Auditing Final Exam
which of the cahs transfers indicates and error in cash cutoff
3
a commitment is best described as
A) an agreement to commit the firm to a set of fixed conditions in the future.
which of the following audits can be regarded as generally being a compliance audit
IRS agents' examination of taxpayer returns
the aicpa's code of professional conduct requires cpas to maintain the confidentiality of client information. this rule would be violated if a cpa disclosed information without a client's consent as a result of
a request by a client's largest stockholder
when a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in
a separate paragraph
statements on standards for accounting and review services SSARS are issued by the
accounting and review services committee
The auditor is determining that the the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction related audit objective?
accuracy
when the auditor compares the cancelled check or direct deposit with the payroll journal for amount, they are concerned with the transaction-related audit objective of
accuracy
what type of report is issued when one or more material internal control weaknesses exist
adverse opinion
thet _____ is a standard of conduct for all members of the aicpa
aicpa code of professional conduct
internal controls are not designed to provide reasonable assurance that
all frauds will be detected
which of the following statements is the most correct regarding errors and fraud
an error is unintentional, whereas fraud is intentional
Before goods are shipped on account, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate.
approve the customer's credit
the aicpa's code of professional conduct requires independence for all
attestation engagements
With whom should the auditor communicate whenever he or she determines that senior management fraud may be present, even if the matter might be considered inconsequential? A) PCAOB B) audit committee C) an appropriate level of management that is at least one level above those involved D) the internal auditors
audit committee
the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and some established criteria is defined as
auditing
privity of contract exists between
auditor and client
the trait that distinguishes auditors from accountants is the
auditor's expertise in the accumulation and the interpretation of audit evidence
security controls should require that users enter an ___ before being allowed access to software and other related data files
authorized password
which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control
no adequate separation of duties
risk assessment procedures include
observation of the entity's operations
an internal control deficiency occurs when computer personnel
originate changes in customer master files
the accoutns payable department usually has responsibility for approving acquisitions for payment by comparing the details on the
purchase order, receiving report, and vendor's invoice
the document that accompanies the customer's payment is the
remittance advice
An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed? A) inquiry B) observation C) reperformance D) examination
reperformance
which of the following tests commonly occur together
substantive tests of transactions and tests of controls
which audit tests involved pysical examination and confirmation
tests of details of balances
which of the following is a correct statement regarding the SEC
the SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission
which staff level in a cpa firm manages the overall relationship with the client and manages the audit in general
the audit manager
which of teh following is correct regarding supplementary information
the auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements
the two major factors affecting acceptable audit risk are
the likely statement users and their intended uses of the statements
when shuold auditors generally assess a client's ability to continue as a going concern
throughout the entire audit process
the exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the
tolerable exception rate
The main focus taken by the auditor in verifying liability balances is on the discovery of:
understated liaibilites and ommitted liabities, both I and II
at what point in the acquisition and payment cycle do most companies first recognize the acquistion and related liability on their records
when the company receives teh goods or services from the vendor
the audit procedure referred to as proof of cash receipts is particularly useful to test
whether all recorded cash receipts have been deposited in the bank
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? A) Sale of a major subsidiary B) Adoption of accelerated depreciation methods C) Write-off of a substantial portion of inventory as obsolete D) Collection of 90% of the accounts receivable existing at December 31
write-off of a substainal portion of inventory as obsolete
How must significant deficiencies and material weaknesses be communicated to those charged with governance? A) Either oral or written communication is acceptable. B) Oral communication is required. C) Written communication is required. D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.
written communication is required
A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client?
yes because the stock is a direct financial interest
which of the following is an accurate statement regarding audit risk, audit failure, and business failure
because auditors gather evidence on a test basis, and because well-concealed frauds are difficult to detect, audit risk is unavoidable
when a qualified or adverse opinion is issued, the qualifying paragraph is inserted
between the scope and opinion paragraphs
responsibility for the issuance of new notes payable would normally be vested in the
board of directors
auditors respond to risk primarily by I changing the extent of testing II changing the types of audit procedures
both I and II
all corporations must have
capital stock
which of the following is likely to be detected as part of the audit of the bank reconciliation
cash received by the client after year end but included in cash receipts in the current year
the responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the
company management
which one of the following substantive analytical procedures would be most useful in altering the auditor to the possibility of obsolete inventory
compare inventory turnover ratio with previous years
a _____ control is a control elsewhere in the system that offsets the abscence of a key control
compensating
in which type of service does the cpa assemble the financial statements but provide no assurance to third parties
compilation
the test of details of balance procedure which requires the auditor to account for unused inventory tag numbers to make sure none have been deleted is associated with the audit objective of
completeness
the audit object to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to
confirm notes payable
the most important consideration in evaluation the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the
consistent accrual of these liabilities relative to those of preceding periods
a cpa firm may charge a contingent fee for
consulting services for a client for which they did not perform any attestation services
output controls need to be designed for which of the following data integrity objectives
detecting erros after the processing is completed
which of the following would be a subsequent discovery of facts which would not require a response by the auditor
discovery of management's intent to increase selling prices in the future
which of the following statements is most correct with respect to separation of duties
employees who authorize transactions should not have custody of the related assets
how often is the AICPA peer review program performed of an AICPA member CPA firm administered by a state CPA Society under the overall direction of the AICPA peer review board
every 3 years
which of the following audit procedures would be the most correct in dtermining the audit objective of existence for the equipment account in the fixed asset master file
exame vendor invoices and receiving reports
attributes sampling would be an appropriate method to use on which of the following procedures in an audit
examine a sample of duplicate sales invoices for credit approval by the credit manager
one of the causes of nonsampling risk is
failure to recognize exceptions
for the report containing a disclaimer for lack of independence, the disclaimer is in the
first and only paragraph
which document or record is used in the write-offf of uncollectible accoutns classes of transactions
general journal
auditing standards require that the audit report must be titled and that the title must
include the word "independent"
any company with stock listed on a securities exchange is require to engage a
independent registrar
inherent risk is often high for an accoutn such as
inventory
performance materiality is often set to a ))) level for notes payable
low
which of the follow statements regarding inherent risk is correct
most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as tehy gain more knowledge about the company
as directed by the sarbanes-oxley act
A) an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer.
which of the following is the correct definition of control deficitiency
a control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis
An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and
a critical assessment of the audit evidence
A partial-period bank statement and the related canceled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called: A) a four-column proof of cash. B) a year-end bank statement. C) a cutoff bank statement. D) a short-period bank statement
a cutoff bank statement
when the auditor determines that the financial statements are fairly stated but there is a nonindependent relationship between the auditor and the client, the auditor should issue
a disclaimer of opinion
fraud occurs when
a misstatement is made and there is both knowledge of its falsity and the intent to deceive
A restriction on the scope of the auditor's examination requires
a qualifying paragraph preceding the opinion paragraph
a misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of
a reasonable user of the financial statements
according to the principle established by the restatement of torts, foreseen users must be members of
a reasonably limited and identifiable user group
which of the following statements regarding the capital acquisition and repayment cycle is most correct
a relatively few transactions affect the cycle, and most are highly material
the cpa firm will lose its independence if
a staff auditor providing audit services to the client acquires stock in that client.
an individual who is not party to the contract between a cpa and the client, but who is known by both and is intended to receive certain benefits from the contract is known as
a third-party beneficiary
which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to congress
GAO auditor
a qualified opinion can be issued for which of the following? I when a limitation on the scope of the audit has occured II when the auditor lacks independence III when generally accepted accounting principles have not been used
I and III
auditors do not provide which of the following
absolute assurance on the financial statements including assuming responsibility for them
a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the
acceptable audit risk
The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the: A) finite correction factor. B) tolerable exception rate. C) acceptable risk of overreliance. D) estimated population exception rate.
acceptable risk of overreliance
recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called
accounting
to ensure proper segregation of duties, who should maintain the perpetual inventory master files
accounting department personnel
Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in: A) accounting estimate rather than a change in accounting principle. B) accounting principle rather than a change in accounting estimate. C) both accounting principle and accounting estimate. D) neither accounting principle nor accounting estimate.
accounting estimate rather than a change in accounting principle
which of the following is likely to be determined first when performing tests of details for accoutns receivable
accoutns receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger
The estimated unpaid obligations for services or benefits that have been received before the balance sheet date are: A) accounts payable. B) accounts receivable. C) unearned liabilities. D) accrued liabilities.
accrued liabilities
when the auditor is determining whether the client followed a consistent depreciation policy from period to period, and the client's depreciation calculations are correc,t the balance-related audit objective of ___ is being determined for depreciation expense
accuracy
the primary audit objectives to focus on when auditing accounts in the capital acquisition and repayment cycle are
accuracy and completeness
what category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented
adverse
an officer participates in litigation against the cpa firm. this is an example of which type of threat to complaince with which of the rules under the aicpas code of professional conduct
adverse interest
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should: A) adjust the financial statements for the year under audit. B) add a paragraph to the audit report. C) advise the client to disclose the event in the notes to the financial statements. D) advise the client to delay issuing the financial statements until the economic loss can be determined.
advise the client to disclose the event in the notes to the financial statements
a member actively endorses an attest client's products or services, this is an example of which type of threat to complaince with which the rules under the aicpa's code of professional conduct
advocacy
Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) Accounts receivable master file B) Customer file C) Aged trial balance D) Sales register
aged trial balance
A written purchase order is a contractual document that is: A) an offer to buy goods or services. B) not enforceable if it is not in writing. C) a binding agreement between purchaser and vendor. D) an acceptance of a vendor's catalog offer to sell
an offer to buy goods or services
most cases of fradulent reporting involve
an overstatement of income
calculating the gross margin for the current audit year as a percent of sales and comparing it with the previous years si what type of evidence
analytical procedures
A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping? A) Reduce the customer's account by recording a sales return B) Write off the customer's account C) Apply the payment from another customer to the customer's account D) Reduce the customer's account by recording a sales allowance
apply the payment from another customer to the customer's account
In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the auditor must take great care in making sure that the significant legal requirements affecting the financial statements have been properly fulfilled and: a. any violations are reported to the SEC. b. are adequately disclosed in the financial statements. c. must issue a disclaimer if they haven't been fulfilled. d. any departures from the agreements are made with management's knowledge and consent.
are adequately disclosed in the financial statements
in the context of an audit of financial statements, substantive tests are audit procedures that
are designed to test for dollar misstatements
Tests of controls
are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk
because of teh importance of tests of controls and substantive tests of transactions for acquisitions and cash disbusrements, it is common in this audit area to use
attributes sampling
examine the cash receipts journal in the accounting system and compare the amounts received to the corresponding amoutns invoiced in the revenue accounting system and to the bank statement evidencing the deposit. this is an example of which of the following
audit procedure
To determine if a sample is truly representative of the population, an auditor would be required to: A) conduct multiple samples of the same population. B) never use sampling because of the expense involved. C) audit the entire population. D) use systematic sample selection.
audit the entire population
Auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist, is known as A) auditing through the computer. B) auditing around the computer. C) embedded audit module approach. D) parallel simulation testing.
auditing htrough the computer
who is responsible for establishing auditing standards for privately held companies
auditing standards board
when a client uses a service center for processing transactions
auditing standards require the auditor to test the service center's controls if the service center application involves processing significant financcial data
inventory is often a significant part of a company's current assets, because of its importance
auditors are required by auditing standards to observe the client taking a physical inventory count
when reviewing the summary of misstatements found in the audit
auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material
three common types of attestation services are
audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting
Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount: A) in the expense account. B) used in the prior period. C) authorized in the minutes of the board. D) paid in the subsequent period.
authorized in minutes of the board
which one of the following duties shold not be assigned to the purchasing department
authorizing the acuisition of goods
Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) increase materiality levels. B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk.
decrease detection risk
if the auditor decides to reduce acceptable audit risk, planned detection risk
decreases
The auditor obtained an aged list of receivables and traced the accounts to the master file, footed the schedule, and traced the amounts to the general ledger. Which balance-related audit objective was met?
detail tie-in
Narratives, flowcharts, and internal control questionnaires are three common methods of: A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure.
documenting the auditor's understanding of internal controls
which of the following is correct with respect to the design and use of business documents
documents shuold be prenumbered consecutively to facilitate control over missing documents
the legal right to perform audits is granted to a cpa firm by regulation of
each state
which of the following is not a primary consideration when assessing inherent risk
effectiveness of internal controls
which one of the following is more difficult to evaluate objectively
efficiency and effectiveness of operations
Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting. II. Separate reports on financial statements and internal control over financial reporting. A) I only B) II only C) Either I or II. D) Neither I nor II.
either I or II
Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include: A) employees of the CPA firm. B) employees of the audit client. C) other CPA firms engaged to do part of the audit work. D) specialists employed by the CPA firm to provide technical advice on the audit.
employees of the audit client
An auditor is vouching a sample of hourly employees from the payroll master file to approved time clock or time sheet data in order to provide evidence that: A) employees work the number of hours for which they are paid. B) payments are made at the contractual rate. C) product cost information is accurate. D) segregation of duties is present between the payroll function and the payment function for cash disbursements.
employees work the number of horus for which they are paid
___ protects the securit of electronic communication when information is transmitted and when it is stored
encryption
A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the
engagement letter
which of the following is the exception rate that the auditor expects to find before testing
estimated population exception rate
the general cash account is considered a significant account in almost all audits
even when the ending balance is immaterial
Auditors will generally send a standard inquiry letter to: A) only those attorneys who have devoted substantial time to client matters during the year. B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. C) those attorneys whom the client relies on for advice related to substantial legal matters. D) only the attorney who represents the client in proceeding where the client is defendant.
every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion
Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case which audit procedure should be used to detect any unrecorded liabilities? A) Examine cash disbursements for several weeks after the balance sheet date. B) Reconcile purchase orders to requisition orders. C) Reconcile purchase orders to receiving reports. D) Reconcile purchase orders to vendor invoices.
examine cash disbusments for several weeks after the balance sheet date
the most effective and effecient audit approach in the examination of the income statement would be which of the following
examine income statement accoutns concurrently with the related balance sheet accoutns
The most common audit test to verify equipment additions is to: A) examine vendors' invoices. B) perform an inventory of the fixed assets. C) confirm the additions with the vendors. D) trace the vendor invoices to the cash disbursements journal.
examine vendor invoices
you are auditing manufacturing company and testing the audit related objective of completeness for the equipment accounts. which of the following audit procedures is most likely to achieve your objective
examine vendor invoices of closely related accoutns such as repairs and maintenance
the auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accoutns that have already been collected. the primary control for preventing this fraud is
examining the uncollecctible account authorization form
which of the following is a factor that relates to incentives or pressures to commit fradulent financial reporting
excessive pressure for management to meet debt repayment requirements
the auditor's responsibilities section of the standard unmodified opinion audit report states that the auditor is
exercising professional judgment throughout the audit
When the auditor sends a confirmation to the broker-dealer, they are testing the balance-related audit objective of: A) detail tie-in. B) existence. C) cutoff. D) rights
existence
the majority of financial instruments are valued using
fair value estimates
in the flow of inventory and costs, when work in progress is credited, ___ is debited
finished goods
the primary accounting record for manufacturing equipment and other fixed assets is the
fixed asset master file
a positive confirmation is more reliabile evidence than a negative confirmation because
follow-up procedures are performed if a response is not received from the debtor
A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients. Which one of the following is generally not a defense?
foreseeable users
net realizable value of accounts receivable is equal to
gross accoutns receivable less allowance for uncollectible accounts
Which ratio do auditors find useful for assessing misstatements in sales, cost of goods sold, accounts receivable, and inventory?
gross profit percent
if the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor
has the responsibility of notifying financial statement users through the auditor's report
althrough the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies that
have to make significant judgments for accounting estimates
The purpose of the requirement in having communication between the predecessor and successor auditors is to: A) allow the predecessor to disclose information which would otherwise be confidential. B) help the successor auditor to evaluate whether to accept the engagement. C) help the client by facilitating the change of auditors. D) ensure the predecessor collects all unpaid fees prior to a change in auditor.
help the successor auditor to evalute whether to accept the engagement
which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees
human resources department
for financial statement audits, audotirs need to understand controls that are relevant to the audit in order to
identify and assess the risks of material misstatements
when determining the timing of the accoutns receivable confirmations
if accoutns receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule
research indicates that the most effective way to prevent and deter fraud is to
implement programs and controls that are based on core values embraced by the company
which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctations in earnings
income smoothing
The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for making decisions. A) balance sheet B) income statement C) statement of cash flows D) statement of stockholders' equity
income statement
If planned detection risk is reduced, the amount of evidence the auditor accumulates will: A) increase. B) decrease. C) remain unchanged. D) be indeterminate.
increase
If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be: A) increased in number. B) reduced in number. C) not performed. D) unchanged from prior planned settings.
increase in number
An exception or deficiency found in a test of controls
indicates the likelihood of a misstatement
When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is: A) insufficient. B) inadequate. C) ineffective. D) inefficient.
ineffective
one of the causes of nonsampling risk is
ineffective audit procedures
becaues cash is the most desirable asset for people to steal, it has a higher
inherent risk
the measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as
inherent risk
________ is the auditor's examination of the client's documents and records to substantiate that the information is included in the financial statements. A) Inspection B) Recalculation C) Observation D) Verification
inspection
A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is: A) inventory as recorded on tags actually exists (existence). B) existing inventory is counted and tagged (completeness). C) inventory is counted accurately (accuracy). D) inventory is classified correctly (classification).
inventory as recorded on tags actually exists (existence)
when performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year ccurrently under audit. the auditor should
investigate the possibility that the client may have made an error in their cost of goods sold computation
an imprest petty cash fund
is being replaced by pre-approved purchase cards in many companies
A CPA is subject to criminal liability if the CPA
is knowingly involved with false financial statements.
under the sarbanes-oxley act, the audit committee of a public company
is responsible for oversight of the work of the independent auditor
what typically initiates the acquisitions and payment cycle
issuance of a purchase requisition or request for purchase of goods or services
which of the following is false concerning the principal cpa firm's alternatives when issuing a report when another cpa firm performs part of the audit
issue a joint report signed by both cpa firms
which of the following is a correct statement regarding block sampling
it is acceptable to use block sampling only if a reasonable number of blocks are used
The most serious shortcoming of the haphazard sample selection method is: A) it is not subject to statistical sampling methods. B) it is time consuming to use. C) it is costly to use. D) it is difficult to remain completely unbiased in the selection.
it is difficult to remain completely unbiased in the selection
the assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrong doing is called
joint and several liability
Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for: A) kiting. B) lapping. C) income smoothing. D) channel stuffing.
kiting
when an employee who is authorized to make customer entries in the accoutns receivable subsidiary ledger purposefully enters cash received into the wrong custromer's accoutn, that employee may be suspected of
lapping
the auditor is examining the accounting entries made to the accumulated depreciation account during the year and notices a significant number and amounts of debits to the account. which of the following provides the most logical explanation?
large number of asset retirements
julia and lisa are sisters. julia is a cpa auditing the company where lisa works. julie's independence is imparied if
lia is the controller
some companies have customers send payments directly to an address maintained by a bank. this is called a ___ system
lockbox
Fictitious Revenues
lower accounts receivable turnover.
the pacob places responsibility for the reliability of internal controls over the financial reporting process on
management
when testing for fraudulent hours or fraudulent expense reports
management falsification of expense reports can be an indicator of disregard for internal controls and the potential for fraud in other areas
in order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that
management is responsible for the preparation of the financial statements
Due to a shortage of personnel, the client asks a member firm to assist with the authorization of accounting transactions. This is an example of which type of threat to compliance with the rules under the AICPA Code of Professional Conduct?
management participation
which of the following is not a factor that relates to opportunities to commit fradulent financial reporting
management's set of ethical values
which of the following is not a "cash equivalent"
marketable securities
auditing standards define ___ as the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonable be expected to influence the economic decisions of users made on the base of the financial statements
materiality
Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences? A) risk and emphasis on the completeness objective B) materiality and emphasis on the accuracy objective C) risk and emphasis on the classification objective D) materiality and emphasis on the occurrence objective
materiality and emphasis on the occurence objective
the purpose of establishing quality control policies and procedures to accept or continue a client relationship is to
minimize the likelihood of associating with a client whose management may lack integrity
the aicpa principles and the auditing standards should be viewed by practitioners as
minimum standards of performance that must be achieved on each audit engagement
___ is fraud that involves theft of an entity's assets
misappropriation of assets
when setting a preliminary judgment about materiality
more evidence is required for a low dollar amount than for a high dollar amount
When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that A) multiple users can access and update data files. B) the accounting information is only in one place. C) the database administrator may lack appropriate accounting knowledge. D) multiple users could all access the data simultaneously causing a system shutdown.
multiple users can access and update data files
If a potential loss on a contingent liability is remote, the liability usually is: A) disclosed in footnotes, but not accrued. B) neither accrued nor disclosed in footnotes. C) accrued and indicated in the body of the financial statements. D) disclosed in the auditor's report but not disclosed on the financial statements.
neither accrued nor disclosed in footnotes
The audit firm issues an audit report for its client. The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless: A) a development occurs that may affect the company's long term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.
new information comes to the auditor's attention concerning an event that occured prior to the date of the audit report that, if known, would have impacted the audit opinion
from which fo the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories
observation of physical inventory counts
you are auditing the inventory account and are concerned about the possibility of an inventory overstatement, what is the best audit procedure to detect damaged inventory
observe the condition of inventory during the client's physical count
the auditor's responsibilities section of the standard unmodified opinion audit report states that the audit is designed to
obtain reasonable assurance whether the statements are free of material misstatement
Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? A) Obtaining client's agreement on the engagement letter B) Obtaining knowledge about the client's business and industry C) Touring the client's plant and offices D) Identifying related parties
obtaining client's agreement on the engagement letter
you have been assigned to the accoutns payable transaction cycle as part of your auditing responsibilities. you have decided to vouch a cample of entries from the accoutns payable master file to supporting documents. which assertion is this test of controls most likely to support
occurence
____ deals with potential overstatement and ___ deals with understatements (unrecorded transactions)
occurence; completeness
most auditors assess the risk of material misstatement as high for related parties and related-party transactions because
of the lack of independence between the parties
the main difference between job order and process costing systems is that
one accumulates costs by individual jobs and the other by particular processes
the sarbane's oxley act requires a cooling off period of _____ before a member of an audit team can work for a client in a key management position
one year
When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed:
one year from the date of the financial statements
Auditors typically rely on internal controls of their private company clients: A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. B) only if the controls are determined to be effective. C) only if the client asks an auditor to test controls. D) only if the controls are sufficient to increase Control Risk to an acceptable level.
only if the controls are determined to be effective
an examination of part of an organization's procedures and methods for the purpose of evaluating efficency and effectiveness is what type of audit
operational audit
which of the following is considered audit evidence
oral statements made by management, written communications, auditor observations Y Y Y
An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is: A) overstatement or understatement of sales. B) overstatement or understatement of accounts receivable. C) overstatement or understatement of bad debt expense. D) overstatement or understatement of sales returns and allowances.
overstatement or understatement of bad debt expense
which of the following would generally not need to be approved by the board of directors
payment of a divident
when assessing risk control, the auditor must do all of the following except
perform the detailed test of balances
The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as A) the materiality range. B) the error range. C) tolerable materiality. D) performance materiality.
performance materiality
When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:
performing a walkthrough
if most or all users' decisions that are based on the financial statements are likely to be significatly affected, the materiality level is
pervasive
which of the following is the most objective type of evidence
physical count of securities and cash
Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably A) eliminate tests of controls. B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff. D) place limited reliance on the work performed by the internal audit staff.
place limited reliance on the work performed by the internal audit staff
the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is
planned detection risk
analytical procedures are so important that they are required during the
planning and completion phases
which of the following would have the least impact in determining sample size
population size
____ is an automated fraud deterction tool offered by most banks
positive pay
a ___ is a list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and who has no access to the accounting records
prelisting of cash receipts
Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold" arrangement. This is an example of which of the following? A) significant accounting estimates B) fictitious revenue recorded C) premature revenue recognized D) alteration of cutoff documents
premature revenue recognized
when the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to
present the information in the audit report and to issue a qualified or an adverse opinion
a major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. tests to identify possible legal encumbrances would satisfy the audit objective of
presentation and disclosure
determining that the footnote disclosures related to long-term debt are accurate is an example of the ___ audit objective
presentation and disclosure
_____ is an attitude that includes a questioning mind, being alter to conditions that might indicate possible mistatements due to fraud or error, and a critical assessment of audit evidence
professional skepticism
the sarbanes-oxley act _____ a cpa firm from doing both bookkeeping and auditing services for the same public company client
prohibits
When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning: A) fictitious employees. B) authorization of wage rates. C) proper classification of payroll transactions. D) completeness of recorded transactions.
proper classification of payroll transactions
which of the following best describes one of the primary objectives of audit documentation
provide reasonable assurance that the audit was conducted in accordance with auditing standards
after the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated. management refused to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. the auditor should
provide the information in the report and modify the opinion
the standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as
prudent person concept
the organization that is responsible for providing oversight for auditors of public companies is called the
public company accounting oversight board
To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the: A) Terms of the open purchase orders. B) Purchase cutoff procedures. C) Contractual commitments made by the purchasing department. D) Purchase invoices received on or around year end.
purchase cutoff procedures
If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded: A) sales. B) sales discounts. C) purchases. D) purchase discounts.
purchases
Refusal by a client to prepare and sign the representation letter would require a(n):
qualified opinion or a disclaimer of opinion
the method used by a cpa firm to ensure that the firm meets its professional responsibilities to clients and others is
quality control
Appropriateness of evidenceis a measure of the
quality of evidence
an advantage of using statistical sampling techniques is that such techniques
quantify sampling risk
A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a: A) random sample. B) statistical sample. C) judgment sample. D) representative sample.
random sample
when dealing with financial instruments, the most difficult balance related audit objective to test is
realizable value
which balance-related audit objective is not relevant to an audit of prepaid expenses
realizable value
the auditor's responsibility section in an audit report states that "the standards require that we plan and perform the audit to obtain ))) assurance about whether the financial statements are free of material misstatement_ what type of assurance is given?
reasonable
a high but not absolute level of assurance is called
reasonable assurance
Receipt of ordered materials by the receiving department will generate the completion of a form called the: A) bill of lading. B) receiving report. C) materials requisition. D) inventory acquisition summary.
receiving report
An auditor is gathering evidence on the completeness assertion. To do so she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all: A) vendor invoices. B) purchase orders. C) receiving reports. D) cash disbursements for accounts payables.
receiving reports
the direct receipt of a confirmation from every bank with which the client does business is
recommended but not required by auditing standards
which of the following is a substantive test of transactions
reconcile the disbursements in the payroll journal with the disbursments on the payroll bank statement
When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: A) reduce acceptable audit risk and increase inherent risk. B) reduce inherent risk and control risk. C) increase inherent risk and control risk. D) increase acceptable audit risk and reduce inherent risk.
reduce acceptable audit risk and increase inherent risk
analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally
reduce the extent of tests of details of balances
auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee
regardless of materiality
with which of managemetn's assertions with respect to implementing internal controls is the auditor primarily concerned
reliability of financial reporting
all of the following are causes for the addition of an emphasis of a matter paragraph under both aicpa and pcaob standards except for
reports involving other auditors
a cample in which the characteristics of the sample are the same as those of the populationm is a
representative sample
A type of positive confirmation known as a blank confirmation: A) requests the recipient to fill in the amount of the balance. B) is considered less reliable than the regular positive confirmation. C) generates as high a response rate as the regular positive confirmation form. D) is used when the auditor is confirming several small balances.
requests the recepient to fill in the amount of the balance
auditing standards ___ that the basis used to determine the preliminary judgment about materiality bet documented in the audit files
require
Auditors are ________ to document the known and likely misstatements in the financial statements under audit. A) permitted B) required C) not allowed D) strongly encouraged
required
the foreign corrupt practices act fcpa of 1977
requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control.
which of the following forms of evidence would be least persuasive in forming the auditor's opinion about marketable securities and other investments held by the company
responses to auditor's questions by the president and controller regarding the investments account
auditing standards specifically require auditors to identify ___ as a fraud risk in most audits
revenue recognition
which of the following services provides the lowest level of assurance on a financial statement
review
the most important output control is
review of datat for reasonableness by someone who knows what the output should look like
for which of the following audit procedures would audit sampling not be appropriate
review sales transactions for large and unusual amounts
the audit objective that requires the auditor to determine that notes payable on the notes payable schedule are properly classified can be tested by performing the procedure to
review the notes to determine whether any are with related parties
the securities and exchange commission c an impose all but which of the following sanctions
revoke a cpa license
an auditor is reviewing the minutes of board meetings to determine whether any securities are pledge as collateral. this test of the details of balances relates to the audit objective of
rights
an auditor must inquire about consigned or customer inventory included on the clients premises to satisfy the balance related audit objective of
rights
Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's: A) audit strategy. B) tests of controls. C) risk assessment procedures. D) tests of transactions.
risk assessment procedures
if material, all of the following are required to be separately disclosed in the financial statements except for
sales for the last ten days of the fiscal year
to test for recorded sales for which there were no actual shipments, the auditor vouches from the
sales journal to the shipping documents
For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice
sales order
a ___ is a document for communicating the description, quantity, and related information for goods ordered by a customer
sales order
which of the following is the risk that an auditor will reach an incorrect conclusion because a cample is not representative of the population
sampling risk
a cpa performs bookkeeping services for a client and then performs an audit of those financial statements this is an example of a _____ threat
self-review
when positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. which of the following would not be considred an alternative procedure
send a second confirmation request
who is responsible for establishing a private company's internal control
senior management
which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement
senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period
the assessment against a defendant of that portion of the damage caused by the defendant's negligence is called
separate and proportionate liability
which type of misstatement is always a fraud
shipments made to nonexistent customers and recorded as sales
When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were: A) received prior to the balance sheet date. B) shipped on or before the balance sheet date. C) both shipped and received prior to the balance sheet date. D) paid for in advance.
shipped on or before the balance sheet date
the financial interests of a cpa's family members can affect the cpa's independence, which of teh following parties would not be included as a direct financial interest of the cpa
sibling living in the same city as the cpa
a ___ exists if one or more control deficiencies exist athat are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting
signficant deficiency
when selecting staff for the audit engagement
staff assigned to the audit must be knowledgeable about the client's industry.
historically, auditing standards have been organized into theree categories, including
standards of field work
the use of the certified public accountant title is regulated by
state law through the licensing departments of each state
when a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger sizes, ___ is being used
stratified sampling
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for: A) contingent liabilities. B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events.
subsequent events
which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and deferred charges
substantive analytical procedures
which of the following further audit procedures are used to determine whether all six transaction related audit objectives have been achieved for each class of transactions
substantive tests of transacctions
financial instruments
such as derivatives can be used as a way of hedging
the process which requires the calculation of an interval and then selects the items based on the size of the interval is
systematic sample selection
the procedures used to test the effectiveness of internal controls are known as
test of controls
Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n)
test of details of balances
When auditing financial instruments, analytical procedures can be used to: A) test the reasonableness of interest and dividend income. B) test the year-end balance. C) determine if the financial instruments were properly valued. D) determine if the gain or loss on the sales were properly computed
test the reasonableness of interest and dividend income
Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals? A) Make inquiries of management and production personnel about the possibility of the disposal of assets. B) Review whether newly acquired assets replace existing assets. C) Test the valuation of fixed assets recorded in prior periods. D) Review plant modifications and changes in product line, taxes, or insurance coverage.
test the valuation of fixed assets recorded in prior periods
A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of: A) identifying employees who do not have proper work credentials. B) establishing a tightly controlled, fraud-free work environment. C) testing for nonexistent employees. D) identifying employees who have not submitted proper W-2 forms.
testing for nonexistent employees
which of the following procedures would most likely be performed in response to the auditors assessment of the risk of monetary misstatements in the financial statements
tests of details of balances
which of the following audit tests would be regarded as a test of controls
tests of the signatures on canceled checks to board of directors authroizations
when assessing whether the financial statements are auditable, the auditor must consider
that the integrity of management and the adequacy of accoutning records are the two primary factors determining auditability
which of the following is not an accurate statement regarding the acquisition and payment cycle
the accounting department should be responsible for receiving goods and preparing the receiving report
which party has the primary responsibility to oversee an organization's financial reporting and internal control process
the audit committee
When an audit client uses a service organization to manage their investment activity: A) the auditor can always rely on the internal controls of the service organization. B) the auditor must state in their audit opinion that the client uses a service organization. C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control. D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates
the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control
audit evidence obtained directly by the auditor will not be reliable if
the auditor lacks the competence to evaluate the evidence
when dealing with materiality
the auditor must bring any material misstatements to the client's attention.
when assessing the risk of material misstatements in the financial statements
the auditor must understand the client's business and industry
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of: A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit. D) the final billing for audit services rendered.
the auditor's report
which of the following is a correct statement regarding the standard unmodified opinion audit report
the auditor's responsibilities paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims,
the auditors must modify their audit report to reflect the lack of available evidence
which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room
the cashier posts the receipts to the accounts receivable subsidiary ledger cards
in addition to confirm bank balances for your audit client, a bank confirmation would normally contain
the clients bank loans with due date, interest rate, and collateral requested
McKesson & Robbins Company is a well know audit case involving auditor responsibility. what occured at the mckesson & robbins company to change the way in which auditors audit inventory?
the company recorded nonexistent inventory
the most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on
the confirmation of accoutns receivable
the most important test of details of balances to determine the existence of recorded acconts receivable is
the confirmation of customers balances
when a company maintains its own records of stock transactions and outstanding stock, internal controls must be adequate to ensure that
the correct amount of dividends is paid to stockholders owning the stock on the dividend record date
an example of an indirect financial interest in a client would be
the covered member's ownership of a mutual fund that has an investment in the client
which of the following statements is true when the cpa has been engaged to perform an audit of financial statements
the cpa firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements
which of the following is not defined as an act discreditable in either the rules or the interpretations of the aicpa's code of professional conduct
the cpa firm's parter in charge was a passenger in a car driven by his wife. on the way home from the firm's christmas party, she was charged with driving while intoxicated
under which of the following circumstances would it be advisable for the auditor to confirm accoutns payable with creditors
the creditor statements are not available and internal control over payables is deficient
An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:
the design and operating effectiveness of the controls
Smith, CPA has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client's refusal to allow this communication to occur would impact Rodgers decision concerning: A) the auditor's ability to design audit tests. B) possible scope exception due to lack of access. C) the desirability of accepting the prospective engagement. D) violation of the GAAP rules concerning consistency and comparability of financial information.
the desirability of accepting the prospective engagement
which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern
the entity is suing a competitor for a minor patent infringement
The objective of an audit of the financial statements is an expression of an opinion on:
the fairness of the financial statements in all material respects
in which of the following cicumstances would an auditor most likely express and adverse opinion
the financial statements are not in conformity with the FASB statement on loss contingencies
the audit report date on a standard unmodified opinion audit report indicates
the last day of the auditor's responsibility for the review of significant events that occured after the date of the financial statements
an example of a physical control is
the matching of employee fingerprints to a database before access to the system is allowed
when auditing accrued property taxes
the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceding year is used in the current year.
the underlying reason for a code of professional conduct for any profession is
the need for public confidence in the quality of service of the profession
three conditions are required for a contingent liability to exist. which of the following is not one of those conditions
the outcome must be resolved by a third-party
an adverse opinion is issued when the auditor believes
the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity iwth GAAP
) If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for: A) the penalties the client owes the IRS. B) the penalties and interest the client owes. C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged. D) the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.
the penalties and interest the client owes, plus the tax preparation fee the cpa charged
which of the follow statements is true regarding communcations between predecessor and successor auditors
the predecessor's response can be limited to stating that no information will be provided
the managemetns' responsibilities section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are
the responsibility of management
if the results of tests of controls support the design and operations of controls as expected, the auditor uses ___ control risk as the prelimiary assessment
the same
as a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because
the scope of the audit has been restricted
Prenumbered documents will only be useful for control purposes if A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period.
the sequence is accounted for periodically
which of the following is a correct statement regarding the shipment of goods
the shipping document is used to update the perpetual inventory records
when analyzing exceptions, the auditor should keep in mind that
they should determine the breakdown in the internal controls that allowed the exceptions to occur
an auditor should examine minutes of the board of directors' meetings
through the date of the audit report
a key internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received. this satisfied the transaction related audit object of
timing
The auditors primary purpose in auditing the client's system of internal control over financial reporting is: A) to prevent fraudulent financial statements from being issued to the public. B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements. D) to efficiently conduct the Audit of Financial Statements.
to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements
Why do auditors establish a preliminary judgment about materiality?
to help plan the appropriate evidence to accumulate
A useful starting point for becoming familiar with the client's inventory is for the auditor to: A) read the AICPA's Industry Audit Guide. B) review accounting theory covering special inventory problems. C) read the client's accounting manual. D) tour the client's facility.
tour the clients facility
the auditor is concerned that a client is failing to bill customers for shipments. an auditor procedure that would gather relevant evidence would be to
trace a sample of shipping documents to related duplicate sales invoices
an attest client threatens the member with not awarding future additional engagements to the firm if the firm does not agree with the client on a parciular accounting matter. this is an example of which type of threat to compliance with which of the rules under the aicpa's code of professional conduct
undue influence
the sarbanes oxley act of 2002 makes it a felony to destroy or create documents to impede or obstruct a federal investigation. those provisions were adopted following which of the following legal cases
united states v andersen
___ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement
utilities
You are the in-charge auditor for a company who has been an audit client for several years. Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment?
verification of the beginning balance in the equipment account
An auditor must obtain written client representations that might be signed by all but which of the following? A) Treasurer B) Chief financial officer C) Vice president of operations D) Chief executive officer
vice president of operations
when the auditor uses supporting evidence for amounts posted to account balances with documentary evidence, that process is called
vouching
which of the following best defines fraud in a financial statement auditing context
when the auditor suspects that fraud may be present, auditing standards require the auditor to obtain additional evidence to determine whether material fraud has occured
in auditing debits and credits to retained earnings, other than net income and dividents, the auditors first concern is
whether the transactions should have been included in retained earnings
the primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is
whether there are any restrictions on the payment of dividends
) In testing for cutoff, the objective is to determine: A) whether all of the current period's transactions are recorded. B) whether transactions are recorded in the correct accounting period. C) the proper cutoff between capitalizing and expensing expenditures. D) the proper cutoff between disclosing items in footnotes or in account balances.
whether transactions are required to provide reasonable assurance that the financial statements are free of both material errors and fraud
for effective internal control, employees maintaining the accoutns receivable subsidiary should not also approve
write-offs of customer accounts
which of the following is a component of general controls
back-up and contingency planning
The total of the individual employee earnings in the payroll master file should equal the total: A) balance of gross payroll in general ledger accounts. B) of the checks drawn to employees for payroll. C) gross payroll plus the total contributed by the employer for payroll taxes. D) gross pay for the current week's payroll.
balance of gross payroll in general ledger accounts
the total of the individual account balances in the accoutns receivable master file should equal the
balance of the accoutns receivable account in the general ledger
The primary emphasis in most tests of details of balances is on the: A) balance sheet accounts. B) revenue accounts. C) cash flow statement accounts. D) expense accounts.
balance sheet accounts
The date of the management representation letter received from the client should
be dated no earlier than the date of the audit report
If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely: A) be reduced. B) be increased. C) remain the same. D) be calculated using a computerized statistical package.
be reduced
Qualitative factors can affect an auditor's assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. A) I only B) II only C) I and II D) neither I nor II
both I and II
failure to capitalize a fixed asset at the correct amount would impact which financial statements
both the income statement and the balance sheet
If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of: A) contract fraud. B) breach of contract. C) constructive fraud. D) criminal neglect.
breach of contract
the possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as
business risk
the record of the issurance and repurchase of capital stock for the life of the corporation is maintained in the
capital stock certificate record
the most important general ledger account included in and affecting several cycles is the
cash account
for which of the following accoutns is cutoff least important
cash collections
physical examination is the inspection or count by the auditor of items such as
cash, inventory, securities, notes receivable, and tangible fixed assets
A proof of cash is effective at identifying which of the following misstatements? A) Checks written for incorrect amounts B) Checks issued to invalid vendors C) Fraudulent checks D) Checks recorded in the books for an amount different from that on the check
checks recorded in the books for an amount different from that on the check
the auditor is reviewing the receivables listed on the aged trial balance for notes and related party recievable. which balance related audit objective is he trying to satisfy
classification
The auditor uses knowledge gained from the understanding of the client's business and industry to assess: A) client business risk. B) control risk. C) inherent risk. D) audit risk.
client business risk
For public companies, the ________ is responsible for hiring the auditor as required by the Sarbanes-Oxley Act.
client's audit committee
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as: A) collusion. B) a material weakness. C) a control deficiency. D) a significant deficiency.
collusion
when dealing with fradulent financial reporting risk for accoutns payable
companies have used fictitious reductions to accoutns payable to overstate net income
when auditing prepaid insurance
companies often have a standard monthly journal entry to reclassify prepared insurance as insurance expense
fradulent financial reporting is most likely to be committed by whom
company management
internal controls can never be regarded as completely effective. even if company perssonel could design an ideal system, its effectiveness depends on the
competency and dependability of the people using it
When the auditor uses tracing as an audit procedure for tests of transactions she is primarily concerned with which audit objective? A) Occurrence B) Completeness C) Cutoff D) Classification
completeness
the tests of detalis of balances procedure which requires the auditor to examine notes paid after year end to determine whether they were liabilities at the balance sheet date is an attempt to satisfy the audit objective of
completeness
which one of the following procedures performed for the billing function provides evidence for the completeness aseertion
completeness
When auditors verify accrued property taxes two audit objectives are especially significant. These are: A) completeness and accuracy. B) completeness and net realizable value. C) detail tie-in and completeness. D) accuracy and classification.
completeness and accuracy
an audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a
compliance audit
the upper limit of the probably population exception rate is the
computered upper exception rate
which of the following is the principle weakness of using negative confirmations for the tests of details of balances for accoutns receivable
conclusions drawn from receiving no reply may not be correct
which of the following audit procedures would not likely detect a client's decision to pledge or factor accoutns receivable
confirmatino of receivables
audit evidence has two primary qualities for the auditor; relevance and reliability. given the choices below, which provides the auditor with the most reliable audit evidence
confirmation of accoutns receivable balance received from a customer
which of the following is most reliable for verifying the correct balance of accoutns payable
confirmations
when an auditor knows that an illegal act has occured, he or she must
consider the effects on the financial statements, including the adequacy of disclosure
In the case of an audit, recklessness is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for
constructive fraud
an increased extent of tests of controls is most likely to occur when:
controls are effective and the prelimiary control risk assessment is low
what event initiates a transaction in the sales and collection cycle
customer request for goods or services
audit procedures designed to uncover credit sales made after the client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives
cutoff
the audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of
cutoff