ECON132A exam 2
All of the following are examples of qualitative characteristics of a misstatement except: a) exceeds the amount for performance materiality. b) affects management's compensation for the period. c) changes a net loss to a net income for the period. d) affects compliance with debt covenants.
A
All of the following are initial procedures performed on an account balance except: a) vouching items from the trial balance to supporting documentation. b) agreeing the opening balance to the audited ending balance from the prior year's working papers. c) scanning account details for unusual items. d) footing a trial balance for mathematical accuracy.
A
An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions? a) Completeness. b) Accuracy. c) Classification. d) Occurrence.
A
Analytical procedures: a) are required during the planning and substantive testing phases of the audit. b) are substantive procedures and cannot be used at any other stage of the audit. c) can be used as substantive tests but cannot be used as primary tests of a balance. d) are used to test controls and are not substantive procedures.
A
Assessing control risk at below the maximum level most likely would involve a) Identifying specific internal control structure policies and procedures relevant to specific assertions. b) Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end. c) Reducing inherent risk for most of the assertions relevant to significant account balances. d) Performing more extensive substantive tests with larger sample sizes than originally planned.
A
Describe the IT application control procedure that provides assurance that all the merchandise for which the client was billed was received. Assume the software application prepares an exception report and follow-up procedures are effective. IT application edit checks compare: a) quantities on the vendor's invoice with quantities entered in receiving. b) quantities and prices on the voucher with quantities and prices on the purchase order. c) quantities and prices on the voucher with quantities and prices on the vendor's invoice. d) quantities times price on the voucher with the amount of cash disbursements.
A
If an auditor decides to assess control risk as low based on IT application control procedures, which of the following would not be part of the auditor's strategy for testing controls? a) Testing the effectiveness of management review controls used to monitor the results of operations. b) Testing the effectiveness of the application with test data. c) Testing the effectiveness of IT general control procedures. d) Testing the effectiveness of manual follow-up procedures.
A
If an auditor performs analytical procedures on rent expense and finds that rent expense has increased 50%, he or she is most likely to perform which of the following additional procedures? a) Vouch larger items in rent expense in a search for unrecorded finance leases. b) Vouch rent payments to underlying documents to determine that all vouchers have receiving reports. c) Test rent cutoff to determine if all rent has been recorded. d) Perform tests of controls to ensure that all rent transactions are authorized.
A
If auditors discover fraud during the audit, it should first be reported to: a) an appropriate level of management or those charged with governance. b) the SEC. c) the PCAOB. d) the employee who is committing the fraud.
A
If management considers a material loss contingency to be probable but an amount cannot be reasonably estimated, the proper accounting treatment is: a) note disclosure only. b) accrual in the financial statements only. c) accrual in the financial statements and note disclosure. d) no adjustment or disclosure necessary.
A
In a public company audit, the audit report is addressed to the: a) the board of directors and shareholders. b) the CEO and CFO. c) audit committee. d) the SEC.
A
The auditor's best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a: a) projected misstatement. b) confirmation misstatement. c) factual misstatement. d) judgmental misstatement.
A
The critical difference between statistical and nonstatistical sampling is: a) the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample. b) the required use of judgment in nonstatistical sampling. c) the elimination of nonsampling risk with statistical sampling. d) that more representative samples are attained with statistical sampling.
A
The going concern assumption means: a) the entity is viewed as continuing in business for the foreseeable future with no need for liquidation. b) the entity is facing difficulties continuing as a viable business entity. c) the auditor is concerned whether the entity is going to change locations. d) assets and liabilities are stated at liquidation values.
A
When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. A reciprocal population is: a) a population that is overstated if the population of interest is understated (or vice versa). b) a class of transactions related to the account balance being tested (e.g., sales to accounts receivable). c) a subset of the population that is the basis for sampling. d) a class of transactions or the account balance to be tested.
A
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the a) Estimate of the total likely misstatement is less than a material amount. b) Amount of known misstatement is acknowledged and recorded by the client. c) Amount of known misstatement is documented in the management representation letter. d) Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.
A
Which of the following IT application control procedures would be most effective in assuring that recorded purchases are accurately recorded for transactions that actually occurred? a) The software application matches voucher information with information supporting purchase orders, receiving reports, and vendor invoices. b) The software application compares the quantity ordered from purchase order information with the quantity received from the receiving department. c) Receiving reports require the signature of the individual who authorized the purchase. d) Vendor invoice information is compared with purchase order information.
A
Which of the following best describes the distinguishing feature of statistical sampling? a) It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. b) It allows the auditor to have the same degree of sampling risk as with nonstatistical sampling but with substantially less work. c) It allows the auditor to substitute sampling techniques for audit judgment. d) It provides for measuring the actual misstatements in financial statements in terms of sampling risk and allowance for sampling risk.
A
Which of the following best illustrates the concept of sampling risk? a) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. b) An auditor may fail to recognize errors in the documents examined for the chosen sample. c) The documents related to the chosen sample may not be available for inspection. d) An auditor may select audit procedures that are not appropriate to achieve the specific objective.
A
Which of the following control activities would most likely assure that no fictitious billings have been posted to the sales journal? a) The software application compares each sales invoice with the supporting shipping documents and notes any discrepancies. b) Each shipment on credit is supported by a prenumbered sales order. c) The accounts receivable master file is compared with the general ledger control account. d) The software application compares prices on the sales invoices with prices on the master price list and notes any discrepancies.
A
Which of the following industries would have the greatest concerns about purchases cutoff at month end, unrecorded liabilities, and accounting for advertising allowances provided by vendors? a) Retail grocer. b) Manufacturer of construction equipment. c) Local school district. d) Hotel.
A
Which of the following is an example of a modified opinion? a) A qualified opinion. b) A going concern emphasis-of-matter paragraph. c) A consistency emphasis-of-matter paragraph. d) A reference to the audit of component auditors.
A
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? a) Prepare a schedule of bank transfers from the client's books. b) Review authenticated deposit slips. c) Review subsequent bank statements and canceled checks received directly from the bank. d) Prepare year-end bank reconciliation.
A
Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures? a) There is heightened risk of fraud. b) Client was not audited in the previous year. c) Unpredictability provides the audit team with more variety. d) Client has a strong internal control environment.
A
Which of the following would not be a reason to increase the extent of a substantive test? a) Auditors have time to test more items. b) Qualitative factors suggest there may be errors in the account. c) The risk of material misstatement is high. d) Internal controls are weak.
A
Which of the following would represent the best evidence for testing the net realizable value of inventory? a) Investigate sales prices on the sale of inventory made after year-end. b) Vouch inventory prices to vendor invoices at an interim date. c) Investigate all prices that have decreased by more than 5% during the year. d) Vouch inventory prices to the perpetual inventory.
A
A cutoff test designed to detect credit sales made before the end of the fiscal year that have been recorded in the subsequent year provides assurance about which of the following management assertions? a) Completeness. b) Classification. c) Accuracy. d) Occurrence.
B
A small manufacturing company makes only credit sales. If cash receipts from sales are misappropriated, which of the following acts would most likely conceal this fraud? a) Understating the accounts receivable subsidiary ledger. b) Understating the cash receipts journal. c) Understating the accounts receivable control account. d) Overstating the sales journal.
B
An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of collection problem in accounts receivable? a) Sales grew by 10% and receivables declined by 2% from year one to year two. b) Sales grew by 5% and receivables grew by 17% from year one to year two. c) Sales declined by 2% and receivables declined by 7% from year one to year two. d) Sales grew by 10% and receivables grew by 11% from year one to year two.
B
An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as: a) block selection. b) stratified sampling. c) random selection. d) haphazard selection.
B
An auditor uses nonstatistical ratio estimation to evaluate the results of a sample. The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. The estimated audited value of the population is: a) $1,930,000. b) $1,920,000. c) $1,980,000. d) $1,900,000.
B
An auditor's program to examine long-term debt most likely would include steps that require: a) inspecting the accounts payable subsidiary ledger for unrecorded long-term debt. b) correlating interest expense recorded for the period with outstanding debt. c) verifying the existence of the holders of the debt by direct confirmation. d) comparing the carrying amount of the debt to its year-end market value.
B
Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following? a) Significant concerns about the completeness of revenues. b) Significant revenue issues associated with bundling products and services. c) More than the usual concern about collection risk. d) Appropriate accounting for commissions on sales.
B
At the conclusion of the audit, the wrap-up process involves all of the following except: a) revisiting assessments for materiality, control risk, and risk of fraud. b) sending confirmations to financial institutions. c) determination that all necessary matters have been appropriately considered. d) review of proper and complete execution of planned audit procedures.
B
At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit? a) Granting of credit. b) Selling of goods for cash. c) Shipment of goods. d) Determination of discounts.
B
Audit sampling is defined as a situation where: a) the auditor screens 100% of the population to identify a subset with particular risk traits. b) the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population. c) the auditor tests a subset of the population to draw a conclusion about a subset of the population. d) the auditor screens less than 100% of the population to identify a subset with particular risk traits.
B
Benchmarking is a process that involves: a) an audit strategy that allows an auditor to rely on IT application controls if manual follow-up procedures are strong. b) an audit strategy that allows the auditor to use evidence from testing an IT application control in a prior period, if the application has not been changed. c) an audit strategy that allows the auditor to test only identified key controls rather than all controls used by the client. d) comparing the effectiveness of one control with another control.
B
For a private company client that follows GAAP, auditors must consider the going concern assumption for a reasonable period of time, which is: a) one year from the date of the financial statements. b) one year from the date the financial statements are issued. c) one year from the completion of interim audit procedures. d) one year from the completion of fieldwork.
B
For effective internal control, the billing function should be performed by the a) Sales department. b) Accounting department. c) Shipping department. d) Credit and collection department.
B
Holding all other factors constant, which of the following factors results in an increase in sample size for substantive tests? a) An increase in the amount of tolerable misstatement. b) An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population. c) A decrease in the amount of expected misstatement in the population to be tested. d) Stratifying the population when appropriate.
B
How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement? a) By performing analytical procedures, but not substantive procedures, at period end. b) By assigning more experienced staff or those with specialized skills to high-risk areas. c) By obtaining a management representation letter. d) By performing tests of controls at interim-and period-end dates.
B
If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated? a) Rights and obligations. b) Existence. c) Completeness. d) Valuation at net realizable value.
B
If an auditor performs tests of controls and determines that the control is not effective, what should the auditor's next step in testing controls be? a) Document the results of tests of controls and proceed with the planned audit strategy. b) Determine if a compensating control exists. c) Perform tests of controls on compensating controls. d) Document the results of tests of controls and proceed with a primarily substantive approach.
B
If auditors identify only one material weakness in a client's internal control system, the appropriate report to issue is a(n): a) qualified opinion. b) adverse opinion. c) unqualified opinion with an emphasis-of-matter paragraph. d) disclaimer of opinion.
B
If the auditor encounters a material scope limitation and cannot obtain sufficient appropriate audit evidence regarding the fair presentation of the financial statements, what type of report would be issued? a) A qualified or adverse opinion. b) A qualified or disclaimer of opinion. c) No report can be issued. d) An unmodified opinion with an emphasis-of-matter paragraph.
B
In an engagement to review financial statements of a private company, the auditor will do all of the following except: a) inquire of management regarding key revenue recognition policies. b) confirm key account receivable balances. c) calculate key ratios relevant to the client. d) issue a report at the conclusion of the engagement.
B
In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning a) Overpayment of employees for hours not worked. b) Control and distribution of unclaimed checks. c) Missing employee identification numbers. d) Withholding of taxes and Social Security contributions.
B
The auditor is studying a ratio of accounts payable turnover in days. Which of the following indicates a potential risk of unrecorded liabilities? a) Accounts payable turnover in days decreased from 30 days to 25 days from year one to year two. b) Accounts payable turnover in days decreased from 28 days to 15 days from year one to year two. c) Accounts payable turnover in days increased from 28 days to 45 days from year one to year two. d) Accounts payable turnover in days increased from 28 days to 30 days from year one to year two.
B
The internal document commonly used to record a credit purchase in the purchases journal is a: a) purchase order. b) voucher. c) vendor's invoice. d) purchase requisition.
B
The primary objective of a CPA's observation of a client's physical inventory count is to: a) provide an appraisal of the quality of the merchandise on hand on the day of the physical count. b) obtain direct knowledge that the inventory exists and has been properly counted. c) allow the auditor to supervise the conduct of the count to obtain assurance that inventory quantities are reasonably accurate. d) discover whether a client has counted a particular inventory item or group of items.
B
The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor. This is an example of a(n): a) IT general control. b) detective control. c) preventive control. d) IT-dependent manual control.
B
When a client does not maintain its own stock records, the auditor should obtain a written confirmation from the transfer agent and registrar concerning: a) the number of shares subject to agreements to repurchase. b) the number of shares issued and outstanding. c) restrictions on the payment of dividends. d) guarantees on preferred stock liquidation value.
B
When obtaining an understanding of internal controls, the auditor identifies important programmed application controls over the occurrence of sales. However, the auditor also has serious concerns about the adequacy of the control environment due to a weak tone at the top about control consciousness. Which of the following best describes how the auditor should respond to this situation when planning tests of controls related to the occurrence of sales? a) The auditor could assess control risk as low for an assertion if ITGCs are tested and shown to be strong. b) The auditor will probably assess control risk at the maximum irrespective of the quality of the programmed application controls. c) The auditor could assess control risk as low for an assertion after performing software-based audit techniques on controls relevant to that assertion. d) The auditor could assess control risk as low for an assertion after performing software-based audit techniques on controls relevant to that assertion and assessing the adequacy of segregation of duties.
B
When sending positive confirmations, which of the following would not be an appropriate way to address nonresponse by a customer? a) Assume that the nonresponse is 100% in error and project the misstatement on the population. b) If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary. c) Search for evidence of subsequent cash receipt from the customer. d) Match open invoices to underlying bills of lading and customer orders.
B
Which of the following can be used as both a risk assessment procedure and a substantive procedure for the audit of accounting estimates? a) Inspect events happening after year-end and up to the date of the auditor's report. b) Inquire of management about the methods and assumptions used in developing the estimate. c) Inspect documentation for proper approval of the accounting estimate. d) Gain an understanding of what is required by the applicable financial reporting framework.
B
Which of the following characteristics of an accounting estimate would lead to lower estimation uncertainty? a) Estimate is derived from a model developed by the client. b) Estimate is related to routine transactions. c) Estimate involves assumptions that cannot be observed in a public market. d) Estimate is related to complex transactions.
B
Which of the following control activities would be a reasonable control over the accuracy of recorded sales? a) The software application prints a report of all bills of lading not matched with a sales invoice. b) The software application matches sales invoice quantities with the underlying packing slip and prices with the sales order. c) The software application matches the customer number on the sale invoice with the customer number on the sales order. d) The software application prints a report of unfilled sales orders.
B
Which of the following controls would most likely prevent a vendor's invoice from being paid twice? a) The software application compares the daily total in the cash disbursements journal with the total vouchers submitted for payment. b) The software application has a field that identifies a vendor's invoice has been paid and the voucher number cannot be reused. c) An independent bank reconciliation is prepared. d) The software application compares information on the check with information on the receiving report.
B
Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements? a) Increase the sample size to reduce the effect of the unusually large disbursements. b) Stratify the cash disbursements population so that the unusually large disbursements are selected. c) Continue to draw new samples until all the unusually large disbursements appear in the sample. d) Set the tolerable rate of deviation at a lower level than originally planned.
B
Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics? a) Relevant data are clean or can be cleaned up easily. b) Evidence to support the audit test is not available in electronic form. c) The audit population is large, and the auditor's tests are supported by reliable and relevant data in electronic form, making ADA efficient. d) Relevant data are reliable and internal controls over the reliability of data are strong.
B
Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments? a) Inspect checks included with the client's cut-off bank statement. b) Read the file of correspondence from taxing authorities. c) Obtain a letter of representations from the client's underwriter of securities. d) Apply ratio analysis on the current-year's liability accounts.
B
Which of the following situations increases the reliability of data being used for substantive analytical procedures? a) Controls over the data have not been tested. b) During the prior-year audit, the data was subjected to audit testing. c) The source of the data is the client's internal budget reports. d) Broad industry averages will be used in comparison with the client's data.
B
A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of a(n): a) IT-dependent manual control. b) detective control. c) preventive control. d) IT general control.
C
Accounting policies and practices that are most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments are called: a) significant accounting policies and practices. b) critical accounting estimates. c) critical accounting policies and practices. d) material contingencies.
C
All of the following are components of the standard unqualified report on the effectiveness of ICFR except: a) the definition of internal control over financial reporting. b) a title that includes the term "independent." c) the definition of a material weakness. d) a statement about the inherent limitations of ICFR.
C
All of the following statements are included in a management representation letter except: a) the effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements. b) no subsequent events have occurred that require adjustment to or disclosure in the financial statements. c) the auditor's fee for completing the audit. d) there have been no violations of laws or regulations.
C
An audit client that manufactures and sells goods to a network of authorized dealers may create the equivalent of a consignment sale if the client: a) ships goods only on a collect on delivery (C.O.D.) basis. b) allows a cash discount if the receivable is paid within 30 days. c) allows an unconditional right of return at any time until the goods are sold by the dealer. d) only allows goods to be returned if they are damaged.
C
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a) Incorrect rejection. b) Assessing control risk too high. c) Incorrect acceptance. d) Assessing control risk too low.
C
An auditor is going to test the client's controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls? a) Software-based audit techniques using test data. b) Inquiry of the person performing the bank reconciliation. c) Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure. d) Reperformance of the bank reconciliation procedure.
C
An evaluated receipt system is: a) a highly automated process associated with the initiation of a purchase transaction. b) a highly automated business process between retailers and customers to receive payment electronically for a purchase transaction. c) a highly automated business process between suppliers and purchasers to exchange data electronically to execute a purchase transaction. d) a highly automated process between suppliers and purchasers to manage the receipt of goods.
C
Assume an auditor is testing an IT application control over the accuracy of purchases. The auditor is most likely to submit test data for a: a) voucher with no receiving report. b) purchase order without appropriate authorization. c) voucher with different quantities than on the receiving report. d) purchase order with an invalid vendor number.
C
Communication with those charged with governance must occur: a) after the financial statements are released. b) after the audit report is issued. c) before the audit report is issued. d) before legal letters are sent to attorneys.
C
From year one to year two, the ratio of sales to fixed assets declined significantly. This is a possible indication that: a) the client has used debt to finance acquisitions of fixed assets. b) the client is overdepreciating fixed assets. c) the client is capitalizing costs that should be expensed. d) the client has treated finance leases as operating leases.
C
ITGCs are important because they: a) prevent the reliability of electronic audit evidence. b) impact the effectiveness of manual controls. c) prevent unauthorized personnel from having access to data and applications. d) allow client staff to change programs without needing to receive authorization for the change.
C
If a client has a going concern issue that has been properly disclosed in the notes, the auditor should: a) issue a qualified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue. b) issue a qualified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue. c) issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue. d) issue an unmodified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue.
C
If an auditor becomes aware after the date of the auditor's report but before the financial statements are issued, of a fact that may materially affect the financial statements, the first step the auditor should take is to: a) alert the appropriate regulatory body. b) make the appropriate adjustments to the financial statements. c) discuss the matter with management and, if appropriate, those charged with governance. d) determine if the financial statements need to be revised.
C
Nonsampling risk: a) does not occur if an auditor relies on unreliable evidence. b) only occurs if you test every item of the population. c) is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues. d) only applies to samples taken for the purposes of substantive testing.
C
The audit firm must retain the audit file of a public company client for: a) 5 years. b) 4 years. c) 7 years. d) 6 years.
C
The auditor's decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample? a) Tolerable misstatement. b) Expected misstatement. c) Reliability factor. d) Book value of the population.
C
The dual dating of an audit report means: a) a subsequent event occurred. b) the release date of the financial statements was after the completion of fieldwork. c) the auditors performed audit procedures regarding a specific event that was after the end of fieldwork. d) the auditors extended their responsibility period to include the release date of the financial statements.
C
The nature of an audit procedure refers to: a) when the procedure is performed. b) the assessed level of detection risk. c) its purpose and its type. d) the sample size required to perform the procedure.
C
When auditing a fixed asset account such as land, buildings, and equipment, the auditor will normally: a) trace transactions from receiving documents to recording of the purchase. b) vouch the book value of fixed assets to underlying purchase documents. c) use a combination of of agreeing beginning balances to prior year working papers and then testing transactions during the year. d) place the greatest emphasis on tests of balances at year-end.
C
When auditing the payroll process, the auditor will normally want to understand: a) the relationship between net payroll and the company's tax liability. b) the relationship between payroll and significant customers. c) the extent to which a company is capital-intensive or labor intensive. d) the predictability of the relationship between payroll expense and capital expenditures for the year.
C
When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what general factor that influences sample size? a) Tolerable misstatement. b) The use of stratification when sampling. c) The desired level of assurance from the sample. d) Expected misstatement.
C
Which of the following is a Type II subsequent event? a) Bankruptcy of a customer subsequent to year-end, which would be considered when evaluating the adequacy of the allowance for uncollectible accounts. b) An amount received related to an insurance claim that was in the course of negotiation at year-end. c) Loss of plant as a result of fire or flood after year-end. d) Deterioration in financial results after year-end, which may indicate doubt about the ability to continue as a going concern.
C
Which of the following procedures is best for identifying unrecorded trade accounts payable? a) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. b) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. c) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. d) Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
C
Which of the following represents an example of an IT application control? a) All changes to software applications must be reviewed and approved by the department affected by the application. b) The accounts receivable manager reviews credit balances in accounts receivable quarterly to determine their causes. c) The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor. d) The assistant controller performs a monthly bank reconciliation and follow-up of unexpected outstanding items.
C
Which of the following situations increases the risk of fraud due to "lapping?" a) The shipping clerk in the warehouse has read-only access to sales orders. b) The accounts receivable clerk also has responsibilities for writing a sales invoice. c) The accounts receivable clerk also has responsibilities for receiving cash. d) The sales manager can approve credit limits for customers.
C
Which of the following statements is not correct about the auditor's report under PCAOB auditing standards? a) Each section of the audit report must have an appropriate label. b) Critical audit matters must be identified and discussed in the auditor's report. c) The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission. d) The auditor's opinion is expressed at the beginning of the audit report.
C
Which of the following would require the auditor to increase the level of control testing for a particular control? a) There are several controls relating to a particular audit objective. b) The WCGW addressed by the control is not very important. c) A high degree of reliance is to be placed on the control to limit the amount of substantive testing required. d) The control is performed monthly instead of daily.
C
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is low, an auditor would probably: a) insist that the client perform physical counts of inventory items several times during the year. b) increase the extent of tests of controls over inventory. c) request the client to schedule the physical inventory count at the end of the year. d) observe the client's inventory count at an interim date.
D
All of the following are examples of a change in accounting principle except: a) a change from one acceptable accounting principle to another acceptable accounting principle. b) a change in the method of application of an acceptable accounting principle. c) a change from an acceptable accounting method to a newly adopted accounting principle. d) a change in an accounting estimate.
D
All of the following phrases would be found in the standard unmodified audit report for a private company except: a) management is responsible for the preparation and fair presentation of the financial statements. b) standards require that we plan and perform the audit to obtain reasonable assurance. c) we believe the audit evidence we have obtained is sufficient and appropriate. d) in our opinion, the financial statements referred to above are correct, in all material respects.
D
An auditor analyzes repairs and maintenance primarily to obtain evidence in support of the assertion that all: a) non-capitalizable expenditures for repairs and maintenance have been recorded in the proper period. b) non-capitalizable expenditures have been recorded. c) expenditures for property and equipment have been recorded in the proper period. d) expenditures for property and equipment have not been charged to expense.
D
An auditor decided to confirm accounts payable to accomplish a low level of detection risk for the completeness assertion. Which of the following is the most reasonable sampling plan? a) Confirm accounts payable with an emphasis on new vendors, irrespective of the size of the account balance. b) Confirm accounts payable with an emphasis on the largest account payables. c) Confirm accounts payable using probability-proportionate to-size sampling. d) Confirm accounts payable with an emphasis on all vendors including zero and small balances.
D
An emphasis-of-matter paragraph is used with an unmodified opinion when: a) a client has an unjustified change in accounting principle. b) there is a disagreement with those charged with governance regarding the selection of accounting policies. c) an extreme limitation of the scope of the audit exists. d) a significant uncertainty exists that should be brought to the financial statements user's attention.
D
An imprest payroll bank account is: a) a bank account that processes all payroll withholding transactions. b) a bank account devoted to all payroll transactions. c) a bank account where a company only deposits sufficient funds to process gross payroll amounts. d) a bank account where a company only deposits sufficient funds to process net payroll transactions.
D
Designing substantive procedures responds to: a) the risk of all types of misstatements at the entity level. b) the risk of material misstatement at the entity level. c) the risk of all types of misstatements at the assertion level. d) the risk of material misstatement at the assertion level.
D
For which of the following companies would the auditor have the least concern about the existence of inventory? a) A computer manufacturer. b) A retail grocer. c) An oil and gas field equipment manufacturer. d) A hotel.
D
If a nonissuer refuses to give permission to the auditor to communicate with its external legal counsel, then the auditor should modify which of the following? a) The audit plan b) The attorney's letter of inquiry c) The management representation letter d) The opinion in the auditor's report
D
If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor's potential fraud risk assessments? a) Fraudulent financial reporting-high risk; misappropriation of assets-low risk. b) Fraudulent financial reporting-low risk; misappropriation of assets-low risk. c) Fraudulent financial reporting-low risk; misappropriation of assets-high risk. d) Fraudulent financial reporting-high risk; misappropriation of assets-high risk.
D
In the audit of inventory, selecting inventory items from a perpetual master file, going to the locations, and obtaining test counts is intended to produce evidence for which audit assertion? a) Rights and obligations. b) Completeness. c) Valuation and allocation. d) Existence.
D
Sampling risk: a) can be eliminated by taking a random sample. b) is the risk that the results of the test will be misinterpreted by the auditor. c) applies only to samples for substantive testing. d) is the risk that the sample chosen by the auditor is not representative of the population of transactions.
D
Sound control activities dictate that defective merchandise returned by customers should be presented initially to: a) the sales manager. b) the accounts receivable supervisor. c) the credit manager. d) the receiving department.
D
Subsequent events occur after: a) the appointment of the auditor. b) the start of the fiscal year. c) the going concern assumption. d) the end of the fiscal year.
D
The auditor decides which controls to test by considering: a) the points at which fraud or error can occur. b) the nature of controls implemented by management. c) the significance of each control in achieving its control objective. d) All of these answer choices are correct.
D
The key documents involved in recording a purchase adjustment involve: a) a purchase return authorization, a shipping report, and a credit memo. b) a vendor's invoice, a receiving report, and a credit memo. c) a purchase order, a vendor's invoice, and a voucher. d) a purchase return authorization, a shipping report, and a debit memo.
D
The purchasing process normally includes all of the following transactions: a) purchases, inventory transactions, and cash receipts. b) purchases on account, purchase returns, and cash receipts. c) purchases of inventory, plant and equipment, and depreciation. d) purchases on account, purchase returns, and cash disbursements.
D
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the a) Operating effectiveness of internal control policies and procedures. b) Factors that raise doubts about the auditability of the financial statements. c) Possibility that the nature and extent of substantive tests may be reduced. d) Risk that material misstatements exist in the financial statements.
D
When analyzing the results of substantive procedures, auditors should beware of: a) weak internal controls. b) audit engagement deadlines. c) professional skepticism. d) confirmation bias.
D
When detection risk is low, the auditor is likely to: a) test the client's internal controls over the preparation of bank reconciliations. b) confirm bank balances with the Federal Deposit Insurance Corporation. c) scan bank reconciliations and test items on bank reconciliations on a sample basis. d) prepare the bank reconciliation using bank data in the client's possession or audit the bank reconciliation using a cutoff bank statement obtained from the bank.
D
When the audit opinion is based in part on the work of another auditor, all of the following changes are made to the standard unmodified audit report except: a) the auditor's responsibility paragraph has added wording stating that other auditors completed a portion of the audit. b) the opinion paragraph references the other auditors. c) the portion of the audit conducted by the component auditor is stated in the report. d) an emphasis-of-matter paragraph is added after the opinion paragraph.
D
Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure? a) Completeness. b) Rights and obligations. c) Accuracy. d) Cutoff.
D
Which of the following is a good example of an IT application control over the occurrence of revenue transactions? a) Strong segregation of duties exists between computer operations and computer program development. b) Computer system changes to the revenue program must be tested and authorized before they are allowed to be used with live data. c) Physical access to computer systems is limited only to specific personnel who work in the revenue process. d) The software application compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up.
D
Which of the following is an example of a subsequent event? a) Legal action that was settled in the last month of the fiscal year. b) A cybersecurity attack that occurred in the third quarter of the fiscal year. c) A major customer declaring bankruptcy two months before the client's year-end. d) A bond issuance after the balance sheet date but prior to issuance of the financial statements.
D
Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period? a) Internal controls are weak and the risk of material misstatement is low. b) Internal controls are strong and the risk of material misstatement is low. c) Internal controls are strong and the risk of material misstatement is high. d) Internal controls are weak and the risk of material misstatement is high.
D
Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed? a) Attorneys' responses to the auditor's inquiries. b) Confirmations of receivables verifying account balances. c) Letters of representations corroborating inventory pricing. d) Client records documenting the use of computer programs.
D
Working papers: a) document the results of the tests but not the purpose of the control selected for testing. b) document the purpose of the control selected for testing and the conclusion made by the auditor but not the results of the test. c) are necessary for the first-year auditor to keep track of the daily work but are not important to the overall audit. d) document the auditor's conclusion about control risk and the basis for that conclusion.
D