Audit Exam 2
A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is A. A material weakness. B. A significant deficiency. C. An insignificant deficiency. D. A probable deficiency.
B
AAA & Associates recently finished auditing LinktheEarth Corporation's internal control over financial reporting. AAA found a number of material weaknesses in the entity's internal control. LinktheEarth's management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end? A. Unqualified report. B. Adverse report. C. Qualified report. D. Disclaimer on opinion.
B
An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means A. The auditor must consider the integrated thoughts and ideas of everyone on the audit staff. B. The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way. C. The auditor must integrate the same objectives whether auditing internal control or auditing the financial statements. D. Two independent CPA firms must work together on the audit.
B
An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by A. Availability of data aggregated at a high level. B. Relative effectiveness and efficiency of the tests. C. Timing of tests performed after the balance sheet date. D. Auditor's familiarity with industry trends.
B
Analytical procedures may be classified as being primarily which of the following? A. Tests of controls. B. Substantive procedures. C. Tests of ratios. D. Detailed tests of balances.
B
Assessing control risk at a lower level involves all of the following except: A. Identifying specific controls to rely on. B. Concluding that controls are ineffective. C. Performing tests of controls. D. Analyzing the achieved level of control risk after performing tests of controls.
B
Assessing control risk at a lower level most likely would involve A. Changing the timing of substantive procedures by omitting interim testing and performing the tests at year-end. B. Identifying specific internal controls relevant to specific assertions. C. Performing more extensive substantive procedures with larger sample sizes than originally planned. D. Reducing inherent risk for most of the assertions relevant to significant account balances.
B
Audit documentation prepared on audits of public entities is the property of the A. Shareholders. B. Auditor. C. Management of the entity being audited. D. SEC.
B
Auditors are most likely to gather audit evidence solely using substantive procedures A. If transactions are recurring. B. For nonrecurring, unusual transactions. C. If control risk is very low. D. If the entity has a well-designed automated system.
B
Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by A. Employment of temporary personnel to aid in the separation of duties. B. Direct participation by the owner of the business in the recordkeeping activities of the business. C. Engaging a CPA to perform monthly bookkeeping. D. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
B
Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether: A. It is independent of management. B. It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations. C. It asks management difficult questions. D. It interacts regularly with internal audit personnel.
B
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by A. Reperformance and corroboration. B. Observation and inquiry. C. Inspection and vouching. D. Confirmation and recomputation.
B
For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date? A. Withdrawals from Federal Bank of more than $5 million must include a manager's signature. B. At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals. C. Federal Bank has just started establishing trusts for its customers and it has only set up ten such trusts. Before making an investment for a trust, bank employees must verify that the investment is in accordance with stated investment policies. D. On an annual basis, Federal Bank management performs credit checks on its loan customers before determining the value of loans it will not be able to collect on.
B
In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that A. Operational efficiency has been achieved in accordance with management plans. B. Errors and fraud have been prevented, or detected and corrected. C. Controls have not been circumvented by collusion. D. Management cannot override the system.
B
It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the A. Cost/benefit relationship of the system of internal control. B. Achievement of the objectives of the system of internal control. C. Comparison of recorded accountability with assets. D. Timing of the tests to be performed.
B
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when A. External policies established by parties outside the entity affect its accounting practices. B. Management is dominated by one individual. C. Internal audit personnel have direct access to the board of directors and the entity's management. D. The audit committee is active in overseeing the entity's financial reporting policies.
B
Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of A. Authorization, execution, and payment. B. Authorization, recording, and custody. C. Custody, execution, and reporting. D. Authorization, payment, and recording.
B
The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities except: A. The maintenance of asset records. B. The segregation of duties. C. The authorization by management of receipts and expenditures. D. The safeguarding of assets.
B
The auditor generally gives most emphasis to ratio and trend analysis in the examination of the A. Statement of Changes in Stockholders' Equity and Retained Earnings. B. Income Statement. C. Balance Sheet. D. Statement of Cash Flows.
B
The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should A. Consider the matter a scope limitation. B. Perform additional audit procedures to investigate the matter further. C. Intensify the examination with the expectation of detecting management fraud. D. Withdraw from the engagement.
B
The auditor should consider all of the following when deciding whether substantive procedures will be performed at an interim date except: A. The level of control risk. B. Scheduling conflicts in the audit firm that make interim testing more convenient. C. Whether business conditions will change after the interim date. D. The ability to examine the remaining period.
B
The five-step process in the audit of ICFR includes A. Form an opinion on the safeguarding of the entity's assets. B. Identify controls to test using a top-down, risk-based approach. C. Form an opinion on the fairness of the presentation of the financial statements. D. Form an opinion on the effectiveness of internal controls in meeting operational goals.
B
The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence? A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined." B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence." C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather." D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it."
B
The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n) A. Analytical procedure. B. Test of controls. C. Substantive procedure. D. Functional test.
B
The permanent (continuing) file of an auditor's working papers most likely would include copies of the A. Bank statements. B. Debt agreements. C. Lead schedules. D. Attorney's letters.
B
The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general file. B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards. C. Ownership be determined by the legal statutes of the state where the auditor practices. D. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers, and partners.
B
Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence. B. Completeness. C. Cutoff. D. Classification.
B
Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements? A. Tests of controls. B. Analytical procedures. C. Computer controls. D. Post-audit review of audit documents.
B
Which of the following is false? A. Regardless of the achieved level of control risk in connection with the audit of the financial statements, auditing standards require the auditor to perform some substantive procedures for all significant accounts and disclosures. B. The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective. C. The audit of internal control is intended to draw conclusions about the effectiveness of internal control over financial reporting as of a specific date. D. The auditor is required by AS5 to evaluate the implications of the financial statement audit for the effectiveness of internal control over financial reporting.
B
Which of the following would not be considered an analytical procedure? A. Estimating payroll tax expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. B. Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics. C. Computing accounts receivable turnover by dividing credit sales by the average net receivables. D. Developing the expected current year sales based on the sales trend of the prior five years.
B
Which statement concerning audit evidence is not valid? A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited. B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated. C. The auditor weighs the cost of obtaining evidence with its usefulness. D. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected.
B
You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases? A. Vouching transactions in accounting records to vendor invoices. B. Tracing vendor invoices to accounting records. C. Recalculation of vendor invoice amounts. D. Confirmation of customer accounts.
B
A substantive strategy differs from a reliance strategy in that a substantive strategy includes A. Increased implementation of detailed tests of transactions and balances. B. Extra tests of controls. C. Increased emphasis on verbal representations from management. D. Setting control risk at a minimum level.
A
According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity? A. The entity's CEO and/or CFO. B. The entity's board of directors. C. An internal control specialist. D. The external auditor.
A
An auditor's primary consideration regarding an entity's internal controls is whether the policies and procedures A. Affect the financial statement assertions. B. Prevent management override. C. Relate to the control environment. D. Reflect management's philosophy and operating style.
A
An example of audit evidence with a medium level of reliability is A. Scanning. B. Recalculation. C. Observation. D. All of these.
A
Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except: A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts) and similar data for the industry in which the entity operates. C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience. D. Study of the relationships of financial data with relevant nonfinancial data.
A
Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the: A. Difficulty and expense involved in testing a particular item. B. Assessment of control risk at a low level. C. Low inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness.
A
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct? A. Accounting records belong to the auditee. B. Documentation of an auditor's understanding of the entity's internal control system is not necessary. C. Audit documents may be regarded as a substitute for the company's accounting records. D. The independent auditor may discard audit documents after two years.
A
Footing is an example of A. Recalculation. B. Confirmation. C. Inquiries. D. Analytical procedures.
A
Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence. B. Completeness. C. Authorization. D. Classification.
A
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the A. Extent of tests of details. B. Level of inherent risk. C. Extent of tests of controls. D. Level of detection risk.
A
Which of the following concerning the auditor's report on internal control over financial reporting is correct? A. The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work. B. In the report on internal control over financial reporting, the auditor can issue only a qualified or an unqualified opinion. C. The auditor needs to state management's assessment of internal control over financial reporting, but does not necessarily need to comment on whether he or she agrees. D. An unqualified opinion is required if a material weakness is identified.
A
Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation? A. Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually. B. Flynt Corporation's CFO was arrested last year for embezzling money from the entity. C. For the current year, the auditor found a material misstatement in Flynt's sales recognition that was undetected by the internal controls. D. Flynt's audit committee is deemed to be ineffective.
A
Which of the following is the least persuasive documentation in support of an auditor's opinion? A. Schedules of details of physical inventory counts conducted by the entity. B. Notation of auditor's inferences drawn from ratios and trends. C. Notation of appraisers' conclusions documented in the auditor's working papers. D. Lists of negative confirmation requests for which no response was received by the auditor.
A
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales invoices. B. Observe the entity's distribution of payroll checks. C. Confirm a sample of recorded receivables by direct communication with the debtors. D. Review standard bank confirmations for indications of kiting.
A
Which of the following statements concerning control risk is correct? A. Assessing control risk and obtaining an understanding of an entity's internal controls may be performed concurrently. B. When control risk is high, an auditor is required to document the basis for that assessment. C. Control risk may be assessed sufficiently low to eliminate substantive procedures for significant accounts. D. When assessing control risk, an auditor should not consider evidence obtained in prior audits about the operation of control activities.
A
Which of the following statements is generally correct about the appropriateness of audit evidence? A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements. B. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained. C. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection. D. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity.
A
A confirmation is used to A. Verify the inventory count is correct. B. Verify that a control is being observed. C. Verify a representation from a third party. D. Verify that a specific trend is correct.
C
After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities A. Documented in the flowchart. B. Considered to be weaknesses that might allow errors to enter the accounting system. C. That the auditor plans to rely on. D. That would aid in preventing fraud.
C
All of the following are typically in the current file except: A. Adjusting journal entries. B. Copies of the audit report. C. Chart of accounts. D. Lead schedules.
C
An IT specialist is least likely to be necessary when A. Data are shared extensively among systems. B. The entity participates heavily in electronic commerce. C. The system has not changed from the prior year. D. Significant audit evidence is in electronic form.
C
An entity's control activities include all of the following except: A. Performance reviews. B. Information processing. C. External auditor's tests of controls. D. Segregation of duties.
C
Analytical procedures are A. Never required. B. Required for planning, substantive testing, and overall review of the financial statements. C. Required for planning and overall review of the financial statements. D. Required during planning only.
C
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that A. Fraud exists within the relevant accounts. B. Internal control activities are not operating effectively. C. Additional tests of details are required. D. The communication with the audit committee should be revised.
C
Analytical procedures used in planning an audit should focus on identifying A. Material weaknesses in internal control. B. The predictability of financial data from individual transactions. C. The various assertions that are embodied in the financial statements. D. Areas that may represent specific risks relevant to the audit.
C
Before applying substantive procedures to the details of accounts at an interim date (a date prior to the balance sheet date), an auditor should A.Assess control risk at high for the assertions embodied in the accounts selected for interim testing. B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. C. Consider the availability of information at a later date that will be necessary for the auditor's procedures (e.g., electronic data). D. Obtain written representations from management that all financial records and related data will be made available.
C
In creating lead schedules for an audit engagement, what financial information is needed to begin? A. Interim financial information, such as third-quarter sales, net income, and inventory and receivables balances. B. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year. C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information. D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries.
C
In determining whether transactions have been recorded, the direction of the audit testing should start from the A. General ledger balances. B. Adjusted trial balance. C. Original source documents. D. General journal entries.
C
In the context of an audit of internal controls, the auditor must document all of the following except: A. The extent to which he or she relied upon work performed by others. B. The auditor's understanding and evaluation of the design of each of the components of the entity's internal control over financial reporting. C. Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur. D. The evaluation of any deficiencies discovered that could result in a modification of the auditor's report.
C
Information and communication includes all of the following except: A. Identifying and recording all valid transactions. B. Determining the time period in which transactions occurred. C. Communicating price changes to customers. D. Properly presenting transactions and related disclosures in the financial statements.
C
Of the following, the most reliable type of evidence typically is: A. Confirmation. B. Inspection of records and documents. C. Reperformance. D. Observation.
C
Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditor. B. Correspondence between the auditor and third-party vendors. C. Copies of company sales invoices inspected by the auditor. D. Computations made by the auditor.
C
Prior to issuing a report on internal controls over financial reporting, an auditor is required to A. Perform procedures sufficient to identify all control deficiencies. B. Communicate to management, in writing, all control deficiencies previously included in written communication from the internal auditors. C. Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made. D. Represent that no significant deficiencies were noted during the audit of internal control.
C
S&H Associates has just performed an audit of Bob's Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true? A. S&H must still assume that management has assessed the effectiveness of internal control. B. Depending on other factors in the audit, S&H can still issue an unqualified opinion. C. S&H should consider this situation a limitation on the scope of the audit. D. Management does not need to give S&H a letter if it has disclosed all known internal control deficiencies.
C
Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent A. Disclosures of information that significantly contradict the auditor's going concern assumption. B. Material fraud or illegal acts perpetrated by high-level management. C. Significant design flaws in internal controls or poor implementation of internal controls. D. Manipulation or falsification of accounting records or documents from which financial statements are prepared.
C
The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because A. Internal audit programs, audit documents, and reports can eliminate the need for the independent auditor's staff. B. The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. C. The work performed by internal audit personnel may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. D. The understanding of the internal audit function is an important substantive procedure to be performed by the independent auditor.
C
The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of A. A management deficiency. B. A design deficiency. C. A deficiency in operation. D. This is not an internal control deficiency.
C
The primary objective of final analytical procedures is to A. Obtain evidence from details tested to corroborate particular assertions. B. Identify areas that represent specific risks relevant to the audit. C. Assist the auditor in assessing the validity of the conclusions reached on the audit. D. Satisfy doubts when questions arise about an entity's ability to continue in existence.
C
The risk assessment component of internal control refers to A. The auditor's assessment of control risk. B. The auditor's assessment of client risk. C. The entity's identification and analysis of risks relevant to achievement of its objectives. D. The entity's monitoring of the potential for material misstatements.
C
To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques? A. Reviewing management documentation. B. Inquiry. C. Scanning. D. Transaction walkthroughs.
C
Which assertions may be tested for the "transactions and events" category of management assertions? A. Existence, completeness, rights and obligations, accuracy, cutoff and classification. B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification. C. Occurrence, completeness, authorization, accuracy, cutoff and classification. D. Existence, rights and obligations, accuracy, authorization, and completeness.
C
Which of the following audit tests would be regarded as a test of controls? A. Tests of the specific items making up the balance in a given general ledger account. B. Tests comparing inventory pricing to vendors' invoices. C. Tests of the signatures on canceled checks to the board of directors' authorizations. D. Tests of the additions to property, plant, and equipment by physical inspections.
C
Which of the following best describes the primary purpose of audit procedures? A. To detect all errors or fraudulent activities. B. To comply with generally accepted accounting principles. C. To gather corroborative evidence about management's assertions. D. To verify the accuracy of the balance sheet account balances.
C
Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and events. B. Assertions about account balances at the period end. C. Assertions about presentation and disclosure. D. None of these.
C
You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Accuracy.
C
A high detection risk strategy includes all of the following except: A. Interim testing. B. Reduced testing of transactions. C. Heavy reliance on analytical procedures as substantive procedures. D. Audit work only completed at year-end.
D
A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2013. The number of subscribers increased steadily throughout the year and at December 31, 2013, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2013 and was increased to $12 for new members on April 1, 2013. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2013, would be approximately A. $179,400. B. $171,600. C. $164,400. D. $163,800.
D
A primary purpose of internal controls is to A. Form a basis for evaluating employees. B. Monitor production quality. C. Avoid clerical errors. D. Meet objectives of maintaining reliable documents and records and accurate financial reporting.
D
All audit documentation should have a heading, which includes A. Name of the company under audit. B. Title of the working paper. C. Company's year-end date. D. All of these.
D
All of the following are significant deficiencies except: A. Absence of appropriate reviews of transactions. B. Evidence of willful wrongdoing by lower-level employees. C. Inadequate provisions for safeguarding assets. D. Inventory is highly subject to obsolescence.
D
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of A. Tests of transactions and balances. B. A preliminary review of internal controls. C. Specialized audit programs. D. Analytical procedures.
D
An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the A. Efficiency of management's decision-making process. B. Appropriate prices that the entity should charge for its products. C. Methods of assigning production tasks to employees. D. Entity's ability to accurately process and summarize financial data.
D
An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor? A. The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. B. Twice as many accounts receivable were written off in the prior year than in the current year. C. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year. D. The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
D
As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except: A. Consider factors that affect the risk of material misstatement. B. Ascertain whether internal control policies and procedures have been placed in operation. C. Identify the types of potential misstatements that can occur. D. Obtain knowledge about the operating effectiveness of the internal control.
D
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposes. B. Audit documents should be the primary support for the financial statements being examined. C. Audit documents should be considered as a substitute for the company's accounting records. D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
D
Audit evidence concerning proper segregation of duties ordinarily is best obtained by A. Preparation of a flowchart of duties performed by available personnel. B. Inquiring whether control activities operated consistently throughout the period. C. Reviewing job descriptions prepared by the Personnel Department. D. Direct personal observation of the employees who apply the control activities.
D
Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if: A. Compliance tests were not performed by the internal audit staff during the remaining period. B. The internal control system provides a basis for reliance in reducing the extent of substantive procedures. C. The auditor used nonstatistical sampling during interim compliance testing. D. Inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.
D
If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end A. Additional tests are seldom conducted for the remaining period. B. Additional control tests are required in the remaining period. C. The entity's controls likely are ineffective. D. Additional tests likely will be performed in the remaining period.
D
In an audit of financial statements of a private company in accordance with generally accepted auditing standards, an auditor is required to A. Identify specific internal control activities relevant to management's financial statement assertions. B. Perform tests of controls to evaluate the effectiveness of the entity's accounting system. C. Determine whether procedures are suitably designed to prevent or detect material misstatements. D. Document the auditor's understanding of the entity's internal control.
D
In designing written audit programs, an auditor should plan specific audit procedures to test A. Timing of audit procedures. B. Cost-benefit of gathering evidence. C. Selected audit techniques. D. Management assertions.
D
In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except: A. Test some of the work performed by others to evaluate the quality and effectiveness of their work. B. Evaluate the nature of the controls subjected to the work of others. C. Evaluate the competence and objectivity of the individuals who performed the work. D. All of these are required.
D
In obtaining an understanding of an entity's internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to A. Determine whether the control activities have been placed in operation. B. Perform procedures to understand the design of the internal control policies. C. Document the understanding of the entity's internal control components. D. Search for significant deficiencies in the operation of the internal control.
D
Proper monitoring within an internal control framework may include all of the following except: A. An external auditor. B. An effective audit committee. C. An internal audit function. D. The internal revenue service.
D
The concept of reasonable assurance in the context of an entity's internal controls recognizes that A. Auditors may fail to detect material misstatements. B. Proper internal controls guarantee that material misstatements will not occur. C. Proper internal controls preclude fraud. D. The costs of some controls may be too high to implement in relation to potential benefits.
D
The documentation of an auditor's understanding of internal controls A. Is optional. B. Must be exclusively in narrative, questionnaires, or flowchart form. C. Must include flowcharts. D. Can include any combination of narratives, questionnaires, or flowcharts.
D
The main goal of auditing internal control is A. To allow the auditor to fix any internal control deficiencies. B. To form an opinion on the ability of internal controls to prevent fraud. C. To assure management that internal control is preventing all material misstatements on the financial statements. D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.
D
Which assertions may be tested for the "presentation and disclosure" category of management assertions? A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation. B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification. C. Occurrence, completeness, classification and understandability, cutoff and classification. D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.
D
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be well documented and cross-referenced in the audit documents. B. Be based on sources that are considered reliable. C. Bear a direct relationship to the audit assertion. D. Be persuasive enough to enable the auditor to form an opinion.
D
Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective internal control system provides more reliable audit evidence.
D
Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements? A. Scanning the journals produced by the internal control system. B. Performing analytical procedures using data aggregated at a high level. C. Vouching a sample of transactions directly related to the controls. D. Observing the entity's personnel applying the controls.
D
Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion? A. Nothing has come to management's attention to suggest that the entity's internal control is less than effective. B. Statements suggesting only negative assurance. C. A conclusion that the entity's internal control over financial reporting is effective when a material weakness exists at the end of the reporting period. D. Disclosure of material weaknesses corrected during the period.
D
Which of the following statements is false? A. The PCAOB focuses on the financial reporting objective of internal controls. B. Management is required to base internal controls on a recognized control framework. C. Most U.S. companies use the internal control framework developed by COSO. D. All controls relevant to financial reporting are accounting controls.
D
