Audit Final Exam

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Which of the following statements is not included in the Basis for Opinion section of the standard report? a. "...it is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement..." b. "We believe that our audit provides a reasonable basis for our opinion" c. "These financial statements are the responsibility of [the company's] management." d. "Those standards require that we plan and perform the audit to obtain reasonable assurance..."

"...it is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement."

For the following control, use AICPA sample size tables to identify the missing value(s). ONLY enter in whole numbers (i.e., no decimals, commas, dollar signs, parentheses, etc.) Control X1 Risk of overreliance: [A] Expected population deviation rate: 0.25 Tolerable deviation rate: 2% Sample size: 194

.10

For the following control, use AICPA sample size tables to identify the missing value(s). ONLY enter in numbers (i.e., no commas, dollar signs, parentheses, etc.) Control X1 Risk of overreliance: 10% Expected population deviation rate: 0.50% Tolerable deviation rate: [A] Sample size: 38

Assume that Dylan Lee found two deviations in a sample of 90 transactions. Using AICPA sample evaluation tables, Lee determined that the ULRD at a 5 percent risk of overreliance is

6.9

Under PCAOB standards, which one of the following factors would indicate that a company has less complex operations? a. A centralized accounting function. b. Lack of involvement by senior management in day-to-day operations. c. Several levels of management. d. Multiple business lines.

A centralized accounting function.

If the audit team is restricted from performing procedures to evaluate the effectiveness of an issuer's internal control over financial reporting, their report would express:

A disclaimer of opinion.

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that

A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.

Required: For each of the following procedures identify the applicable element of quality control. All potential new clients are reviewed before acceptance. The review includes consultation with predecessor auditors, and background checks. All new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement.

Acceptance and Continuance with Clients and Engagements

A client has capitalized leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the misstatements have a material and pervasive effect on the financial statements?

Adverse opinion

What type of opinion should be rendered? Material and Pervasive departure from GAAP.

Adverse opinion.

Which of the following procedures is considered a test of controls? a. An auditor reviews the entity's check register for unrecorded liabilities. b. An auditor evaluates whether a general journal entry was recorded at the proper amount. c. An auditor interviews and observes appropriate personnel to determine segregation of duties. d. An auditor reviews the audit workpapers to ensure proper sign-off.

An auditor interviews and observes appropriate personnel to determine segregation of duties.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. Low growth and profitability as compared to other entities in the same industry. b. Financial management's participation in the initial selection of accounting principles. c. An overly complex organizational structure involving unusual lines of authority. d. Large amounts of liquid assets that are easily convertible into cash.

An overly complex organizational structure involving unusual lines of authority.

In an audit of an issuer: I. Management must assess and report on internal control. II. The auditor must assess and report on internal control.

Both I and II.

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests.

Both I and II.

Which of the following is true of assurance services? a. The services are performed by someone who was involved with the creation of the information. b. Both attestation and auditing services fall under the term of assurance services. c. The intended user is an independent Certified Public Accountant qualified to perform the auditing service. d. The term information refers to subject matter that is an entire system, not standalone data.

Both attestation and auditing services fall under the term of assurance services.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? a. Research and development projects are postponed. b. Cash flows from operating activities are negative. c. Stock dividends replace annual cash dividends. d. Significant related party transactions are pervasive.

Cash flows from operating activities are negative.

Who are the only licensed accounting professionals in the United States?

Certified Public Accountants (CPA)

The only licensed accounting professionals in the United States are:

Certified Public Accountants.

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it:

Changes the company's operating results from a net loss to a net income.

A customer intended to order 100 units of product Z96014 but incorrectly ordered product Z96015, which is not an actual product. Which of the following controls most likely would detect this error? a. Redundant data check. b. Check digit verification. c. Record count. d. Hash total.

Check digit verification.

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed? a. Confirmations of receivables verifying account balances. b. Client records documenting the use of EDP programs. c. Anticipated results documented in budgets or forecasts. d. Gross margin information regarding the client's industry.

Client records documenting the use of EDP programs.

An auditor concludes that client management has been involved in noncompliance with a certain law and that this fact has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the: a. Auditor is unable to obtain sufficient appropriate audit evidence about the noncompliance. b. Noncompliance is serious enough to result in monetary fines for the management involved in noncompliance. c. Noncompliance has a material effect on the financial statements. d. Client refuses to accept the auditor's report as modified for the noncompliance.

Client refuses to accept the auditor's report as modified for the noncompliance.

Enterprise risk management is the responsibility of: a. The company's insurance providers. b. Company management. c. The external auditors. d. All of the above.

Company management.

Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a. Make inquiries of the client's lawyer concerning pending litigation. b. Perform cutoff tests of cash receipts and disbursements. c. Compare financial information with nonfinancial operating data. d. Recalculate the prior-years' accruals and deferrals.

Compare financial information with nonfinancial operating data.

In order to reduce the risk that the aggregate of undetected misstatements in the group financial statements of a nonissuer exceeds the materiality for the group financial statements as a whole, an auditor should establish a:

Component materiality that is lower than the materiality for the group finacial statements.

Which of the following is a correct statement with regard to the job responsibilities of individuals in an automated information processing environment? a. Systems analysts prepare flowcharts and code the logic of the computer program. b. The control group maintains control over data files and programs used in processing transactions. c. Computer operators oversee the operation of the computer for each accounting application system. d. Programmers prepare data for input by converting them from manual format into machine-readable format.

Computer operators oversee the operation of the computer for each accounting application system.

Which of the following would be least likely to be included in an auditor's tests of controls? a. Inquiry. b. Observation. c. Inspection. d. Confirmation.

Confirmation

During the Year 2 audit of ABC Corporation, the auditor discovered that there was a material illegal payment made by management to a foreign official. The auditor is least likely to disclose this information when: a. Responding to an enforceable subpoena. b. Confirming with the bank clerk the balance of ABC Corporation's bank accounts. c. Meeting with those charged with governance. d. Responding to inquiries from a successor auditor.

Confirming with the bank clerk the balance of ABC Corporation's bank accounts.

The following is a description of an internal control. DESCRIPTION: Before a cash disbursement can be processed, a voucher package must be submitted to the accounts payable department. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Activities b. Monitoring c. Information and Communication d. Control Environment e. Risk Assessment

Control Activities

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The client fails to reconcile bank accounts to recorded cash balances.

Control Risk

The company changed from a publicly held company to a privately held company. The company hired a new CFO who performs several key accounting controls and estimates.

Control Risk = Increase Inherent Risk = Increase Acceptable Audit Risk = Increase Planned Evidence = cannot determine(P.E.1)

The overall attitude and awareness of those charged with governance (i.e., an entity's board of directors) concerning the importance of internal control usually is reflected in its: a. Control environment. b. Safeguards over access to assets. c. System of segregation of duties. d. Computer-based controls.

Control environment.

Audit teams use the test data method to gain certain assurances with respect to a. Machine capacity. b. Input data. c. Control procedures contained within the program. d. General controls.

Control procedures contained within the program.

Which of the following best demonstrates the concept of professional skepticism? a. Evaluating potential financial interests held by auditors in the client. b. Critically assessing verbal evidence received from the entity's management. c. Relying more extensively on external evidence rather than internal evidence. d. Focusing on items that have a more significant quantitative effect on the entity's financial statements.

Critically assessing verbal evidence received from the entity's management.

In an entity under audit, employees have the opportunity to change their time worked after their time cards have been approved. This is an example of which of the following types of deficiency? a. Operating. b. Accounting. c. Procedural. d. Design.

Design.

State the effect on detection risk and planned evidence of changing the following factors while holding any other factor constant from the following options. I = Increase D = Decrease N = No Effect C = Cannot be determined CHANGE: A decrease in control risk.

Detection Risk [DR] = Increase Planned Evidence [PE] = Decrease

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?

Detection risk will decrease.

The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is

Detection risk.

Which of the following are considered control environment factors? Detection risk: Human resource policies and practices:

Detection risk: No Human resource policies and practices: Yes

The least important evidence of a CPA firm's evaluation of its system of quality controls would concern the CPA firm's policies and procedures with respect to a. Assigning personnel to audit engagements. b. Confidentiality of audit engagements. c. Determination of audit fees. d. Employment (hiring).

Determination of audit fees.

Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? a. Accounts receivable turnover. b. Return on total assets before interest and taxes. c. Earnings per share. d. Operating cycle.

Earnings per share.

Required: For each of the following procedures identify the applicable element of quality control. At all stages of any engagement, an effort is made to involve professional staff at appropriate levels in the accounting and auditing decisions. Various approvals of the manager or senior accountant are obtained throughout the audit.

Engagement Performance

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's

Engagement letter: No Working papers: Yes

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice? a. Information processing. b. Engagement performance. c. Professional skepticism. d. Technology selection.

Engagement performance

According to the AICPA, the purpose of an audit of financial statements is to

Enhance the degree of confidence that intended users can place in the financial statements.

According to the AICPA, the purpose of an audit of financial statements is to:

Enhance the degree of confidence that intended users can place in the financial statements.

Inherent risk and control risk differ from detection risk in that they:

Exist independently of the financial statement audit.

Inherent risk and control risk differ from detection risk in that they:

Exist independently of the financial statement audit.(P.E.1)

An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the: a. Valuation of intangible assets. b. Existence of fixed asset additions. c. Existence of contingencies. d. Valuation of related party transactions.

Existence of fixed asset additions.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

Extent of tests of details.

T/F An organization's board of directors does not necessarily have to be knowledgeable about the implementation of an organization's compliance and ethics program if the board has delegated that responsibility to a compliance officer.

False

T/F Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures for any assertion when determining what constitutes sufficient and appropriate evidence.

False

T/F Errors are usually more difficult for an auditor to detect than frauds.

False

For the accounting processes below, identify which of the following would be considered nonroutine transactions. (select all that apply) a. Financial statement close b. Depreciation c. Cash receipts d. Payroll e. Bad debt expense

Financial Statement close Depreciation

Government Auditing Standards published by the United States Government Accountability Office define standards associated with the following types of engagements:

Financial audits, attest engagements, and performance audits.

Which of the following levels would most likely address the risk of material misstatement by the auditor's consideration of an entity's control environment? :a. Financial statements. b. Specific account balances. c. Classes of transactions. d. Disclosures.

Financial statements.

Which of the following is a category of fraud? Fraudulent Financial Reporting: Misappropriation of Assets:

Fraudulent Financial Reporting: Yes Misappropriation of Assets: Yes

Francona Madden, an audit manager, considered the control risk assessments listed in the left column of the following table in evaluating A. Cardinal's internal control over sales transactions. The sample sizes for the substantive procedures of the customer accounts receivable are shown to the right of each control risk. What risk of overreliance (ROO) could be assigned for tests of controls at each control risk level? a. From top to bottom: 1 percent, 5 percent, 10 percent. b. From top to bottom: 5 percent, 10 percent, 1 percent. c. From top to bottom: 1 percent, 10 percent, 5 percent. d. From top to bottom: 10 percent, 1 percent, 5 percent.

From top to bottom: 1 percent, 5 percent, 10 percent.

The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the:

Government Accountability Office (GAO)

Which of the following controls involves manually calculating a mathematical total of a field prior to input and comparing that to a total of that field from transactions processed by the client's system? Hash totals: Batch totals: Check digits:

Hash totals: Yes Batch totals: Yes Check digits: No

An auditor of a nonissuer must conduct the audit in accordance with: I. ASB Standards II. PCAOB Standards

I only. - ASB standards.

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure? a. Report the matter to the next higher level of authority within the entity. b. Assume that the deviation is an isolated occurrence without audit significance. c. Make inquiries to understand the potential consequence of the deviation. d. Increase sample size of tests of controls.

Make inquiries to understand the potential consequence of the deviation.

The major emphasis in GAAS related to consideration of fraud in a financial statement audit is on:

Management fraud

Which of the following conditions is necessary for an auditor to accept an engagement to audit and report on a nonissuer's internal control over financial reporting?

Management presents its written assessment about the effectiveness of internal control.

An auditor's engagement letter most likely would include a statement regarding:

Management's responsibility to provide certain written representations to the auditor.

The primary responsibility for establishing and maintaining internal controls rests with a. The internal auditors. b. The Public Company Accounting Oversight Board. c. Management. d. The external auditors.

Management.

The primary responsibility for establishing and maintaining internal controls rests with a. The internal auditors. b. The external auditors. c. The Public Company Accounting Oversight Board. d. Management.

Management.

Internal controls are designed to provide reasonable assurance that a. The internal auditing department's guidance and oversight of management's performance is accomplished effectively and efficiently. b. Management's planning, organizing, and directing processes are properly evaluated. c. Management's plans have not been circumvented by worker collusion. d. Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.

Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud?

Negligence on the part of executive management.

During risk assessment, assume an auditor obtained the following information about an audit client: Coke's assets and revenues are based on significant estimates that involve objective judgments and most uncertainties that are relatively easy to corroborate. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

No, Not Applicable

Audit firms who audit more than _____ issuer clients must be inspected every ______. a. 20, 3 years b. 100, 3 years c. 20, year d. None of the above.

None of the above.

The nature and extent of a CPA firm's quality control policies and procedures will depend on various factors including its

Operating Characteristics: Yes Size: Yes

The nature and extent of a CPA firm's quality control policies and procedures will depend on various factors including its

Operating Characteristics: Yes Size: Yes (P.E.1)

Analytical procedures are most appropriate when testing which of the following types of transactions? a. Payroll and benefit liabilities. b. Acquisitions and disposals of fixed assets. c. Long-term debt transactions. d. Operating expense transactions.

Operating Expense transactions

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the: Operating effectiveness of controls: Design of controls:

Operating effectiveness of controls: No Design of controls: Yes

A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of

Operational Auditing

The standard report issued in the audit of an issuer includes a(n)

Opinion on the Financial Statements section providing the auditors' conclusion as to the fair presentation of the financial statements.

Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements? Opportunities for on-the-job training: Continuity and periodic rotation of personnel:

Opportunities for on-the-job training: Yes Continuity and periodic rotation of personnel: Yes

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by using substantive tests of transactions. Under these circumstances, the auditor most likely would a. Adjust the materiality level and consider the effect on inherent risk. b. Increase the sample size to reduce sampling risk and detection risk. c. Perform tests of controls to support a lower level of assessed control risk. d. Apply analytical procedures and consider the effect on control risk.

Perform tests of controls to support a lower level of assessed control risk.

Identify the principle: The inability of an audit examination to provide absolute assurance with respect to detecting all material misstatements.

Performance

Which of the following GAAS principles is most directly associated with materiality? a. Testing Principle. b. Performance Principle. c. Responsibilities. d. Reporting Principle.

Performance Principle.

The responsibilities principle under generally accepted auditing standards does not include which of the following?

Planning and supervision

In developing an overall audit strategy, an auditor should consider:

Preliminary evaluations of materiality, audit risk, and internal controls. (P.E.1)

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity? a. Preparation of system flowcharts. b. Observation of client personnel. c. Inquiry of client personnel. d. Inspection of documents and reports.

Preparation of system flowcharts.

Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:

Present the results of the auditor's tests of controls.

Dickens, a CPA firm's personnel partner, periodically studies the firm's personnel advancement experience to ascertain whether individuals meeting stating criteria are assigned increased degrees of responsibility. This is evidence of the CPA firm's adherence to prescribed

Quality control standards.

Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements? a. Absolute assurance. b. Reliability of audit evidence. c. Reasonable assurance. d. Professional judgment.

Reasonable Assurance.

Which of the following concepts is least related to the standard of due care? a. Independence in fact. b. Prudent auditor. c. Professional skepticism. d. Reasonable assurance.

Reasonable assurance

Which of the following concepts is least related to the standard of due care?

Reasonable assurance(P.E.1)

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on:

Relative Size

Independent professional attestation services improve the quality of information. Quality is best described as an improvement in informational ______.

Relevance and reliability.

Required: For each of the following procedures identify the applicable element of quality control. No employee will have any direct or indirect financial interest, association, or relationship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm's best interest.

Relevant Ethical Requirements

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including: a. Comparison and confirmation. b. Inspection and verification. c. Reperformance and observation. d. Inquiry and analytical procedures.

Reperformance and observation.

If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report?

Report on Financial Statements: Yes Report on Internal Control over Financial Reporting: Yes

Identify the fundamental principle: The need for auditors to consider their financial relationships with prospective clients.

Responsibilities

Identify the principle: Relevant education and experience requirements for CPA licensure.

Responsibilities

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would: a. Analyze monthly production reports to identify variances and unusual transactions. b. Review the entity's descriptions of inventory controls. c. Perform test counts of inventory during the entity's physical count. d. Analyze inventory turnover statistics to identify slow-moving and obsolete items.

Review the entity's descriptions of inventory controls.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would: a. Review the entity's descriptions of inventory controls. b. Perform test counts of inventory during the entity's physical count. c. Analyze monthly production reports to identify variances and unusual transactions. d. Analyze inventory turnover statistics to identify slow-moving and obsolete items.

Review the entity's descriptions of inventory controls.

When processing controls within the accounting information system may not leave visible evidence that could be inspected by audit teams, the teams should a. Review the run manual. b. Review transactions submitted for processing and compare them to related output. c. Observe the separation of duties of personnel. d. Make corroborative inquiries.

Review transactions submitted for processing and compare them to related output.

The following is a description of an internal control. DESCRIPTION: Senior management obtains and evaluates information about international events that might affect the entity and evaluates the impact of that information on the company's operations. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Activities c. Monitoring d. Information and Communication e. Control Environment

Risk Assessment

What are the three types of safeguards against threats to a CPA's compliance with the ethical rules of the profession?

Safeguard of regulation, client implemented controls, and CPA firms policies.(P.E.1)

Which of the following procedures would an auditor least likely perform in planning a financial statement audit? a. Coordinating the assistance of entity personnel in data preparation. b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. c. Selecting a sample of vendors' invoices for comparison to receiving reports. d. Reading the current year's interim financial statements.

Selecting a sample of vendors' invoices for comparison to receiving reports.

hould an auditor communicate the following matters to those charged with governance of a public entity? Significant audit adjustments recorded by the entity: Management's consultation with other accountants about significant accounting matters:

Significant audit adjustments recorded by the entity: Yes Management's consultation with other accountants about significant accounting matters: Yes

Each of the following is a required attribute of an issuer's audit committee financial expert, except: a. An understanding of internal controls related to financial reporting. b. Significant audit experience as a certified public accountant. c. The ability to assess the application of accounting principles in connection with estimates, accruals, and reserves. d. An understanding of generally accepted accounting principles.

Significant audit experience as a certified public accountant.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. Significant differences between the physical inventory count and the accounting records are not investigated b. The entity's management places no emphasis on meeting publicized earnings projections c. Monthly bank reconciliations ordinarily include several large outstanding checks d. Cash transactions are electronically processed and recorded, leaving no paper audit trail

Significant differences between the physical inventory count and the accounting records are not investigated

Which type of entity generally finds a review of historical financial statements to be the most useful?

Small Private Corporations.

Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?

Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatement.

Which of following best describes the general contents of the first paragraph of the "Basis for Opinion" section of the auditors' report? a. The auditors' conclusion with respect to the fairness of the entity's financial statements. b. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. c. Statements identifying the responsibility of auditors and management in the financial reporting process. d. The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting.

Statements identifying the responsibility of auditors and management in the financial reporting process.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. Senior management has an excessive interest in upgrading the entity's information technology capabilities. b. Supporting accounting records and files that should be readily available are not produced promptly when requested. c. Senior financial management participates in the selection of accounting principles and the determination of significant estimates. d. Related party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm.

Supporting accounting records and files that should be readily available are not produced promptly when requested.

Which of the following is an example of an inherent risk that an auditor should consider? a. Posting of unauthorized journal entries. b. An incorrect formula in a worksheet used to calculate a LIFO inventory reserve. c. Technological developments that may render inventory obsolete. d. Inaccurate physical inventory count.

Technological developments that may render inventory obsolete.

Which act created the Public Company Accounting Oversight Board, which oversees the audits of public companies? a. The SOX Act of 2002. b. The Securities Act of 1933. c. The Companies Act 2006. d. The Securities Exchange Act of 1934.

The SOX Act of 2002.

In planning an audit engagement, which of the following is a factor that affects the independent auditor's judgment as to the quantity, type, and content of working papers?

The anticipated nature of the auditor's report.

A report on an issuer's integrated audit must include each of the following statements, except: a. The audit includes obtaining an understanding of internal control over financial reporting. b. The audit was conducted in accordance with AICPA standards. c. Management is responsible for maintaining effective internal control. d. The auditor believes the audit provides a reasonable basis for the issued opinion.

The audit was conducted in accordance with AICPA standards.

An auditor may not issue a qualified opinion when:

The auditor lacks independence with respect to the audited entity.

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditors attention.(P.E.1)

Which of the following matters is an auditor not required to communicate to those charged with governance? a. The level of responsibility assumed by the auditor under generally accepted auditing standards. b. The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates. c. The degree of reliance the auditor placed on the management representation letter. d. Significant adjustments arising from the audit that were recorded by management.

The degree of reliance the auditor placed on the management representation letter.

Which of the following information discovered during an audit most likely would raise a question concerning possible noncompliance with laws and regulations? a. The entity was a campaign contributor to several local political candidates during the year. b. Material internal control weaknesses previously reported to management were not corrected. c. Related party transactions, although properly disclosed, were pervasive during the year. d. The entity prepared several large checks payable to cash during the year.

The entity prepared several large checks payable to cash during the year.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? a. The establishment of a chief ethics officer who was recently involved in an accounting scandal. b. The establishment of a hotline for reporting unethical behavior. c. The posting of the code of ethics in the company workplace. d. All of the above.

The establishment of a chief ethics officer who was recently involved in an accounting scandal.

T/F All misstatements the auditor finds during the audit should be evaluated for any indication of fraud.

True

The rate of deviations that has a one minus risk of overreliance probability of equaling or exceeding the true deviation rate is the: a. Sample rate of deviation. b. Expected population deviation rate. c. Upper limit rate of deviation. d. Tolerable rate of deviation.

Upper limit rate of deviation.

During risk assessment, assume an auditor obtained the following information about an audit client: WinCo has experienced high turnover in management, but not in its internal audit function. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Opportunity

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: All voided and spoiled payroll checks are properly mutilated and retained. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Completeness [2] = Payroll and Personnel

What is a compliance audit?

an audit to determine whether the entity has conformed with regulations, rules, or processes.

Advances in the technological landscape _______. a. are providing opportunities to increase the cost of an audit. b. are providing opportunities to rethink how an audit is performed. c. have rarely affected the profession auditing and how an audit is conducted. d. have had no bearing on inherent risk whatsoever.

are providing opportunities to rethink how an audit is performed.

Among the various processes relating to auditing and assurance standards, the largest umbrella represents _____ services.

assurance

For audits of very large organizations, the number of notable items _______. a. could number in the thousands. b. could number in the millions. c. could number in the hundreds or thousands. d. could number in the hundreds.

could number in the hundreds or thousands.

An audit team's responsibility would not include: a. assessing the effectiveness of a client's internal controls. b. designing client's internal controls. c. communicating internal control deficiencies. d. documentation of understanding of a client's internal controls.

designing client's internal controls.

When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n)

disclaimer of opinion

Audit teams would most likely introduce test data into a computerized payroll system to test internal controls related to the a. discovery of invalid employee identification numbers. b. proper approval of overtime by supervisors. c. early cashing of payroll checks by employees. d. existence of unclaimed payroll checks held by supervisors.

discovery of invalid employee identification numbers.

The purpose of an engagement letter is to:

document the terms of the engagement.

If the auditor were interested in ensuring that all sales have been recorded, the population would be defined as: a. entries in the cash receipts journal. b. remittance advices. c. shipping documents. d. entries in the general journal.

entries in the general journal.

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should

express a qualified or adverse opinion.

Economic conditions impact _______.

financial statement user's expectations.

Sound internal control can be described as separating all of the following duties and responsibilities except for: a. custody of, or direct access to, assets. b. transaction authorization. c. recordkeeping. d. hiring of employees.

hiring of employees.

Assessing control risk at below the maximum level most likely would involve: a. changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end. b. reducing inherent risk for most of the assertions relevant to significant account balances. c. performing more extensive substantive tests with larger sample sizes than originally planned. d. identifying specific internal control activities that are relevant to specific financial statement assertions.

identifying specific internal control activities that are relevant to specific financial statement assertions.

According to the AICPA audit standards, auditors are required to assume that which of the following has significant risk of fraud? a. overstated expenses b. overstated assets c. improper revenue recognition d. understated liabilities

improper revenue recognition

Auditing standards require that the audit report must be titled and that the title must:

include the word "independent."

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense,

income would not be misstated.

Auditors try to achieve independence in appearance in order to

maintain public confidence in the profession.

As attestation services encompass more than just the inspection of historical financial statements, the term _____ is used rather than ______.

practitioner; auditor.

Pressures of time and money may affect the audit due to all of the following except ________.

pressures by shareholders to find all misstatements in the financial reports.

The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n)

qualified opinion or adverse opinion.(P.E.1)

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on:

relative size.

The nature of audit procedures refers to the ________.

reliance on evidence provided by the client and its management.

In testing control activities, an auditor ordinarily selects from a variety of techniques, including: a. comparison and confirmation. b. inquiry and analytical procedures. c. inspection and verification. d. reperformance and observation.

reperformance and observation.

When obtaining an understanding of an entity's internal control in a financial statement audit at a non-public 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 system. c. search for significant deficiencies in the operation of the internal control system. d. document the understanding of the company's internal control system.

search for significant deficiencies in the operation of the internal control system.

Generally accepted auditing standards are

standards that guide the conduct of an audit examination.

A report on internal control effectiveness by the management team of public companies is required by a. the auditors. b. the Sarbanes-Oxley Act of 2002. c. the PCAOB. d. the AICPA.

the Sarbanes-Oxley Act of 2002

The sum of customers' unpaid balances that is compared to the general ledger balance comes from: a. the accounts receivable trial balance. b. the sales journal. c. a total of sales invoices. d. a total of shipping orders.

the accounts receivable trial balance.

Auditors should design the written audit plan so that:

the audit procedures selected will achieve specific audit objectives.

An erroneous decision to assess control risk at excessively high levels can have an adverse effect on: a. the validity of an audit. b. the type of report the auditor decides to render. c. the effectiveness of an audit engagement. d. the efficiency of an audit engagement.

the efficiency of an audit engagement.

Auditors would use the enterprise risk model:

to evaluate management's risk assessment.

Audit data analytics can be used _______. a. only at the beginning of the audit. b. at virtually any phase of the audit. c. by the internal audit function only. d. only at the end of the audit.

at virtually any phase of the audit.

When CPAs are hired to report on the integrity of financial forecasts and reports on financial reporting processes, it is called an _______.

attestation service

Any service that requires a CPA firm to issue a report about the reliability of an assertation that is made by another part is a(n):

attestation service(P.E.1)

The probability that an audit team will give an inappropriate opinion on financial statements best describes:

audit risk.

Which audit involves gathering evidence to determine whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform? a. An internal audit. b. An integrated audit. c. A performance audit. d. A compliance audit.

A compliance audit.

What type of audit involves gathering evidence to determine whether the person or entity under review has followed the rules?

A compliance audit.

Which of the following is true about the timing of predecessor/successor communications? a. They should occur only before the auditor accepts the engagement. b. They can occur both before and after the auditor accepts the engagement. c. They should occur only after the auditor accepts the engagement. d. The can occur either before or after the auditor accepts the engagement, but not both.

They can occur both before and after the auditor accepts the engagement.

T/F As the entity's internal control is more effective, auditors would assess lower levels of the risk of material misstatement (RoMM), which means that they could gather less sufficient and appropriate evidence.

True

T/F Business valuation falls within the purview of non-assurance services.

True

T/F COSO recommends that corporations implement control activities through formal policies that establish what is expected and procedures that put policies into action.

True

T/F Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size.

True

T/F For a corporate compliance program to be effective, the company must proactively monitor, audit, and evaluate the program's components.

True

T/F For its compliance program to be effective, an organization must communicate the program to all its employees through training programs.

True

T/F If auditors are anxious to complete the audit shortly because of other workload demands and deadlines related to other engagements, then it is likely to have a negative impact on professional skepticism.

True

T/F Materiality is not a factor when considering the possible effect on the lack of auditor independence.

True

T/F Relevance refers to the nature of information provided by the audit evidence, the assertation or assertations supported by the evidence.

True

T/F Review of financial forecasts falls under attestation services.

True

T/F Securities Exchange Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company's financial statements.

True

T/F The Sarbanes-Oxley Act provides both civil and criminal penalties for retaliating against corporate whistleblowers.

True

T/F The Treadway Commission was established with the purpose of defining the responsibility of the auditor in preventing and detecting fraud.

True

T/F The boards of directors of companies that are listed on the NYSE or NASDAQ must be composed of a majority of independent directors.

True

T/F The source of evidence has an important effect on its reliability.

True

T/F Under U.S. law, a corporation can be held responsible for the criminal acts of its employees if those acts are done in the course and scope of their employment and for the ostensible purpose of benefiting the corporation.

True

T/F Under the U.S. Corporate Sentencing Guidelines, a failure to prevent or detect a particular instance of fraud does not necessarily mean that the organization's compliance program is ineffective.

True

T/F The Treadway Commission was established with the purpose of defining the responsibility of the auditor in preventing and detecting fraud.

True(P.E.1)

T/F If the auditor is performing substantive tests at an interim date, the auditor must perform steps to update their conclusion to the date of the financial statements.

True.

T/F It should be the compliance officer's duty to help measure the compliance program's effectiveness.

True.

An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? a. Someone erroneously disables edit checks in a software program designed to identify control exceptions. b. Two employees, who work in different departments, are circumventing an internal control. c. The accounting staff neglects the control, due to increased transactions to be processed. d. The technology department writes a program that does not properly implement the control, due to a lack of understanding.

Two employees, who work in different departments, are circumventing an internal control.

When the audit population can efficiently be tested using traditional audit tests, the auditor is more likely to use _______. a. audit sampling. b. audit data analytics. c. substantive procedures. d. none of these answers are correct.

audit sampling.

Clustering can also be performed _______. a. by the internal audit function before the data is transferred to the external auditors. b. by the client's legal counsel, if necessary. c. by graphing data in a way that allows for visual identification of groups. d. by graphing data in a way that allows for a simple regression analysis.

by graphing data in a way that allows for visual identification of groups.

Data analytics can often be used _______. a. by the firms' actuarial staff when testing controls. b. by the internal audit function as a test of controls. c. by specialists only. d. by the external auditors as a substantive test.

by the external auditors as a substantive test.

The purpose of audit services is to provide ____.

financial statement users with an opinion as to the fair presentation of the financial reporting.

External auditors are responsible: a. for reporting immaterial frauds to a level of management at least one level above the people involved. b. for finding all intentional misstatements concealed by collusion. c. for reporting all frauds to outside agencies or parties. d. for authenticating documents.

for reporting immaterial frauds to a level of management at least one level above the people involved.

Matching information in key data fields _______. a. is a process where the auditor uses his or her understanding of inherent risk to search for key characteristics that may exist in several different databases. b. is a process where the auditor uses audit data analytics to search for key characteristics that may exist in the same database. c. is a process where the auditor uses audit data analytics to search for key characteristics that may exist in several different databases. d. is typically a task assigned to the internal audit function.

is a process where the auditor uses audit data analytics to search for key characteristics that may exist in several different databases.

If the auditors do not have access to all the information relevant to the audit, this is known as a(an) ________.

limitation in scope.

When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report. a. "Do not present fairly." b. "Except for the effects of the matter described in the Basis for Opinion section of our report..." c. "We were engaged to audit the accompanying financial statements." d. "As a result of the departures discussed in the Opinion on the Financial Statements section of our report..."

"Do not present fairly."

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s):

"Reasonable period of time, not to exceed one year": No "Going concern": Yes

For the following control, use AICPA sample size tables to identify the missing value(s). ONLY enter in numbers or periods 1.00, 1.50, etc. (i.e., no commas, dollar signs, parentheses, etc.) Control X1 Risk of overreliance: 10% Expected population deviation rate: [A] Tolerable deviation rate: 2% Sample size: 265

.75

An audit team designed a sample that would provide a 10 percent risk of overreliance that not more than 7 percent of sales invoices lacked credit approval. From previous audits, the audit team expected that 3 percent of the sample invoices lacked proper approval. From the sample of 90 invoices, 7 were found to lack credit approval. Using AICPA sample evaluation tables, the audit team determined that the ULRD was

12.8

Baily Cox, an audit manager, judged that the test of controls of the company's 50,000 purchase transactions should be based on a tolerable rate of deviation of 6 percent, a risk of overreliance of 5 percent, and an expected population deviation rate of 3 percent. Using AICPA sample size tables, Cox determined that the appropriate sample size in this situation would be

195

What is the general order in which the following steps in attributes sampling are performed? 1 = Define the population 2 = Determine the objective of sampling 3 = Determine the sample size 4 = Select the sample

2, 1, 3, 4.

5.0

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? a. An inability to generate cash flow from operations. b. A lack of independent checks. c. A high turnover of senior management. d. A strained relationship between management and the predecessor auditor.

A lack of independent checks.

Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets? a. A large number of inventory items with low sales prices. b. A large number of bearer bonds on hand. c. A large number of fixed assets with easily identifiable serial numbers. d. A large number of transactions processed in a short period of time.

A large number of bearer bonds on hand.

When inherent risk is high, there will need to be:

A lower assessment of audit risk? No More evidence accumulated by the auditor? Yes

Match the following input control with the description or type of error that might be detected by this control. If none of the categories are correct, then select the answer choice "None of these are correct." Select all that apply. INPUT CONTROL: Check digit a. None of these are correct. b. Sum of a data field that has no numerical significance (such as the total of employee numbers). c. Data fields have the appropriate numeric or alphabetic characters. d. A numerical field appended to another numerical field to ensure accurate input of data. e. Data are inadvertently input in an incorrect field.

A numerical field appended to another numerical field to ensure accurate input of data.

Auditors will issue an adverse opinion when

A violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

The Treadway Commission made which of the following recommendations to reduce the probability of fraud in financial reports?

A written charter for the audit committee, a mandatory independent audit committee, and adequate audit committee resources and authority.(P.E.1)

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Issue pronouncements in connection with the unaudited financial statements or other financial information of NONPUBLIC entities.

Accounting and Review Services Committee (ARSC)

Auditors are required to reference consistency in their report when there are changes in

Accounting principles

Required: For the following control, use AICPA sample size and sample evaluation tables to identify the missing value(s). When inputting your answer use ONLY numbers and decimal points. Do NOT use any special characters such as percentage signs or commas. Round answers to one decimal. Control Sample size: 40 Number of deviations: 4 Sample rate of deviation: [a] Risk of overreliance: 10.0% Upper limit rate of deviation: [b] Allowance for sampling risk: [c]

A: 10 B: 19 C:9

Required: For the following control, use AICPA sample size and sample evaluation tables to identify the missing value(s). When inputting your answer use ONLY numbers and decimal points. Do NOT use any special characters such as percentage signs or commas. Round answers to one decimal point. Control Sample size: 45 Number of deviations: 5 Sample rate of deviation: [a] Risk of overreliance: [b] Upper limit rate of deviation: [c] Allowance for sampling risk: 10.9%

A: 11.1 B: 5 C:55

According to the PCAOB, each of the following statements is true with respect to the auditor's responsibility to communicate material weaknesses in internal control over financial reporting, except: a. All such weaknesses must be communicated in writing to the audit committee. b. All such weaknesses must be communicated in writing to management. c. All such weaknesses must be communicated in writing to all stockholders. d. All such weaknesses must be communicated prior to the issuance of the auditor's report on internal control over financial reporting.

All such weaknesses must be communicated in writing to all stockholders.

Audit data analytics can be used _______. a. as a risk assessment tool. b. All these answers are correct. c. as a test of details. d. as a test of controls.

All these answers are correc

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Audit engagements are subject peer review evaluations.

American Institute of Certified Public Accountants (AIPCA)

Which terms are used interchangeably, but actually represent different types of services?

Assurance, attestation, and auditing.

If information comes to the auditor's attention that implies the existence of possible illegal acts that could have a material, but indirect effect on the financial statements, the auditor should next a. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities b. Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred c. All of the above d. Discuss the evidence with the client's audit committee, or others with equivalent authority and responsibility e. Report the matter to an appropriate level of management at least one level above those involved

Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred

Audit teams can obtain evidence of the proper functioning of password access control to a accounting information system by a. Obtaining representations from the client's computer personnel that the password control prevents unauthorized entry. b. Selecting a random sample of the client's completed transactions to check the existence of proper authorization. c. Writing a computer program that simulates the logic of an effective password control system. d. Attempting to sign on to the accounting information system with a false password.

Attempting to sign on to the accounting information system with a false password.

Review of historical financial statements is an example of____.

Attestation Service

The most common assurance services is the ______.

Audit of a company's historical financial statements.

Which of the following is not a difference that is introduced when an entity uses the computer in processing its transactions? a. Audit teams can limit their tests of controls because random errors do not exist in a computerized processing environment. b. Audit teams are not required to obtain an overall understanding of the entity's internal control in a computerized processing environment. c. Audit teams must consider the existence and operating effectiveness of automated controls in their assessment of control risk. d. Audit teams are not permitted to use inquiry and observation as a method of testing general controls in a computerized processing environment.

Audit teams are not required to obtain an overall understanding of the entity's internal control in a computerized processing environment.

Which of the following comes under the purview of the Public Company Accounting Oversight Board?

Auditing Standards (AS)

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Issue the Statements on Quality Control Standards (SQCSs).

Auditing Standards Board (ASB)

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Responsible for setting audit standards for non-issuers.

Auditing Standards Board (ASB)

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been: a. Monitored. b. Authorized. c. Implemented. d. Tested.

Implemented

Which of the following controls most likely would ensure that an organization can reconstruct its financial records? a. System flowcharts provide accurate descriptions of computer operations. b. Personnel who are independent of data input perform parallel simulations. c. Backup files are stored in a location separate from original copies. d. Hardware controls are built into the computer by the computer manufacturer.

Backup files are stored in a location separate from original copies.

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility? a. Statement of cash flows. b. Statement of retained earnings. c. Income statement. d. Balance sheet.

Balance Sheet

Which of the following statements is incorrect concerning analytical procedures used in planning an audit engagement? a. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor. b. They are often used to develop an auditor's preliminary judgment about materiality. c. They typically use financial and nonfinancial data aggregated at a high level. d. Both a and b. e. All of the above.

Both a and b.

Which of the following is/are requirements of management by SOX Section 404? a. A statement that management is responsible for establishing and maintaining internal control b. An assessment as to whether internal controls operated effectively for the entire period under audit c. An assessment of the effectiveness of internal control as of the end of the company's fiscal year d. Both a and c e. All of the above

Both a and c

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on a. Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. b. Whether a misstatement has actually occurred as a result of the deficiency. c. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. d. Both a and c are correct. e. All of these answers are correct.

Both a and c are correct.

When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

By exercising professional judgement in the circumstances.

Detection risk differs from both control risk and inherent risk in that detection risk:

Can be changed at the auditor's discretion.

The following is a description of an internal control. DESCRIPTION: Audit committee members are evaluated to ensure that they are financially literate in addition to understanding their general stewardship role with the firm. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Environment b. Monitoring c. Risk Assessment d. Control Activities e. Information and Communication

Control Environment

The following is a description of an internal control. DESCRIPTION: The company actively trains manager's to ensure that they are up-to-date on current issues in financial reporting. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Activities c. Monitoring d. Information and Communication e. Control Environment

Control Environment

Which of the following risks may be assessed in nonquantitative terms? Control Risk: Detection Risk: Inherent Risk:

Control risk: Yes Detection risk: Yes Inherent risk: Yes

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into: a. Gross sales. b. Operating income. c. Net sales. d. Cost of goods sold.

Cost of goods sold.

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: A retailer pays men more than women for performing the same job. a. Neither. b. Indirect-effect noncompliance. c. Direct-effect noncompliance.

Indirect-effect noncompliance.

T/F According to the Standards of Reporting the auditor must state in the auditor's report whether the financial statement are presented in accordance with generally accepted auditing standards.

False(P.E.1)

On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level that is substantially the same as the planned audit risk level, the auditor will a. Decrease substantive testing. b. Increase materiality levels. c. Decrease planned detection risk. d. Increase inherent risk.

Decrease planned detection risk.

In its tests of controls over the Tarbet Township Housing Assistance Program, Smith, CPA, has found that the clerk assigned to monitor and limit participation in the housing program to a target population of individuals meeting income criteria is routinely overruled by his supervisor in order to meet volume based level of effort requirements. Ineligible participants whose income exceeds program limits are routinely admitted to the program. Smith would characterize this as a(n): a. Audit risk of noncompliance. b. Inherent risk of noncompliance. c. Deficiency in the design of internal control. d. Deficiency in the operation of internal control.

Deficiency in the operation of internal control.

Assume that the audit team wishes to determine the extent to which a particular control policy was functioning as intended. Identifying applications of the control throughout the period under audit would be most closely related to which of the following steps in sampling? a. Determining the objective of sampling. b. Defining the population. c. Defining the characteristic of interest. d. Determining the sample size.

Defining the population.

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated.

Detection Risk

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The audit plan omits several necessary audit procedures.

Detection Risk

Detection Risk [DR] = Decrease Planned Evidence [PE] = Increase

The evidence considered most appropriate by auditors is best described as:

Direct personal knowledge obtained through physical observation and mathematical recalculation.(P.E.1)

Performance audits usually include (Select all that apply.)

Economy and efficiency audits. Program audits.

The monitoring component of internal control excludes: a. Assessing the quality of internal control performance over time. b. Improving controls that are not operating effectively. c. Assessing information derived from external parties. d. Eliminating controls that are not operating effectively.

Eliminating controls that are not operating effectively.

Which of the following activities by small business clients best demonstrates management integrity in the absence of a written code of conduct? a. Documenting internal control procedures using flowcharts rather than narratives. b. Developing and maintaining formal descriptions of accounting procedures. c. Emphasizing ethical behavior through oral communication and management example. d. Reporting regularly to the board of directors about operations and finances.

Emphasizing ethical behavior through oral communication and management example.

When an auditor becomes aware of a possible noncompliance with laws and regulations by a client, the auditor should obtain an understanding of the nature of the noncompliance to: a. Consider whether other similar acts may have occurred. b. Evaluate the effect on the financial statements. c. Recommend remedial actions to those charged with governance. d. Determine the reliability of management's representations.

Evaluate the effect on the financial statements.

Computer-assisted audit techniques (CAATs) could not be used for which of the following audit tasks? a. Summarizing, resequencing, and reformatting data. b. Comparing audit evidence from manual audit procedures to company needs. c. Evaluating control risk assessment. d. Testing calculations and making computations.

Evaluating control risk assessment.

After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the audit documentation. This second review usually focuses on:

Evaluation of the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion.

Identify a service that falls under audit services.

Examination of historical financial statements.

T/F According to the PCAOB standards the engagement partner's signature is mandatory on the auditor's report.

False

T/F According to the Standards of Reporting the auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted auditing standards.

False

T/F An auditor is only required to attempt communications with the last auditor that was engaged to audit a client firm.

False

T/F Appropriateness is affected by the extent to which the audit team can trust the evidence (relevance).

False

T/F As the relevance and reliability of evidence decreases, the appropriateness of evidence increases.

False

T/F Auditing standards require audit termination decisions be in writing.

False

Which of the following most accurately describes the process of a walkthrough? a. Observation of an entity's activities and operations. b. Following a transaction from its origination until it is reflected in the financial statements. c. Testing and documenting the results of tests of selected controls. d. Inspection of selected documents, records, and internal control documentation.

Following a transaction from its origination until it is reflected in the financial statements.

CAATS (Computer Assisted Auditing Techniques) can be used in all of the following ways when gathering evidence except: a. For matching vendor invoices with supporting purchase orders and receiving reports. b. For the development of expectations when performing analytical procedures. c. For the selection of accounts receivable, loans, or other receivables for confirmation. d. For scanning inventory quantities for negative balance.

For matching vendor invoices with supporting purchase orders and receiving reports.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

Functions of the client and its environment while detection risk is not

Which of the following provides the most authoritative guidance for the auditor of a nonissuer? a. General guidance provided by a Statement on Auditing Standards. b. Specific guidance provided by an interpretation of a Statement on Auditing Standards. c. A Journal of Accountancy article discussing implementation of a new standard. d. An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry.

General guidance provided by a Statement on Auditing Standards.

Which of the following types of control best describes procedures to ensure appropriate systems software acquisition? a. Monitoring. b. General. c. Physical. d. Application.

General.

Which of the following would be considered an assurance engagement?

Giving assurance assurance about the average drive length achieved by golfers with a client's golf balls. Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles. Giving an opinion on the fair presentation of a newspaper's circulation data. (All of the above are examples of assurance engagements).

Which of the following is the most likely progression of events for the items below with regard to communications with a predecessor auditor assuming the client firm has not communicated that they do not intend to continue a business relationship (i.e., have fired them) with the predecessor? I. Accept the engagement and confirm the understandings in an engagement letter if client has no reservations and after all significant factors have been considered, discussed, and agreed to. II. Request client's permission to make inquiries of the predecessor. III. Discuss with client the estimated required audit time and fee arrangement with a clear explanation of the purpose & scope of the audit. IV. Advise predecessor of client's decision to change auditors.

II, IV, III, and I

When planning the audit of internal controls for an issuer, the audit team should a. Identify significant accounts, locations, and assertions. b. Conduct a walkthrough of the internal control process. c. Reperform control activities performed by client employees to determine their effectiveness. d. Make inquiries of employees regarding the existence of control activities.

Identify significant accounts, locations, and assertions.

When using test data, why are audit teams required to prepare only one transaction to test each IT control? a. In an IT environment, each transaction is handled in an identical manner. b. The speed and efficiency of the computer results in reduced sample sizes. c. The risk of misstatement is typically lower in an IT environment. d. Audit teams generally perform more extensive substantive testing in an IT environment, resulting in less need to test processing controls.

In an IT environment, each transaction is handled in an identical manner.

Relates to others' perceptions of the auditors' independence.

Independence in appearance

Independent auditors of financial statements perform audits that reduce:

Information risk faced by investors.

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? a. Confirmation and reperformance. b. Analytical procedures and reperformance. c. Inquiry and inspection of records. d. Observation and inspection of records.

Inquiry and inspection of records.

When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control's effectiveness by: a. Mailing confirmations. b. Recalculating the balance in related accounts. c. Analytical procedures. d. Inquiry and other procedures such as observation.

Inquiry and other procedures such as observation.

Ordinarily, what source of evidence should least affect audit conclusions?

Inquiry of management.

Which of the following accounts tends to be most predictable for purposes of analytical procedures? a. Travel and entertainment expense. b. Income taxes payable. c. Accounts receivable. d. Interest expense.

Interest Expense

In an integrated audit of a nonissuer, if an auditor concludes that a material weakness exists as of the date specified in management's assessment, the auditor should take which of the following actions? a. Obtain written representations from management relating to such matters. b. Communicate, in writing, to the entity's outside legal counsel that the material weakness exists. c. Issue an adverse opinion. d. Disclaim an opinion.

Issue an adverse opinion.

Which of the following is true of the PCAOB? a. In 2015, it reorganized its auditing standards using several numbering systems. b. Prior to its creation, the audit profession was highly unregulated. c. When it was created, it rejected nearly all the then standards of the audit profession. d. It can impose punishment on accounting firms that do not adhere to standards.

It can impose punishment on accounting firms that do not adhere to standards.

A company has an internal audit function and is in a regulated industry. Which of the following groups should the auditor approach to inquire about the risks of fraud within the entity? a. Management, sales department head, and audit committee b. Internal audit, regulators, and management c. Management, internal audit, and audit committee d. Internal audit, suppliers, and management

Management, internal audit, and audit committee

Which of the following statements is correct concerning materiality in a financial statement audit? a. The auditor's materiality judgments generally involve quantitative, but not qualitative, considerations. b. If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests. c. Analytical procedures performed during an audit's review stage usually decrease materiality levels. d. Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

The nature of audit procedures can refer to the concept of ________.

Materiality.

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to:

Minimize the likelihood of associating with clients whose management lacks integrity.

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in the auditing standards? a. Misappropriation of an asset or groups of assets. b. Mistakes in the application of accounting principles. c. Misinterpretation of facts that existed when the financial statements were prepared. d. Clerical mistakes in the accounting data underlying the financial statements.

Misappropriation of an asset or groups of assets.

Which is the following is most correct regarding the distinction(s) between the auditor's responsibilities for searching for errors and fraud. a. no b. a significant c. various d. little

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must a. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. b. Perform only substantive procedures. c. Assess control risk at less than the maximum for all relevant assertions. d. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting.

Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

When engaged to audit a nonissuer's interal control, an auditor should:

Obtain management's written assessment regarding whether the company has maintained effective internal control.

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of following additional pieces of information should be document in the audit plan?

Other audit procedures to be performed to comply with generally accepted auditing standards.(P.E.1)

Which of the following would probably not be considered an indication of a material weakness? a. Ineffective oversight by the audit committee. b. Evidence of a material misstatement. c. Overproduction by the manufacturing plant. d. Immaterial fraud committed by senior management.

Overproduction by the manufacturing plant.

Lipham Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be invoiced that do not get shipped. The inadequate controls could cause an a. Understatement of revenues, receivables, and inventory. b. Understatement of revenues and receivables and an overstatement of inventory. c. Overstatement of revenues, receivables, and inventory. d. Overstatement of revenues and receivables and an understatement of inventory.

Overstatement of revenues and receivables and an understatement of inventory.

Which of the following is true with respect to PCAOB inspections of accounting firms? a. Firms performing audits of 100 or fewer issuers may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection. b. All firms performing audits of issuers are required to have annual inspections conducted by the PCAOB. c. All results of PCAOB inspections are made available to the public following the inspection. d. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.

PCAOB inspections review a sample of audits conducted by firms as well as the firm's system of quality control.

Which of the following is true with respect to PCAOB inspections of accounting firms? a. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. b. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. c. All results of PCAOB inspections are made available to the public following the inspection. d. Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection.

PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.

Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that an auditor could tolerate most likely would cause the auditor to

Perform the planned auditing procedures closer to the balance sheet date.

Identify the principle: The auditors' evaluation of the magnitude of a misstatement that would impact perceptions of the entity's profitability.

Performance.

The best way to enact a broad fraud prevention program is to a. Practice management "of the people and for the people" to help them share personal and professional problems. b. Place dedicated hotline telephones on walls around the workplace with direct communication to the company ethics officer. c. Name an "ethics officer" who is responsible for receiving and acting on fraud tips. d. Install airtight control systems of checks and supervision.

Practice management "of the people and for the people" to help them share personal and professional problems.

In developing an overall audit strategy, an auditor should consider: a. Whether the allowance for sampling risk exceeds the achieved upper precision limit. b. Preliminary evaluations of materiality, audit risk, and internal control. c. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. d. Findings from substantive tests performed at interim dates.

Preliminary evaluations of materiality, audit risk, and internal control.

Below is an example of a typical risk in an IT environment. RISK: Destruction of data. Required: Identify a control that may be used to mitigate the risk. a. Physical controls over terminals and testing of programs and applications. b. Controls over access and backup copies c. None of these answers are correct. d. Program and user controls e. Firewalls and password systems

Program and user controls

Which of the following is a category of general controls? a. Program change controls. b. Input controls. c. Detective controls. d. Processing controls.

Program change controls.

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? a. Questioning. b. Judgmental. c. Criticizing. d. Presumptive.

Questioning

Which of the following sampling risks does the audit team control in an attributes sampling application (ROO = risk of overreliance, ROU = risk of underreliance)? ROO: ROU:

ROO: Yes ROU: No

If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should:

Raise or lower the materiality level as appropriate to the situation.

Risks relevant to financial reporting can arise due to which of the following circumstances? a. Performance reviews of employees. b. Board of directors' commitment to competence. c. Rapid growth in the entity's operations. d. Corrective actions implemented by management.

Rapid growth in the entity's operations.

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. Reviewing lease agreements to determine whether leased assets should be capitalized. b. Comparing the market value of property to amounts owed on the property. c. Inspecting title documents to verify whether any assets are pledged as collateral. d. Reading the minutes of meetings of the stockholders and the board of directors.

Reading the minutes of meetings of the stockholders and the board of directors.

Reasonable assurance.

Which of the following input controls would not be effective in identifying the erroneous input of numeric fields in a transaction? a. Hash totals. b. Record counts. c. Check digits. d. Batch totals.

Record counts.

Which of the following principles is most closely associated with the auditors' conclusion as to the fair presentation of the entity's financial statements? a. Communication principle. b. Reporting principle. c. Performance principle. d. Responsibilities principle.

Reporting principle

Identify the principle: The auditors' issuance of a disclaimer of opinion because of a significant scope limitation.

Reporting.

Identify the principle: The auditors' issuance of a qualified opinion because of a departure from GAAP.

Reporting.

Which of the following steps should an auditor perform first to determine the existence of related parties? a. Examine invoices, contracts, and purchasing orders. b. Review the company's business structure. c. Review proxy and other materials filed with the SEC. d. Request a list of related parties from management.

Request a list of related parties from management.

Public companies, or issuers, in the U.S. are ____.

Required by the federal government to have annual financial statement audits.

Identify the fundamental principle: An auditor has raised some questions with respect to management's response to various inquires concerning pending litigation facing the client.

Responsibilities.

Identify the principle: The requirement that auditors possess the skills and knowledge of others in their profession.

Responsibilities.

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? a. Confirmation of accounts receivable from principal customers. b. Review of compliance with terms of debt agreements. c. Confirmation of bank balances. d. Reconciliation of interest expense with debt outstanding.

Review of compliance with terms of debt agreements.

In order to obtain an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures? a. Analytical procedures to determine the need for specific controls. b. Tests of key controls to determine whether they are effective. c. Risk-assessment procedures to evaluate the design of relevant controls. d. Expanded substantive testing to identify relevant controls.

Risk-assessment procedures to evaluate the design of relevant controls.

In order to obtain an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures? a. Expanded substantive testing to identify relevant controls. b. Risk-assessment procedures to evaluate the design of relevant controls. c. Analytical procedures to determine the need for specific controls. d. Tests of key controls to determine whether they are effective.

Risk-assessment procedures to evaluate the design of relevant controls.

Which of the following matters is an auditor required to communicate to those charged with governance? Significant audit adjustments: Changes in significant accounting policies:

Significant audit adjustments: Yes Changes in significant accounting policies: Yes

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? a. Substantive procedures and analytical procedures. b. Tests of details and substantive procedures. c. Tests of controls and tests of details. d. Substantive analytical procedures and tests of controls.

Tests of controls and tests of details.

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements? a. The operating effectiveness of controls. b. The existence of related party transactions. c. The complexity of the information system relevant to financial reporting. d. The adequacy of the accounting records.

The adequacy of the accounting records.

Which of the following statements is usually true? a. It is easier for the auditor to uncover indirect-effect illegal acts than fraud. b. It is easier for the auditor to uncover fraud than errors. c. The auditor's responsibility for detecting indirect-effect illegal acts is similar to the responsibility to detect fraud. d. The auditor's responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.

The auditor's responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.

The issuance of a disclaimer of opinion generally indicates:

The auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

Which of the following matters would an auditor most likely communicate to those charged with governance? a. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables. b. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios. c. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance. d. The level of responsibility assumed by management for the preparation of the financial statements.

The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.

In which of the following circumstances would auditors be most likely to express an adverse opinion? a. Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern. b. The chief executive officer refuses to provide the auditors access to minutes of board of directors' meetings. c. The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases. d. Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon.

The financial statements are not in accordance with generally accepted accounting principles regarding capitalization of leases.

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements? a. The financial statements fail to disclose information that is required by generally accepted accounting principles. b. The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures. c. The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements. d. Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

The financial statements fail to disclose information that if required by generally accepted accounting principles.

Quality control policies and procedures that are established to decide whether to accept a new client should provide the CPA firm with reasonable assurance that:

The likelihood of associating with clients whose management lacks integrity is minimized.

An auditor should obtain knowledge of a client's information and communication system in order to understand each of the following, except: a. The means used by an entity to ensure that management directives are carried out. b. How transactions are initiated, processed, and reported. c. The means used by an entity to communicate financial reporting roles to its staff. d. The process used to prepare financial statements.

The means used by an entity to ensure that management directives are carried out.

At a minimum, an understanding with a client should include:

The objectives and limitations of the engagement, as well as the responsibilities of management and of the auditor.

The primary difference between operational auditing and financial auditing is that in operational auditing:

The operational auditor is seeking to help management use resources in the most effective manner possible.

In the integrated audit of an issuer, which of the following would not be considered an entity-level control? a. The executive committee's process for assessing business risk. b. The board of directors' controls to monitor the activities of the audit committee. c. Management's established controls to monitor results of operations. d. The outside auditor's assessment process of internal auditor competence and objectivity.

The outside auditor's assessment process of internal auditor competence and objectivity.

In the preparation of an audit plan, which of the following items is not essential?

The preparation of a budget identifying the costs of resources needed.

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

The responsibilities of the auditor.

Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time? a. The specific matters to be included in the communication with those charged with governance. b. The minimum amount of misstatements that may be considered to be significant deficiencies in internal control. c. The schedules and analyses that the client's staff should prepare. d. The effects that inadequate controls may have over the safeguarding of assets.

The schedules and analyses that the client's staff should prepare.

Who is responsible for holding the board of directors accountable for proper governance and oversight? a. The external auditors. b. The chairman of the board. c. The shareholders. d. Executive management.

The shareholders.

Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk? a. The suitability of the client's lines of reporting. b. The organization's recruiting and hiring practices. c. Physical proximity of the accounting function to upper management. d. Management's attitude toward information processing and accounting departments.

The suitability of the client's lines of reporting.

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? a. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. b. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls. c. The risk that the internal control system will not detect a material misstatement of a financial statement assertion. d. The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee.

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because

They generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements.

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because:

They generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements.

Which of the following statements best describes the phrase, "generally accepted auditing standards?" a. They identify the policies and procedures for the conduct of an audit. b. They define the nature and extent of the auditor's responsibilities. c. They provide guidance to the auditor with respect to planning the audit and writing the audit report. d. They set forth a measure of the quality of the performance of audit procedures.

They set forth a measure of the quality of the performance of audit procedures.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the: a. Timing of inventory observation procedures to be performed. b. Pending legal matters to be included in the inquiry of the client's attorney. c. Procedures to be undertaken to discover litigation, claims, and assessments. d. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

Timing of inventory observation procedures to be performed.

The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is

To determine the nature, timing, and extent of substantive procedures to be performed.(P.E.1)

One of the primary problems associated with end user computing is a. Inappropriate use of the Internet. b. Increased cost associated with appropriate separation of duties. c. Increased risk of unauthorized changes to mainframe data. d. Unauthorized access to programs and data.

Unauthorized access to programs and data.

Which of the following constitutes a potential risk associated with the use of information technology in an entity's internal control structure? a. A reduction in the ability to monitor the entity's activities. b. A reduction in the circumvention of controls. c. Unauthorized changes to systems. d. The facilitation of additional analyses.

Unauthorized changes to systems.

Which of the following statements most likely represents a control consideration for an entity that performs its accounting using mobile computing devices? a. Random errors in report printing are rare in packaged software systems. b. It is usually difficult to detect arithmetic errors. c. Transactions are coded for account classifications before they are processed on the computer. d. Unauthorized persons find it easy to access the computer and alter the data files.

Unauthorized persons find it easy to access the computer and alter the data files.

Which of the following ratios, when small, may indicate an inadequate estimation process? a. Accounts receivable turnover in days. b. Uncollectible accounts expense to accounts receivable write-offs. c. Uncollectible accounts expense to net credit sales. d. Accounts receivable growth to sales growth.

Uncollectible accounts expense to accounts receivable write-offs.

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Going-concern uncertainties that may have a material, but not pervasive effect on the financial statements.

Unqualified

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern? a. Verifying that approved spending limits are not exceeded. b. Reviewing minutes of board meetings. c. Tracing sales orders to the revenue account. d. Matching purchase orders to accounts payable.

Verifying that approved spending limits are not exceeded.

An auditor has been hired to report on a nonissuer's internal control over financial reporting. Which of the following best describes a reporting option in this scenario? a. When a significant deficiency exists, the auditor may issue either a qualified or adverse opinion. b. When a material weakness exists, the auditor should issue an adverse opinion. c. If management fails to provide a written representation letter acknowledging its responsibility for the effectiveness of internal control, the auditor will generally issue an unmodified opinion with additional explanatory language. d. If management fails to provide a written representation letter acknowledging its responsibility for the effectiveness of internal control, the auditor may issue either a qualified opinion or an adverse opinion.

When a material weakness exists, the auditor should issue an adverse opinion.

During risk assessment, assume an auditor obtained the following information about an audit client: General Electric consistently overstates liabilities and expenses in order to avoid paying out cash dividends in the short-run in order to ensure that they are financially viable and solvent in the long-run. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Rationalization

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: Overall comparisons of purchases and inventory levels are made periodically. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Completeness [2] = Acquisition and Disbursement

Another name commonly given to a regression equation is _______. a. a population distribution equation. b. a statistical variance equation. c. a prediction equation. d. slope line intercept.

a prediction equation.

Management's report on internal controls must include each of the following except: a. a statement providing management's evaluation of the company's control environment. b. statement identifying the framework management uses to evaluate the effectiveness of the company's internal control. c. statement that management is responsible for establishing and maintaining adequate internal control over financial reporting. d. a statement providing management's assessment of the effectiveness of the company's internal control.

a statement providing management's evaluation of the company's control environment.

Regression analysis is best defined as _______. a. a statistical process which involves estimating a prediction equation that expresses an item of interest (commonly known as the y or dependent variable) in terms of other data fields. b. a non-statistical process which involves estimating a prediction parameter that expresses an item of interest (commonly known as the y or dependent variable) in terms of other data fields. c. a non-statistical process which involves estimating a prediction equation that expresses an item of interest (commonly known as the y or dependent variable) in terms of other data fields. d. a statistical process which involves estimating a prediction parameter that expresses an item of interest (commonly known as the y or dependent variable) in terms of other data fields.

a statistical process which involves estimating a prediction equation that expresses an item of interest (commonly known as the y or dependent variable) in terms of other data fields.

Auditors will issue an adverse opinion when

a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.(P.E.1)

It is common for data problems to arise when a company_______. a. changes accounting method. b. changes an accounting estimate. c. acquires another company. d. has no subsidiaries and has not acquired any other companies.

acquires another company.

Audit teams would least likely use computer-assisted audit techniques to a. assess control risk related to computerized processing systems. b. access client data files. c. construct and perform parallel simulations. d. prepare spreadsheets.

assess control risk related to computerized processing systems.

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the:

assurances provided by substantive tests to a lower level.

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

inherent risk.

Tests of controls in an advanced computerized processing system a. can be performed using only actual transactions because testing simulated transactions does not provide relevant evidence. b. is inadvisable because it may distort the evidence in real-time systems. c. is impractical because many procedures within the computerized processing system leave no visible evidence of having been performed. d. can be performed using actual transactions or simulated transactions.

can be performed using actual transactions or simulated transactions.

Determine from the following the factor that would most likely elevate the auditor's concern about the risk of financial statement fraud. a. company finds it difficult to sell equity capital for expansion b. company has a significant portion of liquid assets on its balance sheet c. company reports substantial net income but ever decreasing cash flow from operations d. company cannot borrow debt capital without restrictive covenants

company reports substantial net income but ever decreasing cash flow from operations

Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management's assertion of

completeness(P.E.1)

When assessing internal auditors' objectivity, an independent auditor should:

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

One of the steps in the five step AICPA process to follow when planning, performing, and evaluating results from audit data analytics (ADA) is _______. a. pass the results to management for analysis and evaluation. b. consider the relevance and reliability of the data used. c. prepare a suitable population and representative sample. d. consideration of internal control.

consider the relevance and reliability of the data used.

What type of audit is conducted to provide assurance about various aspects of an organization's activities rather than the reliability of financial statements?

internal audit

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the assertion of: a. occurrence. b. accuracy. c. valuation or allocation. d. cutoff.

cutoff

The purpose of tests of controls is to determine that: a. errors and irregularities are prevented or detected in a timely manner. b. the extent of further audit procedures can be reduced. c. the auditor has an understanding of internal control. d. internal control policies and procedures are functioning as prescribed.

internal control policies and procedures are functioning as prescribed.

The Statements on Auditing Standards issued by the Auditing Standards Board:

interpret generally accepted auditing standards.

Before accepting an engagement to audit a new client, an auditor is required to:

make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

The appropriate separation of duties does not include: a. custody of assets involved in the transactions. b. authorization to execute transactions. c. recording of transactions. d. data preparation.

data preparation.

On the basis of attributes sampling, an auditor decided to increase the assessed level of control risk from the level originally planned. To achieve an overall audit risk level that is substantially the same as the original planned level of audit risk, the auditor would: a. increase inherent risk. b. decrease substantive procedures. c. decrease detection risk. d. increase overall materiality levels.

decrease detection risk.

The item of interest in a regression analysis is referred to as the _______. a. independent variable. b. hypotenuse. c. dependent variable. d. any x variable.

dependent variable.

In an audit of financial statements of a non-public company in accordance with generally accepted auditing standards, an auditor is required to: a. determine whether control activities are operating effectively to prevent or detect material misstatements. b. search for significant deficiencies in the operation of the internal controls. c. document the auditor's understanding of the entity's internal control. d. perform tests of controls to evaluate the effectiveness of the entity's accounting system.

document the auditor's understanding of the entity's internal control.

A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as

due care

Computer operations controls are typically implemented for files and data used in processing. The major objectives of these controls include each of the following except for a. ensure restricted access to the computing environment. b. ensure that files are appropriately secured and protected from loss. c. ensure that files can be reconstructed from earlier versions of information used in processing. d. ensure that appropriate files are used in computerized processing.

ensure restricted access to the computing environment.

To obtain evidence that controls over access to computer programs are properly functioning, audit teams most likely would a. examine the transaction log to discover whether any transactions were lost or entered twice due to a system malfunction. b. vouch a random sample of processed transactions to assure proper authorization. c. enter invalid identification numbers or passwords to ascertain whether the system rejects them. d. create checkpoints at periodic intervals after data processing to test for unauthorized use of the system.

enter invalid identification numbers or passwords to ascertain whether the system rejects them.

When the audit team increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the audit team would most likely increase the: a. extent of substantive tests of details. b. level of detection risk. c. extent of tests of controls. d. level of inherent risk.

extent of substantive tests of details.

When CPAs are able to maintain their actual independence, it is referred to as independence in:

fact

Computer controls that are pervasive and apply to all applications of a computerized processing system are referred to as a. environment controls. b. automated application controls. c. general controls. d. computer controls.

general controls.

If the auditor is auditing an accounts receivable file, the auditor will want to make sure the receivable file matched the_______. a. general ledger as of the date of the test. b. investing section of the statement of cash flows as of the date of the test. c. general ledger as of any date before the test. d. trial balance as of the date of the test.

general ledger as of the date of the test.

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of scope limitation, the report would not

identify the scope limitation as a critical audit matter.

Audit data analytics (ADA)_______. a. is only capable of identifying specific transactions or accounts that are likely to be misstated. b. is effective neither at identifying general types of misstatements or capable of identifying specific transactions or accounts that are likely to be misstated. c. is effective only for identifying general types of misstatements. d. is effective not only for identifying general types of misstatements, but is also capable of identifying specific transactions or accounts that are likely to be misstated.

is effective not only for identifying general types of misstatements, but is also capable of identifying specific transactions or accounts that are likely to be misstated.

A review of historical financial statements as compared to an audit of historical financial statements ________.

is typically less expensive.

The simplest regression _______. a. is where the prediction equation is the average of the data. b. is where the prediction equation is the median of the data. c. involves the use of time-series regression. d. involves the use of logistic regression.

is where the prediction equation is the average of the data.

In a system of quality control, leadership responsibilities for quality within the firm are best characterized by

management's clear and consistent demonstration of its own commitment to quality control and high-quality work.

Issuers' financial statements should be accompanied by all of the following reports except the

management's report on financial statements and related disclosures.

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. The auditor most likely decided that: a. there were many internal control weaknesses that could allow errors to enter the accounting system. b. additional evidence to support a further reduction in control risk is not available. c. it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. d. an increase in the assessed level of control risk is justified for certain financial statement assertions.

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

False positives refer to _______. a. positive confirmations incorrectly received from client vendors. b. items correctly identified as notable items. c. negative confirmations incorrectly received from client vendors. d. items incorrectly identified as notable items.

items incorrectly identified as notable items.

The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with: a. a basis for modifying tests of controls. b. knowledge necessary for audit planning. c. an evaluation of the consistency of application of management's policies. d. evidential matter to use in assessing inherent risk.

knowledge necessary for audit planning.

Compared to an audit of historical financial statements, a review engagements is ________.

less extensive and also less expensive.

Substantive tests of details may involve _______. a. testing of internal controls. b. matching information in the accounting records with information on underlying documents. c. the clients legal counsel. d. the approval of senior management.

matching information in the accounting records with information on underlying documents.

Auditing standards require that an audit be designed to provide reasonable assurance of detecting: a. material errors and fraud in the financial statements. b. inadequate disclosure in the notes to the financial statements. c. material errors in the financial statements. d. fraud in the financial statements.

material errors and fraud in the financial statements.

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not ________ are detected. a. statistically significant to the financial statements b. material to the financial statements c. identified by the client d. important to the financial statements

material to the financial statements

The initial planning of where to use audit data analytics _______. a. is typically left to the internal audit function. b. is determined solely by the audit partner in charge of the audit. c. is a legal question, and should be referred to the client's legal counsel. d. may involve significant audit partner and manager time, or it may be combined with a brainstorming session that involves all members of the audit team.

may involve significant audit partner and manager time, or it may be combined with a brainstorming session that involves all members of the audit team.

As with all audit procedures, auditors must _______. a. must carefully plan the nature, timing, and extent of audit data analytics (ADA) to be used for each client. b. pay little attention to the work of the prior auditor on a first-year engagement. c. always outsource at least some of the audit work to the internal audit function. d. must let the client's management choose the nature, timing, and extent of ADA to be used for each client.

must carefully plan the nature, timing, and extent of audit data analytics (ADA) to be used for each client.

When using cluster analysis, the characteristics of the group _______. a. need not be known beforehand, but are determined by the data. b. need not be known beforehand, and are typically not determined by the data. c. must be known beforehand, and are determined by the data. d. must be known beforehand, but are typically not determined by the data.

need not be known beforehand, but are determined by the data.

As part of understanding the internal control, an auditor is not required to: a. consider factors that affect the risk of material misstatement. b. obtain knowledge about the operating effectiveness of the client's internal control activities. c. identify the types of potential misstatements that can occur. d. ascertain whether internal control policies and activities have been placed in operation.

obtain knowledge about the operating effectiveness of the client's internal control activities.

The internal control in small business is highly dependent on the: a. bonding of employees. b. owner-manager's competence, as well as his/her ethics and integrity. c. complexity of the client's internal controls. d. separation of functional responsibilities.

owner-manager's competence, as well as his/her ethics and integrity.

The term independent with respect to assurance services implies that the services is ________.

performed by someone who was not involved with the creation of the information.

The auditor is most likely going to perform audit data analytics (ADA) as a substantive test when the auditor has _______ a. confirmed the procedures to be conducted with the internal audit function. b. performed tests of controls and concluded that the entity has strong controls. c. performed tests of controls and concluded that the entity has weak controls. d. completed the audit and is ready to issue the audit report.

performed tests of controls and concluded that the entity has strong controls.

When programs or files can be accessed from terminals, users should be required to enter a(n) a. parity check. b. self-diagnosis test. c. echo check. d. personal identification code.

personal identification code

The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of

planning

Inherent risk is the:

probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.

The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as

professional skepticism.

qualified opinion or an adverse opinion.

The concept of ________ recognizes that a GAAS audit may fail to detect all material misstatements.

reasonable assurance

Education of financial statement users as to the responsibilities of preparers and auditors of financial statements will _________.

reduce the audit expectation gap.

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the:

related internal control policies and procedures.

The auditor tested a sample of recorded sales invoices for evidence of credit approval. Based on the results of the sample, the auditor concluded that there was a satisfactory rate of approvals. Unknown to the auditor, credit approvals in the population were not satisfactory. This would be an example of: a. risk of underreliance. b. risk of overreliance. c. risk of incorrect acceptance. d. risk of incorrect rejection.

risk of overreliance.

When performing attributes sampling, the appropriate AICPA Sample Size Table is initially selected based on the auditors' assessment of the a. risk of underreliance. b. expected population deviation rate. c. risk of overreliance. d. tolerable rate of deviation.

risk of overreliance.

When the auditor concludes that a control is functioning properly when, in fact, it is not, the auditor has committed the: a. risk of underreliance. b. risk of incorrect acceptance. c. risk of overreliance. d. risk of incorrect rejection.

risk of overreliance.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: a. possibility that the nature and extent of substantive tests may be reduced. b. operating effectiveness of internal control policies and procedures. c. risk that material misstatements exist in the financial statements. d. factors that raise doubts about the auditability of the financial statements.

risk that material misstatements exist in the financial statements.

If revenue is strongly seasonal, the auditor might decide to _______. a. run a non-statistical regression that is based on the seasonality in historical revenue figures. b. run a time-series regression that is based on seasonality only. c. run a time-series regression that is based on the trend only. d. run a time-series regression that is based on the trend and seasonality in historical revenue figures.

run a time-series regression that is based on the trend and seasonality in historical revenue figures.

After examining sample items and classifying items as deviations, the auditor can divide the number of deviations by the sample size and calculate the: a. sample rate of deviation. b. tolerable rate of deviation. c. risk of underreliance. d. expected population deviation rate.

sample rate of deviation.

The AICPA has developed sample size tables for attributes sampling that specifically incorporate all of the following factors except for the: a. risk of overreliance. b. sample rate of deviation. c. expected population deviation rate. d. tolerable rate of deviation.

sample rate of deviation.

In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the rates observed in prior audits because of the results of prior tests of controls and the overall control environment. The auditor most likely would then increase the planned: a. sample size. b. risk of overreliance. c. tolerable rate of deviation. d. allowance for sampling risk.

sample size.

Regardless of the assessed level of control risk, an auditor of a non-public company would perform some: a. dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk. b. tests of controls to determine the effectiveness of internal control policies. c. analytical procedures to verify the design of internal control activities. d. substantive tests to restrict detection risk for significant transaction classes.

substantive tests to restrict detection risk for significant transaction classes.

Lincoln, CPA, selected a sample of 100 items by dividing the population of 100,000 sales invoices by 100. With a random start, she then selected every 1,000th invoice. This selection process is referred to as: a. judgmental selection. b. nonstatistical selection. c. systematic random selection. d. unrestricted random selection.

systematic random selection.

Assurance, attestation, and auditing are similar because all three represent a common process of _______.

taking information prepared by someone else and comparing that information to an established set of criteria.

Assurance, attestation, and auditing are similar because all three represent a common process of_____.

taking information prepared by someone else and comparing that information to an established set of criteria. (P.E.1)

Audit Expectation Gap is narrowed by realistic user expectations such as that that auditor _________.

tests a sample of transactions.

The auditor is not required to ask the predecessor auditor about:

the fees charged for the previous audit.

An auditor would least likely initiate a discussion with a client's audit committee concerning:

the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

The auditor determines the relevance of data by _______. a. the nature of the audit question or assertion being tested. b. ensuring the data is unrelated to any audit assertion the auditor wishes to test. c. inquiring of the internal auditors. d. confirming its relevancy with senior management.

the nature of the audit question or assertion being tested.

Cluster analysis is defined as _______. a. the process of discovering individual pieces of similar items in a set of data; items in the same group are similar, while items in different groups are not as similar. b. the process of discovering groups (termed clusters in data science) of similar items in a set of data; items in the same group are similar, while items in different groups are not as similar. c. analyzing management techniques and administrative policies simultaneously. d. determining which package of audit services can be sold to a client at the best possible price.

the process of discovering groups (termed clusters in data science) of similar items in a set of data; items in the same group are similar, while items in different groups are not as similar.

If an auditor tested 50 transactions and found two deviations from an important control activity, the auditor could conclude that: a. the tolerable rate is 4%. b. the sample rate of deviation is 4%. c. the expected population deviation rate is 4%. d. the critical rate of occurrence is 4%.

the sample rate of deviation is 4%.

When a new company is acquired, _______. a. there is infrequently a period of transition and integration of accounting and IT systems when different formats are introduced. b. there is rarely any disruption to accounting and information technology (IT) systems. c. the acquiring company's systems are immediately discontinued and replaced with the acquiring company's systems. d. there is frequently a period of transition and integration of accounting and IT systems when different formats are introduced.

there is frequently a period of transition and integration of accounting and IT systems when different formats are introduced.

When the auditor uses the 'matching information in key data fields' process, the expectation is that _______. a. there should be no matches. b. there should always be variances. c. there should be minimal variances. d. there should only be variances when two different databases are used.

there should be no matches.

The auditor should always evaluate evidence _______. a. under the assumption that all information is incorrect. b. after senior management has had a chance to review and approve it. c. with a questioning mind and attitude of professional skepticism. d. under the assumption that all information is correct.

with a questioning mind and attitude of professional skepticism.

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's: a. internal auditor. b. treasurer. c. credit manager. d. accountant.

treasurer

T/F An auditors engagement letter should include acknowledgment of management's responsibility for maintaining effective internal control.

true

In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating:

$10,000

Jamie, from MSM CPA Firm, is auditing RC Airplanes for Year 3. Jamie expects the users of the financial statements to have a medium to high level of tolerance for misstatements and to be most interested in earnings. MSM CPA Firm has the following audit guidance for calculating materiality: Users' Tolerance for Misstatements Benchmarks* Profit before tax Low: 9% Low to Medium: 8% Medium: 7% Medium to High: 6% High: 5% Total assets Low: 2% Low to Medium: 1.75% Medium: 1.50% Medium to High: 1% High: 0.50% *Benchmark selected should be the one that is most relevant to users of the financial statements. Jamie has obtained the following information from RC Airplanes' Year 3 financial statements: Revenue: $1,750,000 Total assets: $850,000 Profit before tax: $250,000 Based on the facts above, what is the overall materiality that Jamie should use for RC Airplanes? a. $12,750 b. $32,500 c. $15,000 d. $17,500

$15,000 is correct. The users of the financial statements are most interested in earnings; therefore, the benchmark that should be utilized is profit before tax. The users' tolerance for misstatements is medium to high (6 percent based on chart). Overall materiality = Profit before tax × Applicable percentage Overall materiality = $250,000 × 0.06 Overall materiality = $15,000 $12,750 is incorrect. This calculation uses a user tolerance of medium to high, but incorrectly uses assets as the benchmark. $17,500 is incorrect. This calculation uses the benchmark of profit before tax, but incorrectly uses a user tolerance of medium. $32,500 is incorrect. This calculation uses a user tolerance of medium to high, but incorrectly uses both assets and profit before tax as the benchmarks. MSM guidance states to use the one benchmark that is most relevant to the users of the financial statements.

Jacob, senior accountant at NEP CPA Firm, is auditing the Year 2 financial statements for Top Firmware Corp., a nonissuer, and he is currently in the planning stage. Top Firmware Corp. sales historically occur evenly throughout the year. Jacob expects a low likelihood of uncorrected and undetected misstatements. NEP CPA Firm's materiality guidelines are as follows: Overall financial statement materiality should be based on either total assets or gross annualized revenue, whichever is larger, and should be calculated by taking the appropriate benchmark and multiplying it by either 1.5 percent if the benchmark is assets, or 1 percent if the benchmark is gross revenue. Performance materiality is calculated by multiplying the overall materiality by either 80 percent(for low likelihood of uncorrected and undetected misstatements) or 60 percent (for high likelihood of uncorrected and undetected misstatements). Selected interim financial information from Top Firmware Corp. For the period 01/01/Year 2 - 06/30/Year 2: Revenue: $2,100,000 Gross profit: $600,000 As of 06/30/Year 2: Total assets: $2,000,000 Stockholders' equity: $1,250,000 Based on the information above, what is the overall financial statement materiality? a. $42,000 b. $30,000 c. $60,000 d. $21,000

$42,000 is correct. Overall materiality = Applicable benchmark × Applicable percentage. $21,000O is incorrect. This calculation uses interim revenue as the benchmark when the annualized interim revenue should be used. $30,000 is incorrect. This calculation uses assets as the benchmark. This is incorrect because NEP CPA Firm guidelines require the benchmark to be based on the larger of total assets or gross annualized revenue. $60,000 is incorrect. This calculation incorrectly doubles assets to calculate materiality. Note: In situations in which assets are used as the benchmark for a materiality calculation, the "as of" amount should be used. $4,200,000 (annualized revenue = $2,100,000 × 2) × 0.01

Katie, senior accountant at Top CPA Firm, is auditing Laminate Floors for the year ended Year 6. Katie expects a high likelihood of uncorrected and undetected misstatements. Based on firm guidelines, Katie should use 1 percent of revenue as the benchmark to calculate overall materiality. Firm guidelines require performance materiality to be calculated by multiplying the overall materiality by either 80 percent (for low likelihood of uncorrected and undetected misstatements) or 60 percent (for high likelihood of uncorrected and undetected misstatements). Selected financial information from Laminate Floors: Revenues Quarter 1: $300,000 Quarter 2: $400,000 Quarter 3: $250,000 Quarter 4: $375,000 Total: $1,325,000 Based on the information above, determine the appropriate performance materiality that Katie should use. a. $7,950 b. $10,600 c. $13,250 d. $21,200

$7,950 is correct. Overall materiality = Applicable benchmark × Applicable percentage. Overall materiality = $1,325,000 × 0.01 Overall materiality = $13,250 Performance materiality = Overall materiality × Applicable percentage Performance materiality = $13,250 × 0.6 Performance materiality = $7,950 $10,600 is incorrect. This calculation incorrectly uses the low likelihood percentage of 80 percent. $13,250 is incorrect. This is the overall materiality. $21,200 is incorrect. This incorrectly adds the performance materiality and overall materiality.

Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer? 1. Must be Communicated to Management and the Audit Committee? 2. Results in an Adverse Opinion of the Effectiveness of Internal Control?

1. Both significant deficiencies and material weaknesses 2. Material weaknesses but not significant deficiencies

The three sources of evidence (from most to least reliable) are:

1. Evidence directly obtained by the auditor 2. Evidence obtained from external sources 3. Evidence obtained from internal sources

Audra Dodge, CPA, is performing an attributes sampling plan for her audit of Truck Company. In her audit of cash disbursements, she has identified preparing a voucher and marking it as "paid" prior to preparing and mailing a check to the vendor as an important control. Dodge defined any voucher that was not marked as "paid" as being a deviation. In performing her sampling application, she established the following parameters: Risk of Overreliance: 5% Expected Population Deviation Rate: 0.00% Tolerable Rate of Deviation: 5% REQUIRED: If Dodge selected the appropriate sample size, and found three deviations, using AICPA sample evaluation table below, determine the upper limit rate of deviation. (Note: If the sample size cannot be directly located on the sample evaluation table, round down to the next highest sample size.) Round your answers to one decimal point. Answers should conform to the following form: 87.0 ANSWER HERE: [a]

13.5

For the following control, use AICPA sample size tables to identify the missing value(s). ONLY enter in numbers (i.e., no commas, dollar signs, parentheses, etc.) Control X1 Risk of overreliance: 5% Expected population deviation rate: 0.50% Tolerable deviation rate: 2% Sample size: [A]

313

Audra Dodge, CPA, is performing an attributes sampling plan for her audit of Truck Company. In her audit of cash disbursements, she has identified preparing a voucher and marking it as "paid" prior to preparing and mailing a check to the vendor as an important control. Dodge defined any voucher that was not marked as "paid" as being a deviation. In performing her sampling application, she established the following parameters: Risk of Overreliance: 5% Expected Population Deviation Rate: 5.00% Tolerable Rate of Deviation: 10% REQUIRED: Based on the original parameters, use the AICPA sample size tables below to determine the appropriate sample size. Answer using whole numbers and no special characters (commas or decimals). For example: 1257 or 53 The critical number of deviations for the appropriate sample size would be [a]

Audra Dodge, CPA, is performing an attributes sampling plan for her audit of Truck Company. In her audit of cash disbursements, she has identified preparing a voucher and marking it as "paid" prior to preparing and mailing a check to the vendor as an important control. Dodge defined any voucher that was not marked as "paid" as being a deviation. In performing her sampling application, she established the following parameters: Risk of Overreliance: 5% Expected Population Deviation Rate: 2.75% Tolerable Rate of Deviation: 7% REQUIRED: If Dodge selected the appropriate sample size, and found seven deviations, what is the sample rate of deviation? Round your answer to one decimal and express it as a percentage. For example, if your answers is 87.777%. Enter: 87.8 ANSWER HERE: [a]

6.4

Which of the following does not demonstrate an inappropriate segregation of duties? a. The purchasing manager approves vendor invoices for payment. b. The cashier performs the monthly bank reconciliation. c. A billing clerk prepares invoices and records the resulting increase in accounts receivable. d. An accounting clerk receives customer payments and records the resulting reduction in accounts receivable.

A billing clerk prepares invoices and records the resulting increase in accounts receivable.

The auditors' report on an issuer's financial statements includes all of the following except:

A disclaimer on the operating effectiveness of the internal control over financial reporting.

Which of the following is not true about the relationship between quality control standards and professional standards such as GAAS? a. Quality control standards relate to the conduct of a firm's entire practice, whereas professional standards such as GAAS relate to the conduct of an individual engagement. b. A firm that has not adopted an appropriate system of quality control may still be in compliance with professional standards with respect to individual engagements. c. A firm's failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements. d. The adoption of quality control standards increases the likelihood of compliance with professional standards on individual engagements.

A firm's failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements.

Which internal control documentation method provides the auditor with the best visual understanding of a system and can be used as a means for analyzing complex operations? a. A flowcharting approach. b. A questionnaire approach. c. A matrix approach. d. A detailed narrative approach

A flowcharting approach.

Which of the following statements correctly defines the term reasonable assurance? a. A significant level of assurance to allow an auditor to detect a material misstatement. b. A substantial level of assurance to allow an auditor to detect a material misstatement. c. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. d. An absolute level of assurance to allow an auditor to detect a material misstatement.

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.

Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls? a. A journal entry made to a seldom-used account. b. A journal entry recorded as a post-closing entry that has no explanation or description. c. A journal entry made to record recurring periodic accounting estimates. d. A journal entry made by an individual who does not typically make journal entries.

A journal entry made to record recurring periodic accounting estimates.

T/F An organization can be held liable for an employee's act if management knew there was a high probability the act had occurred and consciously avoided confirming that fact.

True

In an integrated audit of a nonissuer, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations? a. The auditor was asked by the client to provide the report to another practitioner. b. The entity may not continue as a going concern. c. A material weakness exists. d. The financial statements are misstated.

A material weakness exists.

Early appointment of the independent auditor will enable a. A proper study and evaluation of internal control to be performed. b. A more thorough audit to be performed. c. Sufficient competent evidential matter to be obtained. d. A more efficient audit to be planned.

A more efficient audit to be planned.

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that:

A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.

Which of the following situations represents a limitation, rather than a failure, of internal control? a. A bank teller embezzles several hundred dollars from the cash drawer. b. A movie theater cashier sells reduced-price tickets to full-paying customers and pockets the difference. c. A jewelry store employee steals a small necklace from a display cabinet. d. A purchasing employee and an outside vendor participate in a kickback scheme.

A purchasing employee and an outside vendor participate in a kickback scheme.

Which of the following procedures would yield the most reliable evidence? a. A recalculation of bad debt expense. b. An inquiry of client personnel. c. A comparison of beginning and ending retained earnings. d. A scanning of trial balances.

A recalculation of bad debt expense. (P.E.1)

Under Section 404 of the Sarbanes-Oxley Act, public U.S. companies must include all of the following in their annual report except: a. A report explaining any discovered deficiencies in the company's internal controls over financial reporting. b. A statement of management's responsibility for establishing and maintaining adequate internal controls over financial reporting. c. Management's assessment of the effectiveness of the company's internal controls over financial reporting. d. A statement identifying the framework used in performing the assessment of the effectiveness of internal controls over financial reporting.

A report explaining any discovered deficiencies in the company's internal controls over financial reporting.

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when: a. Internal auditors have direct access to the entity's board of directors. b. A significant portion of management compensation is represented by stock options. c. External policies established by parties outside the entity affect accounting policies. d. Those charged with governance are active in overseeing the entity's financial reporting policies.

A significant portion of management compensation is represented by stock options.

A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through a. Compliance with generally accepted reporting standards. b. A system of peer review. c. A system of quality control. d. Continuing professional education.

A system of quality control.

An auditor must inform those charged with governance about: I. Disagreements with management. II. Disagreements among the audit staff. III. Difficulties encountered in performing the audit.

I and III only.

Before using client data for audit data analytics the auditor needs to consider which of the following? a. If the data obtained from the client is complete. b. All these answers are correct. c. If the data is in a consistent format and whether it needs to be cleaned before it can be used. d. Whether the data is relevant and reliable.

All these answers are correct.

T/F As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

True

T/F As it relates to evidence, the term appropriate refers to the quality of evidence

True

Required: For the following control, use AICPA sample size and sample evaluation tables to identify the missing value(s). When inputting your answer use ONLY numbers and decimal points. Do NOT use any special characters such as percentage signs or commas. Round answers to one decimal point. Control Sample size: 40 Number of deviations: [a] Sample rate of deviation: 0.0% Risk of overreliance: 10.0% Upper limit rate of deviation: [b] Allowance for sampling risk: 5.6%

A: 0 B: 5.6

Required: For the following control, use AICPA sample size and sample evaluation tables to identify the missing value(s). When inputting your answer use ONLY numbers and decimal points. Do NOT use any special characters such as percentage signs or commas. Round answers to one decimal point. Control Sample size: [a] Number of deviations: 5 Sample rate of deviation: [b] Risk of overreliance: 10.0% Upper limit rate of deviation: 24.9% Allowance for sampling risk: [c]

A: 35 B: 14.3 C: 10.6

Which of the following is a private professional membership organization of CPAs representing the accounting profession? a. ASB. b. AICPA. c. PCAOB. d. IAASB.

AICPA.

The responsibility for creating and grading the Uniform CPA Exam lies with the ______.

AIPCA.

Which of the following topics is not addressed in the auditors' report for an issuer? a. Responsibilities of the auditor and management in the financial reporting process. b. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting. c. Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP. d. A description of an audit engagement.

Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP.

According to the SEC, members of an issuer's audit committee may not: a. Be responsible for the compensation of any registered public accounting firm employed by the registrant to provide an audit report. b. Establish procedures for employees to anonymously report fraud. c. Engage independent counsel as deemed necessary to carry out their duties. d. Accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board.

Accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board.

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an EDP system is that the auditor may: a. Consider increasing the use of substantive tests of transactions in place of analytical procedures. b. Substantiate the accuracy of data through self-checking digits and hash totals. c. Access information stored on computer files while having a limited understanding of the client's hardware and software features. d. Reduce the level of required tests of controls to a relatively small amount.

Access information stored on computer files while having a limited understanding of the client's hardware and software features.

The auditor is required to communicate each of the following items to those charged with governance, except: a. The auditor's responsibilities to complete the audit in accordance with generally accepted auditing standards. b. Any significant findings from the audit. c. An overview of the planned scope and timing of the audit. d. All control deficiencies detected during the course of the audit.

All control deficiencies detected during the course of the audit.

The most likely explanation why the auditor's examination cannot reasonably be expected to bring all acts of noncompliance with laws and regulations by the client to the auditor's attention is that: a. Acts of noncompliance with laws and regulations by clients often relate to operating aspects rather than accounting aspects. b. Acts of noncompliance with laws and regulations may be perpetrated by the only person in the client's organization with access to both assets and the accounting records. c. Acts of noncompliance with laws and regulations are perpetrated by management override of internal accounting controls. d. The client's system of internal accounting control may be so strong that the auditor performs only minimal substantive testing.

Acts of noncompliance with laws and regulations by clients often relate to operating aspects rather than accounting aspects.

Which of the following matters is an auditor required to communicate to those charged with governance? a. The results of the auditor's analytical procedures performed in the review stage of the engagement that indicate significant variances from expected amounts. b. Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process. c. Changes in the auditor's preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions. d. The auditor's consideration of risk factors in assessing the risk of material misstatement arising from the misappropriation of assets.

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process.

Which of the following opinions would be issued if auditors believed that the entity's financial statements were not presented in conformity with GAAP? a. Adverse opinion. b. Unmodified opinion. c. Qualified opinion d. Disclaimer of opinion

Adverse opinion

An auditor's primary consideration in evaluating controls is whether specific controls: a. Can be classified into one of the five internal control components. b. Affect financial statement assertions. c. Improve the efficiency of the client's operations. d. Reduce detection risk to a sufficiently low level.

Affect financial statement assertions.

An auditor's primary consideration regarding an entity's internal control is whether the controls: a. Prevent management override. b. Affect the financial statement assertions. c. Relate to the control environment. d. Reflect management's philosophy and operating style.

Affect the financial statement assertions.

In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control: a. Reflects management's philosophy and operating style. b. Affects management's financial statement assertions. c. Enhances management's decision-making processes. d. Provides adequate safeguards over access to assets.

Affects management's financial statement assertions.

An auditor assesses control risk because it:

Affects the level of detection risk that the auditor may accept.

Which of the following statements would least likely appear in an auditor's engagement letter? a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. b. Our engagement is subject to the risk that material errors or fraud, including defalcations, if they exist, will not be detected. c. Arrangements to be made with the predecessor auditor. d. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to a financial statement audit of a nonissuer? a. An auditor need not identify and communicate material weaknesses separately from significant deficiencies. b. All material weaknesses are significant deficiencies. c. All significant deficiencies are material weaknesses. d. An auditor should report immediately material weaknesses and significant deficiencies discovered during an audit.

All material weaknesses are significant deficiencies.

Which of the following is/are requirements of fraud auditing standards? a. Auditors must have a fraud brainstorming session at the beginning of the audit b. The auditor should make appropriate inquiries regarding fraud every audit c. Analytical procedures on revenue accounts are required on every audit d. All of the above. e. None of the above.

All of the above.

If the sample evidence does not support the planned level of control risk, the audit team could a. All of these answers are acceptable. b. Increase the assessed level of control risk. c. Perform additional substantive procedures, reducing the necessary level of detection risk. d. Expand the sample to achieve an observed ULRD less than the tolerable rate of deviation.

All of these answers are acceptable.

If the sample evidence does not support the planned level of control risk, the audit team could a. All of these answers are acceptable. b. Perform additional substantive procedures, reducing the necessary level of detection risk. c. Increase the assessed level of control risk. d. Expand the sample to achieve an observed ULRD less than the tolerable rate of deviation.

All of these answers are acceptable.

At what stage of an audit is an auditor most likely to consider materiality? a. All of these answers are correct. b. Reporting. c. Planning. d. Fieldwork. e. Risk Assessment.

All of these answers are correct.

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including a. All of these answers are correct. b. Any control deficiencies identified during the audit. c. Misstatements detected during the financial statement audit. d. The auditor's testing of controls for the audit of internal control on a public company.

All of these answers are correct.

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including a. Any control deficiencies identified during the audit. b. The auditor's testing of controls for the audit of internal control on a public company. c. All of these answers are correct. d. Misstatements detected during the financial statement audit.

All of these answers are correct.

Which of the following is a responsibility of the audit committee under the Sarbanes-Oxley Act? a. Pre-approving all audit and non-audit provided by the external auditor. b. All of these are correct. c. Resolving disputes about financial reporting between the auditors and management. d. Hiring, overseeing, and paying the company's external auditors.

All of these are are correct.

For companies that fall under the provisions of the Sarbanes-Oxley Act, the CEO and CFO must personally certify the company's annual and quarterly SEC filings. Which of the following statements must be included in the certifications by the CEO and CFO? a. That they have disclosed to their auditors and the audit committee any fraud that involves employees who have a significant role in the internal controls. b. That they have personally reviewed the company's financial statements. c. All of these are correct. d. That they are responsible for the company's internal controls.

All of these are correct.

The Treadway Commission made which of the following recommendations to reduce the probability of fraud in financial reports? a. Adequate audit committee resources and authority. b. A written charter for the audit committee. c. All of these are correct. d. A mandatory independent audit committee.

All of these are correct.

Under NYSE rules, a listed company's board of directors must have which of the following committees? a. Nominating/corporate governance committee. b. Audit committee. c. All of these are correct. d. Compensation committee.

All of these are correct.

Which of the following elements is required for a corporate compliance program to be effective? a. All of these are correct. b. Appropriate incentives for compliance with the program. c. Consistent punishment for employees who violate the program. d. Due diligence in the hiring process.

All of these are correct.

Which of the following is a requirement regarding internal control over financial reporting (ICOFR) under the Sarbanes-Oxley Act? a. Management must acknowledge its responsibility for establishing and maintaining adequate ICOFR. b. The auditor must issue an opinion on management's assessment of the ICOFR. c. All of these are correct. d. Management must identify the framework used in performing its assessment of ICOFR.

All of these are correct.

Which of the following types of personnel can potentially bind a corporation through their own misconduct? a. Executive officers and directors. b. Low-level employees. c. Independent contractors. d. All of these are correct.

All of these are correct.

Which of the following statements is correct with respect to the elements of the "fraud triangle"? a. All of these statements are correct. b. Opportunity refers to a situation that allows someone with motive to carry out fraud. c. Motive is a cause that pressures people into action. d. Fraud is most common when these three factors exist together. e. A lack of integrity describes a person who does not stick to the social or organizational ethical code.

All of these statements are correct.

Audit data analytics can be used _______. a. as a risk assessment tool. b. All these answers are correct. c. as a test of details. d. as a test of controls.

All these answers are correct.

Before using client data for audit data analytics the auditor needs to consider which of the following? a. If the data is in a consistent format and whether it needs to be cleaned before it can be used. b. If the data obtained from the client is complete. c. All these answers are correct. d. Whether the data is relevant and reliable.

All these answers are correct.

Popular ways that an auditor might search an audit population for notable items include: a. All these answers are correct. b. Clustering transactions or balances based on a particular characteristic or multiple characteristics. c. Statistical analysis, such as regression analysis, where the notable items are identified using statistics. d. Matching the characteristics of two populations to see if there are any overlaps.

All these answers are correct.

Some key issues to consider when planning an audit data analytics application are: a. All these answers are correct. b. What is the overall purpose of the audit data analytics application and how will it contribute to the balance of the audit? For example, is audit data analytics being used as a risk assessment procedure or as a substantive test? c. What audit data analytics tool is best suited for the audit purpose? For example, which techniques, tools, graphics, tables or other analytical techniques should be used. d. What financial statement items, accounts or disclosures and related assertions are being audited?

All these answers are correct.

Some key questions that the AICPA Guide for Audit Data Analytics suggests that the auditor should address when evaluating the reliability of data used in an audit data analytics (ADA) application are: a. What is the nature of the data? b. What is the source of the data? c. All these answers are correct. d. What is the process used to produce the data?

All these answers are correct.

The auditor is most likely going to perform audit data analytics (ADA) as a substantive test when the auditor has performed tests of controls and concluded that the entity has _______. a. All these answers are correct. b. strong IT application controls related to the assertion being tested. c. strong information technology (IT) general controls, including strong access controls. d. strong controls over electronic data interchange and the exchange of electronic information about a transaction between the client and its customers or suppliers.

All these answers are correct.

The term notable item refers to something that _______. a. represents a higher risk of material misstatement than anticipated by the auditor. b. All these answers are correct. c. has not been previously identified (a new risk). d. is indicative of a risk of material misstatement.

All these answers are correct.

The term notable item refers to something that _______. a. represents a higher risk of material misstatement than anticipated by the auditor. b. has not been previously identified (a new risk). c. is indicative of a risk of material misstatement. d. All these answers are correct. Response Feedback: Rationale: All these answer choices define a notable item.

All these answers are correct.

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? a. Requiring accountants to pass a yearly background check. b. Replacing personnel every three or four years. c. Allowing for greater management oversight of incompatible activities. d. Disclosing lack of segregation of duties to the external auditors during the annual review.

Allowing for greater management oversight of incompatible activities.

Messi, CPA, is performing an attributes sampling application for Scary Company. In doing so, Messi is interested in determining whether an adequate review of the Scary's bank reconciliations by the Company's CFO was performed. Per Scary Company's instructions, the CFO is required to both sign, and date the upper right-hand corner of each reconciliation, verify that the accuracy of the true cash balance, and provide a detailed explanation of any unusual items noted, if any, as well as specify the ultimate resolution of those matters. During the tests of controls, Messi selected a total of 20 bank reconciliations for examination. Of these invoices, 15 had clear indication of proper review in accordance with Scary's internal control policy. Messi's examination of one reconciliation revealed the following issue. Issue: On one reconciliation, the CFO had initialed the reconciliation rather than sign his name. Required: Which of the answers below, best explain whether the item represents a deviation, and if so, why? a. Although the spirit of the control was met, the review technically does not conform to the control policy, the fact that the review was performed incorrectly suggests that the remainder of the reconciliation was not correctly performed. Therefore, this issue should be classified as a deviation. b. Not enough information to make a determination. c. Although not technically conforming to the control policy, the fact that some indication of review was placed on the reconciliation suggests that this should not be classified as a deviation. d. The determination depends on the auditor's judgment regarding the severity of the departure, therefore, there is no best answer with regard to whether the item represents a deviation.

Although not technically conforming to the control policy, the fact that some indication of review was placed on the reconciliation suggests that this should not be classified as a deviation.

Messi, CPA, is performing an attributes sampling application for Scary Company. In doing so, Messi is interested in determining whether an adequate review of the Scary's bank reconciliations by the Company's CFO was performed. Per Scary Company's instructions, the CFO is required to both sign, and date the upper right-hand corner of each reconciliation, verify that the accuracy of the true cash balance, and provide a detailed explanation of any unusual items noted, if any, as well as specify the ultimate resolution of those matters. During the tests of controls, Messi selected a total of 20 bank reconciliations for examination. Of these invoices, 15 had clear indication of proper review in accordance with Scary's internal control policy. Messi's examination of one reconciliation revealed the following issue. Issue: On one reconciliation, all of the obvious signs of review were present (i.e., signature, date, identification and follow-up of unusual items). However, the audit staff noticed that while the true cash balance per the books and true cash balance per the bank equaled. That is, the number at the bottom of each column was the same. When the auditor footed the numbers appearing on the face of the reconciliation, they found that the true cash balance per the books was lower than the true cash balance per the bank. Required: Which of the answers below, best explain whether the item represents a deviation, and if so, why? a. Although the spirit of the control was met, the review technically does not conform to the control policy, the fact that the review was performed incorrectly suggests that the remainder of the reconciliation was not correctly performed. The point of the control is not to perform a review, rather, the point of the control is to perform the review correctly. Therefore, this issue should be classified as a deviation. b. Although not technically conforming to the control policy, the fact that some indication of review, which is the point of the control, was placed on the reconciliation suggests that this should not be classified as a deviation. c. The determination depends on the auditor's judgment regarding the severity of the departure, therefore, there is no best answer with regard to whether the item represents a deviation. d. Not enough information to make a determination.

Although the spirit of the control was met, the review technically does not conform to the control policy, the fact that the review was performed incorrectly suggests that the remainder of the reconciliation was not correctly performed. The point of the control is not to perform a review, rather, the point of the control is to perform the review correctly. Therefore, this issue should be classified as a deviation.

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Oversees the work of the ASEC, ARSC, and ASB.

American Institute of Certified Public Accountants (AIPCA)

A transaction-level internal control activity is best described as a. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. b. The functioning of the board of directors in support of its audit committee. c. An action taken by auditors to obtain evidence. d. A method for recording, summarizing, and reporting financial information.

An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

Which of the following parties should an auditory notify first when discovering an immaterial fraud is committed by an accounting clerk? a. The audit committee. b. The client's internal auditor. c. The client's legal counsel. d. An appropriate level of management

An appropriate level of management(P.E.1)

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk? a. The client's legal counsel. b. The audit committee. c. An appropriate level of management. d. The client's internal auditor.

An appropriate level of management.

According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review, except

An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team.

Jackson & Company, CPAs, plan to audit the financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley Act of 2002. Which of the following situations would impair Jackson's independence? a. Preparation of Perigee's routine annual tax return, where Jackson's fee will be calculated as a percentage of the tax refund obtained. b. Provision of personal tax services to Johnson, the accounts payable manager of Perigee. c. An audit of Perigee's internal control is performed contemporaneously with the annual financial statement audit. d. Discovering that Lowe, the chief financial officer of Perigee, started his accounting career ten years earlier as a staff accountant for Jackson & Company, and continues to maintain ties with current partners at the firm.

An audit of Perigee's internal control is performed contemporaneously with the annual financial statement audit.

Which of the following statements is not correct about materiality? a. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. b. The concept of materiality recognizes that some matters are important for fair presentation offinancial statements in conformity with GAAP, while other matters are not important. c. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. d. An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

Which of the following statements is most correct regarding errors and fraud? a. Errors are always fraud and frauds are always errors. b. Auditors have more responsibility for finding fraud than errors. c. An error is unintentional, whereas fraud is intentional. d. Frauds occur more often than errors in financial statements.

An error is unintentional, whereas fraud is intentional.

Which of the following statements is true regarding the risk assessment component of internal control? a. An auditor need not consider an entity's risk assessment because he or she is primarily concerned with audit risk in a financial statement audit. b. An auditor evaluates an entity's risk assessment because it is a component of overall audit risk in a financial statement audit. c. An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting. d. An auditor's evaluation of an entity's risk assessment may not be applicable to the audit of every entity.

An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting.

Which of the following statements is correct concerning significant deficiencies in internal control with respect to a financial statement audit of a nonissuer? a. All significant deficiencies are also considered to be material weaknesses. b. An auditor may report that no significant deficiencies were noted during an audit. c. An auditor may communicate significant deficiencies during an audit or after the audit's completion. d. An auditor is required to search for significant deficiencies during an audit.

An auditor may communicate significant deficiencies during an audit or after the audit's completion.

Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? a. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. b. An auditor on the engagement owns a financial interest in the stock of the client. c. The client provides financial support to a number of charitable causes that also receive support from the accounting firm. d. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.

An auditor on the engagement owns a financial interest in the stock of the client.

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer? a. An auditor's report on significant deficiencies should include a restriction on the distribution of the report. b. An auditor should perform tests of controls on significant deficiencies before communicating them to the client. c. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation. d. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.

An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements? a. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence. b. An auditor may not draft an entity's financial statements based on information from management's accounting system. c. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities. d. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

Which of the following statements is not true about engagement letters? a. An engagement letter generally includes specific audit procedures. b. The engagement letter should be signed and dated by the client. c. An engagement letter generally includes the objectives of the engagement. d. An engagement letter reduces the risk of misunderstanding.

An engagement letter generally includes specific audit procedures.

Which of the following communications is most likely to be written before the balance-sheet date? a. Confirmation letters to vendors confirming the amounts they owe to the client. b. An engagement letter. c. A report to the audit committee on the results of testing of internal control over cash receipts. d. An attorney's letter regarding contingent liabilities.

An engagement letter.

Which of the following would best be described as an attest engagement? a. An engagement to implement an ERP system. b. An engagement to develop a more efficient payroll process. c. An engagement to assess the effectiveness of an internal control system. d. An engagement to assist the client in an IRS audit.st engagement?

An engagement to assess the effectiveness of an internal control system.

Each of the following statements is correct regarding how an auditor can obtain an understanding of the likely sources of potential misstatements in an integrated audit of a nonissuer, except: a. An understanding of how transactions are initiated, authorized, processed, and recorded should be achieved. b. The controls that management has implemented to address potential sources of misstatements should be identified. c. Walkthroughs are frequently the most effective way of understanding sources of potential misstatements. d. An evaluation of the entity's information technology risk and controls should be performed utilizing an approach other than the top-down approach.

An evaluation of the entity's information technology risk and controls should be performed utilizing an approach other than the top-down approach.

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements? a. An illegal payment to a foreign official that was not recorded. b. A piece of obsolete office equipment that was not retired. c. An uncollectible account receivable that was not written off. d. A petty cash fund disbursement that was not properly authorized.

An illegal payment to a foreign official that was not recorded.

Which of the following would not result in the audit team's selecting a larger sample of controls for examination? a. All of these answers would result in a larger sample of controls. b. An increase in the expected population deviation rate from 2 percent to 4 percent. c. An increase in the tolerable rate of deviation from 3 percent to 6 percent. d. A reduction in the risk of overreliance from 10 percent to 5 percent.

An increase in the tolerable rate of deviation from 3 percent to 6 percent.

Which of the following individuals would be considered a predecessor auditor? a. A client's accounting employee responsible for the preparation of the company's financial statements. b. An independent CPA who was engaged to perform, but did not complete an audit of financial statements. c. An independent CPA who is considering accepting an engagement to audit financial statements. d. A client's accounting employee who audits the company's branches, subsidiaries, or other outlying locations from the company's home office.

An independent CPA who was engaged to perform, but did not complete an audit of financial statemets.

Which of the following is not included in an auditors' report on an issuer's internal control over financial reporting (assume a separate report is prepared)? a. An indication that the audit team is responsible for maintaining effective internal control over financial reporting. b. A definition of internal control over financial reporting. c. A reference to the auditors' report and opinion on the financial statements. d. A description of inherent limitations of internal control over financial reporting.

An indication that the audit team is responsible for maintaining effective internal control over financial reporting.

Which of the following would not be included in the auditors' report on an issuer's internal control over financial reporting if an adverse opinion is expressed? a. A listing of specific material weakness(es) identified during the audit. b. An indication that the primary purpose of the audit was not to express an opinion on internal control over financial reporting. c. The definition of a material weakness. d. An indication that the issuer has not maintained effective internal control over financial reporting.

An indication that the primary purpose of the audit was not to express an opinion on internal control over financial reporting.

Which of the following would not be included in the auditors' report on an issuer's internal control over financial reporting if an adverse opinion is expressed? a. An indication that the primary purpose of the audit was not to express an opinion on internal control over financial reporting. b. The definition of a material weakness. c. An indication that the issuer has not maintained effective internal control over financial reporting. d. A listing of specific material weakness(es) identified during the audit.

An indication that the primary purpose of the audit was not to express an opinion on internal control over financial reporting.

Which of the following statements is correct regarding internal control? a. A well-designed and operated internal control environment should detect collusion perpetrated by two people. b. A well-designed internal control environment ensures the achievement of an entity's control objectives. c. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud. d. An inherent limitation to internal control is the fact that controls can be circumvented by management override.

An inherent limitation to internal control is the fact that controls can be circumvented by management override.

What is the definition of fraud in an audit of financial statements?

An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

The auditors' report on an issuer's internal control over financial reporting provides:

An opinion with respect to internal control over financial report.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting a. Low growth and profitability as compared to the other entities in the same industry b. An overly complex organizational structure involving unusual lines of authority c. Large amounts of liquid assets that are easily convertible into cash d. Financial management's participation in the initial selection of accounting principles

An overly complex organizational structure involving unusual lines of authority

Which of the following matters in a financial statement audit is most appropriate to communicate with those charged with governance? a. Clearance explanations of workpaper review notes. b. An overview of the planned scope and timing of the audit. c. Major variances in budgeted versus actual audit hours. d. The nature and timing of detailed audit procedures.

An overview of the planned scope and timing of the audit.

Which of the following is necessary in a financial statement audit? a. An understanding of internal control relevant to each of an entity's business functions. b. An understanding of internal control relevant to each of an entity's operating units. c. An understanding of internal control relevant to an entity's financial reporting objective. d. An understanding of internal control relevant to an entity's compliance objective.

An understanding of internal control relevant to an entity's financial reporting objective.

Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud? a. Comparison of revenue reported by month and by product line for the current and prior years. b. Analysis of sales commissions over the most recent five-year period. c. Trend analysis of revenues and sales returns by month. d. Comparison of sales volume, as determined from recorded revenue amounts, with production capacity.

Analysis of sales commissions over the most recent five-year period.

In general, which of the following do not require corroboration to be effective forms of audit evidence? a. Written responses to inquiry b. Analytical procedures c. Observation of procedures d. Verbal responses to inquiry

Analytical Procedures(P.E.1)

Which of the following is always necessary in a financial statement audit? I. Test of the operating effectiveness of controls. II. Analytical procedures. III. Risk assessment procedures.

Analytical procedures and risk assessment procedures. II and III(P.E.1)

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective? a. Audit staff are experienced in performing the planned procedures. b. Analytical procedures have revealed no unusual or unexpected results. c. There were many transactions posted to the account during the period. d. The audit is being performed soon after the balance sheet date.

Analytical procedures have revealed no unusual or unexpected results.

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? a. Test of controls. b. Analytical procedures. c. Test of details. d. Test of transactions.

Analytical procedures.

If specific information comes to an auditor's attention that implies the existence of possible acts of noncompliance with laws and regulations that could have a material, but indirect effect on the financial statements, the auditor should next: a. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities. b. Discuss the evidence with those charged with governance. c. Report the matter to an appropriate level of management at least one level above those involved. d. Apply audit procedures specifically directed to ascertaining whether an act of noncompliance with laws and regulations has occurred.

Apply audit procedures specifically directed to ascertaining whether an act of noncompliance with laws and regulations has occurred.

If specific information comes to an auditors attention that implies the existence of possible acts of noncompliance with laws and regulations that could have a material, but indirect effect on the financial statements, the auditor should next:

Apply audit procedures specifically directed to ascertaining whether an act of noncompliance with laws and regulations has occurred.(P.E.1)

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud? a. Distributing paychecks directly to department store employees. b. Setting the pay rate for departmental employees. c. Hiring employees and authorizing them to be added to payroll. d. Approving a summary of hours each employee worked during the pay period.

Approving a summary of hours each employee worked during the pay period.

Which of the following matters does an auditor usually communicate to management? a. Indications of adverse key financial ratios. b. Arrangements involving a predecessor auditor. c. An agreement regarding preliminary materiality thresholds. d. Identification of recurring operating losses.

Arrangements involving a predecessor auditor.

Which of the following matters does an auditor usually include in the engagement letter? a. Identification of working capital deficiencies. b. Arrangements regarding fees and billing. c. Analytical procedures that the auditor plans to perform. d. Indications of negative cash flows from operating activities.

Arrangements regarding fees and billing.

Which of the following matters does an auditor usually include in the engagement letter? a. Arrangements regarding fees and billing. b. Indications of negative cash flows from operating activities. c. Analytical procedures that the auditor plans to perform. d. Identification of working capital deficiencies.

Arrangements regarding fees and billing.

Which of the following is not a way in which auditors use the concept of overall materiality? a. As a guide for assessing control risk. b. As a guide to planning the audit plan. c. As a guide to the evaluation of evidence. d. As a guide for making decisions about the audit report.

As a guide for assessing control risk.

Which of the following is not a way in which auditors use the concept of overall materiality? a. As a guide for making decisions about the audit report. b. As a guide to planning the audit plan. c. As a guide for assessing control risk. d. As a guide to the evaluation of evidence.

As a guide for assessing control risk.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. As a substantive test: In the final review stage:

As a substantive test: No In the final review stage: Yes

An auditor encounters significant difficulties during an audit that are likely to lead to a modified opinion. When would it be most appropriate for the auditor to communicate those difficulties to the audit committee? a. Early in the audit engagement acceptance process. b. As soon as is practicable during the course of the engagement. c. On the last day of fieldwork. d. On the report issuance date.

As soon as is practicable during the course of the engagement.

Why does the risk of overreliance have an inverse relationship with sample size? a. As the audit team is less concerned with making an incorrect conclusion with respect to reliance on the client's internal control, the audit team can appropriately examine fewer items. b. As the audit team requires greater compliance with the control policy or procedure, the audit team must examine a greater number of items. c. As the level of control risk increases, the audit team is placing less reliance on internal control and can appropriately examine fewer items. d. As the audit team expects fewer deviations from the control policy or procedure, the audit team can appropriately examine fewer items.

As the audit team is less concerned with making an incorrect conclusion with respect to reliance on the client's internal control, the audit team can appropriately examine fewer items.

A successor auditor discovers a possible misstatement in a client's financial statements reported on by a predecessor auditor. Which of the following actions should the successor auditor take next?

Ask the client to arrange a meeting of the predecessor auditor, management, and the successor auditor to discuss the matter.

An auditor would least likely use computer software to: a. access client data files. b. assess information systems control risk. c. prepare spreadsheets. d. construct parallel simulations to test the client's computing system.

Assess information systems control risk

What is the primary objective of the fraud brainstorming session? a. Determine audit risk and materiality. b. Assess the potential for material misstatement due to fraud. c. Identify whether analytical procedures should be applied to the revenue accounts. d. Determine whether the planned procedures in the audit program will satisfy the general audit objectives.

Assess the potential for material misstatement due to fraud.

The negative request form of accounts receivable confirmation is useful particularly when the Assessed Level of Risk of Material Misstatement Relating to Receivables is: Number of Small Balances is: Proper Consideration by the Recipient is:

Assessed Level of Risk of Material Misstatement Relating to Receivables is: Low Number of Small Balances is: Many Proper Consideration by the Recipient is: Likely

Which of the following activities is not an element of a CPA firm's quality-control system to be considered in establishing quality-control policies and procedures? a. Deciding whether to accept or continue a client relationship. b. Monitoring the effectiveness of professional development activities. c. Selecting personnel for advancement who have the necessary qualifications. d. Assessing a client's ability to establish effective internal controls.

Assessing a client's ability to establish effective internal controls.

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures? a. Using statistical sampling techniques. b. Assigning personnel to engagements. c. Complying with laws and regulations. d. Considering audit risk and materiality.

Assigning personnel to engagements.

Which of the following are considered control environment factors? Assignment of authority and responsibility: Detection risk: Integrity and ethical values:

Assignment of authority and responsibility: Yes Detection risk: No Integrity and ethical values: Yes

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Provides guidance for assurance and advisory engagements.

Assurance Services Executive Committee (ASEC)

The acceptable level of detection risk is inversely related to the:

Assurance provided by substantive tests.

To ensure that the audit report for an issuer is prepared in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the report must: a. Be prepared within 60 days of the end of the issuer's fiscal year-end unless extenuating circumstances, as outlined in the act, are publicly disclosed. b. Be prepared within 60 days of the issuer's fiscal year-end, be certified by the Public Company Accounting Oversight Board, and be publicly disclosed. c. Attest to, and report on, the efficiency and effectiveness of the issuer's system of internal control. d. Attest to and report on the internal control assessment made by the management of the issuer.

Attest to and report on the internal control assessment made by the management of the issuer.

For the following management action identify the control environment principle it affects. ACTION: Management is committed to hiring employees with appropriate levels of education, experience, and evidence of integrity and ethical behavior. a. Attracting, Developing, and Retaining Competent Employees b. Commitment to Integrity and Ethical Values c. Individual Accountability d. Effective Organizational Structure e. Effective Board of Directors

Attracting, Developing, and Retaining Competent Employees

Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities? a. Secured creditors. b. Audit committee. c. Senior management. d. Internal auditors.

Audit Committee.

Which of the following factors are included in an entity's control environment? Audit Committee: Internal Audit Function: Management:

Audit Committee: Yes Internal Audit Function: Yes Management: Yes

Which of the following is a listing of details of the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures?

Audit Program (P.E.1)

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The client is one of the industry's largest based on its size and market share.

Audit Risk

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The client lacks sufficient working capital to continue operations.

Audit Risk

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The company is publicly traded.

Audit Risk

The term practitioner would be least likely to be used when referring to the performance of ________.

Audit Services.

Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud? a. All key members of the audit team should be brought to a single location to facilitate communication. b. Audit documentation must include a description of the discussion. c. The discussion should occur only during the planning stage of the audit. d. Discussion among engagement personnel regarding the risk of material misstatement due to fraud is recommended but not required.

Audit documentation must include a description of the discussion.

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud? a. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material misstatement due to fraud. b. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. c. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements. d. The auditor didn't consider factors influencing audit risk for account balances that have effects pervasive to financial statements taken as a whole.

Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Which of the following describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud? a. Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion. b. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole. c. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud. d. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements.

Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.

The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as

Audit procedures.

Which of the following best describes the relationship between auditing and attestation engagements? a. Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement. b. Attestation is a subset of auditing that improves the quality of information or its context for decision makers. c. Auditing is a subset of attestation engagements that focuses on the certification of financial statements. d. Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support.

Auditing is a subset of attestation engagements that focuses on the certification of financial statements.

Which of the following is not true with respect to the responsibilities for establishing generally accepted auditing standards? a. The PCAOB is the body with formal authority for the creation of auditing standards for the audits of public entities. b. Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission. c. If specific guidance is not provided by PCAOB Auditing Standards,auditors may refer to Statements on Auditing Standards that have not been amended or superseded. d. Interpretive publications are issued by the AICPA to provide guidance on the application of generally accepted auditing standards in specific circumstances.

Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission.

What best describes the focus of the following engagements?

Auditing: Financial statements Attestation: Financial Information Assurance: Any information Consulting: Advice and decision support

Which of the following statements is not true with respect to the performance principle? a. Auditors are required to consider both the relevance and reliability of evidence in evaluating whether the evidence they have gathered is appropriate. b. In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements. c. Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements. d. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.

Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that a. The cost of substantive procedures will exceed the cost of control evaluation work. b. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls. c. The cost of control evaluation work will exceed the cost of substantive procedures. d. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the a. Administrative controls from the internal accounting controls. b. Authorization of transactions from the custody of related assets. c. Human resources function from the controllership function. d. Operational responsibility from the record-keeping responsibility.

Authorization of transactions from the custody of related assets.

Which of the following is least indicative of fraudulent activity? a. Numerous cash refunds have been made to different people at the same post office box address. b. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later. c. Bank reconciliation has no outstanding checks or deposits older than 15 days. d. Internal auditors cannot locate several credit memos to support reductions of customers' balances.

Bank reconcilation has no outstanding checks or deposits older than 1 days.

Which of the following automated application controls would offer reasonable assurance that inventory data were completely and accurately entered? a. Sequence checking. b. Limit tests. c. Check digits. d. Batch totals.

Batch totals.

Which of the following input controls is primarily related to ensuring that all transactions are input and transactions are not input more than once? a. Check digits. b. Batch totals. c. Valid character tests. d. Limits and reasonableness tests.

Batch totals.

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a non-for-profit museum. Consultation with the appraiser in this case would:

Be considered as exercising proper due care.

Under PCAOB standards, which one of the following would not be considered by the auditor when determining the procedures to perform to obtain an understanding of the nature of the company? a. Obtain information from SEC filings and other sources about trading activity in the company's securities and holdings of significant shareholders. b. Read public information about the company relevant to the evaluation of the likelihood of material financial statement misstatement and the effectiveness of the company's internal control over financial reporting. c. Become an investor of the company in order to get access to the same information that other investors would have. d. Observe or read transcripts of earnings calls and other publicly available meetings with investors and ratings agencies.

Become an investor of the company in order to get access to the same information that other investors would have.

An auditor of a manufacturer would most likely question whether that client has committed acts of noncompliance with laws and regulations if the client has: a. Been forced to discontinue operations in a foreign country. b. Disclosed several subsequent events involving foreign operations in the notes to the financial statements. c. Been an annual donor to a local political candidate. d. Failed to correct material weaknesses in internal accounting control that were reported after the prior year's audit.

Been forced to discontinue operations in a foreign country.

Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting? a. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level. b. Begin reviewing income statement accounts and then review balance sheet accounts. c. Begin by understanding the overall risks to internal control over financial reporting at the general ledger level. d. Begin reviewing balance sheet accounts and then review income statement accounts.

Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.

Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting? a. Begin reviewing balance sheet accounts and then review income statement accounts. b. Begin by understanding the overall risks to internal control over financial reporting at the general ledger level. c. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level. d. Begin reviewing income statement accounts and then review balance sheet accounts.

Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? a. Avoiding the problem of doing more work than necessary (overauditing). b. Being able to decide early what type of audit opinion to issue. c. Avoiding the problem of doing too little work (underauditing). d. Being able to fine-tune the audit work for effectiveness and efficiency.

Being able to decide early what type of audit opinion to issue.

Those charged with governance are the___.

Board of directors and management of an entity.(P.E.1)

An auditor is required to document the auditor's understanding of the: I. Entity's control activities that help ensure management directives are carried out. II. Entity's control environment factors that help the auditor plan the engagement.

Both I and II.

In an audit of an issuer: I. Management must assess and report on internal control. II. The auditor must assess and report on internal control.

Both I and II.

When completing the audit of internal controls for a public company, AS 2201 requires auditors to test a. Both operating and design effectiveness. b. Design effectiveness only. c. Operating effectiveness only. d. Neither operating nor design effectiveness.

Both Operating and Design Effectiveness

The spouse of the partner in charge of the audit engagement occupies an executive-level position within the client.

Both independence in fact and appearance.

Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? a. Capability. b. Motive. c. Liquidity. d. Opportunity.

Capability.

Which of the following is an example of an operation deficiency in internal control? a. The cashier has online ability to post write-offs to accounts receivable. b. Management does not have a process to identify and assess risks on a recurring basis. c. Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of the misstatements that could occur in those accounts. d. The company does not have a code of conduct for employees to consider.

Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of the misstatements that could occur in those accounts.

Which of the following is most likely to occur first with respect to an audit engagement? a. Conducting risk assessment procedures in order to determine the nature, extent and timing of audit procedures. b. Documenting their understanding with a written engagement letter. c. Client acceptance procedures as part of the firm's quality control procedures. d. Planning the audit.

Client acceptance procedures as part of the firm's quality control procedures.

Which of the following reasons could increase inherent risk? a. Client offers warranties on its products. b. Client has a smaller number of locations and operations are centralized. c. Client's transactions are complex and unique. d. Client takes advantage of discounts offered by suppliers.

Client offers warranties on its products. Client's transactions are complex and unique. (P.E.1)

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the: a. Purchase of merchandise inventory. b. Payment of accounts payable. c. Sale of long-term debt. d. Collection of receivables.

Collection of Receivables.

Which of the following factors most likely would be considered an inherent limitation to an entity's internal control? a. Collusion of employees in circumventing internal controls. b. The ineffectiveness of the entity's audit committee. c. The lack of resources to monitor internal controls. d. The complexity of the entity's electronic order-processing system.

Collusion of employees in circumventing internal controls.

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

Communicate the matter to those charged with governance.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit? a. Perform cutoff tests of cash receipts and disbursements. b. Make inquiries of the client's lawyer concerning pending litigation. c. Recalculate the prior year's accruals and deferrals. d. Compare financial information with nonfinancial operating data.

Compare financial information with nonfinancial operating data.

Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit? a. Obtain representations from management regarding the availability of all financial records. b. Make inquiries of the client's attorney regarding pending and threatened litigation and assessments. c. Compare recorded financial information with anticipated results from budgets and forecasts. d. Communicate with the audit committee concerning the prior year's audit adjustments.

Compare recorded financial information with anticipated results from budgets and forecasts.

As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security numbers in the client's payroll-transaction data. Which of the following audit tests of controls using computer assisted audit techniques would best meet the objective? a. Comparing Social Security numbers paid in the payroll transaction file to a file of government authorized Social Security numbers. b. Obtaining statistics on the population of the payroll file to identify unusual pay amounts to employees. c. Comparing the payroll transaction file to the employee master file to extract payments to employees who are not in the employee master file. d. Randomly selecting 25 payments from the payroll report and comparing the results to employee Social Security cards in the human resources records.

Comparing Social Security numbers paid in the payroll transaction file to a file of government authorized Social Security numbers.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit? a. Inquiring of the client's legal counsel concerning pending litigation. b. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities. c. Comparing the financial statements to anticipated results. d. Examining computer generated exception reports to verify the effectiveness of internal controls.

Comparing the financial statements to anticipated results.

Which of the following would reduce the effectiveness of internal control in an accounting information system? a. Computer operators have access to operator instructions and detailed program lists. b. The control group is solely responsible for the distribution of all computer output. c. Computer programmers write and debug programs that perform routines designed by the systems analyst. d. The computer librarian maintains custody of computer program instructions and detailed lists.

Computer operators have access to operator instructions and detailed program lists.

Which of the following characteristics distinguishes computer processing from manual processing? a. Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing. b. Most computer systems are designed so that transaction trails useful for audit purposes do not exist. c. The potential for systematic error is ordinarily greater in manual processing than in computerized processing. d. Errors or irregularities in computer processing will be detected soon after their occurrences.

Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.

Which of the following is not a role of the risk assessment in an integrated audit of a nonissuer? a. Selecting controls to test. b. Concluding on the effectiveness of a given control. c. Determining significant accounts and relevant assertions. d. Determining evidence necessary to conclude on the effectiveness of a given control.

Concluding on the effectiveness of a given control.

Which of the following factors most likely would cause an auditor not to accept a new audit engagement? a. The close proximity to the end of the entity's fiscal year. b. Concluding that the entity's management probably lacks integrity. c. An inadequate understanding of the entity's internal control. d. An inability to perform preliminary analytical procedures before accepting the engagement.

Concluding that the entity's management probably lacks integrity.

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of this act of noncompliance with laws and regulations, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should: a. Consider withdrawing from the audit engagement and disassociating from future relationships with the client. b. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unmodified opinion, require disclosure. c. Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances. d. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes.

Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

The audit plan usually cannot be finalized until the: a. Significant deficiencies in internal control have been communicated to those charged with governance. b. Representation letter has been signed by the client. c. Consideration of the entity's internal control has been completed. d. Search for unrecorded liabilities has been performed and documented.

Consideration of the entity's internal control has been completed.

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be:

Considered in the evaluation of audit findings in the current year.

Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system? a. Verification of encrypted digital certificates used to monitor the authorization of transactions. b. Extensive testing of firewall boundaries that restrict the recording of outside network traffic. c. Increased reliance on internal control activities that emphasize the segregation of duties. d. Continuous monitoring and analysis of transaction processing with an embedded audit module.

Continuous monitoring and analysis of transaction processing with an embedded audit module.

The following is a description of an internal control. DESCRIPTION: Each quarter, department managers are perform bank reconciliations for the bank account assigned to their respective functional area. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Information and Communication c. Control Activities d. Control Environment e. Monitoring

Control Activities

The following is a description of an internal control. DESCRIPTION: Prior to sales transactions, the credit department assesses the credit worthiness of potential customers. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Monitoring b. Control Environment c. Control Activities d. Risk Assessment e. Information and Communication

Control Activities

The following is a description of an internal control. DESCRIPTION: The company actively promotes a commitment to integrity and competence throughout the organization. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Information and Communication c. Monitoring d. Control Activities e. Control Environment

Control Environment

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The client fails to detect employee theft of inventory from the warehouse because there are no restrictions on warehouse access and the client does not reconcile inventory on hand to recorded amounts on a timely basis.

Control Risk

Which of the following audit risk components may be assessed in nonquantitative terms? Control Risk: Detection Risk: Inherent Risk:

Control Risk: Yes Detection Risk: Yes Inherent Risk: Yes

Actions, policies, and procedures that reflect the overall attitude of management, directors and owners of the entity about internal control relate to which of the following internal control components? a. Control environment. b. Risk assessment. c. Information and communication. d. Monitoring.

Control environment.

Which of the following components of internal control would be considered the foundation for the other components? a. Control environment. b. Control activities. c. Information and communication. d. Risk assessment.

Control environment.

Below is an example of a typical risk in an IT environment. RISK: Unauthorized changes. Required: Identify a control that may be used to mitigate the risk. a. None of these answers are correct. b. Program and user controls c. Firewalls and password systems d. Physical and user controls e. Controls over access and backup copies

Controls over access and backup copies

For the accounting processes below, identify which of the following would be considered an estimate. (select all that apply) a. Physical inventory b. Costs from litigation settlements and judgments c. Warranty obligations d. Inventory costing e. Cash disbursements

Costs from litigation settlements and judgement Warranty Obligations

Which of the following best demonstrates the concept of professional skeptism? a. Critically assessing verbal evidence received from the entity's management. b. Focusing on items that have a more significant quantitative effect on the entity's financial statements. c. Relying more extensively on external evidence rather than internal evidence. d. Evaluating potential financial interests held by auditors in the client.

Critically assessing verbal evidence received from the entity's management.

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios? Current ratio: Quick ratio:

Current ratio: No effect Quick ratio: No effect

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Material and pervasive scope limitation.

Disclaimer

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Decrease detection risk.

As part of the assessment of control risk, the auditor decided to use audit sampling. After specifying the audit objectives, what would the auditor most likely do next? a. Determine the sample size. b. Perform tests of control procedures. c. Define the deviation conditions. d. Select the sample.

Define the deviation conditions.

In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the: a. Controls related to each principal transaction class and account balance. b. Effectiveness of the internal controls that have been placed in operation. c. Consistency with which the internal controls are currently being applied. d. Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Detection. b. Inherent. c. Sampling. d. Control.

Detection

Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Sampling. b. Inherent. c. Control. d. Detection.

Detection

Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year-end?

Detection

Detection Risk [DR] = Increase Planned Evidence [PE] = Decrease

T/F Sufficiency refers to the extent to which the audit team can trust the evidence.

False.

T/F The Securities Act of 1933 enhances annual financial disclosures for public companies and placed more emphasis on corporate responsibility.

False.

An auditor uses assessed control risk to a. Evaluate the effectiveness of the entity's controls. b. Determine the acceptable level of detection risk for financial statement assertions. c. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. d. Identify transactions and account balances where inherent risk is at maximum.

Determine the acceptable level of detection risk for financial statement assertions.

Which of the following procedures would a CPA most likely include in planning a financial statement audit? a. Obtain a written representation letter from the client's management. b. Determine the extent of involvement of the client's internal auditors. c. Scan the client's journals and ledgers to identify any unusual transactions. d. Ask the client's lawyer if contingencies have been recorded in conformity with GAAP.

Determine the extent of involvement of the client's internal auditors.

Which of the following steps in attributes sampling is most closely related to identifying key controls corresponding to the relevant management assertions? a. Determine the sample size. b. Determine the objective of sampling. c. Define the deviation condition. d. Define the population.

Determine the objective of sampling.

The primary objective of compliance auditing is to:

Determine whether client personnel are following laws, rules, regulations, and policies.

Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a. Develop Auditing Standards for the audits of non-issuers. b. Develop Auditing Standards for the audits of issuers. c. Develop Statements on Auditing Standards for the audits of non-issuers. d. Develop Statements on Auditing Standards for the audits of issuers.

Develop Auditing Standards for the audits of issuers.

Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements? a. The assumptions used in developing the prior year's accounting estimates have changed. b. Negative confirmation requests yield fewer responses than in the prior year's audit. c. Differences between reconciliations of control accounts and subsidiary records are not investigated. d. Management consults with another CPA firm about complex accounting matters.

Differences between reconciliations of control accounts and subsidiary records are not investigated.

Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect acts of noncompliance with laws and regulations that are material to XYZ's financial statements, and acts of noncompliance that have a material, but indirect effect on the financial statements will be detected? Direct Effect Noncompliance: Indirect Effect Noncompliance:

Direct effect noncompliance: Reasonable Indirect effect noncompliance: None

Audit evidence concerning proper segregation of duties ordinarily is best obtained by: a. Direct personal observation of the employees who apply control activities. b. Inquiring whether control activities operated consistently throughout the period. c. Preparation of a flowchart of duties performed by available personnel. d. Reviewing job descriptions prepared by the personnel department.

Direct personal observation of the employees who apply control activities.

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: A company fails to fund its pension plan in accordance with ERISA. a. Neither. b. Indirect-effect noncompliance. c. Direct-effect noncompliance.

Direct-Effect Noncompliance

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: A manufacturer inflates expenses on its corporate tax return. a. Neither. b. Indirect-effect noncompliance. c. Direct-effect noncompliance.

Direct-Effect noncompliance

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: An insurance company fails to maintain required reserves for losses. a. Indirect-effect noncompliance. b. Neither. c. Direct-effect noncompliance.

Direct-effect noncompliance

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: A company backdates its executive stock options to lower the exercise price. a. Indirect-effect noncompliance. b. Neither. c. Direct-effect noncompliance.

Direct-effect noncompliance.

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: A military contractor inflates the overhead applied to a combat vehicle. a. Direct-effect noncompliance. b. Indirect-effect noncompliance. c. Neither.

Direct-effect noncompliance.

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance? a. Disagreements of the amount of the LIFO inventory layer based on preliminary information. b. Disagreements regarding management's judgment about accounting estimates for goodwill. c. Disagreements about the scope of the audit. d. Disagreements in the application of accounting principles relating to software development costs.

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

An auditor is examining an important internal control in the audit of Langly Company. In past audits, deviations from this control have been observed at a minimal rate (less than 0.1%); however, because the account balance affected by this control is highly susceptible to fraud, it is important that the auditor obtain a high level of assurance that deviations occur at no higher than a predetermined (low) rate. Which of the following sampling methods would the auditor most likely use to evaluate this control? a. Statistical sampling. b. Attributes sampling. c. Discovery sampling. d. Sequential sampling.

Discovery sampling.

During the initial planning phase of an audit, the auditor most likely would: a. Evaluate the reasonableness of the client's accounting estimates. b. Discuss the timing of the audit procedures with the client's management. c. Identify specific internal control activities that are likely to prevent fraud. d. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

Discuss the timing of the audit procedures with the client's management.

An auditor's communication with those charged with governance is required to include the: a. Assessment of the quality of the entity's earnings as compared to the previous year. b. Discussion of disagreements with management about matters that significantly impact the entity's financial statements. c. Basis for the auditor's preliminary judgment about materiality. d. Justification for the auditor's selection of sampling methods.

Discussion of disagreements with management about matters that significantly impact the entity's financial statements.

In addition to gaining an understanding of the internal controls for a private company, an external auditor, at minimum, would be expected to a. Evaluate the internal auditors' work as an important part of the accounting system element of the internal controls. b. Observe client employees to determine the extent of their compliance with quality control standards. c. Study organization charts to obtain an understanding of the informal lines of communication. d. Document their understanding of the internal control system.

Document their understanding of the internal control system.

In connection with the element of inspection, a CPA firm's system of quality control should ordinarily provide for the maintenance of

Documentation to demonstrate compliance with its policies and procedures.

Which of the following is most closely associated with the responsibilities principle? a. Qualified audit opinion b. Planning c. Risk of material misstatement d. Due care

Due Care

A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords at initial log-in nor do passwords ever expire. Which of the following statements does not reflect a limitation of the client's computer-access control? a. Employees can easily guess fellow employees' passwords. b. Employees are not required to change passwords. c. Employees are not required to take regular vacations. d. Employees can circumvent procedures to segregate duties.

Employees are not required to take regular vacations.

Which of the following is true with respect to fraud risk factors in an IT environment? a. Higher dollar amounts are involved in an IT environment. b. Employees have increased access to information systems and computer resources in an IT environment. c. Employees in an IT environment are highly skilled. d. Audit teams cannot evaluate the accounting information system during the year.

Employees have increased access to information systems and computer resources in an IT environment.

In general, a material internal control weakness may be defined as a condition in which material errors or fraud would ordinarily not be detected within a timely period by a. The chief financial officer when reviewing interim financial statements. b. A controller when reconciling accounts in the general ledger. c. An auditor during the normal study and evaluation of the system of internal control. d. Employees in the normal course of performing their assigned functions.

Employees in the normal course of performing their assigned functions.

The phrase "generally accepted accounting principles" is an accounting term that

Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

The purpose of corporate governance is to: a. Prevent and detect misstatements, whether caused by errors or fraud. b. Ensure the accuracy and reliability of the organization's financial reports. c. Provide reasonable assurance regarding the organization's compliance with applicable laws and regulations. d. Encourage the efficient use of resources and require accountability for the stewardship of those resources.

Encourage the efficient use of resources and require accountability for the stewardship of those resources.

Required: For each of the following procedures identify the applicable element of quality control. Appropriate accounting and auditing research requires adequate technical reference materials. Each firm professional has online password access through the firm's internet website to electronic reference materials on accounting, auditing, tax, SEC, and other technical information, including industry data.

Engagement Performance

Required: For each of the following procedures identify the applicable element of quality control. Audit engagement team members enter their electronic signatures in the firm's engagement management software to indicate the completion of specific audit program steps. At the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed.

Engagement Performance

Required: For each of the following procedures identify the applicable element of quality control. Each audit engagement must include a concurring partner review of critical audit decisions.

Engagement Performance

Which of the following outcomes is a likely benefit of information technology used for internal control? a. Recording of unauthorized transactions. b. Processing of unusual or nonrecurring transactions. c. Enhanced timeliness of information. d. Potential loss of data.

Enhanced timeliness of information.

Analytical procedures used in planning an audit should focus on: a. Identifying material weaknesses in internal control. b. Testing individual account balances that depend on accounting estimates. c. Evaluating the adequacy of the evidence gathered concerning unusual balances. d. Enhancing the auditor's understanding of the client's business.

Enhancing the auditor's understanding of the client's business.

The auditor will usually test the effectiveness of computer general controls as part of testing _______ level controls. a. transaction. b. function. c. division. d. entity.

Entity

An auditor would most likely be concerned with internal controls that provide reasonable assurance about the: a. Entity's ability to process and summarize financial data. b. Appropriate prices the entity should charge for its products. c. Methods of assigning production tasks to employees. d. Efficiency of management's decision-making process.

Entity's ability to process and summarize financial data.

What assurance does the auditor provide that errors, fraud, and direct-effect illegal acts that are material to the financial statements will be detected Errors: Fraud: Direct-Effect Illegal Acts:

Errors: Reasonable Fraud: Reasonable Direct-Effect Illegal Acts: Reasonable

A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to a. Require a fidelity bond on all employees. b. Ensure that all accounts with high inherent risk of fraud are audited. c. Require reconciliations of all accounts to be reviewed by a supervisor. d. Establish employee assistance programs.

Establish employee assistance programs.

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? a. Establish policies to ensure that the audit work meets applicable professional standards. b. Establish procedures that comply with the standards of the Sarbanes-Oxley Act. c. Consider inherent risk and control risk before determining detection risk. d. Use attributes sampling techniques in testing internal controls.

Establish policies to ensure that the audit work meets applicable professional standards.

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? a. Supporting employees with the resources necessary to discharge their responsibilities. b. Establishing budgets and forecasts to identify variances from expectations. c. Limiting direct access to assets by physical segregation and protective devices. d. Monitoring compliance with internal control requirements imposed by regulatory bodies.

Establishing budgets and forecasts to identify variances from expectations.

Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement? a. Eva's management must provide a written report to accompany Henna and Company's report. b. It is required by generally accepted auditing standards. c. It is required by PCAOB standards. d. It is only required if Eva Industries elects to have an audit in accordance with PCAOB standards.

Eva's management must provide a written report to accompany Henna and Company's report.

In which step of a sampling plan is nonstatistical sampling different from statistical sampling? a. Define the characteristic of interest. b. Measure the sample items. c. Define the population. d. Evaluate the sample results.

Evaluate the sample results.

Once the auditor detects a control deficiency, which of the following steps must he or she take first? :a. Modify the planned substantive procedures as a result of the deficiency. b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. c. Test the deficient control, assuming a maximum level of risk. d. Perform tests of other controls related to the same assertion as the control deemed ineffective.

Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.

During which stages of the audit are auditors required to exhibit professional skepticism? (Select all that apply)

Evidence collection stage. Engagement planning stage. Risk assessment stage. Reporting stage.

Which of the following is true with the regard to reliability of evidence? a. Evidence obtained from external sources, such as bank statements are more reliable when they are received from outside the entity in comparison with client copies of the same documents. b. The source of evidence has in important effect on its relevance. c. Evidence obtained directly from top management, such as inquiry, is more reliable than internal documentary evidence. d. Evidence obtained from external sources, such as banks is more reliable than evidence directly obtained by the auditor.

Evidence obtained from external sources, such as bank statements are more reliable when they are received from outside the entity in comparison with client copies of the same documents.

Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance? a. Recurring operating losses that may indicate going concern problems. b. Management's current plans to reduce its ownership equity in the entity. c. Evidence of a lack of objectivity by those responsible for accounting decisions. d. Management's failure to renegotiate unfavorable long-term purchase commitments.

Evidence of a lack of objectivity by those responsible for accounting decisions.

An audit team would be most likely to use attributes sampling in which of the following situations? a. Evaluating management's integrity during the client acceptance process. b. Determining the effectiveness of the audit committee in evaluating the entity's control environment. c. Examining purchase requisitions for proper authorization. d. Performing analytical procedures during the planning stages of the audit.

Examining purchase requisitions for proper authorization.

When an auditor inspects a tangible asset to support a balance in the client's records, the auditor is gathering evidence to support the:

Existence(P.E.1)

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the: a. Risk of incorrect rejection. b. Risk of incorrect acceptance. c. Upper deviation rate. d. Expected deviation rate.

Expected deviation rate

When examining the client's internal control, what is the relationship of each of the following with sample size? Expected rate of deviation: Risk of overreliance:

Expected rate of deviation: Direct Risk of overreliance: Inverse

If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should: a. Disclaim an opinion on internal control. b. Express an adverse opinion on the entity's internal control. c. Conclude that the financial statements are materially misstated because of the material weakness in internal control. d. Expand the audit of internal control to identify deficiencies less severe than material weaknesses.

Express an adverse opinion on the entity's internal control.

T/F The reliability of audit evidence is decreased when it is obtained from independent sources outside the entity.

False.

If the audit team identifies one or more significant deficiencies in an issuer's internal control over financial reporting and the scope of the engagement is not restricted, the auditors' report would: a. Express an unqualified opinion on internal control over financial reporting, with a separate section of the report identifying the significant deficiency. b. Express a qualified opinion on internal control over financial reporting, without reference to the significant deficiency. c. Express an unqualified opinion on internal control over financial reporting without reference to the significant deficiency. d. Express a qualified opinion on internal control over financial reporting, with a separate section of the report identifying the significant deficiency.

Express an unqualified opinion on internal control over financial reporting without reference to the significant deficiency.

Controls used in the management of a computer center to minimize the possibility of using an incorrect file or program are a. Record counts. b. Control totals. c. Limit checks. d. External labels.

External Labels

Which of the following would not overstate current-period net income? a. All of these answers would overstate net income. b. Capitalizing an expenditure that should be expensed. c. Failing to record a liability as an expense. d. Failing to record a check paying an item in Vouchers Payable.

Failing to record a check paying an item in Vouchers Payable

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Accounts receivable subsidiary totaled and reconciled to accounts receivable control account 1. Sales recorded, goods not shipped 2. Sales billed at the wrong price or wrong quantity 3. Goods shipped, sales not recorded 4. Product line A sales recorded as Product line B 5. January sales recorded in December 6. Goods shipped to a bad credit risk customer 7. Failure to post charges to customers for sales

Failure to post charges to customers for sales

For the accounting processes below, identify which of the following would be considered an estimate. (select all that apply) a. Fair value of goodwill and other intangibles b. Payroll c. Cash receipts d. Financial statement close e. Bad debt expense

Fair value of goodwill and other intangibles Bad debt expense

T/F A corporation cannot be held criminally liable for its employees' actions if there were specific policies in place that prohibited the activity undertaken by the employees.

False

T/F Auditors are required to maintain documentation regarding every data analytic procedure performed.

False

T/F Auditors of issuers are required to use the materiality tables from the Auditing Standards on Materiality (ASMs) developed by the PCAOB.

False

T/F In a public company, the CEO should be charged with having primary responsibility for the oversight of the company's compliance program.

False

T/F In order to avoid violating the AICPAs ban on Contingent Fees an engagement letter should specify the specific dollar amount being charged to the client.

False

T/F Relevance is the key determinant affecting the appropriateness of audit evidence.

False

T/F The Sarbanes-Oxley Act requires all public U.S. companies to adopt a code of ethics for senior financial officers.

False

T/F The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards.

False

T/F The more judgment that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed.

False

T/F Under the Sarbanes-Oxley Act, members of the audit committee can be paid for consulting work done for the company, but only if the transaction is documented and conducted at arm's length.

False

T/F When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and obligations assertions.

False

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: a. Employees have stolen inventory just before the year-end. b. An employee has been lapping receivables in both years. c. Fictitious credit sales have been recorded during the year. d. The client recently tightened its credit-granting policies.

Fictitious credit sales have been recorded during the year.

At what stage of an audit is an auditor most likely to consider materiality?

Fieldwork, risk assessment, planning, and reporting. - All of the above. (P.E.1)

When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Financial reporting. b. Compliance with regulations. c. All of these answers are correct. d. Operations.

Financial Reporting

Internal control over safeguarding of assets may include controls relating to: Financial Reporting Objectives: Operations Objectives: Compliance Objectives:

Financial Reporting Objectives: Yes Operations Objectives: Yes Compliance Objectives: No

Below is an example of a typical risk in an IT environment. RISK: Introduction of unauthorized data or programs. Required: Identify a control that may be used to mitigate the risk. a. Physical and user controls b. Firewalls and password systems c. Physical controls over terminals and testing of programs and applications. d. Program and user controls e. None of these answers are correct.

Firewalls and password systems

An advantage of an internal control flowchart is a. Its strict adherence to a yes/no format. b. Its relative ease of completion. c. Flexibility in its application. d. That it always provides sufficient data for the assessment of control risk.

Flexibility in its application.

Which of the following provides the most authoritative guidance for an audit of an issuer?

General guidance provided by the Public Company Accounting Oversight Board Auditing Standards.

Within a U.S. context, the applicable financial reporting framework is typically_____.

Generally Accepted Accounting Principles. (GAAP).

Which of the following are true regarding communication requirements an auditor must follow when providing tax services to an audit client who is an issuer under the Sarbanes-Oxley Act of 2002? I. The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees. II. The auditor must communicate to the audit committee, in writing, when the proposed tax services involve contingent fee arrangements. III. The auditor must discuss with the audit committee the potential effects of the proposed tax services on the firm's independence.

I and III only

Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements? a. Generally, the auditor is under an obligation to inform the PCAOB. b. Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization. c. Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act. d. Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.

Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization.

The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to: a. Discuss staff suggestions concerning the establishment and maintenance of time budgets. b. Give guidance to the staff regarding both technical and personnel aspects of the audit. c. Provide an opportunity to document staff disagreements regarding technical issues. d. Establish the need for using the work of specialists and internal auditors.

Give guidance to the staff regarding both technical and personnel aspects of the audit.

Who among the following users of the financial statement of a company many be particularly interested in evaluating whether the company is paying a fair amount of taxes given its reported earnings, and to gain a better understanding of the company's activities.?

Government

An auditor is selecting prenumbered purchase orders for testing an entity's internal control activities related to their proper approval before office equipment is ordered. The auditor is matching random numbers with the purchase order numbers to determine which purchase orders to inspect. If a random number matches a voided purchase order, the auditor ordinarily would replace the voided purchase order with another if the voided purchase order: a. Has been electronically deleted from the purchase order file. b. Represents office equipment ordered and never received. c. Has been properly voided in the normal course of business. d. Represents office equipment ordered and canceled before being processed by the vendor.

Has been properly voided in the normal course of business.

An auditor is selecting prenumbered purchase orders for testing an entity's internal control activities related to their proper approval before office equipment is ordered. The auditor is matching random numbers with the purchase order numbers to determine which purchase orders to inspect. If a random number matches a voided purchase order, the auditor ordinarily would replace the voided purchase order with another if the voided purchase order: a. Represents office equipment ordered and canceled before being processed by the vendor. b. Represents office equipment ordered and never received. c. Has been properly voided in the normal course of business. d. Has been electronically deleted from the purchase order file.

Has been properly voided in the normal course of business.

The risk of underreliance is the probability that the evidence in the sample indicates: a. Low control risk when the actual operating effectiveness of the control does not justify a low control risk assessment. b. High control risk when the actual operating effectiveness of the control would justify a lower control risk assessment. c. High control risk when the actual operating effectiveness of the control would justify a higher control risk assessment. d. Low control risk when the actual operating effectiveness of the control justifies a low control risk assessment.

High control risk when the actual operating effectiveness of the control would justify a lower control risk assessment.

With regard to the financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is____.

High, but not absolute. (P.E.1)

Which of the following statements are false?

Higher levels of risk of material misstatement (RoMM) means that auditors would be allowed to gather less sufficient appropriate evidence.

The client's computerized exception reporting system helps audit teams conduct a more efficient audit because it a. Highlights abnormal conditions. b. Decreases the necessary level of tests of computer controls. c. Is an efficient computer input control. d. Condenses data significantly.

Highlights abnormal conditions.

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants: a. What benefits may be attained by the assistants' adherence to established time budgets. b. How the results of various auditing procedures performed by the assistants should be evaluated. c. That fraud is not to be reported to those charged with governance. d. Why certain documents are being transferred from the current file to the permanent file.

How the results of various auditing procedures performed by the assistants should be evaluated.

Required: For each of the following procedures identify the applicable element of quality control. Individual partners submit the nominations of those persons whom they wish to be considered for partner. To become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment; and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which he or she is assigned.

Human Resources

Required: For each of the following procedures identify the applicable element of quality control. Through our continuing employee evaluation and counseling program and through quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs. At the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm's director of personnel.

Human Resources

Which of the following items is an example of an inherent limitation in an internal control system? a. Ineffective board of directors. b. Understaffed internal audit functions. c. Human error in decision making. d. Segregation of employee duties.

Human error in decision making.

Which of the following is required before accepting a new audit engagement? I. Making inquiries of the predecessor auditor regarding management integrity. II. Making inquiries of the predecessor auditor regarding matters that may affect the conduct of the audit. III. Understanding the prospective client's business and the industry in which it operates.

I only

Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true?

I, II, and III are fraud risk factors.

A scope limitation can result in which of the following types of opinions? I. Unqualified (standard report) II. Unqualified (with explanatory paragraph) III. Qualified IV. Adverse V. Disclaimer

I, III or V

Which of the following is the most likely progression of events for the items below with regard to communications with a predecessor? I. Ask the client to authorize predecessor to respond fully to all inquiries. II. Coordinate any work that can be done by client personnel so that excess audit time might be eliminated and proposed report deadlines can be reasonably met. III. If predecessor does not respond fully to questions, consider the implications of the limited response in deciding whether to accept the engagement. IV. Satisfy quality control objective, use procedures such as reviewing client's financial statements; inquiring of third parties such as client's banks, legal counsel, investment bankers, and others in the business community as to th

I, III, II, and IV

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: You determined through the planning phase that working capital, debt-to-equity ratio, and other indicators of financial condition all worsened during the past year. The auditor decided to set assessed control risk at the minimum (it was previously assessed below the maximum). This the second year of the audit.

I. Control risk [CR] = Decrease II. Inherent risk [IR] = Decrease III. Acceptable audit risk [AR] = Decrease IV. Planned evidence [PE] - Cannot Determine with the info

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: A continuing client has been selling products online to customers through its Web page during the year under audit. Calculations and remittance of tax amounts is complex, but the online customer ordering process is well integrated with the company's accounting system. Client sales staff are experienced and dedicated to accuracy in the performance of their job duties when they are required to print customer order information and enter that data manually into the sales accounting system.

I. Control risk [CR] = Decrease II. Inherent risk [IR] = Decrease or No Effect III. Acceptable audit risk [AR] = No Effect IV. Planned evidence [PE] = Decrease

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: The auditor decided to set assessed control risk at the maximum (it was previously assessed below the maximum). This is the second year of the audit and there were no misstatements found in last year's audit. For the audit team there is a new partner and manager on the engagement.

I. Control risk [CR] = Increase II. Inherent risk [IR] = Cannot Determine III. Acceptable audit risk [AR] = Decrease IV. Planned evidence [PE] = Increase

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: The company recently a defendant in a civil lawsuit, the company was not expected to successfully defend the lawsuit. The company fully expected to suffer a material loss as a result, instead the company has actually been able to recover a substantial portion of attorney's fees devoted to defending the suit. In auditing inventory, you obtain an understanding of internal control and perform tests of controls and find them to be ineffective. You also note that the client's inventory is homogenous and the market value is readily determinable.

I. Control risk [CR] = Increase II. Inherent risk [IR] = Decrease III. Acceptable audit risk [AR] = Increase IV. Planned evidence [PE] = Decrease

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: The company changed from a publicly held company to a privately held company. The company hired a new CFO who performs several key accounting controls and estimates.

I. Control risk [CR] = Increase II. Inherent risk [IR] = Increase III. Acceptable audit risk [AR] = Increase IV. Planned evidence [PE] = Cannot Determine

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: The client's management materially increased long-term contractual debt. The company engaged in several new complex derivative transactions during the year.

I. Control risk [CR] = No Effect II. Inherent risk [IR] = Increase III. Acceptable audit risk [AR] = Decrease IV. Planned evidence [PE] = Increased

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: An account balance increased materially from the preceding year without apparent reason. The company closed all foreign operations and operates exclusively in the domestic market.

I. Control risk [CR] = No Effect II. Inherent risk [IR] = Increase III. Acceptable audit risk [AR] = Increase IV. Planned evidence [PE] = Decrease or Cannot Determine

According to auditing standards, auditors are required to assume that which of the following has significant risk of fraud. a. overstated assets b. overstated expenses c. improper revenue recognition d. understated liabilities

Improper Revenue Recognition

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: The company is the largest firm in an industry that is characterized by fierce competition. This is the first year of the engagement, and a review of the predecessor auditor's working papers shows there were few misstatements found in the previous year's audit. The auditor also decided to increase reliance on internal control.

I. Control risk [CR] = decrease II. Inherent risk [IR] = increase III. Acceptable audit risk [AR] = decrease IV. Planned evidence [PE] = increase

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: In discussion with management, you conclude that management is planning to sell the business in the next few months. Because of the planned changes, several key accounting personnel quit several months ago for alternative employment. The new accounting personnel seem to lack integrity in comparison. You still believe that it is appropriate to do the audit. You also observe that total debt has significantly decreased with that of the preceding year and profitability and liquidity have increased.

I. Control risk [CR] = increase II. Inherent risk [IR] = increase III. Acceptable audit risk [AR] = decrease IV. Planned evidence [PE] = increase

Based on the following description of an events at an audit client, for each of the audit risk model components determine the most likely effect: I = increase D = decrease N = no effect C = cannot determine from information provided DESCRIPTION: This is the first year of an engagement with a new client. There has been no change in key management personnel. Also, you believe that management sets an appropriate tone with regard to the accuracy financial reporting. The audit firm is being investigated by the PCAOB and the Department of Justice with regard to issues over inappropriate relationships with several other audit clients.

I. Control risk [CR] =Decrease II. Inherent risk [IR] = Decrease III. Acceptable audit risk [AR]= Decrease IV. Planned evidence [PE] = Cannot determine from information provided

How would the following affect the financial statements and determine the type of misstatement: Hold cash receipts journal open past the year-end (cutoff date) and record additional cash receipts occurring after year-end, reducing accounts receivable.

I. No effect on assets II. No effect on liabilities III. No effect on equity. IV. Fraud Only (P.E.1)

Auditors are experts in evidence collection and interpretation. In order to uncover fraud auditors need to be able to critically assess evidence that they collect. In particular, auditors need to be able to distinguish between errors and fraud. Required: Below is a description, determine the following for the description determine I-IV. I. Overall, would the description result in an overall: 1. Overstate assets 2. Understate assets 3. No effect on assets II. Overall, would the description result in an overall: 4. Overstate liabilities 5. Understate liabilities 6. No effect on liabilities III. Overall, would the description result in an overall: 7. Overstate equity 8. Understate equity 9. No effect on equity IV. Determine whether the description is: 1. Error only 2. Fraud only 3. Either error or fraud DESCRIPTION: Accrue too much liability for expenses not yet paid, such as wages, rent, interest, product warranties.

I. [I] = No Effect on Assets II. [II] = Overstate Liabilities III. [III] = Understate Equity IV. [IV] = Error or Fraud Only

I. [I] = No effect on Assets II. [II] = No effect on Liabilities III. [III] = No effect on equity IV. [IV] = Error Only

Auditors are experts in evidence collection and interpretation. In order to uncover fraud auditors need to be able to critically assess evidence that they collect. In particular, auditors need to be able to distinguish between errors and fraud. Required: Below is a description, determine the following for the description determine I-IV. I. Overall, would the description result in an overall: 1. Overstate assets 2. Understate assets 3. No effect on assets II. Overall, would the description result in an overall: 4. Overstate liabilities 5. Understate liabilities 6. No effect on liabilities III. Overall, would the description result in an overall: 7. Overstate equity 8. Understate equity 9. No effect on equity IV. Determine whether the description is: 1. Error only 2. Fraud only 3. Either error or fraud DESCRIPTION: Fail to accrue liabilities for expenses not yet paid, such as wages, rent, interest, product warranties.

I. [I] = No effect on assets II. [II] = Understate liabilities III. [III] = Overstate equity IV. [IV] = Either Error or Fraud.

I. [I] = Overstate Assets II. [II] = No Effect Liabilities III. [III] = Overstate Equity IV. [IV] = Error or Fraud

I. [I] = Overstate Assets II. [II] = No Effect on Liabilities III. [III] = Overstate Equity IV. [IV] = Error Only

Auditors are experts in evidence collection and interpretation. In order to uncover fraud auditors need to be able to critically assess evidence that they collect. In particular, auditors need to be able to distinguish between errors and fraud. Required: Below is a description, determine the following for the description determine I-IV. I. Overall, would the description result in an overall: 1. Overstate assets 2. Understate assets 3. No effect on assets II. Overall, would the description result in an overall: 4. Overstate liabilities 5. Understate liabilities 6. No effect on liabilities III. Overall, would the description result in an overall: 7. Overstate equity 8. Understate equity 9. No effect on equity IV. Determine whether the description is: 1. Error only 2. Fraud only 3. Either error or fraud DESCRIPTION: Hold the sales journal open past the year-end (cutoff date) and record too much sales revenue and cash or accounts receivable.

I. [I] = Overstate Assets II. [II] = No effect on Liabilities III. [III] = Overstate Equity IV. [IV] = Fraud Only

Auditors are experts in evidence collection and interpretation. In order to uncover fraud auditors need to be able to critically assess evidence that they collect. In particular, auditors need to be able to distinguish between errors and fraud. Required: Below is a description, determine the following for the description determine I-IV. I. Overall, would the description result in an overall: 1. Overstate assets 2. Understate assets 3. No effect on assets II. Overall, would the description result in an overall: 4. Overstate liabilities 5. Understate liabilities 6. No effect on liabilities III. Overall, would the description result in an overall: 7. Overstate equity 8. Understate equity 9. No effect on equity IV. Determine whether the description is: 1. Error only 2. Fraud only 3. Either error or fraud DESCRIPTION: Record an expenditure as a prepaid expense instead of a current expense.

I. [I] = Overstate Assets II. [II] = No effect on Liability III. [III] = Overstate Equity IV. [IV] = Error or Fraud

Auditors are experts in evidence collection and interpretation. In order to uncover fraud auditors need to be able to critically assess evidence that they collect. In particular, auditors need to be able to distinguish between errors and fraud. Required: Below is a description, determine the following for the description determine I-IV. I. Overall, would the description result in an overall: 1. Overstate assets 2. Understate assets 3. No effect on assets II. Overall, would the description result in an overall: 4. Overstate liabilities 5. Understate liabilities 6. No effect on liabilities III. Overall, would the description result in an overall: 7. Overstate equity 8. Understate equity 9. No effect on equity IV. Determine whether the description is: 1. Error only 2. Fraud only 3. Either error or fraud DESCRIPTION: Record appraised value of property, plant, and equipment with a corresponding credit to a capital account.

I. [I] = Overstate Assets II. [II] = No effect on liabilities III. [III] = Overstate equity IV. [IV] = Fraud Only

I. [I] = Overstate Assets II. [II] = No effect on liabilities. III. [III] = Overstate Equity IV. [IV] = Fraud

I. [I] = Understate Assets II. [II] = No Effect on Liabilities III. [III] = Understate Equity IV. [IV] = Error or Fraud

Auditors are experts in evidence collection and interpretation. In order to uncover fraud auditors need to be able to critically assess evidence that they collect. In particular, auditors need to be able to distinguish between errors and fraud. Required: Below is a description, determine the following for the description determine I-IV. I. Overall, would the description result in an overall: 1. Overstate assets 2. Understate assets 3. No effect on assets II. Overall, would the description result in an overall: 4. Overstate liabilities 5. Understate liabilities 6. No effect on liabilities III. Overall, would the description result in an overall: 7. Overstate equity 8. Understate equity 9. No effect on equity IV. Determine whether the description is: 1. Error only 2. Fraud only 3. Either error or fraud DESCRIPTION: Classify expenditures as current expenses when they should be classified as prepaid expenses.

I. [I] = Understate Assets II. [II] = No Effect on Liabilities III. [III] = Understate Equity IV. [IV] = Error or Fraud.

If an auditor's risk assessment is based on the effective operation of controls, the auditor will likely: a. Identify specific internal controls that are likely to detect or prevent material misstatements. b. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing. c. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. d. Perform tests of details of transactions and account balances to identify potential errors and fraud.

Identify specific internal controls that are likely to detect or prevent material misstatements.

In planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to: a. Assess the operational efficiency of internal control. b. Identify the types of potential misstatements that could occur. c. Document the assessed level of control risk. d. Determine whether controls have been circumvented by collusion.

Identify the types of potential misstatements that could occur.

Management is responsible for Identifying and measuring fraud risks: Taking steps to mitigate identified risks:

Identifying and measuring fraud risks: Yes Taking steps to mitigate identified risks: Yes

For which of the following audit tests would a CPA most likely use attribute sampling? a. Evaluating the reasonableness of depreciation expense. b. Identifying entries posted to incorrect accounts. c. Estimating the amount in an expense account. d. Selecting receivables for confirmation of account balances.

Identifying entries posted to incorrect accounts.

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

Identifying reasonable explanations for unexpected differences before talking to client management.(P.E.1)

When the auditor's risk assessment is based on the effective operation of controls, the audit will most likely involve: a. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end. b. Reducing inherent risk for most of the assertions relevant to significant account balances. c. Identifying specific internal controls relevant to specific assertions. d. Performing more extensive substantive tests with larger sample sizes than originally planned.

Identifying specific internal controls relevant to specific assertions.

While performing procedures in planning an audit, the auditor's comparison of expectations with recorded amounts yield unusual and unexpected relationships. The auditor should consider the results of the analytical procedures in which of the following? a. Identifying the risks of material misstatement due to fraud. b. Determining planning materiality and acceptable error. c. Determining which controls to test. d. Identifying significant accounts.

Identifying the risks of material misstatement due to fraud.

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the a. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements. b. Illegal act affects the auditor's ability to rely on management representations. c. Illegal act has received widespread publicity. d. Illegal act has material financial statement implications.

Illegal act affects the auditor's ability to rely on management representations.

In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again: a. Only if the deficiency has a material effect on the auditor's assessment of control risk. b. Unless the entity accepts that degree of risk because of cost-benefit considerations. c. In writing, during the current audit. d. Only if the deficiency is considered a material weakness.

In writing, during the current audit.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. Large amounts of liquid assets that are easily convertible into cash. b. Inability to borrow necessary capital without granting debt covenants. c. Inability to generate cash flows from operations while reporting substantial earnings growth. d. Management's lack of interest in increasing the entity's stock trend.

Inability to generate cash flows from operations while reporting substantial earnings growth.

Which of the following is not a possible reason why a properly designed system of internal control may fail to prevent or detect fraud? a. Collusion by two or more individuals may be used to circumvent controls. b. Inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity. c. Human error may result in an inappropriate application of controls. d. Management may override controls through its attitude and actions.

Inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity.

Green, CPA, concludes that there is substantial doubt about JKL Co.'s, a nonissuer, ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report under U.S. auditing standards should:

Include an emphasis -of-matter paragraph following the opinion paragraph: Yes Specifically use the words "going concern": Yes Specifically use the words "substantial doubt": Yes

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls? a. Management override. b. Incompatible duties. c. Mistakes in judgment. d. Collusion among employees.

Incompatible duties.

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a. Incorrect acceptance. b. Incorrect rejection. c. Assessing control risk too high. d. Assessing control risk too low.

Incorrect acceptance.

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a. Incorrect rejection. b. Assessing control risk too low. c. Incorrect acceptance. d. Assessing control risk too high.

Incorrect acceptance.

If an audit team calculated a ULRD of 5 percent when the tolerable rate of deviation was 4 percent, both at the same risk of overreliance, control risk should be a. Increased and substantive procedures should be adjusted accordingly. b. Assessed at the maximum level (100 percent) because the company's performance failed the test. c. Decreased and substantive procedures should be adjusted accordingly. d. Assessed at the level associated with the 4 percent tolerable rate of deviation.

Increased and substantive procedures should be adjusted accordingly.

The auditors' firm provides extensive consulting services to the client, these services provide revenues to the firm that exceed revenues from the audit engagement.

Independence in appearance.

Relates to the auditors state of mind.

Independence in fact

Reflects an unbiased and impartial perspective to the financial statement audit.

Independence in fact.

In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy?

Independence.

An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should: a. Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control. b. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses. c. Include a paragraph describing management's assessment concerning the effectiveness of internal control. d. Indicate that the significant deficiencies should be disclosed in the annual report to the entity's shareholders.

Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control.

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: An exporter pays a bribe to a foreign government official so that government will buy its products. a. Indirect-effect noncompliance. b. Neither. c. Direct-effect noncompliance.

Indirect-effect noncompliance

For the following instances of noncompliance, explain why they are either direct-effect or indirect-effect noncompliance or neither. INSTANCE: A coal mining company fails to place proper ventilation in its mines. a. Direct-effect noncompliance. b. Indirect-effect noncompliance. c. Neither.

Indirect-effect noncompliance.

Which of the following would most likely be classified as a material weakness? a. Evidence of failure of control activities. b. Absence of appropriate separation of duties. c. Ineffective oversight of the financial reporting process by the company's audit committee. d. Absence of appropriate reviews and approvals of transactions.

Ineffective oversight of the financial reporting process by the company's audit committee.

If an auditor encounters significant risks at the client, the auditor should do all of the following except: a. perform extended procedures. b. inform the SEC. c. include more experienced auditors on the engagement. d. perform tests closer to year end.

Inform the SEC

The risk to investors that a company's financial statements may be materially misleading is called:

Information Risk

The following is a description of an internal control. DESCRIPTION: Sales personnel are restricted by the sales system to authorize sales prices for inventory items to customers at amounts from the company's approved price list via a drop-down menu. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Environment b. Monitoring c. Information and Communication d. Control Activities e. Risk Assessment

Information and Communication

The following is a description of an internal control. DESCRIPTION: The company's personnel input information manually. Afterwards, the computer system tracks individual transactions and automatically accumulate transactions to create a trial balance. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Information and Communication b. Control Activities c. Control Environment d. Risk Assessment e. Monitoring

Information and Communication

The following is a description of an internal control. DESCRIPTION: The system automatically reconciles subsidiary ledger to the accounts receivable general ledger account and control accounts on a daily basis . Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Monitoring c. Control Activities d. Control Environment e. Information and Communication

Information and Communication

Objectives of an entity include: Information and Communication Systems: Reliable Financial Reporting: Effective and Efficient Operations:

Information and Communication Systems: No Reliable Financial Reporting: Yes Effective and Efficient Operations: Yes

Which one of the below statements best describes the concept of materiality? a. Information that directly impacts the income statement. b. Information that is not likely to influence the decisions of a reasonable investor. c. Information that meets strict quantitative thresholds. d. Information that is likely to be viewed by a reasonable investor as altering the mix of available information.

Information that is likely to be viewed by a reasonable investor as altering the mix of available information.

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The allowance for doubtful accounts is based on significant assumptions made by management.

Inherent Risk

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The auditor has identified numerous material misstatements during the prior year audit engagements.

Inherent Risk

Below is an independent risk factors. Identify which of the following audit risk model components relates most directly to each risk factor. Risk Factor: The client engages in several material transactions with entities owned by family members of several of the client's senior executives.

Inherent Risk

Which of the following is not a component of internal control? a. Control environment. b. Inherent risk. c. Control activities. d. Monitoring.

Inherent Risk

In reporting on a nonissuer's internal control over financial reporting, an auditor should include a paragraph that describes the: a. Documentary evidence regarding the control environment factors. b. Inherent limitations of any internal control. c. Potential benefits from the practitioner's suggested improvements. d. Changes in internal control since the prior report.

Inherent limitations of any internal control.

The risk of material misstatement is composed of which audit risk components?

Inherent risk and control risk.

An audit team would use test data to test the effectiveness of a. Data backup and recovery controls. b. Input controls. c. Program change controls. d. System development controls.

Input controls.

Which of the following procedures would not be effective in testing controls restricting access to specific computer programs and files? a. Identifying whether the distribution of computer output is restricted to authorized personnel. b. Attempting to access programs and files through the client's computerized system. c. Reviewing the access log and identifying whether access to programs and files has been limited to authorized personnel. d. Inquiring as to whether programs and files are restricted to authorized personnel.

Inquiring as to whether programs and files are restricted to authorized personnel.

Which of the following procedures would not be effective in testing controls restricting access to specific computer programs and files? a. Reviewing the access log and identifying whether access to programs and files has been limited to authorized personnel. b. Attempting to access programs and files through the client's computerized system. c. Inquiring as to whether programs and files are restricted to authorized personnel. d. Identifying whether the distribution of computer output is restricted to authorized personnel.

Inquiring as to whether programs and files are restricted to authorized personnel.

Which of the following statements about performing tests of controls to support a lower level of control risk is not true? a. Observation by the auditor provides more assurance than inquiry alone. b. Prior audits may be considered by the auditor in assessing control risk in the current audit. c. Inquiry alone generally will support a conclusion for a lower assessed level of control risk. d. An audit of financial statements is a cumulative process.

Inquiry alone generally will support a conclusion for a lower assessed level of control risk.

When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control's effectiveness by: a. Recalculating the balance in related accounts. b. Mailing confirmations. c. Inquiry and other procedures such as observation. d. Analytical procedures.

Inquiry and other procedures such as observation.

Which of the following is a complete and accurate list of the walkthrough procedures usually performed in an issuer's integrated audit? a. Inquiry, observation, inspection of relevant documentation, and reperformance of controls. b. Inquiry, sampling, analytical procedures, and testing of controls. c. Inquiry, inspection of relevant documentation, sampling, and reperformance of controls. d. Inquiry, observation, analytical procedures, and testing of controls.

Inquiry, observation, inspection of relevant documentation, and reperformance of controls.

Which of the following is a characteristic of an audit of historical financial statements? a. It is the same as an examination of internal controls. b. It expresses an opinion on the fair presentation of the financial statements. c. It provides limited assurance that no material modifications need to be made to the financial statements. d. It is broader than a review engagement.

It expresses an opinion on the fair presentation of the financial statements.

Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of presentation and disclosure for the inventory account? a. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. b. Trace test counts noted during physical count to the summarization of quantities. c. Inspect the open PO file for significant commitments to consider for disclosure. d. Inspect agreements for evidence of inventory held on consignment.

Inspect the open PO file for significant commitments to consider to disclosure.(P.E.1)

For which of the following audit tests would an auditor most likely use attribute sampling? a. Making an independent estimate of the amount of a LIFO inventory. b. Inspecting employee time cards for proper approval by supervisors. c. Examining invoices in support of the valuation of fixed asset additions. d. Selecting accounts receivable for confirmation of account balances.

Inspecting employee time cards for proper approval by supervisors.

A periodic review of an audit firm's system of quality control by the PCAOB is referred to as a(n)

Inspection

Which of the following procedures would provide the most reliable audit evidence? a. Inspection of bank statements obtained directly from the client's financial institution. b. Inspection of prenumbered client purchase orders filed in the vouchers payable department. c. Inquiries of the client's internal audit staff. d. Inspection of vendor sales invoices received from client personnel.

Inspection of bank statements obtained directly from the client's financial institution.

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? a. Parallel simulation. b. Input controls matrix. c. Data entry monitor. d. Integrated test facility.

Integrated test facility

The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?

Internal Auditing Services, Bookkeeping services, and valuation services.

Which of the following is most indicative of fraudulent activity? a. Three people were absent the day the auditors handed out the paychecks and did not pick them up until the following Monday. b. Internal auditors cannot locate several credit memos to support reductions of customers' balances. c. Numerous cash refunds have been made to different people at different addresses. d. Bank reconciliation has outstanding checks or deposits older than 1 year.

Internal auditors cannot locate several credit memos to support reductions of customers' balances.

COSO identified five interrelated components of _________________. a. Internal control. b. Ethical theories. c. Fraud. d. Professional development.

Internal control.

For the accounting processes below, identify which of the following would be considered routine transactions. (select all that apply) a. Bad debt expense b. Inventory costing c. Cash disbursements d. LIFO calculation e. Physical inventory

Inventory Costing Cash disbursements

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:

Is appropriate and would not negate the unqualified opinion.

Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard:

Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

For which of the following types of clients are audit teams required to express an opinion on internal control over financial reporting?

Issuer: Yes Non-Issuer: NO

In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether: a. The turnover in the accounting department was unusually high. b. There were any subsequent events of which the auditor was unaware. c. It agreed with the auditor's assessed level of control risk. d. It consulted with another CPA firm about accounting matters.

It consulted with another CPA firm about accounting matters.

Under generally accepted auditing standards, which of the following relates to the responsibilities principle?

Maintaining professional skepticism and exercising professional judgment

An auditor is considering internal control in an automated environment. Under these circumstances, the auditor would need to focus on automated controls for all of the following reasons except: a. Unauthorized access to data, systems, or programs creates an additional internal control risk. b. Much of the information used in monitoring the internal control system may be provided through use of information technology. c. Even manual controls may be dependent to some extent on the effective functioning of automated controls. d. It is more efficient and cost-effective to focus on automated controls rather than manual controls.

It is more efficient and cost-effective to focus on automated controls rather than manual controls.

Which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer? a. Fraudulent financial reporting can include the unintentional misstatement of amounts or disclosures in financial statements. b. The distinguishing factor between fraud and error is the materiality of the transaction involved. c. It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles. d. An auditor who initially detects fraud ultimately makes the legal determination of whether fraud has actually occurred.

It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.

The primary benefit of using nonstatistical sampling is that a. It is simpler to use. b. It generally results in a smaller sample size. c. All of the above are true. d. It removes the need to consider allowance for sampling risk.

It is simpler to use.

Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files? a. It is usually easier for unauthorized persons to access and alter the files. b. Random error associated with processing similar transactions in different ways is usually greater. c. It is usually more difficult to compare recorded accountability with physical count of assets. d. Attention is focused on the accuracy of the programming process rather than errors in individual transactions.

It is usually easier for unauthorized persons to access and alter the files.

The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with: a. Audit evidence to use in assessing inherent risk. b. Knowledge necessary for risk assessment and audit planning. c. An evaluation of the consistency of application of management's policies. d. A basis for issuing an opinion on the financial statements.

Knowledge necessary for risk assessment and audit planning.

Within the context of quality control, the primary purpose of continuing professional education and training activities, is to enable a CPA firm to provide personnel within the firm with

Knowledge required to fulfill assigned responsibilities and to satisfy applicable CPE requirements of the AICPA and regulatory agencies.

For the accounting processes below, identify which of the following would be considered nonroutine transactions. (select all that apply) a. Bad debt expense b. LIFO calculation c. Inventory costing d. Cash disbursements e. Physical inventory

LIFO Calculation Physical Inventory

Which of the following is not considered one of the three factors increasing the probability of fraud? a. Opportunity. b. Lack of training. c. Motive. d. Rationalization.

Lack of Training

Required: For each of the following procedures identify the applicable element of quality control. The firm's mission statement indicates its commitment to quality, and this commitment is emphasized in all staff training programs.

Leadership Responsibilities ("tone at the top")

Which of the following persons is responsible for controlling access to systems documentation and access to program and data files? a. Programmers. b. Data conversion operators. c. Librarians. d. Computer operators.

Librarians.

A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum: Likelihood: Magnitude:

Likelihood: Reasonable possibility Magnitude: Material

An auditor's engagement letter most likely would include a statement that:

Limits the auditor's responsibility to detect errors and fraud.

An entity's internal control consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Only some of these objectives, policies, and procedures are relevant to a financial statement audit. Which one of the following would most likely be considered for testing in a financial statement audit? a. Marketing analysis of sales generated by advertising projects. b. Maintenance of statistical production analyses. c. Maintenance of control over unused checks. d. Timely reporting and review of quality control results.

Maintenance of control over unused checks.

Which of the following procedures would an auditor most likely perform in the planning stage of an audit? a. Obtain written representations from management that there are no unrecorded transactions. b. Confirm a sample of the entity's accounts payable with known creditors. c. Make a preliminary judgment about materiality. d. Communicate management's initial selection of accounting policies to the audit committee.

Make a preliminary judgment about materiality.

Managing business risk is the responsibility of:

Management

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to: a. management. b. management for the statements and the auditor for the notes. c. both management and the auditor equally. d. the auditor.

Management

Which of the following groups within an entity is typically in the best position to perpetrate a material fraud? a. Management. b. Directors. c. Entry-level personnel. d. Customers.

Management

Which of the following parties is responsible for directing employees to carry out business activities and managing their performance of those tasks? a. Management. b. Shareholders. c. The board of directors. d. External auditors.

Management

Which of the following components of internal control contributes most to a strong control environment? a. Duties are clearly defined and separated. b. Controls are assessed through ongoing activities and evaluations. c. Policy manuals provide a clear understanding of internal controls. d. Management adheres to internal control policies.

Management adheres to internal control policies.

An auditor's communication of internal control related matters noted in an audit usually should be addressed to: a. The chief accounting officer. b. The chief financial officer. c. Management and those charged with governance. d. The director of internal auditing.

Management and those charged with governance.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? a. Equipment is usually sold at a loss before being fully depreciated. b. There is a lack of turnover of employees in the accounting department. c. Management displays a significant disregard for regulatory authorities. d. Monthly bank reconciliations usually include several deposits in transit.

Management displays a significant disregard for regulatory authorities.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if: a. Documentation that is necessary to prove that the bribes were paid does not exist. b. The client receives financial assistance from a federal government agency. c. Management fails to take the appropriate remedial action. d. The payments violated the client's policies regarding the adherence to applicable laws and regulations.

Management fails to take the appropriate remedial action.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting? a. There is a lack of interest by management in maintaining an earnings trend. b. Computer hardware is usually sold at a loss before being fully depreciated. c. Monthly bank reconciliations usually include several large checks outstanding. d. Management had frequent disputes with the auditor on accounting matters.

Management had frequent disputes with the auditor on accounting matters.

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. The audit committee is active in overseeing the entity's financial reporting policies. b. External policies established by parties outside the entity affect its accounting practices. c. Management is dominated by one individual who is also a shareholder. d. Internal auditors have direct access to those charged with governance.

Management is dominated by one individual who is also a shareholder.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? a. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices. 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. Several members of management have recently purchased additional shares of the entity's stock.

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Which of the following statements would most likely appear in an auditor's engagement letter? a. Management agrees to correct all deficiencies in internal control activities identified by us. b. Management is responsible for making all financial records and related information available to us. c. We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements. d. Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets.

Management is responsible for making all financial records and related information available to us.

When obtaining an understanding of an entity's internal controls, an auditor should concentrate on the substance of the controls rather than their form because: a. Management may establish appropriate procedures but not enforce compliance with them. b. Management may implement procedures whose costs exceed their benefits. c. The procedures may be so inappropriate that no reliance is contemplated by the auditor. d. The procedures may be operating effectively but may not be documented.

Management may establish appropriate procedures but not enforce compliance with them.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? a. Insiders recently purchased additional shares of the entity's stock. b. Management places substantial emphasis on meeting earnings projections. c. Turnover of senior accounting personnel is low. d. The rate of change in the entity's industry is slow.

Management places substantial emphasis on meeting earnings projections.

During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the: a. Management representation letter. b. Prior year's audit plan. c. Letter of audit inquiry to the client's attorney. d. Preliminary judgment about materiality levels.

Management representation letter.

When completing the audit of internal controls for a public company, AS 2201 requires auditors to report on Management's Report on Internal Control: An Audit of Internal Control:

Management's Report on Internal Control: No An Audit of Internal Control: Yes

An auditor's engagement letter most likely would include:

Management's acknowledgment of its responsibility for maintaining effective internal control.

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following? a. Management's assessment of the effectiveness of internal control over financial reporting. b. Representations from the company's external auditors that the company has effective internal control over operations. c. Reasonable assurances that fraud will be identified before the issuance of the company's annual report. d. Management representations that the company's external auditors have examined its internal control over compliance with laws and regulations.

Management's assessment of the effectiveness of internal control over financial reporting.

Which of the following would an auditor most likely consider in evaluating the control environment of an audit client? a. Overall employee satisfaction with assigned duties. b. Management reviews of monthly financial statements. c. The number of CPAs in the accounting department. d. Management's operating style.

Management's operating style.

Which of the following is a factor in the control environment? a. Information processing. b. Management's philosophy and operating style. c. Segregation of duties. d. Performance reviews.

Management's philosophy and operating style.

In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client's entire board of directors. Which of the following considerations will be least relevant to this decision? a. Management's preference. b. The nature of the matters to be communicated. c. Regulatory requirements related to audit communications with those charged with governance. d. Whether the audit committee will be able to provide further information and explanations that the auditor may require while performing the audit.

Management's preference.

Which of the following scope limitation would ordinarily be of most concern to the auditors? a. Management's refusal to provide auditors with written representations. b. The inability to observe inventories because auditors were appointed following the date of the financial statements. c. The use of the work of component auditors in the audit of group financial statements. d. The inability to obtain confirmation of year-end balances from customers because of different billing dates.

Management's refusal to provide auditors with written representations.

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Audit engagements subject to quality reviews referred to as inspections.

Public Company Accounting Oversight Board (PCAOB)

Which of the following matters generally is included in an auditor's engagement letter? a. Management's vicarious liability for violations of laws and regulations committed by its employees. b. Management's responsibility for the fair presentation of the financial statements. c. The factors to be considered in setting preliminary judgments about materiality. d. The auditor's responsibility to search for significant internal control deficiencies.

Management's responsibility for the fair presentation of the financial statements.

Which of the following is not a required part of the understanding between the client and the auditor? a. Management's responsibility to correct deficiencies in internal control identified by the auditor. b. The auditor's responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement caused by deliberate fraud. c. The auditor's responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement caused by unintentional error. d. Management's responsibility to adjust the financial statements if the auditor identifies material misstatements.

Management's responsibility to correct deficiencies in internal control identified by the auditor.

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? a. Management reputation for failing to provide schedules to prior auditors on a timely basis. b. Management's unwillingness to make all financial records available to the CPA. c. The CPA's inability to review the predecessor auditor's working papers. d. The CPA's lack of understanding of the entity's operations and industry.

Management's unwillingness to make all financial records available to the CPA.

Which of the following parties is ultimately responsible for the prevention and detection of fraud within an organization? a. Board directors. b. External auditors. c. Management. d. Internal auditors.

Management.

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? a. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years. b. Disagreements between the predecessor auditor and management as to significant accounting policies and principles. c. Facts known to the predecessor auditor that might bear on the integrity of management. d. The predecessor auditor's understanding of the reasons for the change of auditors.

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? a. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years. b. Disagreements between the predecessor auditor and management as to significant accounting policies and principles. c. The predecessor auditor's understanding of the reasons for the change of auditors. d. Facts known to the predecessor auditor that might bear on the integrity of management.

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? a. The predecessor auditor's understanding of the reasons for the change of auditors. b. Facts known to the predecessor auditor that might bear on the integrity of management. c. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years. d. Disagreements between the predecessor auditor and management as to significant accounting policies and principles.

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

An auditor of a large public company identifies a material weakness in internal control. The auditor a. Will be unable to issue an unqualified opinion on the financial statements. b. Must issue an adverse opinion on internal control over financial reporting. c. May still be able to issue an unqualified opinion on internal control over financial reporting. d. Must issue a qualified or a disclaimer of opinion on internal control over financial reporting.

May still be able to issue an unqualified opinion on internal control over financial reporting.

Which of the following management policies would increase the probability of fraud in a company? a. Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts. b. Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. c. Measuring performance and awarding bonuses based on short-term operating results. d. Diversifying authority throughout divisions and subsidiaries in the organization.

Measuring performance and awarding bonuses based on short-term operating results.

Misappropriation of an asset or groups of assets.(P.E.1)

Required: For each of the following procedures identify the applicable element of quality control. Each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing. Procedures to be undertaken by the reviewers are illustrated by the office review program.

Monitoring

The following is a description of an internal control. DESCRIPTION: Each subsidiary is evaluated by the company's controller with regard to their adherence to company mandated protocols for authorization of transactions. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Activities b. Risk Assessment c. Monitoring d. Control Environment e. Information and Communication

Monitoring

The following is a description of an internal control. DESCRIPTION: Internal auditors verify that the company's human resources department receives university transcripts documenting all college degrees earned before an individual can begin their first day of employment with the company. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Activities c. Control Environment d. Monitoring e. Information and Communication

Monitoring

The following is a description of an internal control. DESCRIPTION: The compensation committee reviews compensation plans for senior executives to ensure that both monetary and equity-based pay totals are consistent with contracts approved by the board of directors. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Activities b. Monitoring c. Information and Communication d. Risk Assessment e. Control Environment

Monitoring

The following is a description of an internal control. DESCRIPTION: The compensation committee reviews compensation plans for senior executives to ensure that both monetary and equity-based pay totals are consistent with contracts approved by the board of directors. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Activities b. Monitoring c. Control Environment d. Information and Communication e. Risk Assessment.

Monitoring

Which of the following computer controls would provide the best evidence that unauthorized users are not accessing specific computer programs and files? a. Periodically reviewing and confirming access rights for the organization's users. b. Ensuring that access to programs and files is removed for recently-terminated employees. c. Using passwords requiring access to those programs and files. d. Monitoring actual user activity through a program log and comparing that activity to authorized levels.

Monitoring actual user activity through a program log and comparing that activity to authorized levels.

If an audit team examined 100 transactions and found one deviation from an important control activity, the audit conclusion could be that control risk can be assessed at the associated control risk level when

More Info is Needed

In which case might an auditor of an issuer render a qualified opinion on internal control? I. When there is a scope limitation. II. When there is a material weakness in internal control.

Neither I nor II.

A distant relative of a partner within the firm occupies an entity-level position within the client of the firm. The audit is conducted by another office of the firm with which the partner has infrequent contact.

Neither independence in fact or appearance.

A staff member within the firm owns shares of stock of one of that firm's clients. She is not a member of the engagement team serving that client.

Neither independent in fact or appearance.

Nathan has performed various testing of controls at Creative CPA Clothing. Nathan has determined a tolerable rate of 10% for the controls testing. Attribute Sample Evaluation Table-Upper Deviation Rate 5% Risk of Assessing Control Risk Too Low **ANDF is the actual number of deviations found.** Control Testing Procedures: All checks are endorsed before they are deposited. Control Testing: On 20 randomly selected days, inspect three checks prior to deposit for endorsement. Number of Items Selected: 60 checks Results of Testing: 58 checks= No exceptions; 2 item= Exception noted REQUIRED: Based on the results of control testing and using the table above, determine whether Nathan should rely on the control or not (Yes or No).

Nathan has performed various testing of controls at Creative CPA Clothing. Nathan has determined a tolerable rate of 10% for the controls testing. Attribute Sample Evaluation Table-Upper Deviation Rate 5% Risk of Assessing Control Risk Too Low **ANDF is the actual number of deviations found.** Control Testing Procedures: Credit memos are approved by a customer sales representative. Control Testing: Randomly select 25 credit memos and verify that the credit is approved by a customer service representative and the president. Number of Items Selected: 25 credit memos Results of Testing: 25 credit memos= No exceptions REQUIRED: Based on the results of control testing and using the table above, determine whether Nathan should rely on the control or not (Yes or No).

Nathan has performed various testing of controls at Creative CPA Clothing. Nathan has determined a tolerable rate of 15% for the controls testing. Attribute Sample Evaluation Table-Upper Deviation Rate 5% Risk of Assessing Control Risk Too Low **ANDF is the actual number of deviations found.** Control Testing Procedures: Inventory is only shipped if there is an approved sales order. Control Testing: Randomly select 50 shipping documents and verify that there is an approved sales order for each shipment. Number of Items Selected: 50 shipping documents Results of Testing: 46 items= no exceptions; 4 items-exception noted REQUIRED: Based on the results of control testing and using the table above, determine whether Nathan should rely on the control or not (Yes or No).

Nathan has performed various testing of controls at Creative CPA Clothing. Nathan has determined a tolerable rate of 15% for the controls testing. Attribute Sample Evaluation Table-Upper Deviation Rate 5% Risk of Assessing Control Risk Too Low **ANDF is the actual number of deviations found.** Control Testing Procedures: All checks issued over $10,000 must have two signatures. Control Testing: Use CAAT technology to select a sample of checks greater than $10,000 and verify that each check in the sample has two signatures. Number of Items Selected: 50 checks that are over $10,000 Results of Testing: 46 checks= no exceptions; 4 checks= exception noted: only 1 signature REQUIRED: Based on the results of control testing and using the table above, determine whether Nathan should rely on the control or not (Yes or No).

With respect to the detection of indirect- effect illegal acts, auditing standards state that the auditor provides: a. no assurance that they will be detected. b. assurance that they will be detected, if material. c. assurance that they will be detected, if highly material. d. the same reasonable assurance provided for other items.

No assurance that they will be detected.

Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance? a. A material misstatement was noted by the auditor and corrected by management. b. No significant deficiencies in internal control exist that would affect the financial statements. c. The auditor is requesting representations regarding the financial statements from management. d. Management has consulted with other accountants about accounting and auditing matters during the period under audit.

No significant deficiencies in internal control exist that would affect the financial statements.

During risk assessment, assume an auditor obtained the following information about an audit client: Toyota's management is amenable to proposed adjustments and quickly remediates accounting issues that their auditor identify as marginal or inappropriate accounting. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

No, Not Applicable

Public Company Accounting Oversight Board (PCAOB) (P.E.1)

The following are activities that occurred at GoodenCo, a nonpublic company. GoodenCo's CEO routinely books flights the day before he travels despite the fact that substantial savings could be had if he booked travel further in advance. Additionally, the CEO books all flights in first class despite the fact that such flights are routinely twice as expensive as comparable business class fares. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

No, Not Applicable

The following are activities that occurred at GoodenCo, a nonpublic company. GoodenCo's management decided not to include a footnote about a material uninsured lawsuit against the company on the grounds that the primary user of the statements, a small local bank, will probably not understand the footnote anyway. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

No, Not Applicable

Audra Dodge, CPA, is performing an attributes sampling plan for her audit of Truck Company. In her audit of cash disbursements, she has identified preparing a voucher and marking it as "paid" prior to preparing and mailing a check to the vendor as an important control. Dodge defined any voucher that was not marked as "paid" as being a deviation. In performing her sampling application, she established the following parameters: Risk of Overreliance: 5% Expected Population Deviation Rate: 2.75% Tolerable Rate of Deviation: 7% REQUIRED: After selecting her sample, Dodge identified four deviations. What would Dodge's conclusion be with respect to the functioning of this control? AICPA Sample Size Table 5% a. Not enough information. b. Yes, the control is functioning effectively. c. No, the control is not functioning effectively. d. None of these are correct.

No, the control is not functioning effectively.

Which of the following services do not need to be pre-approved by the audit committee of an issuer? a. Tax services. b. Non-audit services that are less than five percent of total revenues from the audit client. c. Services provided by the auditor on a recurring basis. d. Non-audit services related to internal control over financial reporting.

Non-audit services that are less than five percent of total revenues from the audit client.

An audit committee should pre-approve all of the following services except? a. Audit services. b. Tax compliance and tax planning services. c. Non-audit services that do not exceed five percent of total revenues. d. Review engagements.

Non-audit services that do not exceed five percent of total revenues.

An auditor may provide an issuer client any of the following non-audit services without impairing independence and without obtaining the preapproval of the audit committee, except: a. Services that the issuer did not recognize as non-audit services at the time of the engagement. b. Non-audit services that were promptly brought to the attention of, and approved by, the audit committee prior to the completion of the audit. c. Non-audit services to perform financial information systems design and implementation. d. Non-audit services with revenues in aggregate of less than 5% of the total revenues paid by the issuer to the auditor during the fiscal year in which the non-audit services are provided.

Non-audit services to perform financial information systems design and implementation.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may a. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details. b. Allow the internal auditor to audit a major subsidiary of the company. c. Not assign any task to the internal auditor because of the internal auditor's lack of independence. d. Only a and b. e. All of the above would be appropriate. f. None of the above are correct.

None of the above are correct.

With respect to the concept of materiality, which of the following statements is correct? a. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction. b. None of these answers are correct. c. Materiality is determined by reference to AICPA guidelines. d. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.

None of these answers are correct.

An engagement letter generally includes which of the following? a. None of these are correct. b. The objectives of a client's internal controls. c. A disclaimer regarding the inherent limitations of an entity's internal audit function. d. The responsibilities of the internal auditor.

None of these are correct.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? a. Inquire about employees' access to recorded but undeposited cash. b. Compare the cash balance in the general ledger with the bank confirmation request. c. Trace the deposits in the cash receipts journal to the cash balance in the general ledger. d. Observe the consistency of the employees' use of cash registers and tapes.

Observe the consistency of the employees' use of cash registers and tapes.

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity? a. Obtain a list of current data center employees. b. Ask the chief technology officer about known problems. c. Observe whether the data center is monitored. d. Inspect the policy manual establishing this control activity.

Observe whether the data center is monitored.

When conducting field work for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software packaa. Selecting sample items of inventory. b. Observing inventory. c. Recalculating balances in inventory reports. d. Analyzing data resulting from inventory.

Observing inventory.

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by: a. Observing the employees who are performing the control activities. b. Preparing a flow chart of the duties performed and the entity's available personnel. c. Performing substantive tests to verify the details of the bank balance. d. Completing an internal control questionnaire that describes the control activities.

Observing the employees who are performing the control activites

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements? a. Observing the entity's personnel applying the activities. b. Performing analytical procedures using data aggregated at a high level. c. Vouching a sample of transactions directly related to the activities. d. Reperforming the activities for a sample of transactions.

Observing the entity's personnel applying the activities.

Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the descriptions below best expresses the minimum amount of work permitted by GAAS for nonpublic companies? a. Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances. b. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment. c. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances, since zero control risk means that no errors or fraud can reach the accounts. d. Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances.

Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances.

After determining that a related party transaction has, in fact, occurred, an auditor should: a. Substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction. b. Add a separate paragraph to the auditor's standard report to explain the transaction. c. Obtain an understanding of the business purpose of the transaction. d. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.

Obtain an understanding of the business purpose of the transaction.

Which of the following procedures would an auditor most likely include in the planning phase of a financial statement audit? a. Perform cutoff tests of the entity's sales and purchases. b. Identify specific internal control activities designed to prevent fraud. c. Evaluate the reasonableness of the entity's accounting estimates. d. Obtain an understanding of the entity's risk assessment process.

Obtain an understanding of the entity's risk assessment process.

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation? a. Send confirmations asking customers about unit prices paid for product. b. Perform additional inquiries with sales personnel. c. Vouch vender invoices to payments made after year-end. d. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must a. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting. b. Assess control risk at less than the maximum for all relevant assertions. c. Perform only substantive procedures. d. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

When engaged to audit a nonissuer's internal control, an auditor should:

Obtain management's written assessment regarding whether the company has maintained effective internal control.

Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for: a. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework. b. Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations. c. Ensuring that the entity's operations are conducted in accordance with the provisions of laws and regulations relevant to the entity's financial statements. d. Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity's financial statements.

Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.

Tests of controls in a GAAS audit are required for a. Obtaining evidence about the operating effectiveness of client control activities. b. Applying analytical procedures to financial statement balances. c. Accomplishing control over the occurrence of recorded transactions. d. Obtaining evidence about the financial statement assertions.

Obtaining evidence about the operating effectiveness of client control activities.

Which of the following does not directly relate to an auditor's responsibility for having appropriate competence and capabilities to perform the audit? a. Attending on-the-job training b. Participating in continuing professional education c. Gaining experience through hands-on practice d. Obtaining reliable documentary evidence

Obtaining reliable documentary evidence

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor:

Obtains reasonable assurance about whether the financial statements are free of material misstatement.

Which of the following statements is true regarding attributes sampling? a. Once the population reaches a certain size, population size has a limited impact on sample size. b. Auditors should use attributes sampling to evaluate controls, regardless of the degree of reliance being placed upon the controls. c. Tests of controls should only be applied to transactions occurring at the end of the year under audit because the audit team wants to reach a conclusion about control risk at year end. d. When determining the appropriate sample size, the audit team will specifically control its exposure to both the risk of overreliance and the risk of underreliance.

Once the population reaches a certain size, population size has a limited impact on sample size.

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted?

One

Which of the following is true with respect to PCAOB inspections of accounting firms? a. Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection. b. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. c. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. d. All results of PCAOB inspections are made available to the public following the inspection.

PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.(P.E.1)

For the accounting processes below, identify which of the following would be considered routine transactions. (select all that apply) a. Bad debt expense b. Payroll c. Cash receipts d. Financial statement close e. Depreciation

Payroll Cash Receipts

An example of a program in which the audit team would be most interested in testing automated application controls is a(n) a. Operating system program. b. Data management system software. c. Utility program. d. Payroll processing program.

Payroll processing program.

If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? a. Inquire of management as to the possibility of fraud. b. Discuss with the audit committee what should be done to prevent possible future misstatements. c. Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. d. Both a and b are correct. e. None of these is correct.

Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred.

An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment? a. Evaluate the effectiveness of the internal controls with tests of controls. b. Consider whether control activities can have a pervasive effect on financial statement assertions. c. Perform tests of details of transactions to detect material misstatements in the financial statements. d. Obtain an understanding of the entity's accounting system and control environment.

Perform tests of details of transactions to detect material misstatements in the financial statements.

Public Company Accounting Oversight Board (PCAOB). (P.E.1)

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to: a. Increase the assessed level of control risk for relevant financial statement assertions. b. Decrease the extent of auditing procedures to be applied to the class of transactions. c. Perform the planned auditing procedures closer to the balance sheet date. d. Apply the planned substantive tests prior to the balance sheet date.

Perform the planned auditing procedures closer to the balance sheet date.

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation? a. Performance of audit tests on a continuous basis. b. Increased emphasis on the completeness assertion. c. Increased effort to search for evidence of management fraud. d. Discrete phases of planning, interim, and year-end fieldwork.

Performance of audit tests on a continuous basis.

Identify the principle: The preparation of a written audit plan that guides the conduct of the audit engagement.

Performance.

Identify the principles: The auditors' consideration of the effectiveness of the entity's internal control of the nature, timing and extent of substantive procedures.

Performance.

Which of the following major stages of the audit is most closely related to attributes sampling? a. Searching for the possible occurrence of subsequent events. b. Determining preliminary levels of materiality. c. Performing substantive procedures. d. Performing tests of controls.

Performing tests of controls.

Below is an example of a typical risk in an IT environment. RISK: Destruction of infrastructure or data. Required: Identify a control that may be used to mitigate the risk. a. None of these answers are correct. b. Physical and user controls c. Firewalls and password systems d. Physical controls over terminals and testing of programs and applications. e. Controls over access and backup copies

Physical and user controls

Below is an example of a typical risk in an IT environment. RISK: Unauthorized access to data or programs. Required: Identify a control that may be used to mitigate the risk. a. Firewalls and password systems b. None of these answers are correct. c. Program and user controls d. Physical controls over terminals and testing of programs and applications. e. Controls over access and backup copies

Physical controls over terminals and testing of programs and applications.

The most reliable evidence regarding the existence of newly acquired computer equipment is:

Physical observation

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act? a. Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. b. Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant. c. Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. d. Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations.

Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations.`

Which of the following is not an essential component of quality control? a. Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards. b. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies. c. Policies to ensure that personnel maintain their independence in fact and in appearance. d. Policies that ensure that monitoring activities are effectively applied.

Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies.

In an attestation engagement, a CPA practitioner is engaged to:

Prepare a written report containing a conclusion about the reliability of a management assertion.

Public Company Accounting Oversight board (PCAOB).

In the United States, what entities are required by the federal government to have an annual financial statement audit?

Public companies or issuers.

When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements? a. Prepare auditing working papers that document the auditor's understanding of the company's internal control. b. Determine whether the company's control policies are designed well enough to prevent material misstatements. c. Design procedures to search for significant deficiencies in the actual operation of the company's internal control. d. Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness.

Prepare auditing working papers that document the auditor's understanding of the company's internal control.

Reporting standards for financial audits under Government Auditing Standards (the yellow book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:

Present the results of the auditor's test of controls.

Government Auditing Standards published by the Government Accountability Office:

Primarily apply to audits of federal financial assistance and government organizations.

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee? a. The firm must address all independence impairment issues on the date of the audit opinion. b. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. c. Communications related to independence may occur in any form prior to issuance of the financial statements. d. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Which of the following controls is least likely to be relevant to a financial statement audit? a. Use of computer passwords to limit access to data files. b. Generation of production statistics used to evaluate variances. c. Policies that relate to compliance with income tax regulations. d. Procedures that prevent the excess use of materials in production.

Procedures that prevent the excess use of materials in production.

Which of the following is an inherent limitation of any client's internal control? a. The benefits expected to be derived from effective internal controls usually do not exceed the costs of effective internal controls. b. Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against frauds perpetrated by management. c. The competence and integrity of client personnel provide an environment conducive to control and provides assurance that effective control will be achieved. d. Procedures whose effectiveness depends on separation of duties can be circumvented by collusion.

Procedures whose effectiveness depends on separation of duties can be circumvented by collusion.

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

Professional Skepticism

In a computerized payroll system environment, an auditor would be least likely to use test data to test controls related to: a. Time tickets with invalid job numbers. b. Missing employee numbers. c. Agreement of hours per clock cards with hours on time tickets. d. Proper approval of overtime by supervisors.

Proper approval of overtime by supervisors.

Which one of the following is not one of the responsibilities principles? a. Proper planning and supervision. b. Due professional care. c. Independence of mental attitude. d. Adequate training and proficiency.

Proper planning and supervision.

An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts: a. Reduce the need to observe client's employees performing routine tasks. b. Provide a visual depiction of client's activities. c. Indicate whether control activities are operating effectively. d. Identify internal control weaknesses more prominently.

Provide a visual depiction of client's activities.

According to rules issued under the Sarbanes-Oxley Act, which of the following non-audit services is an accounting firm permitted to provide for an issuer audit client without impairing the accounting firm's independence? a. Providing an expert opinion in order to advocate the client's interest in litigation. b. Providing legal services to the client in a foreign jurisdiction. c. Providing an expert opinion in order to advocate the client's position in a regulatory investigation. d. Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client.

Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client.

The Sarbanes-Oxley Act of 2002 generally allows public accounting firms to:

Providing tax consulting to an audit client with audit committee approval.

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Departure from generally accepted accounting principles that is material but not pervasive.

Qualified

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Material, but not pervasive, departure from GAAP.

Qualified

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Material, but not pervasive scope limitation.

Qualified Opinion

Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?

Qualified opinion or adverse opinion.

An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a(an):

Qualified opinion or an adverse opinion.

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)

Qualified opinion with reference to departure.

A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards:

Quality control.

Each of the following types of controls is considered to be an entity-level control, except those a. Relating to the control environment. b. Addressing policies over significant risk management practices. c. Pertaining to the company's risk assessment process. d. Regarding the company's annual stockholder meeting.

Regarding the company's annual stockholder meeting.

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit? a. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. b. Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts. c. Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions. d. Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment.

Relations involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. (P.E.1)

Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? a. Relevant ethical requirements. b. Acceptance and continuance of client relationships and specific engagements. c. Monitoring. d. Engagement performance.

Relevant ethical requirements.

Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on the information contained in the financial statements. What term captures this problem?

Reliability

A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:

Reviewing audit documentation and engagement reports.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. b. Performing analytical procedures for indications of possible financial difficulties. c. Reviewing confirmations of loans receivable and payable for indications of guarantees. d. Vouching accounting records for recurring transactions recorded just after the balance sheet date.

Reviewing confirmations of loans receivable and payable for indications of guarantees.

The following is a description of an internal control. DESCRIPTION: Management periodically assesses the company's preparedness for actual implementation of contingency plans related to off-site and cloud access in the event of a security breach or failure of the accounting system. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Monitoring b. Control Activities c. Risk Assessment d. Control Environment e. Information and Communication

Risk Assessment

The following is a description of an internal control. DESCRIPTION: The company periodically assesses the design of the organizational chart that establishes the formal lines of reporting and authorization protocols to identify incompatible duties and possible opportunities or incentives to commit fraud. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Monitoring b. Information and Communication c. Control Activities d. Risk Assessment e. Control Environment.

Risk Assessment.

Which of the following is not true about quality control standards? a. Quality control standards relate to the firm's practice as a whole. b. They apply to attestation engagements as well as to audit engagements. c. A CPA firm is required to adopt a system of quality control. d. Risk assessment is one of the six interrelated elements of quality control.

Risk assessment is one of the six interrelated elements of quality control.

An increase in which of the following would cause the sample size in a test of controls to decrease? a. Risk of underreliance b. Expected population deviation rate c. Risk of overreliance d. Population size

Risk of overreliance

What are the three types of safeguards against threats to a CPA's compliance with the ethical rules of the profession?

Safeguard of regulation, client implemented controls, and CPA firm policies.

Which of the following best describes the method of determining the ULRD? a. Sample rate of deviation + Allowance for sampling risk. b. Tolerable rate of deviation + Allowance for sampling risk. c. Expected population deviation rate + Allowance for sampling risk. d. Risk of underreliance + Allowance for sampling risk.

Sample rate of deviation + Allowance for sampling risk.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

Schedules and analyses to be prepared by the client's employees.

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the:

Scope limitation that caused the changed engagement: No Original engagement that was agreed to: No

For each of the following description, identify whether it is most appropriately associated with the PCAOB, ASB, SEC, ARSC, AICPA, ASEC or none of these. Approves all standards for issuers.

Securities and Exchange Commission (SEC) (P.E.1)

In which of the following circumstances would the audit team most likely use attributes sampling? a. Selecting inventory items for verification of physical quantities. b. Selecting customer accounts receivable for confirmation. c. Selecting purchase orders for indication of proper authorization. d. Selecting additions to property, plant, and equipment during the year.

Selecting purchase orders for indication of proper authorization.

Which of the following events most likely would indicate the existence of related parties? a. Failure to correct internal control weaknesses on a timely basis. b. Selling real estate at a price significantly different from appraised value. c. Granting stock options to key executives at favorable prices. d. High turnover of senior management and members of the board of directors.

Selling real estate at a price significantly different from appraised value.

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except a. Varying the timing of the audit procedures. b. Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters. c. Performing audit procedures on an unannounced basis. d. Sending attorney letters to every attorney listed under the legal expense account. e. None of these is correct.

Sending attorney letters to every attorney listed under the legal expense account.

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud? a. Sending positive confirmations to all of the client's customers with balances on December 31. b. Reviewing the segregation of duties for staff who had responsibility for sales, shipping, and invoicing. c. Reviewing the support for open sales orders not yet shipped at December 31. d. Examining the reconciliation between the subsidiary ledger and the general ledger control account.

Sending positive confirmations to all of the client's customers with balances on December 31.

Which of the following is a preventive control? a. Detailed fluctuation analysis completed by the CFO for revenue. b. Recalculation of a sample of payroll entries by internal auditors. c. Reconciliation of a bank account. d. Separation of duties between the payroll and personnel departments.

Separation of duties between the payroll and personnel departments.

Which of the following control procedures most likely could prevent computer personnel from modifying programs to bypass computer controls? a. Separation of duties for computer programming and computer operations. b. Physical security of computer facilities in limiting access to computer equipment. c. Participation of user department personnel in designing and approving new systems. d. Periodic management review of computer utilization reports and systems documentation.

Separation of duties for computer programming and computer operations.

A type of sampling application in which a relatively small initial sample is examined and decisions regarding expanding that sample are based on the results of this initial sample is known as a. Statistical sampling. b. Sequential sampling. c. Discovery sampling. d. Attributes sampling.

Sequential sampling

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except: a. Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements. b. Actively supervising a principal financial officer or principal accounting officer. c. Serving on at least one other issuer's audit committee or disclosure committee of the board of directors. d. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.

Serving on at least one other issuer's audit committee or disclosure committee of the board of directors.

Which of the following is not related to the responsibilities principle? a. The auditors' use of professional judgment throughout the examination. b. Firm-wide policies to evaluate the financial and professional relationships of its professionals. c. Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession. d. Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting.

Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting.

An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions? a. Staff accountant. b. Controller. c. CFO. d. CEO.

Staff Accountant

An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within previous year for which of the following positions?

Staff Accountant(P.E.1)

Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards? a. If not superseded by the PCAOB, Statements on Auditing Standards issued prior to 2003 are applicable to the audit of public entities. b. Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities. c. The PCAOB issues auditing standards for the audit of public entities, subject to SEC approval. d. Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both public and private entities.

Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities.

One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following

Standards within a system of quality control.

A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA's review report should include a:

Statement that a review is substantially less in scope than an audit.

Which of the following are covered during the risk response phase of an audit? (select all that apply). a. Forming an opinion on the fair presentation of the client's financial statements. b. Substantive or detailed testing of transactions and accounts. c. Identifying factors that may impact the risk of a material misstatement occurring. d. The performance of detailed tests of controls.

Substantive or detailed testing of transactions and accounts. The performance of detailed tests of controls.(P.E.1)

As the acceptable level of detection risk decreases, the assurance directly provided from:

Substantive tests should increase.`

What requirements are usually necessary to become licensed as a certified public accountant?

Successful completion of the Uniform CPA Examination, Education, and Experience in the accounting field.

In connection with the examination of the financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks should not be appropriately delegated to the internal audit staff?

Summarization of the accounts receivable confirmations responses, controlled by the external auditor and based upon the external auditors judgement as to how many accounts and which accounts will provide sufficient coverage.(P.E.1)

Which of the following does not accurately summarize auditors' requirements regarding internal control? Understanding. Public Entity: Yes Nonpublic Entity: Yes b. Test controls. Public Entity: Yes Nonpublic Entity: Yes c. Documenting. Public Entity: Yes Nonpublic Entity: Yes d. Evaluating control risk. Public Entity: Yes Nonpublic Entity: Yes

Test controls. Public Entity: Yes Nonpublic Entity: Yes

When an auditor tests the internal controls of a computerized accounting system, which of the following is true of the test data approach? a. Test data are processed with the client's computer and the results are compared with the auditor's predetermined results. b. Test data programs usually consist of all possible valid and invalid conditions regarding compliance with internal controls. c. Test data are coded to a dummy subsidiary so they can be extracted from the system under actual operating conditions. d. Test data programs need not be tailor-made by the auditor for each client's computer applications.

Test data are processed with the client's computer and the results are compared with the auditor's predetermined results.

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? a. Inquire of management as to the effectiveness of the controls. b. Document that reliance and proceed with the original audit strategy. c. Report the reliance in the report on internal controls. d. Test the operating effectiveness of such controls in the current audit.

Test the operating effectiveness of such controls in the current audit.

Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls? a. Evaluation of the auditing environment. b. Testing of low risk internal control activities. c. All testing of the operating effectiveness of internal control activities. d. As providing the principle evidence for the external auditors' opinion.

Testing of low risk internal control activities.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: a. Analytical procedures for current year property and equipment transactions. b. Analytical procedures for property and equipment balances at the end of the year. c. Tests of controls and extensive tests of property and equipment balances at the end of the year. d. Tests of controls and limited tests of current year property and equipment transactions.

Tests of controls and limited tests of current year property and equipment transactions.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? a. Tests of controls and tests of details. b. Tests of details and substantive procedures. c. Substantive analytical procedures and tests of controls. d. Substantive procedures and analytical procedures.

Tests of controls and tests of details.

During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing:

Tests of controls: Yes Substantive Tests: Yes

An issuer's auditor is prohibited from providing tax services to which of the following individuals? a. The chair of the audit committee. b. The chair of the board of directors. c. The CEO. d. The CFO of an affiliate of the issuer audited by another firm.

The CEO

Which of the following represents an inherent limitation of internal controls? a. Shipping documents are not matched to sales invoices. b. Bank reconciliations are not performed on a timely basis. c. Customer credit checks are not performed. d. The CEO can request a check with no purchase order.

The CEO can request a check with no purchase order.

Which of the following statements most likely would be included in an engagement letter from an auditor to a client? a. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement. b. The CPA firm is responsible for ensuring that the client complies with applicable laws. c. The CPA firm will adjust the financial statements to correct misstatements before issuing a report. d. The CPA firm will involve information technology specialists in the performance of the audit.

The CPA firm will involve information technology specialists in the performance of the audit.

According to the requirements of the Sarbanes-Oxley Act, which of the following parties is responsible for establishing procedures to handle complaints regarding irregularities in a publicly traded company's accounting methods, internal controls, or auditing matters? a. The internal audit function. b. Executive management. c. The external audit firm. d. The audit committee.

The audit committee.

A CPA, has participated in the audit of private company for five years, first as an assistant accountant and the last two years as the senior accountant. The CPA has never seen an accounting adjustment recommended and believes the inherent risk must be zero. Which of the following are true statements? (select all that apply) a. The fact that the client's control system has functioned well in the past ensures that it continues to prevent, detect, and/or correct material errors. b. The CPA's conclusion is justified in acting on a belief that IR = 0. c. The CPA may have seen no adjustments proposed because the client's control system has functioned well in the past and prevented, detected, and/or corrected material errors. d. The CPA may have seen no adjustments proposed because none were material.

The CPA may have seen no adjustments proposed because the client's control system has functioned well in the past and prevented, detected, and/or corrected material errors. The CPA may have seen no adjustments proposed because none were material.

On the audit of a private company, a CPA decided to use substantive procedures to audit the year-end balances very thoroughly to the extent that the risk of failing to detect material errors and irregularities should be 0.02 or less. The CPA gave no thought to inherent risk and conducted only a very limited review of Philly's internal control system. (Select all that apply)

The CPA's decision may result in an inefficient audit. This conduct would never be acceptable for the audit of an issuer-client.

Which of the following is incorrect regarding the code of ethics requirements under the Sarbanes-Oxley Act? a. Public U.S. companies must make publicly available the portions of their code of ethics that address the ethical considerations that apply to senior financial officers. b. Public U.S. companies must disclose in their annual report whether they have adopted a code of ethics for senior financial officers, and if they have not, they must explain their reasoning. c. The SEC has laid out specific language that must be included in all public U.S. companies' code of ethics for senior financial officers. d. The SEC believes that determining the particular sanctions for violations of the code of ethics is best left to the discretion of the company.

The SEC has laid out specific language that must be included in all public U.S. companies' code of ethics for senior financial officers.

Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures? a. The acceptable level of detection risk increases, and the extent of substantive procedures increases. b. The acceptable level of detection risk increases, and the extent of substantive procedures decreases. c. The acceptable level of detection risk decreases, and the extent of substantive procedures decreases. d. The acceptable level of detection risk decreases, and the extent of substantive procedures increases.

The acceptable level of detection risk decreases, and the extent of substantive procedures increases.

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements? a. The adequacy of the accounting records. b. The complexity of the information system relevant to financial reporting. c. The existence of related party transactions. d. The operating effectiveness of controls.

The adequacy of the accounting records.(P.E.1)

In auditing related party transactions, an auditor ordinarily places primary emphasis on: a. The adequacy of the disclosure of the related party transactions. b. Verifying the valuation of the related party transactions. c. Confirming the existence of the related parties. d. The probability that related party transactions will recur.

The adequacy of the disclosure of the related party transactions.

An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client's management refuses to acknowledge the fraud. Which of the following parties should the auditor contact first? a. The recipients of the client's services. b. The agency that provided the grant. c. The state accountancy board. d. The state attorney general's office.

The agency that provided the grant.

The two requirements crucial to achieving audit efficiency and effectiveness with a computer are selecting: a. Audit procedures that are generally applicable to several clients in a specific industry and the appropriate audit tasks for computer applications. b. Client data that can be accessed by the auditor's computer and audit procedures that are generally applicable to several clients in a specific industry. c. The appropriate software to perform the selected audit tasks and client data that can be accessed by the auditor's computer. d. The appropriate audit tasks for computer applications and the appropriate software to perform the selected audit tasks.

The appropriate audit tasks for computer applications and the appropriate software to perform the selected audit tasks.

Who is responsible for the selection and appointment of the independent external auditor? a. Management. b. The audit committee of the board of directors. c. A joint responsibility shared by management and the audit committee. d. The Chief Financial Officer.

The audit committee of the board of directors.

During planning, an auditor of a nonissuer should communicate which of the following to those charged with governance at an entity? a. All audit findings will be communicated in writing to those charged with governance. b. The auditor will express an opinion on the effectiveness of internal controls over compliance with laws and regulations. c. The audit does not relieve management of its responsibilities for the financial statements. d. The auditor is responsible for preparing financial statements in conformity with the applicable financial reporting framework.

The audit does not relieve management of its responsibilities for the financial statements.

An auditor should design the written audit plan so that: a. The audit procedures selected will achieve specific audit objectives. b. All material transactions will be selected for substantive testing. c. Substantive tests prior to the balance sheet date will be minimized. d. Each account balance will be tested under either tests of controls or tests of transactions

The audit procedures selected will achieve specific audit objectives.

During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits? a. The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented. b. The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading. c. The audit team discovers the errors through alternative procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit. d. The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading.

The audit team discovers the errors through alternative procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.

Which of the following statements is correct with respect to the auditor's responsibilities relative to the detection of indirect-effect illegal acts? a. Discovery of indirect-effect illegal acts is usually easier than discovery of fraud. b. The auditor has no responsibility for searching for indirect-effect illegal acts. c. Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect. d. The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.

The auditor has no responsibility for searching for indirect-effect illegal acts.

Which of the following statements indicates that the auditor has gained a sufficient understanding of a client's internal controls related to the sales order process? a. The auditor noted in a narrative that the documentation for the sales order system showed the printing of a shipment-exception report listing non-invoiced shipments. b. The auditor compared sales orders processed with processing clerk head count for three years and noted that processed orders significantly declined while clerk head count remained the same. c. In a statistically valid sample of 100 sales transactions, the auditor found five undiscovered exceptions and concluded that the system was weak. d. The auditor interviewed the company's supervisor of sales clerks and reviewed six shipment exception reports that were randomly selected and that showed significant unrecorded balances.

The auditor in a narrative that the documentation for the sales order showed the printing of shipment-exception report listing non-invoiced shipments. (P.E.1)

Which of the following accurately depicts the auditor's responsibility with respect to Statements on Auditing Standards? a. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures. b. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective. c. The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware. d. The auditor is required to follow the guidance provided by the Standards, without exception.

The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.

Which of the following accurately depicts the auditor's responsibility with respect to the Statements on Auditing Standards? a. The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware. b. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures. c. The auditor is required to follow the guidance provided by the Standards, without exception. d. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective.

The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures. (P.E.1)

Which of the following best describes an auditor's responsibility with respect to communicating internal control deficiencies of issuers? a. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee. b. The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness. c. The auditor is required to communicate all deficiencies in internal control to management, deficiencies that constitute a significant deficiency to the audit committee, and deficiencies that constitute a material weakness to the full board of directors. d. The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate material weaknesses to both management and the audit committee.

The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity. a. Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved. b. Any matters communicated to those charged with governance also are required to be communicated to the entity's management. c. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. d. Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again.

The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.

Which of the following is not true about significant deficiencies in internal control? a. The auditor should not indicate to management that no significant deficiencies in internal control were noted during the audit. b. The auditor is required to communicate to management and those charged with governance all significant deficiencies in internal control that he or she observes during the audit. c. All material weaknesses in internal control are also significant deficiencies. d. The auditor is required to search for significant deficiencies in internal control.

The auditor is required to search for significant deficiencies in internal control.

An auditor may not issue a qualified opinion when:

The auditor lacks independence with respect to the audited entity.(P.E.1)

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an engagement to audit the effectiveness of a nonissuer's internal control? a. The auditor must communicate material weaknesses, but need not disclose significant deficiencies. b. Neither significant deficiencies nor material weaknesses are required to be communicated. c. The auditor must communicate both significant deficiencies and material weaknesses. d. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.

The auditor must communicate both significant deficiencies and material weaknesses.

Which of the following is not a concept from the performance principle under generally accepted auditing standards? a. The auditor must determine and apply an appropriate materiality level throughout the audit. b. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. c. The auditor must plan the work and properly supervise any assistants. d. The auditor must express an opinion in accordance with the auditor's findings.

The auditor must express an opinion in accordance with the auditor's findings.

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer? The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls). b. The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit." c. The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered. d. The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements.

The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer? a. The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered. b. The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements. c. The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls). d. The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit."

The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

If the auditor uncovers a misstatement while conducting substantive testing: a. The auditor needs to determine if the misstatement provides evidence of a weakness in internal controls. b. The misstatement should immediately be reported to senior management. c. The auditor should refer the misstatement to the internal auditors for further investigation. d. The auditor should report the misstatement to the SEC.

The auditor needs to determine if the misstatement provides evidence of a weakness in internal controls.

Which of the following statements indicates that the auditor has gained a sufficient understanding of a client's internal controls related to the sales order process? a. The auditor compared sales orders processed with processing clerk head count for three years and noted that processed orders significantly declined while clerk head count remained the same. b. In a statistically valid sample of 100 sales transactions, the auditor found five undiscovered exceptions and concluded that the system was weak. c. The auditor interviewed the company's supervisor of sales clerks and reviewed six shipment exception reports that were randomly selected and that showed significant unrecorded balances. d. The auditor noted in a narrative that the documentation for the sales order system showed the printing of a shipment-exception report listing non-invoiced shipments.

The auditor noted in a narrative that the documentation for the sales order system showed the printing of a shipment-exception report listing non-invoiced shipments.

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? a. The auditor should report this finding to those charged with governance. b. The auditor should bring the transaction to the attention of an appropriate level of management. c. The auditor should fully investigate other transactions related to this manager to determine if fraud exists. d. The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.

The auditor should bring the transaction to the attention of an appropriate level of management.

Which of the following statements is correct concerning significant deficiencies noted in an audit of the financial statements of a nonissuer? a. The auditor is obligated to search for significant deficiencies that could adversely affect the entity's ability to record and report financial data. b. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses. c. Significant deficiencies are material weaknesses in the design or operation of specific internal control components. d. Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies.

The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

An auditor prepares an unmodified opinion on financial statements that are materially misstated due to fraud. Which of the following is true? a. The auditor will be considered to have met his or her responsibility provided the audit was planned and performed appropriately, including a specific assessment of the risk of material misstatement due to fraud. b. If the client deliberately concealed the fraud from the auditor, the auditor will not be responsible for the erroneous opinion. c. The auditor will be considered to have met his or her responsibility provided none of the three fraud risk factors were observed during the audit. d. If all three fraud risk factors were observed during the audit, the auditor should not have issued an unmodified opinion.

The auditor will be considered to have met his or her responsibility provided the audit was planned and performed appropriately, including a specific assessment of the risk of material misstatement due to fraud.

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor's attention.

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because: a. The auditor's risk assessment is based on the effective operation of controls. b. Evidence to support a reduction in control risk is not available. c. An increase in the assessed level of control risk is justified for certain financial statement assertions. d. There were many internal control weaknesses that could allow errors to enter the accounting system.

The auditor's risk assessment is based on the effective operation of controls.

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?

The auditors should disclaim an opinion and should state specifically that they are not independent.

Which of the following is most closely related to the responsibilities principle? a. The auditors' responsibility to issue a report as a result of their examination. b. The auditors' compliance with relevant ethical requirements of independence and due care. c. The auditors' responsibility to plan the audit and properly supervise assistants. d. The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements.

The auditors' compliance with relevant ethical requirements of independence and due care.

Which of the following is least related to the concept of independence in appearance? a. The ownership of a financial interest in a client by the auditor b. The employment of the auditor's family member in an important position with the client c. The auditors' objectivity and ability to act impartially toward the client d. The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements

The auditors' objectivity and ability to act impartially towards the client.

Which of the following parties is responsible for overseeing business operations by assessing the strategy and underlying purpose of management's decisions and actions? a. The board of directors. b. Shareholders. c. Industry regulators. d. External auditors.

The board of directors.

If an auditor is obtaining an understanding of an issuer's information and communication component of internal control, which of the following factors should the auditor assess? a. The integrity and ethical values of top management. b. The oversight responsibility over financial reporting and internal control by the board or audit committee. c. The philosophy and operating style of management to promote effective internal control over financial reporting. d. The classes of transactions in the issuer's operations that are significant to the issuer's financial statements.

The classes of transactions in the issuer's operations that are significant to the issuer's financial statements.

An auditor has set the materiality level for the financial statements as a whole at $125,000. Which of the following misstatements would the auditor most likely consider material?

The client did not disclose $45,000 of related party transactions in the footnotes.

According to PCAOB standards, when would a company be least likely to reevaluate established materiality levels or tolerable misstatements? a. The client has stated that it will not be able to respond to the auditor's request for evidence within the prescribed timeframe. b. Changes that occurred after the materiality levels were originally set are likely to affect investor's perceptions about the company's financial statements. c. There is a substantial likelihood that misstatements of amounts less than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor. d. Materiality levels and tolerable misstatement were originally based on estimated or preliminary financial statement amounts that differ significantly from actual amounts.

The client has stated that it will not be able to respond to the auditor's request for evidence within the prescribed timeframe.

A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, year 3. Many of the firm's former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit? a. The client's chief accounting officer was the concurring partner on the audit until April 15, year 2. b. The client's CFO was the lead partner on the audit until December 31, year 1. c. The client's CEO was a manager on the audit until June 30, year 2. d. The client's controller was a staff accountant on the audit for two weeks during year 2.

The client's CFO was the lead partner on the audit until December 31, year 1.

Which of the following is true about the auditor's communication with those charged with governance? a. The auditor should not discuss the planned scope and timing of the audit with those charged with governance, since it will compromise the effectiveness of audit procedures by making them too predictable. b. The communication should be two-way: those charged with governance should also communicate relevant matters to the auditor. c. Written communications to those charged with governance are appropriate for general use. d. The auditor should not discuss matters with management prior to communicating those matters to those charged with governance.

The communication should be two-way: those charged with governance should also communicate relevant matters to the auditor.

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? a. The petty cash box is always locked in the desk of the custodian. b. Management has published a company code of ethics and sends frequent communication newsletters about it. c. The company always estimates the inventory but never takes a complete physical count. d. The board of directors reviews and approves all investment transactions.

The company always estimates the inventory but never takes a complete physical count.

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that: :a. The company is more aggressively collecting customer accounts. b. The company has eliminated its discount policy. c. Customer sales have substantially decreased. d. The accounts receivable aging has deteriorated.

The company is more aggressively collecting customer accounts

If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon: a. The control has not been implemented but is operating effectively. b. The control has been implemented but is not operating effectively. c. The control has not been implemented and is not operating effectively. d. The control has been implemented and is operating effectively.

The control has been implemented but is not operating effectively.

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time? a. The control weaknesses to be included in the communication with those charged with governance. b. The appropriateness of the entity's plans for dealing with adverse economic conditions. c. The determination of the fraud risk factors that exist within the client's operations. d. The coordination of the assistance of the client's personnel in data preparation.

The coordination of the assistance of the client's personnel in data preparation.

Which of the following statements about internal control is correct? a. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance. b. The establishment and maintenance of internal control is an important responsibility of the internal auditor. c. Properly maintained internal control reasonably ensures that collusion among employees cannot occur. d. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? a. The degree to which information technology is used in the accounting function. b. The industry and the business and regulatory environments in which the client operates. c. The degree to which the auditor intends to use internal audit personnel to perform substantive tests. d. The relationship between management, the board of directors, and external stakeholders.

The degree to which information technology is used in the accounting function.

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of noncompliance with laws and regulations? a. The failure to develop adequate procedures that detect unauthorized purchases. b. The presence of several difficult-to-audit transactions affecting expense accounts. c. The discovery of unexplained payments made to government employees. d. The exchange of property for similar property in a nonmonetary transaction.

The discovery of unexplained payments made to government employees.

According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement? a. The effects of misclassifications, for example, between operating and nonoperating. b. The cost of the correction. c. The dollar amount of the error. d. The significance of the misstatement relative to the needs of users.

The dollar amount of the error.

Which of the following statements best describes the impact on an audit when a client uses computerized processing of transactions? a. Different independence standards are introduced for audit teams when clients utilize computerized processing. b. The objective of the audit examination focuses on detection of fraud and theft through the computer. c. The effectiveness of computer controls implemented by the client over its computerized processing may need to be evaluated by audit teams. d. The type of substantive procedures performed by the audit team change because of the use of computerized processing.

The effectiveness of computer controls implemented by the client over its computerized processing may need to be evaluated by audit teams.

In which of the following circumstances may auditors issue the standard report on the entity's financial statements? a. The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation. b. The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows. c. The auditors wish to emphasize a matter regarding the financial statements. d. The auditors reference component auditors who examined a subsidiary of group financial statements.

The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? a. The entity's fiscal year ends on June 30. b. The entity's financial statements are generated at an outside service center. c. The entity's financial data is available only in computer-readable form. d. The entity enters into significant derivative transactions as hedges.

The entity enters into significant derivative transactions as hedges.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about a. The entity's ability to process and summarize financial data. b. Methods of assigning production tasks to employees. c. Appropriate prices the entity should charge for its products. d. The efficiency of management's decision‑making process

The entity's ability to process and summarize financial data.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? a. The assertions that are embodied in the financial statements. b. The anticipated sample size for planned substantive tests. c. The entity's financial statements of the prior year. d. The results of the initial assessment of control risk.

The entity's financial statements of the prior year.

Which of the following factors most likely would heighten an auditor's concern about the risk of material misstatement arising from the misappropriation of assets? a. There is a potential for bias in the preparation of accounting estimates. b. The entity's fixed assets lack ownership identification. c. Management recently adopted new accounting principles. d. The entity recently experienced rapid growth in revenue.

The entity's fixed assets lack ownership identification.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements? a. The entity's industry is experiencing declining customer demand. b. Employees who handle cash receipts are not bonded. c. Bank reconciliations usually include in-transit deposits. d. Equipment is often sold at a loss before being fully depreciated.

The entity's industry is experiencing declining customer demand.

An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation? a. The accountant is prohibited from corresponding with the entity's legal counsel. b. The entity's principal creditors no longer require the entity to furnish audited financial statements. c. The entity's management does not provide the accountant with a signed representation letter. d. The accountant is prevented from examining the minutes of the board of directors' meetings.

The entity's principal creditors no longer require the entity to furnish audited financial statements.

The interpretation of the ULRD in an attributes sampling application is a. The estimated rate of deviation in the population with probability equal to the risk of overreliance that the population deviation rate is higher. b. The estimated rate of deviation in the population with certainty that the actual rate of deviation is higher. c. The estimated rate of deviation in the population with certainty that the actual rate of deviation is lower. d. The estimated rate of deviation in the population with probability equal to the risk of overreliance that the actual rate of deviation is lower.

The estimated rate of deviation in the population with probability equal to the risk of overreliance that the population deviation rate is higher.

When planning an audit of the effectiveness of the entity's internal control in an integrated audit of a nonissuer, an auditor would be least likely to consider which of the following factors? a. Preliminary judgments about the effectiveness of internal control. b. The evaluation of the operating effectiveness of the controls. c. The type of available evidential matter pertaining to the effectiveness of the entity's internal control. d. The extent of recent changes in the entity and its operations.

The evaluation of the operating effectiveness of the controls.

Messi, CPA, is performing an attributes sampling application for Scary Company. In doing so, Messi is interested in determining whether an adequate review of the Scary's bank reconciliations by the Company's CFO was performed. Per Scary Company's instructions, the CFO is required to both sign, and date the upper right-hand corner of each reconciliation, verify that the accuracy of the true cash balance, and provide a detailed explanation of any unusual items noted, if any, as well as specify the ultimate resolution of those matters. During the tests of controls, Messi selected a total of 20 bank reconciliations for examination. Of these invoices, 15 had clear indication of proper review in accordance with Scary's internal control policy. Messi's examination of one reconciliation revealed the following issue. Issue: Unlike the other reconciliations that were examined, on one reconciliation there no unusual items noted. Required: Which of the answers below, best explain whether the item represents a deviation, and if so, why? a. Not enough information to make a determination. b. The fact that there were no unusual items noted should ordinarily not represent a deviation, unless there was evidence that there were unusual items that required additional attention. c. The determination depends on the auditor's judgment regarding the severity of the departure, therefore, there is no best answer with regard to whether the item represents a deviation. d. The fact that there were no unusual items noted suggests that the CFO hurriedly performed the review of the reconciliation or did not perform the review at all. Therefore, this issue should be classified as a deviation.

The fact that there were no unusual items noted should ordinarily not represent a deviation, unless there was evidence that there were unusual items that required additional attention.

Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff? a. The risk of material misstatement in the audit. b. The size and complexity of the company. c. The knowledge, skill, and ability of each engagement team member. d. The fee to be paid by the client.

The fee to be paid by the client.

When a former partner of a registered public accounting firm who left the firm two years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true? a. The former partner has no remaining capital balance in the registered public accounting firm. b. The former partner exerts only limited influence over the registered public accounting firm's operations and financial policies. c. The former partner was employed by the registered public accounting firm for a period of 2 years or less. d. The former partner discloses the relationship to the issuer audit client's board of directors.

The former partner has no remaining capital balance in the registered public accounting firm.

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted? a. The entity has no formal written code of conduct. b. Management fails to modify prescribed controls for changes in conditions. c. The integrity of entity's management is suspect. d. Procedures requiring separation of duties are subject to management override.

The integrity of entity's management is suspect.

An auditor would least likely initiate a discussion with those charged with governance concerning: a. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. b. The methods used to account for significant unusual transactions. c. Disagreements with management as to accounting principles that were resolved during the current year's audit. d. The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

Which of the following matters is an auditor required to communicate to those charged with governance? a. The basis for his or her assessment of control risk. b. The auditor's preliminary judgments about materiality levels. c. The process used by management in formulating sensitive accounting estimates. d. The justification for performing substantive procedures at interim dates.

The process used by management in formulating sensitive accounting estimates.

A key similarity between assurance, attestation, and auditing services is ______.

The professional is independent from the information being reported on.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? a. The prospective client has already completed its physical inventory count. b. The CPA makes oral inquiries (only) to the predecessor auditor regarding the prior year's audit. c. The prospective client is unwilling to make all financial records available to the CPA. d. The CPA lacks an understanding of the prospective client's operations and industry.

The prospective client is unwilling to make all financial records available to the CPA.

When communicating internal control related matters noted in a financial statement audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that: a. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control. b. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control. c. A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. d. The issuance of an unmodified opinion on the financial statements may be dependent on corrective follow-up action.

The purpose of the audit was to report on the financial statements and not to provide assurance on internal control

When communicating internal control related matters noted in a financial statement audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that: a. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control. b. A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. c. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control. d. The issuance of an unmodified opinion on the financial statements may be dependent on corrective follow-up action.

The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

The Sarbanes-Oxley Act requires that each member of a company's audit committee be independent with respect to the company. Which of the following is not a violation of the independence requirements for audit committee members? a. Serving as the CEO of a subsidiary of the company. b. The receipt of pension benefits from previous employment with the company. c. Ownership of 18 percent of the company's voting stock. d. The receipt of legal consulting fees from the company.

The receipt of pension benefits from previous employment with the company.

In an engagement to examine management's discussion and analysis (MD&A), which of the following best defines control risk?

The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner.

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: a. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. b. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity. c. The expected rate of deviation for a control activity. d. The frequency of the performance of the control by the company during the period being audited.

The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity.

Which of the following best describes how the auditors' report on an issuer's financial statements references the report on internal control over financial reporting (assume separate reports are prepared):

The report on the financial statements refers to the report on internal control over financial reporting and indicates the opinion expressed on internal control over financial reporting.

Which of the following is not true with respect to the auditors' report on internal control over financial reporting? a. This report may be presented as a combined report with the report on the audit of the financial statements or as a separate report. b. This report should be dated as of the date of the financial statements. c. This report is required in the audit of issuers, but not non-issuers. d. This report expresses an opinion on the design and operating effectiveness of internal control over financial reporting.

The report should be dated as of the date of the financial statements.

Messi, CPA, is performing an attributes sampling application for Scary Company. In doing so, Messi is interested in determining whether an adequate review of the Scary's bank reconciliations by the Company's CFO was performed. Per Scary Company's instructions, the CFO is required to both sign, and date the upper right-hand corner of each reconciliation, verify that the accuracy of the true cash balance, and provide a detailed explanation of any unusual items noted, if any, as well as specify the ultimate resolution of those matters. During the tests of controls, Messi selected a total of 20 bank reconciliations for examination. Of these invoices, 15 had clear indication of proper review in accordance with Scary's internal control policy. Messi's examination of one reconciliation revealed the following issue. Issue: On one reconciliation, the CFO had signed the reconciliation, but did note date, the reconciliation. Also, there was no clear evidence of review, although there were several checkmarks appearing next to several numbers. Required: Which of the answers below, best explain whether the item represents a deviation, and if so, why? a. The review technically does conform to the control policy, in combination with the limited signs of review suggests that the remainder of the reconciliation was not correctly performed or done at all. Therefore, this issue should be classified as a deviation. b. The determination depends on the auditor's judgment regarding the severity of the departure, therefore, there is no best answer with regard to whether the item represents a deviation. c. Not enough information to make a determination. d. Although not technically conforming to the control policy, the fact that some indication of review was placed on the reconciliation suggests that this should not be classified as a deviation.

The review technically does conform to the control policy, in combination with the limited signs of review suggests that the remainder of the reconciliation was not correctly performed or done at all. Therefore, this issue should be classified as a deviation.

Why is the audit team more concerned with controlling the exposure to the risk of overreliance than with the risk of underreliance? a. The risk of underreliance is not related to the audit team's study and evaluation of internal control. b. Only the risk of overreliance results in an incorrect audit decision. c. The risk of overreliance can ultimately result in the audit team's failing to reduce audit risk to acceptable levels. d. The risk of underreliance can be controlled by performing tests of controls during the interim period.

The risk of overreliance can ultimately result in the audit team's failing to reduce audit risk to acceptable levels.

Why is the auditor more concerned with the risk of overreliance than the risk of underreliance? a. The risk of overreliance may result in the auditor failing to perform sufficient substantive procedures. b. The risk of underreliance is not a type of sampling risk. c. The risk of overreliance cannot be controlled by the auditor during the sampling process. d. The risk of overreliance exposes the auditor to an efficiency loss.

The risk of overreliance may result in the auditor failing to perform sufficient substantive procedures.

Which of the following is a definition of control risk? a. The susceptibility of material misstatement assuming there are no related internal control, policies, or procedures. b. The risk that the auditor will not detect a material misstatement. c. The risk that the auditor's assessment of internal controls will be at less than the maximum level. d. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.

The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.

Which of the following could indicate source document fraud? a. The same invoice number appears on different invoices. b. The same customer purchase order number appears on different customer invoices. c. The same invoice date appears on different invoices. d. The same item code appears on different invoices.

The same invoice number appears on different invoices.

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be lower.

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be lower.(P.E.1)

Examples of general controls would include all of the following except: a. The use of the systems development life cycle approach for implementing new programs. b. The use of check digits when inputting customer information. c. The use of grandfather-father-son techniques of file reconstruction. d. Using effective passwords to prevent unauthorized users access to the accounting information system.

The use of check digits when inputting customer information.

Examples of general controls would include all of the following except: a. Using effective passwords to prevent unauthorized users access to the accounting information system. b. The use of the systems development life cycle approach for implementing new programs. c. The use of check digits when inputting customer information. d. The use of grandfather-father-son techniques of file reconstruction.

The use of check digits when inputting customer information.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? a. The establishment of a hotline for reporting unethical behavior. b. The posting of the code of ethics in the company workplace. c. The violation of the code of ethics by senior management. d. The establishment of a chief ethics officer.

The violation of the code of ethics by senior management.

Which of the following beliefs will narrow the audit expectation gap? a. An unmodified audit opinion is an indicator of complete accuracy of the financial statements. b. There is no guarantee the auditor will find all material fraud, should fraud have occurred. c. The auditor is providing complete assurance. d. The auditor is guaranteeing the future viability of the entity.

There is no guarantee the auditor will find all material fraud, should fraud have occurred.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: a. Obsolete inventory has not yet been reduced to fair market value. b. The aging of accounts receivable was improperly performed in both years. c. There was an improper cutoff of sales at the end of the year. d. An unusually large receivable was written off near the end of the year.

There was an improper cutoff of sales at the end of the year.

Which of the following statements is correct concerning an auditor's required communication with those charged with governance? a. This communication is required to occur before the auditor's report on the financial statements is issued. b. If matters are communicated in writing, the report is required to be distributed to both those charged with governance and management. c. This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved. d. If matters are communicated in writing, the report is appropriate for general use.

This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

Which of the following statements is correct concerning an auditor's required communication with those charged with governance? a. This communication is required to occur before the auditor's report on the financial statements is issued. b. This communication should include management changes in the application of significant accounting policies. c. Any significant matter communicated to those charged with governance also should be communicated to management. d. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

This communication should not include management changes in the application of significant accounting policies.

Which of the following is most indicative of fraudulent activity? a. Bank reconciliation has no outstanding checks or deposits older than 15 days. b. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later. c. Numerous cash refunds have been made to different people at different addresses around the country. d. Internal auditors locate several credit memos to support reductions of customers' balances all signed by one high level accounting manager.

Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.

Which of the following is the most indicative of fraudulent activity? a. Numerous cash refunds have been made to different people at different addresses around the country. b. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later. c. Internal auditors locate several credit memos to support reductions of customers' balances all signed by one high level accounting manager. d. Bank reconciliation has no outstanding checks or deposits older than 15 days.

Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.(P.E.1)

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as: a. Time tickets with invalid job numbers. b. Payroll checks with unauthorized signatures. c. Overtime not approved by supervisors. d. Deductions not authorized by employees.

Time tickets with invalid job numbers.

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding? a. To enable the auditor to accurately identify significant deficiencies in internal control. b. To decide whether it will be necessary to perform analytical procedures. c. To allow the auditor to more accurately perform tests of controls. d. To assist the auditor in accurately interpreting information obtained during an audit.

To assist the auditor in accurately interpreting information obtained during an audit.

The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is a. To make consulting suggestions to the entity's management. b. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. c. To determine the nature, timing, and extent of substantive procedures to be performed. d. To determine whether the entity has changed any accounting principles.

To determine the nature, timing, and extent of substantive procedures to be performed.

Proper supervision of assistants is required for all of the following reasons, except: a. To ensure that the work performed by assistants is consistent with the conclusions presented in the report. b. To stay informed regarding significant accounting and auditing questions, new developments, and material problems. c. To ensure that the work performed by assistants provides the professional development they will need to advance within the firm. d. To ensure that the work performed by assistants is adequate to accomplish the objectives of the engagement.

To ensure that the work performed by assistants provides the professional development they will need to advance within the firm.

What is the primary purpose of reviewing conflict-of-interest statements signed by members of management? a. To identify transactions with related parties. b. To consider limitations of internal control. c. To obtain an understanding of business processes. d. To assess control risk.

To identify transactions with related parties.

What is the primary purpose of reviewing conflict-of-interest statements signed by members of management?

To identify transactions with related parties.(P.E.1)

A CPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is

To minimize the likelihood of association with client whose management lacks integrity.

Which of the following factors has a direct relationship with sample size in an attributes sampling application? Tolerable Rate of Deviation: Expected Population Deviation Rate:

Tolerable Rate of Deviation: No Expected Population Deviation Rate: Yes

Which of the following factors used to determine sample size is normally based on the extent to which the audit team expects to rely on the internal control being examined? a. Sample rate of deviation. b. Tolerable rate of deviation. c. Expected population deviation rate. d. Allowance for sampling risk.

Tolerable rate of deviation.

Identify the type of audit procedure and the related audit objective satisfied by the following procedure: Compare amounts on receiving reports to vendors' invoices and entries in the acquisitions journal.

Tracing - X Completeness - C(P.E.1)

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? a. Significant deficiencies in internal control previously communicated to management are not corrected. b. Management places little emphasis on meeting earnings projections. c. Transactions selected for testing are not supported by proper documentation. d. The board of directors makes all major financing decisions.

Transactions selected for testing are not supported by proper documentation.

An internal control questionnaire (ICQ) contains the following question: "Does a single individual receive and list cash receipts and perform posting to sales and general ledgers?" What action should an auditor take if the manager of accounting responds "yes" to the question? a. Treat it as a potential control weakness and perform appropriate testing. b. Include it with other reportable findings in next year's audit report. c. No action is required because "yes" responses on an ICQ indicate the presence of good control. d. Statistically sample the response along with all other "yes" responses to verify their accuracy.

Treat it as a potential control weakness and perform appropriate testing.

T/F An auditor is required to attempt communication with all predecessors involved with the client since the last audit was completed. This is done primarily because each predecessor, having served at different times and for different lengths of time, may have different knowledge about the client.

True

An auditor obtains knowledge about a new client's business and its industry to: a. Understand the events and transactions that may have an effect on the client's financial statements. b. Develop an attitude of professional skepticism concerning management's financial statement assertions. c. Evaluate whether the aggregation of identified misstatements causes the financial statements taken as a whole to be materially misstated. d. Make constructive suggestions concerning improvements to the client's internal control.

Understand the events and transactions that may have an effect on the client's financial statements.

An auditor's flowchart of a client's information system relevant to financial reporting is a diagrammatic representation that depicts the auditor's: a. Identification of weaknesses in the system. b. Assessment of the control environment's effectiveness. c. Assessment of control risk. d. Understanding of the system.

Understanding of the system.

An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters? a. Method of sampling to be used. b. Preliminary judgments about materiality levels. c. Nature of reports to be rendered. d. Understanding the client's operations and business.

Understanding the client's operations and business.

An explanatory paragraph following the opinion paragraph of an auditor's report describes an uncertainty as follows: As discussed in Note 10 to the financial statements, the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. What type of opinion should the auditor express under these circumstances?

Unqualified

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Immaterial scope limitation.

Unqualified

In the scenario listed below, indicate which of the following types of opinions should be rendered on the entities financial statements. Scenario: Immaterial GAAP departure.

Unqualified Opinion

Which of the following opinions are appropriate when there is a restriction on the scope in which the auditor is unable to obtain sufficient appropriate evidence regarding internal control over financial reporting?Unqualified: Adverse: Qualified:

Unqualified: No Adverse: No Qualified: No

The objective of performing analytical procedures in planning an audit is to identify the existence of: a. Acts of noncompliance with laws and regulations that went undetected because of internal control weaknesses. b. Recorded transactions that were not properly authorized. c. Related party transactions. d. Unusual transactions and events.

Unusual transactions and events.

When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor's best course of action in such situations? a. Use audit software to perform analytical procedures. b. Assess the control risk as high. c. Use generalized audit software to extract evidence from client databases. d. Perform limited tests of controls over electronic data.

Use generalized audit software to extract evidence from client databases.

Using AICPA sample evaluation tables, determine the conclusion from a statistical sample of internal controls when a sample of 125 documents indicates five deviations if the tolerable rate of deviation is 5 percent, the expected population deviation rate is 2 percent, and the allowance for sampling risk is 3 percent. a. Accept the evidence as support for assessing a low control risk because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation. b. Use the evidence to assess a higher control risk than planned because the tolerable rate of deviation plus the allowance for sampling risk exceeds the expected population deviation rate. c. Accept the evidence as support for assessing a low control risk because the tolerable rate of deviation less the allowance for sampling risk is less than the expected population deviation rate. d. Use the evidence to assess a higher control risk than planned because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.

Use the evidence to assess a higher control risk than planned because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? a. Usual trade credit from suppliers is denied. b. Restrictions on the disposal of principal assets are present. c. Arrearages in preferred stock dividends are paid. d. Significant related party transactions are pervasive.

Usual trade credit from suppliers is denied.

A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to a. Verify the performance of machine operations that leave visible evidence of occurrence. b. Utilize the speed and accuracy of the computer. c. Substantiate the accuracy of data through self-checking digits and hash totals. d. Gather and store large amounts of supportive audit evidence in machine-readable form.

Utilize the speed and accuracy of the computer.

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count? a. Posting and summarization of inventory transactions. b. Verification of existence of inventory. c. Validation of purchase transactions. d. Authorization of the manufacturing orders.

Verification of existence of inventory.

In which of the following circumstances would an auditor expect to find that an entity had implemented automated controls to reduce risks of misstatement? a. When misstatements are difficult to define. b. When large, unusual, or nonrecurring transactions require judgment. c. When transactions are high volume and recurring. d. When errors are difficult to predict.

When transactions are high volume and recurring.

Which of the following is not an inquiry the auditor should make to identify the risks of material misstatement due to fraud? a. Whether there are any particular business segments for which a risk of fraud may be more likely to exist. b. Whether management is aware of any allegations of fraud. c. Whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud. d. How management communicates to employees its views on acceptable business practices.

Whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud.

Which of the following factors affecting the risk associated with a control is not a consideration when designing the current-year audit procedures in an audit of internal control over financial reporting for an issuer? a. The results of the previous years' testing of the control. b. The nature, timing, and extent of procedures performed in previous audits. c. Whether there have been changes in the operation of a key control since the previous audit. d. Whether the control has been documented in flowchart or narrative form.

Whether the control has been documented in flowchart or narrative form.

Which of the following factors affecting the risk associated with a control is not a consideration when designing the current-year audit procedures in an audit of internal control over financial reporting for an issuer? a. Whether the control has been documented in flowchart or narrative form. b. The nature, timing, and extent of procedures performed in previous audits. c. Whether there have been changes in the operation of a key control since the previous audit. d. The results of the previous years' testing of the control.

Whether the control has been documented in flowchart or narrative form.

Rules issued under the Sarbanes-Oxley Act of 2002 prohibit a registered accounting firm from performing an audit at a public company if any person serving as the public company's chief executive, chief financial or chief accounting officer, or controller or chief accounting officer worked for the registered accounting firm within the preceding: a. Within three years of the current audit. b. Within five years of the current audit. c. Within one year before the current audit. d. Within two years of the current audit.

Within one year before the current audit.

Which of the following events least likely would indicate the existence of related party transactions? a. Writing off obsolete inventory to net realizable value just before year end. b. Borrowing funds at an interest rate significantly below prevailing market rates. c. Maintaining compensating balance arrangements for the benefit of principal stockholders. d. Making a loan with no scheduled date for the funds to be repaid.

Writing off obsolete inventory to net realizable value just before year end.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. A lack of competition in the entity's industry, accompanied by increasing profit margins. b. Year-end adjustments by the entity that significantly affect financial results. c. Management's disclosure of unresolved litigation and contingent liabilities. d. The audit committee's approval of the initial selection of accounting principles.

Year-end adjustments by the entity that significantly affect financial results.

The following are activities that occurred at GoodenCo, a nonpublic company. GoodenCo shipped and billed goods to a customer in New York on December 23, and the sale was recorded on December 24, with the understanding that the goods will be returned on January 31 for a full refund plus a 5 percent handling fee. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

Yes, Fraudulent Financial Reporting

GoodenCo shipped and billed goods to a customer in New York on December 23, and the sale was recorded on December 24, with the understanding that the goods will be returned on January 31 for a full refund plus a 5 percent handling fee.

Yes, Fraudulent Financial Reporting (P.E.1)

The following are activities that occurred at GoodenCo, a nonpublic company. GoodenCo's accountant did not record checks written in the last few days of the year until the next accounting period to avoid a negative cash balance in the financial statements. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

Yes, Fraudulent Financial Reporting.

The following are activities that occurred at GoodenCo, a nonpublic company. The accountant recorded cash received in the first few days of the next accounting period in the current accounting period to avoid a negative cash balance. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

Yes, Fraudulent Financial Reporting.

The following are activities that occurred at GoodenCo, a nonpublic company. Discounts on checks to GoodenCo's largest vendor are never taken, even though the bills are paid before the discount period expires. The president of the vendor's company provides free use of his ski lodge to the accountant who processes the checks in exchange for the lost discounts. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

Yes, Misappropriation of Assets

The following are activities that occurred at GoodenCo, a nonpublic company. GoodenCo's controller prepared and mailed a check to a vendor for a carload of material that was not received. The vendor's chief accountant, who is a friend of GoodenCo's controller, mailed a vendor's invoice to GoodenCo, and the controller prepared a receiving report. The vendor's chief accountant deposited the check in an account he had set up with a name almost identical to the vendor's. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

Yes, Misappropriation of Assets

The following are activities that occurred at GoodenCo, a nonpublic company. GoodenCo's factory superintendent routinely takes scrap metal home in his pickup and sells it to a scrap dealer to make a few extra dollars. Required: 1. Identify which of these activities are frauds (Yes or No); and 2. For each fraud, state what type of fraud is occurring.

Yes, Misappropriation of Assets

During risk assessment, assume an auditor obtained the following information about an audit client: Ford Motors Inc. bases their management stock compensation and bonus plan structure entirely on whether the company exceeds the consensus analyst forecast of earning per share. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Motivation

During risk assessment, assume an auditor obtained the following information about an audit client: KMart's financial performance is threatened by a high degree of competition and market saturation. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Motivation

During risk assessment, assume an auditor obtained the following information about an audit client: Management of Kardashian Inc., has recently begun employing a strong conservative bias in all estimates, assumptions, and financial reporting matters. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Motivation

During risk assessment, assume an auditor obtained the following information about an audit client: Walmart's board of directors includes a majority of directors who are not independent of management. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Opportunity

During risk assessment, assume an auditor obtained the following information about an audit client: Facebook and other firms in the technology industry do not follow new accounting pronouncements that have resulted in explanatory paragraphs for consistency because they note that strict compliance is unduly costly and the company's stockholders and board of directors have repeatedly voted against the adoption of the pronouncement. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Rationalization

During risk assessment, assume an auditor obtained the following information about an audit client: The founder and CEO of Rocka Fella Records, Chay-Z, routinely uses the corporate petty cash fund to pay pedicures and baby food when he is low on cash. Chay-Z does not replenish the fund for the amounts because he owns 90% of the company and the amounts are immaterial, representing only 0.0001% of sales. Required: 1. Indicate whether the information indicates an increased risk for fraud (Yes or No); and 2. If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated. Choose, not applicable if the answer for 1. was No.

Yes, Rationalization

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: The individuals preparing the payroll do not perform other payroll duties (timekeeping, distribution of checks) or have access to payroll data master files or cash. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Existence or Occurence [2] = Payroll and Personnel

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: All sale of the company's common stock are approved by the board of directors. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Existence or Occurrence [2] = Finance and Investment

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: The cost accounting function is kept separate from the inventory and production departments. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Existence or Occurrence [2] = Production

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: Recorded sales are supported by sales orders, shipping documents, and invoices. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Existence or Occurrence [2] = Revenue and Cash Collection

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: A chart of accounts is used to classify each purchase entry. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Presentation and Disclosure [2] = Acquisition and Disbursement

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: All credit sales are posted to customers' individual subsidiary accounts. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Presentation and Disclosure [2] = Revenue and Cash Collection

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: All significant accounting estimates related to determining fair market value of derivative instruments are reviewed by at least two members of senior management with knowledge and expertise in financial instruments. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Valuation or Allocation [2] = Finance and Investment

The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: Receiving reports are automatically and continuously posted to the perpetual inventory record. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies: A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested: I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment

[1] = Valuation or Allocation [2] = Production

The characteristics that distinguish computer processing from manual processing would not include: a. the possible concentration of control activities. b. a high potential for unauthorized access to data. c. a decrease of management supervision of operations. d. automatic initiation and execution of transactions.

a decrease of management supervision of operations.

A primary advantage of using computer-assisted audit techniques (CAATs) packages to audit the financial statements of a client that uses computerized information systems is that the auditor may: a. consider increasing the use of substantive tests of transactions in place of analytical procedures. b. access information stored on computer files even with a limited understanding of the client's hardware and software features. c. substantiate the accuracy of data by using self-checking digits and hash totals. d. reduce the level of required tests of controls to a relatively small amount.

access information stored on computer files even with a limited understanding of the client's hardware and software features.

Once the auditor has planned the application of audit data analytics, the auditor should _______. a. determine how much these procedures will increase the cost of the audit and advise management accordingly. b. access the data, make a copy of the client's data, and prepare the data for analysis. c. seek the approval of management with respect to the tests. d. access the data and prepare the data for the internal auditors to review.

access the data, make a copy of the client's data, and prepare the data for analysis.

In general, accountants should be under orders to record sales and accounts receivable when: a. all supporting documentation of shipping is in order. b. the terms are agreed upon. c. the customer's order is received. d. the item has been paid for.

all supporting documentation of shipping is in order.

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting

an inspection (P.E.1)

AU-C 315, Understanding the Entity and Its Environment, and Assessing the Risks of Material Misstatement, defines risk assessment procedures as _______. a. audit procedures performed to obtain an understanding of the auditor and its environment, including the entity's internal control, to identify and assess the risk of material misstatement at the financial statement level and relevant assertion levels, whether due to error or fraud. b. any procedure that involves international currency transactions. c. any procedure that was performed by the prior auditor, which is repeated by the current auditor. d. audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risk of material misstatement, at the financial statement level and relevant assertion levels - whether due to error or fraud.

audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risk of material misstatement, at the financial statement level and relevant assertion levels - whether due to error or fraud.

In order to provide reasonable assurance the audit must be performed with an attitude of professional skepticism. Which of the following is most correct regarding the "attitude" of professional skepticism? a. auditors should assume that management is incumbent in preparing financial statements b. auditors should assume that management is neither dishonest nor honest c. auditors should assume that management is honest and mistakes are unintentional d. auditors should assume that management is dishonest

auditors should assume that management is neither dishonest nor honest

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the: a. Procedures used to assure proper authorization of transactions. b. Process used to prepare significant accounting estimates. c. Safeguards used to limit access to computer facilities. d. Policies used to detect the concealment of fraud.

b. Process used to prepare significant accounting estimates.

The limitations of an audit are not caused by ________.

b. a guarantee that the financial statements are free from error.

Control strengths and weaknesses should be documented in audit documentation, sometimes called: a. bridge working papers. b. communications of significant deficiencies. c. questionnaires, narratives, and flowcharts. d. internal control letters.

bridge working papers.

Audit data analytics should _______. a. be customized to the individual client and industry. b. should be the same for both client and the industry in which they operate. c. should be the same for each client, but differ among industries. d. be tailored to the individual client but consistent across an industry.

be customized to the individual client and industry.

Williams, CPA, is using attributes sampling to test controls related to the completeness of purchasing transactions. Williams decided to select all purchase orders from September for testing. This is an example of a. block selection. b. random selection. c. haphazard selection. d. monthly selection.

block selection.

Those charged with governance are the:

board of directors and management of an entity.

The purpose of test data is to determine whether a. controls operate as described in responses to internal control questionnaire items and program flowcharts. b. the audit team's test data are consistent with the client's normal transactions. c. all possible combinations of valid data are correctly processed. d. every possible error is prevented or detected by the client's computer controls.

controls operate as described in responses to internal control questionnaire items and program flowcharts.

In assurance services, the term "information" refers to subject matter that is ______.

historical or prospective.

Audit data analytics (ADA) is effective for _______. a. identifying general types of misstatements only. b. none of these answers are correct. c. identifying general types of misstatements, as well as identifying specific transactions or accounts that are likely to be misstated. d. identifying specific transactions or accounts that are likely to be misstated only.

identifying general types of misstatements, as well as identifying specific transactions or accounts that are likely to be misstated.

Management fraud generally refers to

intentional distortions of financial statements

Substantive tests could involve _______. a. matching information in the accounting records with information on underlying documents. b. delegation to the internal audit function. c. withdrawing from the engagement. d. testing the client's system of internal control.

matching information in the accounting records with information on underlying documents.

Substantive tests could involve _______. a. matching information in the accounting records with information on underlying documents. b. withdrawing from the engagement. c. delegation to the internal audit function. d. testing the client's system of internal control.

matching information in the accounting records with information on underlying documents.

The nature of audit procedures can refer to the concept of

materiality (P.E.1)

A common problem with multinational organizations is _______. a. a lack of diversity due to a multinational workforce. b. recording dates in different formats. c. low cash reserves and retained earnings balances. d. use of the same currency in different sales territories.

recording dates in different formats.

Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement? a. senior management emphasizes that job evaluations are based on performance b. senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report c. senior management emphasizes that job rotation is a worthwhile corporate objective d. senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period

senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period

The essential advantages of a computer-assisted audit techniques (CAATs) package would not include the fact that: a. the ability to control and modify the program to meet an auditors' need. b. a large number of CAATs packages are currently available. c. software packages are always inexpensive. d. the same software can be used on different types of clients' computer environments.

software packages are always inexpensive.

Defining notable items depends on _______. a. neither the assertion being audited, nor the auditor's understanding of the business and industry. b. the assertion being audited, and the auditor's understanding of the business and industry. c. the assertion being audited only. d. the auditor's understanding of the business and industry only.

the assertion being audited, and the auditor's understanding of the business and industry

When the auditor uses audit data analytics, _______. a. the auditor is neither looking for anomalies, nor balances nor transactions that do not meet the auditor's expectations. b. the auditor is only looking for balances or transactions that do not meet the auditor's expectations. c. the auditor is looking for anomalies, or balances or transactions that do not meet the auditor's expectations. d. the auditor is looking for anomalies only.

the auditor is looking for anomalies, or balances or transactions that do not meet the auditor's expectations.

If the auditor is auditing revenues and identifies gaps in the sequence of pre-numbered sales invoices, _______. a. the auditor may be facing a valuation problem, even if the file reconciles with the general ledger. b. the auditor is unlikely facing a completeness problem, even if the file reconciles with the general ledger. c. the auditor may be facing a completeness problem, even if the file reconciles with the general ledger. d. the auditor is unlikely facing a valuation problem, even if the file reconciles with the general ledger.

the auditor may be facing a completeness problem, even if the file reconciles with the general ledger.

An example of a vouching procedure might be _______. a. requesting the internal audit function vouch the accuracy of all sales transactions. b. the auditor vouching the quantities on a sales invoice to the quantities on underlying shipping documents, the occurrence of a bill of lading, and prices to the sales order. c. confirming with the client's legal counsel that there is no litigation outstanding. d. the auditor vouching the quantities on a sales invoice to the quantities on underlying shipping documents, the existence of a bill of lading, and prices to the sales order.

the auditor vouching the quantities on a sales invoice to the quantities on underlying shipping documents, the existence of a bill of lading, and prices to the sales order.

When performing audit data analytics (ADA) as a risk assessment procedure, _______. a. the auditor is yet to obtain an understanding of the entity and its environment. b. the auditor should contact the prior auditor for assistance with this procedure. c. the auditor will have first obtained an understanding of the entity and its environment. d. the auditor will work closely with client management to confirm which risk assessment procedures they would prefer the auditor conduct.

the auditor will have first obtained an understanding of the entity and its environment.

Auditors would not normally issue a qualified opinion on the entity's financial statements when

the auditors lack independence with respect to the audited entity.

A set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as: a. control risk assessment. b. functional responsibilities. c. management assertions. d. the control environment.

the control environment.

As part of assessing the risk of material misstatement, the audit team must assess the control risk in the computerized processing system. Initially, the audit team must identify the overall processing scope of the system(s), which would include each of the following considerations except a. the programs and files that are accessed by the system in processing transactions. b. the types of transactions that are processed through the system. c. the type of output that is created as a result of processing transactions through the system. d. the specific control procedures that have been implemented by the client to prevent or detect misstatements that could occur based on the audit team's analysis.

the specific control procedures that have been implemented by the client to prevent or detect misstatements that could occur based on the audit team's analysis.

Auditors use brainstorming: a. to set materiality. b. to heighten management's awareness of fraud potential. c. to determine detection risk. d. to heighten the audit team's awareness of fraud potential.

to heighten the audit team's awareness of fraud potential.

The purpose of an audit strategy is:

to set the scope, timing, and direction for auditing each relevant asseration.

If the_________exceeds the___________ , the audit team would decide to rely on internal control as planned and maintain control risk at planned levels. a. expected population deviation rate; tolerable rate of deviation. b. tolerable rate of deviation; ULRD. c. tolerable rate of deviation; expected population deviation rate. d. ULRD; tolerable rate of deviation.

tolerable rate of deviation; ULRD.

Which of the following would most likely be deemed a direct-effect illegal act? a. violation of federal employment laws b. violation of federal environmental regulations c. violation of civil rights laws d. violation of federal income tax laws

violation of federal income tax laws

An issue addressed in the AICPA Guide to Audit Data Analytics is _______. a. how to ensure adherence to matching of revenues and expenses using audit data analytics. b. what to do when initial investigation identifies a small number of notable items. c. what to do when initial investigation identifies a large number of notable items. d. how to reconcile data analytics and revenue recognition.

what to do when initial investigation identifies a large number of notable items.

The auditor should make the same judgments about the relevance and reliability of information _______. a. after confirming its relevance with senior management. b. for all customers and vendors of a client. c. when making an electronic comparison, as the auditor would consider when making a manual comparison. d. for different audit clients within the same industry.

when making an electronic comparison, as the auditor would consider when making a manual comparison.

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