Auditing Final

Is the confirmation of cash and accounts receivable required according to auditing standards?

Yes but auditor's don't really because it is hard to create fraud in the cash or accounts receivable accounts. However, if you don't confirm it you must justify it and why, unless it is ineffective

The audit risk model includes the four risks listed below. Match the type of risk with the related definition. 1.Detection risk 2.Control risk 3.Inherent risk Audit risk A. The probability that material misstatements have occurred in transactions entering the accounting system. B. The probability that an auditor will give an inappropriate opinion on financial statements. C. The probability that the client's internal control policies and procedures will fail to detect material misstatements if they have entered the accounting system. D. The probability that audit procedures will fail to produce evidence of material misstatements.

A=inherent risk B=audit risk C=control risk D= detection risk

Which of the following is not a component of internal controls? A. Control environment B. Control activities C. Inherent risk D. Monitoring

c

Which of the PCAOB assertions (A-E) are best verified by the following audit procedures (1-4)? 1. Confirming inventory held on consignment by the client with independent third party. 2. Consulting the Wall Street Journal for year-end prices of securities held by the client. 3. Physically examine all major property and equipment additions. 4. Review the aged trial balance for significant past due accounts.

1. B. Rights and obligations 2. C. Valuation or allocation 3. A. Existence or occurrence 4. C. Valuation or allocation

ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. The auditors performed the audit procedures listed 1-3. For each audit procedure select the ASB transaction assertion that is most likely being tested. 1. The auditor reviewed the shipping documents to check the date that product was shipped to XYZ Company. 2. The auditor reviewed the shipping documents to ensure that all product included in the sales revenue to XYZ had been shipped. 3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been properly billed.

1. C. Cutoff 2. B. Completeness 3. D. Accuracy

Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit procedures listed 1-5. For each audit procedure select the ASB balance assertion that is most likely being tested. 1. The auditors walked through the warehouse looking for obsolete inventory. 2. The auditors compared invoices received from suppliers with the cost of inventory listed in the inventory accounts. 3. The auditors reviewed purchase orders to determine if any inventory was on consignment. 4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs had been included in inventory costs. 5. The auditors selected items from the inventory and reviewed inventory records to ensure these items were included in those records.

1. E. Valuation 2. D. Accuracy 3. B. Rights and obligations 4. E. Valuation 5. C. Completeness

Which of the following types of auditors' reports does not require an additional paragraph to support the opinion? A. Unmodified opinion B. Adverse opinion C. Qualified opinion D. Disclaimer of opinion

a

After checks are signed for vendor invoices, why should vouches be marked "paid" or otherwise mutilated?

There's a record of it so it most likely will not be paid again

An audit team's responsibility would not include A. designing client's internal controls. B. documentation of understanding of a client's internal controls. C. communicating internal control deficiencies. D. assessing the effectiveness a client's internal controls.

a

"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion? A. Classification. B. Occurrence. C. Completeness. D. Cutoff.

b

Which of the following factors should an external auditor obtain updated information about then assessing an internal auditor's competence? A. The reporting status of the internal auditor within the organization. B. The educational level and professional experiences of the internal auditor. C. Whether policies prohibit the internal auditor from auditing areas where relatives are employed. D. Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.

b

An auditor selected items from the client's detailed inventory listing (that agreed to the financial statements). During the physical inventory observation, the auditor then found each item selected and counted the number of units on hand. Assuming that the amount on hand was the same as the amount in the client's detailed inventory listing, this procedure most likely would provide evidence concerning management's assertion of A. completeness. B. valuation. C. presentation and disclosure. D. existence. E. rights and obligations.

d

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using A. employee fidelity bonds. B. independently prepared mailroom prelists. C. daily check summaries. D. a bank lockbox system.

d

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of A. occurrence. B. accuracy. C. valuation or allocation. D. cutoff.

d

Which of the following events or activities may occur following the audit report release date? A. Interim testing B. Roll-forward work C. Subsequent events D. Subsequently discovered facts

d

Which of the following is a factor in the control environment? A. Segregation of duties B. Information processing C. Performance reviews D. Management's philosophy and operating style

d

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? A. The entity has rights to the inventory. B. Inventory is properly valued. C. Inventory is properly presented in the financial statements. D. Inventory is complete.

d

Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments? A. Obtaining a description and evaluation of litigation, claims, and assessments from management B. Examining documentary evidence regarding litigation, claims, and assessments C. Reading minutes of meetings of stockholders, directors, and appropriate committees D. Performing analytical procedures

d

Which of the following would not be included in the supporting documents for a voucher? A. Purchase order. B. Vendor invoice. C. Receiving report. D. Blank check.

d

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements or state law. This audit procedure most likely is intended to verify management's assertion of A. existence or occurrence. B. completeness. C. valuation or allocation. D. presentation and disclosure.

D

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of A. presentation and disclosure B. Completeness C. Rights and Obligations D. existence

B

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1-5), select the control objective being tested by placing the correct letter in the blank. A. Existence B. Completeness C. Authorization D. Accuracy E. Classification F. Accounting and posting G. Proper period ______ 1. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date. ______ 2. The auditors traced a sample of daily cash reports to the cash receipts journal. ______ 3. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement. ______ 4. The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts. ______ 5. The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts.

G,b,a,d,f

An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that ultimately agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of A. completeness. B. valuation. C. presentation and disclosure. D. existence. E. rights and obligations.

a

An engagement letter is used primarily to A. ensure a clear contractual understanding of the services to be provided by the CPA. B. express an opinion on the financial statements. C. provide management representations to be included in the audit evidence. D. disclaim liability.

a

Before accepting an engagement to audit a new client, an auditor is required to A. make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. obtain the prospective client's signature to the engagement letter. C. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. discuss the management representation letter with the prospective client's audit committee.

a

Control risk is A. the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B. the probability that a material misstatement could occur and not be detected by auditors' procedures. C. the risk that auditors will not be able to complete the audit on a timely basis. D. the risk that auditors will not properly control the staff on the audit engagement.

a

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of A. Valuation. B. Existence. C. Completeness. D. Rights and obligations.

a

The confirmation of a cash balance provides primary evidence regarding which management assertion? A. Existence B. Valuation C. Allocation D. Completeness

a

The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of A. planning. B. supervision. C. information evaluation. D. quality assurance.

a

The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of A. planning. B. supervision. C. information evaluation. D. quality assurance

a

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

a

To whom should written representations be addressed? A. Auditors B. Board of directors C. Client D. Stockholders

a

Vouchers should be stamped PAID to A. Prevent duplicate payment. B. Generate a new purchase order. C. Indicate posting in the voucher register. D. Facilitate preparation of the bank reconciliation.

a

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. Test the operating effectiveness of such controls in the current audit. B. Document that reliance and proceed with the original audit strategy. C. Inquire of management as to the effectiveness of the controls. D. Report the reliance in the report on internal controls.

a

Which of the following is not a category of audit documentation? A. Temporary files B. Permanent files C. Audit administrative files D. Current documentation files

a

Which of the following is not considered a type of audit evidence? A. The entity's trial balance B. Auditors' calculations C. Physical observation D. Verbal statements made by client personnel

a

Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control? A. To serve as a basis for constructive suggestions B. To plan subsequent substantive tests C. To identify types of possible misstatements that may occur D. To consider factors that may affect the risk of material misstatement

a

Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness? A. All material long term liabilities are recorded. B. New long term liabilities and debt extinguishments are properly authorized. C. Terms, conditions, and restrictions relating to noncurrent debt are adequately disclosed. D. Disclosures of maturities for the next five years are accurate and adequate.

a

After obtaining an understanding of a client's financial reporting control activities, the auditor would next A. test the client's control activities. B. assess the final control risk. C. document the understanding obtained. D. plan the remainder of the audit work.

c

An audit plan of substantive procedures for cash would not include A. request a cutoff bank statement be mailed to the client. B. request client to prepare bank reconciliations. C. prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. D. obtain a written client representation concerning compensating balance agreements.

b

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. Matching purchase orders to accounts payable B. Verifying that approved spending limits are not exceeded C. Tracing sales orders to the revenue account D. Reviewing minutes of board meeting

b

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by A. confirmation and observation. B. observation and inquiry. C. analytical procedures and confirmation. D. inquiry and analytical procedures.

b

Audit evidence is usually considered sufficient when A. it is reliable. B. there is enough quantity to afford a reasonable basis for an opinion on financial statements. C. it has the qualities of being relevant, objective, and free from unknown bias. D. it has been obtained through random selection methods.

b

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A. Accounts receivable B. interest expense C. Accounts payable D. Travel and entertainment expense

b

If auditors assess control risk at the maximum level, they will tend to A. perform a great deal of additional tests of controls. B. perform a great deal of substantive testing during the audit. C. perform substantive tests at an interim date. D. perform more audit procedures using internal evidence.

b

In auditing accrued liabilities, an auditor's procedures most likely would focus primarily on management's assertion of A. existence or occurrence. B. completeness. C. presentation and disclosure. D. valuation or allocation.

b

In auditing the long term debt account, an auditor's procedures most likely would focus primarily on management's assertion of A. existence. B. completeness. C. allocation. D. rights and obligations.

b

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been A. authorized. B. implemented. C. tested. D. monitored.

b

The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions? A. Existence B. Rights and obligations C. Completeness D. Valuation

b

What is the primary purpose of obtaining written representations? A. To provide auditors with substantive evidence of important assertions B. To impress upon management its primary responsibility for the financial statements C. To allow auditors to communicate important internal control deficiencies to management D. To allow auditors to communicate important suggestions for improvement to management

b

When testing the completeness assertion for a liability account, an auditor ordinarily works from the A. financial statements to the potentially unrecorded items. B. potentially unrecorded items to the financial statements. C. accounting records to the supporting evidence. D. trial balance to the subsidiary ledger.

b

Which ASB balance assertion is of the most importance to auditors for long-term liabilities? A. Existence. B. Completeness. C. Rights and obligations. D. Valuation.

b

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. The integrity of entity's management is suspect. C. Procedures requiring separation of duties are subject to management override. D. Management fails to modify prescribed controls for changes in conditions.

b

Which of the following best describes the primary role and responsibility of independent external auditor? A. Produce a company's annual financial statements and notes. B. Express an opinion on the fairness of a company's annual financial statements and footnotes. C. Provide business consulting advice to audit clients. D. Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.

b

Which of the following is not considered one of the three factors increasing the probability of fraud? A. Motive B. Lack of training C. Opportunity D. Rationalization

b

Which of the following management policies would increase the probability of fraud in a company? A. Diversifying authority throughout divisions and subsidiaries in the organization B. Measuring performance and awarding bonuses based on short-term operating results C. Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work D. Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts

b

Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure? A. Purchase orders are not prepared for services acquired directly under authorization of department heads. B. The same person authorizes voucher packages and signs checks. C. Unacceptable goods are not scheduled on receiving reports. D. The same person signs checks and stamps vouchers PAID

b

Which of the following statements is most accurate regarding sufficient and appropriate documentation? A. Accounting estimates are not considered sufficient and appropriate documentation. B. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. D. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

b

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to A. Identify usually large purchases that should be investigated further. B. Verify that cash disbursements were for goods actually received. C. Determine that purchases were properly recorded. D. Test whether payments were for goods actually ordered.

c

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of A. Valuation or allocation. B. Existence or occurrence. C. Completeness. D. Rights and obligations.

c

Failure to record a liability generally results in A. An understatement of profit. B. An understatement of current ratio. C. An overstatement of profit. D. An overstatement of assets.

c

If auditors are appointed on January 3, 2014, the date of the financial statements is December 31, 2014, the date of the auditors' report is February 7, 2015 and the audit report release date is March 3, 2015, what is the appropriate date of the written representations? A. January 3, 2014 B. December 31, 2014 C. February 7, 2015 D. March 3, 2015

c

In a system of quality control, leadership responsibilities for quality within the firm are best characterized by A. basing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients. B. management's evaluation of the integrity and business reputation of the client. C. management's clear and consistent demonstration of its own commitment to quality control and high-quality work. D. assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.

c

Interim testing normally occurs between the ____ and the ____. A. beginning of the year under audit; audit report release date B. date of the financial statements; audit report release date C. beginning of the year under audit; date of the financial statements D. end of the year under audit; date of the auditors' report

c

Management fraud generally refers to A. unintentional mistakes. B. noncompliance. C. intentional distortions of financial statements. D. violations of GAAS.

c

Related party transactions A. Must be valued as if they were arm's length. B. Must be assumed to be valued differently than if they were arm's length. C. Must be disclosed in the financial statements. D. Must be disclosed in the financial statements and the auditor's report.

c

The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard? A. Independence B. Adequate technical competence and capabilities C. Adequate planning and supervision D. Gathering sufficient competent evidence

c

The primary objective of analytical procedures used near the end of an audit is to A. obtain evidence from details tested to corroborate management assertions B. obtain evidence on the validity of the assessment of control risk C. Assist auditors in evaluation the overall financial statement presentation D. identify areas that represent specific risks relevant to the audit

c

To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process? A. Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes. B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes. C. Recognize the financial assertions made in management's financial statements and footnotes. D. Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality.

c

What is the primary drawback with respect to the use of sampling? A. Individuals may fail to obtain a true understanding of the question they are examining. B. The time spent in planning and selecting the sample may exceed the time savings from examining only a subset of the items. C. The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined. D. Sampling cannot be used to examine account balances that are material to the financial statements.

c

Which element of a system of quality control strives to provide the firm with reasonable assurance that its policies and procedures are operating effectively? A. Human resources B. Leadership responsibilities for quality within the firm C. Monitoring D. Relevant ethical requirements

c

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

c

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

c

Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? A. Lending credibility to a client's financial statements B. Using statistical sampling techniques C. Acceptance and continuance of client relationships and specific engagements D. Membership in the Center for Public Company Audit Firms

c

Which of the following is the essential purpose of the audit function? A. Detection of fraud B. Examination of individual transactions to certify as to their validity C. Determination of whether the client's financial statement assertions are fairly state D. Assurance of the consistent application of correct accounting procedures

c

Which of the following procedures would a CPA most likely perform in the planning phase of 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 year's accruals and deferrals.

c

Which of the following should an auditor do when control risk is assessed at the maximum level? A. Perform fewer substantive tests of details B. Perform more tests of controls C. Document the assessment D. Document the control structure more extensively

c

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks? A. The relevant internal control components are not well documented. B. The internal auditor already has tested the relevant controls and found them effective. C. Testing the operating effectiveness of the relevant controls would not be efficient. D. The cost of substantive procedures will exceed the cost of testing the relevant controls.

c

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. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. C. An auditor on the engagement owns a financial interest in the stock of the client. D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

c

If an auditor is performing procedures related to the information that is contained in the client's pension footnote, he/she is most likely obtain evidence concerning management's assertion about A. rights and obligations. B. existence. C. valuation. D. presentation and disclosure.

d

Loan covenants A. Describe the collateral of the loan. B. Require the borrower to maintain certain financial characteristics. C. Describe the lender's responsibilities. D. Include all the above.

d

The audit failures of both Enron and WorldCom were examples in which the leadership responsibilities for quality work within the accounting firm were overshadowed by fears that losing a key client would A. result in shareholder losses from reduced company profitability. B. require additional audit procedures and increase the fees paid by the companies to the accounting firm. C. negatively influence the results of the firm's inspection. D. negatively impact individual auditors' performance evaluations.

d

The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions? A. Occurrence B. Completeness C. Accuracy D. Classification

d

The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions? A. Occurrence B. Rights and obligations C. Comprehensibility D. Understandability

d

The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. The auditor reviewed all work orders that were capitalized as part of the equipment costs. Which of the following is the ASB transaction assertion most closely related to the auditor's testing? A. Occurrence B. Completeness C. Accuracy D. Classification

d

The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing? A. Existence B. Completeness C. Rights and obligations D. Valuation

d

The probability that an auditor's conclusion based on a sample might be different from the conclusion based on the entire population identifies the concept of: A. Confidence levels. B. Nonsampling risk. C. Nonstatistical sampling. D. Sampling risk.

d

What type of evidence would provide the highest level of assurance in an attestation engagement? A. Evidence secured solely from within the entity. B. Evidence obtained from independent sources. C. Evidence obtained indirectly. D. Evidence obtained from multiple internal inquiries.

d

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated? A. Depreciation expense. B. Gain on disposal of equipment. C. Accounts payable. D. Repairs and maintenance expense.

d