Audit Test 2 HW
Of the following, which is the least reliable type of audit evidence? (1) Confirmations mailed by outsiders to the auditors. (2) Correspondence between the auditors and suppliers. (3) Copies of sales invoices inspected by the auditors. (4) Canceled checks returned in the year-end bank statement directly to the client.
(3) Copies of sales invoices inspected by the auditors.
The primary objective of tests of details of transactions performed as substantive procedures is to: (1) Comply with generally accepted auditing standards. (2) Attain assurance about the reliability of the accounting system. (3) Detect material misstatements in the financial statements. (4) Evaluate whether management's policies and procedures are operating effectively.
(3) Detect material misstatements in the financial statements.
Which of the following is not an advantage of establishing an enterprise risk management system within an organization? (1) Reduces operational surprises. (2) Provides integrated responses to multiple risks. (3) Eliminates all risks. (4) Identifies opportunities.
(3) Eliminates all risks.
Which of the following is not a function of audit working papers? (1) Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. (2) Assist audit team members responsible for supervision in reviewing the work. (3) Assist auditors in planning future engagements. (4) Assist peer reviewers and inspectors in performing their roles.
(1) Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.
When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: (1) Consider the organizational level to which the internal auditors report the results of their work. (2) Review the internal auditors' work. (3) Consider the qualifications of the internal audit staff. (4) Review the training program in effect for the internal audit staff.
(1) Consider the organizational level to which the internal auditors report the results of their work.
An auditor may compensate for a weakness in internal control by increasing the extent of: (1) Tests of controls. (2) Detection risk. (3) Substantive tests of details. (4) Inherent risk. e. Controls over financial reporting are
(1) Tests of controls.
i. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? (1) Adequate disclosure. (2) Quality control. (3) Materiality and audit risk. (4) Client acceptance.
(3) Materiality and audit risk.
Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? (1) Segregation of duties over cash disbursements. (2) Requiring approval of purchase transactions. (3) Preparing bank reconciliations. (4) Maintaining backup copies of key transactions.
(3) Preparing bank reconciliations.
Which portion of an audit is least likely to be completed before the balance sheet date? (1) Tests of controls. (2) Issuance of an engagement letter. (3) Substantive procedures. (4) Assessment of control risk.
(3) Substantive procedures.
A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: (1) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. (2) Audit evidence to use in reducing detection risk. (3) A basis for modifying tests of controls. (4) An evaluation of the consistency of application of management policies.
1) Knowledge necessary to determine the nature, timing, and extent of further audit procedures.
Failure of one or both parties to a contract to perform in accordance with the contract's provisions. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
1. Breach of contract
A method of allocating damages to each group that is liable according to that group's pro-rata share of any damages recovered by the plaintiff. For example, if the plaintiff was awarded a total of $500,000 and the CPAs were found to bear 30 percent of the responsibility for the damages, the CPAs would be assessed $150,000. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
10 Proportionate Liab
Confirm accounts receivable. 7. Analytical procedures 8. Tests of controls 9. Risk assessment procedures (other than analytical procedures) 10. Test of details of account balances, transactions, or disclosures
10. Test of details of account balances, transactions, or disclosures
Intent to deceive, manipulate, or defraud. This concept is used in the 1934 Securities Exchange Act to establish auditor liability. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
11. Scienter
A federal securities statute covering registration statements for securities to be sold to the public. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
12. Securities Act of 1933
Written law created by state or federal legislative bodies. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
14. Statutory Law
Which of the following would be least likely to be considered an objective of internal control? (1) Checking the accuracy and reliability of accounting data. (2) Detecting management fraud. (3) Encouraging adherence to managerial policies. (4) Safeguarding assets.
2) Detecting management fraud.
In what section of the audit working papers would a long-term lease agreement be filed? (1) Current working paper file. (2) Permanent working paper file. (3) Lead schedule file. (4) Corroborating documents file.
2) Permanent working paper file.
Unwritten law that has developed through court decisions; it represents judicial interpretation of a society's concept of fairness. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
2. Common Law
Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. The person performing the duties does not have knowledge of misrepresentations within the financial statements. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
3. Constructive Fraud
Which of the following business characteristics is not indicative of high inherent risk? (1) Operating results that are highly sensitive to economic factors. (2) Large likely misstatements detected in prior audits. (3) Substantial turnover of management. (4) A large amount of assets.
4. a large amount of assets
Calculate the ratio of bad debt expense to credit sales. 7. Analytical procedures 8. Tests of controls 9. Risk assessment procedures (other than analytical procedures) 10. Test of details of account balances, transactions, or disclosures
7. Analytical procedures
Compare current financial information with comparable prior periods. 7. Analytical procedures 8. Tests of controls 9. Risk assessment procedures (other than analytical procedures) 10. Test of details of account balances, transactions, or disclosures
7. Analytical procedures
Violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
7. Negligence
Determine whether disbursements are properly approved. 7. Analytical procedures 8. Tests of controls 9. Risk assessment procedures (other than analytical procedures) 10. Test of details of account balances, transactions, or disclosures
8. Tests of controls
If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for: A. Strict liability for all damages incurred B. Gross Negligence C. Either ordinary or gross negligence D. Breach of contract
B. Gross Negligence
In cases of breach of contract, plaintiffs generally have to prove all of the fallowing expect: A. The CPAs had a duty B. The CPAs made a false statement C. The client incurred losses related to the CPAs performance D. The CPAs breached their duty
B. The CPAs made a false statement
Which of the following approaches to auditors's liab is least desirable from the CPAs perspective? A. The Utramares approach B. The Rosenblum approach C. The Restatement of Torts approach D. THe Foreseen User approach
B. The Rosenblum approach
If the CPAs provided negligent tax advice to a public company, the client would bring suit under: A. The Securities act of 1933 B. The Securities Act of 1934 C. The federal income tax law D. Common Law
D. Common Law
A CPA issued an unqualified opinion on the FS of a company that sold CS in a public offering subject to the Securities Act of 1933. Based on a misstatement in the FS, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proved fraud or negligence by the CPA B. The investor did not actually rely upon the false statement C. The CPA detected the false statement after the audit date D. The false statement is immaterial in the overall context of the FS
D. The false statement is immaterial in the overall context of the FS
All assets have been recorded. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation
a. Completeness
Assets are properly classified. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation
d. Presentation and disclosure
The company legally owns the assets. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation
e. Rights and obligations
Which of the following cases reaffirm the principles in the Ultramares case? A. Credit Alliance Corp vs. Arther Anderson B. Rosenblum vs. Adler C. Ernst & Ernest vs. Hochfelder D. Escott vs. BarChris Construction Corp
A. Credit Alliance Corp vs. Arther Anderson
To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: (1) Establish internal control with no material weakness. (2) Accept responsibility for the effectiveness of internal control. (3) Evaluate the effectiveness of internal control using suitable control criteria. (4) Support the evaluation with sufficient evidence.
(1) Establish internal control with no material weakness.
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? (1) To increase the efficiency of the audit by eliminating the need for other audit procedures. (2) To remind the client's management of its primary responsibility for the financial statements. (3) To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. (4) To provide evidence in those areas dependent upon management's future intentions.
(1) To increase the efficiency of the audit by eliminating the need for other audit procedures.
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: (1) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. (2) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. (3) Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. (4) Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.
(2) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.
Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? (1) Checklist. (2) Confirmation. (3) Flowchart. (4) Questionnaire.
(2) Confirmation.
Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: (1) Employment of temporary personnel to aid in the separation of duties. (2) Direct participation by the owner in key record keeping and control activities of the business. (3) Engaging a CPA to perform monthly write-up work. (4) Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.
(2) Direct participation by the owner in key record keeping and control activities of the business.
Which of the following best describes what is meant by the term "fraud risk factor"? (1) Factors that, when present, indicate that risk exists. (2) Factors often observed in circumstances where frauds have occurred. (3) Factors that, when present, require modification of planned audit procedures. (4) Weaknesses in internal control identified during an audit.
(2) Factors often observed in circumstances where frauds have occurred.
Which of the following statements best describes why auditors investigate related party transactions? (1) Related party transactions generally are illegal acts. (2) The substance of related party transactions may differ from their form. (3) All related party transactions must be eliminated as a step in preparing consolidated financial statements. (4) Related party transactions are a form of management fraud.
(2) The substance of related party transactions may differ from their form.
Analytical procedures are most likely to detect: (1) Weaknesses of a material nature in internal control. (2) Unusual transactions. (3) Noncompliance with prescribed control activities. (4) Improper separation of accounting and other financial duties.
(2) Unusual transactions.
Which of the following is most likely to be an overall response to fraud risks identified in an audit? (1) Supervise members of the audit team less closely and rely more upon judgment. (2) Use less predictable audit procedures. (3) Use only certified public accountants on the engagement. (4) Place increased emphasis on the audit of objective transactions rather than subjective transactions.
(2) Use less predictable audit procedures.
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? (1) Generous performance-based compensation systems. (2) Management preoccupation with increased financial performance. (3) An unreliable accounting system. (4) Strained relationships between management and the auditors.
(3) An unreliable accounting system.
Which of the following is not a primary approach to auditing an accounting estimate? (1) Review and test management's process for developing the estimate. (2) Review subsequent transactions. (3) Confirm the amounts. (4) Develop an independent estimate.
(3) Confirm the amounts.
Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. (1) Incentive or pressure. (2) Opportunity. (3) Supervisory position. (4) Attitude.
(3) Supervisory position.
When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: (1) Modify their report for any significant deficiencies identified. (2) Use a "bottom-up" approach to identify controls to test. (3) Test controls for all significant accounts. (4) Perform a separate assessment of controls over operations.
(3) Test controls for all significant accounts.
Which of the following should not normally be included in the engagement letter for an audit? (1) A description of the responsibilities of client personnel to provide assistance. (2) An indication of the amount of the audit fee. (3) A description of the limitations of an audit. (4) A listing of the client's branch offices selected for testing.
(4) A listing of the client's branch offices selected for testing.
The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as (1) Business risk. (2) Engagement risk. (3) Control risk. (4) Detection risk.
(4) Detection risk.
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: (1) Remain silent on the matter since it is an internal matter of the auditing firm. (2) Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. (3) Document the additional work required, since all disagreements of this type will require expanded substantive procedures. (4) Document the assistant auditor's position and how the difference of opinion was resolved.
(4) Document the assistant auditor's position and how the difference of opinion was resolved.
Which of the following is not a financial statement assertion made by management? (1) Existence of recorded assets and liabilities. (2) Completeness of recorded assets and liabilities. (3) Valuation of assets and liabilities. (4) Effectiveness of internal control.
(4) Effectiveness of internal control.
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? (1) Analysis of balance sheet accounts. (2) Analysis of income statement accounts. (3) All matters of continuing accounting significance. (4) Facts that might bear on the integrity of management.
(4) Facts that might bear on the integrity of management.
An entity's ongoing monitoring activities often include: (1) Periodic audits by internal auditors. (2) The audit of the annual financial statements. (3) Approval of cash disbursements. (4) Management review of weekly performance reports.
(4) Management review of weekly performance reports.
The audit committee of a company must be made up of: (1) Representatives from the client's management, investors, suppliers, and customers. (2) The audit partner, the chief financial officer, the legal counsel, and at least one outsider. (3) Representatives of the major equity interests, such as preferred and common stockholders. (4) Members of the board of directors who are not officers or employees.
(4) Members of the board of directors who are not officers or employees.
As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: (1) Each recorded sale represents a bona fide transaction. (2) All sales have been recorded in the sales journal. (3) All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. (4) Recorded sales have been properly posted to customer accounts.
(4) Recorded sales have been properly posted to customer accounts.
A primary purpose of the audit working papers is to: (1) Aid the auditors by providing a list of required procedures. (2) Provide a point of reference for future audit engagements. (3) Support the underlying concepts included in the preparation of the basic financial statements. (4) Support the auditors' opinion.
(4) Support the auditors' opinion.
Misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
5. Fraud
Damage to another is directly attributable to a wrongdoer's act. This issue may be raised as a defense in litigation—that is, the defense may argue that some other factor caused the loss. 1. Breach of contract 2. Common law 3. Constructive fraud 4. Defendant 5. Fraud 6. Joint and several liability 7. Negligence 8. Ponzi scheme 9. Proximate cause 10. Proportionate liability 11. Scienter 12. Securities Act of 1933 13. Securities Exchange Act of 1934 14. Statutory law
9. Proximate Cause
Prepare a flowchart of internal control over sales. 7. Analytical procedures 8. Tests of controls 9. Risk assessment procedures (other than analytical procedures) 10. Test of details of account balances, transactions, or disclosures
9. Risk assessment procedures (other than analytical procedures)
Under common law, the CPAs who were negligent may mitigate some damages to a client by proving: A. Contributory negligence B. The CPAs fee was not material C. The CPAs were not competent to accept the engagement D. The CPAs negligence was caused by the fact that they had too much work
A. Contributory Negligence
The most significant result of the Continental Vending case was that it: A. Created a more general awareness of the possibility of auditor criminal prosecution. B. Extended the auditor's responsibility to all information included in registration statements. C. Defined the CPA's responsibilities for unaudited financial statements. D. Established a precedent for auditors being held liable to third parties under common law for ordinary negligence.
A. Created a more general awareness of the possibility of auditor criminal prosecution.
The 1136 Tenants' case was important because of its emphasis upon the legal liability of the CPA when associated with: A. A review of annual statements. B. Unaudited financial statements. C. An audit resulting in a disclaimer of opinion. D. Letters for underwriters.
B. Unaudited financial statements.
Which of the Following elements is not frequently necessary to hold a CPA liable to a client? A. Acted with scienter or guilty knowledge B. Was not independent of the client C. Failed to exercise due care D. Did not use an engagment letter
C. Failed to exercise due care
Under the Securities and Exchange Act of 1934, auditors and other defendants are faced with: A. Joint Liability B. Joint and several Liability C. Proportionate liability D.Limited liability
C. Proportionate Liability
Which statement bets expresses the factors that purchasers of securities registered under the Securities act of 1933 need tp prove to recover losses from the auditors? A. The purchasers of securities must prove ordinary negligence by the auditors and reliance on the audited financial statements. B. The purchasers of securities must prove that the financial statements were misleading and that they relied on them to purchase the securities. C. The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence." D. The purchasers of securities must prove that the financial statements were misleading and the auditors were negligent.
C. The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence."
Transactions are recorded in the correct accounting period. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation
b. Cutoff
There is such an asset. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation
c. existence and occurrence
Assets are recorded at proper amounts. a. Completeness b. Cutoff c. Existence and occurrence d. Presentation and disclosure e. Rights and obligations f. Valuation
f. Valuation