ACC 4330 Ultimate Final Prep

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material weakness

A control deficiency, or a combination of them that adversely effects entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with GAAP, such that there is a reasonable possibility that a material misstatement will not be prevented or detected. (report it to management, BOD & audit committee)

Active role in subsequent events

B/S to report date, 2 types of events

Substantive Procedures

Detect material misstatements in a transaction class, account balance, and disclosure component of the financial statements.

The CPA firm of Quigley & Associates uses a qualitative approach to implementing the audit risk model. Audit risk is categorized using two terms: very low and low. The risk of material misstatement and detection risk are categorized using three terms: low, moderate, and high. Calculate detection risk for each of the following hypothetical clients. Client No., Audit Risk, Risk of Material Misstatement a) 1, Low, Moderate b) 2, Very low, High c) 3, Low, Low d) 4, Very low, Moderate

Detection Risk a)Moderate b) Low c) High d) Low

Risk Assessment Procedures

Used to obtain an understanding of the entity and its environment, including its internal control

Can you use internal auditors to help?

Yes you can use Internal Auditors to do tests but you can't use them to do the judgment

For public companies, is it the auditor's duty to search for internal control deficiencies?

Yes, they also have to conduct and report on an audit of internal controls

significant deficiency

a control deficiency, or a combination of control deficiencies, that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting (report it to management, BOD & audit committee)

control deficiency

a deficiency in the design or operation of controls that does not permit company personnel to prevent or detect and correct misstatements on a timely basis (report to management)

The concept of materiality would be least important to an auditor when considering the a) Adequacy of disclosure of a client's illegal act b) Discovery of weaknesses in a client's internal control structure c) Effects of a direct financial interest in the client on the CPA's independence d) Error or fraud in the financial statements

c) Effects of a direct financial interest in the client on the CPA's independence

Operational auditing is oriented primarily toward a) Verification that an entity's financial statements are fairly presented. b) Past protection provided by existing internal control. c) Efficiency and future improvements to accomplish the goals of management. d) The accuracy of data reflected in management's financial records.

c) Efficiency and future improvements to accomplish the goals of management.

The risk of incorrect rejection and the likelihood of assessing control risk too high relate to a) Allowable risk of tolerable misstatement b) Expected error c) Efficiency in sampling d) Effectiveness in sampling

c) Efficiency in sampling

Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using: a) a utilitarian perspective. b) rule-based AICPA guidelines. c) a justice-based perspective. d) a rights-based approach.

c) a justice-based perspective.

The engagement partner and manager review the work of engagement team members to evaluate which of the following? a) The work was performed and documented. b) The objectives of the procedures were achieved. c) The results of the work support the conclusions reached. d) All of these are correct.

d) All of these are correct.

Management Assertions

Existence/occurrence Completeness Ownership Rights/Obligations Valuation Allocation Presentation/Disclosure

For non-public companies, is it the auditor's duty to search for internal control deficiencies?

No, it is not the auditor's duties to search for deficiencies, but you do have to report them if you find them

Basic control attributes

SCALP Segregation of duties Comparisons and compliance monitoring Adequate records Limited access to assets and records Proper approvals for all transactions

Which is most important to the external auditor?

Reliability of financial reporting.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? a) Perpetual inventory records are maintained. b) Inventory balances are rarely at low levels. c) Complete recounts are performed by independent teams. d) Unit cost records are integrated with production-accounting records.

a) Perpetual inventory records are maintained.

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment? a) Documentation and test controls over specific risks. b) Self-assessment processes in conjunction with entity-level controls. c) Documentation and test entity-level controls over the entire entity. d) Selective control test at that location.

b) Self-assessment processes in conjunction with entity-level controls.

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a) Greater reliance on analytical procedures. b) Smaller amount of tolerable misstatement. c) Smaller expected frequency of misstatements. d) Greater reliance on internal controls.

b) Smaller amount of tolerable misstatement.

When planning an audit, an auditor should a) evaluate detected misstatements. b) determine overall materiality for audit purposes. c) conclude whether changes in compliance with prescribed internal controls justify reliance on them. d) consider whether the extent of substantive procedures may be reduced based on the results of tests of controls.

b) determine overall materiality for audit purposes.

An auditor suspects that certain client employees are ordering merchandise for themselves over the internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves them for payment. After invoices are paid, employees destroy the invoice and related vouchers. In gathering evidence regarding this fraud, the auditor most likely will select items for testing from the file of all a) Cash disbursements b) Approved vouchers c) Receiving reports d) Vendor's invoices

a) Cash disbursements

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the a) Collection of receivables b) Purchase of inventory c) Payment of accounts payable d) Payment of employees

a) Collection of receivables

During the initial planning phase of an audit, a CPA most likely would a) evaluate the reasonableness of the entity's accounting estimates. b) discuss the timing of the audit procedures with the entity's management. c) identify specific internal control activities that are likely to prevent fraud. d) inquire of the entity's attorney if it is probable that any unrecorded claims will be asserted.

b) discuss the timing of the audit procedures with the entity's management.

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to a) increase the tolerable misstatements in the accounts. b) find smaller errors. c) find larger errors. d) decrease the risk of over reliance.

b) find smaller errors.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because a) negative confirmations do not produce evidence that is statistically quantifiable. b) the auditor cannot infer that all nonrespondents have verified their account information. c) some recipients may report incorrect balances that require extensive follow-up. d) a majority of recipients usually lack the willingness to respond objectively.

b) the auditor cannot infer that all nonrespondents have verified their account information.

During the initial planning phase of an audit, a CPA most likely would a) Identify specific internal control activities that are likely to prevent fraud b) Evaluate the reasonableness of the client's accounting estimates c) Discuss the timing of an audit procedure with the client's management d) Inquire of the client's attorney as to whether any recorded claims are probable of assertion

c) Discuss the timing of an audit procedure with the client's management

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? a) Warehouse location. b) Quantity sold. c) Economic reorder quantity. d) Date of last purchase.

c) Economic reorder quantity.

5 components of internal control (COSO)

Control environment Entity risk assessment process Control activities Information and communications Monitoring

Separation of Duties

Custody Authorization Record keeping

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements? a) Reperforming the activities for a sample of transactions b) Performing analytical procedures using data aggregated at a high level c) Vouching a sample of transactions directly related to the activities d) Observing the entity's personnel applying the activities

d) Observing the entity's personnel applying the activities

Because an audit in accordance with GAAS is influenced by the possibility of materially misstated financial statements, the auditor should conduct the audit with a) Objective judgment b) Conservative advocacy c) Professional responsiveness d) Professional skepticism

d) Professional skepticism

Which of the following internal control activities is most likely to address the completeness assertion for inventory? a) There is a separation of duties between payroll department and inventory accounting personnel. b) The work-in-process account is periodically reconciled with subsidiary records. c) Employees responsible for custody of finished goods do not perform the receiving function. d) Receiving reports are prenumbered and periodically reconciled.

d) Receiving reports are prenumbered and periodically reconciled.

Which of the following procedures would most likely not be an internal control procedure designed to reduce the risk of errors in the billing process? a) Comparing control totals for shipping documents with corresponding totals for sales invoices b) Using computer programmed controls to check pricing and mathematical accuracy of sales invoicesmatical c) Matching shipping documents with approved sales orders before invoice preparation d) Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

d) Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a) Evaluate management's plans to borrow money or restructure debt. b) Review management's plans to dispose of assets. c) Consider management's plans to reduce or delay expenditures. d) Review compliance with the terms of debt agreements.

d) Review compliance with the terms of debt agreements.

What does stratification achieve?

efficiency, getting the same results at a cheaper cost

How can deficiencies arise?

either not designed or operating correctly

How frequently do you test controls?

every time there is a system change as well as at least once every 3 years or if there is significant risk

Vouching

f/s -> source document (away from f/s) Objective: existence

What is the auditor's primary concern with the entity's internal controls?

for them to support management's assertions

What is a standard?

rules set by governing authority to measure quality of performance. Conceptual and tend to be constant over time

What is audit risk?

saying the FS are correct but they might not be Business Risk -> F/S Risk -> Audit Risk

Tracing

source documents -> f/s (towards f/s) Objective: completeness

Suppose that you are the auditor of a major retail client who has reported the following income before taxes (IBT) for the first two quarters of the year: 1st quarter = $1,200,000 and 2nd quarter = $1,500,000. You are in the process of establishing overall materiality for the client. Based on prior years, the client has a 10% decline in IBT from the 2nd quarter to the 3rd quarter. You also know that IBT in the 4th quarter increases by 25% over the 3rd quarter. Determine the amount of overall materiality for the audit based on these preliminary amounts.

$ 287,000

What factors would lead you to not accept the client?

1) Lack of client integrity 2) Lack of Independent mental attitude 3) Lack of skills and knowledge 4) Amount of evidence is so scarce

Nine Elements of the Standard UNMODIFIED Report

1) Report title 2) Addressee 3) Introductory paragraph 4) Management's responsibility 5) Auditor's responsibility 6) Scope paragraph 7) Opinion paragraph 8) Name of auditor 9) Audit report date

Eight Elements of the Standard UNQUALIFIED Report

1) Report title - most important word is independent (only about 150 firms worldwide that can perform PCAOB audits) 2) Addressee - the shareholders 3) Introductory paragraph - 1st 3 words are the most important "We have audited", the new standards move opinion to the beginning in intro paragraph, 4) Scope paragraph 5) Opinion paragraph 6) Explanatory paragraph referring to the audit of ICFR 7) Name of auditor 8) Audit report date

2 criteria for accruing a contingent liability

1) has to be more likely than not & 2) measurable

Under what 2 circumstances do you send positive confirmations?1) higher risk of misstatement/controls are weak &/or 2) if you have a small number of individually large accounts

1) higher risk of misstatement/controls are weak &/or 2) if you have a small number of individually large accounts

Items 1 through 16 represent a series of unrelated statements, questions, excerpts, and comments taken from various parts of an auditor's working paper file. Below is a list of the likely sources of the statements, questions, excerpts, and comments. Select, as the best answer for each item, the most likely source. Select only one source for each item. A source may be selected once, more than once, or not at all. A. Practitioner's report on management's assertion about an entity's compliance with specified requirements. B. Auditor's communications on significant deficiencies and material weakness. C. Audit inquiry letter to legal counsel. D. Lawyer's response to audit inquiry letter. E. Audit committee's communication to the auditor. F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies and material weakness). G. Report on the application of accounting principles. H. Auditor's engagement letter. I. Letter for underwriters. J. Accounts receivable confirmation request. K. Request for bank cutoff statement. L. Explanatory paragraph of an auditor's report on financial statements. M. Partner's engagement review notes. N. Management representation letter. O. Successor auditor's communication with predecessor auditor. P. Predecessor auditor's communication with successor auditor. Items 1. During our audit we discovered evidence of the company's failure to safeguard inventory from loss, damage, and misappropriation. 2. The company considers the decline in value of equity securities classified as available-for-sale to be temporary. 3. There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices. 4. It is our opinion that the possible liability to the company in this proceeding is nominal in amount. 5. As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended July 31, 2015, and is currently in default under substantially all of its debt agreements. In addition, on September 25, 2015, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a going concern. 6. During the year under audit, we were advised that management consulted with Gonzales & Ramirez, CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Gonzales & Ramirez's opinion was consistent with our opinion, so management did not recognize the revenue in the current year. 7. The company believes that all material expenditures that have been deferred to future periods will be recoverable. 8. Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our working papers for your purposes. 9. Indicate in the space provided below whether this information agrees with your records. If there are exceptions, please provide any information that will assist the auditor in reconciling the difference. 10. Blank checks are maintained in an unlocked cabinet along with the check-signing machine. Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds. 11. The company has insufficient expertise and controls over the selection and application of accounting policies that are in conformity with GAAP. 12. The timetable set by management to complete our audit was unreasonable considering the failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information. 13. Several employees have disabled the antivirus detection software on their PCs because the software slows the processing of data and occasionally rings false alarms. The company should obtain antivirus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel. 14. In connection with an audit of our financial statements, please furnish to our auditors a description and evaluation of any pending or probable litigation against our company of which you are aware. 15. The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities. 16. In planning the sampling application, was appropriate consideration given to the relationship of the sample to the assertion and to planning materiality?

1. B. Auditor's communications on significant deficiencies and material weakness. 2. N. Management representation letter. 3. N. Management representation letter. 4. D. Lawyer's response to audit inquiry letter. 5. L. Explanatory paragraph of an auditor's report on financial statements. 6. F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies and material weakness). 7. N. Management representation letter. 8. P. Predecessor auditor's communication with successor auditor. 9. J. Accounts receivable confirmation request. 10. B. Auditor's communications on significant deficiencies and material weakness. 11. B. Auditor's communications on significant deficiencies and material weakness. 12. F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies and material weakness). 13. B. Auditor's communications on significant deficiencies and material weakness. 14. C. Audit inquiry letter to legal counsel. 15. N. Management representation letter. 16. M. Partner's engagement review notes.

Classify each document as to its reliability (high, moderate, or low) 1. Duplicate copies of sales invoices. 2. Purchase orders. 3. Bank statements. 4. Remittance advices. 5. Vendors' invoices. 6. Materials requisition forms. 7. Overhead cost allocation sheets. 8. Shipping documents. 9. Payroll checks. 10. Long-term debt agreements.

1. High if internal control is excellent, moderate to low otherwise. 2. High if internal control is excellent, moderate to low otherwise. 3. High because it comes from an external party. 4. High to moderate because the document has been circulated to a party outside the entity. 5. High because it comes from an external party. 6. High if internal control is excellent, moderate to low otherwise. 7. High if internal control is excellent, moderate to low otherwise. 8. High if internal control is excellent, moderate to low otherwise. 9. High to moderate because the document has been circulated to a party outside the entity. 10. High because it comes from an external party.

Classify each document as internal or external evidence. 1. Duplicate copies of sales invoices. 2. Purchase orders. 3. Bank statements. 4. Remittance advices. 5. Vendors' invoices. 6. Materials requisition forms. 7. Overhead cost allocation sheets. 8. Shipping documents. 9. Payroll checks. 10. Long-term debt agreements.

1. Internal 2. Internal 3. External 4. External 5. External 6. Internal 7. Internal 8. Internal 9. Internal 10. External

a. Classify each document as internal or external evidence. 1. Duplicate copies of sales invoices. 2. Purchase orders. 3. Bank statements. 4. Remittance advices. 5. Vendors' invoices. 6. Materials requisition forms. 7. Overhead cost allocation sheets. 8. Shipping documents. 9. Payroll checks. 10. Long-term debt agreements.

1. Internal 2. Internal 3. External 4. External 5. External 6. Internal 7. Internal 8. Internal 9. Internal 10. External

what is an audit program?

A set of audit procedures prepared to test assertions for a component of the financial statements

Auditing

A systematic process of gathering evidence about economic assertions determining their correspondence with established criteria and communicating results to users

Audit Evidence consists of

ALL the information, from whatever source, usedby the auditor in arriving atthe conclusions on which theaudit opinion is based

What is the audit risk formula?

AR = IR x CR x DR

Subsequent event

After balance sheet date, before issuance date, includes report date

Analytical Procedures

Evaluations of financial information through analysis of plausible relationships among financial and non-financial data

Subsequent event Type II

Causal after b/s; does not affect b/s; disclose

Subsequent event Type I

Causal before b/s; affects b/s; adjust

Tests of Controls

Directed toward the evaluation of the effectiveness of the design and operation of internal controls

How is adequate technical training and proficiency obtained?

Education & Experience

Gross Profit Margin

Gross Profit / Net Sales

Types of tests of controls

Inquiry Observation Inspection Reperformance Walkthrough

Is a number good or not?

It depends

Advantage of statistical sampling

Provides mathematical measurement of sampling risk

Audit Risk is defined as

Risk that the auditor will give an inappropriately unqualified audit opinion on financial statements that are materially misstated due to errors and fraud.

What is due professional care?

Same degree of skill as others in the field, exercised with reasonable care do Do what any trained CPA profession would do

Types of Substantive Procedures

Test of Details Analytical Procedures

Test of Detail

Tests for errors or fraud in individual transactions, account balances, and disclosures

T/F - Risk & materiality are 2 concepts that underly the application of ALL auditing standards. Particularly the standards of fieldwork & reporting.

True

T/F - You can not design substantive tests of financial statements unless you have assessed the RMM first.

True

T/F - You first must understand internal controls before you can assess risk on the balance sheet

True

Dual Dating

Type II footnote disclosure after report date

Using statistical sampling to assist in verifying the year-end accounts receivable balance, and auditor has accumulated the following data: Population: 4,100 accounts Book balance: $5,000,000 Balance determined by the auditor: ? Sample: 200 accounts Sample book balance: $150,000 Sample balance determined by the auditor: $140,000 Using difference estimation, the auditor's estimate of year-end accounts receivable is: a) $4,795,000 b) $5,000,000 c) $5,250,000 d) None of the above.

a) $4,795,000

An audited entity company has not paid its 2015 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2016 audit, the 2015 audit fees must be paid before the: a) 2016 report is issued. b) 2016 fieldwork is started. c) 2017 fieldwork is started. d) 2015 report is issued.

a) 2016 report is issued.

Which of the following controls most likely would reduce the risk of diversion of customer receipts by employees? a) A bank lockbox system b) Prenumbered remittance advices c) Monthly bank reconciliations d) Daily deposit of all cash and checks received

a) A bank lockbox system

When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements? a) A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated. b) The prior year's financial statements are restated following the purchase of another company in the current year. c) A change in accounting principle causes the auditor to make a consistency modification in the current year's audit report. d) A scope limitation caused a qualified opinion on the prior year's financial statements, but the current year's opinion is properly unmodified.

a) A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

Which of the following legal situations would be considered to impair the auditor's independence? a) Actual litigation by the auditor against the present management, alleging management fraud or deceit. b) Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services. c) An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed. d) Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.

a) Actual litigation by the auditor against the present management, alleging management fraud or deceit.

Which of the following best describes the application and other explanatory material section of an AU-C section? a) Although such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of an AU-C section. The auditor is required to understand it. b) It is explanatory material that provides further explanation and guidance on the professional requirements and is intended to be descriptive rather than imperative. It provides additional information for the auditor to consider. c) The auditor should consider applicable explanatory material in planning and performing the audit. d) It provides background information on matters addressed by the AU-C section and identifies and describes other procedures or actions relating to the activities of the auditor.

a) Although such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of an AU-C section. The auditor is required to understand it.

Which of the following is a misappropriation of assets? a) An employee of a consumer electronics store steals 12 CD players. b) Classifying inventory held for resale as supplies. c) Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts equal to 10 percent of sales. d) Investing cash and earning at a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent.

a) An employee of a consumer electronics store steals 12 CD players.

According to the third standard of fieldwork, which of the following terms identifies a requirement for audit evidence? a) Appropriate b) Adequate c) Reasonable d) Disconfirming

a) Appropriate

An auditor suspects that a client's cashier, who also posts sales and collections to customer accounts in the subsidiary ledger, is lapping cash receipts. Of the following, what is the best procedure to detect this fraud? a) Compare dates checks are deposited per bank statement with dates remittance credits are posted b) Compare daily cash summaries with sums of cash receipts journal entries c) Compare individual bank deposits with details of monthly bank statements. d) Compare dates uncollectible accounts are authorized to be written off with dates write-off entries are made.

a) Compare dates checks are deposited per bank statement with dates remittance credits are posted

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming all required disclosures are made, which of the following reports may the CPA issue without violating independence rules? a) Compilation b) Review c) Audit d) Agreed-upon procedures

a) Compilation

The client has pledged inventory and accounts receivable against a line of credit at the bank. To verify the validity of this provision in the loan agreement deals with management's assertion related to a) Completeness b) Recordability c) Valuation d) Presentation/disclosure

a) Completeness

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? a) Completeness. b) Rights and obligations. c) Existence or occurrence. d) Classification.

a) Completeness.

Which of the following is not a component of an entity's internal control? a) Control risk b) Control activities c) The information and communication systems d) The control environment

a) Control risk

Which of the following best describes the general character of the three generally accepted auditing standards classified as standards of field work? a) Criteria for audit planning and evidence gathering. b) Description of the competence, independence, and professional care of persons performing the audit. c) Criteria for the content of the auditor's report on financial statements and related footnote disclosures. d) The need to maintain an independence of mental attitude in all matters relating to the audit.

a) Criteria for audit planning and evidence gathering.

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory? a) During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count. b) Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure. c) Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales. d) Tracing of test counts noted during the entity's physical count to the entity's summarization of quantities.

a) During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

Confirmation of customer accounts receivable rarely provides reliable evidence about which assertion? a) Existence/occurrence b) Valuation c) Presentation/disclosure d) Completeness

a) Existence/occurrence

An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that a) Fictitious credit sales have been recorded during the year. b) Employees have stolen inventory just before year end. c) The client recently tightened its credit-granting policies d) An employee has been lapping receivables in both years.

a) Fictitious credit sales have been recorded during the year.

Which of the following is correct concerning required auditor communications about fraud? a) Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. b) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. c) Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. d) The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities

a) Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements? a) Inability of the auditor to obtain sufficient competent evidence. b) Departure from generally accepted accounting principles. c) Inadequate disclosure of accounting policies. d) Unreasonable justification for a change in accounting principle.

a) Inability of the auditor to obtain sufficient competent evidence.

Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling? a) Inclusion of zero and negative balances generally does not require special design considerations. b) Any amount that is individually significant is automatically identified and selected. c) An estimate of the standard deviation of the population's recorded amounts is not required. d) The auditor rarely needs the assistance of a computer program to design an efficient sample.

a) Inclusion of zero and negative balances generally does not require special design considerations.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? a) Incompatible duties b) Management override c) Mistakes in judgment d) Collusion among employees

a) Incompatible duties

An auditor may decide to decrease the risk of incorrect acceptance when a) Increased reliability from the sample is desired. b) Many differences (audit value minus recorded value) are expected. c) Initial sample results do not support planned level of control risk d) The cost and effort of selecting additional sample items is low.

a) Increased reliability from the sample is desired.

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? a) Independent comparisons of finished goods records with counts of goods on hand. b) Segregation of functions between general accounting and cost accounting. c) Approval of inventory journal entries by the storekeeper. d) Periodic reconciliation of work in process with job cost sheets.

a) Independent comparisons of finished goods records with counts of goods on hand.

In confirming a clients accounts receivable in prior years, an auditor found many differences between recorded account balances and confirmation replies. These differences, which turned out not to be errors, required substantial work and time to resolve. This year, the auditor might change the sampling unit for accounts receivable from entire account balances to a) Individual invoices b) Overdue balances only c) Large account balances only d) Small account balances only

a) Individual invoices

Which of the following statements is true regarding an auditor's communications with a predecessor auditor prior to engagement acceptance? a) Inquiries addressing specific matters are required; or example, the predecessor's understanding for the reasons for the change in auditors. b) U.S. GAAS provides a list of matters that may be subject to the auditor's inquiry of the predecessor auditor. c) If management refuses to authorize the predecessor auditor to respond, or limits the response, the auditor should not accept the engagement. d) If the predecessor auditor provides no response or a limited response, the auditor should not accept the engagement.

a) Inquiries addressing specific matters are required; or example, the predecessor's understanding for the reasons for the change in auditors.

Which of the following statements is correct concerning the Public Company Accounting Oversight Board (PCAOB)? a) It was established by the Sarbanes-Oxley Act of 2002. b) It was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. c) It has oversight authority over the Securities and Exchange Commission (SEC). d) It was established by the Securities Exchange Act of 1933.

a) It was established by the Sarbanes-Oxley Act of 2002.

An auditor strives to achieve independence in appearance in order to a) Maintain public confidence in the profession b) Become independent in fact c) Maintain an unbiased mental attitude d) Appear to be fair

a) Maintain public confidence in the profession

An auditor's engagement letter should include a) Management's acknowledgement of its responsibility for maintaining effective internal control b) The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting c) A reminder that management is responsible for illegal acts committed by employees d) A request for permission to contact the client's lawyer for assistance in identifying litigation, claims and assessments

a) Management's acknowledgement of its responsibility for maintaining effective internal control

Which of the following internal control procedures is usually performed in the vouchers payable department? a) Matching the vendor's invoice with the related receiving reports and purchase orders b) Signing checks c) Payroll accounting d) Opening the incoming mail

a) Matching the vendor's invoice with the related receiving reports and purchase orders

Tracing shipping documents to prenumbered sales invoices provides evidence that a) No duplicate shipments or billings occurred b) Shipments to customers were properly invoiced c) All goods ordered by customers were shipped d) All prenumbered sales invoices were accounted for

a) No duplicate shipments or billings occurred

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? a) Observe the consistency of employees use of over the counter sales computer devices with internal records of such sales b) Inquire about employees access to recorded but undeposited cash c) Trace deposits in the cash receipts journal to the cash balance in the general ledger. d) Compare the cash balance in the general ledger with the bank confirmation.

a) Observe the consistency of employees use of over the counter sales computer devices with internal records of such sales

A cooling-off period of how many years is required before a member of an "issuer's" audit engagement team may begin working for the "registrant" in a key position? a) One year b) Two years c) Three years d) Four years

a) One year

Which of the following statements is correct concerning monetary-unit sampling (MUS)? a) Overstated units have a higher probability of sample selection than units that are understated. b) The sampling distribution of errors should approximate the normal distribution. c) The auditor controls the risk of incorrect rejection by specifying that risk level for the sampling plan. d) None of the above.

a) Overstated units have a higher probability of sample selection than units that are understated.

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a) Prepares the monthly bank reconciliation b) Mails the checks to vendors c) Is denied access to supporting documents d) Prepares the payroll

b) Mails the checks to vendors

Which of the following types of audit evidence is the LEAST reliable? a) Prenumbered purchase order forms prepared by the entity. b) Correspondence from the entity's attorney about litigation. c) Bank statements obtained from the entity. d) Test counts of inventory performed by the auditor.

a) Prenumbered purchase order forms prepared by the entity.

Which of the following types of audit evidence is the least reliable? a) Prenumbered purchase order forms prepared by the entity. b) Correspondence from the entity's attorney about litigation. c) Bank statements obtained from the entity. d) Test counts of inventory performed by the auditor.

a) Prenumbered purchase order forms prepared by the entity.

The PCAOB uses the term internal control over financial reporting to describe a process that does not include which of the following? a) Procedures performed by the auditor b) Procedures that pertain to the maintenance of reasonably detailed records that accurately and fairly reflect the transactions and dispositions of the company's assets. c) Procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with GAAP d) Procedures that provide reasonable assurance regarding prevention or timely detection of authorized acquisition, use, or disposition of company assets.

a) Procedures performed by the auditor

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items a) Represented by tags were included on the listing b) Included on the listing were properly counted c) Represented by tags were reduced to lower of cost or market d) Represented by the tags exist

a) Represented by tags were included on the listing

To reduce the risks associated with accepting e-mail responses to request for confirmations of accounts receivable, an auditor most likely would a) Request senders to mail the original forms directly to the auditor b) Examine subsequent cash receipts for the accounts in question c) Consider the e-mail responses to confirmations to be exceptions d) Mail second requests to the e-mail respondents.

a) Request senders to mail the original forms directly to the auditor

Which of the following internal controls would be most likely to deter the lapping of collections from customers? a) Segregation of duties between receiving cash and posting the accounts receivable ledger. b) Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function. c) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries. d) Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

a) Segregation of duties between receiving cash and posting the accounts receivable ledger.

The best primary audit evidence regarding year-end bank balances is documented in the a) Standard bank confirmations b) Interbank transfer schedule c) Bank reconciliations d) Bank deposit lead schedule

a) Standard bank confirmations

Which of the following computer documentation would an auditor most likely utilize in obtaining an understanding of internal control? a) Systems flowcharts b) Record counts c) Program listings d) Record layouts

a) Systems flowcharts

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective and obsolete items included in inventory are properly identified? a) Test the computation of standard overhead rates b) Tour the manufacturing plant or production facility c) Compare inventory balances to anticipated sales volume d) Review inventory experience and trends

a) Test the computation of standard overhead rates

All of the following statements regarding the Public company Accounting Oversight Board's (PCAOB) adopted interim auditing standards are true except a) The PCAOB adopted GAAS that were in existence on April 16, 2003 as its interim standards. b) The interim standards provide guidance, but they are not authoritative. c) Each of the interim standards remains in effect to the extent not amended or superseded by PCAOB action. d) The interim standards had been previously issued by the AICPA

a) The PCAOB adopted GAAS that were in existence on April 16, 2003 as its interim standards.

Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of field work and reporting? a) Control risk. b) Materiality and audit risk. c) Internal control. d) Expected misstatement.

b) Materiality and audit risk.

Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report? a) The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements. b) The auditor should extend the examination to the extent necessary to verify the "other information." c) The auditor must modify the auditor's report to state that the other information "is unaudited" or "is not covered by the auditor's report." d) The auditor has no obligation to read the "other information."

a) The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.

Which of the following statements concerning control deficiencies is true? a) The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. b) All control deficiencies are significant deficiencies. c) An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB. d) All significant deficiencies are material weaknesses.

a) The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? a) The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. b) As the likely rate of deviation decreases, the auditor should increase the planned sample size. c) The allowable risk of assessing control risk too low has no effect on the planned sample size. d) Of all the factors to be considered, the population size has the greatest effect on the sample size.

a) The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

Which of the following is not a factor a CPA firm should take into consideration when deciding whether to undertake or continue client relationships and engagements? a) The possibility of the existence of related parties b) The client's integrity c) The firm's ability to perform the engagement d) The firm's ability to comply with legal and ethical requirements

a) The possibility of the existence of related parties

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? a) The prospective client's unwillingness to permit inquiry of its legal counsel b) The inability to review the predecessor auditor's working papers c) The CPA's lack of understanding of the prospective client's operations and industry d) The indications that management has not investigated employees in key positions before hiring them

a) The prospective client's unwillingness to permit inquiry of its legal counsel

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations? a) The recipients are likely to sign the confirmations without devoting proper attention to them. b) Subsequent cash receipts are unusually difficult to verify. c) Analytical procedures indicate that few exceptions are expected. d) The risk of material misstatement (IR x CR) is low.

a) The recipients are likely to sign the confirmations without devoting proper attention to them.

Which of the following characteristics most likely would be an advantage of using monetary-unit sampling (MUS) rather than classical difference estimation for errors? a) The sample will result in a smaller sample size if few errors are expected. b) The selection of negative balances requires no special design considerations. c) The sampling process can begin before the complete population is available. d) No preliminary judgments of materiality are necessary.

a) The sample will result in a smaller sample size if few errors are expected.

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? a) The walkthrough of the control system conducted at interim. b) The length of the remaining period. c) The specific controls tested prior to the "as of" date and the results of those tests. d) Any significant changes that occurred in internal control subsequent to the interim date.

a) The walkthrough of the control system conducted at interim.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2½% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a) Tolerable rate (7%) was less than the achieved upper precision limit (8%) b) Expected deviation rate (7%) was more than the percentage of errors in the sample (3½%) c) Expected deviation rate (2½%) was less than the tolerable rate (7%) d) Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3½%)

a) Tolerable rate (7%) was less than the achieved upper precision limit (8%)

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks? a) Treasurer. b) Receptionist. c) Payroll clerk. d) Accounts payable clerk.

a) Treasurer.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a) Understating the sales journal. b) Overstating the accounts receivable control account. c) Overstating the accounts receivable subsidiary ledger. d) Understating the cash receipts journal.

a) Understating the sales journal.

Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value? a) Variable sampling. b) Numeric sampling. c) Random sampling. d) Attribute sampling.

a) Variable sampling.

To verify that all inventory items in a client's inventory listing are valid, an auditor would a) Vouch a sample of items to client's count sheets and test count sheets taken by the auditor b) Trace a sample of items from count sheets to inventory listing and client physical counts c) Physically count all inventory d) Inspect the client's perpetual records over inventory

a) Vouch a sample of items to client's count sheets and test count sheets taken by the auditor

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? a) Whether management has any knowledge of fraud that has been perpetrated on or within the entity. b) Whether management has ever intentionally violated the securities laws. c) Management's attitude about hiring ethical employees. d) Management's attitudes toward regulatory authorities.

a) Whether management has any knowledge of fraud that has been perpetrated on or within the entity.

The questions that follow are based on the Independence Rule of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Select yes if the situation violates the rule, no if it does not. a) A partner's dependent parent is a 5 percent limited partner in a firm entity. Does the parent's direct financial interest in the entity impair the firm's independence? b) A partner assigned to a firm's New York office is married to the president of an entity for which the firm's Connecticut office performs audit services. If the partner does not perform services out of or for the Connecticut office, cannot exercise significant influence over the engagement, and has no involvement with the engagement, such as consulting on accounting or auditing issues, is the firm's independence impaired? c) A CPA's father acquired a 10 percent interest in his son's audit entity. The investment is material to the father's net worth. If the son is aware of his father's investment and the CPA participates in the audit engagement, is the firm's independence impaired? d) An audit partner has a brother who owns a 60 percent interest in an audit entity, which is material to the brother's net worth. If the partner participates in the audit engagement, but does not know about his brother's investment, is the firm's independence impaired?

a) Yes b) No c) Yes d) No

Each of the following situations involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. Select yes if the situation violates the code, no if it does not. a) Jack Jackson is a CPA and controller of Acme Trucking Company. Acme's external auditors have asked Jackson to sign the management representation letter. Jackson has signed the management representation letter, even though he knows that full disclosures have not been made to Acme's external auditors. b) Mary McDermott, CPA, is employed in the internal audit department of the United Fund of America. The United Fund raises money from individuals and distributes it to other organizations. McDermott has audited Children's Charities, an organization that receives funds from United Fund. c) Janet Jett, CPA, formerly worked for Delta Disk Drive, Inc. She is currently interviewing for a new position with Maxiscribe, Inc., another manufacturer of disk drives. Jett has agreed to provide confidential information about Delta's trade secrets if she is hired by Maxiscribe. d) Brian Thorough, CPA, is currently employed as controller of TransLouisiana Oil Company. He has discovered that TransLouisiana has been illegally paying state environmental employees so that they will not charge TransLouisiana with dumping highly toxic chemicals into the bayous. Thorough discloses this information to the state attorney general. e) Jill Burnett, CPA, was hired by Cooper Corporation to supervise its accounting department in preparing financial statements and presenting them to senior management. Due to considerable time incurred on other financial activities, Burnett was unable to supervise the accounting staff adequately. It is later discovered that Cooper's financial statements contain false and misleading information.

a) Yes b) Yes c) Yes d) No e) Yes

The current file of the auditor's working papers should generally include a) a copy of the financial statements. b) copies of bond and note indentures. c) organization charts. d) a flowchart of the accounting system.

a) a copy of the financial statements.

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: a) a system of quality control. b) a system of peer review. c) compliance with generally accepted reporting standards. d) continuing professional education.

a) a system of quality control.

When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may: a) accept the engagement, provided the auditor's opinion is expressed in a special report. b) accept the engagement, provided distribution of the auditor's report is limited to the entity's management. c) not accept the engagement unless also engaged to audit the full financial statements of the entity. d) not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion.

a) accept the engagement, provided the auditor's opinion is expressed in a special report.

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

a) access information stored on computer files while having a limited understanding of the entity's hardware and software features.

In testing the existence assertion for an asset, an auditor ordinarily works from the a) accounting records to the supporting documents. b) potentially unrecorded items to the financial statements. c) supporting documents to the accounting records. d) financial statements to the potentially unrecorded items.

a) accounting records to the supporting documents.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that: a) all goods owned at year-end are included in the inventory balance. b) all goods purchased before year-end are received before the physical inventory count. c) goods observed during the physical count are pledged or sold. d) no goods held on consignment for customers are included in the inventory balance.

a) all goods owned at year-end are included in the inventory balance.

If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors' a) competence and objectivity. b) efficiency and experience. c) independence and review skills. d) training and supervisory skills.

a) competence and objectivity.

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a a) deficiency in operation. b) significant deficiency. c) material weakness. d) deficiency in design.

a) deficiency in operation.

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to a) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit. b) request a printout of a sample of account balances so that they can be individually checked against the respective credit limits. c) request a printout of all account balances so that they can be manually checked against the credit limits. d) develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations.

a) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

A written understanding between the auditor and the entity concerning the auditor's responsibility for fraud is usually set forth in a(n) a) engagement letter. b) internal control letter. c) management letter. d) letter of audit inquiry.

a) engagement letter.

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is a) entering of the voucher into the voucher register. b) cancelation of the supporting documents. c) entry of the check amount in the check register. d) approval of the voucher for payment.

a) entering of the voucher into the voucher register.

If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were a) fictitious sales in the current year. b) unrecorded credit sales in the current year. c) unrecorded cash receipts last year. d) more thorough credit investigations made by the company late last year.

a) fictitious sales in the current year.

An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was: a) limited to the specific event referenced. b) extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence. c) extended to subsequent events occurring through the date of issuance of the report. d) limited to events occurring up to the date of the last subsequent event referenced.

a) limited to the specific event referenced

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to a) measure the sufficiency of the evidential matter obtained. b) eliminate the risk of nonsampling errors. c) minimize the failure to detect errors and fraud. d) reduce audit risk and materiality to a relatively low level.

a) measure the sufficiency of the evidential matter obtained.

As generally conceived, the audit committee of a publicly held company should be made up of a) members of the board of directors who are not officers or employees. b) representatives from the entity's management, investors, suppliers, and customers. c) the audit partner, the chief financial officer, the legal counsel, and at least one outsider. d) representatives of the major equity interests (preferred stock, common stock).

a) members of the board of directors who are not officers or employees.

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor a) obtains reasonable assurance about whether the financial statements are free of material misstatement. b) realizes that some matters, either individually or in the aggregate, are important, while other matters are not important. c) assesses the accounting principles used and evaluates the overall financial statement presentation. d) is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

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

Preliminary engagement activities include a) Understanding the client and client's industry. b) Determining audit engagement team requirements. c) Ensuring the independence of the audit team and audit firm. d) All of the above.

d) All of the above.

A violation of the profession's ethical standards is least likely to occur when a CPA: a) purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period. b) forms an association—not a legally binding partnership—with two other sole practitioners and calls the association "Adams, Betts & Associates." c) receives a percentage of the amounts invested by the CPA's audit entities in a tax shelter with the entities' knowledge and approval. d) has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company.

a) purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a) receiving department. b) accounts payable department. c) department that initiated the requisition. d) purchasing agent.

a) receiving department.

The audit firm's valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present: a) significant uncertainty exists in key inputs to the entity's valuation models. b) the entity owns a large and diverse portfolio of publicly traded stock. c) the entity is a new audit client. d) the entity has a financial instrument with a Level 2 input.

a) significant uncertainty exists in key inputs to the entity's valuation models.

Assertions are expressed or implied representations by management that are reflected in the financial statement components. The auditor performs audit procedures to gather evidence to test those assertions. Your client is All's Fair Appliance Company, an appliance wholesaler. Select the most appropriate audit procedure from the following list and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Audit Procedure: 1. Review of bank confirmations and loan agreements. 2. Review of drafts of the financial statements. 3. Select a sample of shipping documents, match them with related sales invoices, and determine that they have been included in the sales journal and accounts receivable subsidiary ledger. 4. Select a sample of shipping documents for a few days before and after year-end. 5. Confirmation of accounts receivable. 6. Review of aging of accounts receivable with the credit manager. Assertion Audit Procedure a. Ensure that the entity has legal title to accounts receivable (rights and obligations). b. Determine that recorded accounts receivable include all amounts owed to the client (completeness). c. Verify that all accounts receivable are recorded in the correct period (cutoff). d. Ensure that the allowance for uncollectible accounts is properly stated (valuation and allocation). e. Confirm that recorded accounts receivable are valid (existence).

a. 1. Review of bank confirmations and loan agreements. b. 3. Select a sample of shipping documents, match them with related sales invoices, and determine that they have been included in the sales journal and accounts receivable subsidiary ledger. c. 4. Select a sample of shipping documents for a few days before and after year-end. d. 6. Review of aging of accounts receivable with the credit manager. e. 5. Confirmation of accounts receivable.

In obtaining evidence in support of financial statement assertions, the auditor develops specific audit procedures to access those assertions. All's Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Audit Procedure: 1. Compare selected amounts from the accounts payable listing with the voucher and supporting documents. 2. Review drafts of the financial statements. 3. Search for unrecorded liabilities. 4. Select a sample of receiving documents for a few days before and after year-end. 5. Obtain a listing of the accounts payable and agree total to general ledger control account. Specific Assertion a. Verify that recorded accounts payable include all amounts owed to vendors. (completeness) b. Verify that all accounts payable are recorded in the correct period. (cutoff) c. Determine whether accounts payable have been properly accumulated from the journal to the general ledger. (accuracy) d. Determine whether recorded accounts payable are valid. (existence/occurrence)

a. 3. Search for unrecorded liabilities. b. 4. Select a sample of receiving documents for a few days before and after year-end. c. Obtain a listing of the accounts payable and agree total to general ledger control account. d. 1. Compare selected amounts from the accounts payable listing with the voucher and supporting documents.

In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit procedures to address those assertions. Hillmart is a retail department store that purchases all goods directly from wholesalers or manufacturers. Select the most appropriate audit procedure from the dropdowns to address the following assertions. (An audit procedure may be selected once, more than once, or not at all.) Audit Procedure: 1. Examine current vendor price lists. 2. Review drafts of the financial statements. 3. Select a sample of items during the physical inventory count and determine that they have been included on count sheets. 4. Select a sample of recorded items and examine supporting vendor invoices and contracts. 5. Select a sample of recorded items on count sheets during the physical inventory count and determine that items are on hand. 6. Review loan agreements and minutes of board of directors' meetings. Specific Assertion a. Ensure that the entity has legal title to inventory (rights and obligations). b. Ensure that recorded inventory quantities include all products on hand (completeness). c. Verify that inventory has been reduced, when appropriate, to replacement cost or net realizable value (valuation). d. Verify that the cost of inventory has been properly determined (accuracy). e. Verify that the major categories of inventory and their bases of valuation are adequately reported in the financial statements (completeness and accuracy and valuation for presentation and disclosure).

a. 6. Review loan agreements and minutes of board of directors' meetings. b. 3. Select a sample of items during the physical inventory count and determine that they have been included on count sheets. c. 1. Examine current vendor price lists. d. 4. Select a sample of recorded items and examine supporting vendor invoices and contracts. e. 2. Review drafts of the financial statements.

A client's outside counsel has refused to provide information requested by the auditor about a material legal matter involving the client. Accordingly, the auditor a. Cannot express an unqualified opinion. b. May express an unqualified opinion and include an explanatory paragraph. c. Must disclaim an opinion. d. Must withdraw from the engagement.

a. Cannot express an unqualified opinion.

An auditor test counted several items of inventory. This procedure relates most closely to the assertion of a. Existence. b. Disclosure. c. Completeness. d. Valuation.

a. Existence.

The existence of audit risk is recognized by the statement in the auditor's report that the auditor a. Has followed generally accepted auditing standards, which require that the engagement be planned and performed in order to provide reasonable assurance that the financial statements are free from material misstatement. b. Has evaluated the significant estimates made by management as well as the accounting policies used by the client. c. Has formulated a judgment about materiality. d. Is responsible for expressing an opinion on the financial statements.

a. Has followed generally accepted auditing standards, which require that the engagement be planned and performed in order to provide reasonable assurance that the financial statements are free from material misstatement.

Which of the following management roles would typically be acknowledged in a management representation letter? a. Management has the responsibility for the design of controls to detect fraud. b. Management communicates its views on ethical behavior to its employees. c. Management's knowledge of fraud is communicated to the audit committee. d. Management's compensation is contingent upon operating results.

a. Management has the responsibility for the design of controls to detect fraud.

The primary purpose of documenting an engagement is to a. Provide evidence of planning and execution of audit procedures as well as the conclusions reached. b. Serve as a means with which to prepare the financial statements. c. Document deficiencies in internal control with recommendations to management for improvement. d. Comply with the auditing standards of the profession.

a. Provide evidence of planning and execution of audit procedures as well as the conclusions reached.

Samples to test controls are intended to provide a basis for an auditor to conclude whether a. The controls are operating effectively. b. The financial statements are materially misstated. c. The risk of incorrect acceptance is too high. d. Materiality for planning purposes is at a sufficiently low level.

a. The controls are operating effectively.

Attestation

adds reliability and credibility to subject matter or assertions about subject matter that are other parties' responsibilities

Assurance

adds reliability, credibility, relevance and timeliness to information, or its context, for decision makers

How do you treat a violation of the law that is direct & material?

as fraud

In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the interest is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA. a) 1 and 3. b) 2 and 3. c) 1 and 2. d) 1, 2, and 3.

b) 2 and 3.

b) 4½%

Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting? a) A conversation with the head of the entity's internal audit department and those charged with governance to discuss matters pertaining to financial reporting. b) A conversation with those charged with governance to discuss matters pertaining to financial reporting. c) A conversation in which those charged with governance report on management's views on matters pertaining to financial reporting. d) A conversation with only management to discuss matters pertaining to financial reporting.

b) A conversation with those charged with governance to discuss matters pertaining to financial reporting.

Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the accounting profession? a) A fee paid to the client's audit firm for recommending investment advisory services to the client b) A fee paid to the client's tax accountant for recommending a computer system to the client c) A contingent fee paid to the CPA for preparing the client's amended income tax return d) A contingent fee paid to the CPA for reviewing the client's financial statements

b) A fee paid to the client's tax accountant for recommending a computer system to the client

Which of the following is not required documentation in an audit in accordance with generally accepted auditing standards? a) A written engagement letter formalizing the level of service to be rendered b) A flowchart depicting the segregation of duties and authorization of transactions c) A written audit program describing the necessary procedures to be performed d) Written representations from management

b) A flowchart depicting the segregation of duties and authorization of transactions

Under the ethical standards of the accounting profession, which of the following positions would be considered a position of significant influence? a) A marketing position related to the client's primary products b) A policy-making position in the client's finance division c) A staff position in the client's research and development division d) A senior position in the client's human resources division

b) A policy-making position in the client's finance division

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

b) A significant portion of management compensation is represented by stock options

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

b) Affects management's financial statement assertions

Which of the following presumptions is least likely to relate to the reliability of audit evidence? a) The more effective internal control, the more assurance it provides about the accounting data and financial statements. b) An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. c) Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity d) The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

b) An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? a) An adverse report. b) An unqualified report. c) A disclaimer of opinion. d) An exculpatory opinion.

b) An unqualified report.

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of a) Classification b) Existence/occurrence c) Presentation/disclosure d) Understandability

b) Existence/occurrence

Which of the following internal control questionnaire questions is appropriate for the completeness assertion over purchases? a) Are purchase requisitions prenumbered and controlled by an employee independent of purchasing? b) Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for? c) Are unpaid vouchers periodically reconciled with inventory records by independent employees? d) Are entries in the vouchers payable register supported by requisitions, receiving reports, and vendor invoices

b) Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

The primary objective of final analytical procedures is to a) Identify areas that represent specific risks relevant to the audit. b) Assist the auditor in assessing the validity of the conclusions reached on the audit. c) Obtain evidence from details tested to corroborate particular assertions. d) Satisfy doubts when questions arise about an entity's ability to continue in existence.

b) Assist the auditor in assessing the validity of the conclusions reached on the audit.

Which is true regarding significant deficiencies and material weaknesses in an audit of financial statements? a) Auditors must search for them. b) Auditors must communicate them to management and those charged with governance. c) Auditors must communicate them to those charged with governance. d) They must be disclosed in financial statement footnotes.

b) Auditors must communicate them to management and those charged with governance.

Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n): a) authorized quality control review board. b) CPA firm that has been engaged to audit a former audit entity. c) federal court that has issued a valid subpoena. d) disciplinary body created under state statute.

b) CPA firm that has been engaged to audit a former audit entity.

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting a) Opening and closing inventory balances b) Cash receipts and accounts receivable c) Shipping and receiving activities d) Cutoffs of sales and purchases

b) Cash receipts and accounts receivable

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a) Confirming a sample of recorded receivables by direct communication with the debtors. b) Comparing a sample of shipping documents to related sales invoices. c) Reviewing standard bank confirmations for indications of cash manipulations. d) Observing the entity's distribution of payroll checks.

b) Comparing a sample of shipping documents to related sales invoices.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of a) Occurrence b) Completeness c) Valuation d) Rights/obligations

b) Completeness

An auditor traced a sample of purchase orders and related receiving reports to the purchases and cash disbursements journals. The assertion(s) this procedure verifies is (are) a) Existence b) Completeness c) Disclosure d) Compliance

b) Completeness

Which of the following assertions should an auditor focus primary attention when auditing accounts payable? a) Classification and understandability b) Completeness c) Existence d) Occurrence

b) Completeness

A portion of a client's inventory is stored in independent public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which audit procedure? a) Observation b) Confirmation c) Inspection of receipts from the warehouse d) Recomputation of client amounts

b) Confirmation

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? a) Controls to monitor results of operations. b) Controls to monitor the inventory taking process. c) The period-end financial reporting process. d) Management's risk assessment process.

b) Controls to monitor the inventory taking process.

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? Desired Confidence Level, Tolerable Deviation Rate, Expected Population Deviation Rate a) Increase, Increase, Decrease b) Decrease, Increase, Decrease c) Decrease, Increase, Increase d) Decrease, Decrease, Increase

b) Decrease, Increase, Decrease

To measure how effectively and efficiently an entity employs its resources, an auditor calculates days inventory outstanding. This calculation is performed by a) Dividing gross profit by net sales b) Dividing inventory turnover into 365 c) Dividing cost of goods sold by average inventory d) Dividing cost of goods sold by 365

b) Dividing inventory turnover into 365

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report? a) Inquire of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end. b) Examine relevant internal audit reports issued during the subsequent period. c) Review a fire insurance settlement during the subsequent period. d) Confirm bank accounts established after year-end.

b) Examine relevant internal audit reports issued during the subsequent period.

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated? a) Examine reported purchase returns that appear too low. b) Examine vendor statements for amounts not recorded as purchases c) Search for customer-returned goods that were not reported as returns d) Review bank transfers

b) Examine vendor statements for amounts not recorded as purchases

The auditing standards used to guide the conduct of the audit are a) Explicitly referred to in the opinion paragraph of the auditor's standard report. b) Explicitly referred to in the scope paragraph of the auditor's standard report. c) Implicitly referred to in the opinion paragraph of the auditor's standard report. d) Implicitly referred to in the opening paragraph of the auditor's standard report. e) Explicitly referred to in the opening paragraph of the auditor's standard report. f) Implicitly referred to in the scope paragraph of the auditor's standard report.

b) Explicitly referred to in the scope paragraph of the auditor's standard report.

Under the SEC's rules regarding independence, which of the following must an entity disclose? a) Only fees for systems implementation and design and nonaudit services performed by the audit firm. b) Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm. c) Only fees for internal and external audit services provided by the audit firm. d) Only fees for the external audit.

b) Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm.

In which of the following situations would a CPA's independence be considered impaired? I. The CPA maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. II. The CPA has a direct financial interest in an audit client, but the interest is maintained in a blind trust. III. The CPA owns a commercial building and leases it to an audit client. The lease qualifies as a capital lease. a) I and II b) II and III c) I and III d) I, II, and III

b) II and III

Which of the following statements is correct concerning the use of prior audit evidence regarding operating effectiveness of internal controls? a) If the auditor plans to rely on controls that have changed since they were last tested, the auditor should test those controls at least once every three years. b) If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third year. c) If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test those controls at least every other year. d) If the auditor plans to rely on controls that mitigate a significant risk, those controls should be tested at least every other year.

b) If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third year.

The 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 types of sampling risk? a) Incorrect rejection b) Incorrect acceptance c) Assessing control risk too low d) Assessing control risk too high

b) Incorrect acceptance

After testing a "non-issuer" client's internal controls, an auditor discovers what he determines to be a material weakness in the client's internal controls. Under these circumstances the auditor most likely would a) Issue a disclaimer of opinion about internal controls as part of the audit report on the financial statements b) Increase the assessment of control risk as well as the extent of related substantive tests c) Issue a qualified opinion of this finding as part of the auditor's report on the financial statements d) Withdraw from the audit because internal controls are ineffective.

b) Increase the assessment of control risk as well as the extent of related substantive tests

Which of the following best places the events of the last decade in proper sequence? a) Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to auditees, prohibition of most consulting work for auditees, establishment of PCAOB. b) Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB. c) Sarbanes-Oxley Act, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. d) Increased consulting services to auditees, Sarbanes-Oxley Act, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB.

b) Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB.

Which of the following audit procedures most likely would provide assurance about the valuation of a retail concern's inventory? a) Tracing test counts to the client's final inventory listing b) Inspection of inventory that is unsaleable c) Testing of the entity's computation of overhead rates d) Confirming inventory pledged as collateral against a loan

b) Inspection of inventory that is unsaleable

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? a) Subsidiary ledgers are periodically reconciled with inventory control accounts. b) Inventory manager does not have ability to record inventory transactions. c) Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down. d) Summary of the receiving reports is independently compared to the inventory status report.

b) Inventory manager does not have ability to record inventory transactions.

Which of the following statements best describes what is meant by an unqualified audit opinion? a) Issuance of an unqualified auditor's report indicates that the auditor is expressing different opinions on each of the basic financial statements regarding whether the client's financial statements are fairly presented in accordance with agreed-upon criteria. b) Issuance of a standard unqualified auditor's report indicates that in the auditor's opinion the clients' financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases. c) Issuance of an unqualified auditor's report indicates that the auditor is not qualified to express an opinion that the client's financial statements are fairly presented in accordance with agreed-upon criteria. d) Issuance of an unqualified auditor's report indicates that in the auditor's opinion the client's financial statements are not fairly enough presented in accordance with agreed-upon criteria for a clean opinion.

b) Issuance of a standard unqualified auditor's report indicates that in the auditor's opinion the clients' financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases.

An auditor may use a systematic sampling technique with a start at any randomly selected item when performing a test of controls with respect to control over cash receipts. The biggest disadvantage of this type of sampling is that the items in the population a) Must be systematically replaced in the population after sampling b) May occur in a systematic pattern, thus destroying the sample randomness c) Must be recorded in a systematic pattern before the sample can be drawn d) May systematically occur more than once in the sample

b) May occur in a systematic pattern, thus destroying the sample randomness

Which of the following best describes what is meant by the term generally accepted auditing standards? a) Procedures to be used to gather evidence to support financial statements b) Measures of audit quality and the objectives to be achieved in an audit c) Pronouncements issued by the Auditing Standards Board d) Rules acknowledged by the accounting profession because of their universal application

b) Measures of audit quality and the objectives to be achieved in an audit

Audit evidence concerning limited access to assets is best obtained by a) Performing tests of transactions that corroborate management's financial statement assertions of existence/occurrence b) Observe the control being implemented. c) Reading a flowchart of activities performed by sales personnel d) Developing audit objectives that reduce control risk.

b) Observe the control being implemented.

Which of the following would not be considered an analytical procedure? a) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked b) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics c) Computing accounts receivable turnover by dividing credit sales by the average net receivables d) Developing the expected current year sales based on the sales trend of the prior five years

b) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

Which of the following is NOT a part of the role of internal auditors? a) Assisting the external auditors b) Providing reports on the reliability of financial statements to investors and creditors. c) Consulting activities. d) Operational audits.

b) Providing reports on the reliability of financial statements to investors and creditors.

Part of an auditor's process of establishing whether the preconditions for an audit are present, involves obtaining management's acknowledgment of its responsibility for all of the following except a) The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework b) Providing the auditor with access to key persons within the entity who have been authorized by management or those charged with governance to be involved in the audit c) The design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements d) Providing the auditor with access to all information that is relevant to the preparation and fair presentation of the financial statements

b) Providing the auditor with access to key persons within the entity who have been authorized by management or those charged with governance to be involved in the audit

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is moderately material, but the auditor does not consider it to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor's opinion. Which kind of audit report would an auditor most likely issue under these circumstances? a) Standard unqualified opinion. b) Qualified opinion due to departure from GAAP. c) Adverse opinion. d) No opinion at all.

b) Qualified opinion due to departure from GAAP.

Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities? a) Recompute selected extensions and footings of dividend schedules and compare totals to the general ledger. b) Reconcile recorded earnings with the dividend earnings reported in the investment broker statement. c) Trace deposits of dividend checks to the cash receipts book. d) Compare the amounts received with prior-year dividends received.

b) Reconcile recorded earnings with the dividend earnings reported in the investment broker statement.

During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh more heavily for the auditor in this instance? a) Moon management has the right to make company estimates. b) Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. c) The interests of Moon Co., the auditor, and the public should be weighed equally in the decision. d) Accounts Receivable as stated by Moon Co. might turn out to be fully collectible.

b) Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a) Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. b) Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. c) Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. d) Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.

b) Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Which of the following courses of action would an auditor most likely follow in planning a sample for accounts receivable confirmation if the auditor is aware of several unusually large accounts? a) Set tolerable error (materiality) at a lower level than originally planned. b) Stratify the population by dollar amount. c) Increase sample size to reduce the effect of the unusually large items. d) Require more confidence (less detection risk).

b) Stratify the population by dollar amount.

In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor's needs in a given situation? a) The qualitative aspects of misstatements. b) The acceptable level of risk. c) The total dollar amount of the population. d) The estimated percentage of deviations in the population.

b) The acceptable level of risk.

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? a) Management should identify material weaknesses in its report. b) The auditor should provide recommendations for improving internal control in the audit report. c) Management's report should state its responsibility for establishing and maintaining an adequate internal control system. d) The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively.

b) The auditor should provide recommendations for improving internal control in the audit report.

According to the accounting profession's professional standards, an auditor world be considered independent in which of the following instances? a) The auditor is the officially appointed stock transfer agent for a client b) The auditor's checking account that is fully insured by a federal agency is held at a client financial institution c) The client owes the auditor fees for more than two years prior to the issuance of the audit report. d) The client is the only tenant in a commercial building owned by the auditor. The lease qualifies as a capital lease under GAAP.

b) The auditor's checking account that is fully insured by a federal agency is held at a client financial institution

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses? a) The current year's accounts receivable with the prior year's accounts receivable b) The current year's payroll expense with the prior year's payroll expense c) The budgeted current year's sales with the prior year's sales d) The budgeted current year's warranty expense with the current year's contingent liabilities

b) The current year's payroll expense with the prior year's payroll expense

Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements? a) A technological development in the industry that could affect the entity's future ability to continue as a going concern. b) The discovery of information regarding a contingency that existed before the financial statements were issued. c) The final resolution of a lawsuit explained in a separate paragraph of the auditor's report. d) The entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales.

b) The discovery of information regarding a contingency that existed before the financial statements were issued.

Which of the following would an auditor most likely use in determining overall materiality when planning the audit? a) The anticipated sample size of the planned substantive tests. b) The entity's income before taxes for the period-to-date (e.g., 6 months). c) The results of tests of controls. d) The contents of the engagement letter.

b) The entity's income before taxes for the period-to-date (e.g., 6 months).

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? a) The interaction or relationship of the control with other controls. b) The financial statement amounts exposed to the deficiency. c) The susceptibility of the related assets or liability to loss or fraud. d) The nature of the financial statement accounts, disclosures, and assertions involved.

b) The financial statement amounts exposed to the deficiency.

Which of the following statements concerning audit evidence is correct? a) The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. b) The measure of the reliability of audit evidence lies in the auditor's judgment. c) To be appropriate, audit evidence should be either persuasive or relevant but need not be both. d) An entity's general ledger may be sufficient audit evidence to support the financial statements.

b) The measure of the reliability of audit evidence lies in the auditor's judgment.

Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained? a) Purchase and sale of investments are executed on the specific authorization of the board of directors. b) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel. c) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. d) Direct access to securities in the safe-deposit box is limited to one corporate officer.

b) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel.

GAAS requires the auditor to obtain reasonable assurance that the financial statements as a whole are free from material misstatement. Reasonable assurance, which is a high, rather than absolute, level is assurance is acceptable because a) It is generally understood that conclusive evidence is rarely available b) There are inherent limitations of an audit, some of which cannot be cured by further audit procedures c)Auditors are human beings and accordingly, are fallible d) The AICPA has established this as the standard for the profession

b) There are inherent limitations of an audit, some of which cannot be cured by further audit procedures

Which of the following statements is correct concerning statistical sampling in tests of controls? a) The qualitative aspects of deviations are not considered by the auditor. b) There is an inverse relationship between the sample size and the tolerable deviation rate. c) Deviations from controls at a given rate usually result in misstatements at a higher rate. d) As the population size doubles, the sample size should also double.

b) There is an inverse relationship between the sample size and the tolerable deviation rate.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that a) Obsolete inventory has not yet been reduced to fair market value. b) There was an improper cutoff of sales at the end of the year. c) An unusually large receivable was written off near the end of the year. d) The aging of accounts receivable was improperly performed in both years.

b) There was an improper cutoff of sales at the end of the year.

The overall objectives of the audit, in conducting an audit of financial statements in accordance with GAAS, include all of the following, except a) To report on the financial statements b) To adequately plan the work and properly supervise any assistants. c) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. d) To communicate as required by GAAS, in accordance with the auditor's findings.

b) To adequately plan the work and properly supervise any assistants.

An auditor's analytical procedures most likely would be facilitated if the entity a) Segregates obsolete inventory before the physical inventory count b) Uses a standard cost system that produces variance reports c) Corrects material weaknesses in internal control before the beginning of the audit d) Develops its data from sources solely within the entity

b) Uses a standard cost system that produces variance reports

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

b) Verifying that approved spending limits are not exceeded

Which of the following matters should an auditor communicate to those charged with governance? Significant Audit Adjustments, Management's Consultations with Other Accountants a) Yes, No b) Yes, Yes c) No, No d) No, Yes

b) Yes, Yes

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from: a) the entity's lack of experience with such litigation. b) a lack of sufficient evidence. c) a lack of insurance coverage for possible losses from such litigation. d) an inability to estimate the amount of loss.

b) a lack of sufficient evidence.

Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: a) a qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph. b) a qualified opinion or a disclaimer of opinion. c) a qualified opinion or an adverse opinion. d) an unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph.

b) a qualified opinion or a disclaimer of opinion.

To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or: a) determines the market price per share at the balance sheet date from published quotations. b) confirms the number of shares owned that are held by an independent custodian. c) relies on the entity's internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed. d) confirms the number of shares owned with the issuing company.

b) confirms the number of shares owned that are held by an independent custodian.

Considering each independently, a change in which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Misstatement, Tolerable Misstatement a) Yes, No b) No, Yes c) Yes, Yes d) No, No

c) Yes, Yes

Comparative financial statements for a public company include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial statements. If the predecessor's report was unqualified, the successor should: a) obtain a letter of representations from the predecessor concerning any matters that might affect the successor's opinion. b) indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion. c) request that the predecessor auditor reissue the prior year's report. d) express an opinion on the current year's statements alone and make no reference to the prior year's statements.

b) indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion.

An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: a) necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." b) is appropriate and would not negate the unmodified opinion. c) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. d) is considered an "except for" qualification of the opinion.

b) is appropriate and would not negate the unmodified opinion.

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a) supporting schedule. b) lead schedule. c) working trial balance. d) audit control account.

b) lead schedule.

An auditor would be most likely to identify a contingent liability by obtaining a(n): a) bank confirmation of the entity's cash balance. b) letter from the entity's general legal counsel. c) accounts payable confirmation. d) list of subsequent cash receipts.

b) letter from the entity's general legal counsel.

In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except: a) supervision responsibilities. b) performance evaluation. c) engagement performance. d) review responsibilities.

b) performance evaluation.

Purchase cutoff procedures should be designed to test whether all inventory a) purchased and received before the end of the year was paid for. b) purchased and received before the end of the year was recorded. c) ordered before the end of the year was received. d) owned by the entity is in the possession of the entity at the end of the year.

b) purchased and received before the end of the year was recorded.

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and also a) reconcile the accounts payroll ledger. b) recompute the calculations on vendors' invoices. c) post the detailed accounts payable records. d) cancel vendors' invoices after payment.

b) recompute the calculations on vendors' invoices.

An auditor would most likely verify the interest earned on bond investments by: a) confirming the bond interest rate with the issuer of the bonds. b) recomputing the interest earned on the basis of face amount, interest rate, and period held. c) testing the controls over cash receipts. d) vouching the receipt and deposit of interest checks.

b) recomputing the interest earned on the basis of face amount, interest rate, and period held.

An auditor would be least likely to use confirmations in connection with the examination of a) long-term debt. b) refundable income taxes. c) inventory held in a third-party warehouse. d) stockholders' equity.

b) refundable income taxes.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items: a) included in the listing are represented by inventory tags. b) represented by inventory tags are included in the listing. c) represented by inventory tags are bona fide. d) included in the listing have been counted.

b) represented by inventory tags are included in the listing.

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a: a) description of a CPA's procedures for responding to an inquiry from a trial board. b) set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain. c) list of violations that would cause the automatic suspension of a CPA's license. d) complete list of all the different kinds of crimes that would be considered as acts discreditable to the profession.

b) set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.

When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that: a) justifies the use of the income tax basis of accounting. b) states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles. c) emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards. d) refers to the authoritative pronouncements that explain the income tax basis of accounting being used.

b) states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

The assurance bucket is filled with all of the following types of evidence except a) test of controls. b) the audit report. c) substantive analytical procedures. d) tests of details.

b) the audit report.

The assurance bucket is filled with all of the following types of evidence except a) test of controls. b) the audit report. c) substantive analytical procedures. d) tests of details.

b) the audit report.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that a) the deviation rates of both the auditor's sample and the population are less than the tolerable deviation rate. b) the deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate. c) the deviation rates of both the auditor's sample and the population exceed the tolerable deviation rate. d) the deviation rate in the auditor's sample exceeds the tolerable deviation rate, but the deviation rate in the population is less than the tolerable deviation rate.

b) the deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate.

A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): a) "except for" qualified opinion. b) unqualified opinion. c) consistency modification. d) explanatory paragraph.

b) unqualified opinion.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a) invoices filed in the entity's open invoice file. b) vendors with whom the entity has previously done business. c) amounts recorded in the accounts payable subsidiary ledger. d) payees of checks drawn in the month after year-end.

b) vendors with whom the entity has previously done business.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a) credit granted to customers. b) write-offs of customer accounts. c) cash disbursements. d) employee overtime wages.

b) write-offs of customer accounts.

A manager prepared and signed checks payable to a fictitious supplier and deposited the checks into a personal bank account. Which of the following internal controls would most likely have prevented, or at least detected, the embezzlement? a. A responsible employee must account for the numerical sequence of checks on a regular basis. b. A check signer other than the manager must sign checks only when approved invoices are presented with the completed, unsigned check. c. Competitive bids are used for all purchases. d. Payments to suppliers must be made by certified check.

b. A check signer other than the manager must sign checks only when approved invoices are presented with the completed, unsigned check.

A CPA certificate is evidence of a. Recognition of independence. b. Basic competence at the time the certificate is granted. c. Culmination of the educational process. d. Membership in the AICPA.

b. Basic competence at the time the certificate is granted.

Customers are more likely to complain to the client if which of the following internal control objectives for cash receipts is violated? a. Occurrence. b. Completeness. c. Authorization. d. Rights and obligations.

b. Completeness.

Cutoff tests over purchases and accounts payable should primarily be performed a. In the prior period to support adjusting entries. b. During the subsequent events period. c. During the year under audit. d. After the date of the report.

b. During the subsequent events period.

During the audit, the CPA determined that certain information available in a client's records provides important insight into the company's financial position. Disclosing this information is not required by GAAP, and the client does not consent to the disclosure. No other basis exists for modifying the report. The auditor should a. Qualify the opinion because of a client-imposed scope limitation. b. Express an unmodified opinion. c. Qualify the opinion because of a lack of disclosure. d. Express an adverse opinion because of a lack of disclosure.

b. Express an unmodified opinion.

If an auditor discovers material related-party transactions that have been properly accounted for, the audit report a. Must include an explanatory paragraph. b. May include an explanatory paragraph emphasizing the matter. c. Must include a qualified opinion. d. May include a "subject to" opinion.

b. May include an explanatory paragraph emphasizing the matter.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? a. Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. b. Observe merchandise and raw materials during the client's physical inventory count. c. Review the management's inventory representation letter for accuracy. d. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

b. Observe merchandise and raw materials during the client's physical inventory count.

If completeness is a concern for accounts payable, auditors may send accounts payable confirmations to a. Primarily vendors with large accounts payable balances. b. Primarily vendors with small accounts payable balances. c. All vendors. d. A random sample of all vendors.

b. Primarily vendors with small accounts payable balances.

Prior to the date of the audit report, but after the balance-sheet date, a major facility owned by the client in a foreign country was confiscated. Management refuses to disclose this material information in a financial statement note or present pro forma data giving effect to the event. The auditor should a. Provide the information in the report and express an unqualified opinion. b. Provide the information in the report and qualify the opinion. c. Add a note to the financial statements. d. Take no action.

b. Provide the information in the report and qualify the opinion.

An auditor's report includes an additional paragraph disclosing a difference of opinion between the auditor and the client for which the auditor believes an adjustment to the financial statements should have been made. The opinion paragraph of the auditor's report most likely expresses a(n) a. Unmodified opinion. b. Qualified opinion. c. "Subject to" opinion. d. Disclaimer of opinion.

b. Qualified opinion.

Which of the following types of evidence is an auditor most likely to consider in determining whether internal controls are operating as designed? a. A letter of representations corroborating inventory pricing. b. Questionnaires completed by employees in the receiving department concerning their duties and responsibilities. c. Attorneys' responses to the auditor's inquiries. d. Confirmations of receivables verifying account balances.

b. Questionnaires completed by employees in the receiving department concerning their duties and responsibilities.

Smith is engaged in the audit of a cable TV firm, which services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the validity of the accounts receivable balances at the balance sheet date, Smith would most likely a. Send positive confirmation requests. b. Send negative confirmation requests. c. Examine evidence of subsequent cash receipts instead of sending confirmation requests. d. Use statistical sampling instead of sending confirmation requests.

b. Send negative confirmation requests.

If an auditor concludes that a substantial doubt exists about the client's ability to continue as a going concern, the report must a. Include an emphasis-of-matter paragraph preceding the opinion paragraph. b. Use the words "going concern" in an explanatory paragraph following the opinion paragraph. c. Express a qualified or an adverse opinion. d. Use conditional language in expressing the conclusion about the substantial doubt.

b. Use the words "going concern" in an explanatory paragraph following the opinion paragraph.

Why should an auditor focus on both substance and effect of internal controls?

because they might be prescribed but not followed.

Robinson has decided to use monetary-unit sampling (MUS) in the audit of a client's accounts receivable balances. She has decided on the following as inputs to the sampling process: Desired confidence: 90% Expected overstatement: $5,000 Recorded amount of population of accounts: $500,000 Number of accounts: 400 Tolerable misstatement: $25,000 Which numbers come closest to the required sample size for this population and desired level of confidence? a) 120 b) 108 c) 67 d) 30

c) 67

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? a) An adverse report. b) An exculpatory opinion. c) A disclaimer of opinion. d) An unqualified report.

c) A disclaimer of opinion.

Which of the following situations most likely could lead to an embezzlement scheme? a) The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger. b) Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment. c) Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement d) Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to vendors.

c) Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement

Which of the following control activities is not usually performed in the accounts payable department? a) Indicating the asset and expense accounts to be debited. b) Matching the vendor's invoice with the related receiving report. c) Accounting for unused prenumbered purchase orders and receiving reports. d) Approving vouchers for payment by having an authorized employee sign the vouchers.

c) Accounting for unused prenumbered purchase orders and receiving reports.

In the audit of inventories, an auditor would be least likely to verify that a) The financial statement disclosures related to inventories are correct b) Damaged goods and obsolete items have been properly accounted for c) All inventory of the client's is on the client's premises at the time of the count d) The client has used proper FIFO pricing

c) All inventory of the client's is on the client's premises at the time of the count

Which of the following statements concerning the auditor's use of statistical sampling is correct? a) A classical variables sample needs to be designed with special considerations to include negative balances in the sample. b) An assumption of monetary-unit sampling is that the underlying accounting population is normally distributed. c) An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling. d) The selection of zero balances usually does not require special sample design considerations when using monetary-unit sampling.

c) An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling.

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

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

Under the ethical standards of the accounting profession, which of the following investments by a CPA in a corporate client is an indirect financial interest? a) An investment held in a retirement plan b) An investment held in a blind trust c) An investment held through a regulated mutual fund d) An investment held through participation in an investment club

c) An investment held through a regulated mutual fund

The authority to accept incoming goods in receiving should be based on a(n) a) Vendor's invoice b) Materials requisition c) Approved purchase order d) Credit department approval

c) Approved purchase order

Which of the following types of audit evidence is the most persuasive? a) Prenumbered client purchase order forms b) Client work sheets supporting cost allocations c) Bank statements obtained from the client d) Representation letter

c) Bank statements obtained from the client

Which of the following factors should an auditor consider in evaluating the severity of a deficiency in internal control to determine if it should be communicated to the proper persons? I. Magnitude of the potential misstatement II. Likelihood of the misstatement a) I only b) II only c) Both I and II d) Neither I nor II

c) Both I and II

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests a) I only b) II only c) Both I and II d) Neither I nor II

c) Both I and II

The distinction between a control deficiency, a material weakness, and a significant deficiency is related to which of the following factors: a) The likelihood of a financial statement misstatement b) The magnitude of financial statement misstatement c) Both likelihood and magnitude d) Neither likelihood nor magnitude

c) Both likelihood and magnitude

All of the following are indicators of material weaknesses in internal controls except a) Restatement of previously issued financial statements b) Ineffective oversight from the entity's audit committee c) Breakdowns in segregation of duties d) Identification of fraud

c) Breakdowns in segregation of duties

Which of the following internal control procedures is performed in the treasurer's department? a) Preparation of an approved vendor list b) Approving invoices for payment c) Canceling payment vouchers and marking them "paid" d) Preparation of checks

c) Canceling payment vouchers and marking them "paid"

An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate? a) Attribute sampling. b) Monetary-unit sampling. c) Classical variables sampling. d) Stop-n-go sampling.

c) Classical variables sampling.

Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed? a) Gross margin information regarding the client's industry b) Confirmations of receivables verifying account balances c) Client records documenting approvals over transactions in the revenue cycle d) Anticipated results documented in budgets and forecasts.

c) Client records documenting approvals over transactions in the revenue cycle

Which of the following best describes what an auditor should do when control risk is assessed at the maximum level for an assertion? a) Perform fewer substantive tests of details on the assertion. b) Perform more tests on controls over the assertion. c) Communicate the control weakness to management, and perform more extensive substantive tests over the assertion. d) Document the controls more extensively.

c) Communicate the control weakness to management, and perform more extensive substantive tests over the assertion.

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

c) Control environment

Which of the following controls would most likely be tested during an interim period? a) Controls over nonroutine transactions. b) Controls over transactions that involve a high degree of subjectivity. c) Controls that operate on a continuous basis. d) Controls over the period-end financial reporting process.

c) Controls that operate on a continuous basis.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in Tolerable Misstatement, Increase in Assessed Level of Control Risk a) Increase sample size, Decrease sample size b) Decrease sample size, Decrease sample size c) Decrease sample size, Increase sample size d) Increase sample size, Increase sample size

c) Decrease sample size, Increase sample size

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-off? a) Employees responsible for authorizing sales and bad debt write-offs are denied access to cash b) Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts. c) Employees involved in the credit-granting function are separated from the sales function. d) Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

c) Employees involved in the credit-granting function are separated from the sales function.

Analytical procedures used in planning an audit should focus on a) Reducing the scope of tests of controls and substantive tests b) Providing assurance that potential material misstatements will be identified c) Enhancing the auditor's understanding of the client's business d) Assessing the adequacy of the available audit evidence

c) Enhancing the auditor's understanding of the client's business

In creating lead schedules for an audit engagement, a CPA often uses automated workpaper software. What client information is needed to begin this process? a) Interim financial information such as third quarter sales, net income, and inventory and receivables balances b) Specialized journal information such as the invoice and purchase order numbers of the last few sales and purchases of the year c) General ledger information such as account numbers, prior-year account balances, and current-year unadjusted information d) Adjusting entry information such as deferrals and accruals, and reclassification journal entries

c) General ledger information such as account numbers, prior-year account balances, and current-year unadjusted information

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? a) The details of most recorded transactions are not available after a specified period of time. b) Internal control activities requiring the segregation of duties are subject to management override. c) It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements. d) Management has a reputation for consulting with several accounting firms about significant accounting issues.

c) It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

An independent audit aids in the communication of economic data because the audit a) Guarantees that financial data are fairly presented. b) Confirms the exact accuracy of management's financial representations. c) Lends credibility to the financial statements. d) Assures the readers of financial statements that any fraudulent activity has been corrected.

c) Lends credibility to the financial statements.

Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population is a) Higher than assessing control risk too low for the larger population b) Indeterminate relative to assessing control risk too low for the larger population c) Lower than assessing control risk too low for the larger population d) The same as assessing control risk too low for the larger population

c) Lower than assessing control risk too low for the larger population

Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of incorrect acceptance on the smaller population is a) Higher than the risk of incorrect acceptance for the larger population b) Indeterminate relative to the risk of incorrect acceptance for the larger population c) Lower than the risk of incorrect acceptance for the larger population d) The same as the risk of incorrect acceptance for the larger population

c) Lower than the risk of incorrect acceptance for the larger population

An audit in accordance with GAAS is conducted on the premise that a) Users of financial statements understand the inherent limitations of an audit b) Estimated amounts in the financial statements are reasonable c) Management and, when appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit d) Those charged with governance understand their role according to GAAS

c) Management and, when appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? a) Turnover of senior accounting personnel is low. b) Insiders recently purchased additional shares of the entity's stock. c) Management places substantial emphasis on meeting earnings projections. d) The rate of change in the entity's industry is slow.

c) Management places substantial emphasis on meeting earnings projections.

Which of the following are considered control environment factors: Detection Risk, Personnel Policies and Practices a) Yes, Yes b) Yes, No c) No, Yes d) No, No

c) No, Yes

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation? a) Discrete phases of planning, interim, and year-end fieldwork b) Increased effort to search for evidence of management fraud c) Performance of audit tests on a continuous basis d) Increased emphasis on the completeness assertion

c) Performance of audit tests on a continuous basis

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both a) Journalize entries and prepare financial statements b) Record cash receEstablish internal controls and authorize transactionsipts and cash disbursements c) Perpetrate and conceal errors and fraud d) No answer text provided.

c) Perpetrate and conceal errors and fraud

Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should a) Add the checks to the daily cash summary b) Verify that each check is supported by a prenumbered sales invoice c) Prepare a duplicate listing of checks received d) Record the checks in the cash receipts journal

c) Prepare a duplicate listing of checks received

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for a) Cash flow increases and decreases b) Audit objectives and assertions c) Reclassifications and adjustments d) Reconciliations and tick marks

c) Reclassifications and adjustments

Which of the following procedures is least likely to be performed before the balance sheet date? a) Confirmation of receivables. b) Test of internal control over cash. c) Search for unrecorded liabilities. d) Observation of inventory.

c) Search for unrecorded liabilities.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? a) Turnover of personnel in the Accounting Department b) Objectivity of audit committee members c) Square footage of selling space d) Management's plans to repurchase stock

c) Square footage of selling space

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a) The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. b) The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. c) The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. d) The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.

c) The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were lower than the recorded quantities in the client's perpetual records. This situation could be the result of the client's a) Recording fictitious sales b) Recording fictitious purchases c) The client's failure to record sales d) The clients failure to record sales returns

c) The client's failure to record sales

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

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

Which of the following most likely represents a weakness in internal control of an IT system? a) The systems programmer designs the operating and control functions of programs and participates in testing operating systems. b) The accounts payable clerk prepares data for computer processing and enters the data into the computer. c) The systems analyst reviews output and controls the distribution of output from the IT department. d) The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

c) The systems analyst reviews output and controls the distribution of output from the IT department.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a) Merchandise received is not promptly reconciled to the outstanding purchase order file. b) Obsolete items included in inventory balances are rarely reduced to lower-of-cost-or market c) The write-off of receivables by personnel who receive cash permits misappropriation of cash receipts d) Fictitious transactions are recorded that cause understatement of revenue and overstatement of receivables.

c) The write-off of receivables by personnel who receive cash permits misappropriation of cash receipts

Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? a) To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity's information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed. b) To achieve its objectives, a business formulates strategies to implement its transactions, which are carried out through business processes. The entity's information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed. c) To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed. d) To achieve its business processes, a business formulates objectives, which are carried out through the entity's strategies. The entity's information and internal control systems must be designed to ensure that the entity's strategies are properly executed, captured, and processed.

c) To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff? a) Shipments lacking sales invoices and shipping documents b) Excessive write-offs of accounts receivable c) Unrecorded sales at year-end d) Lapping of year-end accounts receivable

c) Unrecorded sales at year-end

An auditor recomputes and evaluates the adequacy of a client's allowance for doubtful accounts. This procedure supports management's assertion of a) Completeness b) Existence/occurrence c) Valuation/allocation d) Rights/obligations

c) Valuation/allocation

When an auditor fails to receive replies to positive confirmation requests for year-end accounts receivable confirmations, the auditor most likely would a) Inspect the allowance for doubtful accounts to verify whether the accounts in question were written off b) Increase the assessed level of detection risk for valuation and completeness assertions c) Vouch subsequent collections of the accounts in question to cash receipts records after year-end d) Report the error to the client as a material misstatement

c) Vouch subsequent collections of the accounts in question to cash receipts records after year-end

Which of the following is a substantive test that an auditor most likely performs to verify existence and accuracy of recorded accounts payable? a) Confirm accounts payable balances with vendors b) Investigating open purchase order files for prenumbered documents c) Vouching selected entries in these journals to documentation such as purchase orders and receiving reports d) Intercept unopened client mail, for a reasonable period of time after year end to check for unrecorded vendor invoices.

c) Vouching selected entries in these journals to documentation such as purchase orders and receiving reports

According to the accounting profession's Code of Professional Conduct, which of the following events may justify a departure from a Statement on Auditing Standards? New Legislation, Evolution of a new form of business transaction a) No, Yes b) Yes, No c) Yes, Yes d) No, No

c) Yes, Yes

When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why a) a recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement. b) deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions. c) a recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded. d) deviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatements at a higher rate.

c) a recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.

On receiving the cutoff bank statement, the auditor should vouch: a) deposits listed on the cutoff statement to deposits in the cash receipts journal. b) deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. c) checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement. d) checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement.

c) checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.

Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who: a) obtain receipts for the transfer of completed work to finished goods prepare a completed production report. b) issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued. c) compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory. d) are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis.

c) compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that: a) independent internal verification of activity reports is established. b) transfers to the finished goods department are documented by a completed production report and a quality control report. c) custody of work in process and finished goods is properly maintained. d) production orders are prenumbered and signed by a supervisor.

c) custody of work in process and finished goods is properly maintained.

Tolerable misstatement is a) the amount of misstatement that management is willing to tolerate in the financial statements. b) materiality for the income statement as a whole. c) materiality used to establish a scope for the audit procedures for the individual account balance or disclosures. d) materiality for the balance sheet as a whole.

c) materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when a) no reply to a negative confirmation request is received. b) pledging of the receivables is probable. c) no reply to a positive confirmation request is received. d) the collectibility of the receivables is in doubt.

c) no reply to a positive confirmation request is received.

Final analytical procedures are generally intended to: a) gather evidence concerning account balances that have not yet been investigated. b) test transactions to corroborate management's financial statement assertions. c) provide the auditor with a final, overall evaluation of the relationships among financial statement balances. d) gather evidence concerning account balances that have not yet been investigated.

c) provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent a) material fraud or illegal acts perpetrated by high-level management. b) potential manipulation or falsification of accounting records. c) significant deficiencies in the design or operation of internal control. d) disclosures of information that significantly contradict the auditor's going concern assumption.

c) significant deficiencies in the design or operation of internal control.

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether a) the risk of incorrect acceptance is too high. b) the financial statements are materially misstated. c) the controls are operating effectively. d) materiality for planning purposes is at a sufficiently low level.

c) the controls are operating effectively.

The substantive analytical procedure known as trend analysis is best described by a) development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. b) the comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. c) the examination of changes in an account over time. d )the comparison of common-size financial statements over time.

c) the examination of changes in an account over time.

The substantive analytical procedure known as trend analysis is best described by a) development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. b) the comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. c) the examination of changes in an account over time. d) the comparison of common-size financial statements over time.

c) the examination of changes in an account over time.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low for the assertion that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a) expected population deviation rate (7%) was more than the percentage of errors in the sample (3.5%). b) computed upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%). c) tolerable deviation rate (7%) was less than the computed upper deviation rate (8%). d) expected population deviation rate (2.5%) was less than the tolerable deviation rate (7%).

c) tolerable deviation rate (7%) was less than the computed upper deviation rate (8%).

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to a) trace a transaction from each major class of transactions from origination through the entity's information system. b) tour the organization's facilities and locations before beginning any audit work. c) trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports. d) trace a transaction from every class of transactions from origination through the entity's information system.

c) trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports.

King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n): a) disclaimer of opinion. b) unmodified opinion with an emphasis-of-matter paragraph. c) unmodified opinion. d) qualified opinion.

c) unmodified opinion.

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of: a) completeness. b) presentation. c) valuation. d) existence.

c) valuation.

Which of the following is acceptable language in an audit report? a. "In our opinion, subject to the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence...." b. "In our opinion, except for the above-mentioned limitation on the scope of our audit...." c. "In our opinion, except for the effects of the matters described in the basis for qualified opinion paragraph...." d. "In our opinion, except for the limitation on the scope of our audit as indicated in the following paragraph...."

c. "In our opinion, except for the effects of the matters described in the basis for qualified opinion paragraph...."

Vouching costs used to price inventory to vendors' invoices tests which of the following assertions? a. Completeness. b. Cutoff. c. Accuracy. d. Classification

c. Accuracy.

Majors, CPA, completed the audit of Ajax Plastics Company's 2016 financial statements on March 15, 2017. On March 25, 2017, two weeks before the 2016 financial statements were issued, the company refinanced its entire portfolio of long-term debt at a more favorable interest rate and terms. What are the implications, if any, of this event for Ajax and Majors? a. No impact on the financial statements or audit report since this event occurred after the audit report date. b. Ajax should adjust the financial statements for the event, but Majors should not amend the audit report. c. Ajax should disclose the event in the financial statement footnotes, and Majors should dual date the audit report. d. Ajax should disclose the event in the financial statement footnotes, but Majors should not amend the audit report.

c. Ajax should disclose the event in the financial statement footnotes, and Majors should dual date the audit report.

Which of the following is the best evidence to evaluate the reasonableness of advertising expense? a. Oral evidence obtained through discussions with company marketing executives and representatives of the advertising agency retained. b. Documentary evidence obtained by vouching charges to the account to source documents and tracing charges from source documents to the account. c. Analytical evidence developed by comparing the ratio of advertising expenses to sales with historical data for the company and industry. d. Arithmetical evidence developed by recomputing charges submitted by the advertising agency and paid by the company.

c. Analytical evidence developed by comparing the ratio of advertising expenses to sales with historical data for the company and industry.

Which procedure is usually considered unnecessary with respect to ascertaining the occurrence of subsequent events requiring adjustments? a. Obtaining information from legal counsel about impending litigation. b. Reading available minutes of meetings of shareholders and directors. c. Considering the effect of a casualty that occurred subsequent to the balance sheet date. d. None of the above

c. Considering the effect of a casualty that occurred subsequent to the balance sheet date.

Which of the following control activities is not usually performed in the vouchers payable department? a. Determining the mathematical accuracy of the vendor's invoice. b. Having an authorized person approve the voucher. c. Controlling the mailing of the check and remittance advice. d. Matching the receiving report with the purchase order.

c. Controlling the mailing of the check and remittance advice.

An opinion in an updated report on comparative financial statements differs from that previously expressed. Because of facts discovered after the original report release date, management revised the prior period financial statements. In these circumstances, the auditor should a. Not refer to the opinion previously expressed. b. Include an other-matter paragraph preceding the opinion paragraph. c. Disclose the substantive reasons for the different opinion. d. Dual date the updated report.

c. Disclose the substantive reasons for the different opinion.

The auditor of a registrant (public company) must understand and audit which of the following aspects of internal control? a) Design b) Implementation c) Operating effectiveness d) All of the above e) None of the above

d) All of the above

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? a. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. b. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts. c. Employees involved in the credit-granting function are separated from the sales function. d. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

c. Employees involved in the credit-granting function are separated from the sales function.

If an auditor is unable to observe the year-end physical inventory count but has become satisfied about the balance through the use of alternative auditing procedures, (s)he should a. Disclaim an opinion because observation is required. b. Express an unmodified opinion and include an emphasis-of-matter paragraph in the report containing a reference to the alternative procedures used. c. Express an unmodified opinion with no reference to the alternative procedures performed. d. Express a qualified opinion and include an emphasis-of-matter paragraph stating that alternative procedures were performed.

c. Express an unmodified opinion with no reference to the alternative procedures performed.

Which of the following statements ordinarily is included among the written management representations obtained by the auditor in an audit of a private company? a. Management acknowledges that there are no material weaknesses in internal control. b. Sufficient evidential matter has been made available to permit the expression of an unqualified opinion. c. Guarantees for which the company is potentially liable have been properly recorded. d. Instances of fraud involving management that have exceeded the materiality limits have been acknowledged.

c. Guarantees for which the company is potentially liable have been properly recorded.

In an audit of financial statements, substantive procedures a. Are conducted to establish audit objectives. b. Are conducted to assess the degree of inherent risk, control risk, and detection risk. c. Include analytical procedures and tests of details of both balances and transactions. d. Include any procedure performed to assess the accounting system's ability to prevent or detect material misstatements.

c. Include analytical procedures and tests of details of both balances and transactions.

Auditor confirmation of accounts payable a. Should be performed prior to the balance sheet date. b. Is required to determine the existence of unrecorded liabilities. c. Is not a required procedure because reliable external evidence is ordinarily available to support the balance. d. Is required when creditor statements are available and control risk is low.

c. Is not a required procedure because reliable external evidence is ordinarily available to support the balance.

An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor's present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if the a. Financial statements and auditor's report were not distributed beyond management and the board of directors. b. Auditor's previously expressed opinion was qualified because of a departure from GAAP. c. Results of other procedures that were applied tend to compensate for the procedure omitted. d. Omission is due to unreasonable delays by client personnel in providing data on a timely basis.

c. Results of other procedures that were applied tend to compensate for the procedure omitted.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments? a. Examining legal invoices sent by the client's attorney. b. Verifying attorney-client privilege through interviews. c. Reviewing the response from the client's lawyer to a letter of audit inquiry. d. Reviewing the written representation letter obtained from management.

c. Reviewing the response from the client's lawyer to a letter of audit inquiry.

In an audit of contingent liabilities, an auditor should a. Send confirmations to related parties because they are more likely to disclose a contingent liability than unrelated parties. b. Verify that general business risks have properly resulted in accrual of contingent liabilities. c. Send an inquiry letter to the client's legal counsel because the letter is the primary means to corroborate the representations of management. d. Verify that contingent liabilities are disclosed in notes to the financial statements but not accrued when they are probable and capable of reasonable estimation.

c. Send an inquiry letter to the client's legal counsel because the letter is the primary means to corroborate the representations of management.

The PCAOB requires that documentation from audits of public companies be retained for a. A reasonable period of time. b. Five years. c. Seven years. d. Forever.

c. Seven years.

A major customer of Auditee Co. suffered a material uninsured casualty loss at its only plant 1 week after Auditee's balance sheet date. The CPA completed the audit 2 weeks later. The CPA a. Should express a qualified opinion to reflect the uncertainty. b. Need not request disclosure of the information in the financial statements being audited because it did not reflect conditions existing at year-end. c. Should request management to disclose the information in the financial statements being audited. d. Should request management to recognize a loss in the financial statements being audited.

c. Should request management to disclose the information in the financial statements being audited.

When the client has a significant amount of negotiable securities on hand, planning by the auditor is necessary to guard against a. Unauthorized negotiation of the securities before they are counted. b. Unrecorded sales of securities after they are counted. c. Substitution of securities already counted for other securities, which should be on hand but are not. d. Substitution of authentic securities with counterfeit securities

c. Substitution of securities already counted for other securities, which should be on hand but are not.

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should consider a. Audit evidence about the operating effectiveness of controls. b. Inherent risk at the maximum level. c. The ability to reduce detection risk resulting from performing interim-date procedures. d. Materiality for the accounts tested as insignificant.

c. The ability to reduce detection risk resulting from performing interim-date procedures

Dual dating an auditor's report implies that a. The auditor performed all subsequent-events procedures through the latest of the two dates. b. The auditor is assuming no responsibility for events occurring subsequent to the date of the original report. c. The auditor is limiting his/her responsibility for events occurring subsequent to the date of the original report to the specific event referred to. d. The specific event referred to is unaudited.

c. The auditor is limiting his/her responsibility for events occurring subsequent to the date of the original report to the specific event referred to.

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

c. Understatement of revenues and receivables, and an overstatement of inventory.

In May Year 3, an auditor reissues the auditor's report on the Year 1 financial statements at a former client's request. The Year 1 financial statements are to be presented comparatively with subsequent audited financial statements. They are not restated, and the auditor does not revise the wording of the report. The auditor should a. Dual-date the reissued report. b. Use the release date of the reissued report. c. Use the original report date on the reissued report. d. Use the current-period auditor's report date on the reissued report.

c. Use the original report date on the reissued report.

Engagement Letter

contract that Lays out both client's & auditor's responsibilities

Inventory Turnover

cost of sales / average inventory (higher = better, faster // lower = bad, slower, indicates obsolescence)

d) 4.5%

One of the major problems in an IT system is that incompatible functions may be performed by the same individual. One compensating control for this is the use of a) Echo checks b) A self-checking digit system c) Computer-generated hash totals d) A computer log

d) A computer log

When the receiving department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department a) The unpaid voucher b) A credit memo c) The vendor invoice d) A debit memo

d) A debit memo

During an audit conducted in accordance with GAAS, an auditor should depart from a relevant presumptively mandatory requirement only when a) A required specific procedure is conditional and the condition does not exist b) The difficulty, time, or cost of a required specific procedure outweigh the benefit of applying it c) The audit documents the justification that an alternative procedure is sufficient to achieve the objectives of the required procedure d) A required specific procedure would be ineffective in achieving the intent of the requirement

d) A required specific procedure would be ineffective in achieving the intent of the requirement

In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? a) Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion. b) Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary. c) Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation. d) Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion.

d) Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion.

Which of these statements concerning illegal acts by clients is correct? a) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements. b) An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements. c) An auditor considers illegal acts from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. d) An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.

d) An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.

Which of the following presumptions is correct about the reliability of audit evidence? a) Information obtained indirectly from outside sources is the most reliable audit evidence. b) To be reliable, audit evidence should be convincing rather than persuasive. c) Reliability of audit evidence refers to the amount of corroborative evidence obtained. d) An effective internal control structure provides more assurance about the reliability of audit evidence.

d) An effective internal control structure provides more assurance about the reliability of audit evidence.

Which of the following best describes relationship among auditing, attest, and assurance services? a) Attest is a type of auditing service. b) Auditing and attest services represent two distinctly different types of services-there is no overlap. c) Assurance is a type of attest service. d) Auditing is a type of assurance service.

d) Auditing is a type of assurance service.

An auditor is trying to determine the sample size for an inventory observation using classical variables (difference) estimation. To calculate required sample size, the auditor usually has to take into account: A. Variability in the dollar amount of inventory B. Tolerable error a) A but not B b) B but not A c) Neither A nor B d) Both A and B

d) Both A and B

Inventory cutoff is most appropriately verified through a review of a) Prenumbered receiving reports for a period before and after balance sheet date b) Review of prenumbered shipping documents for a period before and after balance sheet date c) Neither A nor B d) Both A and B

d) Both A and B

Which of the following is an example of fraudulent financial reporting? a) An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. b) An employee steals inventory, and the shrinkage is recorded as a cost of goods sold. c) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. d) Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

d) Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a) Vendors' invoices included in the entity's files. b) Bank statements obtained from the entity. c) Prenumbered entity sales invoices. d) Computations made by the auditor.

d) Computations made by the auditor.

The permanent (continuing) file of an auditor's working papers most likely would include copies of the a) Lead schedules b) Attorney's letters c) Bank statements d) Debt agreements

d) Debt agreements

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? a) A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor's work. b) An entity may have a poorly designed internal control system. c)Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. d) Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

d) Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the a) Allowable risk of tolerable misstatement b) Preliminary estimates of materiality levels c) Efficiency of the audit d) Effectiveness of the audit

d) Effectiveness of the audit

For effective internal control, the accounts payable department generally should a) Be under the treasurer's department b) Stamp, perforate, or otherwise cancel supporting documents after payment is mailed c) Approve all purchases d) Establish agreement of the vendor's invoice with the receiving report and purchase order

d) Establish agreement of the vendor's invoice with the receiving report and purchase order

Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States? ASB PCAOB a) Nonpublic company audits Nonpublic company audits b) Public company audits Public company audits c) Public company audits Nonpublic company audits d) Nonpublic company audits Public company audits

d) Nonpublic company audits Public company audits

Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? a) A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues. b) Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character. c) Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. d) Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.

d) Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.

Which of the following statements relating to attest and assurance services is NOT correct? a) Assurance services can be performed to improve the quality or context of information for decision makers. b) Independence is an important attribute of assurance services providers. c) In performing an attest service, the CPA determines the correspondence of the subject matter (or an assertion about the subject matter) against criteria that are suitable and available to users. d) Financial statement auditing is a form of attest service but it is not an assurance service.

d) Financial statement auditing is a form of attest service but it is not an assurance service.

An auditor anticipates assessing control risk at a low level in a computerized environment. Under these circumstances, on which of the following procedures would the auditor initially focus? a) Programmed control procedures b) Application control procedures c) Output control procedures d) General control procedures

d) General control procedures

When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist? a) When the fraud results from misappropriation of assets rather than fraudulent financial reporting. b) When a line manager rather than a lower-level employee commits the fraudulent act. c) When the amount is material. d) In response to inquiries from a successor auditor.

d) In response to inquiries from a successor auditor.

Risk of material misstatement refers to a combination of which two components of the audit risk model? a) Control risk and detection risk. b) Audit risk and inherent risk. c) Audit risk and control risk. d) Inherent risk and control risk.

d) Inherent risk and control risk.

Which of the following procedures would provide the most reliable audit evidence? a) Inquiries of the client's internal audit staff held in private b) Inspection of prenumbered client purchase orders filed in the Vouchers Payable Department c) Analytical procedures performed by the auditor on the entity's trial balance d) Inspection of bank statements obtained directly from the client's financial institution

d) Inspection of bank statements obtained directly from the client's financial institution

The Public Company Accounting Oversight Board a) Is a quasi-governmental organization that has legal authority to set accounting standards for public companies. b) Is a quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards. c) Is a quasi-governmental organization that is independent of the SEC in setting auditing standards. d) Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

d) Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

The PCAOB auditing standards recognize that effective internal control over financial reporting (ICFR) cannot, and does not, provide absolute assurance of achieving the company's reporting objectives in large part due to inherent limitations. Which of the following is not such an inherent limitation? a) Lapses in judgment and breakdowns resulting from human failures b) Circumvention by collusion c) Circumvention by improper management override d) Lack of controls over information technology.

d) Lack of controls over information technology.

Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements? a) Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP. b) Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement. c) Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP. d) Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

d) Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures because a) The procedures may be operating effectively but may not be documented. b) Management may implement procedures whose costs exceed their benefits. c) The procedures may be so inappropriate that no reliance is contemplated by the auditor. d) Management may establish appropriate procedures but not enforce compliance with them.

d) Management may establish appropriate procedures but not enforce compliance with them.

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was a) Less than the risk of assessing control risk too low, based on the auditor's sample b) Less than the deviation rate in the auditor's sample c) More than the risk of assessing control risk too low, based on the auditor's sample d) More than the deviation rate in the auditor's sample

d) More than the deviation rate in the auditor's sample

Which of the following would be considered a nonattest assurance service engagement? I. Expressing an opinion about the reliability of an entity's financial statements. II. Reviewing and commenting on an entity-prepared business plan. a) I only. b) II only. c) Both I and II. d) Neither I nor II.

d) Neither I nor II.

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the a) Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate. b) Sample rate of deviation is less than the expected rate of deviation used in planning the sample. c) Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation. d) Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

d) Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the a) Risk of assessing control risk too low b) Expected population deviation rate c) Tolerable rate d) Sample size

d) Sample size

Which of the following procedures would an auditor least likely perform in searching for unrecorded liabilities? a) Examine cash disbursements for the period immediately after audit b) Examine unmatched receiving report files c) Examine unpaid invoice file d) Scan cash disbursements just before year-end for indications of unusual transactions

d) Scan cash disbursements just before year-end for indications of unusual transactions

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to a) Determine whether the control procedures have been implemented b) Perform procedures to understand the design of the internal control policies c) Document the understanding of the entity's internal control d) Search for significant deficiencies in the operation of the entity's internal control

d) Search for significant deficiencies in the operation of the entity's internal control

In an audit of the internal control over financial reporting (ICFR) conducted in accordance with PCAOB standards, the auditor must communicate in writing to the audit committee a) Significant deficiencies only b) Material weaknesses only c) All deficiencies in ICFR d) Significant deficiencies and material weaknesses

d) Significant deficiencies and material weaknesses

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a) Supported by a receiving report b) Prenumbered and accounted for c) Approved by the purchasing department d) Stamped paid and accompanied by the check signer's initials

d) Stamped paid and accompanied by the check signer's initials

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of professional Conduct, which of the following activities would impair the CPA's independence with respect to the client? a) The CPA records transactions in accordance with classifications determined by management. b) The CPA prepares financial statements from a trial balance provided by management. c) The CPA posts adjusting journal entries prepared by management to the trial balance. d) The CPA authorizes client transactions and reports them to management.

d) The CPA authorizes client transactions and reports them to management.

Which of the following statements concerning monetary-unit sampling is correct? a) Overstated units have a lower probability of sample selection than units that are understated. b) The sampling distribution should approximate the normal distribution. c) The sampling interval is calculated by dividing the number of physical units in the population by the sample size. d) The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan.

d) The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan.

In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? a) The auditor wishes to emphasize that the entity had significant related-party transactions. b) The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows. c) The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements. d) The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

d) The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

Which of the following factors would least likely affect the quantity and content of an auditor's working papers? a) The condition of the client's records b) The assessed risk of material misstatement c) The nature of the auditor's report d) The content of the representation letter

d) The content of the representation letter

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that a) Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness. b) Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability. c) Establishing and maintaining internal control is an important responsibility of management d) The cost of an entity's internal control should not exceed the benefits expected to be derived.

d) The cost of an entity's internal control should not exceed the benefits expected to be derived.

Which of the following statements best describes the role of materiality in a financial statement audit? a) The higher the level at which the auditor assess materiality, the greater the amount of evidence the auditor must gather. b) Materiality refers to the "material" from which audit evidence is developed. c) The level of materiality has no bearing on the amount of evidence the auditor must gather. d) The lower the level at which the auditor assess materiality, the greater the amount of evidence the auditor must gather.

d) The lower the level at which the auditor assess materiality, the greater the amount of evidence the auditor must gather.

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would a) Trace inventory tags noted during the observation to items listed in receiving reports and vendors' invoices b) Trace items in receiving reports and vendor invoices to the final inventory listing c) Trace items in count sheets to the final inventory listing d) Vouch items in the final inventory listing to inventory tags and auditor's test count sheets

d) Vouch items in the final inventory listing to inventory tags and auditor's test count sheets

Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations. What should the auditor conclude if the tolerable deviation rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%? a) The sample results should be accepted as support for the planned assessed level of control risk because the tolerable deviation rate less the allowance for sampling risk equals the expected population deviation rate. b) The planned assessed level of control risk should be modified because the tolerable deviation rate plus the allowance for sampling risk exceeds the expected population deviation rate. c) The sample results should be accepted as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate. d) The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

d) The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls? a) As the population size doubles, the sample size should increase by about 67%. b) The sample size is inversely proportional to the expected error rate. c) There is no relationship between the tolerable error rate and the sample size. d) The population size has little or no effect on the sample size.

d) The population size has little or no effect on the sample size.

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

d) The suitability of the client's lines of reporting

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

d) Timing of inventory observation procedures to be performed

For what primary purpose does the auditor obtain an understanding of the entity and its environment? a) To limit audit risk to an appropriately high level. b) To decide which facts about the entity to include in the audit report. c) To determine the audit fee. d) To plan the audit and determine the nature, timing, and extent of the audit procedures to be performed.

d) To plan the audit and determine the nature, timing, and extent of the audit procedures to be performed.

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? a) Accounts receivable b) Credit c) Accounts payable d) Treasurer

d) Treasurer

Which of the following is the most important reason for an auditor to gain an understanding of an audit client's system of internal control over financial reporting? a) Understanding a client's system of internal control can help the auditor sell consulting services to the client. b) Understanding a client's system of internal control is not a required part of the audit process. c) Understanding a client's system of internal controls can help the auditor make valuable recommendations to management at the end of the engagement. d) Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.

d) Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? a) Unauthorized goods returned for credit. b) Excessive sales discounts. c) Lapping of year-end accounts receivable. d) Unrecorded sales for the year.

d) Unrecorded sales for the year.

To determine whether all of a client's merchandise that they have been billed for has received, the auditor would test from the population of a) Receiving reports b) Vouchers unpaid c) Canceled checks d) Vendor invoices

d) Vendor invoices

During an auditor's physical inventory observation, all of the following are important procedures except a) Verify that shipping and receiving have been closed down for the count b) Verify that all items are counted. c) Verify that all counting teams receive proper instructions d) Verify that the client has computed gross margins properly

d) Verify that the client has computed gross margins properly

Under which of the following conditions may an auditor's observation procedures be conducted during or after the end of the period under audit? a) When the client maintains periodic inventory systems b) When the auditor finds minimal variations in client records and test counts in prior periods c) When total inventory has not varied more than 5% in the last 5 years d) When an accurate perpetual inventory system has been maintained and checked by the client periodically with physical counts

d) When an accurate perpetual inventory system has been maintained and checked by the client periodically with physical counts

An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the: a) existence of unrealized gains or losses in the portfolio. b) classification between current and noncurrent portfolios. c) valuation of marketable equity securities. d) completeness of recorded investment income.

d) completeness of recorded investment income.

An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide: a) an objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. b) a description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome. c) the opinion of a specialist as to whether loss contingencies are possible, probable, or remote. d) corroboration of the information furnished by management concerning litigation, claims, and assessments.

d) corroboration of the information furnished by management concerning litigation, claims, and assessments.

The risk of incorrect acceptance relates to the a) allowable risk of tolerable misstatement. b) efficiency of the audit. c) planning materiality. d) effectiveness of the audit.

d) effectiveness of the audit.

An auditor's tests of controls over the issuance of raw materials to production would most likely include: a) inquiry of the custodian about the procedures followed when defective materials are received from vendors. b) observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual. c) reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. d) examination of materials requisitions and reperformance of entity controls designed to process and record issuances.

d) examination of materials requisitions and reperformance of entity controls designed to process and record issuances.

The negative request form of accounts receivable confirmation is useful particularly when The Assessed Level of Control Risk Relating to Receivables Is, The Number of Small Balances Is, Consideration by the Recipient Is a) high, low, likely b) low, low, unlikely c) high, high, likely d) low, high, likely

d) low, high, likely

The permanent file section of the working papers that is kept for each audit client most likely contains a) a schedule of time spent on the engagement by each individual auditor. b) review notes pertaining to questions and comments regarding the audit work performed. c) correspondence with the entity's legal counsel concerning pending litigation. d) narrative descriptions of the entity's accounting system and control procedures.

d) narrative descriptions of the entity's accounting system and control procedures.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all a) vendor invoices. b) canceled checks. c) purchase orders. d) receiving reports.

d) receiving reports.

An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably: a) apply gross profit tests to ascertain the reasonableness of the physical counts. b) insist that the entity perform physical counts of inventory items several times during the year. c) increase the extent of tests of controls of the inventory system. d) request that the entity schedule the physical inventory count at the end of the year.

d) request that the entity schedule the physical inventory count at the end of the year.

An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to: a) provide the data necessary to prepare a proof of cash. b) request that a cutoff bank statement and related checks be sent to the auditor. c) detect kiting activities that may otherwise not be discovered. d) seek information about loans from the banks.

d) seek information about loans from the banks.

GAAS require the auditor to document in the working papers the justification for a departure from a relevant presumptively mandatory requirement. What language indicates a presumptively mandatory requirement? a) must b) could c) may consider d) should

d) should

All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence except: a) information systems design and implementation. b) human resource services. c) management functions. d) some specific tax services. e) all of the above are seen by the SEC as impairing independence

d) some specific tax services.

The primary evidence regarding year-end bank balances is documented in the: a) bank deposit lead schedule. b) outstanding check listing. c) interbank transfer schedule. d) standard bank confirmations.

d) standard bank confirmations.

When goods are received, the receiving clerk should match the goods with a) the vendor invoice and the purchase order. b) the purchase order and the requisition form. c) the vendor invoice and the vendor shipping document. d) the vendor shipping document and the purchase order.

d) the vendor shipping document and the purchase order.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's a) evaluation of all matters of continuing accounting significance. b) opinion of any subsequent events occurring since the predecessor's audit report was issued. c) awareness of the consistency in the application of generally accepted accounting principles between periods. d) understanding as to the reasons for the change of auditors.

d) understanding as to the reasons for the change of auditors.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of a) existence. b) completeness. c) rights and obligations. d) valuation and allocation.

d) valuation and allocation.

An auditor observed the annual physical inventory count on December 15. The client adjusted the inventory balance and detailed perpetual inventory records to agree with the count. Goods are shipped FOB shipping point. Listed below are four material items discovered when the auditor tested sales cutoff as of the client's year-end of December 31. Which item does not require an adjusting entry? Shipped; Recorded As Sales; Credited to inventory a. 1/1; 12/31; 12/31 b. 12/31; 1/3; 12/31 c. 1/1; 12/31; 12/16 d. 12/9; 12/20; 12/12

d. 12/9; 12/20; 12/12

Which of the following does NOT increase the amount of substantive testing necessary? a. A lower acceptable level of detection risk. b. An increase in the assessed control risk. c. A lower acceptable audit risk. d. A decrease in the assessed inherent risk.

d. A decrease in the assessed inherent risk.

An internal auditor is reviewing the company's policy regarding investing in financial derivatives. The auditor would normally expect to find all of the following in the policy except a. A specific authorization limit for the amount and types of derivatives that can be used by the organization. b. A statement indicating whether derivatives are to be used for hedging or speculative purposes. c. A specific limit on the amount authorized for any single trader. d. A statement requiring board review of each transaction because of the risk involved in such transactions.

d. A statement requiring board review of each transaction because of the risk involved in such transactions.

An audit assistant found a purchase order for a regular supplier in the amount of $5,500. The purchase order was dated after receipt of the goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of $450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about the lack of a receiving report. The senior should: a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving repot. b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn't happen very often. c. Disagree with the assistant because the two problems have an equal risk of loss associated with them d. Disagree with the assistant because the lack of a receiving report had a greater risk of loss associated with it.

d. Disagree with the assistant because the lack of a receiving report had a greater risk of loss associated with it.

An auditor who lacks independence on an audit engagement should a. Express a qualified opinion. b. Express a qualified opinion and state the reasons for the impairment of independence. c. Summarize in the report the audit procedures that were performed. d. Disclaim an opinion and not state the reasons for the impairment of independence.

d. Disclaim an opinion and not state the reasons for the impairment of independence.

Does an auditor make the following representations explicitly or implicitly in the opinion paragraph when expressing an unmodified opinion on the financial statements? Conformity with the Applicable financial reporting Framework (GAAP); Adequacy of Disclosure a. Explicitly; Explicitly b. Implicitly; Implicitly c. Implicitly; Explicitly d. Explicitly; Implicitly

d. Explicitly; Implicitly

The timing of analytical procedures may vary with the auditor's objectives. The auditing standards suggest that analytical procedures should be performed in all of the following stages except a. In the initial planning stages to assist in determining the nature, timing, and extent of other auditing procedures by identifying, among other things, significant matters that require consideration during the audit. b. During the conduct of the audit in conjunction with other procedures applied by the auditor to individual elements of financial information. c. At or near the conclusion of the audit as an overall review of the financial information. d. For the purpose of monitoring the client's transaction processes after the audit report has been issued.

d. For the purpose of monitoring the client's transaction processes after the audit report has been issued.

In the absence of evidence about illegal acts having a material but indirect effect on the financial statements, an audit in accordance with GAAS will customarily a. Include procedures designed to provide reasonable assurance that such acts are detected. b. Include procedures similar to those performed to detect material errors and fraud. c. Include procedures designed to provide negative assurance about the occurrence of such acts. d. Not include procedures specifically designed to detect such acts.

d. Not include procedures specifically designed to detect such acts.

Which of the following procedures would an auditor most likely perform prior to the balance sheet date? a. Review subsequent events. b. Perform search for unrecorded liabilities. c. Send inquiry letter to client's legal counsel. d. Review detail and test significant travel and entertainment expenses.

d. Review detail and test significant travel and entertainment expenses.

Attribute Sampling

determining the rate (%) of occurrence of SCALP looking for attributes of internal control to assess control risk Doesn't work well with 0, negative balances or understatements

Sampling incorrect ACCEPTANCE

ineffective, risk of assessing control risk too low

Sampling incorrect REJECTION

inefficient, test more than necessary, more expensive

What is the effect of stratification?

it cuts down on the standard deviation of the population & therefore cuts down on total sample size than if it hadn't been stratified

What does the control environment do?

it sets the tone & defines the foundation for the other components.

Variable Sampling

look at variables to estimate $ error, unique because it defines the population as # of $ in BV, not the number of items

sample size formula

n = (RF * N) / (M - E)

Why would an auditor concern himself with internal controls?

promotes accuracy in financial & other reporting

Passive role in subsequent events

report to Issuance - react to what happened

Going Concern key words

substantial doubt & going concern placed at end to justify modify unqualified opinion

ACC 4330 Ultimate Final Prep

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