Auditing Exam #2
Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires auditors to attest to, and report on, a public company's internal control over financial reporting, applies to public companies with market capitalization meeting or exceeding which of the following thresholds? $10 million. $25 million. $75 million. $100 million.
$75 million.
Watt, CPA, concludes that, while ABC Co. has properly accounted for and disclosed certain significant related party transactions, an emphasis-of-matter paragraph calling attention to these transactions should be added after Watt's opinion paragraph in the audit report. What should be included in the emphasis-of-matter paragraph? A clear reference to the transactions and an indication that Watt's audit opinion is not modified in light of these transactions. A detailed description of the transactions, a clear reference to the transactions, and an indication that Watt's audit opinion is not modified in light of these transactions. A detailed description of the transactions and a clear reference to the transactions. A detailed description of the transactions.
A clear reference to the transactions and an indication that Watt's audit opinion is not modified in light of these transactions.
Which of the following would be most likely to cause an auditor to have substantial doubt regarding a company's ability to continue as a going concern? A current ratio of 1.3 and a quick ratio of 0.8. Negative cash flow from investing activities. Management's refusal to sign a management representation letter. Failure to obtain positive confirmation of several large receivables.
A current ratio of 1.3 and a quick ratio of 0.8.
According to professional standards, which of the following circumstances will impair a CPA's independence? The CPA's nondependent stepchild recently inherited, from a party unrelated to the CPA, an immaterial amount of stock in the client. The CPA's firm acts as administrator of a trust which owns 5% of the client's stock, which makes up 7% of the total assets of the trust. A partner in the firm who works in the same office as the CPA, but performs no services for the client, has a material investment in a mutual fund which invests in the client. The CPA accepted free pizza from the client while working late hours on the audit.
A partner in the firm who works in the same office as the CPA, but performs no services for the client, has a material investment in a mutual fund which invests in the client.
The report resulting from an engagement to apply agreed-upon procedures related to the financial statements will generally include which of the following? A statement that the accountant takes no responsibility for the sufficiency of the procedures performed. A statement that the public is entitled to view the report and limited assurance in the form of a statement that the accountant is not aware of any modifications necessary to bring the statements in compliance with GAAP. Limited assurance in the form of a statement that the accountant is not aware of any modifications necessary to bring the statements in compliance with GAAP. Reasonable assurance that the statements are in compliance with GAAP.
A statement that the accountant takes no responsibility for the sufficiency of the procedures performed.
Regarding confidentiality, Most states recognize auditor-client privilege. An auditor may not provide confidential information to members of the auditor's firm who are not on the audit engagement team. An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review. An auditor will generally refuse a request for confidential information made by the AICPA's professional ethics division.
An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review.
Identify the correct statement regarding integrated audits. The AICPA began requiring integrated audits in response to accounting scandals such as Enron. An integrated audit involves providing an opinion on the financial statements and the internal control effectiveness of a company. The term "integrated audit" refers to the cooperation between internal and external auditors in preparing audited financial statements. Evaluating internal controls is often a vital part of an integrated audit.
An integrated audit involves providing an opinion on the financial statements and the internal control effectiveness of a company.
Under the ethical requirements of the profession, a certified public accountant may Retain client records to ensure client payment for work performed. Charge a contingent fee for filing an amended tax return in a case where the client had inadvertently omitted a common deduction in the original return. Disclose questions from his or her CPA examination. Audit a bank where the accountant obtained a current, fully secured 20-year mortgage under the same terms offered to the general public prior to the audit.
Audit a bank where the accountant obtained a current, fully secured 20-year mortgage under the same terms offered to the general public prior to the audit.
For effective internal control, the purchasing manager generally should Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. Defer to the accounts payable department for authorization of purchases. Establish the agreement of the vendor's invoice with the receiving report and purchase order. Be responsible for negotiating terms with vendors.
Be responsible for negotiating terms with vendors.
Vinson, CPA is supervisor to Elkins, CPA. Under Vinson's direction, Elkins signed a document containing materially false and misleading information. Who has committed an act discreditable to the profession? Vinson. Elkins. Both Vinson and Elkins. Neither Vinson nor Elkins.
Both Vinson and Elkins.
An auditor is establishing procedures for testing management's assertions regarding existence in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about existence? Confirmations only. Observation only. Neither confirmations nor observation. Both confirmations and observation.
Both confirmations and observation.
In a situation where there is a justified departure from a promulgated accounting principle that is adequately disclosed, how will the auditor modify the standard report? By modifying the Auditor's Responsibility paragraph. By adding an other-matter paragraph after the opinion paragraph. By adding an emphasis-of-matter paragraph after the opinion paragraph. By modifying the Management's Responsibility paragraph.
By adding an emphasis-of-matter paragraph after the opinion paragraph.
In an action brought against an auditor under common law liability, the client must prove which of the following? 1. lack of due care 2. proximate cause a. y n b. n y c. y y d. n n
C
Which of the following schemes might be detected through the use of a bank cutoff statement? Checks were written near year-end to reduce the balance in accounts payable but were not mailed until a week after year-end. Checks received by the cashier were not deposited and accounts receivable was not appropriately reduced. Checks were written in amounts in excess of invoice amounts in a collusion scheme in which the accounts payable clerk was misappropriating refunds of excess payments. Checks were written to nonexistent payees and mailed to the home addresses of officers.
Checks were written near year-end to reduce the balance in accounts payable but were not mailed until a week after year-end.
A company employs three clerks and one purchasing manager. Their responsibilities are as follows: 1. purchasing manager- Approves purchase requests before they are processed and negotiates terms with vendors. 2. Clerk 1, Purchasing - Places orders with vendors. 3. Clerk 2, Accounts Payable - Prepares payment vouchers after verifying accuracy of vendor invoices and comparing supporting documents. 4. Clerk 3, Receiving - Receives delivery of goods from vendors. Which of the following would indicate a weakness in the company's internal control? Clerk 3 conducts manual counts of goods received, unaware of the quantities actually ordered. The Purchasing Manager frequently attends vendor events with all expenses paid by the company. Clerk 2 has custody of unused purchase orders. Clerk 1 reports to the Purchasing Manager, who has significant influence over Clerk 1's pay and career progression
Clerk 2 has custody of unused purchase orders.
An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property's depreciable base? Deed. Bank confirmation of mortgage loan. Closing statement. Flood insurance policy.
Closing statement.
Choose the correct statement(s) regarding the auditing of debt obligations. A typical audit plan for debt obligations will rely heavily on sampling. Common analytical procedures performed while auditing debt obligations include analyzing ratios between related accounts, such as interest expense and notes payable. An auditor will focus on the management assertion of existence in order to determine that debt obligations are not understated. An auditor typically will use monetary unit sampling for debt obligations.
Common analytical procedures performed while auditing debt obligations include analyzing ratios between related accounts, such as interest expense and notes payable.
Which of the following procedures would an accountant be most likely to perform during an engagement to review the financial statements of a nonissuer (nonpublic entity)? Obtain written representation from management indicating its evaluation of the effectiveness of the entity's internal controls. Analyze all contracts with a potentially material effect on the financial records, such as purchase contracts for large capital expenditures. Obtain an understanding of the client's segregation of duties regarding the recording and reconciling of financial information. Compare the financial statement actual expenses to budgeted expenses.
Compare the financial statement actual expenses to budgeted expenses.
When testing investments in equity securities of publicly held entities, the auditor prepares a schedule of dividends received and compares it to dividend information available to the public. Which assertion is the auditor testing? Completeness Existence Classification Rights and obligations
Completeness
Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of? Rights and obligations. Completeness. Allocation and valuation. Existence.
Completeness
Which of the following assertions applies to an audit of inventory? Occurrence Classification Cutoff Completeness
Completeness
An auditor observes new equipment while walking around a client's factory and vouches the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained? Existence. Rights and obligations. Completeness. Valuation and allocation.
Completeness.
When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account? Existence. Completeness. Valuation and allocation. Rights and obligations.
Completeness.
Which of the following is not one of the seven categories of threats to independence identified by the AICPA in its conceptual framework on independence? Familiarity threat. Undue influence threat. Advocacy threat. Conflict of interest threat.
Conflict of interest threat.
According to the AICPA Code of Professional Conduct, which of the following nonaudit services can a CPA perform for a nonpublic audit client without impairing independence, provided the general requirements for performing nonattest services are met? 1. tax services 2. bookkeeping a. prohibited, allowed b. allowed, prohibited c. prohibited, prohibited d. allowed, allowed
D
Which of the following is a required financial statement compilation procedure? 1. Obtain a management Representation letter 2. Apply Analytical Procedures a. y y b. y n c. n y d. n n
D
Which of the following account balances reported on Hermida Co.'s balance sheet dated December 31, year 1 is most likely to rely on management estimates? Deferred income taxes of $30,000. Cash of $10,000. Investment in Gruler Co., accounted for under the equity method. Accounts payable of $7,000.
Deferred income taxes of $30,000.
Which of the following auditing procedures will provide evidence to support management's assertions regarding the allocation and valuation of inventories? Vouching inventories to receiving documents. Determining the replacement cost of inventories. Vouching inventory counts to accounting records. Tracing items reported in the accounting records to inventory counts.
Determining the replacement cost of inventories.
Which of the following is not an inherent risk of investments in derivative securities? Reliance on outside parties. Technical complexity. Ease of theft. Credit risk.
Ease of theft.
Choose the correct statement(s) regarding an auditor's final assessment, near the end of an audit, of significant accounting estimates made by management: Recalculating most estimates is typical at this stage. Overly conservative estimates are preferable to overly aggressive estimates. A company's accounting for compensation plans involving stock options requires little additional scrutiny if the stock is publicly traded at a known market price. Estimates are reconsidered in relation to the financial statements as a whole.
Estimates are reconsidered in relation to the financial statements as a whole.
When evaluating management's fair value estimates of items for which only Level 3 inputs are available, an auditor would be most likely to Consider the Pareto Principle and how it governs the relationship between cost and fair market value. Evaluate how consistently the process by which management made the fair value estimates was applied from item to item. Advise the client to solicit bids on the items in order to determine their fair market values. Gather evidence of known prices for identical items actively traded in open markets.
Evaluate how consistently the process by which management made the fair value estimates was applied from item to item.
An auditor is seeking evidence in an examination of bonds payable. Which of the following procedures would the auditor likely perform? Send confirmations to bondholders. Trace assets purchased with bond proceeds to documentation for evidence of liens. Evaluate reasonableness of interest expense in relation to bonds payable balances. Perform analytical procedures relative to bond discount or premium.
Evaluate reasonableness of interest expense in relation to bonds payable balances.
Which of the following types of attestation engagements may an accountant undertake with respect to prospective financial statements? Review and agreed-upon procedures engagement. Examination only. Examination and agreed-upon procedures engagement. Review, agreed-upon procedures engagement, and examination.
Examination and agreed-upon procedures engagement.
Which of the following procedures would an auditor most likely follow to assess the client's rights and obligations regarding its inventory? Review supplier catalogs to estimate the replacement cost of the inventory on hand. Inspect the inventory on hand. Examine vendor invoices for the inventory. Read the financial statements and trace purchases into the purchases journal.
Examine vendor invoices for the inventory.
An auditor performs a procedure in which the volume produced by a manufacturing entity is compared to the capacity of the entity's manufacturing equipment to determine if the entity is operating within its relevant range. This procedure will provide evidence about which assertion? Existence. Rights and obligations. Valuation and allocation. This is a review procedure and is not appropriate for an audit engagement.
Existence.
Which of the following is true about forecasts? orecasts present management's expected future results based on externally-provided hypothetical assumptions. Forecasts present what management believes would occur based on hypothetical assumptions in a "what if" scenario. Forecasts present management's expected future results based on internally-provided hypothetical assumptions. Forecasts present management's expected future results based on certain conditions and courses of action which management believes will occur.
Forecasts present management's expected future results based on certain conditions and courses of action which management believes will occur.
Which of the following reports must a public company file with the Securities and Exchange Commission anytime there is a significant event? Form 8-K. Form 10-K. Form 10-Q. Form S-1.
Form 8-K.
An accountant's standard report on a compilation should state that the accountant Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP. Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP and has obtained an understanding of the accounting practices in the client's industry. Has obtained an understanding of the accounting practices in the client's industry. Has not audited or reviewed the accompanying financial statements.
Has not audited or reviewed the accompanying financial statements.
Which of the following procedures would an accountant not be likely to perform during an engagement to review the financial statements of a nonissuer (nonpublic entity)? I. Testing the days-to-failure assumption in the warranty reserve account. II. Obtaining an understanding of the accounting practices in the client's industry. III. Obtaining an understanding of the client's internal control. None of the above. I and III only. II and III only. I only.
I and III only.
Identify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit. The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit. Typically, a junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit. Analytical procedures used in the review near the conclusion of the audit are not required.
If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
Which of the following statements is correct regarding the auditing of management estimates? Management bias is rarely a consideration in the auditing of management estimates. The auditor will often adjust downward the inherent lack of precision associated with an accounting estimate. In testing the underlying data of an estimate and the process used by management in making it, the auditor should evaluate the reasonableness of related management assumptions given the measurement requirements of the applicable financial reporting framework. Developing a point estimate or range to evaluate management estimates is a presumptively mandatory requirement of the auditor.
In testing the underlying data of an estimate and the process used by management in making it, the auditor should evaluate the reasonableness of related management assumptions given the measurement requirements of the applicable financial reporting framework.
When other information accompanying audited financial statements contains a material inconsistency that management refuses to revise, the auditor may do which of the following? Withhold the auditor's report and withdraw from the engagement. Include an other-matter paragraph in the report. Withdraw from the engagement. Withdraw from the engagement and Include an other-matter paragraph in the report.
Include an other-matter paragraph in the report.
An auditor is unable to obtain sufficient appropriate audit evidence regarding a significant transaction that does not affect the ending balance of any balance sheet account. There were no additional significant matters identified by the auditor during the course of the engagement. In this situation, the auditor is most likely to: Withdraw from the engagement. Issue an unmodified opinion in regard to financial position and disclaim an opinion in regard to the results of operations and cash flows. Issue an unmodified opinion in regard to financial position and cash flows and disclaim an opinion in regard to the results of operations. Issue a disclaimer of opinion on all the financial statements.
Issue an unmodified opinion in regard to financial position and disclaim an opinion in regard to the results of operations and cash flows.
In an audit of a company's financial statements, which of the following is not considered a disclosure in regards to which the auditor is specifically required to provide positive assurance? Management Discussion and Analysis (MD&A). The fact that certain material amounts are classified as current liabilities. Parenthetical notations contained within the financial statements. The notes to the financial statements.
Management Discussion and Analysis (MD&A).
A portion of a client's accounts receivable consists of many small accounts, each of which is not significant. The company has a collection period of approximately one month and cash flows generally correspond to the previous month's sales. As a result, the auditor considers the risk of material misstatement to be relatively low. Which type of accounts receivable confirmation is likely to be used by the auditor for these accounts? Negative confirmations. Positive confirmations. Open ended confirmations. Blank confirmations.
Negative confirmations.
X Company is concerned that it does not have enough employees to ensure adequate segregation of duties in its revenue cycle. Which of the following may be performed by the same individual? Approving sales and delivering the inventory from the storage area to the shipping area. Opening the mail and reconciling the perpetual inventory records to the physical count. Opening the mail and recording entries in the sales journal. Recording entries in the sales journal and delivering inventory from the storage area to the shipping area.
Opening the mail and reconciling the perpetual inventory records to the physical count.
An opportunity for fraud involving lapping of accounts receivable is more likely when which two duties involving accounts receivable are not segregated? Authorization and reconciliation. Receipt of returned goods and recording. Opening the mail and recording. Recording and reconciliation.
Opening the mail and recording.
When auditing group financial statements for a nonissuer, where the group auditor decides to assume responsibility for the work of all component auditors, which of the following paragraphs are adjusted? 1. Report on the Consolidated Financial Statements Paragraph (Intro) 2. Auditor's Responsibility Paragraph 3. Opinion paragraph a. N, N, Y b. Y, Y, Y c. N, N, N d. N, Y, N
Option c.
Which of the following audit procedures is most likely to be included in an audit program to examine long-term debt? Comparing the carrying value of debt to its market value as of the balance sheet date. Sending confirmations to verify the existence of the individual holders of the entity's bonds. Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances. Inspecting the subsidiary ledger for unrecorded liabilities.
Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances.
In testing controls over purchases, an auditor most likely would determine that the person who receives inventory Already has advance copies of purchase orders with the quantity of goods to expect. Prepares receiving reports for all goods received. Conducts periodic comparisons of receiving reports to general ledger postings. Posts to the general ledger to reflect the receipt of goods.
Prepares receiving reports for all goods received.
An auditor traces a recorded long-term debt to its debt covenant documentation, and discovers that the company is in violation of the debt covenant. Which management assertion regarding the debt is most likely affected by the violation? Presentation and disclosure. Completeness. Rights and obligations. Valuation and allocation.
Presentation and disclosure.
Which of the following is correct regarding pro forma financial information and related practitioner engagements? Practitioners may only perform either a compilation or examination of pro forma financial information. An example of pro forma financial information is a statement of financial position resulting after an expected successful product launch. During an engagement to perform agreed-upon procedures to pro forma financial information, a practitioner must provide a report stating the procedures may not be sufficient for the purpose intended. Pro forma financial information is based on historical information.
Pro forma financial information is based on historical information.
Which of the following is true about projections? Projections present management's expected future results based exclusively on externally-provided hypothetical assumptions. Projections present what management believes would occur based on hypothetical assumptions in a "what-if" scenario. Projections present what management believes will occur based on certain assumptions held by management. Projections present future financial information with an assumption that current trends will continue into the future.
Projections present what management believes would occur based on hypothetical assumptions in a "what-if" scenario.
Which of the following procedures would be appropriate for an auditor testing management's assertions related to the existence of investments in securities? Review bank confirmations for information about collateral arrangements. Compare recorded amounts with published market value information. Reconcile interest and dividends received. Review financial statements of investees accounted for under the equity method.
Reconcile interest and dividends received.
Which of the following audit procedures would be most effective in providing evidence regarding the existence of cash and cash equivalents? Review bank reconciliations to verify amounts. Perform analytical procedures to determine if amounts and volume of transactions match expectations. Review bank confirmations to verify bank balances. Test translation of foreign currency transactions.
Review bank confirmations to verify bank balances.
In testing management's rights and obligations assertion in relation to inventories, which of the following procedures would the auditor most likely consider most reliable? Review consignment agreements. Vouch inventory counts to accounting records. Trace inventory in accounting records to inventory counts. Make inquiries and analyze inventory turnover to identify slow-moving or obsolete items.
Review consignment agreements.
A client has recently granted stock options to its employees and the auditor is developing an audit program for their examination. Which of the following procedures will the auditor likely perform? Examine payroll records or stock ledgers to verify the existence of the option holders. Review minutes of board of director meetings to verify authorization of the grant. Evaluate treasury stock to determine if there is a sufficient amount to cover the stock options. Send a confirmation to the Secretary of State in the state of incorporation.
Review minutes of board of director meetings to verify authorization of the grant.
The auditor wishes to obtain evidence to support management's assertion as to the completeness of long-term debt. Which of the following procedures would likely be most effective? Trace a sample of loans to the original documentation. Trace a sample of loans to subsequent payments. Recalculating bond discount amortization. Review minutes of board of director meetings.
Review minutes of board of director meetings.
An auditor is unable to observe the physical count of inventory. Which of the following would not be an appropriate alternate procedure? Perform test counts of items in inventory. Apply procedures to transactions occurring between the count date and the date of the financial statements. Review shipping terms for all inventory in transit on the balance sheet date. Evaluate internal controls related to the maintenance of perpetual inventory records.
Review shipping terms for all inventory in transit on the balance sheet date.
Which of the following procedures would not be effective for obtaining evidence of the accuracy of the amount recorded as interest expense? Reviewing note receivable confirmations. Calculating an estimate of interest expense based on average liability balances and comparing the amount to recognized interest expense. Sending confirmations to a sample of creditors. Tracing loans and notes payable to original loan documents.
Reviewing note receivable confirmations.
Which assertions may be supported by evidence obtained when an auditor traces items recorded in inventory to purchase documents? Rights & obligations and completeness. Rights & obligations and valuation & allocation. Valuation & allocation and completeness. Valuation & allocation and existence.
Rights & obligations and valuation & allocation.
Verdun, an investor, is attempting to hold an auditor liable for fraud. Under which of the following must Verdun prove scienter? Common law. Contract law. Securities Act of 1933. Securities Exchange Act of 1934.
Securities Exchange Act of 1934.
An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the period. During the period, the entity had several transactions involving the purchase and disposal of equipment. Which of the following would be the most effective in providing evidence that all equipment reported in the financial statements actually exists? Select items on the factory floor and trace them to the accounting records. Select items from the accounting records and trace them to purchase documents. Evaluate the entity's policies for capitalizing and expensing costs related to the acquisition of equipment. Select items from the accounting records and observe them in the entity's factory.
Select items from the accounting records and observe them in the entity's factory.
An employee wants to create a fake employee identification number as part of a fraud scheme. Which of the following controls would be most likely to prevent the employee from creating the fake identification number? Controls over management override. Reconciliation of control totals. Reconciliation of the bank account used for payroll. Self-checking digits.
Self-checking digits.
Under the Sarbanes Oxley Act (SOX) of 2002, which of the following nonaudit services is not prohibited from being performed for an audit client by a registered public accounting firm? Bookkeeping services. Appraisal or valuation services. Internal audit services. Tax compliance services.
Tax compliance services.
Which of the following procedures is an accountant not required to perform in an engagement to review the financial statements of a client for which the accountant does not perform audits? Testing small samples of transactions to ensure proper segregation of duties. Inquiring of management who have responsibility for financial and accounting matters about their knowledge of any fraud or suspected fraud affecting the entity. Obtaining evidence that the interim financial information agrees or reconciles with the accounting records. Obtaining a management representation letter.
Testing small samples of transactions to ensure proper segregation of duties.
Which of the following would impair a CPA's independence? The CPA is a member of the same exclusive country club as the CEO of the client company. The CPA's fee is contingent on what the court decides is an appropriate fee in the circumstances. The CPA has a money market account with a financial institution client; the amount in excess of insured amounts is immaterial to the CPA's net worth. The CPA prepares routine invoices for the client.
The CPA prepares routine invoices for the client.
According to professional standards, which of the following circumstances will impair a CPA's independence? A partner in the CPA's firm who works in another state and does no work for the client has a material indirect financial interest in the client. The CPA has a car loan with a financial institution client. The CPA's nondependent stepchild has a material financial interest in the client of which the CPA is aware. The client recently exceeded the 90-day limit for outstanding unpaid invoices due to the CPA.
The CPA's nondependent stepchild has a material financial interest in the client of which the CPA is aware.
Which organization developed the framework most commonly used by the auditing profession for benchmarking internal control of nonissuers? The Committee of Sponsoring Organizations of the Treadway Commission. The Public Company Accounting Oversight Board. The Financial Reporting Council. The AICPA.
The Committee of Sponsoring Organizations of the Treadway Commission.
Communicating which of the following to the audit committee is not typically required of an auditor? Any disagreements with management. Any significant reclassifying journal entries proposed as adjustments by the auditor. The auditor's judgment of management integrity. The process used by management to make accounting estimates.
The auditor's judgment of management integrity.
Management's written representations should be in the form of a letter addressed to: The audit committee of the board of directors. The stockholders of the entity. The auditor. The board of directors.
The auditor.
Under which of the following circumstances would a disclaimer of opinion be appropriate? The auditor believes management's estimates of the useful lives of key assets are unreasonable, but management refuses to change the estimates. Management does not provide reasonable justification for a change in accounting principles. The auditor believes, with evidence, that the chief executive officer has committed material fraud. The chief executive officer is unwilling to sign the management representation letter.
The chief executive officer is unwilling to sign the management representation letter.
Which of the following will generally not be included in a standard bank confirmation? Balances in deposit accounts as of the balance sheet date. Balances of outstanding loan as of the balance sheet date. The dates on which inactive accounts were closed. Agreements related to compensating balances and collateral for loans.
The dates on which inactive accounts were closed.
Which of the following payroll procedures would an auditor most likely consider to be a weakness in internal control? Operational managers are responsible for hiring and firing employees as well as approving time sheets. The employee that prepares the payroll checks also distributes them to employees after the checks have been signed by the treasurer. The payroll-processing specialist is responsible for setting up payroll arrangements for new hires. Unclaimed checks are given to the treasurer for safe-keeping.
The employee that prepares the payroll checks also distributes them to employees after the checks have been signed by the treasurer.
Which of the following is least likely to be an indicator of potential impairment of a long-lived asset? The operating segment which utilizes the asset has a projected loss. The independently-verified fair value of similar assets approximates the asset's book value. The operating segment which utilizes the asset has experienced recent impairment of goodwill. Competitive pressures threaten to render the asset obsolete.
The independently-verified fair value of similar assets approximates the asset's book value.
Regarding threats to independence: The management participation threat involves a risk of the auditor essentially reviewing the reports indicating the results of decisions that the auditor participated in when serving in an attest client management role. The advocacy threat involves an appearance of preferentially serving the audit firm and its interests over the interests of the client and the investing public. The PCAOB requires audit partner rotation every three years as a safeguard to independence. The AICPA requires audit partner rotation every ten years as a safeguard to independence.
The management participation threat involves a risk of the auditor essentially reviewing the reports indicating the results of decisions that the auditor participated in when serving in an attest client management role.
Regarding warranty reserves and their associated auditing issues, The warranty reserve account can be manipulated to understate income during a good sales year. A known decrease in product reliability, with all other factors remaining the same, should lead to a decrease in the warranty reserve account. A common fraud scheme known as "channel stuffing" relies on manipulation of reserve accounts, sometimes including the warranty reserve account. An inherent risk of warranty reserves is the reliance on outside parties.
The warranty reserve account can be manipulated to understate income during a good sales year.
X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that occurred during the period were actually recorded. Which of the following procedures would likely be most effective for that purpose? Trace entries from the sales journal to sales invoices and customer purchase orders. Trace a sample of receiving reports to the sales journal. Trace a sample of sales invoices to bills of lading. Trace a sample of bills of lading to the sales journal.
Trace a sample of bills of lading to the sales journal.
X Company prepares a sales invoice, using a pre-printed, sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that that were recorded during the period actually occurred. Which of the following procedures would likely be most effective for that purpose? Trace entries from the sales journal to sales invoices and bills of lading. Trace a sample of receiving reports to the sales journal. Trace a sample of sales invoices to bills of lading. Trace a sample of bills of lading to the sales journal.
Trace entries from the sales journal to sales invoices and bills of lading. Correct
To obtain assurance that the accounting records accurately reflect only transactions that actually occurred, supporting management's occurrence assertion, the auditor would most likely examine a sample of general ledger postings and Verify their proper reconciliation to the applicable sub-ledgers. Trace them back to the supporting source documentation. Vouch for the proper authorization and training of the personnel who prepared them. Use professional judgment to come to a reasoned conclusion as to their reasonableness and accuracy.
Trace them back to the supporting source documentation.
Weller, CPA is conducting an audit of Wadd, LLC. Weller wishes to independently perform procedures to validate assumptions inherent in certain reserve accounts on Wadd's balance sheet. The CEO of Wadd asks if Weller could rely primarily on Wadd's own internal support for the accounts, citing a pressing need to provide audited financial statements to prospective investors as soon as possible, and as a sign of Wadd's gratitude, presents Weller with valuable tickets to a sporting event. What category of threat to independence is Weller being subjected to? Undue influence threat. Adverse interest threat. Familiarity threat. Advocacy threat.
Undue influence threat.
Jensen, CPA determines during an audit of nonpublic client Clunker Co. that there may be substantial doubt as to the company's ability to continue as a going concern. Accordingly, Jensen conducts a thorough assessment of management plans for overcoming the adverse conditions which currently threaten the going concern assumption and decides the plans will likely succeed. Assuming management has properly disclosed the going concern issues and information about the plans for mitigation and if there are no other issues with the audit, which of the following types of opinion and report modification would Jensen be most likely to issue? Unmodified with no additional paragraph. Adverse with an emphasis-of-matter paragraph. Qualified with no additional paragraph. Qualified with an emphasis-of-matter paragraph.
Unmodified with no additional paragraph.
A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises questions as to which assertion in regard to property, plant, and equipment? Existence. Rights and obligations. Valuation and allocation. Completeness.
Valuation and allocation.
While auditing inventory, the auditor analyzed the inventory turnover rates and made inquiries of production supervisors and inventory control personnel about slow-moving or obsolete items in inventory. These procedures are designed to provide evidence to support management's assertion regarding: Rights and obligations. Completeness. Existence. Valuation and allocation.
Valuation and allocation.
The fact that a company has significant amounts of cash in the form of foreign currency would raise the inherent risk of which management assertion regarding cash? Completeness Rights and obligations. Valuation or allocation. Presentation and disclosure.
Valuation or allocation.
Which of the following circumstances requires the auditor to include an other-matter paragraph in the audit report? When the financial statements are accompanied by required supplementary information. When there is a matter appropriately disclosed in the financial statements but which the auditor believes is of such importance as to be fundamental to users' understanding of the financial statements. When the report of a component auditor is being relied upon in an audit of consolidated financial statements. When a scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence regarding the results of operations.
When the financial statements are accompanied by required supplementary information.
Kiboshny Co. is desperate to remain in good standing with its long-term debt covenants. Which of the following measures, if not detected by the auditor, might allow Kiboshny to fraudulently overstate its current ratio? 1. Improperly Classifying Current Debt as Noncurrent 2. Improperly Recording Expenses as Debits to Retained Earnings 3.Failing to Record Interest Expense on Long-Term Debt a. Y ; Y ; Y b. Y ; N ; Y c. Y ; Y ; N d. Y ; N ; N
b. Y, N, Y
Upon examining repair and maintenance costs recorded by Cane Company during the year, an auditor finds a material amount that should have been capitalized in property, plant and equipment. If this error is left uncorrected, how would it affect Cane's reported net income and assets in its year-end financial statements? 1. net income. 2. assets a. overstates ; understate b. understate ; overstate c. overstate ; overstate d. understate ; understate
d. understate ; understate
