ACCT 497

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: - valuation and allocation. - completeness. - rights and obligations. - existence.

valuation and allocation.

The revenue process affects numerous accounts in the financial statements. True/False

True

Tolerable misstatement is also called performance materiality by the AICPA. True/False

True

Send letters to a sample of accounts receivable customers to verify whether they have an outstanding balance at December 31, 2018. This is a Balance-Related assertion? Which assertion the auditor is testing for?

Existence

Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory? - Existence - Valuation and Allocation. - Completeness. - Rights and obligations.

Existence

A decrease in inherent risk and an increase in control risk of the same amount results in ______ in planned detection risk and ______ in planned evidence. Assuming Acceptable Audit Risk hold constant.

- no effect - no effect

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee? - A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan. - A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience. - A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement. - A fee based on the fee charged by the prior auditor.

A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.

Which of the following is an indicator of attitudes / rationalizations to engage in fraudulent financial reporting? - A member of management has been accused of illegal acts at another entity that they control. - A member of management has incurred significant gambling debt. - The organization's board of directors is not independent of management. - A number of the company's account balances are based on significant estimates that involve subjective judgments.

A member of management has been accused of illegal acts at another entity that they control.

Which of the following in an indicator of an opportunity to engage in fraudulent financial reporting? - A number of the company's account balances are based on significant estimates that involve subjective judgments. - A member of management has incurred significant gambling debt. - A member of management has been accused of illegal acts at another entity that they control. - Management frequently argues with the auditor regarding the validity of estimates in the financial statements.

A number of the company's account balances are based on significant estimates that involve subjective judgments.

Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. Select one letter for each of the three independent variables and planned evidence: I= increase, D=decrease, N=no effect, and C= cannot determine from the information provided. The auditor decided to set assessed control risk at maximum (it was previously assessed below the maximum): Control Risk: ___ Inherent Risk: ___ Acceptable Audit Risk: ___ Planned evidence: ___

Control Risk: I Inherent Risk: N Acceptable Audit Risk: N Planned evidence: I

Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. Select one letter for each of the three independent variables and planned evidence: I= increase, D=decrease, N=no effect, and C= cannot determine from the information provided. The client acquired a new subsidiary located in Italy (assuming control risk holding constant): Control Risk: ___ Inherent Risk: ___ Acceptable Audit Risk: ___ Planned evidence: ___

Control Risk: N Inherent Risk: I Acceptable Audit Risk: N Planned evidence: I

Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. Select one letter for each of the three independent variables and planned evidence: I= increase, D=decrease, N=no effect, and C= cannot determine from the information provided. The company changed from a privately held company to a publicly held company: Control Risk: ___ Inherent Risk: ___ Acceptable Audit Risk: ___ Planned evidence: ___

Control Risk: N Inherent Risk: N Acceptable Audit Risk: D Planned evidence: I

An auditor performs the following test of controls: Select a sample of invoices. Obtain copies of invoices, corresponding sales orders, and packing slips. Compare all three documents and make sure that sales quantities and selling prices match. What assertion does this test of controls most closely relate to? - Controls are in place to ensure the accuracy of sales transactions. - Controls are in place to ensure that all sales transactions are recorded. - Controls are in place to ensure that sales transactions are recorded on a timely basis. - Controls are in place to assure all sales transactions actually occurred.

Controls are in place to ensure the accuracy of sales transactions.

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? - 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. - Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. - A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor's work. - An entity may have a poorly designed internal control system.

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.

Which of the following is true relating to audit work paper documentation? - It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered. - It should not include copies of any client-generated documents. - It is generally examined and utilized by the client after the audit is completed. - It must be destroyed once the audit is complete and the opinion is rendered.

It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered.

If a company's external auditor expresses an unmodified opinion as a result of the audit of the company's financial statements, readers of the audit report can assume that - Material issues about the application of accounting principles were resolved to the satisfaction of the external auditor. - The external auditor found no fraud - The company is financially sound and the financial statements are accurate. - Internal control is effective.

Material issues about the application of accounting principles were resolved to the satisfaction of the external auditor.

Which of the following statements appears in the scope paragraph of the audit report for a non-accelerated filer, but does not appears in the scope paragraph of the audit reports for an accelerated filer and/or large accelerated filer? - The auditor does not express an opinion on the effectiveness of the company's internal controls. - Auditing standards require the auditor to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. - The financial statements are presented fairly, in all material respects. - Management is responsible for the preparation and fair presentation of the financial statements.

The auditor does not express an opinion on the effectiveness of the company's internal controls.

A company is engaged in a seasonal business where a substantial portion of its annual sales occur in the last month of the fiscal year. Which of the following approaches to auditing revenues is most appropriate for this company? - The auditor should select an extended sample of transactions occurring in the last month of the fiscal year and review supporting documentation. - The auditor should perform analytical procedures on sales at an interim date and discuss any changes between the interim date and fiscal year end with senior management. - The auditor should perform transactions testing at an interim date and use analytical procedures to gather evidence on the last month's sales. - The auditor should review inventory transactions for the last month of the fiscal year.

The auditor should select an extended sample of transactions occurring in the last month of the fiscal year and review supporting documentation.

Which of the following is not a valid reason for reducing the extent of detailed audit testing on an account? - The auditor wants to make sure that the number of hours spent on the engagement does not go over budget. - Analytical procedures results indicate that the likelihood of material misstatement is low. - Internal control testing indicates a low level of control risk. - The cost of obtaining additional evidence outweighs its usefulness

The auditor wants to make sure that the number of hours spent on the engagement does not go over budget.

Which of the following best explains why an auditor on a non-public company would test the operating effectiveness of a control procedure? - The auditor will be able to reduce the extent of substantive testing in areas that are affected by the control procedure. - The assessed level of control risk for the transactions affected by the procedure is high. - The control procedure is important in preventing or detecting material misstatements in the financial statements. - The assessed level of control risk for the transactions affected by the procedure is low.

The auditor will be able to reduce the extent of substantive testing in areas that are affected by the control procedure.

Which of the following circumstances would most likely result in a standard unqualified opinion with an explanatory paragraph? - The auditor wishes to emphasize significant litigation pending against the client that is properly disclosed in the financial statements. - The client refuses to book an accrual for a material legal settlement that was pending as of the balance sheet date, but settled before the end of fieldwork. - The client's financial statements contain immaterial errors that were not corrected. - The client's legal counsel is requested to advise whether the client's actions constitute material noncompliance with tax law but refuses to do so.

The auditor wishes to emphasize significant litigation pending against the client that is properly disclosed in the financial statements.

Which of the following statements is correct with regard to the quality or appropriateness of evidential matter? - The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. - Evidential matter must be either valid or relevant but need not be both. - Internal accounting data alone may be considered sufficient appropriate evidential matter to issue an unqualified opinion on financial statements. - Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained.

The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.

Which of the following addresses the completeness assertion with respect to credit sales transactions? - The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. - The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances. - The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly. - The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences they report.

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

Which of the following statements about internal control is correct? - The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system. - A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. - An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance. - The establishment and maintenance of internal control is an important responsibility of the internal auditor.

The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments? - The misstatement will cause the client to fail to meet an earnings forecast. - A misstatement exceeded five percent of net income. - The auditor also provides consulting services to the audit client. - The audit committee is not well-educated about the accounting principle in question.

The misstatement will cause the client to fail to meet an earnings forecast.

According to the text, each of the following is a main purpose for performing audit procedures except: - To develop recommendations for the control system. - To obtain an understanding of the entity and its environment. - To test the operating effectiveness of controls. - To detect material misstatements in the financial statements

To develop recommendations for the control system.

Channel stuffing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell. True/False

True

The risk of material misstatement is the product of inherent risk and control risk. True/False

True

An entity requires credit approval before shipping goods to customers. Which of the following assertions does this support? - Valuation - Completeness. - Occurrence. - Rights and obligations.

Valuation

Add all customer balances in the accounts receivable trial balance and agree the amount to the general ledger. This is a Balance-Related assertion? Which assertion the auditor is testing for?

Valuation and Allocation

All accounts on the list are expected to be collected within 1 year. For this statement about accounts receivable, identify the appropriate management assertion. - Completeness - Existence - Valuation and Allocation - Rights and Obligation

Valuation and Allocation

All accounts on the list arose from normal course of business and not due from related parties. For this statement about accounts receivable, identify the appropriate management assertion. - Completeness - Existence - Valuation and Allocation - Rights and Obligation

Valuation and Allocation

Discuss with credit department personnel the likelihood of collection of all accounts as of December 31, 2018 with a balance greater than $100,000 and greater than 90 days old as of year-end. This is a Balance-Related assertion? Which assertion the auditor is testing for?

Valuation and Allocation

Receivables that have been uncollectible have been written off. For this statement about accounts receivable, identify the appropriate management assertion. - Completeness - Existence - Valuation and Allocation - Rights and Obligation

Valuation and Allocation

A confirmation is used to - Verify a representation from a third party. - Verify the inventory count is correct. - Verify that a control is being observed. - Verify that a specific trend is correct.

Verify a representation from a third party.

During your audit of Raceway.com, Inc., you conclude that there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your audit sufficiently to verify whether the balance is actually misstated. First, Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable: [Answer1] Second, suppose this issue is highly material, state the type of audit report that should be issued: [Answer2]

[Answer1]: Scope of the audit has been restricted [Answer2]: Disclaimer of Opinion

You are auditing Deep Clean Services for the first time. Deep Clean has been in business for several years but over the last two years has struggled to stay afloat given the economic conditions. Based on your audit work, you have substantial doubt that Deep Clean will be in business by the end of its next fiscal year. First, Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable: [Answer1] Second, suppose this issue is material but not highly material, state the type of audit report that should be issued: [Answer2]

[Answer1]: Substantial doubt about going concern [Answer2]: Unqualified opinion with explanation paragraph

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: - fictitious sales in the current year. - more thorough credit investigations made by the company late last year. - unrecorded credit sales in the current year. - unrecorded cash receipts last year.

fictitious sales in the current year.

For each situation, state the appropriate audit report from the following alternatives: i) Adverse opinion on ICFR ii) Disclaimer of opinion on ICFR iii) Unqualified opinion on ICFR The auditor determined that a deficiency in internal control exists that will not prevent or detect a material misstatement in the financial statements.

i) Adverse opinion on ICFR

For each situation, state the appropriate audit report from the following alternatives: i) Adverse opinion on ICFR ii) Disclaimer of opinion on ICFR iii) Unqualified opinion on ICFR The auditor identified a material misstatement in the financial statement that was not detected by management of the company

i) Adverse opinion on ICFR

For each situation, state the appropriate audit report from the following alternatives: i) Adverse opinion on ICFR ii) Disclaimer of opinion on ICFR iii) Unqualified opinion on ICFR The auditor identified several significant deficiencies in internal control. Because of these significant deficiencies, the auditor believes that there is a reasonable possibility that internal control will not prevent or detect material misstatement on a timely basis.

i) Adverse opinion on ICFR

For each situation, state the appropriate audit report from the following alternatives: i) Adverse opinion on ICFR ii) Disclaimer of opinion on ICFR iii) Unqualified opinion on ICFR During interim testing, the auditor identified and communicated to management a significant control deficiency. Management immediately corrected the deficiency and the auditor was able to sufficiently test the newly-instituted internal control before the end of the fiscal period.

iii) Unqualified opinion on ICFR

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: - integrity of management. - adequacy of the preplanned audit program. - ability to establish consistency in application of accounting principles between years. - apparent scope limitation.

integrity of management.

Tolerable misstatement is: - materiality used to establish a scope for the audit procedures for the individual account balance - materiality for the balance sheet as a whole. - materiality for the income statement as a whole. - the amount of misstatement that management is willing to tolerate in the financial statements

materiality used to establish a scope for the audit procedures for the individual account balance

To determine whether the internal controls operated effectively to minimize instances of failure to post invoices to customers' accounts receivable master file, the auditor would select a sample of transactions from the population represented by the - sales invoice file - customer order file - bill of lading file - customers' accounts receivable master file

sales invoice file

An auditor has determined a $10 million materiality level for a client's balance sheet and a $3 million materiality level for the client's income statement. As a result, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of - $3 million or more. - $6.5 million or more. - $10 million or more. - $13 million or more.

$3 million or more.

A decrease in acceptable audit risk results in a(n) ______ in planned detection risk and a(n) ______ in planned evidence. Assuming Inherent Risk and Control Risk hold constant.

- decrease - increase

A decrease in planned detection risk results in a(n) ______ in planned evidence. Assuming Inherent Risk, Control Risk, and Acceptable Audit Risk hold constant.

- increase

A decrease in control risk results in a(n) _______ in planned detection risk and a(n) ______ in planned evidence. Assuming Inherent Risk and Acceptable Audit Risk hold constant.

- increase - decrease

A decrease in inherent risk results in a(n) ______ in planned detection risk and a(n) ______ in planned evidence. Assuming Control Risk and Acceptable Audit Risk hold constant.

- increase - decrease

In which of the following cases is the computed upper deviation rate the lowest? - 10 percent sampling risk, sample of 100 items, 2 deviations found. - 10 percent sampling risk, sample of 120 items, 3 deviations found. - 5 percent sampling risk, sample of 80 items, 4 deviations found. - 5 percent sampling risk, sample of 50 items, 1 deviation found.

10 percent sampling risk, sample of 100 items, 2 deviations found.

An auditor has set the risk of assessing control risk too low at 5%, the tolerable deviation rate at 5%, and expected deviation rate at 1.5%. What is the recommended sample size for this application? - 124 - 159 - 208 - 73

124

An auditor has set the risk of assessing control risk too low at 10%, the tolerable deviation rate at 7%, and expected deviation rate at 0.0%. What is the recommended sample size for this application? - 32 - 44 - 57 - 20

32

An auditor set the tolerable deviation rate at 10 percent for a statistical sampling application. In which of the following situations would the auditor conclude that internal controls are not functioning properly? - 5 percent sampling risk, sample of 80 items, 4 deviations found. - 10 percent sampling risk, sample of 80 items, 4 deviations found. - 10 percent sampling risk, sample of 100 items, 5 deviations found. - 5 percent sampling risk, sample of 50 items, 1 deviation found.

5 percent sampling risk, sample of 80 items, 4 deviations found.

Assume that the risk of assessing control risk too low is 5%, the tolerable deviation rate is 6%, and the auditor finds two errors in a sample of 100 items. What is the computed upper deviation rate? - 6.2 - 5.2 - 10.2 - 2.2

6.2

An auditor has set the risk of assessing control risk too low at 5%, the tolerable deviation rate at 7%, and expected deviation rate at 0.5%. What is the recommended sample size for this application? - 66 - 77 - 88 - 55

66

An auditor performing a test of controls expects zero errors in the population being tested and desires to achieve 5% risk of assessing control risk too low. They determine that the minimum acceptable sample size for this application in 42. What is the tolerable deviation rate for this sampling application? - 7% - 0% - 5% - 10%

7%

Assume the risk of assessing control risk too low is 5% and the tolerable deviation rate is 5%. the auditor selects a sample of 60 items and finds 1 deviation. What is the computed upper deviation rate? - 7.7 - 6.7 - 8.7 - 5.7

7.7

Which of the following does not indicate the need for an explanatory paragraph in an audit opinion? - A change in accounting estimate. - A change in accounting principle. - Substantial doubt about the entity continuing as a going concern. - A change in reporting entity.

A change in accounting estimate

What type of opinion should an auditor give when the auditor is not independent? - A disclaimer of opinion. - A standard unmodified opinion. - An unmodified opinion with an explanatory paragraph. - A qualified opinion.

A disclaimer of opinion.

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee? - A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan. - A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience - A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement - A fee based on the fee charged by the prior auditor.

A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.

An auditor finds a misstatement that is material but not highly material. Which of the following types of audit opinion should be issued? - A qualified opinion. - An unqualified opinion with an emphasis-of-matter paragraph. - A disclaimer of opinion. - An adverse opinion.

A qualified opinion.

What are the accounting requirements for a correct sales cutoff? - A shipment should be recorded as a sale when the risks of ownership transfer to the buyer and collectability is reasonably assured - A shipment should be recorded as a sale when the merchandise is shipped - A shipment should be recorded as a sale when the payment for the merchandise has been received by the seller - A shipment should be recorded as a sale when the merchandise is received by the purchaser

A shipment should be recorded as a sale when the risks of ownership transfer to the buyer and collectability is reasonably assured

According to the ethical standards of the profession, which of the following acts is generally prohibited? - Accepting a commission for recommending a product to an audit client. - Purchasing a product from a third party and reselling it to a client. - Writing a financial management newsletter promoted and sold by a publishing company. - Accepting engagements obtained through the efforts of third parties.

Accepting a commission for recommending a product to an audit client.

In testing the existence assertion for an asset, an auditor ordinarily works from the - Accounting records to the supporting documents. - Financial statements to the potentially unrecorded items. - Potentially unrecorded items to the financial statements. - Supporting documents to the accounting records.

Accounting records to the supporting documents.

Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following? - Accounts Receivable - Goodwill. - Deferred Taxes. - Machinery and Equipment.

Accounts Receivable

For a sample of sales transactions selected from the sales journal, verify that the amount of the transaction has been recorded in the correct account in the receivable subledger. This is a Transaction-Related assertion? Which assertion the auditor is testing for?

Accuracy

What objectives of controls are of primary interest to an auditor performing a financial statement audit? - Accurate and reliable financial reporting. - Effective and efficient operations. - Compliance with applicable laws and regulations. - Prevention or detection and timely correction of errors and fraud.

Accurate and reliable financial reporting.

Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards? - All choices - Auditing standards issued by the AICPA and the PCAOB are considered minimum standards of performance for auditors. - The AICPA sets auditing standards for use in audits of nonpublic entities. - The PCAOB sets auditing standards for use in audits of publicly held companies.

All choices

Which of the following organizations affect the environment that CPAs work in? - All choices - The American Institute of Certified Public Accountants [AICPA]. - The Securities and Exchange Commission [SEC]. - The Public Company Accounting Oversight Board [PCAOB].

All choices

In assessing whether to accept a client for an audit engagement, a CPA should consider: - All of these choices are correct. - the current financial health of the prospective client. - the integrity of management. - the CPA's overall engagement risk.

All of these choices are correct.

Which of the following presumptions is correct regarding the reliability of audit evidence? - An effective internal control system provides increased assurance with regard to the reliability of audit evidence. - To be reliable, evidence should be convincing rather than simply persuasive. - Information obtained directly from the company is considered to be the most reliable type of evidence. - Reliability generally refers to the amount and relevance of corroborative audit evidence obtained.

An effective internal control system provides increased assurance with regard to the reliability of audit evidence.

Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements? - An illegal payment to a foreign official that was not recorded. - A piece of obsolete office equipment that was not retired. - A petty cash fund disbursement that was not properly authorized. - An uncollectible account receivable that was not written-off.

An illegal payment to a foreign official that was not recorded.

Which of the following is true regarding audit evidence? - Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported. - Auditors typically gather audit evidence about one whole financial statement at a time rather than one account at a time. - Auditors rarely gather audit evidence about one business process at a time. - When audit evidence supports management's assertions, a qualified audit report can be issued.

Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported.

Which of the following best describes relationships among auditing, attest, and assurance services? - Auditing is a type of assurance service. - Attest is a type of auditing service. - Auditing and attest services represent two distinctly different types of services. - Assurance is a type of attest service.

Auditing is a type of assurance service.

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of - Authorization, recording, and custody. - Authorization, execution, and payment. - Custody, execution, and reporting. - Authorization, payment, and recording

Authorization, recording, and custody.

Which of the following is the most persuasive type of audit evidence? - Bank statements obtained directly from the bank. - Bank statements obtained from the client. - Prenumbered client sales invoices. - Vendor's invoices included in the client's files.

Bank statements obtained directly from the bank.

An auditor wishes to tests whether a company's internal controls are operating effectively to prevent the failure to invoice shipments. Which of the following populations should the auditor select transaction items from? - Bill of lading file. - Customer order file. - Accounts receivable subsidiary ledger. - Sales invoice file.

Bill of lading file

Which of the following is a detection risk factor? - Choosing a sample that is not representative of its population. - An unstable business environment. - Lack of segregation of duties. - An account balance that is based on subjective estimates.

Choosing a sample that is not representative of its population.

Which of the following procedures addresses the completeness assertion? - Compare a sample of shipping documents to related sales invoices. - Compare a sample of payroll transactions to supporting documentation. - Confirm accounts receivable balances with the customers. -Review bank statements for indications of kiting.

Compare a sample of shipping documents to related sales invoices.

Determine whether all risks related to accounts receivable are adequately disclosed. This is a Presentation and Disclosure related assertion Which assertion the auditor is testing for?

Completeness

Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue? - Completeness - Existence and occurrence. - Rights and obligations. - Valuation and Allocation.

Completeness

There is no unrecorded receivables. For this statement about accounts receivable, identify the appropriate management assertion. - Completeness - Existence - Valuation and Allocation - Rights and Obligation

Completeness

Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. Select one letter for each of the three independent variables and planned evidence: I= increase, D=decrease, N=no effect, and C= cannot determine from the information provided. The client began selling products online to customers through its Web page during the year under audit. The online customer ordering process is not integrated with the company's accounting system. Client sales staff print out customer order information and enter that data into the sales accounting system: Control Risk: ___ Inherent Risk: ___ Acceptable Audit Risk: ___ Planned evidence: ___

Control Risk: I Inherent Risk: I Acceptable Audit Risk: N Planned evidence: I

Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. Select one letter for each of the three independent variables and planned evidence: I= increase, D=decrease, N=no effect, and C= cannot determine from the information provided. The client's management materially decreased long-term contractual debt: Control Risk: ___ Inherent Risk: ___ Acceptable Audit Risk: ___ Planned evidence: ___

Control Risk: N Inherent Risk: N Acceptable Audit Risk: I Planned evidence: D

Which of the following is not addressed during the process of obtaining an understanding of internal controls? - Control operating effectiveness - Control design effectiveness - Control environment effectiveness - Information and communication effectiveness

Control operating effectiveness

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? - Decrease in desired confidence level, Increase in tolerable deviation rate, and Decrease in expected population deviation rate. - Decrease in desired confidence level, Decrease in tolerable deviation rate, and Increase in expected population deviation rate. - Increase in desired confidence level, Increase in tolerable deviation rate, and Decrease in expected population deviation rate. - Decrease in desired confidence level, Increase in tolerable deviation rate, and Increase in expected population deviation rate.

Decrease in desired confidence level, Increase in tolerable deviation rate, and Decrease in expected population deviation rate.

Evaluating a prospective client requires the following step(s): - Determine if the firm is independent of the client. - Communicate with the SEC. - Test internal controls. - Communicate with the AICPA.

Determine if the firm is independent of the client.

An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take? - Document the errors and the conclusion that the financial statements are free from material misstatement. - Withdraw from the engagement because the client's refusal to correct the errors is a scope limitation. - Issue a qualified, "except for" opinion on the financial statements because the client refuses to correct the errors. - Correct the errors on the client's behalf, and then issue the audit report.

Document the errors and the conclusion that the financial statements are free from material misstatement.

A written understanding between the auditor and the entity concerning the auditor's responsibility for fraud is usually set forth in a(n) - Engagement leer. - Management Leer. - Internal control leer. - Leer of audit inquiry.

Engagement leer.

According to the AICPA, the basic purpose of a financial statement audit is to - Enhance the degree of confidence that users can place in the financial statements - Assure that all fraudulent transactions have been detected. - Examine individual transactions so that the auditor may certify as to their validity. - Assure the consistent application of correct accounting procedures

Enhance the degree of confidence that users can place in the financial statements

Which of the following items would be included in an auditor's permanent file documentation? - Excerpts of the corporate charter and bylaws. - Board of Directors' minutes. - An analysis of which account balances are likely to be materially misstated. - Documentation regarding the assessed level of control risk.

Excerpts of the corporate charter and bylaws.

An auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. Which assertion does this address? - Existence - Valuation and Allocation - Completeness - Cutoff

Existence

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? - Expected amount of misstatement and the measure of tolerable misstatement. - Expected amount of misstatement but not the measure of tolerable misstatement. - Measure of tolerable misstatement but not the expected amount of misstatement. - Neither the expected amount of misstatement nor the measure of tolerable misstatement.

Expected amount of misstatement and the measure of tolerable misstatement.

Which of the following is NOT a qualitative factor that may affect an auditor's establishment of materiality? - Firm policy sets materiality at 4% of pretax income. - Potential for fraud. - The company is close to violating loan covenants. - A small misstatement would interrupt an earnings trend

Firm policy sets materiality at 4% of pretax income.

Which of the following best denes professional skepticism? - Having an attitude that includes a questioning mind and a critical assessment of evidence. - Operating under the assumption that the client's financial statements contain material misstatement. - Assuming that very little of what the client tells the auditor is true. - Collecting evidence that proves client assertions beyond a reasonable doubt.

Having an attitude that includes a questioning mind and a critical assessment of evidence.

Which of the following is NOT part of the control environment? - IT application controls. - Management's operating style. - Organizational structure. - Human resource policies and procedures.

IT application controls.

Assume that the planned level of acceptable audit risk in each of the following circumstances is 0.05. Under which of the following circumstances would an auditor need to gather the least audit evidence? - Inherent risk = 0.5 Control risk = 0.4 - Inherent risk = 1.0 Control risk = 1.0 - Inherent risk = 0.5 Control risk = 1.0 - Inherent risk = 0.7 Control risk = 0.3

Inherent risk = 0.5 Control risk = 0.4

Which of the following ethical concepts is considered to be the cornerstone of the auditing profession? - Independence. - Confidentiality. - Due professional care. - Protection of rights.

Independence.

The risk to investors that a company's financial statements may be materially misleading is called - Information risk. - Moral hazard. - Business risk. - Investment risk.

Information risk.

Audit sampling is not used for which type of audit evidence. - Inquiry - Inspection of tangible assets. - Reperformance. - Confirmation.

Inquiry

The financial statements are materially misstated. The risk of incorrect acceptance is too high. Materiality for planning purposes is at a sufficiently low level. - Inspecting employee time cards for proper approval by supervisors. - Making an independent estimate of the amount of LIFO inventory. - Examining invoices in support of the valuation of fixed asset additions. - Selecting accounts receivable balances for confirmation.

Inspecting employee time cards for proper approval by supervisors.

Which of the following procedures would provide the most reliable audit evidence? - Inspection of bank statements obtained directly from the client's financial institution - Inquiries of the client's internal accounting staff. - Inspection of prenumbered client purchase orders filed in the accounts payable department. - Observation of procedures performed by the client's personnel to approve cash disbursements.

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

The concept of materiality as it applies to a financial statement audit - Is determined, in part, based on how financial statement users may be influenced in making decisions. - Relates primarily to the audit fees involved. - involves less professional judgment for public companies. - Relates primarily to the quantity of audit procedures performed.

Is determined, in part, based on how financial statement users may be influenced in making decisions.

A client's customer management system sends an automated email each me a customer master record is modified. The customer has to confirm the change by responding to the e-mail. A member of the billing management team must review the response to confirm that the change was authorized by the customer. Why is this control important? - It ensures that items shipped by the company are delivered to authorized customers. - It ensures that sales are classified in the proper general ledger account. - It ensures that sales cutoff is accurate. - It ensures that the recording of sales transactions is complete.

It ensures that items shipped by the company are delivered to authorized customers.

Which of the following statements about audit documentation is true? - It is the property of the auditor, and client permission is generally required to allow other parties to examine the documentation. - It becomes the property of the client after completion of the audit. - It is the property of the auditor, and client permission is not necessary to allow other parties to examine the documentation. - It is the property of the auditor, and there are no circumstances under which the auditor would be required to show the documentation to other parties.

It is the property of the auditor, and client permission is generally required to allow other parties to examine the documentation.

Joe Fastrack is an audit partner in Deloitte's Los Angeles office. Under which of the following situations is independence impaired? - Joe's dependent daughter holds stock in one of the Los Angeles office's audit clients through her college fund. - Joe's wife has a part-time accounting position with a company that is audited by Deloitte's San Francisco office. - The firm provides both a financial audit report and a cybersecurity risk management attestation report to one of Joe's clients. - Joe holds shares in a mutual fund that is invested in several clients served by the Los Angeles office.

Joe's dependent daughter holds stock in one of the Los Angeles office's audit clients through her college fund.

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

Lends credibility to the financial statements.

Which of the following procedures is not used by auditors to obtain an understanding of internal controls? - Making inquiries of banks and attorneys. - Performing walkthroughs of the accounting system. - Reviewing system flowcharts. - Taking plant and operational tours.

Making inquiries of banks and attorneys.

Which of the following procedures is performed BEFORE accepting a prospective client? - Making inquiries of third pares regarding management integrity. - Verifying cash balances. - Testing of internal controls. - Verifying the existence of key fixed assets.

Making inquiries of third pares regarding management integrity.

Which of the following procedures is performed BEFORE accepting a prospective client? - Making inquiries of third pares regarding management integrity. - Verifying cash balances. - Testing of internal controls. - Verifying the existence of key fixed assets.

Making inquiries of third pares regarding management integrity.

In the context of agency theory, information asymmetry refers to the idea that - Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders). - Information can vary in its reliability. - Information can vary in its relevance. - Management likely will not act in the best interests of the absentee owners.

Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when - Management is dominated by one individual. - External policies established by pares outside the entity affect its accounting practices. - Internal auditors have direct access to the board of directors and the entity's management. - The audit committee is active in overseeing the entity's financial reporting policies.

Management is dominated by one individual

An advantage of statistical sampling over non-statistical sampling is that statistical sampling helps an auditor to - Measure the sufficiency of the evidential matter obtained. - Eliminate the risk of non-sampling errors. - Reduce audit risk and materiality to a relatively low level. - Minimize the failure to detect errors and fraud.

Measure the sufficiency of the evidential matter obtained.

Which of the following statements regarding the monitoring component of the COSO internal control framework is NOT correct? - Monitoring should be conducted by the external auditor, not by the company's employees. - Monitoring can be an ongoing process. - Monitoring can be conducted as a separate evaluation. - Monitoring conducted by internal audit staff can reduce the extent of testing performed by the external auditor.

Monitoring should be conducted by the external auditor, not by the company's employees.

Which of the following statements is true regarding audit sampling? - Non-statistical audit sampling is commonly used in practice - When using non-statistical sampling, the sample does not need to be representative of the population. - When using non-statistical sampling, sampling risk does not need to be considered. - When using statistical sampling, the sample can be selected haphazardly.

Non-statistical audit sampling is commonly used in practice

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is: - Observation - Reperformance. - Inspection. - Analytical procedures.

Observation

Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. This is a Transaction-Related assertion? Which assertion the auditor is testing for?

Occurence

Which of the following would best be described as an assurance service? - Offering an opinion concerning the accuracy of statements made on a client's web site relating to its online privacy policies. - Preparing a report representing a client's position during an IRS audit. - Working with a client to develop a more efficient method of processing financial transactions. - Assisting a client in identifying potential sources of capital for future acquisitions.

Offering an opinion concerning the accuracy of statements made on a client's web site relating to its online privacy policies.

What organization is responsible for setting auditing standards for audits of publicly traded companies in the US? - PCAOB - AICPA - FASB - GASB

PCAOB

Which of the following can revoke the CPA's right to audit publicly traded companies? - PCAOB - ASB - AICPA - State Board of Accountancy

PCAOB

Which of the following can revoke the CPA's right to audit publicly traded companies? - PCAOB/SEC. - AICPA - SEC - State Board of Accountancy

PCAOB/SEC.

Which of the following statements is true as it relates to limited liability partnerships? - Partners are personally liable for the acts of those under their supervision. - Only senior partners are liable for the partnership's debts. - Partners have no liability in a limited liability partnership arrangement. - All partners must be AICPA members.

Partners are personally liable for the acts of those under their supervision.

An auditor finds that the client's gross profit percentage has declined from 25% in the prior year to 20% in the current year. Which of the following should the auditor do next? - Perform additional audit procedures to determine why the fluctuation occurred. - Require the client to research the reason for the discrepancy. - Require the client to make an adjustment so that gross profit is consistent from year to year. - Consider issuing an audit opinion with a going concern explanatory paragraph.

Perform additional audit procedures to determine why the fluctuation occurred.

An auditor wishes to detect sales overstatements. They should compare: - Postings in the sales journal with supporting documentation. - Supporting documentation with postings in the sales journal. - Postings in the sales journal with the accounts receivable subledger. - Sales journal totals with the general ledger.

Postings in the sales journal with supporting documentation.

Which of the following types of audit evidence is the least reliable? - Prenumbered sales invoices prepared by the client. - Bank statements obtained from the client. - Test counts of inventory performed by the auditor. - Correspondence from the client's attorney about litigation.

Prenumbered sales invoices prepared by the client.

Given the following circumstances regarding an audit, please circle the answer choice that corresponds to the category of audit report that an audit firm should issue: The audit firm is independent with respect to the client, both in fact and in appearance. The audit firm is not able to make a definitive determination as to whether or not the entire set of financial statements are in accordance with accounting principles generally accepted in the United States of America, as they were unable to obtain sufficient appropriate evidence regarding the carrying value of a material investment in another company or their share of the net income from that company. Despite the uncertainty associated with the above bulleted material item, overall, the financial statements are still fairly presented in all material respects. - Qualified - Unqualified with Emphasis-of-matter Explanatory Paragraph - Disclaimer - Adverse

Qualified

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is: - Recalculation - Scanning. - Observation. - Confirmation.

Recalculation

Audit sampling is commonly used for which type of audit evidence? - Reperformance - Observation. - Analytical procedures. - Inquiry.

Reperformance

Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct? - Reporting - Integrity. - Due care. - Scope and nature of services.

Reporting

Which of the following situations requires client consent to disclose confidential information contained in audit documentation? - Request from another CPA firm that is considering making a bid to obtain the audit engagement. - PCAOB inspection proceedings. - Preparing a response to a court subpoena. - Responding to a disciplinary proceeding initiated by the State Board of Accountancy.

Request from another CPA firm that is considering making a bid to obtain the audit engagement.

Receivables have not been sold or discounted. For this statement about accounts receivable, identify the appropriate management assertion. - Completeness - Existence - Valuation and Allocation - Rights and Obligation

Rights and Obligation

You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Your audit supervisor instructs you to look at documentation to determine which items are held on consignment. Which audit assertion does this address? - Rights and obligations - Existence - Completeness - Valuation and allocation

Rights and obligations

Which of the following represents a potential control weakness with respect to the valuation of accounts receivable. - Salespeople are responsible for evaluating and monitoring the financial condition of prospective and continuing customers. - Trade credit standards are reviewed and approved by the finance committee of the board of directors. - Customers not meeting trade credit standards are shipped merchandise on a cash on delivery (COD) basis only. - An authorized signature from the credit department is required for all credit sales orders.

Salespeople are responsible for evaluating and monitoring the financial condition of prospective and continuing customers.

An auditor wishes to detect a possible understatement of sales. The auditor would most likely trace transactions from the - Shipping documents to sales invoices. - Sales invoices to shipping documents. - Cash receipts journal to the sales journal. - Sales journal to the cash receipts journal.

Shipping documents to sales invoices.

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? - Smaller amount of tolerable misstatement. - Greater reliance on internal controls. - Greater reliance on analytical procedures. - Smaller expected frequency of misstatements.

Smaller amount of tolerable misstatement.

Given the following conditions, please circle the answer choice below that corresponds to the category of audit report that an audit firm should issue: The financial statements include a balance sheet, income statement, statement of changes in stockholders' equity, and a statement of cash flows. The auditor has accumulated sufficient appropriate evidence and can conclude that the audit has been performed in accordance with auditing standards. The financial statements and footnotes are presented in accordance with U.S. generally accepted accounting principles No circumstances have been identified that would cause any addition to or modification of the wording of the report. - Standard Unqualified - Unqualified with Emphasis-of-matter Explanatory Paragraph - Disclaimer - Qualified

Standard Unqualified

Which of the following can revoke the CPA's license to practice? - State Board of Accountancy - AICPA - SEC - PCAOB

State Board of Accountancy

Which of the following can revoke the CPA's license to practice? - State Board of Accountancy. - AICPA. - SEC - PCAOB

State Board of Accountancy.

Which of the following will increase detection risk? - The auditor decides to increase the overall level of acceptable audit risk. - The auditor finds evidence that internal controls over end-of-period adjustments have not been properly applied. - An account balance is based on subjective estimates. - A client's inventory is susceptible to theft.

The auditor decides to increase the overall level of acceptable audit risk.

Which of the following would most likely cause the auditor to decline to accept an audit engagement? - The auditor discovers evidence that the prospective client's management may have been engaged in illegal acts at other companies that it controls. - The prospective client's overall profitability is lagging behind that of other companies in its industry. - Internal controls over the prospective client's processing over routine cash disbursements are poor. - The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques.

The auditor discovers evidence that the prospective client's management may have been engaged in illegal acts at other companies that it controls.

When auditing a public company, which of the following impairs an auditor's independence? - The auditor has been a partner on the engagement for ten years. - Offering audit services as well as preparing the tax return for the same client. - The auditor's spouse works in the assembly line of an audit client. - Lack of fee disclosure in the client's annual report.

The auditor has been a partner on the engagement for ten years.

Which of the following appears first in the revised PCOAB audit opinion? - The auditor's opinion on the financial statements. - A reference to the internal control audit. - Statements regarding management's and the auditor's responsibility. - The scope paragraph.

The auditor's opinion on the financial statements.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? - The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. - The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. - The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. - 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.

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

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

The controls are operating effectively.

Which of the following would an auditor most likely use in determining the auditor's overall materiality? - The entity's annualized interim (i.e. quarterly) financial statements. - The anticipated sample size for planned substantive procedures. - The results of the internal control questionnaire. - The contents of the management representation leer.

The entity's annualized interim (i.e. quarterly) financial statements.

Which of the following was not a huge implication for the audit profession from the passing of the Sarbanes-Oxley Act of 2002 (SOX)? - The implementation of a peer review program to assess a firm's system of quality control for its private clients - The requirement for the reporting and testing of internal controls (Section 404) - The implementation of enhanced independence-related rules - The establishment of the Public Company Accounting Oversight Board (PCAOB)

The implementation of a peer review program to assess a firm's system of quality control for its private clients

Monitoring is a major component of the COSO Internal Control—Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? - The independent auditor can serve as part of the entity's control environment and continuous monitoring. - Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. - Monitoring can be an ongoing process. - Monitoring can be conducted as a separate evaluation.

The independent auditor can serve as part of the entity's control environment and continuous monitoring.

Which of the following is a valid reason to NOT test internal controls in a given area? - The internal controls appear to be ineffective in preventing or detecting material misstatements. - The auditor's initial understanding indicates that control risk is low. - The auditor plans to rely on the control to reduce the extent of substantive testing. - The control is related to a significant account assertion on a publicly traded company.

The internal controls appear to be ineffective in preventing or detecting material misstatements.

Which of the following is not a concern as to whether a misstatement is qualitatively material? - The misstatement is less than 5% of pretax income. - The misstatement hides a failure to meet analysts' expectations. - The misstatement increases management's compensation. - The misstatement changes a small amount of profit to a small reported loss.

The misstatement is less than 5% of pretax income.

According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)? - The partner (or partner equivalent) in another office in a nearby city who regularly plays golf with the engagement partner (or partner equivalent) and does not work on the engagement or have any interaction with the client. - The office's IT expert partner, who consulted with the engagement partner (or partner equivalent) regarding the client's IT system and spent 15 hours on the engagement. - The office's managing partner (or partner equivalent) who determines the compensation of the attest engagement partner. - The office's partner (or partner equivalent) who monitors quality control over the attest engagement.

The partner (or partner equivalent) in another office in a nearby city who regularly plays golf with the engagement partner (or partner equivalent) and does not work on the engagement or have any interaction with the client.

Which of the following statements is correct concerning statistical sampling in tests of controls? - There is an inverse relationship between the tolerable deviation rate and the sample size - As the population size increases, the sample size should increase proportionately. - There is an inverse relationship between the expected population deviation rate and the sample size. - In determining tolerable deviation rate, an auditor considers detection risk and the sample size.

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

Audit risk is - The risk of issuing an incorrect audit opinion. - The risk that audit procedures will fail to find material misstatements. - The overall risk of material misstatement. - The auditor's risk of loss from events arising in connection with a set of audited financial statements.

The risk of issuing an incorrect audit opinion.

Which of the following is an design deficiency in internal control? - The same individual records and deposits cash receipts. - The company's policy states that internal auditors should test controls over significant transactions once a year. - Accounts payable staff routinely process payments without required approvals from the purchasing manager. - Employees frequently ignore a policy that requires the storage area for high-value inventory to be secured at all times.

The same individual records and deposits cash receipts.

Which of the following statements is true? - The subject matter of attestation services typically covers a broader range than that for audit services. - An audit services provider must be independent, while an assurance services provider does not. - Audits require a report, while assurance engagements do not. - Assurance services do not require the provider to gather evidence

The subject matter of attestation services typically covers a broader range than that for audit services.

What is the primary objective of testing all individually significant items rather than sample testing? - To accept no sampling risk for items greater than tolerable misstatement. - To increase the audit risk at which a decision will be reached from the results of the sample selected. - To increase sample size. - To increase the size of the confidence bound around the projected misstatement.

To accept no sampling risk for items greater than tolerable misstatement.

According to the text, the first step in applying materiality to an audit is - To determine a materiality level for the overall financial statements. - To determine tolerable misstatement for each account balance. - To aggregate the misstatements found in each account and determine their overall affect on the financial statements. - To ask management what constitutes a material amount in their business.

To determine a materiality level for the overall financial statements.

Which of the following is the primary reason an external financial auditor evaluates internal controls? - To determine if the company's controls are likely to prevent, or detect and correct, material misstatements in the financial statements. - To determine if the company's controls allow it to operate effectively and efficiently. - To determine if the company has controls in place to ensure management integrity. - To determine if the company's controls ensure compliance with applicable laws and regulations.

To determine if the company's controls are likely to prevent, or detect and correct, material misstatements in the financial statements.

Why was the Sarbanes-Oxley Act passed? - To restore investor confidence in the wake of a series of accounting scandals. - To better protect consumers from fraudulent lending practices. - To ease some of the regulatory burden on the accounting profession. - To make it easier for investors to recover assets from failed firms.

To restore investor confidence in the wake of a series of accounting scandals.

For attributes sampling, of the three factors that enter into sample size determination, which two factors may the auditor adjust to reflect the importance of the control? - Tolerable deviation rate and overreliance risk. - Expected deviation rate and overreliance risk. - Population size and tolerable deviation rate. - Tolerable deviation rate and expected deviation rate.

Tolerable deviation rate and overreliance risk.

Which of the following relationships is correct? - Tolerable misstatement and sample size are inversely related. - Desired confidence level and sample size are inversely related. - Expected misstatement and sample size are inversely related. - Tolerable misstatement and desired confidence level are directly related.

Tolerable misstatement and sample size are inversely related.

An auditor was engaged to audit the financial statements of a company after its fiscal year had ended. The timing of the auditor's appointment made it infeasible to confirm accounts receivable by the date the audited financial statement's were to be delivered to the company's principal lender. However, the auditor was able to perform other procedures and was satisfied as to the reasonableness of the accounts receivable balances, as well as the other items in the client's financial statements. Which of the following types of audit opinions should be issued? - Unqualified opinion - Unqualified opinion with an emphasis-of-matter paragraph - Disclaimer of opinion. - Qualified opinion.

Unqualified opinion

One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify: - Unusual changes that may signal possible account misstatements. - Transactions that have not been properly authorized. - Illegal acts undetected as a result of poor internal controls. - Inefficient operations.

Unusual changes that may signal possible account misstatements.

Four weeks after the year-end date, a major-customer of Prince Construction Co. declared bankruptcy. Because the customer had confirmed the balance due to Prince at the balance sheet date, management refuses to charge off the account or otherwise disclose the information. The receivable represents 10% of accounts receivable and 20% of net earnings before taxes. First, Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable: [Answer1] Second, suppose this issue is highly material, state the type of audit report that should be issued: [Answer2]

[Answer1]: Failure to follow GAAP [Answer2]: Adverse Report

You complete the audit of Munich Department Store, and in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in Munich. First, Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable: [Answer1] Second, state the type of audit report that should be issued: [Answer2]

[Answer1]: Lack of Independence [Answer2]: Disclaimer of Opinion

Please circle the answer choice below that best completes the missing phrase at the end of the following definition of materiality - "A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of _____________________." - a reasonable user of the statements - the auditor - management or the board of directors - anyone

a reasonable user of the statements

The Sarbanes-Oxley Act prohibited auditors from providing certain services to their audit clients including: a) Bookkeeping or related financial statement services b) Management functions or human resources c) Tax services - a) and b) - a) only - b) and c) - a), b), and c)

a) and b)

In general, revenue is recognized when: - an entity satisfies a performance obligation - goods are shipped. - it is recorded in the sales journal. - it is received in cash.

an entity satisfies a performance obligation

To determine whether the internal controls operated effectively to minimize instances of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the - bill of lading - customer file - customers' accounts receivable - master file sales invoice file

bill of lading

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': - competence and objectivity. - efficiency and experience. - independence and review skills. - training and supervisory skills.

competence and objectivity.

Increase TDR will ______ sample size

decrease

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

engagement letter

The Public Company Accounting Oversight Board does not: - establish auditing standards that must be followed by all CPAs. - perform inspections of the quality controls at audit firms that audit public companies. - oversee auditors of public companies. - perform any of the functions mentioned in the choices.

establish auditing standards that must be followed by all CPAs.

In performing an attest engagement, a CPA typically - expresses a conclusion about an assertion. - supplies litigation support services. - assesses control risk at a low level. - provides management consulting services.

expresses a conclusion about an assertion.

For each situation, state the appropriate audit report from the following alternatives: i) Adverse opinion on ICFR ii) Disclaimer of opinion on ICFR iii) Unqualified opinion on ICFR The auditor was unable to obtain any evidence about the operating effectiveness of internal control over financial reporting

ii) Disclaimer of opinion on ICFR

For each situation, state the appropriate audit report from the following alternatives: i) Adverse opinion on ICFR ii) Disclaimer of opinion on ICFR iii) Unqualified opinion on ICFR As a result of performing tests of controls, the auditor identified a significant deficiency in internal control over financial reporting. However, the auditor does not believe that it represents a material weakness in internal control.

iii) Unqualified opinion on ICFR

Increase EPDR will ______ sample size

increase

Increase in desired confident level will ______ sample size

increase

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

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

For private companies, accounting firms are prohibited from providing: - none of these. - outsourced internal audit services. - audit services. - review services.

none of these.

A violation of the profession's ethical standards would most likely occur when a CPA who: - refused to hire a new employee does so because the CPA deemed the candidate to be "too old." - is also admitted to the Bar represents on letterhead to be both an attorney and a CPA. - writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail. - is controller of a bank permits the bank to use the controller's CPA title in the listing of ofcers in its publications.

refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a: - restaurant where the CPA dines frequently. - charitable organization in which an employee of the CPA serves as treasurer. - municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality. - company in which the CPA's private investment club owns a one-tenth interest.

restaurant where the CPA dines frequently.

The confidence factor for non-statistical sampling is based on - the risk of misstatement in the account and the level of desired confidence. - the number of items in the account. - auditor judgment. - variability in the population and the risk of misstatement in the account.

the risk of misstatement in the account and the level of desired confidence.

When a CPA is approached to perform an audit for the first me, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining: - whether the engagement should be accepted. - whether the predecessor's work should be utilized. 4 - whether, in the predecessor's opinion, the financial statements are materially correct. - whether, in the predecessor's opinion, the company's internal controls have been satisfactory.

whether the engagement should be accepted.