Aud16.17.18.21 - 1.2.5.6.7.8.9.10.11.12.13.14.15

Under the Single Audit Act, the auditor must apply procedures to test for compliance and test the effectiveness of controls for:

Option B Major Programs - Yes Non-Major Programs - No

An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s):

Option B Must - Yes Should - No

A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale?

Option B Sales - yes Inventory - no

Primary responsibility for the financial statements lies with:

Option C Auditors- No Management- Yes

Authoritative GAAP Sources include:

Option C FASB Remediation Statements - No FASB Codification - Yes

Which of the following types of audits are ordinarily performed following generally accepted auditing standards?

Option C Public Company Audit - No Nonpublic Company Audit - Yes

When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)?

Option C Qualified - no Adverse - yes

By definition, proper professional skepticism on an audit requires:

Option C Questioning mind - yes Subjective assessment of audit evidence - no

Further audit procedures include:

Option C Risk assessment procedures - no Tests of controls - yes

Critical audit matters are included in a public company audit report with a(n):

Option D Adverse Opinion - No Disclaimer of Opinion - No

A material weakness caused by ineffective oversight of the external financial reporting function by the audit committee will ordinarily result in communication to:

Option D PCAOB - No The Stock Exchange That the Company is Listed On - No

Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts. Which procedure(s) would possibly identify these transactions?

Option D Trace from source documents to journals - yes Vouch from journal to source documents - yes

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?

Oral responses obtained by the auditor through a telephone call.

Auditors may choose not to confirm accounts payable because:

Other reliable external evidence to support the balances is likely to be available.

Which of the following summarizes the threshold at which auditors are required to request management to record any identified factual misstatements that are:

Other than trivial.

When a nonpublic audit client has omitted required supplementary information, the audit report should include a(n)?

Other-matter paragraph.

Which of the following is not a control that should be established for purchases of equipment?

Requiring that the department that ordered the equipment is the same that requested the equipment.

The Government Accountability Office (GAO):

Responsibilities include conducting operational audits to ensure spending meets Congress's requirements.

Which of the following is a strong indicator that a material weakness in internal control exists?

Restatement of previously issued financial statements to reflect a correction.

Which of the following statements presents an example of a general control for a computerized system?

Restricting access to the computer center by use of biometric devices.

Which of the following is not a required source of information for the auditors' assessment of fraud risk?

Results of tests of controls.

Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests?

Results will be projected to the population.

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts?

Review accounts which have been written off as uncollectible prior to year-end.

When a client engages in transactions involving derivatives, the auditor should:

Review agreements underlying the derivative.

Which of the following procedures is not a procedure that is completed near the end of the engagement?

Review cash transactions.

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

Review detail and test significant travel and entertainment expenses.

The auditors are least likely to learn of retirements of equipment through which of the following?

Review of the purchase returns and allowances account.

During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should:

Review the minutes for authorization.

Inquiries and analytical procedures ordinarily form the basis for which type of engagement?

Review.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period.

Which of the following is not a component of the control environment?

Risk assessment.

An approach that quantifies the total of uncorrected misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:

Rollover approach.

For good internal control, a copy of a receiving report should be sent to all of the following departments except:

Shipping.

The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures:

Should compare the deviation rate of the sample to the tolerable rate.

Properly designed internal control will permit the same employee to:

Sign checks, and also cancel supporting documents.

Which of the following must the auditor communicate to the audit committee?

Significant deficiencies and material weaknesses.

A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n):

Significant deficiency.

For effective internal control, which of the following functions should not be assigned to the company's accounting department?

Signing payroll checks.

Various 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 measure of tolerable misstatement.

Tests for unrecorded assets typically involve tracing from:

Source documents to recorded journal entries.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during risk assessment?

Square footage of selling space.

An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the

Standard deviation.

A client has changed the salvage values of a number of its fixed assets. The auditors of the public company believe that the revised salvage values are realistic. The appropriate report on the financial statements is:

Standard unqualified.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

Tests of controls and limited tests of current year property and equipment transactions.

In the consideration of internal control, the operating effectiveness of controls is tested by:

Tests of controls.

Which of the following is not a basic procedure used in an audit?

Tests of direct evidence.

The auditors' report for a nonpublic company should indicate:

That the audit was made in accordance with auditing standards generally accepted in the United States of America.

In cases of a publicly traded company audit in the United States, when International Standards on Auditing (ISAs) conflict with the PCAOB, standards, which of the following is correct?

The PCAOB standard is applicable.

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

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

Which of the following is least likely to be included in a public company audit report with an unqualified opinion?

The name of the engagement partner.

When a Statement on Auditing Standards uses the word "should" relating to a requirement, it means that the auditor:

Must comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards.

The permanent file section of the working papers that is retained for each audit client most likely contains:

Narrative descriptions of the client's accounting procedures and controls.

In using the statement of cash flows to obtain an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?

Negative cash flows from investing.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements?

Net income is overstated.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

No discrepancies exist between the data on the checks and the data in the journal.

Which of the following statements regarding auditor documentation of the client's internal control is correct?

No one particular form of documentation is necessary, and the extent of documentation may vary.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

No reply to a positive confirmation request is received.

The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:

None, as sampling does not seem appropriate in this situation.

The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:

Nonsampling error.

An audit performed in accordance with generally accepted auditing standards should:

Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.

The minimum likelihood of loss involved in the consideration of a control deficiency that is less than a significant deficiency is:

Not considered.

Auditing by testing the input and output of a computer system instead of the computer program itself will:

Not detect program errors which do not show up in the output sampled.

In which of the following accounts would one expect a related party transaction to be easiest to detect?

Notes payable.

When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample?

Number of deviations in the population.

An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Observation and inquiry.

Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?

Observation of procedures.

General controls over IT systems are typically tested using:

Observation, inspection, and inquiry.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

Observe physical counts of the inventory items.

Substantive procedures that cannot be performed with generalized audit software include:

Observing inventory.

When conducting fieldwork for a physical inventory, an auditor is least likely to perform which of the following steps using a generalized audit software package?

Observing inventory.

Which of the following auditing procedures is ordinarily performed last?

Obtaining a management representation letter.

In an audit in accordance with Government Auditing Standards, the auditors are required to provide a report on:

1) The organization's internal control. 2) Compliance with laws and regulations which are required to be tested by generally accepted auditing standards.

An audit plan for the examination of the retained earnings account should include a step that requires verification of the:

Authorization for both cash and stock dividends.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

Usernames, passwords, and identity cards are examples approaches to:

Authorization.

The primary purpose of the internal auditors' evaluation of internal control is to:

Determine if management has planned and implemented activities needed to attain goals and objectives.

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

Determine the expected day of collection of each of the receivables.

The program flowcharting symbol representing a decision is a:

Diamond.

A circumstance caused scope limitation in a Sarbanes-Oxley 404 internal control audit is most likely to result in a(n):

Disclaimer of opinion.

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an):

Disclaimer of opinion.

Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?

Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.

An audit should be designed to obtain reasonable assurance of detecting material misstatements due to:

Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts and others.

Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement?

Establish the basis for depreciable assets and verify the depreciation expense.

Which of the following is not a primary objective in the audit of interest-bearing debt?

Establish the legality of outstanding debt.

Which of the following is not a general objective for the audit of asset accounts?

Establishing proper liabilities relating to assets.

What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances?

Estimation.

In auditing long-term debt, an auditor would be most likely to:

Evaluate whether debt provisions have been met.

The individual looking for guidance on revenue recognition is most likely to appropriately review:

FASB ASC 606.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):

Factual misstatement.

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:

Factual, judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements.

The financial statements of a United States public company are most likely to follow:

Generally accepted accounting principles.

When performing an audit of a city in accordance with the Single Audit Act, an auditor should adhere to:

Government Auditing Standards.

In their consideration of a client's IT controls, the auditors will encounter general controls and application controls. Which of the following is an application control?

Hash total.

In an audit in accordance with generally accepted auditing standards, the auditors must test compliance with those laws and regulations that:

Have a direct and material effect on the financial statements.

Which is least likely to be a question asked of employee personnel during a walk-through?

Have you assessed the operating effectiveness of the system?

Which of the following is not a service included in the attestation subject matter standard?

Historical financial statement examination.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:

Holds legal title to the merchandise.

An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as:

Horizontal analysis.

Which of the following is one of the elements of AICPA quality control?

Human Resources.

A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of:

Human resources.

When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on: I. Recommendations for actions to improve operations. II. The scope of the auditor's tests of compliance with laws and regulations.

II only.

Which of the following is not true about the auditors' verification of notes receivable?

Inspecting the notes is sufficient evidence of existence of the notes.

To which of the following matters would materiality limits not apply when obtaining written client representations?

Instances of fraud involving management.

The organization that issues standards for the practice of internal auditing is the:

Institute of Internal Auditors.

Which of the following testing techniques is more commonly used by internal auditors than by independent auditors?

Integrated test facilities.

Which of the following is not one of the attribute standards of the IIA's Standards for the Professional Practice of Internal Auditing?

Integrity and skepticism.

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.

Which of the following best describes the scope of internal auditing as it has developed to date?

Internal auditing has evolved to more of an operational orientation from a financial orientation.

Which of the following groups are not considered a specialist by AICPA Professional Standards?

Internal auditors.

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and:

Internal control over financial reporting.

An audit in accordance with the Single Audit Act does not involve reporting upon:

Internal control over operations.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:

Internal control over receivables is good.

When the auditors obtain an understanding of internal control for the financing cycle, documentation will frequently include a written description as well as a(n):

Internal control questionnaire.

International Standards on Auditing are issued by

International Auditing and Assurance Standards Board.

The body that issues international pronouncements providing auditing procedural and reporting guidance is the:

International Auditing and Assurance Standards Board.

Which of the following is a general purpose financial reporting framework?

International Financial Reporting Standards.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:

Letter of audit inquiry to the client's lawyer.

Which of the following is not a control that generally is established over cash transactions?

Obtaining a receipt for every disbursement.

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Occurrence of sales transactions.

Which of the following components may not use a network as part of the information systems architecture?

Off-the-shelf accounting software.

Which of the following manipulations would understate accounts payable on the financial statements?

Omission of expenses.

Which of the following is not required of an individual seeking to become a certified internal auditor?

One year of supervisory experience.

A data warehouse is an example of:

Online analytical processing.

A comprehensive examination of an operating unit or a complete organization to evaluate its systems, controls, and performance, as measured by management's objectives is called a(an):

Operational Audit.

An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?

Operational audits are more subjective and often involve evaluating efficiency and effectiveness of operations.

The first section of a public company audit report is the:

Opinion section.

The order of presentation of sections in a public company financial statement audit report is:

Opinion, Basis for Opinion, Critical Audit Matters.

Financial statement assertions are established for classes of transactions:

Option A Account Balances - yes Disclosures - yes

The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies?

Option A Attestation Standards - Yes Independence Standards - Yes

Ordinarily, a public company audit report must be addressed to:

Option A Board of Directors- Yes Shareholders- Yes

When performing an audit of internal control under PCAOB requirements, auditors evaluate control:

Option A Design Effectiveness - yes Operating Effectiveness - yes

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to:

Option A Errors - yes Misappropriation of Assets - yes

Walk-throughs provide evidence that helps the auditor to:

Option A Evaluate design effectiveness of controls - yes Confirm whether controls have been placed in operation - yes

Which of the following would most likely be included in a SEC 10K filing in which a material weakness in internal control exists?

Option A Financial Statement:Audit Report - Unqualified Internal Control Audit Report - Adverse

Which must management communicate to the audit committee?

Option A Known Material Weaknesses - yes Known Significant Deficiencies - yes

Which must the auditor communicate to management?

Option A Known Material Weaknesses - yes Known Significant Deficiencies - yes

The confirmation process may be performed using a(n):

Option A Paper form- yes Electronic form - yes

A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale?

Option A Sales - yes Inventory - yes

Ordinarily, a public company must be addressed to:

Option A Shareholders - Yes Board of Directors - Yes

An auditor may obtain information on the December 31 month-end balance per bank in which of the following?

Option A Standard Confirmation Form - yes January 1-10 Cutoff Statement - yes ---OR--- Option B December 31 Bank Statement - yes Schedule of Bank (Cash) Transfers - no

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement?

Option A Substantive Tests of Details- yes Substantive Analytical Procedures- yes

Of the following, which are current types of peer reviews?

Option A System Reviews - yes Engagement Reviews - yes

Shortly after year-end, Allen Corporation was informed of the bankruptcy of Quest. Allen Corporation showed a receivable of $20,000 (a material amount) due from Quest as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Quest had been experiencing financial difficulties for the past several years. Yet, Quest's bankruptcy did not occur until after Allen Corporation's year-end. Under these circumstances:

Option A The financial statements should be adjusted - Yes The event requires financial statement disclosure, but no adjustment - No The auditor's report should be modified for a lack of consistency - No

An audit provides reasonable assurance of detecting which of the following types of material illegal acts?

Option B Direct Effect - Yes Without a Direct Effect - No

The risk associated with survivability and profitability is referred to as

Business risk.

The form typically used to confirm accounts payable:

Requires the vendor to indicate the amount of the payable.

Of the following, a public company audit report is most likely to be addressed to the:

Shareholders.

Tests of controls are most likely to be performed when:

The auditor plans to rely on the controls.

Which of the following best describes the specific accounts payable that are selected for confirmation?

Accounts with a large amount of activity regardless of their balance.

An auditor's report on comparative financial statements should be dated as of the date of the:

Accumulation of sufficient appropriate audit evidence.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The factual misstatement in this situation is:

$0.

The 4,000 accounts receivable of GHI Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,600. Using the mean-per-unit estimation technique, Smith has properly estimated a projected misstatement of a $8,000 overstatement for the entire population. The audited value of Smith's sample is:

$1,300

The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is:

$1,900

An auditor believes that a client's warranty liability is between $100,000 and $130,000, with each amount in that interval equally likely. The financial statements show a liability of $90,000.

$10,000 judgmental misstatement.

A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, the decrease in this year's income due to these understatements is:

$140,000.

Using difference estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$215,000.

Using ratio estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$216,346.

Using mean-per-unit estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$225,000.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000, with all points in that interval equally likely. The judgmental misstatement in this situation is:

$30,000.

Using the mean-per-unit estimation method an auditor has properly calculated the estimated total audited value of a population as $200,000. Her sample included 200 of the population's 40,000 items. She found that, in her sample the average audited value was $1 less than the average book value. What was the average audited value in the sample?

$5.

The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of a $9,000 overstatement for the entire population. The estimated total audited value of the population is:

$51,000

Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $640,000. The projected misstatement based on this sample is:

$60,000

To determine sample size in an attribute sampling application, what must be specified?

Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.

In variables estimation sampling, the sample standard deviation is used to calculate the:

Allowance for sampling risk.

The internal control flowchart is an example of:

An administrative working paper.

Which of the following is not a responsibility that should be assigned to a company's internal audit department?

Approving credit.

If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors:

Are assuming responsibility for the work of the component auditors.

The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable?

12.5%.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

A bank lockbox system.

Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when:

A book value for each sample item is unknown.

The auditors may expect a proper debit to goodwill due to:

A business combination.

Which of the following will result in emphasis-of-matter as to consistency in a nonpublic company auditor's report, regardless of whether the item is fully disclosed in the financial statements?

A change from an unacceptable accounting principle to a generally accepted one.

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report?

A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuing its prompt detection?

A control total for hours worked, prepared from time cards collected by the timekeeping department.

Which of the following approaches to an audit is most likely to result in a detailed analysis of one or more characteristics of an entire population?

A data analytical approach.

An audit client has refused to allow the auditors to perform an auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of:

A disclaimer of opinion.

Which of the following best describes a voucher prepared under good internal control?

A document prepared by Accounts Payable authorizing a cash disbursement.

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

A large number of accounts receivable are in dispute.

A registrar/transfer agent system relating to capital stock is most likely used by:

A large, publicly traded company.

To be effective, analytical procedures performed near the end of the audit should be performed by

A manager or partner who has a comprehensive knowledge of the client's business and industry.

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?

A material amount would significantly alter the "total mix" of information made available to an investor.

In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?

A price for a similar asset obtained from an active market.

Which of the following best illustrates the concept of sampling risk?

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect:

A second payment of an account payable which had already been paid in full two months earlier.

When an adverse opinion is expressed on the financial statements of a nonpublic company, the opinion paragraph should include a direct reference to:

A separate basis for modification paragraph (section).

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?

Legality.

Which of the following types of audits is designed to determine that an organization has complied with the specific requirements of major financial assistance programs?

A single audit.

Which of the following is not explicitly included in an audit report for a nonpublic company?

A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

A successor auditor is required to make an effort to communicate with the predecessor auditor prior to:

Accepting the engagement.

Which of the following are issued by the Securities and Exchange Commission?

Accounting and Auditing Enforcement Releases.

According to PCAOB standards, determining the allowance for doubtful accounts is referred to as a(n):

Accounting estimate transaction.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

Accounting records to the source documents.

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

Accounts receivable are overstated at December 31, 20X0.

To test the existence assertion for recorded receivables, an auditor would select a sample from the:

Accounts receivable subsidiary ledger.

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:

Accurate perpetual inventory records are maintained.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Acknowledge the receipt of securities returned.

Which of the following policies is an internal control weakness related to the acquisition of factory equipment?

Acquisitions are made through and approved by the department in need of the equipment.

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the:

Adequacy of replacement funds.

When designing the physical layout of a data processing center, which of the following would be least likely to be a necessary control that is considered?

Adequate physical layout space for the operating system.

Which of the following may be used to reduce the risk of nonsampling errors?

Adequately planning audit samples.

An audit opinion that states that the financial statements are not fairly presented is referred to as a(n)

Adverse opinion.

A material weakness that exists at year-end will result in what type of audit report on internal control?

Adverse.

An auditor identified a material weakness in internal control in December. The client was informed and the client corrected the material weakness shortly after year-end (December 31); the auditor agrees that the correction eliminated the material weakness as of January 31. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:

Adverse.

Most of the audit work on accounts payable is typically performed:

After the balance sheet date.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

Aging of accounts receivable.

A summary of findings rather than assurance is most likely to be included in a(n):

Agreed-upon procedures report.

Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant, and equipment for a continuing nonpublic client?

Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

Which of the following is correct with respect to control deficiencies discovered during an audit?

All material weaknesses in internal control must be reported to the audit committee in writing.

Under PCAOB internal control reporting standards, what are the auditor's communication requirements to the audit committee with respect to material weaknesses?

All must be communicated in written form.

The SEC reporting requirement that a public company prepare a report in which it acknowledges its responsibility for establishing and maintaining accurate internal control and to assess internal control effectiveness in general applies to which companies?

All public companies.

If the economy is experiencing a recession, an auditor should focus increased attention on which of the following accounts?

Allowance for doubtful accounts.

Which of the following is accurate, as indicated in the principles underlying an audit?

An auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement.

Preliminary arrangements agreed to by the auditors and the client should be documented in writing by the auditors. This documentation is known as:

An engagement letter.

Which of the following best describes a CPA's engagement to report on a public entity's internal control over financial reporting?

An engagement to form an opinion on the effectiveness of internal control.

Which of the following situations would heighten an auditor's concern about the risk of fraudulent financial reporting

An overly complex organizational structure involving unusual lines of authority.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect:

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:

An unrecorded deposit made at the bank at the end of the month.

Which of the following audit procedures is least likely to detect an unrecorded liability?

Analysis and recomputation of depreciation expense.

A fast-growing service company is developing its information technology internally. What is the first step in the company's systems development life cycle?

Analysis.

An abnormal fluctuation in gross profit suggests the need for extended audit procedures for sales and inventories. This would most likely be identified in the audit risk assessment phase by utilizing:

Analytical procedures.

Which of the following would least likely be included in an auditor's tests of controls?

Analytical procedures.

In testing for unrecorded retirements of equipment, an auditor might:

Analyze miscellaneous revenue.

Which of the following is used to obtain evidence that the client's equipment accounts are not understated?

Analyzing repairs and maintenance expense accounts.

An investor reading the financial statements of The Fairbury Corporation observes that the statements are accompanied by an unmodified auditors' report. From this, the investor may conclude that:

Any disputes over significant accounting issues have been settled to the auditors' satisfaction.

Because log-on procedures may be cumbersome and tedious, users often store log-on sequences in their personal computers and invoke them when they want to use mainframe facilities. A risk of this practice is that

Anyone with access to the personal computers could log on to the mainframe.

Financial statements are prepared following a(an)

Applicable financial reporting framework.

A large corporation entered into a very significant long-term debt agreement during the current year. Which of the following would the auditors most likely be concerned with:

Approval by the corporation's Board of Directors.

Accrued liabilities generally differ from accounts payable in that accrued liabilities:

Are often based on estimates.

Which of the following is least likely to render a quantitatively small misstatement material?

Arises from an item not capable of precise measurement.

On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first:

Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year?

At least every third audit.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:

Attempt to determine whether their report is still being relied upon by third parties.

The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:

Attributes sampling.

When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate?

Attributes.

Based on PCAOB standards for an internal control audit, which of the following is least likely to indicate a significant deficiency relating to a client's antifraud programs?

Audit committee's active engagement in discussions on the topic of fraud.

In the United States, the hiring of a company's external auditors of a public company is most likely the responsibility of the

Audit committee.

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the:

Audit committee.

The scope of an internal audit is initially defined by the:

Audit objectives.

Which of the following is not included in PCAOB Form AP?

Audit staff investments in each particular client.

The Statements on Auditing Standards have been issued by the:

Auditing Standards Board.

An advantage of data analytical approaches applied to auditing is that

Auditing of entire populations of transactions may, in particular situations, become cost justified.

Which of the following is not a problem associated with the use of test data for computer-audit purposes?

Auditing through the computer is more difficult than auditing around the computer.

A primary responsibility of a registrar of capital stock is to:

Avoid any overissuance of stock.

Which of the following statistical selection techniques is least desirable for use by an auditor?

Block selection.

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected:

Be applied on a basis consistent with those followed in the prior year.

When no independent stock transfer agent is employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should:

Be defaced to prevent reissuance and attached to their corresponding stubs.

Tracing copies of sales invoices to shipping documents will provide evidence that all:

Billed sales were shipped.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

Confirming current (0-30 day) year-end accounts receivable.

While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and:

Consider the likelihood that the risks could result in material misstatements.

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes:

Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

The framework most likely to be used by the client in its internal control assessment is the:

COSO internal control framework.

Among the Dodd-Frank Wall Street Reform and Consumer Protection Act's requirements is one requiring:

CPA examinations of broker-dealer internal control over compliance.

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?

Calculate an estimate the total of uncorrected misstatements in the financial statements.

Company A does not employ an independent stock transfer agent, but rather issues its own stock and maintains its stock records. When outstanding shares are transferred from one holder to another, the certificate of the selling shareholder should be:

Canceled (generally by perforation) and attached to the certificate book.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:

Cash disbursements.

When auditing the statement of cash flows of a profitable, growing company which combination is most likely?

Cash flows from operations - Positive Cash flows from investing - Negative

When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited?

Cash.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:

Check Clearing for the 21st Century Act.

A bank wants to reject erroneous account numbers to avoid invalid input. Management of the bank was told that there is a method that involves adding another number at the end of the account numbers and subjecting the other numbers to an algorithm to compare with the extra numbers. What technique is this?

Check digit.

On receiving the bank cutoff statement, the auditor should trace:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

The auditors use a bank cutoff statement to compare:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Which of the following manipulations would understate receivables on the financial statements?

Closing the sales journal prior to year-end.

Which of the following is not one of the criteria for revenue recognition?

Collectibility is certain.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Collection of receivables.

This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations:

Committee of Sponsoring Organizations.

Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse?

Communicate with the regulatory agency about the legitimacy of the public warehouse.

Which of the following is an analytical procedure that should be applied to the income statement?

Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

Detection risk.

Kiting would least likely be detected by:

Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

Which of the following is most likely to be considered an analytical procedure?

Comparing inventory balances to recent sales activities.

A practical and effective audit procedure for the detection of lapping is:

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

Garcia was engaged to audit the financial statements of Delta Corporation for the year ended September 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud?

Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following is the best audit procedure for the detection of lapping?

Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following is not considered to be an analytical procedure?

Comparisons of financial statement amounts with source documents.

If the external auditors decide that the work performed by the internal auditors may be used, they should consider the internal auditors':

Competence, objectivity, and approach.

Which of the following is least likely to be directly examined in an inspection performed by the PCAOB?

Compilation engagements.

An auditor who selects a sample from the shipping documents file to determine whether invoices were prepared is satisfying the audit objective of:

Completeness

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?

Completeness.

The assertion most directly addressed when performing the search for unrecorded liabilities is:

Completeness.

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries?

Completeness.

Which of the following assertions is of principle concern to the auditors in the examination of accounts payable?

Completeness.

Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?

Compliance audit.

In a client/server environment, the "client" is most likely to be the:

Computers of various users.

Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $650,000. Based on these results, the auditor would:

Conclude that there is too great a risk that the account balance is materially misstated, because one limit of the interval calculated by projected misstatement + or - allowance for sampling risk exceeds the tolerable misstatement.

Which of the following procedures would probably be most effective in identifying duplicate billing of customers during the year?

Confirmation of accounts at year end.

Which of the following is not true about the confirmation of accounts receivable?

Confirmation requests should be signed by the auditors.

The auditor can best verify a client's bond sinking fund transactions and year-end balance by:

Confirmation with the bond trustee.

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?

Confirming accounts payable.

If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by:

Confirming accounts receivable.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

Confirming accounts receivable.

Of the following statements about internal control, which one is not valid?

Control activities ensure all fraud will be eliminated.

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a:

Control deficiency.

The completeness of computer generated sales figures can be tested by comparing the number of items listed on the daily sales report with the number of items billed on the actual invoices. This process uses:

Control totals.

Which of the following testing techniques minimizes the possibility that the auditors will contaminate a client's financial records?

Controlled programs.

An auditor's purpose for performing tests of controls is to provide reasonable assurance that:

Controls are operating effectively.

Which statement is correct concerning the relevance of various types of controls to a financial statement audit?

Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

Which of the following is not a type of auditors' opinion?

Conventional.

For audit purposes, a corporation's articles of incorporation are normally:

Copied and placed in the permanent file.

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into:

Cost of goods sold.

Which of the following is least likely to be considered a risk assessment procedure relating to internal control?

Counting marketable securities at year-end.

The public company audit report is most likely to have a section with the title of:

Critical Audit Matters.

An unqualified public company audit report on a client's internal control over financial reporting which is not combined with the audit report on the financial statements is least likely to include which of the following sections?

Critical audit matters.

An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as:

Cross-sectional analysis.

Internal control over marketable securities is enhanced when:

Custody of securities is maintained by a stockbroker or bank.

In which of the following areas are the auditors least likely to use the work of a specialist?

Determination of the existence of a complex financial instrument.

When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an exception report. The exception report should most probably be reviewed and followed up on by the:

Data control group.

Which of the following would be least likely to be considered a desirable attribute of a database management system?

Data redundancy.

The individual with whom an auditor would be most likely to discuss specific access controls within a client's relational database management system is the

Database administrator.

Various computing devices (e.g., desktops, laptops, tablets, phones) have resulted in a(n):

Decentralization of data processing activities.

An unexpected economic downturn is likely to have which effect on inventory turnover.

Decrease.

Decreases in the estimated standard deviation have what effect on required sample size?

Decreases.

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect:

Deliveries for which no purchase order was issued.

To minimize the opportunities for fraud, unclaimed cash payroll should be:

Deposited in a special bank account.

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:

Design further audit procedures.

Working papers used by the auditor that record the procedures used to gather evidence should be:

Designed to meet the circumstances of the particular engagement.

When using a statistical sampling plan, the auditors would probably require a smaller sample if the:

Desired risk of incorrect acceptance increases.

The auditors will typically not initiate discussion with the audit committee regarding the:

Details of the procedures which the auditors intend to apply.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to:

Detect unrecorded liabilities.

The confirmation of accounts payable is most closely associated with:

Detection risk.

The confirmation of accounts receivable is most closely associated with:

Detection risk.

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:

Disclosed in the notes to the financial statements of the current year.

Which of the following is not a data communication control?

Distributed data processing.

A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:

Distributing payroll checks to employees.

The inspection of a vendor's invoice by the auditors is:

Documentary evidence about occurrence of a transaction.

The date on which no information may be deleted from audit documentation is the

Documentation completion date.

Which of the following is not an element of quality control?

Documentation. Independence.

Which of the following is not a control over cash disbursements?

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

An act passed by Congress aimed at promoting financial stability improving accountability and transparency in the financial system:

Dodd-Frank Act.

Which of the following revenue related transactions is not linked to the accounts indicated?

Don't write off uncollectible receivables-sales returns, sales discounts.

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to:

Each of the years in the two-year period.

An operational audit is most likely to address an organization's:

Effectiveness, efficiency and economy of operations.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:

Efficiency of the audit.

Which of the following has made it difficult to engage in kiting in recent years?

Electronic processing of checks.

Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level?

Emphasize the need to remain neutral, rather than to exercise professional skepticism.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:

Employees worked the number of hours for which their pay was computed.

A system in which each department member is responsible for the development and execution of the computer application that he or she uses is referred to as:

End user computing.

Which of the following is most likely to include user group development and execution of certain computer applications?

End user computing.

A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of:

Engagement performance.

The accounts payable department receives the purchase order form to accomplish all of the following except:

Ensure the goods had been received by the party requesting the goods.

Which of the following fits most directly under the control activities components of the COSO IC framework?

Ensuring that cash disbursements are authorized by appropriate personnel.

Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable?

Examination of January receiving reports prepared for goods shipped FOB destination in December to the client.

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

Examination of deeds and title guaranty policies on hand.

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date?

Examination of paid checks issued in payment of securities purchased.

Attestation risk is limited to a low level in which of the following engagement(s)?

Examinations, but not reviews.

Which of the following procedures is least likely in the audit of capital stock?

Examine all outstanding stock certificates for completeness.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

Examine cash receipts received after year-end.

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:

Examining subsequent receipts of year-end accounts receivable.

Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable?

Examining underlying documentation for cash disbursements in the period after year-end.

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Examining vendor statements for amounts not reported as purchases.

When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample?

Exceed.

A plant manager would be most likely to provide information on which of the following?

Existence of obsolete production equipment.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

Existence of the balances confirmed.

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all

Expenditures for fixed assets have been capitalized.

In governmental accounting, emphasis is placed on:

Expenditures of funds.

Which of the following is a term used in public company audit reports?

Explanatory paragraph.

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:

Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to:

Extend auditing procedures.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

Extreme degree of competition within the industry.

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?

Fictitious revenues.

An audit of the financial statements of a company is referred to as a(n)

Financial audit.

An analytical procedure example is the comparison of:

Financial ratios of the current year to previous years.

A set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing in the financial statements is referred to as a(n)

Financial reporting framework.

Management is beginning to take corrective action on human resources department deficiencies reported during the last internal audit. According to the IIA's Standards, the internal auditor should:

Follow up to see that the corrective action satisfies the audit recommendations.

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?

For subsequent comparison with the completed inventory listing.

A form filed with the SEC when a company changes auditors is a:

Form 8-K.

Which of the following is correct concerning requirements about auditor communications about fraud?

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

Controls are not designed to provide assurance that:

Fraud will be eliminated.

A dual purpose test simultaneously:

Functions as a substantive test and as a test of controls.

Operational auditing is primarily oriented toward:

Future improvements to accomplish the goals of management.

Financial accounting standards for cities are developed primarily by the

GASB.

An auditor anticipates assessing control risk at a low level in a computerized environment. Under these circumstances, on which of the following controls would the auditor initially focus?

General controls.

To best test existence, an auditor would sample from the:

General ledger to source documents.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

General ledger.

Which of the following types of matters do not generally require disclosure in the financial statements?

General risk contingencies.

Which of the following is the most accurate statement regarding audit evidence?

The auditor must obtain sufficient appropriate audit evidence.

Which of the following could not be more efficiently performed with data analytics?

Identification of an unrecorded cash deposit.

Which of the following is least likely to be performed efficiently using data analytics?

Identification of defective inventory items.

The auditors' program for the examination of long-term debt should include steps that require the:

Identification of notes payable to related parties.

The auditors plan to use data analytics to audit purchases. Which of the following is least likely to be performed efficiently using data analytics?

Identification of purchases of goods from related parties that the auditors had not been informed of and were not aware of the relationship.

Which of the following must be included in management's report internal control under section 404 of the Sarbanes-Oxley Act of 2002?

Identification of the framework used for evaluating internal control.

An auditor will ordinarily examine invoices from lawyers primarily in order to:

Identify possible unasserted litigation, claims, and assessments.

The auditors may use data analytics to help test repairs and maintenance expense for overstatement by:

Identifying expenditures with characteristics that indicate they are capital expenditures.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows:

If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.

Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients?

If audit procedures reveal noncompliance, the auditors should take appropriate actions.

An audit firm has been engaged to report on whether a material weakness that previously resulted in an adverse opinion on internal control has been remediated. Which of the following statements is correct?

If there has been an auditor change, the successor auditor may issue such a report.

Which of the following is most likely to be considered a material weakness in internal control?

Immaterial fraud committed by senior management.

Which of the following is correct concerning the PCAOB's concept of a significant account?

In deciding whether an account is a significant account one does not consider the effect of internal control.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?

In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

Which of the following situations would raise an auditor's concern about the risk of fraudulent financial reporting?

Inability to generate positive cash flows from operations, while reporting large increases in earnings.

The auditors will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are:

Included in the final inventory schedule.

An attestation engagement:

Includes a report on subject matter, or on an assertion about subject matter.

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?

Including in inventory items that are consigned out to vendors, but not yet sold.

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

Incorrect rejection.

Fraudulent sales and accounts receivables recorded at year-end (with no cost of goods sold entry) will:

Increase days of sales in accounts receivable.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:

Increase ownership equity.

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist?

Increase the assessed level of detection risk.

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size?

Increase.

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size?

Increase.

A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation?

Increased risk of misstatement of revenue.

A decrease in the tolerable misstatement has what effect on the required sample size?

Increases.

Changing from a sampling plan using random selection without replacement to random selection with replacement has what effect on the required sample size?

Increases.

Which of the following attributes is more essential for an auditor than of management?

Independence.

The risk that a company's financial statements will materially depart from generally accepted accounting principles is referred to as:

Information Risk.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if:

Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:

Inherent risk.

Confirmation would be most effective in addressing the existence assertion for the:

Inventory held on consignment.

Which of the following conditions identified during the audit increases the risk of employee fraud?

Inventory items of small size, but high value.

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

Inventory.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Investigate changes in capital stock recorded after year-end.

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for:

Investigation of variances within a formal budgeting system.

To avoid potential errors and fraud a well-designed internal control in the accounts payable area should include a separation of which of the following functions?

Invoice verification and merchandise ordering.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year including those that occurred in prior years is referred to as:

Iron curtain approach.

For purposes of an audit of financial statements, electronic confirmation of cash balances:

Is acceptable when properly controlled.

The auditors include an emphasis-of-matter paragraph in a nonpublic company audit report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph:

Is appropriate and would not negate the unmodified opinion.

A basis for modification paragraph in the audit of the financial statements of a nonpublic company:

Is only included with qualified, adverse, or disclaimers of opinion.

The review of a company's financial statements by a CPA firm:

Is substantially less in scope of procedures than an audit.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:

Issue an "except for" qualification or an adverse opinion.

Which of the following is not correct relating to the Sarbanes-Oxley Act?

It applies to both public and nonpublic audit clients.

Which of the following is an advantage of systematic selection over random number selection?

It does not require establishment of correspondence between random numbers and items in the population.

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if:

It is difficult to reconcile vendors' monthly statements.

Which of the following is correct relating to kiting?

It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

Which of the following is correct concerning "window dressing" for cash?

It may increase but not falsify cash position.

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of:

Kiting.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with _____.

Knowledge necessary to assess the risks of material misstatements.

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with:

Knowledge required to fulfill assigned responsibilities and to progress within the firm.

Which of the following best describes the problem with the use of published industry averages for analytical procedures?

Lack of comparability.

A compliance audit is most likely to address an organization's compliance with:

Laws and regulation.

A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a:

Lead schedule.

Statistical sampling generally may be applied to test internal control when the client's internal control procedures:

Leave an audit trail in the form of evidence of compliance.

The auditor will most likely perform extensive tests for possible understatement of:

Liabilities.

Which of the following is least likely to result in an adverse opinion?

Limitation in the scope of the audit.

With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is:

Limited to the specific event referred to.

An example of an internal control weakness is to assign the human resource department responsibility for:

Maintaining time cards.

When an auditor is planning an audit, the auditor should:

Make preliminary judgments about materiality levels for audit purposes.

Software that is designed to disable or damage computer systems or data is referred to as:

Malware.

Which of the following is least likely to be included in a client's representation letter?

Management acknowledges responsibility for illegal actions committed by employees.

An auditor should obtain written representations from the company's attorney concerning litigation claims and assessments, which may be limited to matters that are considered either individually or collectively material. An understanding on the limits of materiality for this purpose has been reached by:

Management and the auditor.

Which of the following is not an underlying premise of an audit?

Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework.

The internal auditing department provides information about control and quality of performance to:

Management and the board of directors.

The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

Management fails to take appropriate corrective action.

Which of the following situations would an auditor consider a potential risk factor for misstatements from fraudulent financial reporting?

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Which of the following is explicitly included as a part of the description of management's responsibility in a nonpublic company unmodified audit report?

Management is responsible for the maintenance of internal control.

The existence of a material weakness led to an adverse opinion in the internal control audit report of a publicly traded company. Which of the following statements is correct if management believes that it has remediated the weakness?

Management may engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit.

Which of the following is least likely to be included as a titled section in a standard unqualified public company audit report?

Management responsibilities section.

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?

Management's disregard for internal control.

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and Hall began the audit work on February 17, year 2. Hall completed the audit work on March 24, year 2, and completed the report on March 28, year 2. The client's representation letter normally would be dated:

March 24, year 2.

Deficiencies in internal control identified by the auditor that are lesser than significant deficiencies:

Must be communicated to management, and the audit committee need only be informed of the communication to management.

Which of the following is a control procedure that is usually applied to accounts payable?

Matching invoices with receiving documents before disbursements are authorized.

Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?

Material related party transactions must be disclosed in the notes to the financial statements.

Which of the following is an accurate statement about internal control weaknesses?

Material weaknesses are also control deficiencies.

A material weakness involves a reasonable possibility that what size misstatement will not be prevented or detected?

Material.

An advantage of using statistical sampling techniques is that such techniques:

Mathematically measure risk.

An attorney responding to an auditor as a result of the client's letter of audit inquiry may appropriately limit the response to:

Matters to which the attorney has given substantive attention in the form of legal consultation or representation.

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor:

May accept the engagement.

When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:

May occur in a systematic pattern and destroy the sample randomness.

Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA?

Members, regardless of whether they are in public practice, are required to meet such requirements.

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that:

Misstatements have been prevented or detected.

A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element?

Monitoring.

Internal auditing is considered to be part of an organization's:

Monitoring.

A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment, one would normally expect the audit of accounts receivable to require:

More audit time.

The Dodd-Frank Act requires auditors to report on broker-dealer compliance with internal control:

Over compliance with various SEC requirements during the most recent fiscal year.

An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of:

Overall system of quality control.

Purchase cutoff procedures should be designed to test whether all inventory:

Owned by the company was recorded.

An example of an access control is a:

Password.

Which transaction would not necessarily be considered a related party transaction?

Payment of a bonus to the president.

An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):

Peer Review Engagement.

The auditors have calculated the total uncorrected identified misstatements as $445,000; materiality for the audit is $450,000. The client has declined to record the related journal entries. In this situation it is most likely that the auditors will:

Perform additional audit procedures to reduce audit risk to an appropriately low level.

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?

Perform analytical procedures in the period subsequent to the balance sheet date.

Which of the following would be least likely to be considered an audit planning procedure?

Perform the risk assessment.

The effectiveness of controls is not generally tested by:

Performance of analytical procedures.

Auditors can mitigate risk, like the failure to detect material dollar errors in the financial statements, by doing what?

Performing substantive procedures.

Which of the following is not considered one of the five major components of internal control?

Physical controls.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely?

Plant assets were retired during the year.

Which of the following is not included in the auditors' standard unmodified audit report for a nonpublic company?

Preferred accounting principles have been consistently applied.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers.

With properly designed internal control, the same employee should not be permitted to:

Prepare disbursement vouchers and sign checks.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most?

Presentation and Disclosure.

The Auditing Standards Board's guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in:

Principles Underlying an Audit Conducted in Accordance with GAAS.

Which of the following is not programmed as a processing control?

Private lines.

Which of the following would be least likely to address control over the initiation and execution of equipment transactions?

Procedures exist to restrict access to equipment.

Analytical procedures are required at the risk assessment stage and as:

Procedures near the end of the audit.

The auditors are least likely to "audit around the computer" when:

Processing is primarily online and updating is real-time.

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatements, and a critical assessment of audit evidence is referred to as:

Professional skepticism.

The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a:

Projected misstatement.

An auditor would be least likely to use confirmations in connection with the examination of

Property, plant, and equipment.

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date?

Property, plant, and equipment.

When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most?

Property, plant, and equipment.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should:

Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

Passage of the Sarbanes-Oxley Act led to the establishment of the:

Public Company Accounting Oversight Board.

Which public companies does Section 404(b) of the Sarbanes-Oxley Act of 2002 require to obtain an audit of their internal control over financial reporting?

Public companies with a market capitalization in excess of $75,000,000.

In United States v. Arthur Young, the Supreme Court of the United States described the auditor's role as requiring independence, complete fidelity to the public trust and to serve as a(n):

Public watchdog.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the:

Purchase cutoff procedures.

A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to:

Purchases.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:

Qualification of the audit report.

Kent is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Kent detected noncompliance with requirements that have a material effect on that program. Kent's report on compliance should express a(an):

Qualified opinion or an adverse opinion.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

Quantities ordered are excluded from the receiving department copy of the purchase order.

In the audit of a federal assistance program, a cost that appears to be in violation of a law or regulation is referred to as a:

Questioned Cost.

Costs paid with federal assistance that appear to be in violation of a law or regulation are known as:

Questioned costs.

Which of the following is an advantage of describing internal control through the use of a standardized questionnaire?

Questionnaires highlight weaknesses in the system.

In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient?

Ratio estimation.

The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to:

Read and consider the manner of presentation of the "other financial information."

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness?

Reasonable possibility.

The minimum likelihood of loss involved in the consideration of a possible material weakness is:

Reasonably possible.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?

Receive a cutoff statement directly from the client's bank.

The use of a "blind" purchase order is designed to prevent errors by the:

Receiving department.

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:

Receiving reports.

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client:

Recomputation.

For a large publicly traded client, the auditors' examination of capital stock accounts will not normally include:

Reconciliation of a stock certificate book with the general ledger.

A client recorded a payable for a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:

Record and conceal fraudulent transactions in the normal course of assigned tasks.

When the auditors select a sample from the vouchers payable register at the end of the period and trace them to underlying documents, the auditors are gathering evidence primarily to support that:

Recorded obligations occurred prior to year-end.

Concerning retention of working papers, the Sarbanes-Oxley Act:

Requires retention for at least 7 years.

After considering the client's internal control, the auditors have concluded that it is well-designed and is functioning as anticipated. Under these circumstances, the auditors would most likely:

Reduce substantive procedures in areas where the internal control was found to be effective.

If the predecessor auditors do not reissue their audit report on comparative financial statements, the successor auditors should:

Refer to the report of the predecessor auditors.

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

Refinance debt to lower loan payments.

To present fairly in conformity with generally accepted accounting principles, the financial statements must:

Reflect transactions and events within a range of reasonable limits.

An independent auditor finds that the Simmer Corporation purchased land owned by an officer of the company for an amount in excess of its asking price. This finding indicates the existence of:

Related party transactions.

Which of the following is not one of the assertions made by management about an account balance?

Relevance.

Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as:

Relevant assertions.

In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy?

Relevant ethical requirements.

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

Repairs and maintenance expense.

Which of the following accounts should be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?

Repairs and maintenance.

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:

Report release date.

If noncompliance with a law is discovered during the audit of a publicly held company, the auditors should first:

Report the act to those in charge of governance within the client's organization.

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for audits in accordance with Government Auditing Standards?

Reports on compliance with laws and regulations and internal control.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:

Represented by inventory tags are included in the listing.

Which of the following is most consistent with an increase in the ratio of debt to equity?

Repurchase of a portion of the company's outstanding common stock.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?

Sales and Bad Debt Expense.

For effective internal control, the billing function should not be performed by the:

Sales department.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?

Sales.

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:

Sales.

Which of the following procedures is least likely to be completed before the balance sheet date?

Search for unrecorded liabilities.

The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:

Securities and Exchange Commission.

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions?

Securities held for the client by the financial institution.

Which of the following would not generally be considered a program control?

Segregation of duties controls.

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Selling expense.

In November, two months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to interest revenue. The most effective method for detecting this type of error is:

Send a bank confirmation as of year-end.

When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by

Sending a confirmation request to the service organization.

Which of the following is not a universal rule for achieving internal control over cash?

Separate recordkeeping from accounting for cash to the extent possible.

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:

Separate the authorization of transactions from the custody of related assets.

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?

Separation of payroll duties is less than adequate for effective internal control.

Which of the following statistical sampling techniques involves taking samples in a series of stages?

Sequential sampling.

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

Settlement of litigation in excess of the recorded liability.

A public company's audit report must be addressed to the board of directors and the

Shareholders.

The right to practice as a CPA is given by which of the following organizations?

State Boards of Accountancy.

Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling?

Statistical samples are more representative of the population.

For a corporation that does not utilize the services of an independent registrar and stock transfer agent, which of the following represents a weakness in internal control over stock issuance?

Stock certificates are signed immediately upon receipt from the printer.

Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent?

Stock certificates often are not issued in today's electronic environment.

Which of the following procedures would an entity most likely include in its disaster recovery plan?

Store duplicate copies of files in a location away from the computer center.

An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to:

Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately.

The auditors' search for unrecorded liabilities is completed:

Subsequent to the balance sheet date.

Compliance auditing procedures are:

Substantive procedures.

Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories?

Supervising the taking of the annual physical inventory.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?

Supplies expense.

During an audit, the working papers are primarily considered to be:

Support for the auditors' representations as to compliance with generally accepted auditing standards.

Which of the following employees normally would be assigned the operating responsibility for designing the information system?

Systems analyst.

The proper use of prenumbered termination forms by the payroll department should provide assurance that all:

Terminated employees are removed from payroll.

Which of the following best describes the auditors' approach to the audit of accrued liabilities?

Test computations.

A CPA examines a sample of credit memoranda to ensure they were signed by an officer of the company. This is an example of a:

Test of a control.

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?

Testing the entity's computation of standard overhead rates.

When there are numerous property and equipment transactions during the year, an auditor planning to assess the risk of material misstatement at a low risk level must perform.

Tests of controls and limited tests of current year property and equipment transactions.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?

The account balances as of year-end will generally be confirmed.

For the highest degree of independence, the director of internal auditing should report directly to:

The audit committee of the board of directors.

Auditors must communicate internal control "significant deficiencies" to:

The audit committee.

Which of the following modifications of the auditors' report does not include an additional paragraph?

The audit report of a nonpublic company indicates a division of responsibility between two CPA firms.

A problem for a CPA associated with advanced IT systems is that:

The audit trail is sometimes generated only in machine readable form.

Which of the following is not included as a part of the description of the auditor's responsibility in a nonpublic company unmodified report?

The audit was performed in accordance with generally accepted accounting principles.

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that:

The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified?

The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client.

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits?

The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit.

Which statement is correct relating to the count of inventory when a company that specializes in taking such counts ("the company") is involved with counting a client's inventory?

The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence.

Which of the following statements regarding audit evidence is generally correct?

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

Under which of the following set of circumstances might the auditors disclaim an opinion?

The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

Which of the following statements is correct concerning the understanding of internal control needed by auditors?

The auditors must have a sufficient understanding to assess the risks of material misstatement.

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

The auditors should supervise the taking of the inventory.

Which of the following topics is not normally included in an engagement letter?

The auditors' level of materiality in planning the audit.

Which of the following is true about the auditors' observation of the client's physical inventory?

The auditors' observation addresses the existence assertion.

Which of the following statements is correct regarding the auditor's determination of materiality for a public company audit?

The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:

The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:

The authority to make purchases of requisitioned materials and services.

Which of the following is consistent with effective internal control over sales transactions?

The billing department accounts for all shipping documents.

Changes in capital stock accounts should normally be approved by:

The board of directors.

Bond transactions are normally confirmed with:

The bond trustee.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:

The cash receipts journal was held open after year-end.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

The cashier posts the receipts to the accounts receivable subsidiary ledger.

Auditors must obtain written client representations that typically should be signed by:

The chief executive officer and the chief financial officer.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests?

The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.

Internal control over bonds payable is best when:

The company utilizes the services of a bond trustee.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

The confirmation requests are sent on the client's letterhead.

An auditor may decide not to perform tests of controls related to the control activities within the computer portion of the client's internal control. Which of the following would not be a valid reason for choosing to omit such test?

The controls appear adequate.

Which of the following is likely to be of least importance to an auditor in considering the internal control in a company with computer processing?

The cost/benefit of data processing operations.

When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that:

The costs of training staff may be higher.

Which of the following is least likely to be an accurate statement concerning characteristics of an audit?

The direction of tests for understatement errors is generally directed from the recorded entry to source documents.

An operational audit report which deals with the accounts receivable department of a wholesaler is most likely to address:

The efficiency and effectiveness of the customer collections and include any findings requiring corrective action.

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?

The existence of inventories is inherently difficult to substantiate.

An inventory turnover analysis is useful to the auditor because it may detect:

The existence of obsolete merchandise.

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit?

The factors often have been observed in circumstances where frauds have occurred.

Which of the following matters is generally included in an auditor's engagement letter?

The financial accounting framework that will be applied.

Consider the following computer applications: (1) At a catalog sales firm, as phone orders are entered into their computer, both inventory and credit are immediately checked. (2) A manufacturer's computer sends the coming week's production schedule and parts orders to a supplier's computer. Which statement below is true for these applications?

The first application is an example of online real-time and the second is an example of EDI.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

The inference drawn from receiving no reply may not be correct.

Which of the following is not a factor that is considered a part of the client's overall control environment?

The information system.

Which situation would most likely require special audit planning by the auditors?

The investment portfolio has several complex financial instruments, such as deriviatives.

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan?

The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

Which of the following computer related employees should not be allowed access to program listings of application programs?

The operator.

Which of the following is correct concerning a public company audit report with a disclaimer of opinion?

The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

Which of the following professionals has primary responsibility for the performance of an audit?

The partner in charge of the engagement.

In the audit of the allocation of income for a partnership, the auditors would be most interested in reviewing:

The partnership agreement.

Which of the following statements is correct concerning statistical sampling in tests of controls?

The population size has little effect on determining sample size except for very small populations.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

The positive form used for large balances and the negative form for the small balances.

The operational auditors' initial conclusions about potential problem areas are summarized as:

The preliminary survey.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except:

The principal amount paid on a direct liability.

Which of the following situations would cause a CPA to not accept a new audit engagement?

The prospective client is unwilling to make financial records available to the CPA.

Which of the following is not a difference between the audit report of a nonpublic and public company?

The public company report has an additional paragraph referring to the client's fraud prevention procedures.

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to:

The purchase order.

Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration?

The rate of technological change is moderate in the industry.

The tolerable deviation rate in sampling for tests of controls is:

The rate the auditor will tolerate without modifying the planned assessment of control risk.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

The request was mailed by the assistant treasurer.

If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?

The risk is high that the account is materially misstated.

Which of the following types of risk is of critical importance to auditors in performing tests of controls?

The risk of assessing control risk too low.

Which of the following would most likely be an appropriate addressee for an audit report?

The shareholders of the corporation whose financial statements were examined.

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:

The shipping clerk's file of duplicate copies of bills of lading.

An after-school program provides free healthy snacks to low-income families with funds passed-through the state welfare department from the U.S. Department of Health and Human Services. In this situation, which organization is the primary recipient of the funds?

The state welfare department.

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?

The statements are not in conformity with generally accepted accounting principles regarding pension plans.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

The storekeeper is responsible for maintenance of perpetual inventory records.

When a company has changed auditors, according to the Professional Standards:

The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.

Which of the following personnel is responsible for determining the computer processing needs of the various users?

The systems analyst.

Which of the following personnel is responsible for the proper functioning of the security features built into the operating system?

The systems programmer.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report:

The type of opinion expressed by the predecessor auditor.

In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit?

The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

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

Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

They are authoritative statements, enforced through the Code of Professional Conduct.

Which statement is correct with respect to accounts payable confirmations?

They are more frequently used in situations in which some vendors don't send monthly statements.

If the auditors do not perform tests of controls for certain assertions:

They must assess control risk at the maximum level for those assertions.

Which of the following is not correct relating to representation letters?

They often serve as a substitute for the application of other procedures.

If management refuses to furnish certain written representations that the auditor believes are essential, which of the following is appropriate?

This may have an effect on the auditor's ability to rely on other representations of management.

In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size?

This year's sample is larger than last year's sample.

Auditors should perform audit procedures relating to subsequent events?

Through the date of the audit report.

A system in which hardware and software are not only linked together, but are also very dependent upon each other is referred to as:

Tightly coupled.

Which of the following is not a primary purpose of audit working papers?

To decrease the need for substantive procedures.

In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustments when they were identified. What is the primary purpose served by this schedule?

To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.

A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is:

To minimize the likelihood of association with clients whose managements lack integrity.

Which of the following is an auditor most likely to confirm from the transfer agent and registrar?

Total shares of stock issued.

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:

Trace a sample of the bills of lading to sales invoices.

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Trace tag counts to final inventory listing.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Trace the balances from accounts receivable ledger to the billing statements.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by:

Tracing sales invoices to shipping documents to test the occurrence of reported sales.

Which of the following terms best describes a payroll system?

Transaction processing system (TPS).

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:

Treasurer.

Operating control over check signing normally should be the responsibility of the:

Treasurer.

Which of the following most likely would approve the issuance of notes payable?

Treasurer.

An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:

Treat the missing check as a deviation for the purpose of evaluating the sample.

During an audit of a publicly-held company, the auditors should obtain written confirmation regarding debenture transactions from the:

Trustee.

The capability for computers to communicate with various electronic devices is an important feature in the design of modern business information systems. Which of the following risks associated with the use of telecommunications systems is minimized through the use of a password control system?

Unauthorized access to system program and data files.

Passwords are designed primarily to prevent:

Unauthorized access to the system.

A successor auditor should always make inquiries of the predecessor auditor before accepting an audit engagement. The successor should specifically inquire about the predecessor's:

Understanding as to the reasons for the change of auditors.

When the auditors discover an understatement of liabilities, they would most likely also expect to find an:

Understatement of assets.

Auditors should be aware that a voucher system may result in which of the following at year-end:

Understatement of liabilities.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatement of outstanding checks.

An independent auditor has concluded that substantial doubt remains about a nonpublic client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an):

Unmodified opinion with an appropriate emphasis-of-matter paragraph.

A basis for modification paragraph for a nonpublic company is least likely to relate to which of the following types of opinion?

Unmodified.

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

Unpaid bills.

A control deficiency that is less than a significant deficiency is most likely to result in what form of audit opinion on internal control?

Unqualified

Determining that receivables are presented at net realizable value is most directly related to which management assertion?

Valuation.

An auditor identified a material weakness in internal control in August. The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminated the material weakness prior to year-end. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:

Unqualified.

Assume that an auditor is focusing on two weaknesses in internal control. Although neither is by itself a material weakness, the two significant deficiencies in combination represent a material weakness. The client effectively remediates one of them prior to year-end but does not have time to remediate the other prior to year-end. What type of audit report on internal control is appropriate?

Unqualified.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

One reason why the independent auditors perform analytical procedures on the client's operations is to identify:

Unusual transactions.

Which of the following is not a procedure normally performed while completing the audit of a public company?

Update internal control questionnaire.

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:

Updating the report on the previous financial statements regardless of the opinion previously issued.

Smith Corporation has numerous customers. Customer files are kept on disk storage. Each account in the customer file contains name, address, credit limit, and account balance. The auditor wishes to test these files to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:

Use generalized audit software to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Use less predictable audit procedures.

The term "except for" in an audit report is:

Used in a qualified opinion.

When a client's accounts payable computer system was relocated, the administrator provided support through an Internet connection to a server. Subsequently, the administrator left the company. No changes were made to the accounts payable system at that time. Which of the following situations represents the greatest security risk?

User accounts are not removed upon termination of employees.

Which of the following is a password security problem?

Users are assigned (or select) passwords when accounts are created, but do not change them.

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment?

Using a budget to forecast and control acquisitions and retirements.

A company's labor distribution report requires extensive corrections each month because of labor hours charged to inactive jobs. Which of the following data processing input controls appears to be missing?

Validity test.

A control feature in a computer application program that involves comparing a customer number to the customer database:

Validity test.

There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate," respectively, are:

Variables and attributes.

Internal control over accounts payable is improved when:

Vendor statements are reconciled with the accounts payable ledger.

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

Vendor's invoices.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:

Verify reconciling items on the client's bank reconciliation.

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?

Verifying that all inventory owned by the client is on hand at the time of the count.

A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so:

Violates professional standards.

The auditor's plan to examine interest-bearing debt most likely will include steps that require:

Vouching borrowing and repayment transactions.

The auditors believe there is a significant risk of obsolescence of inventories for a particular client. Which of the following procedures would be least likely to detect obsolescence?

Vouching purchases of inventory.

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?

Vouching retirements of plant and equipment.

Generally accepted auditing standards established by the AICPA through April of 2003:

Were accepted as interim standards by the Public Company Accounting Oversight Board.

Encryption protection is least likely to be used in which of the following situations?

When transactions are transmitted over local area networks.

When the auditors express an opinion on financial statements, their responsibilities extend to:

Whether the results of their client's operating decisions are fairly presented in the financial statements.

A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a:

Working trial balance.

A review of the board of directors' minutes is least likely to result in the discovery of

Write-off of an large accounts payable.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?

Write-off of trade accounts receivable.

The auditors' understanding established with a client should be confirmed through a(an):

Written communication with the client.

Audit documentation is intended to allow ___________ to understand the audit work performed, the evidence obtained, and the significant conclusions.

an experienced auditor

A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:

other-matter paragraph should be added to the audit report.