Auditing Final Exam

which of the cahs transfers indicates and error in cash cutoff

3

a commitment is best described as

A) an agreement to commit the firm to a set of fixed conditions in the future.

which of the following audits can be regarded as generally being a compliance audit

IRS agents' examination of taxpayer returns

the aicpa's code of professional conduct requires cpas to maintain the confidentiality of client information. this rule would be violated if a cpa disclosed information without a client's consent as a result of

a request by a client's largest stockholder

when a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in

a separate paragraph

statements on standards for accounting and review services SSARS are issued by the

accounting and review services committee

The auditor is determining that the the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction related audit objective?

accuracy

when the auditor compares the cancelled check or direct deposit with the payroll journal for amount, they are concerned with the transaction-related audit objective of

accuracy

what type of report is issued when one or more material internal control weaknesses exist

adverse opinion

thet _____ is a standard of conduct for all members of the aicpa

aicpa code of professional conduct

internal controls are not designed to provide reasonable assurance that

all frauds will be detected

which of the following statements is the most correct regarding errors and fraud

an error is unintentional, whereas fraud is intentional

Before goods are shipped on account, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate.

approve the customer's credit

the aicpa's code of professional conduct requires independence for all

attestation engagements

With whom should the auditor communicate whenever he or she determines that senior management fraud may be present, even if the matter might be considered inconsequential? A) PCAOB B) audit committee C) an appropriate level of management that is at least one level above those involved D) the internal auditors

audit committee

the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and some established criteria is defined as

auditing

privity of contract exists between

auditor and client

the trait that distinguishes auditors from accountants is the

auditor's expertise in the accumulation and the interpretation of audit evidence

security controls should require that users enter an ___ before being allowed access to software and other related data files

authorized password

which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control

no adequate separation of duties

risk assessment procedures include

observation of the entity's operations

an internal control deficiency occurs when computer personnel

originate changes in customer master files

the accoutns payable department usually has responsibility for approving acquisitions for payment by comparing the details on the

purchase order, receiving report, and vendor's invoice

the document that accompanies the customer's payment is the

remittance advice

An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed? A) inquiry B) observation C) reperformance D) examination

reperformance

which of the following tests commonly occur together

substantive tests of transactions and tests of controls

which audit tests involved pysical examination and confirmation

tests of details of balances

which of the following is a correct statement regarding the SEC

the SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission

which staff level in a cpa firm manages the overall relationship with the client and manages the audit in general

the audit manager

which of teh following is correct regarding supplementary information

the auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements

the two major factors affecting acceptable audit risk are

the likely statement users and their intended uses of the statements

when shuold auditors generally assess a client's ability to continue as a going concern

throughout the entire audit process

the exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the

tolerable exception rate

The main focus taken by the auditor in verifying liability balances is on the discovery of:

understated liaibilites and ommitted liabities, both I and II

at what point in the acquisition and payment cycle do most companies first recognize the acquistion and related liability on their records

when the company receives teh goods or services from the vendor

the audit procedure referred to as proof of cash receipts is particularly useful to test

whether all recorded cash receipts have been deposited in the bank

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? A) Sale of a major subsidiary B) Adoption of accelerated depreciation methods C) Write-off of a substantial portion of inventory as obsolete D) Collection of 90% of the accounts receivable existing at December 31

write-off of a substainal portion of inventory as obsolete

How must significant deficiencies and material weaknesses be communicated to those charged with governance? A) Either oral or written communication is acceptable. B) Oral communication is required. C) Written communication is required. D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.

written communication is required

A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client?

yes because the stock is a direct financial interest

which of the following is an accurate statement regarding audit risk, audit failure, and business failure

because auditors gather evidence on a test basis, and because well-concealed frauds are difficult to detect, audit risk is unavoidable

when a qualified or adverse opinion is issued, the qualifying paragraph is inserted

between the scope and opinion paragraphs

responsibility for the issuance of new notes payable would normally be vested in the

board of directors

auditors respond to risk primarily by I changing the extent of testing II changing the types of audit procedures

both I and II

all corporations must have

capital stock

which of the following is likely to be detected as part of the audit of the bank reconciliation

cash received by the client after year end but included in cash receipts in the current year

the responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the

company management

which one of the following substantive analytical procedures would be most useful in altering the auditor to the possibility of obsolete inventory

compare inventory turnover ratio with previous years

a _____ control is a control elsewhere in the system that offsets the abscence of a key control

compensating

in which type of service does the cpa assemble the financial statements but provide no assurance to third parties

compilation

the test of details of balance procedure which requires the auditor to account for unused inventory tag numbers to make sure none have been deleted is associated with the audit objective of

completeness

the audit object to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to

confirm notes payable

the most important consideration in evaluation the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the

consistent accrual of these liabilities relative to those of preceding periods

a cpa firm may charge a contingent fee for

consulting services for a client for which they did not perform any attestation services

output controls need to be designed for which of the following data integrity objectives

detecting erros after the processing is completed

which of the following would be a subsequent discovery of facts which would not require a response by the auditor

discovery of management's intent to increase selling prices in the future

which of the following statements is most correct with respect to separation of duties

employees who authorize transactions should not have custody of the related assets

how often is the AICPA peer review program performed of an AICPA member CPA firm administered by a state CPA Society under the overall direction of the AICPA peer review board

every 3 years

which of the following audit procedures would be the most correct in dtermining the audit objective of existence for the equipment account in the fixed asset master file

exame vendor invoices and receiving reports

attributes sampling would be an appropriate method to use on which of the following procedures in an audit

examine a sample of duplicate sales invoices for credit approval by the credit manager

one of the causes of nonsampling risk is

failure to recognize exceptions

for the report containing a disclaimer for lack of independence, the disclaimer is in the

first and only paragraph

which document or record is used in the write-offf of uncollectible accoutns classes of transactions

general journal

auditing standards require that the audit report must be titled and that the title must

include the word "independent"

any company with stock listed on a securities exchange is require to engage a

independent registrar

inherent risk is often high for an accoutn such as

inventory

performance materiality is often set to a ))) level for notes payable

low

which of the follow statements regarding inherent risk is correct

most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as tehy gain more knowledge about the company

as directed by the sarbanes-oxley act

A) an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer.

which of the following is the correct definition of control deficitiency

a control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis

An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and

a critical assessment of the audit evidence

A partial-period bank statement and the related canceled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called: A) a four-column proof of cash. B) a year-end bank statement. C) a cutoff bank statement. D) a short-period bank statement

a cutoff bank statement

when the auditor determines that the financial statements are fairly stated but there is a nonindependent relationship between the auditor and the client, the auditor should issue

a disclaimer of opinion

fraud occurs when

a misstatement is made and there is both knowledge of its falsity and the intent to deceive

A restriction on the scope of the auditor's examination requires

a qualifying paragraph preceding the opinion paragraph

a misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of

a reasonable user of the financial statements

according to the principle established by the restatement of torts, foreseen users must be members of

a reasonably limited and identifiable user group

which of the following statements regarding the capital acquisition and repayment cycle is most correct

a relatively few transactions affect the cycle, and most are highly material

the cpa firm will lose its independence if

a staff auditor providing audit services to the client acquires stock in that client.

an individual who is not party to the contract between a cpa and the client, but who is known by both and is intended to receive certain benefits from the contract is known as

a third-party beneficiary

which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to congress

GAO auditor

a qualified opinion can be issued for which of the following? I when a limitation on the scope of the audit has occured II when the auditor lacks independence III when generally accepted accounting principles have not been used

I and III

auditors do not provide which of the following

absolute assurance on the financial statements including assuming responsibility for them

a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the

acceptable audit risk

The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the: A) finite correction factor. B) tolerable exception rate. C) acceptable risk of overreliance. D) estimated population exception rate.

acceptable risk of overreliance

recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called

accounting

to ensure proper segregation of duties, who should maintain the perpetual inventory master files

accounting department personnel

Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in: A) accounting estimate rather than a change in accounting principle. B) accounting principle rather than a change in accounting estimate. C) both accounting principle and accounting estimate. D) neither accounting principle nor accounting estimate.

accounting estimate rather than a change in accounting principle

which of the following is likely to be determined first when performing tests of details for accoutns receivable

accoutns receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger

The estimated unpaid obligations for services or benefits that have been received before the balance sheet date are: A) accounts payable. B) accounts receivable. C) unearned liabilities. D) accrued liabilities.

accrued liabilities

when the auditor is determining whether the client followed a consistent depreciation policy from period to period, and the client's depreciation calculations are correc,t the balance-related audit objective of ___ is being determined for depreciation expense

accuracy

the primary audit objectives to focus on when auditing accounts in the capital acquisition and repayment cycle are

accuracy and completeness

what category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented

adverse

an officer participates in litigation against the cpa firm. this is an example of which type of threat to complaince with which of the rules under the aicpas code of professional conduct

adverse interest

After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should: A) adjust the financial statements for the year under audit. B) add a paragraph to the audit report. C) advise the client to disclose the event in the notes to the financial statements. D) advise the client to delay issuing the financial statements until the economic loss can be determined.

advise the client to disclose the event in the notes to the financial statements

a member actively endorses an attest client's products or services, this is an example of which type of threat to complaince with which the rules under the aicpa's code of professional conduct

advocacy

Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) Accounts receivable master file B) Customer file C) Aged trial balance D) Sales register

aged trial balance

A written purchase order is a contractual document that is: A) an offer to buy goods or services. B) not enforceable if it is not in writing. C) a binding agreement between purchaser and vendor. D) an acceptance of a vendor's catalog offer to sell

an offer to buy goods or services

most cases of fradulent reporting involve

an overstatement of income

calculating the gross margin for the current audit year as a percent of sales and comparing it with the previous years si what type of evidence

analytical procedures

A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping? A) Reduce the customer's account by recording a sales return B) Write off the customer's account C) Apply the payment from another customer to the customer's account D) Reduce the customer's account by recording a sales allowance

apply the payment from another customer to the customer's account

In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the auditor must take great care in making sure that the significant legal requirements affecting the financial statements have been properly fulfilled and: a. any violations are reported to the SEC. b. are adequately disclosed in the financial statements. c. must issue a disclaimer if they haven't been fulfilled. d. any departures from the agreements are made with management's knowledge and consent.

are adequately disclosed in the financial statements

in the context of an audit of financial statements, substantive tests are audit procedures that

are designed to test for dollar misstatements

Tests of controls

are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk

because of teh importance of tests of controls and substantive tests of transactions for acquisitions and cash disbusrements, it is common in this audit area to use

attributes sampling

examine the cash receipts journal in the accounting system and compare the amounts received to the corresponding amoutns invoiced in the revenue accounting system and to the bank statement evidencing the deposit. this is an example of which of the following

audit procedure

To determine if a sample is truly representative of the population, an auditor would be required to: A) conduct multiple samples of the same population. B) never use sampling because of the expense involved. C) audit the entire population. D) use systematic sample selection.

audit the entire population

Auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist, is known as A) auditing through the computer. B) auditing around the computer. C) embedded audit module approach. D) parallel simulation testing.

auditing htrough the computer

who is responsible for establishing auditing standards for privately held companies

auditing standards board

when a client uses a service center for processing transactions

auditing standards require the auditor to test the service center's controls if the service center application involves processing significant financcial data

inventory is often a significant part of a company's current assets, because of its importance

auditors are required by auditing standards to observe the client taking a physical inventory count

when reviewing the summary of misstatements found in the audit

auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material

three common types of attestation services are

audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting

Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount: A) in the expense account. B) used in the prior period. C) authorized in the minutes of the board. D) paid in the subsequent period.

authorized in minutes of the board

which one of the following duties shold not be assigned to the purchasing department

authorizing the acuisition of goods

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk 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: A) increase materiality levels. B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk.

decrease detection risk

if the auditor decides to reduce acceptable audit risk, planned detection risk

decreases

The auditor obtained an aged list of receivables and traced the accounts to the master file, footed the schedule, and traced the amounts to the general ledger. Which balance-related audit objective was met?

detail tie-in

Narratives, flowcharts, and internal control questionnaires are three common methods of: A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure.

documenting the auditor's understanding of internal controls

which of the following is correct with respect to the design and use of business documents

documents shuold be prenumbered consecutively to facilitate control over missing documents

the legal right to perform audits is granted to a cpa firm by regulation of

each state

which of the following is not a primary consideration when assessing inherent risk

effectiveness of internal controls

which one of the following is more difficult to evaluate objectively

efficiency and effectiveness of operations

Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting. II. Separate reports on financial statements and internal control over financial reporting. A) I only B) II only C) Either I or II. D) Neither I nor II.

either I or II

Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include: A) employees of the CPA firm. B) employees of the audit client. C) other CPA firms engaged to do part of the audit work. D) specialists employed by the CPA firm to provide technical advice on the audit.

employees of the audit client

An auditor is vouching a sample of hourly employees from the payroll master file to approved time clock or time sheet data in order to provide evidence that: A) employees work the number of hours for which they are paid. B) payments are made at the contractual rate. C) product cost information is accurate. D) segregation of duties is present between the payroll function and the payment function for cash disbursements.

employees work the number of horus for which they are paid

___ protects the securit of electronic communication when information is transmitted and when it is stored

encryption

A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the

engagement letter

which of the following is the exception rate that the auditor expects to find before testing

estimated population exception rate

the general cash account is considered a significant account in almost all audits

even when the ending balance is immaterial

Auditors will generally send a standard inquiry letter to: A) only those attorneys who have devoted substantial time to client matters during the year. B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. C) those attorneys whom the client relies on for advice related to substantial legal matters. D) only the attorney who represents the client in proceeding where the client is defendant.

every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion

Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case which audit procedure should be used to detect any unrecorded liabilities? A) Examine cash disbursements for several weeks after the balance sheet date. B) Reconcile purchase orders to requisition orders. C) Reconcile purchase orders to receiving reports. D) Reconcile purchase orders to vendor invoices.

examine cash disbusments for several weeks after the balance sheet date

the most effective and effecient audit approach in the examination of the income statement would be which of the following

examine income statement accoutns concurrently with the related balance sheet accoutns

The most common audit test to verify equipment additions is to: A) examine vendors' invoices. B) perform an inventory of the fixed assets. C) confirm the additions with the vendors. D) trace the vendor invoices to the cash disbursements journal.

examine vendor invoices

you are auditing manufacturing company and testing the audit related objective of completeness for the equipment accounts. which of the following audit procedures is most likely to achieve your objective

examine vendor invoices of closely related accoutns such as repairs and maintenance

the auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accoutns that have already been collected. the primary control for preventing this fraud is

examining the uncollecctible account authorization form

which of the following is a factor that relates to incentives or pressures to commit fradulent financial reporting

excessive pressure for management to meet debt repayment requirements

the auditor's responsibilities section of the standard unmodified opinion audit report states that the auditor is

exercising professional judgment throughout the audit

When the auditor sends a confirmation to the broker-dealer, they are testing the balance-related audit objective of: A) detail tie-in. B) existence. C) cutoff. D) rights

existence

the majority of financial instruments are valued using

fair value estimates

in the flow of inventory and costs, when work in progress is credited, ___ is debited

finished goods

the primary accounting record for manufacturing equipment and other fixed assets is the

fixed asset master file

a positive confirmation is more reliabile evidence than a negative confirmation because

follow-up procedures are performed if a response is not received from the debtor

A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients. Which one of the following is generally not a defense?

foreseeable users

net realizable value of accounts receivable is equal to

gross accoutns receivable less allowance for uncollectible accounts

Which ratio do auditors find useful for assessing misstatements in sales, cost of goods sold, accounts receivable, and inventory?

gross profit percent

if the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor

has the responsibility of notifying financial statement users through the auditor's report

althrough the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies that

have to make significant judgments for accounting estimates

The purpose of the requirement in having communication between the predecessor and successor auditors is to: A) allow the predecessor to disclose information which would otherwise be confidential. B) help the successor auditor to evaluate whether to accept the engagement. C) help the client by facilitating the change of auditors. D) ensure the predecessor collects all unpaid fees prior to a change in auditor.

help the successor auditor to evalute whether to accept the engagement

which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees

human resources department

for financial statement audits, audotirs need to understand controls that are relevant to the audit in order to

identify and assess the risks of material misstatements

when determining the timing of the accoutns receivable confirmations

if accoutns receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule

research indicates that the most effective way to prevent and deter fraud is to

implement programs and controls that are based on core values embraced by the company

which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctations in earnings

income smoothing

The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for making decisions. A) balance sheet B) income statement C) statement of cash flows D) statement of stockholders' equity

income statement

If planned detection risk is reduced, the amount of evidence the auditor accumulates will: A) increase. B) decrease. C) remain unchanged. D) be indeterminate.

increase

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be: A) increased in number. B) reduced in number. C) not performed. D) unchanged from prior planned settings.

increase in number

An exception or deficiency found in a test of controls

indicates the likelihood of a misstatement

When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is: A) insufficient. B) inadequate. C) ineffective. D) inefficient.

ineffective

one of the causes of nonsampling risk is

ineffective audit procedures

becaues cash is the most desirable asset for people to steal, it has a higher

inherent risk

the measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as

inherent risk

________ is the auditor's examination of the client's documents and records to substantiate that the information is included in the financial statements. A) Inspection B) Recalculation C) Observation D) Verification

inspection

A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is: A) inventory as recorded on tags actually exists (existence). B) existing inventory is counted and tagged (completeness). C) inventory is counted accurately (accuracy). D) inventory is classified correctly (classification).

inventory as recorded on tags actually exists (existence)

when performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year ccurrently under audit. the auditor should

investigate the possibility that the client may have made an error in their cost of goods sold computation

an imprest petty cash fund

is being replaced by pre-approved purchase cards in many companies

A CPA is subject to criminal liability if the CPA

is knowingly involved with false financial statements.

under the sarbanes-oxley act, the audit committee of a public company

is responsible for oversight of the work of the independent auditor

what typically initiates the acquisitions and payment cycle

issuance of a purchase requisition or request for purchase of goods or services

which of the following is false concerning the principal cpa firm's alternatives when issuing a report when another cpa firm performs part of the audit

issue a joint report signed by both cpa firms

which of the following is a correct statement regarding block sampling

it is acceptable to use block sampling only if a reasonable number of blocks are used

The most serious shortcoming of the haphazard sample selection method is: A) it is not subject to statistical sampling methods. B) it is time consuming to use. C) it is costly to use. D) it is difficult to remain completely unbiased in the selection.

it is difficult to remain completely unbiased in the selection

the assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrong doing is called

joint and several liability

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for: A) kiting. B) lapping. C) income smoothing. D) channel stuffing.

kiting

when an employee who is authorized to make customer entries in the accoutns receivable subsidiary ledger purposefully enters cash received into the wrong custromer's accoutn, that employee may be suspected of

lapping

the auditor is examining the accounting entries made to the accumulated depreciation account during the year and notices a significant number and amounts of debits to the account. which of the following provides the most logical explanation?

large number of asset retirements

julia and lisa are sisters. julia is a cpa auditing the company where lisa works. julie's independence is imparied if

lia is the controller

some companies have customers send payments directly to an address maintained by a bank. this is called a ___ system

lockbox

Fictitious Revenues

lower accounts receivable turnover.

the pacob places responsibility for the reliability of internal controls over the financial reporting process on

management

when testing for fraudulent hours or fraudulent expense reports

management falsification of expense reports can be an indicator of disregard for internal controls and the potential for fraud in other areas

in order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that

management is responsible for the preparation of the financial statements

Due to a shortage of personnel, the client asks a member firm to assist with the authorization of accounting transactions. This is an example of which type of threat to compliance with the rules under the AICPA Code of Professional Conduct?

management participation

which of the following is not a factor that relates to opportunities to commit fradulent financial reporting

management's set of ethical values

which of the following is not a "cash equivalent"

marketable securities

auditing standards define ___ as the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonable be expected to influence the economic decisions of users made on the base of the financial statements

materiality

Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences? A) risk and emphasis on the completeness objective B) materiality and emphasis on the accuracy objective C) risk and emphasis on the classification objective D) materiality and emphasis on the occurrence objective

materiality and emphasis on the occurence objective

the purpose of establishing quality control policies and procedures to accept or continue a client relationship is to

minimize the likelihood of associating with a client whose management may lack integrity

the aicpa principles and the auditing standards should be viewed by practitioners as

minimum standards of performance that must be achieved on each audit engagement

___ is fraud that involves theft of an entity's assets

misappropriation of assets

when setting a preliminary judgment about materiality

more evidence is required for a low dollar amount than for a high dollar amount

When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that A) multiple users can access and update data files. B) the accounting information is only in one place. C) the database administrator may lack appropriate accounting knowledge. D) multiple users could all access the data simultaneously causing a system shutdown.

multiple users can access and update data files

If a potential loss on a contingent liability is remote, the liability usually is: A) disclosed in footnotes, but not accrued. B) neither accrued nor disclosed in footnotes. C) accrued and indicated in the body of the financial statements. D) disclosed in the auditor's report but not disclosed on the financial statements.

neither accrued nor disclosed in footnotes

The audit firm issues an audit report for its client. The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless: A) a development occurs that may affect the company's long term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.

new information comes to the auditor's attention concerning an event that occured prior to the date of the audit report that, if known, would have impacted the audit opinion

from which fo the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories

observation of physical inventory counts

you are auditing the inventory account and are concerned about the possibility of an inventory overstatement, what is the best audit procedure to detect damaged inventory

observe the condition of inventory during the client's physical count

the auditor's responsibilities section of the standard unmodified opinion audit report states that the audit is designed to

obtain reasonable assurance whether the statements are free of material misstatement

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? A) Obtaining client's agreement on the engagement letter B) Obtaining knowledge about the client's business and industry C) Touring the client's plant and offices D) Identifying related parties

obtaining client's agreement on the engagement letter

you have been assigned to the accoutns payable transaction cycle as part of your auditing responsibilities. you have decided to vouch a cample of entries from the accoutns payable master file to supporting documents. which assertion is this test of controls most likely to support

occurence

____ deals with potential overstatement and ___ deals with understatements (unrecorded transactions)

occurence; completeness

most auditors assess the risk of material misstatement as high for related parties and related-party transactions because

of the lack of independence between the parties

the main difference between job order and process costing systems is that

one accumulates costs by individual jobs and the other by particular processes

the sarbane's oxley act requires a cooling off period of _____ before a member of an audit team can work for a client in a key management position

one year

When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed:

one year from the date of the financial statements

Auditors typically rely on internal controls of their private company clients: A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. B) only if the controls are determined to be effective. C) only if the client asks an auditor to test controls. D) only if the controls are sufficient to increase Control Risk to an acceptable level.

only if the controls are determined to be effective

an examination of part of an organization's procedures and methods for the purpose of evaluating efficency and effectiveness is what type of audit

operational audit

which of the following is considered audit evidence

oral statements made by management, written communications, auditor observations Y Y Y

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is: A) overstatement or understatement of sales. B) overstatement or understatement of accounts receivable. C) overstatement or understatement of bad debt expense. D) overstatement or understatement of sales returns and allowances.

overstatement or understatement of bad debt expense

which of the following would generally not need to be approved by the board of directors

payment of a divident

when assessing risk control, the auditor must do all of the following except

perform the detailed test of balances

The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as A) the materiality range. B) the error range. C) tolerable materiality. D) performance materiality.

performance materiality

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:

performing a walkthrough

if most or all users' decisions that are based on the financial statements are likely to be significatly affected, the materiality level is

pervasive

which of the following is the most objective type of evidence

physical count of securities and cash

Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably A) eliminate tests of controls. B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff. D) place limited reliance on the work performed by the internal audit staff.

place limited reliance on the work performed by the internal audit staff

the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is

planned detection risk

analytical procedures are so important that they are required during the

planning and completion phases

which of the following would have the least impact in determining sample size

population size

____ is an automated fraud deterction tool offered by most banks

positive pay

a ___ is a list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and who has no access to the accounting records

prelisting of cash receipts

Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold" arrangement. This is an example of which of the following? A) significant accounting estimates B) fictitious revenue recorded C) premature revenue recognized D) alteration of cutoff documents

premature revenue recognized

when the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to

present the information in the audit report and to issue a qualified or an adverse opinion

a major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. tests to identify possible legal encumbrances would satisfy the audit objective of

presentation and disclosure

determining that the footnote disclosures related to long-term debt are accurate is an example of the ___ audit objective

presentation and disclosure

_____ is an attitude that includes a questioning mind, being alter to conditions that might indicate possible mistatements due to fraud or error, and a critical assessment of audit evidence

professional skepticism

the sarbanes-oxley act _____ a cpa firm from doing both bookkeeping and auditing services for the same public company client

prohibits

When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning: A) fictitious employees. B) authorization of wage rates. C) proper classification of payroll transactions. D) completeness of recorded transactions.

proper classification of payroll transactions

which of the following best describes one of the primary objectives of audit documentation

provide reasonable assurance that the audit was conducted in accordance with auditing standards

after the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated. management refused to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. the auditor should

provide the information in the report and modify the opinion

the standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as

prudent person concept

the organization that is responsible for providing oversight for auditors of public companies is called the

public company accounting oversight board

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the: A) Terms of the open purchase orders. B) Purchase cutoff procedures. C) Contractual commitments made by the purchasing department. D) Purchase invoices received on or around year end.

purchase cutoff procedures

If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded: A) sales. B) sales discounts. C) purchases. D) purchase discounts.

purchases

Refusal by a client to prepare and sign the representation letter would require a(n):

qualified opinion or a disclaimer of opinion

the method used by a cpa firm to ensure that the firm meets its professional responsibilities to clients and others is

quality control

Appropriateness of evidenceis a measure of the

quality of evidence

an advantage of using statistical sampling techniques is that such techniques

quantify sampling risk

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a: A) random sample. B) statistical sample. C) judgment sample. D) representative sample.

random sample

when dealing with financial instruments, the most difficult balance related audit objective to test is

realizable value

which balance-related audit objective is not relevant to an audit of prepaid expenses

realizable value

the auditor's responsibility section in an audit report states that "the standards require that we plan and perform the audit to obtain ))) assurance about whether the financial statements are free of material misstatement_ what type of assurance is given?

reasonable

a high but not absolute level of assurance is called

reasonable assurance

Receipt of ordered materials by the receiving department will generate the completion of a form called the: A) bill of lading. B) receiving report. C) materials requisition. D) inventory acquisition summary.

receiving report

An auditor is gathering evidence on the completeness assertion. To do so she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all: A) vendor invoices. B) purchase orders. C) receiving reports. D) cash disbursements for accounts payables.

receiving reports

the direct receipt of a confirmation from every bank with which the client does business is

recommended but not required by auditing standards

which of the following is a substantive test of transactions

reconcile the disbursements in the payroll journal with the disbursments on the payroll bank statement

When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: A) reduce acceptable audit risk and increase inherent risk. B) reduce inherent risk and control risk. C) increase inherent risk and control risk. D) increase acceptable audit risk and reduce inherent risk.

reduce acceptable audit risk and increase inherent risk

analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally

reduce the extent of tests of details of balances

auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee

regardless of materiality

with which of managemetn's assertions with respect to implementing internal controls is the auditor primarily concerned

reliability of financial reporting

all of the following are causes for the addition of an emphasis of a matter paragraph under both aicpa and pcaob standards except for

reports involving other auditors

a cample in which the characteristics of the sample are the same as those of the populationm is a

representative sample

A type of positive confirmation known as a blank confirmation: A) requests the recipient to fill in the amount of the balance. B) is considered less reliable than the regular positive confirmation. C) generates as high a response rate as the regular positive confirmation form. D) is used when the auditor is confirming several small balances.

requests the recepient to fill in the amount of the balance

auditing standards ___ that the basis used to determine the preliminary judgment about materiality bet documented in the audit files

require

Auditors are ________ to document the known and likely misstatements in the financial statements under audit. A) permitted B) required C) not allowed D) strongly encouraged

required

the foreign corrupt practices act fcpa of 1977

requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control.

which of the following forms of evidence would be least persuasive in forming the auditor's opinion about marketable securities and other investments held by the company

responses to auditor's questions by the president and controller regarding the investments account

auditing standards specifically require auditors to identify ___ as a fraud risk in most audits

revenue recognition

which of the following services provides the lowest level of assurance on a financial statement

review

the most important output control is

review of datat for reasonableness by someone who knows what the output should look like

for which of the following audit procedures would audit sampling not be appropriate

review sales transactions for large and unusual amounts

the audit objective that requires the auditor to determine that notes payable on the notes payable schedule are properly classified can be tested by performing the procedure to

review the notes to determine whether any are with related parties

the securities and exchange commission c an impose all but which of the following sanctions

revoke a cpa license

an auditor is reviewing the minutes of board meetings to determine whether any securities are pledge as collateral. this test of the details of balances relates to the audit objective of

rights

an auditor must inquire about consigned or customer inventory included on the clients premises to satisfy the balance related audit objective of

rights

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's: A) audit strategy. B) tests of controls. C) risk assessment procedures. D) tests of transactions.

risk assessment procedures

if material, all of the following are required to be separately disclosed in the financial statements except for

sales for the last ten days of the fiscal year

to test for recorded sales for which there were no actual shipments, the auditor vouches from the

sales journal to the shipping documents

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice

sales order

a ___ is a document for communicating the description, quantity, and related information for goods ordered by a customer

sales order

which of the following is the risk that an auditor will reach an incorrect conclusion because a cample is not representative of the population

sampling risk

a cpa performs bookkeeping services for a client and then performs an audit of those financial statements this is an example of a _____ threat

self-review

when positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. which of the following would not be considred an alternative procedure

send a second confirmation request

who is responsible for establishing a private company's internal control

senior management

which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement

senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period

the assessment against a defendant of that portion of the damage caused by the defendant's negligence is called

separate and proportionate liability

which type of misstatement is always a fraud

shipments made to nonexistent customers and recorded as sales

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were: A) received prior to the balance sheet date. B) shipped on or before the balance sheet date. C) both shipped and received prior to the balance sheet date. D) paid for in advance.

shipped on or before the balance sheet date

the financial interests of a cpa's family members can affect the cpa's independence, which of teh following parties would not be included as a direct financial interest of the cpa

sibling living in the same city as the cpa

a ___ exists if one or more control deficiencies exist athat are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting

signficant deficiency

when selecting staff for the audit engagement

staff assigned to the audit must be knowledgeable about the client's industry.

historically, auditing standards have been organized into theree categories, including

standards of field work

the use of the certified public accountant title is regulated by

state law through the licensing departments of each state

when a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger sizes, ___ is being used

stratified sampling

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for: A) contingent liabilities. B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events.

subsequent events

which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and deferred charges

substantive analytical procedures

which of the following further audit procedures are used to determine whether all six transaction related audit objectives have been achieved for each class of transactions

substantive tests of transacctions

financial instruments

such as derivatives can be used as a way of hedging

the process which requires the calculation of an interval and then selects the items based on the size of the interval is

systematic sample selection

the procedures used to test the effectiveness of internal controls are known as

test of controls

Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n)

test of details of balances

When auditing financial instruments, analytical procedures can be used to: A) test the reasonableness of interest and dividend income. B) test the year-end balance. C) determine if the financial instruments were properly valued. D) determine if the gain or loss on the sales were properly computed

test the reasonableness of interest and dividend income

Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals? A) Make inquiries of management and production personnel about the possibility of the disposal of assets. B) Review whether newly acquired assets replace existing assets. C) Test the valuation of fixed assets recorded in prior periods. D) Review plant modifications and changes in product line, taxes, or insurance coverage.

test the valuation of fixed assets recorded in prior periods

A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of: A) identifying employees who do not have proper work credentials. B) establishing a tightly controlled, fraud-free work environment. C) testing for nonexistent employees. D) identifying employees who have not submitted proper W-2 forms.

testing for nonexistent employees

which of the following procedures would most likely be performed in response to the auditors assessment of the risk of monetary misstatements in the financial statements

tests of details of balances

which of the following audit tests would be regarded as a test of controls

tests of the signatures on canceled checks to board of directors authroizations

when assessing whether the financial statements are auditable, the auditor must consider

that the integrity of management and the adequacy of accoutning records are the two primary factors determining auditability

which of the following is not an accurate statement regarding the acquisition and payment cycle

the accounting department should be responsible for receiving goods and preparing the receiving report

which party has the primary responsibility to oversee an organization's financial reporting and internal control process

the audit committee

When an audit client uses a service organization to manage their investment activity: A) the auditor can always rely on the internal controls of the service organization. B) the auditor must state in their audit opinion that the client uses a service organization. C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control. D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates

the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control

audit evidence obtained directly by the auditor will not be reliable if

the auditor lacks the competence to evaluate the evidence

when dealing with materiality

the auditor must bring any material misstatements to the client's attention.

when assessing the risk of material misstatements in the financial statements

the auditor must understand the client's business and industry

An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of: A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit. D) the final billing for audit services rendered.

the auditor's report

which of the following is a correct statement regarding the standard unmodified opinion audit report

the auditor's responsibilities paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed

If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims,

the auditors must modify their audit report to reflect the lack of available evidence

which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room

the cashier posts the receipts to the accounts receivable subsidiary ledger cards

in addition to confirm bank balances for your audit client, a bank confirmation would normally contain

the clients bank loans with due date, interest rate, and collateral requested

McKesson & Robbins Company is a well know audit case involving auditor responsibility. what occured at the mckesson & robbins company to change the way in which auditors audit inventory?

the company recorded nonexistent inventory

the most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on

the confirmation of accoutns receivable

the most important test of details of balances to determine the existence of recorded acconts receivable is

the confirmation of customers balances

when a company maintains its own records of stock transactions and outstanding stock, internal controls must be adequate to ensure that

the correct amount of dividends is paid to stockholders owning the stock on the dividend record date

an example of an indirect financial interest in a client would be

the covered member's ownership of a mutual fund that has an investment in the client

which of the following statements is true when the cpa has been engaged to perform an audit of financial statements

the cpa firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements

which of the following is not defined as an act discreditable in either the rules or the interpretations of the aicpa's code of professional conduct

the cpa firm's parter in charge was a passenger in a car driven by his wife. on the way home from the firm's christmas party, she was charged with driving while intoxicated

under which of the following circumstances would it be advisable for the auditor to confirm accoutns payable with creditors

the creditor statements are not available and internal control over payables is deficient

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:

the design and operating effectiveness of the controls

Smith, CPA has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client's refusal to allow this communication to occur would impact Rodgers decision concerning: A) the auditor's ability to design audit tests. B) possible scope exception due to lack of access. C) the desirability of accepting the prospective engagement. D) violation of the GAAP rules concerning consistency and comparability of financial information.

the desirability of accepting the prospective engagement

which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern

the entity is suing a competitor for a minor patent infringement

The objective of an audit of the financial statements is an expression of an opinion on:

the fairness of the financial statements in all material respects

in which of the following cicumstances would an auditor most likely express and adverse opinion

the financial statements are not in conformity with the FASB statement on loss contingencies

the audit report date on a standard unmodified opinion audit report indicates

the last day of the auditor's responsibility for the review of significant events that occured after the date of the financial statements

an example of a physical control is

the matching of employee fingerprints to a database before access to the system is allowed

when auditing accrued property taxes

the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceding year is used in the current year.

the underlying reason for a code of professional conduct for any profession is

the need for public confidence in the quality of service of the profession

three conditions are required for a contingent liability to exist. which of the following is not one of those conditions

the outcome must be resolved by a third-party

an adverse opinion is issued when the auditor believes

the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity iwth GAAP

) If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for: A) the penalties the client owes the IRS. B) the penalties and interest the client owes. C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged. D) the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.

the penalties and interest the client owes, plus the tax preparation fee the cpa charged

which of the follow statements is true regarding communcations between predecessor and successor auditors

the predecessor's response can be limited to stating that no information will be provided

the managemetns' responsibilities section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are

the responsibility of management

if the results of tests of controls support the design and operations of controls as expected, the auditor uses ___ control risk as the prelimiary assessment

the same

as a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because

the scope of the audit has been restricted

Prenumbered documents will only be useful for control purposes if A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period.

the sequence is accounted for periodically

which of the following is a correct statement regarding the shipment of goods

the shipping document is used to update the perpetual inventory records

when analyzing exceptions, the auditor should keep in mind that

they should determine the breakdown in the internal controls that allowed the exceptions to occur

an auditor should examine minutes of the board of directors' meetings

through the date of the audit report

a key internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received. this satisfied the transaction related audit object of

timing

The auditors primary purpose in auditing the client's system of internal control over financial reporting is: A) to prevent fraudulent financial statements from being issued to the public. B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements. D) to efficiently conduct the Audit of Financial Statements.

to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements

Why do auditors establish a preliminary judgment about materiality?

to help plan the appropriate evidence to accumulate

A useful starting point for becoming familiar with the client's inventory is for the auditor to: A) read the AICPA's Industry Audit Guide. B) review accounting theory covering special inventory problems. C) read the client's accounting manual. D) tour the client's facility.

tour the clients facility

the auditor is concerned that a client is failing to bill customers for shipments. an auditor procedure that would gather relevant evidence would be to

trace a sample of shipping documents to related duplicate sales invoices

an attest client threatens the member with not awarding future additional engagements to the firm if the firm does not agree with the client on a parciular accounting matter. this is an example of which type of threat to compliance with which of the rules under the aicpa's code of professional conduct

undue influence

the sarbanes oxley act of 2002 makes it a felony to destroy or create documents to impede or obstruct a federal investigation. those provisions were adopted following which of the following legal cases

united states v andersen

___ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement

utilities

You are the in-charge auditor for a company who has been an audit client for several years. Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment?

verification of the beginning balance in the equipment account

An auditor must obtain written client representations that might be signed by all but which of the following? A) Treasurer B) Chief financial officer C) Vice president of operations D) Chief executive officer

vice president of operations

when the auditor uses supporting evidence for amounts posted to account balances with documentary evidence, that process is called

vouching

which of the following best defines fraud in a financial statement auditing context

when the auditor suspects that fraud may be present, auditing standards require the auditor to obtain additional evidence to determine whether material fraud has occured

in auditing debits and credits to retained earnings, other than net income and dividents, the auditors first concern is

whether the transactions should have been included in retained earnings

the primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is

whether there are any restrictions on the payment of dividends

) In testing for cutoff, the objective is to determine: A) whether all of the current period's transactions are recorded. B) whether transactions are recorded in the correct accounting period. C) the proper cutoff between capitalizing and expensing expenditures. D) the proper cutoff between disclosing items in footnotes or in account balances.

whether transactions are required to provide reasonable assurance that the financial statements are free of both material errors and fraud

for effective internal control, employees maintaining the accoutns receivable subsidiary should not also approve

write-offs of customer accounts

which of the following is a component of general controls

back-up and contingency planning

The total of the individual employee earnings in the payroll master file should equal the total: A) balance of gross payroll in general ledger accounts. B) of the checks drawn to employees for payroll. C) gross payroll plus the total contributed by the employer for payroll taxes. D) gross pay for the current week's payroll.

balance of gross payroll in general ledger accounts

the total of the individual account balances in the accoutns receivable master file should equal the

balance of the accoutns receivable account in the general ledger

The primary emphasis in most tests of details of balances is on the: A) balance sheet accounts. B) revenue accounts. C) cash flow statement accounts. D) expense accounts.

balance sheet accounts

The date of the management representation letter received from the client should

be dated no earlier than the date of the audit report

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely: A) be reduced. B) be increased. C) remain the same. D) be calculated using a computerized statistical package.

be reduced

Qualitative factors can affect an auditor's assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. A) I only B) II only C) I and II D) neither I nor II

both I and II

failure to capitalize a fixed asset at the correct amount would impact which financial statements

both the income statement and the balance sheet

If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of: A) contract fraud. B) breach of contract. C) constructive fraud. D) criminal neglect.

breach of contract

the possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as

business risk

the record of the issurance and repurchase of capital stock for the life of the corporation is maintained in the

capital stock certificate record

the most important general ledger account included in and affecting several cycles is the

cash account

for which of the following accoutns is cutoff least important

cash collections

physical examination is the inspection or count by the auditor of items such as

cash, inventory, securities, notes receivable, and tangible fixed assets

A proof of cash is effective at identifying which of the following misstatements? A) Checks written for incorrect amounts B) Checks issued to invalid vendors C) Fraudulent checks D) Checks recorded in the books for an amount different from that on the check

checks recorded in the books for an amount different from that on the check

the auditor is reviewing the receivables listed on the aged trial balance for notes and related party recievable. which balance related audit objective is he trying to satisfy

classification

The auditor uses knowledge gained from the understanding of the client's business and industry to assess: A) client business risk. B) control risk. C) inherent risk. D) audit risk.

client business risk

For public companies, the ________ is responsible for hiring the auditor as required by the Sarbanes-Oxley Act.

client's audit committee

An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as: A) collusion. B) a material weakness. C) a control deficiency. D) a significant deficiency.

collusion

when dealing with fradulent financial reporting risk for accoutns payable

companies have used fictitious reductions to accoutns payable to overstate net income

when auditing prepaid insurance

companies often have a standard monthly journal entry to reclassify prepared insurance as insurance expense

fradulent financial reporting is most likely to be committed by whom

company management

internal controls can never be regarded as completely effective. even if company perssonel could design an ideal system, its effectiveness depends on the

competency and dependability of the people using it

When the auditor uses tracing as an audit procedure for tests of transactions she is primarily concerned with which audit objective? A) Occurrence B) Completeness C) Cutoff D) Classification

completeness

the tests of detalis of balances procedure which requires the auditor to examine notes paid after year end to determine whether they were liabilities at the balance sheet date is an attempt to satisfy the audit objective of

completeness

which one of the following procedures performed for the billing function provides evidence for the completeness aseertion

completeness

When auditors verify accrued property taxes two audit objectives are especially significant. These are: A) completeness and accuracy. B) completeness and net realizable value. C) detail tie-in and completeness. D) accuracy and classification.

completeness and accuracy

an audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a

compliance audit

the upper limit of the probably population exception rate is the

computered upper exception rate

which of the following is the principle weakness of using negative confirmations for the tests of details of balances for accoutns receivable

conclusions drawn from receiving no reply may not be correct

which of the following audit procedures would not likely detect a client's decision to pledge or factor accoutns receivable

confirmatino of receivables

audit evidence has two primary qualities for the auditor; relevance and reliability. given the choices below, which provides the auditor with the most reliable audit evidence

confirmation of accoutns receivable balance received from a customer

which of the following is most reliable for verifying the correct balance of accoutns payable

confirmations

when an auditor knows that an illegal act has occured, he or she must

consider the effects on the financial statements, including the adequacy of disclosure

In the case of an audit, recklessness is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for

constructive fraud

an increased extent of tests of controls is most likely to occur when:

controls are effective and the prelimiary control risk assessment is low

what event initiates a transaction in the sales and collection cycle

customer request for goods or services

audit procedures designed to uncover credit sales made after the client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives

cutoff

the audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of

cutoff