Audit Final
An audited entity company has not paid its 2015 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2016 audit, the 2015 audit fees must be paid before the: A. 2016 report is issued. B. 2017 fieldwork is started. C. 2016 fieldwork is started. D. 2015 report is issued.
A
Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must A. disclose the reasons for any qualification in the predecessor auditor's opinion. B. express an opinion on the current year statements alone and make no reference to the prior year statements. C. issue a standard comparative audit report indicating the division of responsibility. D. obtain written approval from the predecessor auditor to include the prior year's financial statements.
A
In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances A. jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement. B. jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance. C. jackson may accept a referral fee from the other CPA firm. D. jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.
A
King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n): A. unmodified opinion. B. unmodified opinion with an emphasis-of-matter paragraph. C. disclaimer of opinion. D. qualified opinion.
A
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: A. a system of quality control. compliance with generally accepted reporting standards. B. compliance with generally accepted reporting standards. C. a system of peer review. D. continuing professional education.
A
Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using A. A utilitarian perspective. B. A right-based approach. C. A justice-based perspective. D. Rule-based AICPA guidelines.
A
When an auditor expresses an adverse opinion, the opinion paragraph should include A. a direct reference to a separate paragraph disclosing the basis for the opinion. B. a description of the uncertainty or scope limitation that prevents an unqualified opinion. C. the principal effects of the departure from generally accepted accounting principles. D. the substantive reasons for the financial statements being misleading.
A
Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code? A. Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate. B. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. C. A requirement of most state laws calls for the profession to establish a code of conduct. D. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.
A
Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? A. Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary. B. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. C. A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues. D. Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character.
A
Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements? A. First standard. B. Second standard. C. Fourth standard. D. Third standard.
A
Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n): A. CPA firm that has been engaged to audit a former audit entity. B. disciplinary body created under state statute. C. authorized quality control review board. D. federal court that has issued a valid subpoena.
A
On receiving the cutoff bank statement, the auditor should vouch: A. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement. B. checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement. C. deposits listed on the cutoff statement to deposits in the cash receipts journal. D. deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
A. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.
In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or A. confirm the number of shares owned that are held by an independent custodian. B. correspond with the investee company to verify the number of shares owned. C. determine that the investment is carried at the lower-of-cost-or-market. D. inspect the audited financial statements of the investee company.
A. confirm the number of shares owned that are held by an independent custodian.
n confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding A. existence, rights and obligations, and completeness. B. rights and obligations. C. completeness. D. existence.
A. existence, rights and obligations, and completeness.
An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. A. One purpose of this procedure is to: A. seek information about loans from the banks. B. request that a cutoff bank statement and related checks be sent to the auditor. C. provide the data necessary to prepare a proof of cash. D. detect kiting activities that may otherwise not be discovered.
A. seek information about loans from the banks.
The primary evidence regarding year-end bank balances is documented in the: A. standard bank confirmations. B. interbank transfer schedule. C. outstanding check listing. D. bank deposit lead schedule.
A. standard bank confirmations.
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the A. treasurer. B. chief Accountant. C. internal Auditor. D. cashier.
A. treasurer.
Which of the following audit procedures would provide the least reliable evidence that the entity has legal title to inventories? Observation of physical inventory counts. Examination of paid vendors' invoices. Analytical review of inventory balances compared to purchasing and sales activities. Confirmation of inventories at locations outside the entity's facilities.
Analytical review of inventory balances compared to purchasing and sales activities.
A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of A. fieldwork. B. quality control. C. supervision and review. D. due professional care.
B
All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except: A. the auditor is under no obligation to perform audit procedures on this other information. B. the auditor must perform audit procedures on this other information. C. the auditor must request that material inconsistencies be corrected. D. the auditor must consider whether the other information is consistent with the information contained in the audited financial statements
B
An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee A. was unusually large. B. has not been paid and will not be paid for at least twelve months. C. has not been paid and the client has filed a voluntary petition for bankruptcy. D. was renegotiated during the prior year audit based on the need for expanded testing.
B
An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to A. annual audited financial statements issued by the investee companies. B. dividend record books produced by investment advisory services. C. stock indentures published by corporate transfer agents. D. stock ledgers maintained by independent registrars.
B
An auditor would issue an adverse opinion if A. a qualified opinion cannot be given because the auditor lacks independence. B. the statements taken as a whole do not fairly present the financial condition and results of operations of the company. C. the audit was begun by other independent auditors who withdrew from the engagement. D. a restriction on the scope of the audit was significant.
B
Comparative financial statements for a public company include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial statements. If the predecessor's report was unqualified, the successor should: A. request that the predecessor auditor reissue the prior year's report. B. indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion. C. express an opinion on the current year's statements alone and make no reference to the prior year's statements. D. obtain a letter of representations from the predecessor concerning any matters that might affect the successor's opinion.
B
During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh more heavily for the auditor in this instance? A. Moon management has the right to make company estimates. B. Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. C. Accounts Receivable as stated by Moon Co., might turn out to be fully collectible. D. The interests of Moon Co., the auditor, and the public should be weighed equally in the decision.
B
In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except: A. engagement performance. B. performance evaluation. C. supervision responsibilities. D. review responsibilities.
B
In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements? A. Unreasonable justification for a change in accounting principle. B. Inability of the auditor to obtain sufficient competent evidence. C. Departure from generally accepted accounting principles. D. Inadequate disclosure of accounting policies.
B
Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from: A. the entity's lack of experience with such litigation. B. a lack of sufficient evidence. C. a lack of insurance coverage for possible losses from such litigation. D. an inability to estimate the amount of loss.
B
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a A. List of violations that would cause the automatic suspension of a CPA's license. B. Set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain. C. Description of a CPA's procedures for responding to an inquiry from a trial board. D. List of specific crimes that would be considered as acts discreditable to the profession.
B
The quality control standards are concerned primarily with A. preventing legal action. B. a firm's monitoring of its practice. C. actions of individual auditors. D. disciplinary actions against individual auditors.
B
When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover A. only the current year, but the prior year's report should be presented. B. both years. C. only the current year, but the prior year's report should be referred to. D. only the current year.
B
Which of the following auditing 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. Inspecting title documents to verify whether any assets are pledged as collateral. B. Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.
B
Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report? A. A change in the companies included in combined financial statements. B. A change in accounting estimate. C. A correction of an error in principle. D. A change in accounting principle.
B
Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Comparing recorded dividends with a standard financial reporting service's record of dividends. C. Comparing recorded dividends with amounts appearing on federal information forms 1099. D. Utilizing analytical procedures and statistical sampling.
B. Comparing recorded dividends with a standard financial reporting service's record of dividends.
Which of the following procedures would be most important in the audit of an investment valued at fair value? A. Inquire of management's regarding the accuracy and reliability of the underlying data. B. Develop an independent estimate of the fair value measurement. C. Read the footnote disclosure related to the investment. D. Compare the balance in the investment account to the prior year.
B. Develop an independent estimate of the fair value measurement.
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions? A. Bank reconciliation. B. Proof of cash. C. Evaluate ratio of cash to current liabilities. D. Cash confirmation.
B. Proof of cash.
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier endorses the checks. B. The cashier posts the receipts to the accounts receivable subsidiary ledger cards. C. The cashier makes the daily deposit at a local bank. D. The cashier prepares the daily deposit.
B. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. The controller compares the current market prices of recorded investments with the brokers' advices on file. B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments. C. Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name. D. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.
B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments.
Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained? A. Purchase and sale of investments are executed on the specific authorization of the board of directors. B. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel. C. Direct access to securities in the safe-deposit box is limited to one corporate officer. D. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
B. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel.
As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is the major flaw in this audit procedure? A. Sending the request was meaningless because the account was closed before the year-end. B. The request was mailed by the assistant treasurer. C. The confirmation request was signed by the treasurer. D. The CPA did not sign the confirmation request before it was mailed.
B. The request was mailed by the assistant treasurer.
An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the: A. existence of unrealized gains or losses in the portfolio. B. completeness of recorded investment income. C. valuation of marketable equity securities. D. classification between current and noncurrent portfolios.
B. completeness of recorded investment income.
If fraud is suspected, auditors may complete all of the following procedures except: A. performing a proof of cash. B. footing the bank reconciliation and the outstanding checks listing. C. testing for kiting. performing extended bank reconciliation procedures, D. including detailed examination of reconciling items.
B. footing the bank reconciliation and the outstanding checks listing.
The audit firm's valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present: A. the entity owns a large and diverse portfolio of publicly traded stock. B. significant uncertainty exists in key inputs to the entity's valuation models. C. the entity has a financial instrument with a Level 2 input. D. the entity is a new audit client.
B. significant uncertainty exists in key inputs to the entity's valuation models.
A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): A. consistency modification. B. explanatory paragraph. C. unqualified opinion. D. "except for" qualified opinion.
C
Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit? A. He must refer to the qualification of the other auditor and qualify his report likewise. B. He must include the other auditor's report with his report but need not qualify his report. C. He need make no reference. D. He must include the other auditor's report with his report and give an explanation of its significance.
C
According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)? A. The office's managing partner (or partner equivalent) who determines the compensation of the attest engagement partner. B. The office's IT expert, who consulted with the engagement partner (or partner equivalent) regarding the client's IT system. C. The partner (or partner equivalent) in another office in a nearby city who regularly plays golf with the engagement partner (or partner equivalent). D. The office's partner (or partner equivalent) who monitors quality control over the attest engagement.
C
In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the interest is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA. A. 1 and 2. B. 1 and 3. C. 2 and 3. D. 1, 2, and 3.
C
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion? A. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. B. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. C. The financial statements fail to disclose information that is required by generally accepted accounting principles. D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
C
Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an) A. qualified report due to a scope limitation. B. qualified report due to a departure from GAAP. C. unqualified report with an explanatory/emphasis-of-matter paragraph. D. a standard unmodified auditor's report.
C
The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to A. enable the CPA firm to attest to the reliability of the client. B. satisfy the CPA firm's duty to the public concerning the acceptance of new clients. C. minimize the likelihood of association with clients whose management lacks integrity. D. anticipate before performing any fieldwork whether an unqualified opinion can be expressed.
C
Under the SEC's rules regarding independence, which of the following must an entity disclose? A. Only fees for systems implementation and design and nonaudit services performed by the audit firm. B. Only fees for the external audit. C. Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm. D. Only fees for internal and external audit services provided by the audit firm.
C
What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control? A. Guarantee that firms do not associate with clients whose management lacks integrity. B. Guarantee that firms will not be sued as a result of association with a client. C. Provide reasonable assurance that firms do not associate with clients whose management lacks integrity. D. Provide reasonable assurance that firms will not be sued as a result of association with a client.
C
When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. prepare prospective financial information to verify whether management's plans can be effectively implemented. B. issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements. C. consider the adequacy of disclosure about the entity's possible inability to continue as a going concern. D. project future conditions and events for a period of time not to exceed one year following the date of the financial statements.
C
When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements? A. A change in accounting principle causes the auditor to make a consistency modification in the current year's audit report. B. The prior year's financial statements are restated following the purchase of another company in the current year. C. A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated. D. A scope limitation caused a qualified opinion on the prior year's financial statements, but the current year's opinion is properly unmodified.
C
When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that: A. refers to the authoritative pronouncements that explain the income tax basis of accounting being used. B. emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards. C. states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles. D. justifies the use of the income tax basis of accounting.
C
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. Significant related party transactions are pervasive. B. Arrearages in preferred stock dividends are paid. C. Usual trade credit from suppliers is denied. D. Restrictions on the disposal of principal assets are present.
C
Which of the following is allowable for a CPA? A. The audit engagement partner (or partner equivalent) serves on the client's audit committee. B. An uncollateralized signature loan from a client. C. A used car loan from a banking client where the client has a lien on the car. D. Owning more than five percent of the outstanding shares of client stock in a retirement account.
C
Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct? A. Integrity. B. Due care. C. Reporting. D. Scope and nature of services.
C
Which of the following legal situations would be considered to impair the auditor's independence? A. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services. B. An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed. C. Actual litigation by the auditor against the present management, alleging management fraud or deceit. D. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services.
C
Which of the following would be considered a change that affects consistency? A. Change in accounting estimate. B. All of the other options are correct. C. Change in accounting principle. D. Change in classification and reclassification.
C
With respect to ethics, the rights-based approach A. suggests that auditors should always verify ownership of a client's material tangible assets. B. is primarily concerned with equity and impartiality. C. suggests that an individual's actions should not violate the rights of any individual. D. recognizes that decisions involve trade-offs between costs and benefits.
C
With respect to ethics, the utilitarian theory A. suggests that auditors should always verify ownership of a client's material tangible assets. B. suggests that an individual's actions should not violate the rights of any individual. C. recognizes that decisions involve trade-offs between costs and benefits. D. is primarily concerned with equity and impartiality.
C
Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? A. A designated member of the board of directors controls the securities in a bank safe-deposit box. B. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. C. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities. D. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.
C. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities? A. Recompute selected extensions and footings of dividend schedules and compare totals to the general ledger. B. Compare the amounts received with prior-year dividends received. C. Reconcile recorded earnings with the dividend earnings reported in the investment broker statement. D. Trace deposits of dividend checks to the cash receipts book.
C. Reconcile recorded earnings with the dividend earnings reported in the investment broker statement.
A primary purpose of the proof of cash is to A. investigate variances from expected cash balances. B. reconcile actual cash receipts and disbursements to budgeted receipts and disbursements. C. ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account. D. prevent fraud.
C. ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
The auditor should ordinarily mail confirmation requests to all banks with which the entity has conducted any business during the year, regardless of the year-end balance, since A. the mailing of confirmation forms to all such banks is required by generally accepted auditing standards. B. this procedure relieves the auditor of any responsibility with respect to non-detection of forged checks. C. the confirmation form also seeks information about indebtedness to the bank. D. this procedure will detect kiting activities that would otherwise not be detected.
C. the confirmation form also seeks information about indebtedness to the bank.
A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards? A. Professional ethics. B. Supervision and review. C. Accounting and review services. D. Quality control.
D
A scope limitation sufficient to preclude an unqualified opinion always will result when management A. requests that certain material accounts receivable not be confirmed. B. engages the auditor after the year-end physical inventory is completed. C. prevents the auditor from reviewing the working papers of the predecessor auditor. D. refuses to provide a representation letter acknowledging D. its responsibility for the fair presentation of the financial statements in conformity with GAAP.
D
A violation of the profession's ethical standards is least likely to occur when a CPA: A. forms an association—not a legally binding partnership—with two other sole practitioners and calls the association "Adams, Betts & Associates." B. receives a percentage of the amounts invested by the CPA's audit entities in a tax shelter with the entities' knowledge and approval. C. has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company. D. purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period.
D
A violation of the profession's ethical standards would most likely have occurred when a CPA A. purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period. B. made arrangements with a bank to collect notes issued by a client in payment of fees due. C. named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name. D. issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.
D
An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: A. necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." B. is considered an "except for" qualification of the opinion. C. violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. D. is appropriate and would not negate the unmodified opinion.
D
An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except: A. reference to the note to the financial statements that describes the basis of presentation. B. an opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting. C. a statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles. D. an opinion as to whether the basis of accounting used is appropriate under the circumstances.
D
Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Cravens will probably A. express an unqualified opinion on the balance sheet and income statement except for inventory. B. issue an adverse opinion. C. decline the engagement. D. issue a disclaimer of opinion.
D
Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: A. a qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph. B. an unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph. C. a qualified opinion or an adverse opinion. D. a qualified opinion or a disclaimer of opinion.
D
In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor A. learns that the other CPA issued an unqualified opinion on the subsidiary's financial statements. B. is unable to review the other CPA's audit programs and working papers. C. issues an unqualified opinion on the consolidated financial statements. D. is satisfied as to the other CPA's independence and professional reputation.
D
In which of the following circumstances would a CPA who audits XM Corporation lack independence? A. The CPA and XM's president are both on the board of directors of COD Corporation. B. The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company. C. The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile. D. The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.
D
In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? A. The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows. B. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements. C. The auditor wishes to emphasize that the entity had significant related-party transactions. D. The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion
D
When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may: A. accept the engagement, provided distribution of the auditor's report is limited to the entity's management. B. not accept the engagement unless also engaged to audit the full financial statements of the entity. C. not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion. D. accept the engagement, provided the auditor's opinion is expressed in a special
D
When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n) A. adverse opinion or a disclaimer of opinion. B. qualified opinion or a disclaimer of opinion. C. qualified opinion or an unqualified opinion. D. qualified opinion or an adverse opinion.
D
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A. Prenumbered remittance advices. B. Monthly bank reconciliations. C. Daily deposit of cash receipts. D. A bank lockbox system.
D. A bank lockbox system.
An auditor would most likely verify the interest earned on bond investments by: A. confirming the bond interest rate with the issuer of the bonds. B. testing the controls over cash receipts. C. vouching the receipt and deposit of interest checks. D. recomputing the interest earned on the basis of face amount, interest rate, and period held.
D. recomputing the interest earned on the basis of face amount, interest rate, and period held.
Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory? Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure. Tracing of test counts noted during the entity's physical count to the entity's summarization of quantities. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.
During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.
An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? Economic reorder quantity. Date of last purchase. Warehouse location. Quantity sold.
Economic reorder quantity.
Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? Independent comparisons of finished goods records with counts of goods on hand. Approval of inventory journal entries by the storekeeper. Segregation of functions between general accounting and cost accounting. Periodic reconciliation of work in process with job cost sheets.
Independent comparisons of finished goods records with counts of goods on hand.
Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? Subsidiary ledgers are periodically reconciled with inventory control accounts. Inventory manager does not have ability to record inventory transactions . Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down. Summary of the receiving reports is independently compared to the inventory status report.
Inventory manager does not have ability to record inventory transactions.
What is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory? Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. Review the management's inventory representation letter for accuracy. Observe the condition of merchandise and raw materials during the entity's physical inventory count. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.
Observe the condition of merchandise and raw materials during the entity's physical inventory count.
Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory? New product line where sales exceed production. Obsolete inventory. Manufacturing overhead was not allocated to the production process. Manufacturing salaries were recorded as administrative expenses.
Obsolete inventory.
Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? Complete recounts are performed by independent teams. Unit cost records are integrated with production-accounting records. Perpetual inventory records are maintained. Inventory balances are rarely at low levels.
Perpetual inventory records are maintained.
For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end? Production schedules. Materials requisitions. Receiving documents. Purchase orders.
Receiving documents.
Which of the following internal control activities is most likely to address the completeness assertion for inventory? Employees responsible for custody of finished goods do not perform the receiving function . Receiving reports are prenumbered and periodically reconciled. There is a separation of duties between payroll department and inventory accounting personnel. The work-in-process account is periodically reconciled with subsidiary records.
Receiving reports are prenumbered and periodically reconciled.
Which of the following best describes the occurrence assertion for inventory? Recorded inventory transactions actually happened. Purchase requisitions initiated by authorized personnel. All inventory is recorded. Inventory properly accumulated from journals and ledgers.
Recorded inventory transactions actually happened.
A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice A. used a records-retention agency to store the CPA's working papers and client records. B. served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff. C. referred life insurance assignments to the CPA's spouse, who is a life insurance agent. D. failed to file his personal tax return.
a
In an audit of inventories, an auditor would least likely verify that all inventory owned by the entity is on hand at the time of the count. damaged goods and obsolete items have been properly accounted for. the financial statement presentation of inventories is appropriate. the entity has used proper inventory pricing.
all inventory owned by the entity is on hand at the time of the count.
Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist? a. Management's key assumptions are subject to volatility. B. The entity does not have control weaknesses in its valuation processes. C. Management is objective and transparent in their assumptions. D. The entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an active market.
a. Management's key assumptions are subject to volatility.
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? a. Reimbursement of the fund from the general cash account occurs twice or more each week. B. The custodian occasionally uses the cash fund to cash employee checks. C. The custodian endorses reimbursement checks. D. Reimbursement vouchers are not prenumbered.
a. Reimbursement of the fund from the general cash account occurs twice or more each week.
When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that: goods observed during the physical count are pledged or sold. all goods purchased before year-end are received before the physical inventory count. all goods owned at year-end are included in the inventory balance. no goods held on consignment for customers are included in the inventory balance.
all goods owned at year-end are included in the inventory balance.
With respect to ethics, the justice-based approach A. suggests that auditors should always verify ownership of a client's material tangible assets. B. is primarily concerned with equity and impartiality. C. suggests that an individual's actions should not violate the rights of any individual. D. recognizes that decisions involve trade-offs between costs and benefits.
b
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? a. Notes payable and notes receivable. b. Notes receivable and interest income. c. Interest income and interest expense. d. Accrued interest receivable and accrued interest payable.
b. Notes receivable and interest income.
To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or: a. determines the market price per share at the balance sheet date from published quotations. b. confirms the number of shares owned that are held by an independent custodian. c. relies on the entity's internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed. d. confirms the number of shares owned with the issuing company.
b. confirms the number of shares owned that are held by an independent custodian.
Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who: compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory. obtain receipts for the transfer of completed work to finished goods prepare a completed production report. are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis. issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued.
compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.
The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that: production orders are prenumbered and signed by a supervisor. independent internal verification of activity reports is established. transfers to the finished goods department are documented by a completed production report and a quality control report. custody of work in process and finished goods is properly maintained.
custody of work in process and finished goods is properly maintained.
All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence except: A. human resource services. B. management functions. C. all of the above are seen by the SEC as impairing independence. D. some specific tax services. E. information systems design and implementation
d
Tests to help identify the __________ of controls help to evaluate the client's internal control structure. idea need intent effectiveness creation
effectiveness
An auditor's tests of controls over the issuance of raw materials to production would most likely include: observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual. examination of materials requisitions and reperformance of entity controls designed to process and record issuances. reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. inquiry of the custodian about the procedures followed when defective materials are received from vendors.
examination of materials requisitions and reperformance of entity controls designed to process and record issuances.
Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company holds the shipping documents for the merchandise issued in the company's name. holds legal title to the merchandise. has paid for the merchandise. has physical possession of the merchandise.
holds legal title to the merchandise.
An auditor generally tests physical security controls over inventory by inspection and recomputation. inquiry and observation. test counts and cutoff procedures. examination and reconciliation.
inquiry and observation.
Auditors are most likely to ensure that no production activity is scheduled prior to observing physical inventory. completing the book to physical adjustment. determining the amount of consigned inventory. determining standard costs.
observing physical inventory.
The safeguarding of inventory most likely includes comparison of the information contained on the purchase requisitions, purchase orders, receiving reports, and vendors' invoices. application of established overhead rates on the basis of direct labor hours or direct labor costs. periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count. analytical procedures for raw materials, goods in process, and finished goods that identify unusual transactions, theft, and obsolescence.
periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.
Failure to record inventory in the proper period can affect all of the following accounts except: cost of Goods Sold. receivables. prepaid Expenses. sales.
prepaid Expenses.
An entity's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record sales discounts. sales. purchases. purchase returns.
purchases
Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's __________. sample size records budget projection internal controls
records
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items: included in the listing are represented by inventory tags. represented by inventory tags are bona fide. represented by inventory tags are included in the listing. included in the listing have been counted.
represented by inventory tags are included in the listing.
An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably:
request that the entity schedule the physical inventory count at the end of the year.
An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably: apply gross profit tests to ascertain the reasonableness of the physical counts. increase the extent of tests of controls of the inventory system. insist that the entity perform physical counts of inventory items several times during the year. request that the entity schedule the physical inventory count at the end of the year.
request that the entity schedule the physical inventory count at the end of the year.
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would review the entity's description of inventory policies and procedures. analyze inventory turnover statistics to identify slow-moving and obsolete items. analyze monthly production reports to identify variances and unusual transactions. perform test counts of inventory during the entity's physical count.
review the entity's description of inventory policies and procedures.
An entity's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record purchases. purchase discounts. sales. sales returns.
sales
An inventory turnover analysis is useful to the auditor because it may detect the existence of obsolete merchandise. the optimum automatic reorder points. methods of avoiding cyclical holding costs. inadequacies in inventory pricing.
the existence of obsolete merchandise.
A good step in auditing consignment inventory is comparing
the physical quantity on hand with the client's records of consigned goods.
Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of: completeness. existence. presentation. valuation.
valuation
