ACCT 543 Exam 1

fraud risk

- Errors usually get detected - A lot of fraud goes undetected - Have to look at "what could be wrong" to detect fraud

4 assertions added by ASB

- classification - accuracy - cutoff - understandability

5 classes of PCAOB assertions

- existence and occurrence - completeness - valuation and allocation - rights and obligations - presentation and disclosure

what are the 8 types of audit evidence?

- physical examination - confirmations - documentation - analytical procedures - re-performance - observation - inquiries - recalculation

To express an opinion, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. To obtain reasonable assurance, which is high but not absolute level of assurance, the auditor

- plans the works and properly supervises any assistants - determines and applies appropriate materiality level or levels throughout the audit - identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity's internal control - obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks

3 broad classifications of GAAS

- responsibilities - performance - reporting

audit risk model

AR = IR x CR x DR

DR =

AR/ (IR x CR)

Reporting

Based on evaluation of the evidence obtained, the auditor expresses in the form of a written report, an opinion in accordance with the auditor's findings, or states that an opinion cannot be expressed. The opinion states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

If you raise IR or CR...

DR will go down (inversely related)

If you raise AR...

DR will go up (directly related)

risk of material misstatement

IR x CR

2.46 Which of the following is true with respect to PCAOB inspections of accounting firms? a) all firms performing audits of issuers are required to have annual inspections conducted by the PCAOB b) PCAOB inspections review a sample of audits conducted by firms as well as the firm's system of quality control c) all results of PCAOB inspections are made available to the public following the inspection d) firms performing audits of 100 or fewer issuers may elect to have peer review conducted through AICPA in lieu of a PCAOB inspection

PCAOB inspections review a sample of audits conducted by firms as well as the firm's system of quality control

1.24 It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that a) a potential conflict of interest always exists between the auditor and the management of the enterprise under audit b) in audits of financial statements, the auditor acts exclusively in the capacity of an auditor c) the professional status of the independent auditor imposes commensurate professional obligations d) financial statements and financial data are verifiable

a potential conflict of interest always exists between the auditor and the management of the enterprise under audit

3.22 Generally accepted auditing standards require that auditors always prepare and use a) a written planning memorandum explaining the auditors' understanding of the client's business b) a written client consent to discuss audit matters with prospective auditors c) a written audit plan d) the written time budgets and schedules for performing each audit

a written audit plan

inherent risk

account balances

1.56 Which of the following would be best described as an attest engagement? a) an engagement to implement an ERP system b) an engagement to develop a more efficient payroll process c) an engagement to assess the effectiveness of an internal control system d) an engagement to assist the client in and IRS client

an engagement to assess the effectiveness of an internal control system

AR

audit risk- risk of a material misstatement

a higher DR means

auditors do less work

vouch

back- financial statements to source documents (revenues)

3.35 The revenue cycle of a company generally includes which accounts? a) inventory, accounts payable, and general expenses b) inventory, general expenses, and payroll c) cash, accounts receivable, and sales d) cash, notes payable, and capital stock

cash, accounts receivable, and sales

the audit risk is dependent on the...

client

4.40 An audit committee is a. composed of internal auditors b. composed of members of the audit team c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company d. a committee composed of persons not associating in any way with the client or the board of directors

composed of members of a company's board of directors who are not involved in the day-to-day operations of the company

CR

control risk- risk a material misstatement is not detected by client internal controls

3.24 Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the a) current file audit documentation b) permanent file audit documentation c) administrative audit documentation in the current file d) planning memorandum in the current file

current file audit documentation

4.34 when a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will a. increase b. decrease c. remain unchanged d. not be able to be determined with the information provided

decrease

4.46 Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. inherent b. control c. detection d. sampling

detection

4.26 The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is a. audit risk b. inherent risk c. control risk d. detection risk

detection risk

which part of the audit risk model is in the auditors' control?

detection risk

DR

detection risk- risk a material misstatement will not be detected by auditors

timing

do more close to end of year testing (better evidence towards end of year/ post close)

nature

do more reliable testing to improve nature (do the controls yourself, rely on external documents, go through confirmation.com)

1.35 Performance audits usually include [two answers] a) financial audits b) economy and efficiency audits c) compliance audits d) program audits

economy and efficiency audits program audits

fraud risk

errors vs. irregularities

3.37 Confirmations of accounts receivable provide evidence primarily about which two assertions? a) completeness and valuation b) valuation and rights and obligations c) existence and rights and obligations d) existence and completeness

existence and rights and obligations

2.43 Which of the following combinations would provide the auditor the most reliable evidence? a) internal, more effective b) internal, less effective c) external, more effective d) external, less effective

external, more effective

trace

forward- source documents to financial statements (expenses)

management fraud

fraudulent financial reporting

Financial statements have _______ reliability, so risk of material misstatements (AR) needs to be low

high

Public companies have ______ reliance on financial statements

high

4.43 Auditors perform analytical procedures in the planning stage of an audit for the purpose of a. deciding the matters to cover in an engagement letter b. identifying unusual conditions that deserve more auditing effort c. determining which of the financial statement assertions are the most important for the client's financial statements d. determining the nature, timing, and extent of further audit procedures for auditing the inventory

identifying unusual conditions that deserve more auditing effort

1.37 Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard a) is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses b) can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion c) should be disregarded because it is not in writing d) is not considered a sufficient basis for Jones to conclude that all expenses have been recorded

is not considered a sufficient basis for Jones to conclude that all expenses have been recorded

4.35 Auditors are not responsible for accounting estimates with respect to a. making the estimates b. determining the reasonableness of estimates c. determining that estimates are presented in conformity with GAAP d. determining that estimates are adequately disclosed in the financial statements

making the estimates

employee fraud

misappropriation of assets

1.26 A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of a) environmental auditing b) financial auditing c) compliance auditing d) operational auditing

operational auditing

2.26 Which of the following categories of principles is most closely related to gathering audit evidence? a) performance b) reasonable assurance c) reporting d) responsibilities

performance

4.29 Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? a. exercising more professional skepticism b. carefully avoiding conducting interviews with people in areas that are most susceptible to fraud c. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis d. studying management's selection and application of accounting principles more carefully

performing procedures such as inventory observation and cash counts on a surprise or unannounced basis

4.24 The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as a. inherent risk b. control risk c. detection risk d. risk of material misstatement

risk of material misstatement

1.58 In testing the goodwill at an audit client in the retail industry, an auditor may seek to determine whether the account balance had been impaired. Such impairment procedures would be designed to test which financial statement assertion? a) existence b) completeness c) presentation and disclosure d) valuation

valuation

substantive testing is used for

vouching and tracing

4.30 Analytical procedures are generally used to produce evidence from a. confirmations mailed directly to the auditors by client customers b. physical observations of inventories c. relationships among current financial balances and prior balances, forecasts, and nonfinancial data d. detailed examination of external, external-internal, and internal documents

relationships among current financial balances and prior balances, forecasts, and nonfinancial data

2.38 Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? a) acceptance and continuance of client relationships and specific engagements b) engagement performance c) monitoring d) relevant ethical requirements

relevant ethical requirements

types of fraud

- management fraud - employee fraud

inherently risky parts of financial statements include...

- revenues - expenses - COGS - inventory

is PP&E inherently risky?

no- there are only a few PPE transactions

1.41 When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management's assertion regarding a) completeness b) existence c) valuation and allocation d) rights and obligations e) occurence

existence

2.41 Which of the following topics is not addressed in the auditors' report for an issuer? a) responsibilities of the auditor and management in the financial reporting process b) absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP c) a description of an audit engagement d) a summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting

absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP

4.33 Analytical procedures used when planning an audit should concentrate on a. weaknesses in the company's internal control activities b. predictability of account balances based on individual significant transactions c. management assertions in financial statements d. accounts and relationships that can represent specific potential problems and risks in the financial statements

accounts and relationships that can represent specific potential problems and risks in the financial statements

4.21 If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? a. inventory b. gost of goods sold c. bad debt expense d. accounts receivable

accounts receivable

2.34 Breaux & Co. CPAs require that all audit documentation indicates the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? a) independence b) adequate competence and capabilities c) adequate planning and supervision d) sufficient appropriate evidence gathered

adequate planning and supervision

2.50 Which of the following opinions would be issued if auditors believed that the entity's financial statements were not presented in conformity with GAAP? a) adverse opinoin b) disclaimer of opinion c) qualified opinion d) unmodified opinion

adverse opinion

1.45 During an audit of a company's cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion? a) existence b) rights and obligations c) valuation and allocation d) occurence

existence

1.53 When auditing the accounts receivable account on the balance sheet, an auditor's procedures most likely would focus primarily on management's assertion of a) existence b) completeness c) presentation and disclosure d) rights and obligations

existence

which assertions go in the balances column?

existence rights and obligations valuation and allocation presentation completeness accuracy classification

Auditors are responsible for

-Having appropriate competence and capabilities to perform the audit -Complying with relevant ethical requirements -Maintaining professional skepticism and exercising professional judgment, throughout the planning and performance of the audit

4.27 The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? a. 0.20 b. 0.10 c. 0.75 d. 0.00

0.10

1.50 Which of the following best describes the focus of the following engagements? a) Auditing Engagement- Any information Attestation Engagement- Financial statements Assurance Engagement- Advice and decision support Consulting Services Engagement- Financial information b) Auditing Engagement- Financial information Attestation Engagement- Advice and decision support Assurance Engagement- Financial statements Consulting Services Engagement- Any information c) Auditing Engagement- Advice and decision support Attestation Engagement- Any information Assurance Engagement- Financial information Consulting Services Engagement- Financial statements d) Auditing Engagement- Financial statements Attestation Engagement- Financial information Assurance Engagement- Any information Consulting Services Engagement- Advice and decision support

Auditing Engagement- Financial statements Attestation Engagement- Financial information Assurance Engagement- Any information Consulting Services Engagement- Advice and decision support

1.23 Which of the following would be considered an assurance engagement? a) giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past b) giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles c) giving an opinion on the fair presentation of a newspaper's circulation data d) giving assurance about the average drive length achieved by golfers with a clients's golf balls e) all of the above

all of the above

1.30 The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client? a) bookkeeping services b) internal auditing services c) valuation services d) all of the above

all of the above

1.33 What requirements are usually necessary to become licensed as a certified public accountant? a) successful completion of the Uniform CPA Examination b) experience in the accounting field c) education d) all of the above

all of the above

1.42 The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from a) acting in a managerial decision-making role for an audit client b) auditing the firm's own work on an audit client c) providing tax consulting to an audit client without audit committee approval d) all of the above

all of the above

1.51 Which of the following is a reason to obtain professional certification? a) certification provides credibility that an individual is technically competent b) certification often is a necessary condition for advancement and promotion within a professional services firm c) obtaining certification is often monetarily rewarded by an individual's employer d) all of the above

all of the above

3.21 When initiating communications with predecessor auditors, prospective auditors should expect a. to take responsibility for obtaining the client's consent for the predecessor to give information about prior audits b. to conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement c. to obtain copies of some or all of the predecessor auditors' audit documentation d. all of the above

all of the above

3.33 Prior to accepting a new audit engagement, a public accounting firm should a) attempt to contact the predecessor auditors b) evaluate the integrity of management c) assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement d) all of the above

all of the above

4.32 Analytical procedures can be used in which of the following ways? a. as a means of overall review near the end of the audit b. as "attention-directing" methods when planning an audit at the beginning c. as substantive audit procedures to obtain evidence during an audit d. all of the above

all of the above

3.43 The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may a) allow the internal auditor to perform certain tests of internal controls b) allow the internal auditor to audit a major subsidiary of the company c) not assign any task to the internal auditor because of the internal auditor's lack of independence d) allow the internal auditor to perform analytical procedures but not be involved with any tests of details

allow the internal auditor to perform certain tests of internal controls

3.31 Which of the following communications is most likely to be written before the balance-sheet date? a) a report to the audit committee on the results of testing of internal control over cash receipts b) confirmation letters to vendors confirming the amounts they owe to the client c) an attorney's letter regarding contingent liabilities d) an engagement letter

an engagement letter

4.45 An auditor's analytical procedures indicated a lower than expected return on an equity method investment. This situation most likely could have been caused by a. an error in recording amortization of the excess of the investor's cost over the investment's underlying book value b. the investee's decision to reduce cash dividends declared per share of its common stock c. an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities d. a substantial fluctuation in the price of the investee's common stock on a national stock exchange

an error in recording amortization of the excess of the investor's cost over the investment's underlying book value

4.37 It is acceptable under generally accepted auditing standards for an audit team to a. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. b. assess control risk at zero and perform a minimum of detection work c. assess inherent risk at zero and perform a minimum of detection work d. decide that audit risk can be 40 percent

assess risk of material misstatement at high and achieve an acceptably low audit risk by

4.48 What is the primary objective of the fraud brainstorming session? a. determine audit risk and materiality b. identify whether analytical procedures should be applied to the revenue account c. assess the potential for material misstatement due to fraud d. determine whether the planned procedures in the audit plan will satisfy the general audit objectives

assess the potential for material misstatement due to fraud

4.44 A primary objective of analytical procedures used in the final review stage of an audit is to a. identify account balances that represent specific risks relevant to the audit b. gather evidence from tests of details to corroborate financial statement assertions c. detect fraud that may cause the financial statements to be misstated d. assist the auditor in evaluating the overall financial statement presentation

assist the auditor in evaluating the overall financial statement presentation

2.47 The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as a) audit procedures b) audit standards c) interpretive publications d) statements on auditing standards

audit procedures

1.44 Which of the following best describes the relationship between auditing and attestation engagements? a) auditing is a subset of attestation engagements that focuses on the certification of financial statements b) attestation in a subset of auditing that provides lower assurance than that provided by an audit engagement c) auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support d) attestation is a subset of auditing that improves the quality of information or its context for decision makers

auditing is a subset of attestation engagements that focuses on the certification of financial statements

2.45 Which of the following statements is not true with respect to the performance principle? a) auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits b) audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements c) in assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements d) auditors are required to consider both the relevance and the reliability of evidence in evaluating whether the evidence they have gathered is appropriate

auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits

4.42 Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation? a. the responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud b. auditors must design tests to detect all material noncompliance that indirectly affects the financial statements c. auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statements is detected d. auditors must design tests to detect all noncompliance that directly affects the financial statements

auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statements is detected

2.40 Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would a) be considered as exercising proper due care b) be considered a failure to follow generally accepted auditing standards because Kramer should have known how to value fine art before accepting the engagement c) not be considered a violation of generally accepted auditing standards because generally accepted auditing standards do not apply to not-for-profit entities d) none of the above

be considered as exercising proper due care

3.26 Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? a) being able to fine-tune the audit work for effectiveness and efficiency b) avoiding the problem of doing more work than necessary (over-auditing) c) being able to decide early what type of audit opinion to issue d) avoiding the problem of doing too little work (under-auditing)

being able to decide early what type of audit opinion to issue

4.28 If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to a. change from 0.1 to 0.04 b. change from 0.2 to 0.3 c. change from 0.25 to 0.1 d. be unchanged.

change from 0.25 to 0.1

control risk

client control structure

2.51 Which of the following principles is most closely associated with the auditor's conclusion as to the fair presentation of the entity's financial statements? a) communication principle b) performance principle c) reporting principle d) responsibilities principle

communication principle

3.41 Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a) make inquiries of the client's lawyer concerning pending litigation b) perform cutoff tests of cash receipts and disbursements c) compare financial information with non-financial operating data d) recalculate to the prior-years' accruals and deferrals

compare financial information with non-financial operating data

3.40 Which of the following would be considered an analytical procedure? a) testing purchasing, shipping, and receiving cutoff activities b) comparing inventory balances to recent sales activities c) projecting the deviation rate of a statistical sample to the population d) reconciling physical counts to perpetual records and general ledger balances

comparing inventory balances to recent sales activities

4.31 Which of the following relationships between types of analytical procedures and sources of information are most logical? a) comparison of current account balances with prior periods - physical production statistics b) comparison of current account balances with expected balances - company's budgets and forecasts c) evaluation of current account balances with relation to predictable historical patterns - published industry ratios d) evaluation of current account balances in relation to non-financial information - company's own comparative financial statements

comparison of current account balances with expected balances - company's budgets and forecasts

1.47 Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management's assertion of a) presentation and disclosure b) completeness c) rights and obligations d) existence

completeness

1.49 In auditing the accrued liabilities account on the balance sheet, an auditor's procedures most likely would focus primarily on management's assertion of a) existence or occurrence b) completeness c) presentation and disclosure d) valuation or allocation

completeness

1.54 An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of a) rights and obligations b) completeness c) existence d) valuation

completeness

2.29 Which of the following best demonstrates the concept of professional skepticism? a) relying more extensively on external evidence rather than internal evidence b) focusing on items that have a more significant quantitative effect on the entity's financial statements c) critically assessing verbal evidence received from the entity's management d) evaluating potential financial interests held by auditors in the client

critically assessing verbal evidence received from the entity's management

1.39 When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion? a) cutoff b) existence c) valuation and allocation d) rights and obligations e) occurence

cutoff

1.32 The primary objective of compliance auditing is to a) give an opinion on financial statements b) develop a basis for a report on internal control c) perform a study of effective and efficient use of resources d) determine whether client personnel are following laws, rules, regulations, and policies

determine whether client personnel are following laws, rules, regulations, and policies

2.48 Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a) develop Auditing Standards for the audits of non-issuers b) develop Auditing Standards for the audits of issuers c) develop Statements on Auditing Standards for the audits of non-issuers d) develop Statements on Auditing Standards for the audits of issuers

develop Auditing Standards for the audits of issuers

2.36 The evidence considered most appropriate by auditors is best described as a) internal documents such as sales invoice copies produced under conditions of strong internal control b) written representations made by the president of the entity c) documentary evidence obtained directly from independent external sources d) direct personal knowledge obtained through physical observation and mathematical recalculation

direct personal knowledge obtained through physical observation and mathematical recalculation

1.28 According to the AICPA, the purpose of an audit of financial statements is to a) enhance the degree of confidence that intended users can place in the financial statements b) express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board c) express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission d) obtain systematic and objective evidence about financial assertions and report the results to interested users

enhance the degree of confidence that intended users can place in the financial statements

4.41 When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to a. recommend remedial actions to the audit committee b. evaluate the effect of the noncompliance on the financial statements c. determine whether to contact law enforcement officials d. determine whether other similar acts could have occurred

evaluate the effect of the noncompliance on the financial statements

3.39 When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following? a) key factors that are consistent with prior periods b) assumptions that are similar to industry guidelines c) measurements that are objective and not susceptible to bias d) evidence of a conservative systematic bias

evidence of a conservative systematic bias

4.39 When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a. key factors that are consistent with prior periods b. assumptions that are similar to industry guidelines c. measurements that are objective and not susceptible to bias d. evidence of a conservative systematic bias

evidence of a conservative systematic bias

3.25 An auditor's permanent file audit documentation most likely will contain a) internal control analysis for the current year b) the most recent engagement letter c) memoranda of conference with management d) excerpts of the corporate charter and bylaws

excerpts of the corporate charter and bylaws

3.36 When auditing the existence assertion for an asset, auditors proceed from the a) financial statement amounts back to the potentially unrecorded items b) potentially unrecorded items forward to the financial statement amounts c) general ledger back to the supporting original transaction documents d) supporting original transaction documents to the general ledger

general ledger back to the supporting original transaction documents

1.34 The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the a) governmental internal audit agency (GIAA) b) central internal auditors (CIA) c) securities and exchange commission (SEC) d) government accountability office (GAO)

government accountability office (GAO)

3.32 Which of the following procedures would most likely be performed during planning? a) surprise counting of the client's petty cash fund b) reporting internal control deficiencies to the audit committee c) performing a search for unrecorded liabilities d) identifying related parties

identifying related parties

2.44 Which of the following is most closely related to the relevance of audit evidence? a) auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian b) in addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable c) in response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year d) because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period

in addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable

1.38 The risk to investors that a company's financial statements may be materially misleading is called a) client acceptance risk b) information risk c) moral hazard d) business risk

information risk

1.31 Independent auditors of financial statements perform audits that reduce a) business risks faced by investors b) information risk faced by investors c) complexity of financial statements d) timeliness of financial statements

information risk faced by investors

4.25 The risk of material misstatement is composed of which audit risk components? a) inherent risk and control risk b) control risk and detection risk c) inherent risk and detection risk d) inherent risk, control risk, and detection risk

inherent risk and control risk

IR x FR

inherent risk and fraud risk- risk a material misstatement can occur

2.31 Ordinarily, what source of evidence should least affect audit conclusions? a) external documentary evidence b) inquiry of management c) documentation prepared by the audit team d) inquiry of entity legal counsel

inquiry of management

1.48 Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of rights and obligations for the inventory account? a) trace test counts noted during physical count to the summarization of quantities b) inspect agreement for evidence of inventory held on consignment c) select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales d) inspect the open purchase order file for significant commitments to consider for disclosure

inspect agreement for evidence of inventory held on consignment

2.33 Which of the following procedures would provide the most reliable audit evidence? a) inquiries of the client's internal audit staff b) inspection of prenumbered client purchase orders filed in the vouchers payable department c) inspection of vendor sales invoices received from client personnel d) inspection of bank statements obtained directly from the client's financial institution

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

3.38 With respect to the concept of materiality, which of the following statements is correct? a) materiality depends only on the dollar amount of an item relative to other items in the financial statements b) materiality depends on the nature of a transaction rather than the dollar amount of the transaction c) materiality is determined by reference to AICPA guidelines d) materiality is a matter of professional judgment

materiality is a matter of professional judgment

1.46 When auditing an investment in a publicly-traded company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion? a) inspect the stock certificates evidencing the investment b) examine the audited financial statements of the investee company c) review the broker's advice or canceled check for the investment's acquisition d) obtain market quotations from The Wall Street Journal or another independent source

obtain market quotations from The Wall Street Journal or another independent source

which assertions go into the transactions column?

occurrence cutoff presentation completeness accuracy classification

which assertions go in the presentation column?

occurrence rights and obligations valuation and allocation understandability completeness accuracy classification

1.43 Substantial equivalency refers to a) an auditor's tendency not to believe management's assertions without sufficient corroboration b) providing consulting work for another firm's audit client in exchange for the other firm's providing consulting services to one of your clients c) the waiving of certification exam parts for an individual holding an equivalent certification from another professional organization d) permitting a CPA to practice in another state without having to obtain a license in that state

permitting a CPA to practice in another state without having to obtain a license in that state

2.32 The most reliable evidence regarding the existence of newly acquired computer equipment is a) inquiry of management b) documentation prepared externally c) evaluation of the client's procedures d) physical observation

physical observation

2.37 Auditors' understanding of the internal control in an entity provides information for a) determining whether members of the audit team have the required competence and capabilities to perform the audit b) ascertaining the independence in mental attitude of members of the audit team c) planning the professional development courses the audit staff needs to keep up to date with new auditing standards d) planning the nature, timing, and extent of substantive procedures on an audit

planning the nature, timing, and extent of substantive procedures on an audit

1.25 In an attestation engagement, a CPA practitioner is engaged to a) compile a company's financial forecast based on management's assumptions without expressing any form of assurance b) prepare a written report containing a conclusion about the reliability of a management assertion c) prepare a tax return using information the CPA has not audited or reviewed d) give expert testimony in court on particular facts in a corporate income tax controversy

prepare a written report containing a conclusion about the reliability of a management assertion

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

presentation and disclosure

1.55 An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about a) rights and obligations b) existence c) presentation and disclosure d) valuation

presentation and disclosure

2.27 Which of the following is not related to ethical requirements of auditors? a) due care b) independence in appearance c) independence in fact d) professional judgment

professional judgment

extent

quantity of sample size (more samples is more extensive/ more evidence)

2.35 Which of the following concepts is least related to the standards of due care? a) independence in fact b) professional skepticism c) prudent auditor d) reasonable assurance

reasonable assurance

2.42 Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements? a) absolute assurance b) professional judgment c) reliability of audit evidence d) reasonable assurance

reasonable assurance

4.20 Auditing standards do not require auditors of financial statements to a) understand the nature of errors and frauds b) assess the risk of occurrence of errors and frauds c) design audits to provide reasonable assurance of detecting errors and frauds d) report all errors and frauds found to police authorities

report all errors and frauds found to police authorities

4.38 Under the Private Securities Litigation Reform Act (the act), independent auditors are required to first a. report in writing all instances of noncompliance with the Act to the client's board of directors b. report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC c. report clearly inconsequential noncompliance with the Act to the audit committee of the client's board of directors d. resign from the audit engagements and report the instances of noncompliance with the Act to the SEC

report in writing all instances of noncompliance with the Act to the client's board of directors

1.40 When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods help on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion? a) completeness b) existence c) valuation and allocation d) rights and obligations e) occurence

rights and obligations

1.59 In testing inventory at an audit client in the retail industry, you note that some of the inventory is contracted to be held on consignment. As a result, which financial statement assertion is now relevant? a) rights and obligations b) completeness c) existence or occurrence d) valuation or allocation

rights and obligations

revenues are inherently...

risky- everyone wants to overstate them

3.30 Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date? a) interviewing internal auditors about their reporting responsibilities b) reviewing accounting records for recurring transactions occurring near year-end c) inspecting communications with the client's legal counsel regarding recorded contingent liabilities d) scanning the minutes for significant transactions with members of the board of directors

scanning the minutes for significant transactions with members of the board of directors

3.28 An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a) schedules and analyses to be prepared by the client's employees b) methods of statistical sampling the auditor will use c) specification of litigation in progress against the client d) client representations about availability of all minutes of meetings of the board of directors

schedules and analyses to be prepared by the client's employees

3.34 An audit plan contains a) specifications of audit standards relevant to the financial statements being audited b) specifications of procedures the auditors believe appropriate for the financial statements under audit c) documentation of the assertions under audit, the evidence obtained, and the conclusions reached d) reconciliation of the account balances in the financial statements with the account balances in the client's general ledger

specifications of procedures the auditors believe appropriate for the financial statements under audit

4.36 An audit strategy memorandum contains a. specifications of auditing standards relevant to the financial statements being audited b. specifications of procedures the auditors believe appropriate for the financial statements under audit c. documentation of the assertions under audit, the evidence obtained, and the conclusions reached d. reconciliation of the account balances in the financial statements with the account balances in the client's general ledger

specifications of procedures the auditors believe appropriate for the financial statements under audit

2.28 One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following a) generally accepted auditing standards b) standards within a system of quality control c) generally accepted accounting principles d) international auditing standards

standards within a system of quality control

2.49 Which of the following best describes the general contents of the first paragraph of the "Basis for Opinion" section of the auditors' report? a) a description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB b) the auditors' conclusion with respect to the fairness of the entity's financial statements c) statements identifying the responsibility of auditors and management in the financial reporting process d) the auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting

statements identifying the responsibility of auditors and management in the financial reporting process

3.23 When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, types, and content of audit documentation? a) the auditor's need to document compliance with generally accepted auditing standards b) the auditors' need to verify the existence of new sales contracts important for the client's business c) the auditor's judgment about their independence with regard to the client d) the auditors' judgment about materiality

the auditor's judgment about their independence with regard to the client

2.39 Which of the following is most closely related to the responsibilities principle? a) the auditor's responsibility to issue a report as a result of their examination b) the requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements c) the auditors' compliance with relevant ethical requirements of independence and due care d) the auditors' responsibility to plan the audit and properly supervise assistants

the auditors' compliance with relevant ethical requirements of independence and due care

3.29 When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? a) yes, the auditors' report should mention the fact that an audit specialist was used b) the auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions c) the use of an audit specialist need not be mentioned if the auditors decide not to take responsibility for the audit specialist's findings d) the auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings

the auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions

4.23 Which of the following circumstances would most likely cause an audit team to perform extended procedures? a. supporting documents are produced when requested b. the client made several large adjustments at or near year-end c. the company has recently hired a new chief financial officer after the previous one retired d. the company maintains several different petty cash funds

the client made several large adjustments at or near year-end

4.47 Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? a. the entity's fiscal year ends on June 30 b. the entity enters into significant derivative transactions as hedges c. the entity's financial statements are generated at an outside service center d. the entity's financial data is available only in computer-readable form

the entity enters into significant derivative transactions as hedges

1.27 The primary difference between operational auditing and financial auditing is that in operational auditing a) the operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards b) the operational auditor is seeking to help management use resources in the most effective manner possible c) the operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them d) the operational auditor can use analytical skills and tools that are not necessary in financial auditing

the operational auditor is seeking to help management use resources in the most effective manner possible

3.27 Which of the following is an advantage of computer-assisted audit techniques (CAATs)? a) all the CAATs programs are written in one computer language b) the software can be used for audits of clients that use differing computer equipment and file formats c) the use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures d) the use of CAATs can be substituted for a relatively large part of the required testing

the software can be used for audits of clients that use differing computer equipment and file formats

3.44 Which of the following conditions most likely would post the greatest risk in accepting a new audit engagement? a) staff will need to be rescheduled to cover this new client b) there will be a client-imposed scope limitation c) the firm will have to hire a specialist in one audit area d) the client's financial reporting system has been in place for 10 years

there will be a client-imposed scope limitation

1.29 Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because a) financial statements are too complex for the bankers to analyze themselves b) they are too far away from company headquarters to perform accounting and auditing themselves c) the consequences of making a bad loan are very undesirable d) they generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements

they generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements

3.42 Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a) they often replace the tests of controls that are performed to assess control risk b) they typically use financial and non-financial data aggregated at a high level c) they usually involve the comparison of assertions developed by management to ratios calculated by an auditor d) they are often used to develop an auditor's preliminary judgment about materiality

they typically use financial and non-financial data aggregated at a high level

2.30 The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is a) to determine that nature, timing, and extent of substantive procedures to be performed b) to make consulting suggestions to the entity's management c) to obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements d) to determine whether the entity has changed any accounting principles

to obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements

1.36 The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about a) completeness b) existence c) valuation and allocation d) rights and obligations e) occurence

valuation and allocation

1.57 An auditor seeks to test the accuracy of the amount recorded as revenue on a contract with a customer under ASC 606. Which PCAOB assertion is most likely being tested? a) rights and obligations b) valuation and allocation c) presentation and disclosure d) completeness

valuation and allocation

4.22 One of the typical characteristics of management fraud is a. falsification of documents in order to misappropriate funds from an employer b. victimization of investors through the use of materially misleading financial statements c. illegal acts committed by management to evade laws and regulations d. conversion of stolen inventory to cash deposited in a falsified bank account

victimization of investors through the use of materially misleading financial statements