Audit Final Review
Which of the following is the primary source for evidence to corroborate the existence of pending litigation?
Attorney confirmations
MUS is based on which of the following?
Attributes sampling.
The written record that forms the basis for the auditor's conclusions is referred to as what?
Audit Documentation
What are tests of controls?
Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for
Authorizing payroll rate changes for all employees.
When a threat to independence arises that is not specifically considered in the Code of Professional Conduct an auditor should consider
Available safeguards to independence
An auditor most likely would express an unmodified opinion and would not add an emphasis-of-matter or other-matter paragraph to the report if the auditor
Believes that there is a remote likelihood of a material loss resulting from an uncertainty.
After obtaining an understanding of an entity's internal control structure, an auditor may assess control risk at the maximum level for some assertions because the auditor
Believes the internal control policies and procedures are unlikely to be effective.
During the recording sales function, which of the following are the auditor's major concerns regarding billing of customers?
Billing for all shipments Billing only for actual shipments Billing at authorized prices
Which of the following statements, extracted from a client's lawyer's letter concerning litigation, claims, and assessments, would be most likely to cause the auditor to request clarification?
"We believe that the action can be settled for less than the damages claimed."
The audit report represents the _______
"end product" of the financial statement audit
The audit firm must retain the audit file of a public company client for:
7 years
When an entity has more than one class of employee, it is important to evaluate the reasonableness of payroll based on employee class. Which of the following procedures is commonly used to test this?
Calculate average payroll cost per employee classification
An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all
Canceled checks
An auditor would be most likely to limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting
Cash receipts and accounts receivable.
Which of the following statements is true?
A CPA firm as an entity is prohibited from the same activities as a covered member of the firm.
Which two of the following are involved in recording cash disbursements?
Check or electronic funds transfer Cash disbursements journal
In vouching revenue transactions, the auditor selects a sample of sales invoices to vouch to the supporting source documents in order to provide evidence pertaining to four assertions. Which ones are these (choose two options)?
Classification and cutoff Occurrence and accuracy
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?
Communicate the matter to those charged with governance.
In auditing long-term bonds payable, an auditor most likely would
Compare interest expense with the bond payable amount for reasonableness.
Auditors should carefully consider which of the following assertions for loss contingencies?
Completeness
An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions?
Completeness.
Which of the following is an example of a subsequent event?
A bond issuance after the balance sheet date but prior to issuance of the financial statements.
Which of the following best describes the independence requirements for a close relative of a covered member?
A close relative cannot hold a key position with an audit client.
Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?
A distinguishing mark of a profession is its acceptance of responsibility to the public
Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession?
A fee paid to the client's tax accountant for recommending a computer system to the client.
What is a credit memo?
A form stating the particulars of a credit to accounts receivable, including the specific items returned, prices, and amount credited to a customer's account.
Which of the following would require the auditor to increase the level of control testing for a particular control?
A high degree of reliance is to be placed on the control to limit the amount of substantive testing required.
For which of the following companies would the auditor have the least concern about the existence of inventory?
A hotel.
Which of the following is an example of a modified opinion?
A qualified opinion.
If the auditor encounters a material scope limitation and cannot obtain sufficient appropriate audit evidence regarding the fair presentation of the financial statements, what type of report would be issued?
A qualified or disclaimer of opinion.
Which of the following best illustrates the concept of sampling risk?
A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
Under the AICPA ethics rules on independence, which of the following individuals would not be a covered member?
A tax partner in another office who provides 9 hours of tax services to the audit client.
Which of the following situations could most likely lead to an embezzlement scheme?
Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.
The auditor is studying a ratio of accounts payable turnover in days. Which of the following indicates a potential risk of unrecorded liabilities?
Accounts payable turnover in days decreased from 28 days to 15 days from year one to year two.
What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate?
Accounts receivable aging schedule.
Audit documentation should contain which of the following?
All of the options.
The processes used by management in developing estimates include which of the following?
All of the options.
An example of an incentive or pressure that increases the risk of fraud is:
All of these answer choices are correct.
An external confirmation sent to a bank:
All of these answer choices are correct.
At the outset of substantive testing, the auditor needs to _______.
All of these answer choices are correct.
It is important for an auditor to understand a public company's system of internal control in order to:
All of these answer choices are correct.
Substantive tests of property, plant and equipment often focus on _______.
All of these answer choices are correct.
When performing ADA as a risk assessment procedure, a notable item:
All of these answer choices describe notable items.
Audit data analytics can be used _______.
All these answer choices are correct.
Holding all other factors constant, which of the following factors results in an increase in sample size for substantive tests?
An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.
As a control for the assertion of cutoff of cash receipts, a daily exception report is generated for which of the following?
Any cash receipts recorded in the incorrect time period
Two determinants of the persuasiveness of evidence include which of the following?
Appropriateness and sufficiency
Examples of inquiries of management regarding subsequent events include which three of the following? (Select all that apply.)
Are there any plans to issue new shares or debt instruments (debentures)? Have sales occurred or are planned that may affect the carrying value or classification of assets? Has the company entered into new commitments, borrowings, or guarantees?
An auditor decided to confirm accounts payable to accomplish a low level of detection risk for the completeness assertion. Which of the following is the most reasonable sampling plan?
Confirm accounts payable with an emphasis on all vendors including zero and small balances.
During the audit the independent auditor identified the existence of a weakness in the client's internal control and communicated this finding in writing to the client's senior management and those charged with governance. The auditor should
Consider the effects of the condition on the audit.
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:
Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to
Corroborate information regarding deposit and loan balances.
How are components of the audit risk model rearranged to solve for detection risk?
DR = AR ÷ RMM
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the
Debit memo.
An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following?
Directional testing for existence.
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should:
Disclaim an opinion on the financial statements.
An auditor's principal objective in analyzing repairs and maintenance expense accounts is to
Discover expenditures that were expensed, but should have been capitalized.
Directional testing involves testing transactions or balances for which type of error?
Either overstatement or understatement.
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that
Employees work the number of hours for which they are paid.
The phrase "generally accepted accounting principles" is an accounting term that
Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
Which three of the following are involved in the purchasing cycle?
Establishing payment terms Selecting vendors Purchasing goods
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the
Estimate of the total likely misstatement is less than a material amount.
Walk-throughs provide evidence that helps auditors to
Evaluate design effectiveness of controls.
A client's materials-purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to
Evaluate the reliability of information generated as a result of the purchasing process.
Which one of the following would be the least reliable type of evidence?
Evidence from an easily overridden information system.
If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated?
Existence.
In the audit of inventory, selecting inventory items from a perpetual master file, going to the locations, and obtaining test counts is intended to produce evidence for which audit assertion?
Existence.
Which of the following is not an item the auditor needs to determine in designing sampling for substantive testing?
Expected deviation rate.
Thomas, CPA, has examined the consolidated financial statements of Kass Corporation. Jones, CPA, has examined the financial statements of the sole subsidiary which is material in relation to the total examined by Thomas. It would be appropriate for Thomas to serve as the group engagement partner, but it is impractical for Thomas to review the work of Jones. Assuming an unmodified opinion is expressed by Jones, one would expect Thomas to
Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to
Extend auditing procedures.
Which is generally the most reliable form of evidence?
Externally generated evidence sent directly to the auditor.
A debit memo is a form stating the particulars of a credit to accounts receivable, including the specific items returned, prices, and amount credited to a customer's account.
False
A legal representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
False
A shortening of inventory turnover days may indicate existence or valuation problems.
False
AS 1301 specifies that only critical accounting policies and practices must be communicated to the audit committee.
False
An example of a Type II subsequent event would be the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date
False
An immaterial misstatement occurs when the client departs from the applicable financial reporting framework.
False
Analytical procedures are an optional part of every audit as part of audit planning.
False
Auditors of public companies can perform an integrated audit, which means performing the financial statement audit and the audit of the effectiveness of the internal control over financial reporting (ICFR) at the same time.
False
In a compilation engagement, the CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.
False
Management often has more incentives to understate revenues than to overstate revenues.
False
Monetary unit sampling (MUS) is designed to test whether there is an acceptable risk of account balance understatement.
False
Most auditors plan to test controls in the revenue cycle because of the relatively low volume of routine transactions in this cycle.
False
One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable,
False
Positive accounts receivable confirmation should be used on all accounts which represent small immaterial balances.
False
Simple random sampling, systematic sampling, and block sampling are acceptable sample selection methods for statistical sampling:
False
The cash receipts function, which includes the process of receipts from cash and credit sales, involves the following subfunctions: (1) disbursing cash, (2) depositing cash, and (3) recording the receipts.
False
The more judgement that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed.
False
The most efficient method of testing a large population is the use on nonstatistical sampling
False
If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor's potential fraud risk assessments?
If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor's potential fraud risk assessments?
When sending positive confirmations, which of the following would not be an appropriate way to address nonresponse by a customer?
If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary.
Which of the following is NOT an example of a loss contingency?
Income tax disputes
Which three of the following are included in common inherent limitation in internal control? (Select all that apply.)
Ineffective understanding of the purpose of a control Human error that results in a breakdown in internal control Collusion by two or more individuals to circumvent a control
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would
Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
Inspect the shipping records documenting the merchandise sold to the debtors.
Which of the following would be least likely to help you assess the integrity of management?
Interviews with human resources about its long-term disability provider.
Which of the following would represent the best evidence for testing the net realizable value of inventory?
Investigate sales prices on the sale of inventory made after year-end.
In testing controls over cash disbursements, an auditor would be most likely to determine that the person who signs checks also
Is responsible for mailing the checks.
Which of the following is a Type II subsequent event?
Loss of plant as a result of fire or flood after year-end.
Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit?
Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when
Management is dominated by one individual who is also a shareholder.
Wilson, CPA, completed the field work of the audit of Abco's December 31, Year 1, financial statements on March 6, Year 2, at which time Wilson believed that sufficient appropriate audit evidence had been obtained to support the auditor's opinion. However, a subsequent event requiring adjustment to the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson's attention on April 24, Year 2, which preceded the issuance of the audit report on Abco's Year 1 financial statements. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated
March 6, Year 2.
Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?
Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.
Analytical procedures during risk assessment of a going concern _______.
May identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations
Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?
New convertible bonds are issued to expand the company's product line.
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
Not refer to the change in the auditor's report.
When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the
Number of shares issued and outstanding.
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor will be most likely to test the procedures by
Observation and inquiry.
In determining the effectiveness of an entity's controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and
Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant and equipment?
Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.
Accounting software starts with the population of payroll disbursements and develops a one-for-one match with underlying approved hours worked. A report is generated each pay period disclosing any payroll that is not supported by hours worked. The employee number is also compared with the approved master payroll file. A report is generated listing any transactions that are not supported by underlying documents or files. This is a description of a control over which of the following assertions for the payroll process?
Occurrence of payroll
Which of the following is a direct financial interest?
One owned directly by the covered member (even if managed by others)
A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position?
One year.
MUS is designed to test for which of the following?
Overstatements.
At the warehouse, when goods are pulled from inventory, which of the following is normally produced to detail the items that will be shipped to the customer and the quantity of each item shipped?
Packing slip
Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if
Partial payments to vendors are continuously made in the ordinary course of business.
A client just read about a business paying extraordinary sums of money to a variety of employees. How would the client company use an IT application control to prevent this type of valuation problem?
Perform a limit test related to the class of employee.
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?
Plant assets were retired during the current year.
Immediately upon receipt of cash, a responsible employee should
Prepare a remittance listing.
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?
Prepare a schedule of bank transfers from the client's books.
On receiving a client's bank cut-off statement, an auditor most likely would trace
Prior-year checks listed in the cut-off statement to the year-end outstanding checklist.
Which of the following is/are essential to the proper statement of cash at the balance sheet date?
Proper cutoff of cash receipts and cash disbursements at the end of the year
Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at Judd's wholesale prices. Jackson was probably able to accomplish this because of Judd's poor internal control over
Purchase orders.
An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?
Qualified and disclaimer.
Appropriateness of evidence is a measure of which of the following?
Quality of evidence.
Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments?
Read the file of correspondence from taxing authorities.
Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit?
Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified
Which audit procedure is being used when an auditor checks the calculations in a client-prepared spreadsheet?
Recalculation.
Which three of the following are steps involved in controlling activities in an Evaluated Receipts Settlement (ERS) system?
Recording payables Initiating an ERS transaction Receiving goods
During which of the following functions is the auditor primarily concerned that sales invoices are recorded accurately and in the proper period?
Recording sales
Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?
Reduction of the frequency of data entry errors.
Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?
Releasing financial information to a local bank with the approval of the client's mail clerk
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably
Request that the client schedule the physical inventory count at the end of the year.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their time cards.
A letter issued regarding significant deficiencies relating to an entity's internal control observed during an audit of financial statements should include a
Restriction on the distribution of the report.
Which of the following industries would have the greatest concerns about purchases cutoff at month end, unrecorded liabilities, and accounting for advertising allowances provided by vendors?
Retail grocer.
Which three of the following analytical procedures are commonly used to audit long term debt? (Several choices may be correct.)
Return on common equity Interest bearing debt to total assets Shareholders' equity to total assets
Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?
Review of transactions by upper management or the board.
Which of the following procedures is best for identifying unrecorded trade accounts payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the
Risk that material misstatements exist in the financial statements.
To which of the following tests is the determination of FOB destination and FOB shipping point critical?
Sales cutoff test
An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of collection problem in accounts receivable?
Sales grew by 5% and receivables grew by 17% from year one to year two.
Which of the following provides the basis for recording a sale in the sales journal?
Sales invoice
While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record
Sales returns.
In an audit of financial statements, risks related to a high rate of return of products sold include which of the following?
Sales that are recorded improperly.
The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:
Securities and Exchange Commission.
Which of the following internal control procedures would most likely deter lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger.
An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?
Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks
Which of the following are indicators of possible management bias? (Select all that apply.)
Selecting an estimate that indicates a pattern of optimism or pessimism. Changes in the method of making the accounting estimate that are based on subjective assumptions. Selecting or developing significant assumptions that yield an estimate more favorable for management's objectives.
Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following?
Significant revenue issues associated with bundling products and services.
What audit procedures are designed to detect material misstatements at the assertion level?
Substantive procedures
Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?
Supporting records that should be readily available are frequently not produced when requested.
Vouching of transactions deals with which of the following?
Testing backward
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?
Testing the entity's computation of standard overhead rates
Which of the following situations increases the risk of fraud due to "lapping?"
The accounts receivable clerk also has responsibilities for receiving cash.
If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following is the CPA's best defense?
The auditor followed GAAS
When a plaintiff is suing the auditor for damages under Rule 10(b)-5 of the 1934 Securities Act, which of the following is not part of the plaintiff's burden of proof?
The auditor was negligent.
What two factors lead to the development of an overall strategy?
The auditor's determination of materiality and audit risk
Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?
The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.
Which of the following statements concerning a compilation of specific elements, accounts, or items of a financial statement is correct
The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.
Which of the following audit assertions is least likely to be accomplished by vouching payroll transactions to supporting documentation (e.g., time cards and employee contracts)?
The completeness of payroll transactions.
Which of the following is a control for the completeness (of cash receipts assertion)?
The computer compares each item on the underlying information in the bank remittance report to develop a one for one match with recorded cash receipts in the daily remittance report.
When considering the internal control structure, an auditor should be aware of the concept of reasonable assurance, which recognizes that
The cost of an entity's internal control structure should not exceed the benefits expected to be derived.
Which of the following statements is not correct about the auditor's report under PCAOB auditing standards?
The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission.
External documentation may lack reliability. Which of the following is the most probable reason for that?
The documentation may have been altered if the process is not controlled from inception
Which of the following underlies the application of generally accepted auditing standards, particularly the standards for obtaining sufficient appropriate audit evidence?
The elements of materiality and audit risk.
Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?
The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
Which of the following procedures represents a weakness in internal control for payroll?
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?
The planned level of assurance at the relevant assertion level.
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?
The recipients are likely to sign the confirmations without devoting proper attention to them
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?
The recipients are likely to sign the confirmations without devoting proper attention to them.
As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?
The sample size would be lower.
PCAOB AS 2310, The Confirmation Process and AU-C 505 state there is a presumption that the auditor will request the confirmation of receivables during an audit unless there are special conditions. Which of the following are among these conditions?
The use of confirmations would be ineffective as an audit procedure. Accounts receivable are immaterial to the financial statements.
Which three of the following are account balance assertions? (Several choices may be correct.)
The valuation of inventory and the allocation of costs to cost of goods sold The existence of inventory The completeness of inventory
Why does the client prepare independent bank reconciliation?
To check for the completeness, existence, and valuation of cash balances
Kate has a very unusual auditing situation. An unusual transaction has created a situation where following GAAP seems problematic. Kate needs advice. Which of the following is true as Kate considers how to handle the situation?
To depart from GAAP, Kate need both demonstrate that following GAAP would mislead investors, and describe the departure, its approximate effects, and the reasons why compliance would mislead.
Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales?
Trace bill of lading to sales invoice and sales journal.
In performing tests concerning the granting of stock options, an auditor should
Trace the authorization for the transaction to a vote of the board of directors.
The process of vouching helps establish which of the following regarding recorded transactions?
Transactions are valid.
A timing difference type of exception in the confirmation process may arise when goods are in transit at the confirmation date.
True
An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts.
True
An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.
True
Analytical procedures during risk assessment may identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations
True
By using data analytics tools, the auditor can potentially audit the whole population rather than taking a sample:
True
Characteristics of a pervasive misstatement or scope limitation include that is it not confined to specific elements, accounts, or items of the financial statements.
True
Comparing financial statement presentation with Generally Accepted Accounting Principles (GAAP) requirements is part of presentation and disclosure verification.
True
For companies that sell goods or services on account, there is significant interaction between sales and accounts receivable.
True
In attributes sampling if the selected item cannot be located, the auditor should assume that the control procedure was not followed and assess that item as a failure.
True
Monetary unit sampling (MUS) results in an efficient sample size and concentrates on the dollar value of the account balances.
True
Risks associated with revenue recognition are such that auditors often consider the occurrence of revenues and the existence of receivables assertions to be a significant inherent risk.
True
Sampling risk is defined as the risk that an inference drawn from a sample will be incorrect
True
The effectiveness of IT controls usually depends on both effective entity level controls and effective IT general controls.
True
The nature of cash balances makes them susceptible to theft.
True
Tolerable misstatements is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion
True
Understanding how the entity earns and recognizes revenue assists the auditor in developing an expectation of total revenues by understanding the client's capacity, market place, and customers.
True
Using attributes sampling the auditor can test for multiple attributes using the same source documents
True
Whether auditors choose to dual date or extend the end of fieldwork, they must request written representation from management as of the new date of the auditor's report.
True
MNE and Associates used the benchmark of 5% of income (earnings) before income tax and came up with $9.5 million as their planning materiality for Garden, Inc. MNE also determined that planning materiality using a benchmark of 1% total assets resulted in $23 million. How should MNE decide which planning materiality amount to use?
Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment.
A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following?
Use of prenumbered shipping, invoice and sales documents.
Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?
Verification of existence of inventory.
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would
Verify the sources and contents of the faxes in telephone calls to the senders.
Which of the following should be done by the auditor on receipt of the cutoff statement? (Several choices may be correct.)
Vouch a sample of deposits in transit on the bank reconciliation to deposits on the cutoff statement Scan the cutoff statement and enclosed data for unusual items Tracing a sample of all checks dated in the prior year to the outstanding checks listed on the bank reconciliation
In the initial procedures of the audit program for the revenue cycle, which of the following substantive tests come under the category of tests of details of transactions?
Vouch cash receipt transactions to supporting bank remittance reports, remittance advices. Vouch recorded revenue transactions to supporting sales invoices, shipping documents, and sales orders. Vouch sales adjustment transactions to authorizations for sales returns and allowance or uncollectible account write-offs.
If an auditor performs analytical procedures on rent expense and finds that rent expense has increased 50%, he or she is most likely to perform which of the following additional procedures?
Vouch larger items in rent expense in a search for unrecorded finance leases.
Which of the following provides evidence for the occurrence assertion?
Vouching
When would auditors increase the amount of detailed audit procedures used to test the year-end account balances and transactions from throughout the year?
When the detection risk is low
When performing tests of controls, the auditor is making _______.
a "yes or no" decision with respect to effectiveness
All of the following are examples of a change in accounting principle except:
a change in an accounting estimate.
There is significant interaction between cash receipt transactions and accounts receivable because _______.
a misstatement of cash receipts will result in a misstatement of accounts receivable.
A compilation engagement would be described as _______
a non-attest service
If an auditor has determined that inherent risk for accounts receivable is high and wishes to verify the balance as accurate, the best corroborating evidence would be ________
a positive confirmation sent to the entity in question
Internal control is defined as:
a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting, and compliance.
An audit strategy can take _______.
a reliance on controls approach, a substantive approach, or a combination of both
An emphasis-of-matter paragraph is used with an unmodified opinion when:
a significant uncertainty exists that should be brought to the financial statements user's attention.
Financial statements include _______.
a variety of items that cannot be measured precisely and must be estimated by client management
With respect to the going concern assumption, auditors also draw their own conclusions _______.
about whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.
If receivables are growing faster than sales, it may be an indication that the company is _________.
accomplishing sales growth by taking on increased credit risk
AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states the objective of the auditor is to obtain sufficient appropriate evidence that _______.
accounting estimates are reasonable, and disclosures are adequate
The rights and obligations assertion with respect to accounts payable relates to whether the _______.
accounts payable reflect the recorded liability of the entity
If auditors identify only one material weakness in a client's internal control system, the appropriate report to issue is a(n):
adverse opinion.
In the initial procedures of the audit program for substantive tests of revenue cycle assertions, to determine that the trial balance is an accurate and complete representation of the underlying accounting records, the auditor should compare a sample of the customer balances shown in the ________ with that in the _________.
aged trial balance; subsidiary ledger subsidiary ledger; aged trial balance
Control activities useful in reducing the risk of fraud focus on establishing the validity and occurrence of such transactions and include ________.
all sales returns should be authorized by sales management
When no response has been received after the second or third positive confirmation request to a customer, ________.
alternative procedures should ordinarily be performed
If auditors discover fraud during the audit, it should first be reported to:
an appropriate level of management or those charged with governance.
When the audit opinion is based in part on the work of another auditor, all of the following changes are made to the standard unmodified audit report except:
an emphasis-of-matter paragraph is added after the opinion paragraph.
Many clients build in redundant controls such that if one control does not detect a misstatement, ________.
another control will detect the problem
Operational (performance) audits are useful because they:
are concerned with the economy, efficiency, and effectiveness of an organization's activities.
Analytical procedures _______.
are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
Analytical procedures:
are required during the planning and substantive testing phases of the audit.
Under an FOB shipping point arrangement, title passes from seller to buyer when goods ________.
are shipped
In the substantive approach, if there is no internal control in place, the auditors _______.
assess RMM as high since both inherent and control risk are high
A typical response with respect to staff assignment for an audit deemed to be riskier would be ________.
assignment of a senior individual with experience in the industry
A detailed listing of the specific audit procedures to be used to gather evidence for an account is called the:
audit program
If a scope limitation is material, _______.
auditors cannot state a conclusion without evidence to support the conclusion
When the results of substantive procedures identify misstatements, _______.
auditors consider whether the misstatements may be indicative of the need to re-evaluate inherent risk, control risk or fraud risk
At the conclusion of the audit, _______.
auditors typically revaluate materiality decisions made during the audit to ensure it is still appropriate based on the results of audit procedures
If controls are weak, _______.
auditors will increase the control risk assessment and perform additional substantive tests to detect material misstatements
With respect to understanding the client's revenue process, it is particularly important that the auditor ________.
be knowledgeable about the entity, how the entity earns revenues, and particular revenue recognition issues that may be relevant to the entity
An engagement letter is prepared by an auditor and acknowledged by a client _______.
before the audit begins
Communication with those charged with governance must occur:
before the audit report is issued.
An audit testing strategy that can be used to allow evidence obtained in prior audit periods to support a conclusion about IT application controls in the current audit period is known as _______.
benchmarking
The auditor begins selecting controls to test by _______.
by understanding the entity and the business and determining the risk of material fraud or error at the financial statement level
The three categories of management assertions are:
classes of transactions, account balances, and presentation and disclosure.
Assume you are involved in an audit and your expectations regarding effective controls are not confirmed. In this situation, you will need to take all of the following steps, EXCEPT _______.
communicating the control weaknesses to management and those charged with governance
Generally, a written representation _______.
complements other audit procedures that were performed and generally does not provide sufficient appropriate audit evidence on its own
When an auditor inspects loan documentation and traces the details to recording in the client's records, the auditor is gathering evidence to support the:
completeness assertion.
When an auditor is auditing a client's inventory accounts, the primary focus is on the assertions of _______.
completeness, existence, valuation and allocation, and rights and obligations
In an engagement to review financial statements of a private company, the auditor will do all of the following except:
confirm key account receivable balances.
One of the steps in the five step AICPA process to follow when planning, performing, and evaluating results from audit data analytics (ADA) is _______.
consider the relevance and reliability of the data used
An engagement letter is like a(an) _______.
contract
An auditor's program to examine long-term debt most likely would include steps that require:
correlating interest expense recorded for the period with outstanding debt.
All of the following are reasons why users would demand an audit of financial statements except:
cost
If ending inventory is overstated, _______.
cost of goods sold will be understated
For clients with multiple locations, the auditors_______.
could vary which locations are tested each year and the type of audit procedures that are performed at the different locations
Accounting policies and practices that are most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments are called:
critical accounting policies and practices
The assertion related to recording transactions in the correct accounting period is:
cutoff.
Purchases of inventory on credit should involve _______.
debits to inventory and credits to payables
Substantive procedures are designed to _______
detect material misstatements at the assertion level
When auditors perform analytical procedures during the risk assessment for purchases and payables, they should _______.
develop a skill in analyzing the likely assertions that might be misstated based on the data
Understanding how the entity earns and recognizes revenue assists the auditor in ________.
developing an expectation of total revenues by understanding the client's capacity, market place, and customers
A walkthrough is important as _________.
different companies often have different documents and transaction flows
Confirmation of accounts receivable involves ________.
direct written communication between the client's customers and the auditor
If an auditor becomes aware after the date of the auditor's report but before the financial statements are issued, of a fact that may materially affect the financial statements, the first step the auditor should take is to:
discuss the matter with management and, if appropriate, those charged with governance.
The audit process _______.
enhances the degree of confidence that intended users place in the financial statements
When the auditor is performing audit data analytics (ADA) as a substantive test of details of a population of transactions or balances, the auditor will have _______.
evaluated inherent risk
Subsequent events refer to _______.
events occurring between the date of the financial statements and the date of the auditor's report
All of the following are examples of qualitative characteristics of a misstatement except:
exceeds the amount for performance materiality.
When an auditor inspects a tangible asset to support a balance in the client's records, the auditor is gathering evidence to support the:
existence assertion.
Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr, at a minimum, must prove that Cox:
failed to exercise due care.
An example of a loss contingency includes _______.
guarantees of debt of others
Most auditors plan to test controls in the purchases cycle because of the _______.
high volume of routine transactions in this process
With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is _______.
high, but not absolute
An audit plan details the nature, extent, and timing of audit procedures to be performed. The "extent" of audit procedures is best defined as _______.
how much testing will be done
All of the following phrases would be found in the standard unmodified audit report for a private company except:
in our opinion, the financial statements referred to above are correct, in all material respects.
Audit evidence will typically consist of ________.
information that supports and corroborates management's assertions and any information that contradicts the assertions
Many elements of valuing inventory _______.
involve professional judgment and accounting estimates
An important rights and obligations issue _______.
involves consignment inventory
Determining the likelihood of a loss contingency occurring and trying to estimate a reasonable amount for a future loss _______.
involves significant judgment by management
The most common user of a private company's financial statements _______.
is a bank or other lender
The most important control over the existence, completeness, and valuation of cash balances _______.
is an independent bank reconciliation
A detailed record of work completed and evidence gathered in forming the audit opinion ________.
is contained in the working papers
A common scheme to conceal the misappropriation of cash receipts ________.
is known as lapping
A representative audit sample _______.
is likely to provide a reasonable basis for drawing a conclusion about an entire population
The management representation letter _______.
is not a substitute for obtaining sufficient, appropriate evidence regarding the financial statements through other audit procedures
If a client has a going concern issue that has been properly disclosed in the notes, the auditor should:
issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue.
If a misstatement is considered material, _______.
it could affect decisions that users make if the users are made aware of the misstatement
If a specialist is engaged to assist with the audit:
it means the auditor does not have the requisite skill and knowledge to assess the item.
When an adverse opinion is issued regarding internal control over financial reporting (ICFR), the auditor_______.
makes a clear statement that the company has not maintained effective internal control for the period under audit
The outcome of litigation _______.
may be highly uncertain, and the circumstances may change over the course of a long court battle that spans several years
Many smaller businesses, not-for-profit organizations, and smaller governments _______
may have inadequate segregation of duties, which results in weak internal controls over cash
If management determines the loss contingency is probable and an amount can be reasonably estimated, then the company _______.
must record a liability and a related expense or loss, and disclose the relevant details of the event in the notes to the financial statements
The essence of the due care standard is that the auditor should not be guilty of:
negligence.
An unmodified auditor's report is _______.
not an indication the company is successful financially, but rather an indication the company has followed accounting standards as dictated by the applicable financial reporting framework
When a material weakness is identified, the auditor should _______.
not presume that a material misstatement occurred in the financial statements
If management considers a material loss contingency to be probable but an amount cannot be reasonably estimated, the proper accounting treatment is:
note disclosure only.
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is low, an auditor would probably:
observe the client's inventory count at an interim date.
The auditor may spend more time testing the existence assertion of recorded inventory in all of the following EXCEPT _______.
office supply stores
For a private company client that follows GAAP, auditors must consider the going concern assumption for a reasonable period of time, which is:
one year from the date the financial statements are issued.
If a loss contingency is reasonably possible or the amount cannot be reasonably estimated, _______.
only a disclosure in the notes is required
The auditing procedure of observation ________.
only provides evidence of a process at the time auditors observe it being carried out
With regard to management assertions, it is true to say that ________.
only some assertions apply to accounts and their balances
The objectives of internal control include:
operations objectives, reporting objectives, and compliance objectives.
Many of the controls over inventory _______.
overlap with other cycles
An auditor may plan to test controls in the payroll process because, among other factors:
payroll transactions are generally routine and processed in a high volume, which makes controls effective for management to employ.
When detection risk is low, the auditor is likely to:
prepare the bank reconciliation using bank data in the client's possession or audit the bank reconciliation using a cutoff bank statement obtained from the bank.
An example of a factor that provides the incentive for management to misstate revenue cycle assertions would be ________.
pressures to overstate revenues to achieve revenue or profitability targets that were not achieved
When reviewing the results of analytical procedures, the auditor needs to bring an appropriate level of _______.
professional skepticism
The purchases cutoff test involves determining that _______.
purchase transactions occurring near the balance sheet date are recorded in the proper period
If a company receives goods but waits to record the transaction until a vendor's invoice is received, _______.
purchases and accounts payable will be understated
The purchasing process normally includes all of the following transactions:
purchases on account, purchase returns, and cash disbursements.
The sales cutoff test is designed to obtain reasonable assurance that ________.
sales and accounts receivable are recorded in the accounting period in which the transactions occurred
A credit sale should always include debits to accounts receivable and cost of goods sold, and credits to ________.
sales and inventory
The purchasing or procurement process involves _______.
selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
At the conclusion of the audit, the wrap-up process involves all of the following except:
sending confirmations to financial institutions.
The control environment:
sets the tone of an entity with respect to internal control and influences the control consciousness of its people.
Segregation of duties ________.
should always be considered an important internal control
The search for unrecorded liabilities consists of procedures designed specifically to detect _______.
significant unrecorded obligations at the balance sheet date (or as of an interim date)
Many clients build in redundant controls _______.
so if one control does not find a misstatement, another control will detect the problem
Martin Inc. is being audited by the firm MNE and Associates. MNE's auditors decide that $100 million is the planning materiality and $50 million is the appropriate performance materiality at the account level. If all of Martin's account balances are below $50 million, the auditors will:
still perform detailed some audit procedures on the account because the immaterial misstatements can be material in aggregate.
An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as:
stratified sampling.
In a compilation engagement, _______.
the CPA will assist management in the presentation of financial statements but will not provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework
Ultimate responsibility for audit decisions, supervision of the team members, and the issuance of the final audit report rests with _______.
the audit partner
If a prospective new audit client does not allow the auditor to contact its existing auditor:
the auditor should consider that a negative factor on the integrity of client management.
When there is the potential for material misstatements from purchase adjustments transactions, _______.
the auditor should obtain an understanding of all relevant aspects of the internal control structure components and consider the factors that affect the risk of such misstatements
If the test results do not confirm the preliminary evaluation of controls, _______.
the auditor will consider whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested
All of the following statements are included in a management representation letter except:
the auditor's fee for completing the audit.
The dual dating of an audit report means:
the auditors performed audit procedures regarding a specific event that was after the end of fieldwork.
An example of a Type I subsequent event would be _______.
the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date
In a public company audit, the audit report is addressed to the:
the board of directors and shareholders.
The population consists of _______.
the class of transactions or the account balance to be tested
From year one to year two, the ratio of sales to fixed assets declined significantly. This is a possible indication that:
the client is capitalizing costs that should be expensed.
Before the external auditors decide to use the work performed by the internal auditors, the external auditors must first assess:
the competence and objectivity of the internal audit function.
The internal control component that addresses how an organization holds an individual accountable for his or her internal control responsibilities in pursuit of objectives is related to:
the control environment.
All of the following are components of the standard unqualified report on the effectiveness of ICFR except:
the definition of a material weakness.
The going concern assumption means:
the entity is viewed as continuing in business for the foreseeable future with no need for liquidation.
When auditing the payroll process, the auditor will normally want to understand:
the extent to which a company is capital-intensive or laborintensive.
An unmodified opinion is expressed by_______.
the external auditor when the auditor concludes the financial statements are presented fairly, in all material respects
When a client does not maintain its own stock records, the auditor should obtain a written confirmation from the transfer agent and registrar concerning:
the number of shares issued and outstanding.
An inherent risk of major concern to the auditor in the payroll process is:
the occurrence and cutoff assertions for payroll.
The working papers for a client contain both a permanent and a current file. The difference between the two files is that:
the permanent file includes documents that relate to the client and are relevant for more than one year's audit, and the current file includes the details of work completed and evidence gathered that relate to the current year's audit.
Designing substantive procedures responds to:
the risk of material misstatement at the assertion level.
Prevention of fraud refers to _______.
the use of controls and procedures aimed at avoiding a fraud
Detection of fraud refers to _______.
the use of controls and procedures aimed at uncovering a fraud should one occur
The critical difference between statistical and nonstatistical sampling is:
the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample.
An example of a scenario which would cause the auditors to modify the opinion on internal control would be _______.
there is a restriction on the scope of the auditor's work
Whether auditors choose to dual date the audit report, or extend the end of fieldwork, _______.
they must request written representation from management as of the new date of the auditor's report
Showing comparative financial statements helps users _______.
to analyze the company's financial condition and profitability
Final analytical procedures are intended
to corroborate audit evidence obtained during the audit, and to confirm the financial statements are consistent with the auditor's revised expectations based on evidence evaluated during the audit
Auditors must use their professional judgment _______.
to distinguish if a misstatement or scope limitation is just material or pervasively material
In addition to income before income taxes, another acceptable benchmark(s) for private company audits is(are) _______.
total assets and total revenues
Selecting source documents and working forward to follow the transaction through to recording in the journal and ledger is called _______.
tracing
An important aspect of developing a preliminary audit strategy involves _______.
understanding the entity and its environment
The process used for developing an audit strategy for various assertions begins with _________.
understanding the flow of transactions in a given transaction cycle
When auditors determine that the financial statements of a private firm are presented fairly in accordance with the applicable financial reporting framework, they issue the standard _______ report, which is often referred to as a "_______" report.
unmodified, clean
When auditing a fixed asset account such as land, buildings, and equipment, the auditor will normally:
use a combination of of agreeing beginning balances to prior year working papers and then testing transactions during the year.
The audit expectation gap occurs when:
user beliefs do not align with what professional standards and regulations expect of auditors.
The quantity of evidence that an auditor will gather:
varies with the assessed risk of material misstatement.
The internal document commonly used to record a credit purchase in the purchases journal is a:
voucher.
An audit plan details the nature, extent, and timing of audit procedures to be performed. The "nature" of audit procedures is best defined as _______.
what type of procedure will be used
An audit plan details the nature, extent, and timing of audit procedures to be performed. The "timing" of audit procedures is best defined as _______.
when the procedure will be performed
With respect to timing, tests of controls _______.
will usually be carried out at an interim date, often about three months prior to year-end
An audit of inventory _______.
will vary from client to client
An audit must be customized each year because inherent risk factors for a client _______.
will vary from year to year
The _______ clearly lays out the purpose of the test of the control, the nature and extent of the work performed at an interim date, the results of the audit tests, and the auditor's conclusion about control risk.
working paper
When auditors choose to send confirmations of accounts payable, accounts with _______.
zero or small balances should be among those selected for confirmation because they may be more understated than accounts with large balances
