Auditing Chapter 9 and 17
25. The Rotter 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. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion. B. Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. C. Disclaim an opinion and explain all of the reasons therefore. D. Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements.
A
28. When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate? A. Attributes. B. Ratio. C. Stratified. D. Variables.
A
32. A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is: A. Standard unqualified. B. Unqualified with explanatory language as to consistency. C. Qualified for consistency. D. Disclaimer.
A
33. Which of the following would be most likely to be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer.
A
34. 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? A. Exceed. B. Equal. C. Be less than. D. Indefinite.
A
36. When using sampling for tests of controls, which of the following audit consequences may follow? A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low. B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high. C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests. D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.
A
38. Which of the following circumstances generally results in the issuance of a report that is other than unqualified? A. Circumstances have significantly limited the scope of the auditors' procedures. B. The principal auditors for the engagement are relying on the work of other auditors. C. The financial statements depart from a standard established by the FASB because the auditors have concluded that application of the standard would result in materially misleading financial statements. D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.
A
41. An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of: A. A disclaimer of opinion. B. An adverse opinion. C. An "except for" qualification of the report. D. An unqualified report with explanatory language.
A
47. The 3000 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: A. $51,000 B. $58,000 C. $60,000 D. $69,000
A
48. The 4000 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: A. $1,300 B. $1,400 C. $1,600 D. $1,800
A
16. An explanatory paragraph relating to a scope limitation in the audit of the financial statements of a nonpublic company should be placed A. After the opinion paragraph. B. Prior to the opinion paragraph. C. Either before or after the opinion paragraph. D. An audit report modified for a scope limitation does not include an explanatory paragraph.
B
16. Using ratio estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population? A. $160,000. B. $161,538. C. $168,000. D. $200,000.
B
18. When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure. B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action. C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D. Issue an adverse opinion.
B
22. When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. D. Issue an unqualified opinion, but inform the reader by including the omitted information in the audit report.
B
The 1000 accounts receivable of Winco Company have a total book value of $20,000 (Average book value = $20). Bob Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values: 1. Book value of $19. 2. Audited value of $19.60. 20. What is the estimated total audited value using mean per unit sampling?
B
The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. 44. Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: A. $37,500 B. $38,462 C. $38,500 D. $41,600
B
11. Using the difference estimation technique, estimated total audited value of the population is: A. $100,000. B. $120,000. C. $140,000. D. $144,000
C
13. When the auditor of a nonpublic company issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? A. Option A B. Option B C. Option C D. Option D
C
17. 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: A. Increase current dividend distributions. B. Reduce existing lines of credit. C. Increase ownership equity. D. Purchase assets formerly leased.
C
17. Using mean-per-unit estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population? A. $160,000. B. $161,538. C. $168,000. D. $200,000.
C
20. 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 A. Repurchase the entity's stock at a price below its book value. B. Issue stock options to key executives. C. Lease rather than purchase operating facilities. D. Accelerate the due date of an existing mortgage.
C
24. Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on financial statement audits? A. Perform analytical procedures aimed particularly at assessing whether bankruptcy is probable. B. Issue a report with a "going concern" modification when failure is at least reasonably probable. C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern. D. Determine that related uncertainties are properly disclosed and make no mention in the audit report.
C
26. When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: A. Issue an unqualified report with an explanatory paragraph. B. Withdraw from the engagement. C. Issue an "except for" qualification or an adverse opinion. D. Issue an "except for" qualification or a disclaimer of opinion.
C
29. A scope restriction is least likely to result in a(an): A. Qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Standard unqualified opinion.
C
31. When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample? A. Sample size. B. Risk of assessing control risk too low. C. Number of deviations in the population. D. Number of deviations found in the sample.
C
36. Which of the following is not a difference between the audit report of a nonpublic and public company? A. The nonpublic company report includes the word "Registered" in the title. B. The nonpublic company report refers to standards of the PCAOB. C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures. D. The nonpublic company report must include the city and state in which the report has been issued.
C
39. Which of the following modifications of the auditors' report does not include an additional paragraph? A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B. The report includes an emphasis of a matter. C. The audit report indicates a division of responsibility between two CPA firms. D. The report is qualified because the scope of the auditors' work was restricted.
C
46. The 3000 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: A. $1,700 B. $1,800 C. $1,900 D. $2,300
C
51. 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 adjusted 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: A. $ 5,000 B. $45,000 C. $60,000 D. $70,000
C
58. Statistical sampling generally may be applied to test internal control when the client's internal control procedures: A. Depend primarily on appropriate segregation of duties. B. Are carefully reduced to writing and are included in client accounting manuals. C. Leave an audit trail in the form of evidence of compliance. D. Enable the detection of material fraud in the accounting records.
C
The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. 45. Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: A. $37,500 B. $38,462 C. $38,500 D. $41,600
C
56. During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this change? A. A decrease in population standard deviation. B. An increase in sample standard deviation. C. An increase in required sample size. D. A decrease in the required sample size.
D
57. Which of the following is an advantage of systematic selection over random number selection? A. It provides a stronger basis for statistical conclusions. B. It enables the auditor to use the more efficient "sampling with replacement" tables. C. There may be correlation between the location of items in the population, the feature of sampling interest, and the sampling interval. D. It does not require establishment of correspondence between random numbers and items in the population.
D
61. The tolerable deviation rate in sampling for tests of controls is: A. Used to determine the probability of the auditor's conclusion based upon reliance factors. B. The probability that the financial statements are not materially in error. C. A measure of the reliability of substantive tests. D. The rate the auditor will tolerate without modifying the planned assessment of control risk.
D
62. In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of: A. Projected misstatement. B. Sampling error. C. Standard error. D. Nonsampling error.
D
The 1000 accounts receivable of Winco Company have a total book value of $20,000 (Average book value = $20). Bob Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values: 1. Book value of $19. 2. Audited value of $19.60. 21. What is the estimated total audited value using difference estimation sampling? A. $19,387. B. $19,400. C. $19,600. D. $20,600.
D
11. Which of the following is not explicitly included in an audit report for a nonpublic company? A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. B. A statement that the auditor's responsibility is to express an opinion on the financial statements. C. A statement that the financial statements in the report are the responsibility of management. D. A title with the word "independent."
A
15. Using difference estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population? A. $160,000. B. $161,538. C. $168,000. D. $200,000.
A
28. The first paragraph of a standard unqualified audit report for a nonpublic client is referred to as the: A. Introductory paragraph. B. Scope paragraph. C. Opinion paragraph. D. Explanatory paragraph.
A
37. 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: A. Attributes sampling. B. Stratified sequential sampling. C. Discovery sampling. D. None, as sampling does not seem appropriate in this situation.
A
40. Which of the following types of risk is of critical importance to auditors in performing tests of controls? A. The risk of assessing control risk too low. B. The risk of assessing control risk too high. C. The risk of incorrect acceptance. D. The risk of incorrect rejection.
A
48. The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language: A. Is appropriate and would not negate the unqualified opinion. B. Is considered a qualification of the report. C. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
A
50. Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting? A. It applies equally to a complete set of financial statements and to each individual financial statement. B. It applies only to a complete set of financial statements. C. It applies equally to each item in each financial statement. D. It applies equally to each material item in each financial statement.
A
52. The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct? A. The adjusted allowance for sampling risk will be smaller than had been planned. B. The adjusted allowance for sampling risk will be larger than had been planned. C. The risk of incorrect rejection will necessarily decrease. D. The size of the population must be decreased.
A
55. Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests? A. The projected misstatement exceeds the tolerable misstatement. B. The allowance for sampling risk exceeds the projected misstatement. C. The risk of incorrect acceptance exceeds the risk of incorrect rejection. D. The tolerable misstatement exceeds the sample net misstatement.
A
65. 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: A. May accept the engagement because such engagements merely involve limited reporting objectives. B. May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary. C. Should refuse the engagement because there is a client-imposed scope limitation. D. Should refuse the engagement because of a departure from generally accepted auditing standards.
A
67. If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the: A. Magnitude of the portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor.
A
67. Which of the following statements is correct concerning statistical sampling in tests of controls? A. The population size has little effect on determining sample size except for very small populations. B. The expected population deviation rate has little or no effect on determining sample size except for very small populations. C. As the population size doubles, the sample size also should double. D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.
A
68. An advantage of using statistical sampling techniques is that such techniques: A. Mathematically measure risk. B. Eliminate the need for judgmental decisions. C. Define the values of allowance for sampling risk and tolerable misstatement required to provide audit satisfaction. D. Have been established in the courts to be superior to judgmental sampling.
A
19. A dual purpose test simultaneously. A. Addresses two different accounts. B. Functions as a substantive test and as a test of controls. C. Functions as an analytical procedure and a substantive test. D. Substantiates an ending balance and the transactions making up the balance.
B
19. When an auditor of financial statements 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. The effects of the adverse financial conditions likely will cause a bankruptcy filing. B. Information about the entity's ability to continue as a going concern is not disclosed. C. Management has no plans to reduce or delay future expenditures. D. Negative trends and recurring operating losses appear to be irreversible.
B
23. CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal 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? A. Such assumption of responsibility violates the profession's standards. B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements. C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unqualified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.
B
29. Which of the following statistical sampling techniques involves taking samples in a series of stages? A. Systematic sampling. B. Sequential sampling. C. Continuous sampling. D. Multiple location sampling.
B
32. When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that: A. Designing efficient samples is more difficult. B. The costs of training staff may be higher. C. Sampling without replacement must be used. D. Objectively evaluating results is impossible.
B
33. Changing from a sampling plan using random selection with replacement to random selection without replacement has what effect on the required sample size? A. Increases. B. Decreases C. No effect. D. An indeterminate effect.
B
35. Increases in the planned allowance for sampling risk have what effect on required sample size? A. Increases. B. Decreases. C. No effect. D. Indeterminate.
B
35. The unqualified standard audit report of a nonpublic company does not explicitly state that: A. The financial statements are the responsibility of the company's management. B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. C. The auditors believe that the audit provides a reasonable basis for their opinion. D. An audit includes assessing the accounting principles used.
B
37. If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unqualified opinion. B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles. C. The auditors should issue an opinion "subject to" the information that would have been contained in the statement of cash flows. D. The auditors should refuse to issue an opinion on only the two financial statements.
B
49. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an): A. Change in accounting principle. B. Limitation in the scope of the audit. C. Uncertainty. D. Related party transaction.
B
49. Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests? A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population is not misstated. B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement. C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements exist in the account. D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated.
B
51. Which of the following will not result in qualification of the auditors' report due to a scope limitation? A. Restrictions imposed by the client. B. Reliance placed upon the report of other auditors. C. Inability to obtain sufficient competent evidential matter. D. Inadequacy in the accounting records.
B
53. 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? A. Mean-per-unit estimation. B. Ratio estimation. C. Difference estimation. D. Sequential sampling estimation.
B
57. A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management: A. Asks the auditor to report on the balance sheet and not on the other basic financial statements. B. Refuses to permit its lawyer to respond to the letter of audit inquiry. C. Discloses material related party transactions in the notes to the financial statements. D. Knows that confirmation of accounts receivable is not feasible.
B
63. 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: A. Referred to in the auditor's report for the current year. B. Disclosed in the notes to the financial statements of the current year. C. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. D. Treated as a subsequent event.
B
68. Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification.
B
69. An auditor's report on comparative financial statements should be dated as of the date of the: A. Issuance of the report. B. Accumulation of sufficient appropriate audit evidence. C. Latest financial statements being reported on. D. Last related-party transaction disclosed in the statements.
B
70. 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: A. Must be recorded in a systematic pattern before the sample can be drawn. B. May occur in a systematic pattern and destroy the sample randomness. C. May systematically occur more than once in the sample. D. Must be systematically replaced in the population after sampling.
B
71. 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: A. Incorrect acceptance. B. Incorrect rejection. C. Assessing control risk too high. D. Assessing control risk too low.
B
72. 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: A. Evaluate the results as if the sample size had been 19. B. Treat the missing check as a deviation for the purpose of evaluating the sample. C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not. D. Choose another check to replace the missing check in the sample.
B
77. An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the: A. Sample mean. B. Standard deviation. C. Standard error of the sample mean. D. Estimated population total minus the actual population total.
B
25. Which of the following is not generally used for selecting samples? A. Random number tables. B. Random number generators. C. Physical representation numbers. D. Systematic selection.
C
27. Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report? A. A change in the estimated useful lives of a class of fixed assets. B. A write-off of a patent because future benefits do not appear to exist. C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets. D. A change in calculating bad debt expense from one percent to two percent of credit sales.
C
43. If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors: A. Are not required to investigate the professional reputation of the other auditors. B. Are issuing an inappropriate report. C. Are assuming full responsibility for the work of the other auditors. D. Are issuing a qualified opinion.
C
45. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: A. A note to the financial statements which discusses the basis for the opinion. B. The scope paragraph which discusses the basis for the opinion rendered. C. A separate paragraph which discusses the basis for the opinion rendered. D. The consistency in the application of generally accepted accounting principles.
C
55. In which of the following circumstances would an adverse opinion be appropriate? A. The auditor is not independent with respect to the enterprise being audited. B. The statements are not in conformity with generally accepted accounting principles because they omit a statement of changes in financial position. C. The statements are not in conformity with generally accepted accounting principles regarding pension plans. D. A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards.
C
60. To determine sample size in an attribute sampling application, what must be specified? A. Population mean, expected error rate, allowance for sampling risk. B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation. C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate. D. Population mean, standard deviation, allowance for sampling risk.
C
61. Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A. Must not refer to the audit of the other CPA. B. Must refer to the audit of the other CPA. C. May refer to the audit of the other CPA. D. May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA.
C
63. 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: A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage. B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of shrinkage. C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately. D. Continue to draw new samples until a sample is drawn which includes none of the items known to be subject to large amounts of shrinkage.
C
64. If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to: A. Increase. B. Remain the same. C. Decrease. D. Change by 4%.
C
65. Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control? A. Number of items in the population. B. Total dollar amount of the items to be sampled. C. Acceptable level of risk of assessing control risk too low. D. Tolerable misstatement.
C
66. When using a statistical sampling plan, the auditors would probably require a smaller sample if the: A. Population increases. B. Desired allowance for sampling risk decreases. C. Desired risk of incorrect acceptance increases. D. Expected deviation rate increases.
C
75. Which of the following statistical selection techniques is least desirable for use by an auditor? A. Systematic selection. B. Stratified selection. C. Block selection. D. Sequential selection.
C
12. Using the ratio estimation technique, the estimated total audited value of the population is: A. $100,000. B. $120,000. C. $140,000. D. $144,000
D
12. When an auditor 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 current financial statement date (9/30/X1), the auditor's responsibility includes: A. Preparing prospective financial information to verify whether management's plans can be effectively implemented. B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1. C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
D
21. Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Evaluating the entity's procedures for identifying and recording related party transactions. C. Inspecting title documents to verify whether any real property is pledged as collateral. D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.
D
27. The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures: A. Need not consider the risk of assessing control risk too low. B. Has committed a nonsampling error. C. Will have to use discovery sampling techniques to evaluate the results. D. Should compare the deviation rate of the sample to the tolerable rate.
D
38. 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: A. Attributes sampling. B. Stratified random sampling. C. Variables sampling. D. None, as sampling does not seem appropriate in this situation.
D
41. The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a: A. Statistical error. B. Sampling misstatement. C. Standard error of the mean. D. Nonsampling error.
D
50. 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 adjusted 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: A. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that the population does not contain a material misstatement. B. Because the total audited value tolerable misstatement includes the book value, conclude that the population does not contain a material misstatement. C. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that there is too great a risk that the account balance is materially misstated. D. Because the total audited value adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.
D
76. 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? A. Lower assessment of control risk. B. Greater reliance on analytical procedures. C. Smaller expected frequency of misstatements. D. Smaller measure of tolerable misstatement.
D
78. In variables estimation sampling, the sample standard deviation is used to calculate the A. Point estimate of central tendency. B. Tainting of the sample interval. C. Risk of incorrect acceptance. D. Adjusted allowance for sampling risk.
D
22. 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? A. Increase. B. Remain the same. C. Decrease. D. Indeterminate, depends upon exact change being made.
A
23. 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? A. Increase. B. Remain the same. C. Decrease. D. Indeterminate, depends upon exact change being made.
A
24. An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.
A
26. 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? A. This year's sample is larger than last year's sample. B. This year's sample is smaller than last year's sample. C. This year's sample is equal to last year's sample. D. This year's sample is indeterminate in relation to last year's sample.
A
30. Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling? A. Statistical samples are more representative of the population. B. Statistical sample plans involve additional costs of evaluation. C. Statistical sampling allows a more objective evaluation of sample results. D. Statistical sampling may assist the auditors in designing more efficient samples.
A
56. An independent auditor has concluded that a substantial doubt remains about a 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): A. Unqualified opinion with an appropriate explanatory paragraph. B. "Except for" qualified opinion. C. Standard unqualified opinion. D. Adverse opinion.
A
58. Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain: A. A standard unqualified opinion. B. An unqualified opinion and an explanatory paragraph. C. Either a qualified opinion or a disclaimer of opinion. D. An "except for" qualification.
A
59. Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. B. As the likely rate of deviation decreases, the auditor should increase the planned sample size. C. The allowable risk of assessing control risk too low has no effect on the planned sample size. D. Of all the factors to be considered, the population size has the greatest effect on the sample size.
A
60. The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify: A. The introductory, scope, and opinion paragraphs of the report. B. Only the scope paragraph of the report. C. Only the opinion paragraph of the report. D. Only the opinion paragraph of the report and include an explanatory paragraph.
A
69. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: A. Efficiency of the audit. B. Effectiveness of the audit. C. Selection of the sample. D. Audit quality controls.
A
70. In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases. B. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. D. Tests of controls show that the entity's internal control is so poor that it can not be relied upon.
A
74. Which of the following best illustrates the concept of sampling risk? A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize deviations in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection.
A
The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. 43. Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: A. $37,500 B. $38,462 C. $38,500 D. $41,600
A
13. Using the mean-per-unit estimation technique, the estimated total audited value of the population is: A. $100,000. B. $120,000. C. $140,000. D. $144,000.
B
14. 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? A. $4. B. $5. C. $6. D. $10.
B
30. Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store? A. A decision by the auditor to emphasize that the client is a part of a larger organization. B. Reliance placed upon a specialist to evaluate the diamonds. C. A change from FIFO to specific identification accounting for inventory. D. A question as to whether the client will be able to remain a going concern.
B
42. What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.
B
42. Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? A. Form 8-K. B. Form S-1. C. Form 10-Q. D. Form 10-K.
B
47. The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report on the financial statements will probably contain a(an): A. Qualified opinion and an explanatory paragraph with a reference to note "B". B. Unqualified opinion and an explanatory paragraph. C. Adverse opinion and an explanatory paragraph. D. "Except for" opinion and an explanatory paragraph.
B
59. The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent: A. The CPA from reporting on one basic financial statement and not the others. B. Misinterpretations regarding the degree of responsibility that the auditor is assuming. C. The CPA from expressing different opinions on each of the basic financial statements. D. Management from reducing its final responsibility for the basic financial statements.
B
66. When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an): A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified opinion with a separate explanatory paragraph.
B
73. 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: A. Attributes and variable. B. Variables and attributes. C. Constants and attributes. D. Constants and variables.
B
79. Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when: A. The total book value is known and corresponds to the sum of all the individual book values. B. A book value for each sample item is unknown. C. There are some observed differences between audited values and book values. D. The audited values are nearly proportional to the book value.
B
14. When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? A. Option A B. Option B C. Option C D. Option D
C
18. If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude? A. Since the projected misstatement is less than the tolerable misstatement, the account is not misstated. B. Since the projected misstatement is less than the tolerable misstatement, the account is misstated. C. The risk is high that the account is materially misstated. D. The analysis has been improperly performed since the projected misstatement is unequal to the tolerable misstatement.
C
31. Which of the following statements is correct with respect to explanatory paragraphs in reports on audits of the financial statements of nonpublic companies? A. They always precede the opinion paragraph. B. They always follow the opinion paragraph. C. Sometimes they precede and sometimes they follow the opinion paragraph. D. They always precede the scope paragraph.
C
34. The term "except for" in an audit report is: A. Used in an adverse opinion. B. No longer considered appropriate. C. Used in a qualified opinion D. Used for an unqualified opinion when an explanatory paragraph is added.
C
39. Which of the following may be used to reduce the risk of nonsampling errors? A. Increasing the size of audit samples. B. Stratifying audit samples. C. Adequately planning audit samples. D. Using statistical sampling techniques.
C
15. When an auditor issues an unqualified report on financial statements, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? A. Option A B. Option B C. Option C D. Option D
D
40. If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should: A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. B. Reproduce the predecessor auditors' report and include it with the new set of financial statements. C. Have the client omit the comparative financial statements. D. Refer to the report of the predecessor auditors.
D
44. After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: A. Delete the date of the report. B. Dual-date the report. C. Use the reissue date. D. Use the date of the previous report.
D
46. Under which of the following set of circumstances might the auditors disclaim an opinion? A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. B. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary. C. There has been a material change between periods in the method of application of accounting principles. D. There are significant scope limitations on the audit.
D
52. 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: A. Only the current year under audit. B. Either one or both years at the option of the auditors. C. Each of the two years plus the preceding year. D. Each of the years in the two-year period.
D
53. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements? A. Option A B. Option B C. Option C D. Option D
D
54. 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: A. Be appropriate in the circumstances for the particular entity. B. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. C. Present information in the financial statements that is classified and summarized in a reasonable manner. D. Be applied on a basis consistent with those followed in the prior year.
D
54. Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests? A. Its use is generally acceptable only for populations with an immaterial book value. B. It requires the use of structured sample size selection techniques to be acceptable. C. It may be especially useful in circumstances in which the combination of inherent and control risk is at the maximum level. D. Results will be projected to the population.
D
62. 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: A. The reasons why the predecessor auditor's report is not presented. B. The identity of the predecessor auditor who examined the financial statements of the prior year. C. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. D. The type of opinion expressed by the predecessor auditor.
D
64. 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: A. Expressing dual dated opinions. B. Updating the report on the previous financial statements only if there has not been a change in the opinion. C. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist. D. Updating the report on the previous financial statements regardless of the opinion previously issued.
D
