Audit Final Okstate

Which of the following conditions necessitates a larger sample size? A. A low level of tolerable misstatement. B. A high level of detection risk. C. A low assessed level of control risk. D. A low frequency of misstatement.

A. A low level of tolerable misstatement.

In an integrated audit, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations? A. A material weakness exists. B. The financial statements are misstated. C. The entity may not continue as a going concern. D. The auditor was asked by the client to provide the report to another practitioner.

A. A material weakness exists.

Which of the following procedures would yield the most reliable evidence? A. A recalculation of credit loss expense. B. An inquiry of client personnel. C. A comparison of beginning and ending retained earnings. D. A scanning of trial balances.

A. A recalculation of credit loss expense.

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

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

In an audit of internal control over financial reporting, which deficiencies in control should be communicated in writing to those charged with governance? A. Both material weaknesses and significant deficiencies. B. Only material weaknesses. C. Only significant deficiencies. D. All deficiencies.

A. Both material weaknesses and significant deficiencies.

When an auditor concludes that substantial doubt exists about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern. B. Express a qualified or adverse opinion, depending on materiality, because of the possible effects on the financial statements. C. Prepare prospective financial information to verify whether management's plans can be effectively implemented. D. Project future conditions and events for a period of time not to exceed 1 year following the date of the financial statements.

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

Before performing substantive procedures at an interim date, an auditor should A. Consider the increased risk that period-end misstatements will not be detected. B. Assess control risk at a low level. C. Determine that materiality for the accounts tested is insignificant. D. Assess inherent risk at a high level.

A. Consider the increased risk that period-end misstatements will not be detected.

In the integrated audit of an issuer, an auditor has identified entity-level controls that are important to the conclusion as to whether the company has effective internal control over financial reporting. Each of the following is an example of an entity-level control, except A. Controls over the completeness of deposited cash. B. Controls over management override. C. Controls over the period-end financial reporting process. D. The company's risk assessment process.

A. Controls over the completeness of deposited cash.

A fire destroyed the client's office building on 3/15/Year 2. (will be 2 answers) Auditor action: A. Do nothing. B. Investigate the event and modify the report or report date. C. Investigate the event but do not modify the report or report date. Client action: A. Do nothing. B. Make an entry to record the transaction. C. Do not make an entry but disclose in the notes.

A. Do nothing A. Do nothing

An IRS judgment recorded on 12/31/Year 1 was ultimately settled for a significantly different amount on 3/25/Year 2. Auditor action: A. Do nothing. B. Investigate the event and modify the report or report date. C. Investigate the event but do not modify the report or report date. Client action: A. Do nothing. B. Make an entry to record the transaction. C. Do not make an entry but disclose in the notes.

A. Do nothing B. Do nothing

How are management's responsibility and the auditor's responsibility represented in the auditor's report? Management's Responsibility Auditor's Responsibility A. Explicitly Explicitly B. Implicitly Explicitly C. Implicitly Implicitly D. Explicitly Implicitly

A. Explicitly Explicitly

Does an auditor make the following representations explicitly or implicitly in the opinion paragraph when expressing an unmodified opinion? Conformity with theApplicable Adequacy ofDisclosure FinancialReporting Framework A. Explicitly Implicitly B. Implicitly Explicitly C. Implicitly Implicitly D. Explicitly Explicitly

A. Explicitly Implicitly

As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to A. Find smaller misstatements. B. Increase the tolerable misstatement in the accounts. C. Find larger misstatements. D. Decrease the risk of overreliance.

A. Find smaller misstatements.

When financial statements are presented fairly, they are A. Free from material misstatement, whether due to fraud or error. B. Free from material misstatement but not free from material error due to fraud. C. Free from most material misstatements, whether due to fraud or error. D. Absolutely assured to not contain material misstatements.

A. Free from material misstatement, whether due to fraud or error.

As a consequence of a change in the customer base for accounts receivable, the auditor determined that the variability in their balances increased the risk of material misstatement. A. Increase B. Decrease

A. Increase

Due to more relaxed credit terms, the number of accounts receivable quadrupled during the current year. A. Increase B. Decrease

A. Increase

The engagement partner increased the assessed risk of material misstatement for the audit. A. Increase B. Decrease

A. Increase

When planning a statistical sample for a test of controls, the auditor increased the expected population deviation rate because of the results of the prior year's tests of controls and the understanding of the control environment. A. Increase B. Decrease

A. Increase

The client did not furnish adequate evidence for the auditor to evaluate the internal controls over inventory. All other evidence was provided. A. Issue a disclaimer of opinion. B. Determine whether the control deficiency is a material weakness by obtaining further evidence. C. Express an adverse opinion on the internal controls. D. Express an unmodified opinion on the internal controls.

A. Issue a disclaimer of opinion.

Under which of the following circumstances would a disclaimer of opinion not be appropriate? A. Management does not provide reasonable justification for a change in accounting principles. B. The chief executive officer is unwilling to sign the management representation letter. C. The auditor is unable to determine the amounts associated with an employee fraud scheme. D. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.

A. Management does not provide reasonable justification for a change in accounting principles.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should A. Not refer to consistency in the auditor's report. B. Explicitly concur that the change is preferred. C. Refer to the change in an emphasis-of-matter or explanatory paragraph. D. Refer to the change in the opinion paragraph.

A. Not refer to consistency in the auditor's report.

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample? A. Number of items in the population. B. Tolerable population rate of deviation. C. Degree of assurance desired. D. Risk of overreliance.

A. Number of items in the population.

Audit documentation A. Provides evidence that the audit was performed in accordance with GAAS. B. Is unnecessary if the auditor expresses an adverse opinion. C. Serves as a substitute for the client's accounting records. D. Is the property of the client.

A. Provides evidence that the audit was performed in accordance with GAAS.

Auditor A was engaged to audit the financial statements for the most recent year of Company Y, a nonissuer. At the end of the audit, the auditor determines that either a qualified opinion or a disclaimer of opinion will be expressed. The most likely reason is that A. The auditor was unable to obtain sufficient appropriate evidence to conclude the statements are presented fairly. B. The auditor did not observe beginning inventory but performed alternative procedures. C. Management refused to provide to the auditor material information about revenue recognition. D. The auditor identified misstatements that are material and pervasive.

A. The auditor was unable to obtain sufficient appropriate evidence to conclude the statements are presented fairly.

Under which of the following circumstances would an auditor most likely issue either a qualified or a disclaimer of opinion? A. The client's attorney refused to respond to the letter of audit inquiry. B. The auditor performed alternate substantive procedures to provide adequate assurance due to missing documentation. C. The financial statements contain an immaterial departure from generally accepted accounting principles (GAAP). D. There is substantial doubt about the entity's ability to continue as a going concern.

A. The client's attorney refused to respond to the letter of audit inquiry.

A former client requests a predecessor auditor to reissue an audit report on a prior period's financial statements. The financial statements are not restated and the report is not revised. What date(s) should the predecessor auditor use in the reissued report? A. The date of the prior-period report. B. The date of the client's request. C. The date of reissue. D. The dual dates.

A. The date of the prior-period report.

A company's customer sued it for damages. Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount of range of the potential loss. The client fully disclosed the situation in the notes to the financial statements, but no accrual was made. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

The auditor employs a specialist to help gather evidence as to the value of derivatives held by the client. The specialist's findings support managements' reported values. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

The auditor was not able to confirm receivables at year end but was able to become satisfied that the receivables were fairly stated by other auditing procedures. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

The financial statements were presented fairly, in all material respects. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

The only scope limitation and reporting problem during the current-year audit of the balance sheet only was that the auditor did not observe a client's taking of beginning physical inventory and was unable to become satisfied about the inventory by means of other auditing procedures. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects A. Audit risk. B. Nonsampling risk. C. Sampling risk. D. Statistical risk.

B. Nonsampling risk.

During the audit of internal controls integrated with the audit of the financial statements, the auditor discovered a material weakness in internal control. The auditor most likely will express a(n) A. Disclaimer of opinion on internal control. B. Adverse opinion on internal control. C. Qualified opinion on internal control. D. Unmodified opinion on internal control.

B. Adverse opinion on internal control.

Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting? A. Begin reviewing income statement accounts and then review balance sheet accounts. B. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level. C. Begin reviewing balance sheet accounts and then review income statement accounts. D. Begin by understanding the overall risks to internal control over financial reporting at the general ledger level.

B. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because A. Recipients usually respond only if they disagree with the information on the request. B. Customers may not be inclined to report understatement errors in their accounts. C. Auditors typically select many accounts with low recorded balances to be confirmed. D. Many customers merely sign and return the confirmation without verifying its details.

B. Customers may not be inclined to report understatement errors in their accounts.

The allowable risk of assessing the risk of material misstatement too low and the tolerable deviation rate increased. The expected population deviation rate decreased. A. Increase B. Decrease

B. Decrease

The auditor determined that an increase in the tolerable misstatement was appropriate. A. Increase B. Decrease

B. Decrease

The auditors examined the client's internal controls over cash receipts and concluded that they are operating exactly as designed. However, the design of the controls does not include control procedures to prevent misstatements and the potential omission of cash receipts. A. Issue a disclaimer of opinion. B. Determine whether the control deficiency is a material weakness by obtaining further evidence. C. Express an adverse opinion on the internal controls. D. Express an unmodified opinion on the internal controls.

B. Determine whether the control deficiency is a material weakness by obtaining further evidence.

In which of the following situations is attribute sampling likely to be used? A. Making selections from a cash disbursements journal to test liabilities for understatement. B. Determining the estimated number of occurrences of improperly authorized cash disbursements. C. Inquiring of the client the number of occurrences of fraud during the year. D. Examining invoices and canceled checks in support of recorded operating expenses.

B. Determining the estimated number of occurrences of improperly authorized cash disbursements.

On February 13, Year 2, Fox, CPA, met with the audit committee of the Gem Corporation to review the draft of Fox's report on the company's financial statements as of and for the year ended December 31, Year 1. On February 16, Year 2, Fox completed all remaining field work and obtained sufficient appropriate evidence to support the opinion on the financial statements. On February 28, Year 2, the final report was mailed to Gem's audit committee. What date most likely would be used on Fox's report? A. February 13, Year 2. B. February 16, Year 2. C. February 28, Year 2. D. December 31, Year 1.

B. February 16, Year 2.

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? A. Overreliance. B. Incorrect Acceptance. C. Underreliance. D. Incorrect rejection.

B. Incorrect Acceptance

While performing a 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 A. Underreliance. B. Incorrect rejection. C. Incorrect acceptance. D. Overreliance.

B. Incorrect rejection.

When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if A. Management has no plans to reduce or delay future expenditures. B. Information about the entity's ability to continue as a going concern is not disclosed. C. The effects of the adverse financial conditions likely will cause a bankruptcy filing. D. Negative trends and recurring operating losses appear to be irreversible.

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

The auditor learned that certain transactions recorded during the year failed to be disclosed in the notes as related party transactions. Auditor action: A. Do nothing. B. Investigate the event and modify the report or report date. C. Investigate the event but do not modify the report or report date. Client action: A. Do nothing. B. Make an entry to record the transaction. C. Do not make an entry but disclose in the notes.

B. Investigate the event and modify the report or report date. C. Do not make an entry but disclose in the notes.

The audit working paper that reflects the major components of an amount reported in the financial statements is the A. Interbank transfer schedule. B. Lead schedule. C. Supporting schedule. D. Carryforward schedule.

B. Lead schedule.

To test for unsupported entries in the ledger, the direction of audit testing should be from the A. Externally generated documents. B. Ledger entries. C. Journal entries. D. Original source documents.

B. Ledger entries.

An auditor released an audit report that was dual-dated for a subsequently discovered fact occurring after the date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was A. Limited to include only events occurring before the date of the last subsequent event referenced. B. Limited to the specific event referenced. C. Extended to include all events occurring since the original report date. D. Extended to subsequent events occurring through the date of issuance of the related financial statements.

B. Limited to the specific event referenced.

Which of the following should a predecessor auditor perform before reissuing a report on financial statements when those financial statements are to be presented on a comparative basis with financial statements audited by another auditor? A. Request attorney's responses to identify any significant litigation subsequent to the original date of the report. B. Obtain representation letters from management of the former client and the successor auditor. C. Change the date of the reissued report to match the date on which additional procedures were performed. D. Review minutes of board meetings held since the original date of the audit report.

B. Obtain representation letters from management of the former client and the successor auditor.

In attribute sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample? A. Risk of overreliance. B. Population size. C. Tolerable population deviation rate. D. Expected population deviation rate.

B. Population size.

An issuer refuses to include in its audited financial statements some operating segments information that the auditor believes is required. The missing information is considered to be material, but its possible effects are not pervasive. A. Unmodified B. Qualified C. Adverse D. Disclaimer

B. Qualified

Management imposed certain limited restrictions on the scope of the audit. A. Unmodified B. Qualified C. Adverse D. Disclaimer

B. Qualified

The auditor could not obtain sufficient appropriate evidence for one material account. A. Unmodified B. Qualified C. Adverse D. Disclaimer

B. Qualified

An external auditor finds that the financial statements contain material misstatements that are not pervasive. Which audit opinion is appropriate? A. Unqualified opinion. B. Qualified opinion. C. Disclaimer of opinion. D. Adverse opinion.

B. Qualified opinion.

Before a predecessor auditor reissues the prior year's audit report on the financial statements of a former client for inclusion with the successor auditor's report on comparative financial statements, the predecessor does all of the following except A. Obtain a successor auditor representation letter. B. Review the audit documentation of the successor auditor. C. Compare the current-period comparative financial statements with those of the prior year. D. Obtain and read the current comparative financial statements.

B. Review the audit documentation of the successor auditor.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A. A majority of recipients usually lack the willingness to respond objectively. B. The auditor cannot infer that all nonrespondents have verified their account information. C. Some recipients may report incorrect balances that require extensive follow-up. D. Negative confirmations do not produce evidence that is statistically quantifiable.

B. The auditor cannot infer that all nonrespondents have verified their account information.

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk? A. The internal control not being as effective as the auditor believes. B. The auditor selecting inappropriate auditing procedures. C. The internal control being more effective than the auditor believes. D. The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated.

B. The auditor selecting inappropriate auditing procedures.

An auditor is reporting on the financial statements of an issuer in accordance with PCAOB standards. Which of the following is most likely to be included in the Critical Audit Matters section of the report? A. The CEO and CFO have been replaced during the year. B. The bankruptcy of the largest customer resulted in a material receivable in doubt at year end. C. A lawsuit was settled during the year, resulting in reporting of a material loss. D. After a change in auditors, the current auditor performed the issuer's initial audit.

B. The bankruptcy of the largest customer resulted in a material receivable in doubt at year end.

Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, Year 1. That doubt has been removed in Year 2. What is Mead's reporting responsibility if Tech, a nonissuer, is presenting its financial statements for the year ended June 30, Year 2, on a comparative basis with those of Year 1? A. A different emphasis-of-matter paragraph describing Mead's reasons for the removal of doubt should be included. B. The emphasis-of-matter paragraph included in the Year 1 auditor's report should not be repeated. C. A different emphasis-of-matter paragraph describing Tech's plans for financial recovery should be included. D. The emphasis-of-matter paragraph included in the Year 1 auditor's report should be repeated in its entirety.

B. The emphasis-of-matter paragraph included in the Year 1 auditor's report should not be repeated.

In which of the following circumstances would an auditor be most likely to express an adverse opinion? A. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. B. The financial statements are not in conformity with the FASB Codification's guidance regarding the capitalization of leases. C. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern. D. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.

B. The financial statements are not in conformity with the FASB Codification's guidance regarding the capitalization of leases.

In the integrated audit, which of the following would not be considered an entity-level control? A. The executive committee's process for assessing business risk. B. The outside auditor's assessment process of internal auditor competence and objectivity. C. The board of directors' controls to monitor the activities of the audit committee. D. Management's established controls to monitor results of operations.

B. The outside auditor's assessment process of internal auditor competence and objectivity.

Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is A. Unmodified but not mention the departure in the auditor's report. B. Unmodified and describe the departure in an other-matter paragraph. C. Qualified or adverse, depending on materiality, and describe the departure in an other-matter paragraph. D. Qualified and describe the departure in a separate paragraph.

B. Unmodified and describe the departure in an other-matter paragraph.

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(n) A. Qualified opinion because of a departure from auditing standards. B. Unmodified opinion. C. Unmodified opinion with an emphasis-of-matter paragraph. D. Qualified opinion because of a scope limitation.

B. Unmodified opinion.

When financial statements are materially but not pervasively misstated, an auditor may express a Qualified Opinion. Disclaimer of an opinion A. Yes Yes B. Yes No C. No No D. No Yes

B. Yes No

The risk of underreliance is the risk that the sample selected to test controls A. Does not support the tolerable misstatement for some or all financial statement assertions. B. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. C. Indicates that the controls are less effective than they actually are. D. Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole.

C. Indicates that the controls are less effective than they actually are.

Under U.S. GAAP, what is considered a "reasonable period" regarding going-concern issues? A. 6 months. B. 9 months. C. 1 year. D. 2 years.

C. 1 year.

A company, 70% of whose assets and 55% of whose revenues arise from subsidiaries, reports in the financial statements its investment in subsidiaries in accordance with the cost method. A. Unmodified B. Qualified C. Adverse D. Disclaimer

C. Adverse

The auditor concludes that revenues are overstated and the misstatements are pervasive to the financial statements. A. Unmodified B. Qualified C. Adverse D. Disclaimer

C. Adverse

The financial statements as a whole are not presented fairly in accordance with the applicable financial reporting framework. A. Unmodified B. Qualified C. Adverse D. Disclaimer

C. Adverse

In which situation is the auditor most likely not to include an emphasis-of-matter paragraph in the auditor's report of a nonissuer? A. Significant transactions with related parties were recorded. B. Unusually important subsequent events occurred. C. An important audit procedure was performed. D. The client suffered a major catastrophe.

C. An important audit procedure was performed.

The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions? A. Rights and obligations. B. Valuation and Allocation. C. Completeness. D. Presentation and disclosure.

C. Completeness.

Accounting records alone do not provide sufficient appropriate evidence on which to base an opinion on the financial statements. Thus, the auditor should obtain other information. Which of the following is audit evidence other than accounting records? A. Journal entries. B. Worksheets supporting cost allocations. C. Confirmations of accounts receivable. D. General and subsidiary ledgers.

C. Confirmations of accounts receivable.

The risk of incorrect acceptance and the risk of overreliance relate to the A. Efficiency of the audit. B. Preliminary estimates of materiality levels. C. Effectiveness of the audit. D. Tolerable misstatement.

C. Effectiveness of the audit.

The auditors concluded that the ineffectiveness of the design of controls over accounts payable and cash disbursements represents a material weakness in internal control even though the financial statements are not materially misstated. A. Issue a disclaimer of opinion. B. Determine whether the control deficiency is a material weakness by obtaining further evidence. C. Express an adverse opinion on the internal controls. D. Express an unmodified opinion on the internal controls.

C. Express an adverse opinion on internal controls.

A lawsuit was settled on 2/1/Year 2 that was initiated against the client on 6/1/Year 1. No previous entry had been made. Auditor action: A. Do nothing. B. Investigate the event and modify the report or report date. C. Investigate the event but do not modify the report or report date. Client action: A. Do nothing. B. Make an entry to record the transaction. C. Do not make an entry but disclose in the notes.

C. Investigate the event but do not modify the report or report date. B. Make an entry to record the transaction.

A flood destroyed the client's inventory on 2/15/Year 2. Auditor action: A. Do nothing. B. Investigate the event and modify the report or report date. C. Investigate the event but do not modify the report or report date. Client action: A. Do nothing. B. Make an entry to record the transaction. C. Do not make an entry but disclose in the notes.

C. Investigate the event but do not modify the report or report date. C. Do not make an entry but disclose in the notes.

The possibility of the auditor's failure to recognize a misstatement in an amount or a deviation from a prescribed control arises from A. The standard error of the mean. B. Statistical risk. C. Nonsampling risk. D. Sampling risk.

C. Nonsampling risk.

The existence of audit risk is recognized by the statement in the auditor's report that the auditor A. Realizes some matters, either individually or in the aggregate, are important, while other matters are not important. B. Is responsible for expressing an opinion on the financial statements. C. Obtains reasonable assurance about whether the financial statements are free of material misstatement. D. Evaluates the accounting policies used.

C. Obtains reasonable assurance about whether the financial statements are free of material misstatement.

As a result of tests of controls, an auditor underrelies on controls. This incorrect assessment most likely occurred because A. The auditor believes that the controls reduce the extent of substantive testing when, in fact, they do not. B. The assessed risk of material misstatement based on the auditor's sample is less than the actual risk. C. Operating effectiveness based on the auditor's sample is less than the true operating effectiveness of the controls. D. The auditor believes that the controls relate to management's assertions when, in fact, they do not.

C. Operating effectiveness based on the auditor's sample is less than the true operating effectiveness of the controls.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to A. Responses that were mailed rather than faxed to the auditor. B. Accounts receivable that have been classified as uncollectible. C. Payments mailed to the client that have not been recorded. D. Customers who have credit or zero balances with the client.

C. Payments mailed to the client that have not been recorded.

When an issuer refuses to include in its audited financial statements the segment disclosures that the auditor believes are required, the auditor should express a(n) A. Adverse opinion because of a significant uncertainty. B. Unmodified opinion with an emphasis-of-matter paragraph. C. Qualified opinion because of inadequate disclosure. D. Disclaimer of opinion because of the significant scope limitation.

C. Qualified opinion because of inadequate disclosure.

When a nonissuer entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor's report. This paragraph should describe the change and A. Explain why the change is justified under the applicable reporting framework. B. Describe the cumulative effect of the change on all periods prior to those presented. C. Refer to the financial statement note that discusses the change in detail. D. State the auditor's explicit concurrence with or opposition to the change.

C. Refer to the financial statement note that discusses the change in detail.

In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year's rate because of the results of the prior year's tests of controls and the overall control environment. The auditor most likely would then increase the planned A. Risk of overreliance. B. Allowance for sampling risk. C. Sample size. D. Tolerable deviation rate.

C. Sample size.

In auditing accounts receivable, the negative form of external confirmation request most likely would be used when A. The auditor performs a dual-purpose test that assesses the risk of material misstatement. B. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information. C. The assessed risk of material misstatement relative to accounts receivable is low. D. A small number of accounts receivable are involved, but a relatively large number of errors are expected.

C. The assessed risk of material misstatement relative to accounts receivable is low.

Which of the following statements is true concerning statistical sampling in tests of controls? A. The expected population deviation rate has little or no effect on determining sample size except for very small populations. B. As the population size doubles, the sample size also should double. C. The population size has little or no effect on determining sample size except for very small populations. D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

C. The population size has little or no effect on determining sample size except for very small populations.

Mary, a staff auditor, selects a sample of recorded sales. To test the assertion that recorded sales actually occurred, she A. Traces shipping documents to sales. B. Confirms accounts receivable. C. Vouches recorded sales to shipping documents. D. Traces sales to the financial statements.

C. Vouches recorded sales to shipping documents.

On August 13, a CPA dated the audit report on financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual-date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for A. Only the specific subsequent event disclosed by the entity. B. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity. C. Only the subsequent events that occurred through August 13. D. All subsequent events that occurred through August 27.

D. All subsequent events that occurred through August 27.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion? A. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. B. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. C. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized in accordance with the equity method. D. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

D. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

The auditor has not performed an audit sufficient in scope to enable her to form an opinion. A. Unmodified B. Qualified C. Adverse D. Disclaimer

D. Disclaimer

The chief executive officer is unwilling to sign the management representation letter. A. Unmodified B. Qualified C. Adverse D. Disclaimer

D. Disclaimer

The client does not permit inquiry of outside legal counsel. The effects of this inability to obtain sufficient appropriate evidence are pervasive. A. Unmodified B. Qualified C. Adverse D. Disclaimer

D. Disclaimer

A change in accounting principle made by a nonissuer has no material effect on the financial statements in the current year but is expected to have a material effect in later years. Accordingly, the change should be A. Treated as a consistency modification of the opinion in the auditor's report for the current year. B. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. C. Treated as a subsequent event. D. Disclosed in the notes to the financial statements of the current year.

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

Management has not provided assurance that there are no material weaknesses in controls. Subsequent tests revealed no material weaknesses. A. Issue a disclaimer of opinion. B. Determine whether the control deficiency is a material weakness by obtaining further evidence. C. Express an adverse opinion on the internal controls. D. Express an unmodified opinion on the internal controls.

D. Express an unmodified opinion on the internal controls.

The auditor's prior-year report on internal control included an adverse opinion. The client has since modified internal controls. No material weaknesses were found in the current year. A. Issue a disclaimer of opinion. B. Determine whether the control deficiency is a material weakness by obtaining further evidence. C. Express an adverse opinion on the internal controls. D. Express an unmodified opinion on the internal controls.

D. Express an unmodified opinion on the internal controls.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to A. Reduce the level of audit risk and materiality to a relatively low amount. B. Minimize the failure to detect errors and fraud. C. Eliminate the risk of nonsampling errors. D. Measure the sufficiency of the evidence obtained.

D. Measure the sufficiency of the evidence obtained.

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of Rights and Obligations Valuation and Allocation A. No No B. Yes No C. Yes Yes D. No Yes

D. No Yes

The sample size of a test of controls varies inversely with Expected Population Tolerable Population Deviation rate Deviation rate A. Yes No B. Yes Yes C. No No D. No Yes

D. No Yes

If the auditor obtains satisfaction with respect to the accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the auditor's report should be unmodified and could be expected to A. Refer to a note that discloses the alternative procedures. B. Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable. C. Disclose that alternative procedures were used because of a management-imposed scope limitation. D. Not mention the alternative procedures.

D. Not mention the alternative procedures.

The predecessor auditor, who is satisfied after properly communicating with the current auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor's report should A. Refer to the report of the current auditor only in the auditor's responsibility section. B. Refer to the work of the current auditor in the opinion paragraph. C. Refer to both the work and the report of the current auditor only in the opinion paragraph. D. Not refer to the report or the work of the current auditor.

D. Not refer to the report or the work of the current auditor.

In determining whether transactions have been recorded, the direction of the audit testing should begin from the A. General journal entries. B. General ledger balances. C. Adjusted trial balance. D. Original source documents.

D. Original source documents.

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the leastpersuasive type of evidence? A. Bank statement obtained from the client. B. Correspondence from the client's attorney about litigation. C. Test counts of inventory made by the auditor. D. Prenumbered purchase order forms.

D. Prenumbered purchase order forms.

An auditor would be least likely to use external confirmations in connection with the audit of A. Shareholders' Equity. B. Noncurrent debt. C. Inventories. D. Refundable income taxes.

D. Refundable income taxes.

Which of the following is a sampling risk that is associated with the efficiency of an audit? A. Detection risk. B. Risk of incorrect acceptance. C. Inherent risk. D. Risk of assessing control risk too high.

D. Risk of assessing control risk too high.

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the A. Risk of overreliance. B. Expected population deviation rate. C. Tolerable deviation rate. D. Sample size.

D. Sample size.

At the completion of an audit, which of the following entities has ownership of the audit working papers? A. The client's audit committee. B. The client. C. The client's stockholders. D. The CPA firm that performed the audit.

D. The CPA firm that performed the audit.

Which of the following situations would result in an adverse opinion? A. The auditor is unable to complete an inventory count because of a warehouse fire that occurred one month after year end. B. The auditor discovers that the client has been depreciating assets in an inappropriate manner, which has caused accumulated depreciation to be immaterially understated on the balance sheet. C. The audit partner on the engagement is the sister of the client's CEO. D. The auditor discovers that the client's 20 largest customers have inflated accounts receivable on the books and that the aggregate of these misstatements is material and pervasive to the financial statements.

D. The auditor discovers that the client's 20 largest customers have inflated accounts receivable on the books and that the aggregate of these misstatements is material and pervasive to the financial statements.

If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures, A. The auditor will have to evaluate the results by reference to the principles of discovery sampling. B. No inferences can be drawn from the sample. C. The auditor has caused nonsampling risk to increase. D. The auditor may or may not achieve desired precision at the desired level of confidence.

D. The auditor may or may not achieve desired precision at the desired level of confidence.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion? A. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern. B. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. C. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. D. The financial statements fail to disclose information that is required by the applicable reporting framework.

D. The financial statements fail to disclose information that is required by the applicable reporting framework.

Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a(n) A. Unmodified opinion with an additional paragraph. B. Qualified opinion due to a scope limitation. C. Qualified opinion due to a material misstatement. D. Unmodified opinion with no additional paragraph in the auditor's report.

D. Unmodified opinion with no additional paragraph in the auditor's report.

An auditor may reasonably express an "except for" qualified opinion for a(n) Scope Limitation Unjustified Change in an Accounting Principle A. Yes No B. No Yes C. No No D. Yes Yes

D. Yes Yes