Audit Chapter 12, Audit Chapter 13, Audit Chapter 14, Audit Chapter 15

Mailing disbursement checks and remittance advices should be controlled by the employee who

Signs the checks last.

Many elements of valuing inventory _______.

involve professional judgment and accounting estimates

An important rights and obligations issue _______

involves consignment inventory

The most important control over the existence, completeness, and valuation of cash balances _______.

is an independent bank reconciliation

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 2005. Assume all checks are dated and issued on December 30, 2005.

#101 and #303.

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 2005.Assume all checks are dated and issued on December 30, 2005.

#202 and #404.

In a well-designed internal control structure, employees in the same department most likely would approve purchase orders, and also

Negotiate terms with vendors.

For which of the following companies would the auditor have the least concern about the existence of inventory?

A hotel.

Examples of inquiries of management regarding subsequent events include which three of the following? (Select all that apply.) A. Have sales occurred or are planned that may affect the carrying value or classification of assets? B. Are there any plans to issue new shares or debt instruments (debentures)? C. Has the company entered into new commitments, borrowings, or guarantees? D. Have competitors diversified their portfolio?

A, B, C

The audit report represents the _______. A. "end product" of the financial statement audit B. beginning of the audit process C. "end product" of the internal audit review and audit D. opinion of management with respect to the fairness and accuracy of the financial statements

A. "end product" of the financial statement audit

Which of the following is an example of a modified opinion? A. A qualified opinion. B. A reference to the audit of component auditors. C. A going concern emphasis-of-matter paragraph. D. A consistency emphasis-of-matter paragraph.

A. A qualified opinion.

An auditor most likely would express an unmodified opinion and would not add an emphasis-of-matter or other-matter paragraph to the report if the auditor A. Believes that there is a remote likelihood of a material loss resulting from an uncertainty. B. Discovers that supplementary information required by FASB has been omitted. C. Wishes to emphasize that the entity had significant transactions with related parties. D. Concurs with the entity's change in its method of accounting for inventories.

A. Believes that there is a remote likelihood of a material loss resulting from an uncertainty.

Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme.Under these circumstances, Morris should A. Disclaim an opinion on the financial statements. B. Express an unmodified opinion with a separate emphasis-of-matter paragraph. C. Express an unmodified opinion with a separate other-matter paragraph. D. Express an adverse opinion on the financial statements.

A. Disclaim an opinion on the financial statements.

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to A. Extend auditing procedures. B. Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. C. Assume responsibility for events subsequent to the issuance of the auditor's report. D. Accept responsibility for subsequent events.

A. Extend auditing procedures.

Analytical procedures during risk assessment of a going concern _______. A. May identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations B. May identify internal matters that have occurred such as legal proceedings C. May identify only external matters that have occurred such as loss of a key franchise, loss of a principal customer, or work stoppages due to natural disaster D. May identify positive trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations

A. May identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations

Which of the following statements concerning a compilation of specific elements, accounts, or items of a financial statement is correct A. The compilation cannot be relied upon to disclose errors, fraud, or illegal acts. B. The compilation must be performed in conformance with an accounting basis consistent with GAAP. C. The accountant performing the compilation must be independent with regard to the client. D. The compilation involves compiling financial statements for different subsidiaries of the company.

A. The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit? A. The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report. B. The entity recorded the amount of an asset impaired as of the balance sheet date. C. A reasonable estimate was determined for a liability incurred after the balance sheet date. D. Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible.

A. The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.

Analytical procedures during risk assessment may identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations A. True B. False

A. True

Characteristics of a pervasive misstatement or scope limitation include that is it not confined to specific elements, accounts, or items of the financial statements. A. True B. False

A. True

Whether auditors choose to dual date or extend the end of fieldwork, they must request written representation from management as of the new date of the auditor's report. A. True B. False

A. True

All of the following are examples of a change in accounting principle except: A. a change in an accounting estimate. B. a change in the method of application of an acceptable accounting principle. C. a change from one acceptable accounting principle to another acceptable accounting principle. D. a change from an acceptable accounting method to a newly adopted accounting principle.

A. a change in an accounting estimate.

A compilation engagement would be described as _______. A. a non-attest service B. an audit engagement C. an attest service D. an assurance service

A. a non-attest service

An emphasis-of-matter paragraph is used with an unmodified opinion when: A. a significant uncertainty exists that should be brought to the financial statements user's attention. B. a client has an unjustified change in accounting principle. C. there is a disagreement with those charged with governance regarding the selection of accounting policies. D. an extreme limitation of the scope of the audit exists.

A. a significant uncertainty exists that should be brought to the financial statements user's attention.

If auditors identify only one material weakness in a client's internal control system, the appropriate report to issue is a(n): A. adverse opinion. B. qualified opinion. C. unqualified opinion with an emphasis-of-matter paragraph. D. disclaimer of opinion.

A. adverse opinion.

If auditors discover fraud during the audit, it should first be reported to: A. an appropriate level of management or those charged with governance. B. the SEC. C. the employee who is committing the fraud. D. the PCAOB.

A. an appropriate level of management or those charged with governance.

When the results of substantive procedures identify misstatements, _______. A. auditors consider whether the misstatements may be indicative of the need to re-evaluate inherent risk, control risk or fraud risk B. auditors consider whether the misstatements may be indicative of the need to re-evaluate inherent risk only C. auditors consider whether the misstatements may be indicative of the need to re-evaluate control risk only D. the auditors refer the misstatements to the prior auditor for correction

A. auditors consider whether the misstatements may be indicative of the need to re-evaluate inherent risk, control risk or fraud risk

Generally, a written representation _______. A. complements other audit procedures that were performed and generally does not provide sufficient appropriate audit evidence on its own B. is sufficient evidence to issue an unmodified audit report C. replaces other audit procedures that were performed and generally does provide sufficient appropriate audit evidence on its own D. should be drafted by the client's legal counsel and signed with the auditor

A. complements other audit procedures that were performed and generally does not provide sufficient appropriate audit evidence on its own

In an engagement to review financial statements of a private company, the auditor will do all of the following except: A. confirm key account receivable balances. B. issue a report at the conclusion of the engagement. C. inquire of management regarding key revenue recognition policies. D. calculate key ratios relevant to the client.

A. confirm key account receivable balances.

Accounting policies and practices that are most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments are called: A. critical accounting policies and practices. B. significant accounting policies and practices. C. material contingencies. D. critical accounting estimates.

A. critical accounting policies and practices.

The audit process _______. A. enhances the degree of confidence that intended users place in the financial statements B. is aimed primarily at creditors C. can typically take up to a year D. decreases the degree of confidence that intended users place in the financial statements

A. enhances the degree of confidence that intended users place in the financial statements

Subsequent events refer to _______. A. events occurring between the date of the financial statements and the date of the auditor's report B. events occurring after the financial statement date C. events occurring before the financial statement date D. events occurring after completion of the audit and issuance of the audit report

A. events occurring between the date of the financial statements and the date of the auditor's report

All of the following are examples of qualitative characteristics of a misstatement except: A. exceeds the amount for performance materiality. B. changes a net loss to a net income for the period. C. affects compliance with debt covenants. D. affects management's compensation for the period.

A. exceeds the amount for performance materiality.

An unmodified auditor's report is _______. A. not an indication the company is successful financially, but rather an indication the company has followed accounting standards as dictated by the applicable financial reporting framework B. an indication that a firm is financially successful C. an indication the company is successful financially, but not an indication the company has followed accounting standards as dictated by the applicable financial reporting framework D. an indicator that the firm's stock price may be about to drop

A. not an indication the company is successful financially, but rather an indication the company has followed accounting standards as dictated by the applicable financial reporting framework

In a compilation engagement, _______. A. the CPA will assist management in the presentation of financial statements but will not provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework B. an internal auditor reviews the client firm's filings with the Securities and Exchange Commission (SEC) for compliance and accuracy C. the current and prior auditors will jointly determine the fairness and conformity of a client's financial statements D. the CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework

A. the CPA will assist management in the presentation of financial statements but will not provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework

An example of a Type I subsequent event would be _______. A. the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date B. the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed after the balance sheet date C. a sudden change in senior management after the financial statement date D. a filing with the Securities and Exchange Commission (SEC) of an amended form 10K after the financial statement date

A. the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date

In a public company audit, the audit report is addressed to the: A. the board of directors and shareholders. B. audit committee. C. the SEC. D. the CEO and CFO.

A. the board of directors and shareholders.

The going concern assumption means: A. the entity is viewed as continuing in business for the foreseeable future with no need for liquidation. B. the auditor is concerned whether the entity is going to change locations. C. the entity is facing difficulties continuing as a viable business entity. D. assets and liabilities are stated at liquidation values.

A. the entity is viewed as continuing in business for the foreseeable future with no need for liquidation.

An example of a scenario which would cause the auditors to modify the opinion on internal control would be _______. A. there is a restriction on the scope of the auditor's work B. certain analytical procedures conducted yield expected results C. there is a restriction on the scope of the prior auditor's work D. hiring of a new Chief Operating Officer

A. there is a restriction on the scope of the auditor's work

Which of the following situations could most likely lead to an embezzlement scheme?

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.

The auditor is studying a ratio of accounts payable turnover in days. Which of the following indicates a potential risk of unrecorded liabilities?

Accounts payable turnover in days decreased from 28 days to 15 days from year one to year two.

Substantive tests of property, plant and equipment often focus on _______.

All of these answer choices are correct.

An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for

Authorizing payroll rate changes for all employees.

Which of the following statements, extracted from a client's lawyer's letter concerning litigation, claims, and assessments, would be most likely to cause the auditor to request clarification? A. "We believe that the company will be able to defend this action successfully." B. "We believe that the action can be settled for less than the damages claimed." C. "We believe that the plaintiff's case against the company is without merit." D. "We believe that the possible liability to the company is nominal in amount."

B. "We believe that the action can be settled for less than the damages claimed."

Which of the following is an example of a subsequent event? A. Legal action that was settled in the last month of the fiscal year. B. A bond issuance after the balance sheet date but prior to issuance of the financial statements. C. A cybersecurity attack that occurred in the third quarter of the fiscal year. D. A major customer declaring bankruptcy two months before the client's year-end.

B. A bond issuance after the balance sheet date but prior to issuance of the financial statements.

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the A. Amount of known misstatement is documented in the management representation letter. B. Estimate of the total likely misstatement is less than a material amount. C. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client. D. Amount of known misstatement is acknowledged and recorded by the client.

B. Estimate of the total likely misstatement is less than a material amount.

A legal representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. A. True B. False

B. False

AS 1301 specifies that only critical accounting policies and practices must be communicated to the audit committee. A. True B. False

B. False

An example of a Type II subsequent event would be the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date. A. True B. False

B. False

An immaterial misstatement occurs when the client departs from the applicable financial reporting framework. A. True B. False

B. False

Auditors of public companies can perform an integrated audit, which means performing the financial statement audit and the audit of the effectiveness of the internal control over financial reporting (ICFR) at the same time. A. True B. False

B. False

In a compilation engagement, the CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. A. True B. False

B. False

Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit? A. Management plans to expand into international operations during the next few years. B. Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud. C. Management believes the company is the premier company in its industry regarding service to customers. D. Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS).

B. Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements? A. A fixed asset used in operations is sold at a substantial profit. B. New convertible bonds are issued to expand the company's product line. C. A loss is reported on uncollectible accounts of an acknowledged distressed customer. D. Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.

B. New convertible bonds are issued to expand the company's product line.

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose? A. Adverse and unmodified, with an emphasis-of-matter paragraph added. B. Qualified and disclaimer. C. Disclaimer and unmodified with an emphasis-of-matter paragraph added. D. Qualified and adverse.

B. Qualified and disclaimer.

Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments? A. Inspect checks included with the client's cut-off bank statement. B. Read the file of correspondence from taxing authorities. C. Apply ratio analysis on the current-year's liability accounts. D. Obtain a letter of representations from the client's underwriter of securities.

B. Read the file of correspondence from taxing authorities.

Which of the following statements is not correct about the auditor's report under PCAOB auditing standards? A. Each section of the audit report must have an appropriate label. B. The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission. C. Critical audit matters must be identified and discussed in the auditor's report. D. The auditor's opinion is expressed at the beginning of the audit report.

B. The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission.

In which of the following circumstances would an auditor be most likely to express an adverse opinion? A. Tests of controls show that the entity's internal control structure is so ineffective that it cannot be relied upon. B. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases. C. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern. D. The chief executive officer refuses the auditor access to minutes of board of directors' meetings.

B. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.

If a scope limitation is material, _______. A. auditors should state a conclusion even without evidence to support the conclusion B. auditors cannot state a conclusion without evidence to support the conclusion C. the auditor should immediately withdraw from the engagement D. it is of no relevance to the financial statements and their users

B. auditors cannot state a conclusion without evidence to support the conclusion

The most common user of a private company's financial statements _______. A. are regulatory agencies such as the Internal Revenue Service (IRS) B. is a bank or other lender C. are employees of the company D. are competing companies

B. is a bank or other lender

The management representation letter _______. A. can sometimes be used as a substitute for the gathering of audit evidence B. is not a substitute for obtaining sufficient, appropriate evidence regarding the financial statements through other audit procedures C. can replace the audit of internal control conducted as part of the audit, but cannot replace the analytical procedures D. can replace analytical procedures conducted as part of the audit, but cannot replace the audit of internal control

B. is not a substitute for obtaining sufficient, appropriate evidence regarding the financial statements through other audit procedures

If a client has a going concern issue that has been properly disclosed in the notes, the auditor should: A. issue an unmodified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue. B. issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue. C. issue a qualified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue. D. issue a qualified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue.

B. issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue.

When an adverse opinion is issued regarding internal control over financial reporting (ICFR), the auditor_______. A. makes a clear statement that the company has maintained effective internal control for the period under audit B. makes a clear statement that the company has not maintained effective internal control for the period under audit C. opines that the company has fairly reported its financial statements in accordance with Generally Accepted Accounting Principles (GAAP) D. is not entitled to receive full compensation for services rendered during the audit

B. makes a clear statement that the company has not maintained effective internal control for the period under audit

The outcome of litigation _______. A. may be highly certain, and the circumstances may change over the course of a long court battle that spans several years B. may be highly uncertain, and the circumstances may change over the course of a long court battle that spans several years C. is usually decided relatively quickly D. does not affect the auditor

B. may be highly uncertain, and the circumstances may change over the course of a long court battle that spans several years

When a material weakness is identified, the auditor should _______. A. presume that a material misstatement exists in the financial statements B. not presume that a material misstatement occurred in the financial statements C. proceed with issuing an unmodified opinion D. immediately request the internal audit function conduct a full review of the control issue

B. not presume that a material misstatement occurred in the financial statements

If a loss contingency is reasonably possible or the amount cannot be reasonably estimated, _______. A. disclosure should occur in the financial statements only B. only a disclosure in the notes is required C. then no disclosure is required D. disclosure should occur in both the financial statements and the notes to the financial statements

B. only a disclosure in the notes is required

At the conclusion of the audit, the wrap-up process involves all of the following except: A. review of proper and complete execution of planned audit procedures. B. sending confirmations to financial institutions. C. determination that all necessary matters have been appropriately considered. D. revisiting assessments for materiality, control risk, and risk of fraud.

B. sending confirmations to financial institutions.

The dual dating of an audit report means: A. the auditors extended their responsibility period to include the release date of the financial statements. B. the auditors performed audit procedures regarding a specific event that was after the end of fieldwork. C. the release date of the financial statements was after the completion of fieldwork. D. a subsequent event occurred.

B. the auditors performed audit procedures regarding a specific event that was after the end of fieldwork.

All of the following are components of the standard unqualified report on the effectiveness of ICFR except: A. the definition of internal control over financial reporting. B. the definition of a material weakness. C. a title that includes the term "independent." D. a statement about the inherent limitations of ICFR.

B. the definition of a material weakness.

Whether auditors choose to dual date the audit report, or extend the end of fieldwork, _______. A. their liability with respect to the financial statements remains the same B. they must request written representation from management as of the new date of the auditor's report C. they must request written representation from the internal auditors as of the new date of the auditor's report D. no further representations should be requested of management

B. they must request written representation from management as of the new date of the auditor's report

Auditors must use their professional judgment _______. A. to distinguish if a misstatement or scope limitation is just immaterial or pervasively material B. to distinguish if a misstatement or scope limitation is just material or pervasively material C. to determine if the firm has the ability to pay the auditor for services rendered D. in selecting the client's audit committee

B. to distinguish if a misstatement or scope limitation is just material or pervasively material

The audit firm must retain the audit file of a public company client for: A. 4 years. B. 6 years. C. 7 years. D. 5 years.

C. 7 years.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should A. Explicitly state whether the change conforms with GAAP. B. Refer to the note in the financial statements that discusses the change. C. Not refer to the change in the auditor's report. D> Refer to the change in an emphasis-of-matter paragraph.

C. Not refer to the change in the auditor's report.

Which of the following is NOT an example of a loss contingency? A. Guarantees of debt of others B. Income tax disputes C. Payment of income taxes D. Threat of expropriation of assets

C. Payment of income taxes

With respect to the going concern assumption, auditors also draw their own conclusions _______. A. as to whether the client is likely to attempt to acquire another company in the near future B. as to whether the client is likely to be a target for an acquisition by another company in the near future C. about whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time D. about whether there is substantial doubt about the entity's ability to continue as a going concern for an indefinite period of time

C. about whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time

When the audit opinion is based in part on the work of another auditor, all of the following changes are made to the standard unmodified audit report except: A. the portion of the audit conducted by the component auditor is stated in the report. B. the opinion paragraph references the other auditors. C. an emphasis-of-matter paragraph is added after the opinion paragraph. D. the auditor's responsibility paragraph has added wording stating that other auditors completed a portion of the audit.

C. an emphasis-of-matter paragraph is added after the opinion paragraph.

At the conclusion of the audit, _______. A. auditors may attempt to contact the client's legal counsel B. auditors typically attempt to contact the prior auditor C. auditors typically revaluate materiality decisions made during the audit to ensure it is still appropriate based on the results of audit procedures D. auditors ask management for recommendations on any needed adjustments to the accounts

C. auditors typically revaluate materiality decisions made during the audit to ensure it is still appropriate based on the results of audit procedures

If controls are weak, _______. A. auditors will perform less substantive testing as a result B. auditors will decrease the control risk assessment and perform additional substantive tests to detect material misstatements C. auditors will increase the control risk assessment and perform additional substantive tests to detect material misstatements D. auditors will increase the control risk assessment and perform fewer substantive tests to detect material misstatements

C. auditors will increase the control risk assessment and perform additional substantive tests to detect material misstatements

If an auditor becomes aware after the date of the auditor's report but before the financial statements are issued, of a fact that may materially affect the financial statements, the first step the auditor should take is to: A. alert the appropriate regulatory body. B. make the appropriate adjustments to the financial statements. C. discuss the matter with management and, if appropriate, those charged with governance. D. determine if the financial statements need to be revised.

C. discuss the matter with management and, if appropriate, those charged with governance.

An example of a loss contingency includes _______. A. collection of accounts receivable B. payment of accounts payable C. guarantees of debt of others D. repurchasing outstanding shares

C. guarantees of debt of others

If a misstatement is considered material, _______. A. an auditor should immediately issue an adverse opinion B. it should have no bearing on financial statement users and the decisions they make C. it could affect decisions that users make if the users are made aware of the misstatement D. it should not affect decisions that users make if the users are made aware of the misstatement

C. it could affect decisions that users make if the users are made aware of the misstatement

For a private company client that follows GAAP, auditors must consider the going concern assumption for a reasonable period of time, which is: A. one year from the date of the financial statements. B. one year from the completion of interim audit procedures. C. one year from the date the financial statements are issued. D. one year from the completion of fieldwork.

C. one year from the date the financial statements are issued.

An unmodified opinion is expressed by_______. A. the external auditor when the auditor concludes the financial statements are presented fairly, in all material and immaterial respects B. management when the auditor concludes the financial statements are presented fairly, in all material respects C. the external auditor when the auditor concludes the financial statements are presented fairly, in all material respects D. the internal audit function upon concluding the financial statements are fairly represented

C. the external auditor when the auditor concludes the financial statements are presented fairly, in all material respects

Showing comparative financial statements helps users _______. A. spot potential problems in the most recent years note disclosures B. understand the difference between basic and diluted earnings per share C. to analyze the company's financial condition and profitability D. to calculate a definite future stock price

C. to analyze the company's financial condition and profitability

When an entity has more than one class of employee, it is important to evaluate the reasonableness of payroll based on employee class. Which of the following procedures is commonly used to test this?

Calculate average payroll cost per employee classification

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Canceled checks.

Which two of the following are involved in recording cash disbursements?

Cash disbursements journal, Check or electronic funds transfer

In auditing long-term bonds payable, an auditor most likely would

Compare interest expense with the bond payable amount for reasonableness.

In auditing payroll, an auditor most likely would

Compare payroll costs with entity standards or budgets.

An auditor decided to confirm accounts payable to accomplish a low level of detection risk for the completeness assertion. Which of the following is the most reasonable sampling plan?

Confirm accounts payable with an emphasis on all vendors including zero and small balances.

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to

Corroborate information regarding deposit and loan balances.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the

Number of shares issued and outstanding.

If the auditor encounters a material scope limitation and cannot obtain sufficient appropriate audit evidence regarding the fair presentation of the financial statements, what type of report would be issued? A. An unmodified opinion with an emphasis-of-matter paragraph. B. No report can be issued. C. A qualified or adverse opinion. D. A qualified or disclaimer of opinion.

D. A qualified or disclaimer of opinion.

An example of a factor that mitigates doubts about an entity's ability to continue as a going concern would be _______. A. a letter of guarantee from a parent company B. the ability to raise additional funds through the issuance of more stock C. the ability to sell an unprofitable segment of the business D. All of these examples are mitigating factors.

D. All of these examples are mitigating factors.

During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do? A. Report the matters to regulatory authorities. B. Consider the fraud a scope limitation and disclaim an opinion. C. Immediately withdraw from the engagement. D. Communicate the matter to those charged with governance.

D. Communicate the matter to those charged with governance.

Auditors should carefully consider which of the following assertions for loss contingencies? A. Rights and obligations B. Presentation and disclosure C. Existence D. Completeness

D. Completeness

Thomas, CPA, has examined the consolidated financial statements of Kass Corporation. Jones, CPA, has examined the financial statements of the sole subsidiary which is material in relation to the total examined by Thomas. It would be appropriate for Thomas to serve as the group engagement partner, but it is impractical for Thomas to review the work of Jones. Assuming an unmodified opinion is expressed by Jones, one would expect Thomas to A. Refuse to express an opinion on the consolidated financial statements. B. Express an unmodified opinion on the consolidated financial statements and not refer to the work of Jones. C. Express a qualified opinion on the consolidated financial statements and refer to the work of Jones. D. Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.

D. Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.

Which of the following is a Type II subsequent event? A. Bankruptcy of a customer subsequent to year-end, which would be considered when evaluating the adequacy of the allowance for uncollectible accounts. B. An amount received related to an insurance claim that was in the course of negotiation at year-end. C. Deterioration in financial results after year-end, which may indicate doubt about the ability to continue as a going concern. D. Loss of plant as a result of fire or flood after year-end.

D. Loss of plant as a result of fire or flood after year-end.

This question has been amended to conform to new Auditing StandardsWilson, CPA, completed the field work of the audit of Abco's December 31, Year 1, financial statements on March 6, Year 2, at which time Wilson believed that sufficient appropriate audit evidence had been obtained to support the auditor's opinion. However, a subsequent event requiring adjustment to the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson's attention on April 24, Year 2, which preceded the issuance of the audit report on Abco's Year 1 financial statements. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated A. April 10, Year 2. B. April 24, Year 2. C. Using dual dating. D. March 6, Year 2.

D. March 6, Year 2.

Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate? A. The revision of materiality at the financial statement levels will not affect the planned nature and timing of audit procedures, only the extent of those procedures. B. The auditor is required to reperform audit procedures already completed on the audit using the revised materiality. C. The auditor should consider disclaiming an opinion due to a scope limitation. D. Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

D. Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit? A.Testing the effectiveness of internal control procedures that appear to be suitably designed to prevent or detect material misstatements B. Calculating each individual expense account balance as a percentage of total entity expenses and comparing the results with industry averages C. Comparing each individual expense account balance with the relevant budgeted amounts and investigating any significant variations D. Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified

D. Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified

Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report? A. The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts. B. The client's willingness to pay additional fees for the additional procedures to be performed. C. The potential impact on financial statements and associated audit reports for the previous five years. D. The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

D. The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

Communication with those charged with governance must occur: A. after the financial statements are released. B. after the audit report is issued. C. before legal letters are sent to attorneys. D. before the audit report is issued.

D. before the audit report is issued.

The audit process _______. A. is unrelated to the degree of confidence that intended users place in the financial statements B. decreases the degree of confidence that intended users place in the financial statements C. has no effect on the degree of confidence that intended users place in the financial statements D. enhances the degree of confidence that intended users place in the financial statements

D. enhances the degree of confidence that intended users place in the financial statements

All of the following phrases would be found in the standard unmodified audit report for a private company except: A. management is responsible for the preparation and fair presentation of the financial statements. B. standards require that we plan and perform the audit to obtain reasonable assurance. C. we believe the audit evidence we have obtained is sufficient and appropriate. D. in our opinion, the financial statements referred to above are correct, in all material respects.

D. in our opinion, the financial statements referred to above are correct, in all material respects.

Determining the likelihood of a loss contingency occurring and trying to estimate a reasonable amount for a future loss _______. A. should be determined by the client's legal counsel B. should be determined solely by the internal auditor C. should be determined solely by the external auditor D. involves significant judgment by management

D. involves significant judgment by management

If management determines the loss contingency is probable and an amount can be reasonably estimated, then the company _______. A. must record a liability and a related depreciation expense or loss, and disclose the relevant details of the event in the notes to the financial statements B. should include a note in the notes to the financial statements but need not record an entry in accounting journals C. must record an asset and a related expense or loss, and disclose the relevant details of the event in the notes to the financial statements D. must record a liability and a related expense or loss, and disclose the relevant details of the event in the notes to the financial statements

D. must record a liability and a related expense or loss, and disclose the relevant details of the event in the notes to the financial statements

If management considers a material loss contingency to be probable but an amount cannot be reasonably estimated, the proper accounting treatment is: A. no adjustment or disclosure necessary. B. accrual in the financial statements and note disclosure. C. accrual in the financial statements only. D. note disclosure only.

D. note disclosure only.

All of the following statements are included in a management representation letter except: A. the effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements. B. no subsequent events have occurred that require adjustment to or disclosure in the financial statements. C. there have been no violations of laws or regulations. D. the auditor's fee for completing the audit.

D. the auditor's fee for completing the audit.

Final analytical procedures are intended A. to corroborate audit evidence obtained during the audit only B. to corroborate audit evidence obtained during the audit, and to confirm the financial statements are inconsistent with the auditor's revised expectations based on evidence evaluated during the audit. C. to refute audit evidence obtained during the audit, and to confirm the financial statements are consistent with the auditor's revised expectations based on evidence evaluated during the audit D. to corroborate audit evidence obtained during the audit, and to confirm the financial statements are consistent with the auditor's revised expectations based on evidence evaluated during the audit

D. to corroborate audit evidence obtained during the audit, and to confirm the financial statements are consistent with the auditor's revised expectations based on evidence evaluated during the audit

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the

Debit memo.

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to

Discover expenditures that were expensed, but should have been capitalized.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

Employees work the number of hours for which they are paid.

Which three of the following are involved in the purchasing cycle?

Establishing payment terms,Purchasing goods, Selecting vendors

A client's materials-purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to

Evaluate the reliability of information generated as a result of the purchasing process.

In the audit of inventory, selecting inventory items from a perpetual master file, going to the locations, and obtaining test counts is intended to produce evidence for which audit assertion?

Existence.

A shortening of inventory turnover days may indicate existence or valuation problems.

False

If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor's potential fraud risk assessments?

Fraudulent financial reporting-high risk; misappropriation of assets-high risk.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to

Identify potential liabilities for unpaid payroll taxes.

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

Which of the following would represent the best evidence for testing the net realizable value of inventory?

Investigate sales prices on the sale of inventory made after year-end.

In testing controls over cash disbursements, an auditor would be most likely to determine that the person who signs checks also

Is responsible for mailing the checks.

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor will be most likely to test the procedures by

Observation and inquiry.

In determining the effectiveness of an entity's controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and

Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant and equipment?

Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.

Accounting software starts with the population of payroll disbursements and develops a one-for-one match with underlying approved hours worked. A report is generated each pay period disclosing any payroll that is not supported by hours worked. The employee number is also compared with the approved master payroll file. A report is generated listing any transactions that are not supported by underlying documents or files. This is a description of a control over which of the following assertions for the payroll process?

Occurrence of payroll

An auditor most likely would extend substantive tests of payroll when

Overpayments are discovered in performing tests of details.

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if

Partial payments to vendors are continuously made in the ordinary course of business.

A client just read about a business paying extraordinary sums of money to a variety of employees. How would the client company use an IT application control to prevent this type of valuation problem?

Perform a limit test related to the class of employee.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?

Plant assets were retired during the current year.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers from the client's books.

On receiving a client's bank cut-off statement, an auditor most likely would trace

Prior-year checks listed in the cut-off statement to the year-end outstanding checklist.

Which of the following is/are essential to the proper statement of cash at the balance sheet date?

Proper cutoff of cash receipts and cash disbursements at the end of the year

Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at Judd's wholesale prices. Jackson was probably able to accomplish this because of Judd's poor internal control over

Purchase orders.

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

Recalculating payroll accruals.

In a properly designed internal control structure, the same employee would most likely match vendors' invoices with receiving reports and also

Recompute the calculations on vendors' invoices.

Which three of the following are steps involved in controlling activities in an Evaluated Receipts Settlement (ERS) system?

Recording payables Receiving goods Initiating an ERS transaction

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Reduction of the frequency of data entry errors.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

Request that the client schedule the physical inventory count at the end of the year.

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

Require employees to have their direct supervisors approve their time cards.

Which of the following industries would have the greatest concerns about purchases cutoff at month end, unrecorded liabilities, and accounting for advertising allowances provided by vendors?

Retail grocer.

Which three of the following analytical procedures are commonly used to audit long term debt? (Several choices may be correct.)

Return on common equity Interest bearing debt to total assets Shareholders' equity to total assets

Which of the following procedures is best for identifying unrecorded trade accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records.This situation could be the result of the client's failure to record

Sales returns.

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

Testing the entity's computation of standard overhead rates

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

The check signer reviews and cancels the voucher packets.

Which of the following audit assertions is least likely to be accomplished by vouching payroll transactions to supporting documentation (e.g., time cards and employee contracts)?

The completeness of payroll transactions.

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

The current year's payroll expense with the prior year's payroll expense.

Which three of the following are account balance assertions? (Several choices may be correct.)

The existence of inventory The completeness of inventory The valuation of inventory and the allocation of costs to cost of goods sold

Which of the following procedures represents a weakness in internal control for payroll?

The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

There are significant unexplained variances between standard and actual labor costs.

Why does the client prepare independent bank reconciliation?

To check for the completeness, existence, and valuation of cash balances

In performing tests concerning the granting of stock options, an auditor should

Trace the authorization for the transaction to a vote of the board of directors.

Which of the following should be done by the auditor on receipt of the cutoff statement? (Several choices may be correct.)

Tracing a sample of all checks dated in the prior year to the outstanding checks listed on the bank reconciliation, Scan the cutoff statement and enclosed data for unusual items, Vouch a sample of deposits in transit on the bank reconciliation to deposits on the cutoff statement

Comparing financial statement presentation with Generally Accepted Accounting Principles (GAAP) requirements is part of presentation and disclosure verification.

True

The nature of cash balances makes them susceptible to theft.

True

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?

Verification of existence of inventory.

If an auditor performs analytical procedures on rent expense and finds that rent expense has increased 50%, he or she is most likely to perform which of the following additional procedures?

Vouch larger items in rent expense in a search for unrecorded finance leases.

The rights and obligations assertion with respect to accounts payable relates to whether the _______.

accounts payable reflect the recorded liability of the entity

Assume you are involved in an audit and your expectations regarding effective controls are not confirmed. In this situation, you will need to take all of the following steps, EXCEPT _______.

communicating the control weaknesses to management and those charged with governance

When an auditor is auditing a client's inventory accounts, the primary focus is on the assertions of _______.

completeness, existence, valuation and allocation, and rights and obligations

An auditor's program to examine long-term debt most likely would include steps that require:

correlating interest expense recorded for the period with outstanding debt.

If ending inventory is overstated, _______.

cost of goods sold will be understated

Purchases of inventory on credit should involve _______.

debits to inventory and credits to payables

When auditors perform analytical procedures during the risk assessment for purchases and payables, they should _______.

develop a skill in analyzing the likely assertions that might be misstated based on the data

Most auditors plan to test controls in the purchases cycle because of the _______.

high volume of routine transactions in this process

Many smaller businesses, not-for-profit organizations, and smaller governments _______.

may have inadequate segregation of duties, which results in weak internal controls over cash

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is low, an auditor would probably:

observe the client's inventory count at an interim date.

Many of the controls over inventory _______.

overlap with other cycles

An auditor may plan to test controls in the payroll process because, among other factors:

payroll transactions are generally routine and processed in a high volume, which makes controls effective for management to employ.

When detection risk is low, the auditor is likely to:

prepare the bank reconciliation using bank data in the client's possession or audit the bank reconciliation using a cutoff bank statement obtained from the bank.

When reviewing the results of analytical procedures, the auditor needs to bring an appropriate level of _______.

professional skepticism

The purchases cutoff test involves determining that _______.

purchase transactions occurring near the balance sheet date are recorded in the proper period

If a company receives goods but waits to record the transaction until a vendor's invoice is received, _______.

purchases and accounts payable will be understated

The purchasing process normally includes all of the following transactions:

purchases on account, purchase returns, and cash disbursements.

The purchasing or procurement process involves _______.

selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities

The search for unrecorded liabilities consists of procedures designed specifically to detect _______.

significant unrecorded obligations at the balance sheet date (or as of an interim date)

Many clients build in redundant controls _______.

so if one control does not find a misstatement, another control will detect the problem

When there is the potential for material misstatements from purchase adjustments transactions, _______.

the auditor should obtain an understanding of all relevant aspects of the internal control structure components and consider the factors that affect the risk of such misstatements

From year one to year two, the ratio of sales to fixed assets declined significantly. This is a possible indication that:

the client is capitalizing costs that should be expensed.

When auditing the payroll process, the auditor will normally want to understand:

the extent to which a company is capital-intensive or laborintensive.

When a client does not maintain its own stock records, the auditor should obtain a written confirmation from the transfer agent and registrar concerning:

the number of shares issued and outstanding.

An inherent risk of major concern to the auditor in the payroll process is:

the occurrence and cutoff assertions for payroll.

An important aspect of developing a preliminary audit strategy involves _______.

understanding the entity and its environment

When auditing a fixed asset account such as land, buildings, and equipment, the auditor will normally:

use a combination of of agreeing beginning balances to prior year working papers and then testing transactions during the year.

The internal document commonly used to record a credit purchase in the purchases journal is a:

voucher.

An audit of inventory _______.

will vary from client to client

When auditors choose to send confirmations of accounts payable, accounts with _______.

zero or small balances should be among those selected for confirmation because they may be more understated than accounts with large balances