the timing of the entry and the lack of a related credit to Accumulated Depreciation.

An effective procedure for identifying unrecorded retirements of equipment is to: Multiple Choice Foot related property records. Recalculate depreciation on the related equipment. Select items of equipment in the accounting records and then locate them in the plant. Select items of equipment and then locate them in the accounting records.

Select items of equipment in the accounting records and then locate them in the plant. An inability to locate assets may reveal to the auditors that unrecorded retirements have occurred.

When confirming accounts payable, the approach is most likely to be one of: Multiple Choice Selecting the accounts with the largest balances at year-end, plus a sample of other accounts. Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. Selecting a random sample of accounts payable at year-end. Confirming all accounts.

Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. Accounts payable confirmations are ordinarily sent to suppliers with whom the client has done the most business. This is because the largest potential for an understatement may exist due to the client having established high levels of credit. A sample of other accounts will ordinarily also be selected.

The least likely approach in auditing management's estimate relating to an accrued liability is to: Multiple Choice Independently develop an estimate of the amount to compare to management's estimate. Review and test management's process of developing the estimate. Review subsequent events or transactions bearing on the estimate. Send confirmations relating to the estimate.

Send confirmations relating to the estimate. Auditors audit estimates through (1) independently developing an estimate, (2) reviewing management's process, and (3) reviewing subsequent events. There often is no one to send a confirmation related to the estimate.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? Multiple Choice A business combination. Early retirement of bonds payable. Settlement of litigation. Plant closure due to a strike.

Settlement of litigation. The settlement of litigation is most likely to result in an adjusting entry (i.e., be a "Type 1 subsequent event) because the cause of the litigation most likely occurred before 20X2.

An audit report for a public client indicates that the AUDIT was performed in accordance with: Multiple Choice Generally accepted auditing standards (United States). Standards of the Public Company Accounting Oversight Board (United States). Generally accepted accounting principles (United States). Generally accepted accounting principles (Public Company Accounting Oversight Board)

Standards of the Public Company Accounting Oversight Board (United States). An audit report of a public client indicates that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board (United States).

The Compliance with Standards Rule requires CPAs to adhere to all of the following applicable standards, except: Multiple Choice Statements on Standards for Consulting Services. Statements on Auditing Standards. Statements on Standards for Attestation Engagements. Statements on Responsibilities for Assurance Services.

Statements on Responsibilities for Assurance Services. No Statements on Responsibilities in Assurance Services exist.

Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do? Multiple Choice Disclaim an opinion. Issue an adverse opinion. Suggest that Kelly Company engage another CPA to perform the audit. Rely on the competence of client personnel.

Suggest that Kelly Company engage another CPA to perform the audit. The General Standards Rule prohibits a public accounting firm from accepting an engagement that the firm is not competent to perform. If technical competence problems develop during the engagement, the CPAs should advise the client and withdraw from the engagement.

Which of the following is not an overall test of the annual provision for depreciation expense? Multiple Choice Compare rates used in the current year with those used in prior years. Test computation of depreciation provisions for a representative number of units. Test deductions from accumulated depreciation for assets purchased during the year. Perform analytical procedures.

Test deductions from accumulated depreciation for assets purchased during the year. Assets purchased during the year should not result in deductions from the accumulated depreciation account.

Which of the following is least likely to be considered a substantive procedure relating to payroll? Multiple Choice Investigate fluctuations in salaries, wages, and commissions. Test computations of compensation under profit sharing for bonus plans. Test commission earnings. Test whether employee time reports are approved by supervisors.

Test whether employee time reports are approved by supervisors. Testing whether employee time reports are approved by supervisors is an example of a test of a control, not a substantive procedure.

The auditor's opinion on the fairness of financial statements may be affected by subsequent events. Required: b. Identify those auditing procedures that the auditor should apply at or near the completion of fieldwork to disclose significant subsequent events.

The specific auditing procedures that the auditors should apply at or near the completion of field work to disclose subsequent events include: (1) Review the latest available interim financial statements. (2) Review the minutes of stockholders', directors', and appropriate committees' meetings through the date of the audit report. (3) Make inquiries of appropriate client officials. (4) Obtain a letter from the client's attorney describing any pending litigation, unasserted claims, or other loss contingencies. (5) Obtain a letter of representations from the client concerning subsequent events. This letter should be dated as of the date of the audit report.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: Multiple Choice This is a duplication of cutoff tests. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. There is likely to be other reliable external evidence available to support the balances.

There is likely to be other reliable external evidence available to support the balances. Auditors will usually find in the client's possession externally created evidence such as vendors' invoices and statements that substantiate the accounts payable. No such external evidence is on hand to support accounts receivable.

In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions? Multiple Choice Maintaining custody of the client's securities. Training client employees. Supervising client employees. Acting as the third approver of large client expenditures.

Training client employees. A CPA may help train client employees for an attest client. The Code of Professional Conduct prohibits maintaining custody of client assets, supervising client employees, and authorizing transactions.

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: Multiple Choice All transactions resulting in the ending balance. Tests of controls over disposals. Transactions that occurred during the year. Performing analytical procedures on beginning balances of the accounts.

Transactions that occurred during the year. Ordinarily, the emphasis for testing property accounts is on transactions that occurred during the year because the account turns over so slowly. Note, however, that audits performed under PCAOB AS 2110 also require consideration of internal control over property, plant and equipment.

The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets.

Unmodified—with an emphasis-of-matter paragraph. Since the auditor concurs that the change is desirable, an unmodified opinion with an emphasis-of-matter paragraph is appropriate.

Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics? Multiple Choice Performance of work with honesty, diligence, and responsibility. Prudence in the use and protection of information acquired in the course of their duties. Use of appropriate sampling methods to select areas for audit. Continual improvement in proficiency and effectiveness and the quality of services provided

Use of appropriate sampling methods to select areas for audit. The IIA Code of Ethics does not directly address the use of sampling methods.

To assure accountability for fixed-asset retirements, management should implement an internal control that includes: Multiple Choice Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. Utilization of serially numbered retirement work orders. Periodic observation of plant assets by the internal auditors.

Utilization of serially numbered retirement work orders. Serially numbered retirement work orders provide a systematic means of assuring that units of plant and equipment are not retired without authorization by management. Retirement work orders also provide the accounting department with the information necessary to record the retirement of equipment in the accounting records. The alternative procedures suggested are not satisfactory. Some retirements of plant asset do not involve cash receipts. The inquiries and observations by internal auditors would come after the fact of asset retirements.

Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a publicly held company. During the course of the audit, Barber discovered that DGF has been making illegal bribes to foreign government officials to obtain business, and he reported the matter to senior management and the board of directors of DGF. Required: a. If management and the board of directors take appropriate remedial action, should Barber be required to report the matter outside the company?

When management and the board of directors take appropriate remedial action, the CPA is not required to report the matter outside the company.