Audit FInal

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10 After considering the client's internal control, the auditors have concluded that it is well-designed and is functioning as anticipated. Under these circumstances, the auditors would most likely: A Reduce substantive procedures in areas where the internal control was found to be effective. B Cease to perform further substantive procedures. C Increase the extent of anticipated analytical procedures. D Perform all tests of controls to the extent outlined in the preplanned audit plan.

10 Which of the following best illustrates the concept of sampling risk? A A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B An auditor may select audit procedures that are not appropriate to achieve the specific objective. C An auditor may fail to recognize deviations in the documents examined for the chosen sample. D The documents related to the chosen sample may not be available for inspection.

109 An example of an internal control weakness is to assign the personnel department responsibility for: A Distribution of paychecks. B Hiring personnel. C Authorizing deductions from pay. D Interviewing employees for jobs.

50 The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

6 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 Accept responsibility for year-end adjusting entries. C Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report. D Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.

6 An auditor's purpose for performing tests of controls is to provide reasonable assurance that: A Controls are operating effectively. B The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized. TC ransactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. D Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles

74 If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size? A Increase. B Remain the same. C Decrease. D Indeterminate, depends upon exact change being made.

75 In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size? A This year's sample is larger than last year's sample. B This year's sample is smaller than last year's sample. C This year's sample is equal to last year's sample. D This year's sample is indeterminate in relation to last year's sample.

78 Which of the following statements is correct concerning statistical sampling in tests of controls? A The population size has little effect on determining sample size except for very small populations. B The expected population deviation rate has little or no effect on determining sample size except for very small populations. C As the population size doubles, the sample size also should double. D For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

8 Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests? A The projected misstatement exceeds the tolerable misstatement. B The allowance for sampling risk exceeds the projected misstatement. C The risk of incorrect acceptance exceeds the risk of incorrect rejection. D The tolerable misstatement exceeds the sample net misstatement

9 In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: A Efficiency of the audit. B Effectiveness of the audit. C Selection of the sample. D Audit quality controls.

8 Which of the following best describes the reason why independent auditors report on financial statements? A A management fraud may exist and it is more likely to be detected by independent auditors. B Different interests may exist between the company preparing the statements and the persons using the statements. C A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work. D Poorly designed internal control may be in existence.

84 Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A Accounts receivable divided by Cost of goods sold. B Aging of accounts receivable. C Cash Sales divided by Accounts receivable. D Year 2 accounts receivable compared to year one accounts receivable.

110 It would be appropriate for the payroll accounting department to be responsible for which of the following functions? A Approval of employee time records. B Maintenance of records of employment, discharges, and pay increases. C Preparation of periodic governmental reports as to employees' earnings and withholding taxes. D Distribution of paychecks to employees.

99 Which of the following is true about the auditors' observation of the client's physical inventory? A The count must be made at year-end. B The auditors should supervise the client's personnel. C The auditors' observation addresses the existence assertion. D The auditors should justify any omission of the observation in the audit report.

52 Tracing from source documents to journals most directly tests: Completeness (understatements). Existence (overstatements).

COMPLETENESS

1 CPAs should not be liable to any party if they perform their services with: A Regulatory providence. B Good faith. C Ordinary negligence. D Due professional care.

32 The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: A Account risk. B Control risk. C Detection risk. D Inherent risk.

Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct? rev: 08_27_2015_QC_CS-22328, 09_20_2017_QC_CS-101481 A An individual assigned to the attest engagement. B A partner in the office of the partner in charge of the attest engagement. C A manager who is in charge of providing tax services to the attest client. D A partner in the national office of the firm that performs marketing services.

e. Which of these organizations has the responsibility to perform inspections of auditors of public companies? A American Institute of Certified Public Accountants. B Securities and Exchange Commission. C Financial Accounting Standards Board. D Public Company Accounting Oversight Board.

12 Which of the following best describes what is meant by generally accepted auditing standards? A Acts to be performed by the auditors. B Measures of the quality of the auditors' performance. C Procedures to be used to gather evidence to support financial statements. D Audit objectives generally determined on audit engagements.

124 In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: A Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. B Not in accordance with generally accepted auditing standards. C A qualification that lessens the collective responsibility of both CPA firms. D An example of a dual opinion requiring the signatures of both auditors.

128 Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will: A Win because there was no privity of contract between Hark and Third. B Lose because Hark knew that a bank would be relaying the financial statements. C Win because Third was contributory negligent in granting the loan. D Lose because Hark was negligent in performing the audit.

15 In which of the following situations would a public accounting firm have violated the AICPA Code ofProfessional Conduct in determining its fee? A A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing. B A fee is to be established at a later date by the Bankruptcy Court. C A fee is based upon the nature of the engagement rather than upon the actual time spent on the engagement. D A fee is based on the fee charged by the client's former auditors.

16 A public accounting firm would least likely be considered in violation of the AICPA independence rules in which of the following instances? A A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. B A manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm. C An attest client owes the firm fees for this and last year's annual engagements. D A covered member's dependent son owns stock in an attest client

21 A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client? A Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. B Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child. C No, because the CPA would not be considered to have a direct financial interest in the client. D No, because the CPA would not be considered to have a material indirect financial interest in the client.

22 An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: A Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. B Establish standards to follow for effective accounting practice. C Provide a framework within which accounting policies could be effectively developed and executed. D Outline criteria that can be utilized in conducting interviews of potential new accountants.

38 Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist? A Apply increased professional skepticism about material transactions. B Increase the assessed level of detection risk. C Assign personnel with particular skill to areas of high risk. D Obtain increased evidence about the appropriateness of management's selection of accounting principles.

49 To best test existence, an auditor would sample from the: A General ledger to source documents. B General ledger to the financial statements. C Source documents to the general ledger. D Source documents to journals.

5 Auditors are periodically punished for holding an investment in a client. This violates which ethical rule? A Independence. B Non compliance with GAAP. C Integrity. D Confidentiality.

6 The risk that information is misstated is referred to as: A Information risk. B Inherent risk. C Relative risk. D Business risk.

68 An auditor identified a material weakness in internal control in December. The client was informed and the client corrected the material weakness shortly after year-end (December 31); the auditor agrees that the correction eliminated the material weakness as of January 31. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: A Adverse. B Unqualified. C Unqualified with explanatory language relating to the material weakness. D Qualified.

7 The auditor's primary means of obtaining corroboration of management's information concerning litigation is a: A Letter of audit inquiry to the client's lawyer. B Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C Confirmation of claims and assessments from the other parties to the litigation. D Confirmation of claims and assessments from an officer of the court presiding over the litigation.

80 Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A Understatement of outstanding checks. B Overstatement of outstanding checks. C Understatement of deposits in transit. D Overstatement of bank services charges.

88 An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? A Completeness. B Existence. C Legality. D Valuation

89 Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? A Quantities ordered are excluded from the receiving department copy of the purchase order. B Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. C Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. D Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

92 An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: A Existence. B Completeness. C Valuation. D Rights.

93 In testing for unrecorded retirements of equipment, an auditor might: A Select items of equipment from the accounting records and then attempt to locate them during the plant tour. B Compare depreciation expense with the prior year's depreciation expense. C Trace equipment items observed during the plant tour to the equipment subsidiary ledger. D Scan the general journal for unusual equipment retirements.

94 Which of the following is not one of the auditors' objectives in auditing depreciation? A Establishing the reasonableness of the client's replacement policy. B Establishing that the methods used are appropriate. C Establishing that the methods are consistently applied. D Establishing the reasonableness of depreciation computations.

The financial statements should be adjusted The event requires financial statement disclosure, but no adjustment The auditor's report should be modified for a lack of consistency A. Yes No No B. Yes No Yes C. No Yes Yes D. No Yes No Option A Option B Option C Option D

The most important benefit of having an annual audit by a public accounting firm is to: A Provide assurance to investors and other outsiders that the financial statements are reliable. B Enable officers and directors to avoid personal responsibility for any misstatements in the financial statements. C Meet the requirements of government agencies. D Provide assurance that illegal acts, if any exist, will be brought to light.

When using sampling for tests of controls, which of the following audit consequences may follow? A If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low. B If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high. C If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests. D If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.

Which of the following best illustrates the concept of sampling risk? A A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B An auditor may fail to recognize misstatements in the documents examined for the chosen sample. C The documents related to the chosen sample may not be available for inspection. D An auditor may select audit procedures that are not appropriate to achieve the specific objective.

Which of the following is not prohibited by the AICPA Code of Professional Conduct? A Advertising in newspapers. B Payment of commission to obtain an audit client. C Acceptance of a contingent fee for a review of financial statements. D Engaging in discriminatory employment practices.

1 Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B Receive a cutoff statement directly from the client's bank. C Prepare a four column bank reconciliation using the year-end bank statement. D Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.

10 An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatements, and a critical assessment of audit evidence is referred to as: A Reasonable assurance. B Professional skepticism. C Audit neutralism. D Auditing mindset.

10 With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is: A Extended to include all events occurring until the date of the last subsequent event referred to. B Limited to the specific event referred to. C Limited to all events occurring through the date of issuance of the report. D Extended to include all events occurring through the date of submission of the report to the client.

100 Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? A To document every test count. B For subsequent comparison with the completed inventory listing. C To document compliance with generally accepted accounting principles. D For use in subsequent audits.

102 Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories? A Confirmation of goods in the hands of public warehouses. B Supervising the taking of the annual physical inventory. C Carrying out physical inventory procedures at an interim date. D Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory.

106 Auditors may choose not to confirm accounts payable because: A Confirmation obtains evidence identical to that obtained by cutoff tests. B Other reliable external evidence to support the balances is likely to be available. C A reading of the corporate minutes reveals that confirmation is unnecessary. D The balances due will have changed between the year-end and the date of confirmation.

119 CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? A Such assumption of responsibility violates the profession's standards. B In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. C In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

120 The basis for a modification paragraph is ordinarily placed: A Within the "Auditor's Responsibility" section of the audit report. B Preceding the opinion section. C After the opinion section. D Based on the auditor's judgment either before or after the opinion section.

123 The auditors' report should be dated as of the date the: A Report is delivered to the client. B Auditors have accumulated sufficient evidence. C Fiscal period under audit ends. D Peer review of the working papers is completed.

126 A principle that may reduce or entirely eliminate auditor liability to a client is: A Client constructive negligence. B Client contributory negligence. C Auditor ordinary negligence. D Auditor gross negligence.

2. When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: A Be less than the preliminary assessed level of control risk. B Equal the preliminary assessed level of control risk. C Equal the actual control risk. D Be less than the actual control risk.

20 Independence is required of a CPA performing: A Audits, but not any other professional services. B Attestation services, but not other professional services. C Attestation and tax services, but not other professional services. D All professional services

28 Which of the following best describes what is meant by the term "fraud risk factor"? A Factors that, when present, indicate that risk exists. B Factors often observed in circumstances where frauds have occurred. C Factors that, when present, require modification of planned audit procedures. D Weaknesses in internal control identified during an audit.

29 Which of the following is most likely to be an overall response to fraud risks identified in an audit? A Supervise members of the audit team less closely and rely more upon judgment. B Use less predictable audit procedures. C Use only certified public accountants on the engagement. D Place increased emphasis on the audit of objective transactions rather than subjective transactions.

33 Which of the following statements is correct regarding the auditor's determination of materiality? A The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. B The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. C Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. D The amount used for the planning should equal that used for evaluation.

4 A material weakness involves an amount that could result in a misstatement that is: A Smaller than inconsequential. B Material. C Tolerable. D Larger than inconsequential.

4 On receiving the bank cutoff statement, the auditor should trace: A Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C Deposits listed on the cutoff statement to deposits in the cash receipts journal. D Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation.

4 Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): A Extrapolation difference. B Known misstatement. C Likely misstatement. D Projected misstatement.

42 The auditors' understanding established with a client should be established through a(an): A Oral communication with the client. B Written communication with the client. C Written or oral communication with the client. D Completely detailed audit plan.

48 Which of the following is most likely to be considered an analytical procedure? A Testing purchases at year-end to determine they were recorded in the proper period. B Comparing inventory balances to recent sales activities. C Selecting a sample of year-end receivables for confirmation. D Reconciling physical counts of inventory to perpetual records

5 Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A Lapping. B Kiting. C Effective cash management. D Related party transactions.

5 Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? A The complexity of the information processing system. B Human judgment in the decision making process. C The ineffectiveness of the board of directors. D The lack of management incentives to improve the control environment.

6 Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A Examine sales invoices. B Inclusion of the information in the engagement letter. C Examine correspondence. D Examine any subsequent cash receipts.

7 Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr, at a minimum, must prove that Cox: A Knew of the instances of fraud. B Failed to exercise due care. C Was grossly negligent. D Acted recklessly or with lack of reasonable grounds for belief.

85 Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A The positive form for small balances, and the negative form for large balances. B The positive form used for large balances and the negative form for the small balances. C The positive form used for trade receivables and the negative form for other receivables. D The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

86 Which of the following is not true relating to the auditors' observation of the client's physical inventory? A The auditors should evaluate the client's planning of the physical inventory. B The auditors should make certain that consigned items from suppliers are included in physical inventory totals. C The auditors should evaluate the adequacy of the client's counting procedures. D The auditors should take test counts of the client's inventory.

87 Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles? A Valuing inventory at cost. B Including in inventory items that are consigned out to vendors, but not yet sold. C Using standard cost as the measure of inventory cost. D Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.

9 An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the: A Evaluation materiality approach. B Iron curtain approach. C Projected misstatement approach. D Rollover approach.

98 Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? A Establishing a written company policy distinguishing between capital and revenue expenditures. B Using a budget to forecast and control acquisitions and retirements. C Analyzing monthly variances between authorized expenditures and actual costs. D Requiring acquisitions to be made by user departments.

Auditors often utilize sampling methods when performing tests of controls. Which of the following sampling methods is most useful when testing controls? A Unrestricted random sampling with replacement. B Attributes sampling. C Stratified random sampling. D Variables sampling.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: A Employment of temporary personnel to aid in the separation of duties. B Direct participation by the owner in key record keeping and control activities of the business. C Engaging a CPA to perform monthly write-up work. D Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee

Which of the following statements best describes why auditors investigate related party transactions? A Related party transactions generally are illegal acts. B The substance of related party transactions may differ from their form. C All related party transactions must be eliminated as a step in preparing consolidated financial statements. D Related party transactions are a form of management fraud.

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of: A Incorrect acceptance. B Incorrect rejection. C Assessing control risk too high. D Assessing control risk too low.

1 Which of the following is most likely to be considered a Type 1 subsequent event? A A business combination completed after year-end, but for which negotiations began prior to year-end. B A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. C Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. D Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

101 Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? A Supplies of relatively little value are expensed when purchased. B The cycle basis is used for physical counts. C The storekeeper is responsible for maintenance of perpetual inventory records. D Perpetual inventory records are maintained only for items of significant value.

111 To minimize the opportunities for fraud, unclaimed cash payroll should be: A Deposited in a safe deposit box. B Held by the payroll custodian. C Deposited in a special bank account. D Held by the controller.

113 An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: A December 31, 20X8. B January 17, 20X9. C February 10, 20X9. D February 16, 20X9.

121 Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A Must not refer to the audit of the component auditor. B Must refer to the audit of the component auditor. C May refer to the audit of the component auditor. D May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

122 A material departure from generally accepted accounting principles will result in auditor consideration of: A Whether to issue an adverse opinion rather than a disclaimer of opinion. B Whether to issue a disclaimer of opinion rather than a qualified opinion. C Whether to issue an adverse opinion rather than a qualified opinion. D Nothing, because none of these opinions is applicable to this type of exception.

125 Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability? A Absolute liability. B Contributory negligence. C Joint and several liability. D Proportional liability.

23 A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is: A Considered acceptable by the AICPA Code of Professional Conduct. B Ill advised since it would impair the CPA's independence with respect to the client. C Considered discreditable to the profession. D A violation of generally accepted auditing standards.

24 An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue? A Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function. B The decision as to loss of independence must be made by the client based on the facts of the particular case. C The auditor should not make management decisions for an audit client. D The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.

25 a. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? A Generous performance-based compensation systems. B Management preoccupation with increased financial performance. C An unreliable accounting system. D Strained relationships between management and the auditors.

3 As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A The confirmation request was signed by the treasurer. B Sending the request was meaningless because the account was closed before the year-end. C The request was mailed by the assistant treasurer. D The CPA did not sign the confirmation request before it was mailed

3 The inspection of a vendor's invoice by the auditors is: A Physical evidence about occurrence of a transaction. B Part of the client's accounting system. C Documentary evidence about occurrence of a transaction. D Direct evidence about occurrence of a transaction.

39 Which of the following procedures is not performed as a part of planning an audit engagement? A Reviewing the working papers of the prior year. B Developing an overall audit strategy. C Confirmation of all major accounts. D Designing an audit plan.

41 While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and: A Assess the risk of misstatements due to illegal acts. B Consider the complexity of the transactions involved. C Consider the likelihood that the risks could result in material misstatements. D Determine materiality levels.

46 The inspection of a vendor's invoice by the auditors is: A Direct evidence about occurrence of a transaction. B Physical evidence about occurrence of a transaction. C Documentary evidence about occurrence of a transaction. D Part of the client's accounting system.

47 Confirmation would be most effective in addressing the existence assertion for the: A Addition of a milling machine to a machine shop. B Payment of payroll during regular course of business. C Inventory held on consignment. D Granting of a patent for a special process developed by the organization.

56 Auditors must communicate internal control significant deficiencies to: A the SEC. B the shareholders. C the audit committee. D the Public Company Accounting Oversight Board.

59 After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: A Additional evidence to support a reduction in the assessed level of control risk is not available. B An increase in the assessed level of control risk is justified for certain financial statement assertions. C It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. D There were many internal control deficiencies that would allow misstatements to enter the accounting system.

62 Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A Previous experience with the entity. B Inquiries of appropriate management personnel. C Performance of substantive procedures. D Inspection of document and records.

63 At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A More than remote. B Probable. C Reasonable possibility. D Sufficient.

67 Assume that an auditor is focusing on two weaknesses in internal control. Although neither is by itself a material weakness, the two significant deficiencies in combination represent a material weakness. The client effectively remediates one of them prior to year-end but does not have time to remediate the other prior to year-end. What type of audit report on internal control is appropriate? A Adverse. B Qualified. C Unqualified. D Unqualified with explanatory language.

7 Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A Reviewing an aging of accounts receivable. B Examination of cash receipts subsequent to the balance sheet date. C Confirming current (0-30 day) year-end accounts receivable. D Reviewing credit files for selected account.

77 If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to: A Increase. B Remain the same. C Decrease. D Change by 4%.

8 If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on: A Criminal deceit. B Strict liability. C Gross negligence. D Ordinary negligence.

83 Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A The cashier prepares the daily deposit. B The cashier makes the daily deposit at a local bank. C The cashier posts the receipts to the accounts receivable subsidiary ledger. D The cashier endorses the checks.

9 The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? A 5%. B 60%. C 12.5%. D 42.7%.

96 The auditors may conclude that depreciation charges are insufficient by noting: A continuous trade-ins of relatively new assets. B insured values greatly in excess of book values. C excessive recurring losses on assets retired. D large amounts of fully depreciated assets.

An auditor may compensate for a weakness in internal control by increasing the extent of: A Tests of controls. B cDetection risk. C Substantive tests of details. D Inherent risk.

Bell's accounts-payable clerk has a brother who is one of Bell's vendors. The brother will often invoice Bell twice for the same delivery. The accounts-payable clerk removes the receiving report for the first invoice from the paid voucher file and uses it for support of payment for the duplicate invoice. The most effective procedure for preventing this activity is to: A mail signed checks without allowing them to be returned to the accounts-payable clerk. B use dual signatures. C cancel vouchers and supporting papers when payment is made. D use prenumbered receiving reports.

Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do? A Disclaim an opinion. B Issue an adverse opinion. C Suggest that Kelly Company engage another CPA to perform the audit. D Rely on the competence of client personnel.

Of the following, which is the least reliable type of audit evidence? A Confirmations mailed by outsiders to the auditors. B Correspondence between the auditors and suppliers. C Copies of sales invoices inspected by the auditors. D Canceled checks returned in the year-end bank statement directly to the client.

The auditors identified a material weakness in internal control in August. The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditors concluded that management eliminated the material weakness prior to year-end. The appropriate audit report on internal control is: A Adverse. B Qualified. C Unqualified. D Unqualified with explanatory language relating to the material weakness.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? A Examine human resources records for accuracy and completeness. B Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. C Make a surprise observation of the company's regular distribution of paychecks on a test basis. D Visit the working areas and verify that employees exist by examining their badge or identification numbers.

Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics? A Performance of work with honesty, diligence, and responsibility. B Prudence in the use and protection of information acquired in the course of their duties. C Use of appropriate sampling methods to select areas for audit. D Continual improvement in proficiency and effectiveness and the quality of services provided.

103 Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? A Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. B Examine unusual relationships between monthly accounts payable balances and recorded purchases. C Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. D Examine selected cash disbursements in the period subsequent to year-end.

11 Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards? A The audit provides reasonable assurance the client will remain in business for at least one year. B The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement. C Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation. D An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements

112 A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that: A Only bonafide employees worked and their pay was properly computed. B Jobs on which employees worked were charged with the appropriate labor cost. C Internal control relating to payroll disbursements are operating effectively. D Employees worked the number of hours for which their pay was computed.

116 Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with: A An estimate of the dollar amount of the probable loss. B An expert opinion as to whether a loss is possible, probable, or remote. C Information concerning the progress of cases to date. D Corroborative audit evidence.

118 An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the: A Evaluation materiality approach. B Iron curtain approach. C Projected misstatement approach. D Rollover approach.

2 If the auditors do not perform tests of controls for certain assertions: A They have performed a substandard audit. B They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. C They must issue a qualified opinion. D They must assess control risk at the maximum level for those assertions.

26 Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? A Analysis of balance sheet accounts. B Analysis of income statement accounts. C All matters of continuing accounting significance. D Facts that might bear on the integrity of management.

27 h. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as A Business risk. B Engagement risk. C Control risk. D Detection risk.

3 Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? A The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls. B. Certain controls do not leave a trail of documentary evidence. C. Deviation rates were greater than zero and approached anticipated levels. D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

35 Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: A Awareness of the consistency in the application of generally accepted accounting b principles between accounting periods. B Evaluation of all matters of continuing accounting significance. C Opinion of any subsequent events occurring since the predecessor's audit report was issued. D Understanding as to the reasons for the change of auditors.

37 Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A Several members of management have recently purchased additional shares of the entity's stock. B Several members of the board of directors have recently sold shares of the entity's stock. C The entity distributes financial forecasts to financial analysts that predict conservative operating results. D Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

4 Governmental auditing, in addition to including audits of financial statements, often includes audits of efficiency, effectiveness, and: A Adequacy. B Evaluation. C Accuracy. D Compliance.

4 If the auditors do not perform tests of controls for certain assertions: A They have performed a substandard audit. B They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. C They must issue a qualified opinion. D They must assess control risk at the maximum level for those assertions.

40 Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted? A There are significant related party transactions that management claims occurred in the ordinary course of business. B Internal control activities requiring the segregation of duties are subject to management override. C Management continues to employ an inefficient system of information technology to record financial transactions. D It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

5 Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A Sale of long-term debt or capital stock. B Loss of a plant as a result of a flood. C Major purchase of a business which is expected to double the sales volume. D Settlement of litigation in excess of the recorded liability.

57 Tests of controls are most likely in which of the following situations? A Few transactions have occurred, but for very material amounts. B When substantive procedures are being used as the only further audit procedures. C The cost of tests of controls is likely to exceed the savings brought about by a resulting decrease in the scope of substantive procedures. D The assessed level of the risk of misstatement includes a presumption that controls operate effectively.

6 A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan, the CPA's best defense would be that the: A Bank's identity was known to the CPA prior to completion of the audit. B Bank was not the CPA's client. C Client was aware of the misstatements. D Audit complied with generally accepted auditing standards.

60 Which is most likely when the assessed level of control risk increases? A Change from performing substantive procedures at year-end to an interim date. B Perform substantive procedures directed inside the entity rather than tests directed c toward parties outside the entity. C Use the maximum number of dual purpose tests. D Use larger sample sizes for substantive procedures.

61 A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? A Zero. B Low. C Moderate. D Maximum.

64 Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both: A Journalize cash receipts and disbursements and prepare the financial statements. B Monitor internal controls and evaluate whether the controls are operating as intended. C Adopt new accounting pronouncements and authorize the recording of transactions. D Record and conceal fraudulent transactions in the normal course of assigned tasks.

69 The minimum likelihood of loss involved in the consideration of a control deficiency that is less than a significant deficiency is: A Remote. B More than remote. C Probable. D Not considered. 70 All significant deficiencies are: Control Deficiencies, but not Material weakness

7 Which of the following professionals has primary responsibility for the performance of an audit? A The managing partner of the firm. B The senior assigned to the engagement. C The manager assigned to the engagement. D The partner in charge of the engagement.

8 Which of the following would indicate the need to use positive accounts receivable confirmation requests? A A large population consisting of small balances. B Good internal control over accounts receivable. C Most accounts are with large reputable companies. D A large number of accounts receivable are in dispute.

81 The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A Lend authority of the auditor's directives. B Detect forged securities. C Coordinate the return of all securities to proper locations. D Acknowledge the receipt of securities returned.

82 The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A Recorded cash disbursement transactions are properly authorized. B Proper cash purchase discounts have been recorded. C Cash disbursements are for goods and services actually received. D No discrepancies exist between the data on the checks and the data in the journal.

90 An inventory turnover analysis is useful to the auditor because it may detect: A Inadequacies in inventory pricing. B Methods of avoiding cyclical holding cost. C The optimum automatic reorder points. D The existence of obsolete merchandise.

95 Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A Examination of correspondence with the corporate counsel concerning acquisition matters. B Examination of ownership documents registered and on file at a public hall of records. C Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment. D Examination of deeds and title guaranty policies on hand.

97 Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense. B Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles. C Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D Establish the basis for depreciable assets and verify the depreciation expense.

A primary purpose of the audit working papers is to: A Aid the auditors by providing a list of required procedures. B Provide a point of reference for future audit engagements. C Support the underlying concepts included in the preparation of the basic financial statements. D Support the auditors' opinion.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows: A If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. B If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. C If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. D If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is: A qualified. B disclaimer. C adverse. D unqualified.

i. Which of the following nonattest services may be performed by the auditors of a public company? A Internal audit outsourcing. B Tax planning for all company officers. C Bookkeeping services. D Preparation of the company's tax return.

51 The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective? (1) Trace from source documents to journals. (2) Vouch from journals to source documents. Either (1) or (2).

114 Shortly after year-end, Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances: The financial statements should be adjusted The event requires financial statement disclosure, but no adjustment The auditor's report should be modified for a lack of consistency A. Yes No No B. Yes No Yes C. No Yes Yes D. No Yes No Option A Option B Option C Option D

117 If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: A Attempt to determine whether their report is still being relied upon by third parties. B Notify regulatory agencies. C Notify legal counsel. D Wait until the beginning of the next year's audit to determine whether misstatements have occurred

127 Under common law, when performing an audit, a CPA: A Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. B Must strictly adhere to generally accepted accounting principles. C Is strictly liable for failures to discover client fraud. D Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

34 Which of the following topics is not normally included in an engagement letter? A The auditors' preliminary assessment of internal control. B The auditors' estimate of the fee for the engagement. C Limitations on the scope of the engagement. D A description of responsibility for the detection of fraud.

b. Which of the following has primary responsibility for the fairness of the representations made in financial statements? A Client's management. B Independent auditor. C Audit committee. D AICPA.

1 Which of the following is not considered one of the five major components of internal control? A Risk assessment. B Segregation of duties. C Control activities. D Monitoring. E The Control Environment Information System Relevant to Financial Reporting & Communication

115 A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: A Confirmation of related lawsuits with the claimants. B Qualification of the audit report. C An assessment that loss of the litigation is probable. D An adverse opinion.

19 Which of the following is not a broad category of threat to auditor independence? A Familiarity. B Safeguards implemented by the client. C Financial self interest. D Undue Influence.

9 Tracing copies of sales invoices to shipping documents will provide evidence that all: A Shipments to customers were recorded as receivables. B Billed sales were shipped. C Debits to the subsidiary accounts receivable ledger are for sales shipped. D Shipments to customers were billed.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: A Presentation. B Valuation. C Rights. D Existence

72 In attributes sampling, which one of the following must be known in order to appraise the results of the auditor's sample? A Actual deviation rate of the attribute in the population. B Standard deviation of the values in the population. C Deviations in sample. D Estimated dollar value of the population.

10 Which of the following is the best argument against the use of negative accounts receivable confirmation requests? A The cost-per-response is excessively high. B There is no way of knowing if the intended recipients received them. C Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D The inference drawn from receiving no reply may not be correct.

107 Which of the following manipulations would understate accounts payable on the financial statements? A Overstatement of purchases. B Closing the cash disbursements journal prior to year-end. C Leaving the cash receipts journal open after year-end. D Overstating purchase returns

2 Internal control over marketable securities is enhanced when: A Securities are held by the cashier. B Securities are registered in the name of the custodian. C Detailed records of securities are maintained by the custodian of the securities. D Securities are held under joint control of two or more officials.

36 b. Which of the following business characteristics is not indicative of high inherent risk? A Operating results that are highly sensitive to economic factors. B Large likely misstatements detected in prior audits. C Substantial turnover of management. D A large amount of assets.

A procedure that involves tracing a transaction from origination through the company's information systems until it is reflected in the company's financial report is referred to as a(n): A Analytical analysis. B Substantive test. C Test of a control. D Walk-through.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: A this is a duplication of cutoff tests. B accounts payable balances at the balance sheet date may not be paid before the audit is completed. C correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. D there is likely to be other reliable external evidence available to support the balances

Which of the following is correct about forensic audits? A All audit engagements are forensic in nature. B Forensic audits are performed by law firms; they are not performed by CPA firms. C Forensic audits are equivalent to compliance audits. E Forensic audits are usually performed in situations in which fraud has been found or is suspected.

31 Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques. B Management's disregard for internal control. C The existence of related party transactions. D Management's attempt to meet earnings per share growth rate goals.

MANAGMENT'S DISREGARD FOR INTERNAL CONTROL

129 The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of:

Registered Public Accounting Firms and Registered Public Accounting Firm Employees

i. An audit provides reasonable assurance of detecting material misstatement due to: Fraudulent Financial Reporting Misappropriation of Assets Yes Yes Yes No No Yes No No

YES YES

30 Which of the following is most likely to be an overall response to fraud risks identified in an audit? Supervise members of the audit team less closely and rely more upon judgment. Use less predictable audit procedures. Use only certified public accountants on the engagement. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

Audit FInal

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