Auditing Chpt 7 - 12
Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed? A. Physical inspection of a sample of inventory. B. Search for unrecorded cash receipts C. Obtaining a client representation letter D. Confirmation of accounts receivable.
B. Search for unrecorded cash receipts
Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true? A. Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft. B. The risk that material misstatement will not be timely prevented or detected by internal control can be reduced to zero by effective controls. C. Detection risk is a function of the efficiency of an auditing procedure,. D. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.
A. Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.
An audit in accordance with GAAS is most likely to include comprehensive audit procedures designed to detect material noncompliance by the client relating to A. Environmental laws B. Tax laws C. Antitrust laws D. Insider trading rules
B. Tax laws
Which of the following statements concerning noncompliance with laws and regulations by clients is correct? A. An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements. B. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance with laws and regulations having any effect on the financial statements. C. Whether an act constitutes noncompliance with laws and regulations is a matter of auditor judgment. D. An auditor has no responsibility to detect noncompliance with laws and regulations that has an effect on the financial statements.
A. An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements.
Each of the following statements is correct regarding the likely sources of potential misstatements in an integrated audit except A. An evaluation of the entity's information technology risk and controls should be performed separately from the top-down approach. B. The controls that management has implemented to address potential sources of misstatements should be identified. C. An understanding of how transactions are initiated, authorized, processed, and recorded should be achieved. D. Walkthroughs are frequently the most effective way of understanding sources of potential misstatements.
A. An evaluation of the entity's information technology risk and controls should be performed separately from the top-down approach.
Snow, CPA, was engaged by Master Co., a nonissuer, to audit the effectiveness of Master's internal control over financial reporting as part of an integrated audit. Snow's report should state that A. Because of inherent limitations, internal control may not prevent, or detect and correct, misstatements. B. Management's evaluation of the effectiveness of internal control is based on criteria established by the AICPA. C. The results of Snow's tests will form the basis for Snow's opinion on the fairness of Master's financial statements in accordance with U.S. GAAP D. The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.
A. Because of inherent limitations, internal control may not prevent, or detect and correct, misstatements.
The following are steps in the financial statement audit process: I. Prepare flowchart II. Gather exhibits of all documents III. Interview personnel The most logical sequence of steps is A. I, II, III B. I, III, II C. III, II, I D. II, I, III
C. III, II, I
Analytical procedures are required for which of the following? A. Audit planning B. Tests of balances C. Client retention decision D. Internal control evaluation.
A. Audit planning
Who establishes generally accepted auditing standards? A. Auditing Standards Board and the PCAOB B. Financial Accounting Standards Board and the GASB C. State Boards of Accountancy D. Securities and Exchange Commission
A. Auditing Standards Board and the Public Company Accounting Oversight Board
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion? A. Auditor judgment B. Materiality C. Audit risk D. Reasonable assurance
A. Auditor judgment
Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud or circumstances may provide an opportunity. The auditor's concern about the risk of material misstatements due to fraud is least likely to be increased if management. A. Consists of many individuals that make operating and financing decisions. B. Commits to unduly aggressive forecasts. C. Has an excessive interest in increasing the entity's stock price through use of unduly aggressive accounting practices. D. Is interested in appropriate means of minimizing reported earnings for tax-motivated reasons.
A. Consists of many individuals that make operating and financing decisions.
Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? A. Earnings per share B. Return on total assets before interest and taxes C. Accounts receivable turnover D. Operating cycle
A. Earnings per share
Directors, management, external auditors, and internal auditors all play important roles in creating proper control processes. Senior management is primarily responsible for A. Establishing risk management and control processes. B. Reviewing the reliability and integrity of financial and operational information. C. Ensuring that external and internal auditors oversee the administration of risk management and control processes. D. Implementing and monitoring controls designed by the board of directors.
A. Establishing risk management and control processes.
An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that A. Fictitious credit sales have been recorded during the year. B. Employees have stolen inventory just before year end. C. The client recently tightened its credit-granting policies. D. An employee has been lapping receivables in both years.
A. Fictitious credit sales have been recorded during the year.
A CPA's understanding of internal control in a financial statement audit of a nonissuer. A. Is usually more limited than that made in an audit of internal control integrated with an audit of financial statements. B. Is usually more extensive than that made in an audit of internal control integrated with an audit of financial statements. C. Will usually be identical to that made in an audit of internal control integrated with an audit of financial statements. D. Will usually result in a report on the effectiveness of internal control.
A. Is usually more limited than that made in an audit of internal control integrated with an audit of financial statements.
The negative request form of accounts receivable confirmation may be used when the Risk of Material Number of Consideration Misstatement is Small by the Balances is Recipient is A. Low Many Likely B. Low Few Unlikely C. High Few Likely D. High Many Likely
A. Low, Many, & Likely
Before accepting an engagement to audit a new client, an auditor is required to A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. Obtain the prospective client's signature to the engagement letter. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client's audit committee.
A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if A. Management is closely involved in operations. B. The entity is involved in complex transactions. C. The entity is subject to legal or regulatory requirements also found in larger entities. D. Financial reporting objectives have been established.
A. Management is closely involved in operations.
Which of the following statements about the assessment of the risks of material misstatement in a client's computer environment is true? A. The auditor's objectives with respect to the assessment of the risks of material misstatement are the same as in a manual system. B. The auditor must obtain an understanding of internal control and test controls in computer environments. C. If the general controls are ineffective, the auditor ordinarily can asses the risks of material misstatement at a low level if the application controls are effective. D. The auditor usually can ignore the computer system if (s)he can obtain an understanding of the controls outside the computer system.
A. The auditor's objectives with respect to the assessment of the risks of material misstatement are the same as in a manual system.
Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor's concept of A. Materiality B. Comparative analysis C. Reasonable assurance D. Audit risk
A. Materiality
The PCAOB's AS 2201 states that internal controls may be preventive or detective. Which of the following controls is preventive? A. Requiring two persons to open mail B. Reconciling the accounts receivable subsidiary file with the control account. C. Using batch totals D. Preparing bank reconciliations.
A. Requiring two persons to open mail.
The Sarbanes-Oxley Act of 2002 requires management to include a report on internal control in the firm's annual report. It also requires auditors to evaluate management's internal control report. Which of the following statements concerning these requirements is false? A. The auditors should provide recommendations for improving internal control in their assessment. B. Management should identify significant deficiencies and material weaknesses in its report. C. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. D. The auditors should evaluate whether internal controls are effective in accurately and fairly reflecting the firms transactions.
A. The auditors should provide recommendations for improving internal control in their assessment.
Which of the following factors has the least influence on an auditor's consideration of the reliability of data for purposes of analytical procedures. A. Whether the data were processed in a computer system or in a manual accounting system. B. Whether sources within the entity were independent of those who are responsible for the amount being audited. C. Whether the data were subjected to audit testing in the current or prior year. D. Whether the data were obtained from independent sources outside the entity or from sources within the entity.
A. Whether the data were processed in a computer system or in a manual accounting system.
In assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Business Risk CPA's Business Risk A. Yes Yes B. Yes No C. No Yes D. No No
A. Yes & Yes
Which of the following audit risk components may be assessed in nonquantitative terms? Control Detection Inherent Risk Risk Risk A. Yes Yes Yes B. No Yes Yes C. Yes Yes No D. Yes No Yes
A. Yes, Yes, Yes
As the acceptable level of detection risk decreases, an auditor may change the A. Timing of substantive tests by performing them at an interim date rather than at year-end. B. Nature of substantive procedures from a less effective to a more effective procedure. C. Timing of tests of controls by performing them at several dates rather than at one time. D. Assessed level of inherent risk to a higher amount.
B. Nature of substantive procedures from a less effective to a more effective procedure.
If the auditor considers an act of noncompliance with laws and regulations to be sufficiently serious to warranty withdrawing from the engagement, the auditor would likely A. Notify all parties who may rely upon the company's financial statements of the company's illegal act. B. Consult with legal counsel as to what other action, if any, should be taken. C. Return all incriminating evidence and working papers to the client's audit committee for follow-up. D. Contact the successor auditor to make the successor aware of the possible consequences of relying on management's representations.
B . Consult with legal counsel as to what other action, if any, should be taken.
The committee of Sponsoring Organisations (COSO) of the Treadway Commission issued a document in 1992 that has been embraced by numerous organizations, including the AICPA and the GAO. That document is titled. A. The Yellow Book B. Internal Control - Integrated Framework C. Statements on Auditing Standards D. Code of Professional Conduct
B . Internal Control-Integrated Framework
A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information? A. AICPA Codification of Statements on Auditing Standards. B. AICPA Accounting Trends and Techniques C. PCAOB Inspection Reports D. SEC Statement 10-K Guide
B. AICPA Accounting Trends and Techniques
Which of the following is required documentation in an audit in accordance with auditing standards? A. A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting. B. An audit plan documenting the procedures to be used to reduce audit risk. C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. D. An internal control questionnaire identifying policies and procedure that assure specific objectives will be achieved.
B. An audit plan documenting the procedures to be used to reduce audit risk.
The primary reason to establish internal control is to A. Safeguard the resources of the organization B. Provide reasonable assurance that the objectives of the organization are achieved. C. Encourage compliance with organizational objectives. D. Ensure the accuracy, reliability, and timeliness of information.
B. Provide reasonable assurance that the objectives of the organization are achieved.
Which of the following statements is true concerning analytical procedure used as risk amounts with assertions developed by management. A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by management. B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level. C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk. D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.
B. Analytical procedures used as risk assessment procedures ordinarily use data aggregated at a high level.
Transaction authorization within an organization may be either specific or general. An example of specific transaction authorization is A. Setting of automatic reorder points for material or merchandise. B. Approval of a detailed construction budget for a warehouse. C. Establishment of requirements to be met in determining a customer's credit limits. D. Establishment of sales prices for products to be sold to any customer.
B. Approval of a detailed construction budget for a warehouse.
Using personal computers in auditing may affect the methods used to review the work of staff assistants because A. Supervisory personnel may not have an understanding of the capabilities and limitations of personal computers B. Audit documentation may not contain readily observable details of calculations. C. The audit standards for supervision may differ D. Documenting the supervisory review may require assistance of consulting services personnel.
B. Audit documentation may not contain readily observable details of calulations
The PCAOB's AS 1215, Audit Documentation, requires that a complete and final set of audit documentation be assembled for retention as of a date not more than 45 days after the audit report release date. After that date, audit documentation may A. Be deleted or discarded, but no information may be added. B. Be added, but no audit documentation may be deleted or discarded. C. Not be deleted, discarded, or added. D. Be deleted, discarded, or added as necesary.
B. Be added, but no audit documentation may be deleted or discarded.
Notes that are included with financial statements are the responsibility of the. A. Securities and Exchange Commission B. Company's management C. Independent auditor D. Internal auditor
B. Company's management
As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security numbers in the client's payroll-transaction data. Which of the following audit tests of controls using computer-assisted audit techniques would best meet the objective? A. Obtaining statistics on the populations of the payroll file to identify unusual pay amounts to employees. B. Comparing Social Security numbers paid in the payroll transaction file to a file of government-authorized Social Security numbers. C. Randomly selecting 25 payments from the payroll report and comparing the results to employee Social Security cards in the human resources records. D. Comparing the payroll transaction file to the employee master file to extract payments to employees who are not in the employee master file.
B. Comparing Social Security numbers paid in the payroll transaction file to a file of government-authorized Social Security numbers.
Which of the following best describe the interrelated components of internal control? A. Organizational structure, management philosophy, and planning B. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls. C. Risk assessment process, backup facilities, responsibility accounting, and natural laws. D. Assignment of authority and responsibility, management philosophy, and organizational structure.
B. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls.
In obtaining an understanding of internal control, the auditor may trace several transactions through the control process, including how the transactions interface with any service organizations whose services are part of the information system. The primary purpose of this task is to A. Replace substantive procedures. B. Determine whether the controls have been implemented. C. Determine the effectiveness of the control procedures. D. Detect fraud
B. Determine whether the controls have been implemented.
Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer record contains the name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow is to A. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. B. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit. C. Request a printout of all account balances so they can be manually checked against the credit limits. D. Request a printout of a sample of account balances so they can be individually checked against the credit limits.
B. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.
Which of the following items is an example of an inherent limitation in an internal control system? A. Segregation of employee duties B. Human error in decision making. C. Ineffective board of directors. D. Understaffed internal audit functions.
B. Human error in decision making
Users of an issuer's financial statements demand independent audits because: A. Users demand assurance that fraud does not exist. B. Management may not be objective in reporting. C. Users expect auditors to correct management errors. D. Management relies on the auditor to improve internal controls.
B. Management may not be objective in reporting
The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that A. The auditor will reject a correct account balance as incorrect. B. Material misstatements that occur will not be detected by the audit. C. The auditor will apply an inappropriate audit procedure. The auditor will apply an inappropriate measure of audit materiality.
B. Material misstatements that occur will not be detected by the audit.
When an auditor tests a computerized accounting system, which of the following is true of the test data approach? A. Several transactions of each type must be tested. B. Test data are processed by the client's computer programs under the auditor's control. C. Test data must consist of all possible valid and invalid conditions. D. The program tested is different from the program used through the year by the client.
B. Test data are processed by the client's computer programs under the auditor's control.
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? A. The auditor should fully investigate other transactions related to this manager to determine if fraud exists. B. The auditor should bring the transaction to the attention of an appropriate level of management. C. The auditor should report this finding to those charged with governance. D. The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.
B. The auditor should bring the transaction to the attention of an appropriate level of management.
Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an option? A. The audit plan B. The auditor's judgment C. Auditing standards D. The audit documentation.
B. The auditor's judgment
Which of the following is a true statement concerning an engagement to examine the effectiveness of an entity's internal control over financial reporting? A. The practitioner relies on management's assessment about the effectiveness of internal control. B. The management evaluates the effectiveness of internal control. C. Management relies on the practitioners audit in making the assessment about the effectiveness of internal control. D. Management agrees not to include the practitioner's report in a general-use document.
B. The management evaluates the effectiveness of internal control.
The frequency of the comparison of recorded accountability with assets (for the purpose of safeguarding assets) should be determined by A. The amount of assets independent of the cost of the comparison. B. The nature and amount of the asset and the cost of making the comparison. C. The cost of the comparison and whether the susceptibility to loss results from errors or fraud. D. The auditor in consultation with client management.
B. The nature and amount of the asset and the cost of making the comparison.
Which of the following statements about audit evidence is true? A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment. C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. D. A client's accounting records can be sufficient audit evidence to support the financial statements.
B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment.
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? A. Staff will need to be rescheduled to cover this new client. B. There will be a client-imposed scope limitation. C. The firm will have to hire a specialist in one audit area D. The client's financial reporting system has been in place for 10 years.
B. There will be a client-imposed scope limitation.
Which of the following documentation is not required for an audit in accordance with auditing standards? A. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives B. An indication that the accounting records agree or reconcile with the financial statements. C. A client letter that details the auditor's planned field work. D. The basis for the auditor's conclusions about the assessed risks of material misstatement.
C. A client letter that details the auditor's planned field work.
The components of internal control include A. Monitoring of controls that sets the tone of the organization. B. A process of managing risks relevant to preparing financial statements. C. A control environment consisting of policies and procedures to help ensure that management directives are carried out. D. Control activities that identify, capture, and exchange information.
C. A control environment consisting of policies and procedures to help ensure that management directives are carried out.
The auditor's responsibility for the detection of noncompliance with laws and regulations is greatest for laws and regulations that have A. An indirect effect on financial statement amounts. B. A direct effect on the financial statements that is either material or immaterial. C. A direct effect on the determination of material amounts and disclosures in the financial statements. D. All of the answers are correct.
C. A direct effect on the determination of material amounts and disclosures in the financial statements.
Analytical procedures used as risk assessment procedures should. A. Focus on forming an overall conclusion. B. Provide a basis for the opinion. C. Address the risk of material misstatement of revenue due to fraudulent financial reporting D. Assist in evaluating controls.
C. Address the risk of material misstatement of revenue due to fraudulent financial reporting.
Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests. A. I only B. II only C. Both I & II D. Neither I or II
C. Both I & II
A secondary result of the auditor's understanding of internal control for a nonissuer is that the understanding may A. Provide a basis for determining the nature, timing, and extent of audit tests. B. Assure that management's procedures to detect fraud are properly functioning. C. Bring to the auditor's attention possible control conditions required to be communicated to the client. D. Develop evidence to support the assessed risks of material misstatement.
C. Bring to the auditor's attention possible control conditions required to be communicated to the client.
During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should A. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unmodified opinion, require disclosure. B. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes. C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client. D. Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.
C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.
The design or operation of a control may not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. According to AU-C 265, this circumstance is a A. Material weakness B. Significant deficiency C. Control deficiency D. Critical deficiency
C. Control deficiency
Monitoring of controls is an important component of internal control. Which of the following items is not an example of monitoring? A. Management regularly compares divisional performance with budgets for the division. B. Data processing management regularly generates exception reports for unusual transactions or volumes of transactions and follows up with investigation as to causes. C. Data processing management regularly reconciles bath control totals for items processed with batch controls for items submitted. D. Management has asked internal auditing to perform regular audits of the controls over cash processing.
C. Data processing management regularly reconciles batch control totals for items processed with batch controls for items submitted.
Audit documentation that records the procedures used by the auditor to gather evidence should be A. Considered the primary support for the financial statements being audited. B. Viewed as the connected link between the books of account and the financial statements. C. Designed to meet the circumstances of the particular engagement. D. Destroyed when the audited entity ceases to be a client.
C. Designed to meet the circumstances of the particular engagement.
The major purpose of the auditor's study and evaluation of the company's computer processing operations is to A. Evaluate the competence of computer processing operating personnel. B. Ensure the exercise of due professional care C. Evaluate the reliability and integrity of financial information D. Become familiar with the company's means of identifying, measuring, classifying, and reporting information.
C. Evaluate the reliability and integrity of financial information.
Which of the following is a step in an auditor's decision to rely on internal controls? A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B. Perform tests of details of transactions and account balances to identify potential fraud and error. C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls. D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.
C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls.
In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule is to? A. To point out to the responsible entity officials the errors made by various entity personnel. B. Summarize the corrections that must be made before the entity can prepare and submit its federal tax return. C. Identify the potential financial statement effects of misstatement or disputed items that were not considered clearly trivial when discovered. D. Summarize the misstatements made by the entity so that corrections can be made after the audited financial statements are released.
C. Identify the potential financial statement effects of misstatement or disputed items that were not considered clearly trivial when discovered.
Which of the following could the auditor examine only in online systems? A. Results of test decks B. Resolution of errors C. Levels of terminal access D. Tests of transactions
C. Levels of terminal access
Which of the following is considered a fraudulent activity? A. A mistake in gathering or processing accounting data from which financial statements are prepared. B. An incorrect accounting estimate arising from oversight or misinterpretation of facts. C. Misappropriation of assets D. A mistake in the application of accounting principles relating to amount, classification, manner of presentation, or disclosure.
C. Misappropriation of assets
Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation? A. Discrete phases of planning, interim, and year-end fieldwork. B. Increased effort to search for evidence of management fraud. C. Performance of audit tests on a continuous basis. D. Increased emphasis on the completeness assertion.
C. Performance of audit tests on a continuous basis
The auditor is evaluating the effectiveness of a sales commission plan adopted 12 months earlier. An audit procedure likely to provide strong evidence of the plan's effectiveness is to A. Calculate the percentage change in monthly sales by product line for the last 3 years B. Compare monthly selling costs of this year with those of the 2 preceding years. C. Regress monthly indices of external economic conditions against sales for the 2 preceding years and compare predictions with reported sales. D. Compare the ratio of selling costs per dollar of sales each month for the past year with that of other companies in the industry.
C. Regress monthly indices of external economic conditions against sales for the 2 preceding years and compare predictions with reported sales.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation B. Valuation and rights and obligations C. Rights and obligations and existence. D. Existence and completeness
C. Rights and obligations and existence
Which of the following is a component of internal control? A. Financial reporting B. Operating effectiveness C. Risk assessment D. Organizational structure
C. Risk assessment
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. Some recipients may report incorrect balances that require extensive follow-up. C. The auditor cannot infer that all nonrespondents have verified their account information. D. Negative confirmations do not produce evidence that is statistically quantifiable.
C. The auditor cannot infer that all nonrespondents have verified their account information.
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes A. The auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors B. Management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. C. The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. D. Management's responsibility for providing the auditor with an assessment of the risks of material misstatement due to fraud.
C. The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention.
Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is that an auditor will request confirmation of accounts receivable. Confirmation is necessary when A. Based on prior years' audit experience, response rates will be inadequate. B. Based on experience with similar engagements, responses are expected to be unreliable. C. The combined assessed level of inherent and control risk is high D. The accounts receivable are immaterial.
C. The combined assessed level of inherent and control risk is high.
Internal control can provide only reasonable assurance of achieving an entity's control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to internal control? A. The auditor's primary responsibility is the detection of fraud. B. The board of directors is active and independent. C. The cost of internal control should not exceed its benefits. D. Management monitors internal control.
C. The cost of internal control should not exceed its benefits.
AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations? A. The auditor has obtained greater assurance about the balance of sales at Plant A, where (s)he has made limited tests of details because of effective internal control, than at Plant B, where (s)he has made extensive tests of details because of ineffective internal control. B. The auditor's computation of interest payable on outstanding bonds provides greater assurance than reliance on the client's calculation. C. The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings. D. The schedule of insurance coverage obtained from the company's insurance agent provides greater assurance than one prepared by the internal audit staff.
C. The report of an auditor's specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings.
When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor's Understanding of Overall Responses the Entity's Control to Assessed Risks Environment A. Yes No B. No Yes C. Yes Yes D. No No
C. Yes & Yes
A report on an issuer's integrated audit must include each of the following statements, except A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment. C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. D. A client's accounting records can be sufficient audit evidence to support the financial statements.
D. A client's accounting records can be sufficient audit evidence to support the financial statements.
Which of the following is usually included or shown in the audit documentation? A. The procedures used by the auditor to verify the personal financial status of members of the client's management team B. Analyses that are designed to be a part of, or a substitute for, the client's accounting records. C. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements. D. A summary of how significant findings were addressed.
D. A summary of how significant findings were addressed.
Control activities constitute one of the five components of internal control described in the COSO model. Control activities do not emcompass A. Performance reviews B. Information processing C. Physical controls D. An internal auditing function
D. An internal auditing function
Which of the following statements about analytical procedures is true? A. Analytical procedures may be omitted entirely for some financial statement audits. B. Analytical procedures used as risk assessment procedures should not use non financial information. C. Analytical procedures usually are effective and efficient for tests of controls. D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
An auditor would least likely use computer software to A. Construct parallel simulations B. Access data files C. Prepare spreadsheets D. Assess risk
D. Assess risk
When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below? A = Tests of controls B = Preparation of a flowchart documenting the understanding of the client's internal control C = Substantive procedures A. ABC B. ACB C. BAC D. BCA
D. BAC
An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may material affect the financial statements. The auditor should set forth the reasons and findings in communication to the A. PCAOB B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Board of directors.
D. Board of directors
Issuers are required by the PCAOB to obtain an auditor's report attesting to the effectiveness of internal control over financial reporting (AS 2201). Likewise nonissuers may retain an auditor to issue a report on internal control in accordance with the AICPA's auditing standards (AU-C 940). Which of the following statements bests characterizes the relation between these two standards? A. The two standards have different purposes: The AICPA standards address only controls relating to the safeguarding of assets, while the PCAOB's standards relate more broadly to financial statements. B. The AICPA standards recognize that the internal controls are the responsibility of the auditor, while the PCAOB standards recognize that the internal controls are the responsibility of management. C. The AICPA standards accepts COSO's Internal Control-Integrated Framework as suitable and available framework for control, while the PCAOB standards do not. D. Both the AICPA standards and the PCAOB standards require management to provide a written assessment or assertion concerning the effectiveness of controls.
D. Both the AICPA standards and the PCAOB standards require management to provide a written assessment or assertion concerning the effectiveness of controls.
Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether inadequate provisions for the safeguarding of assets have been corrected. D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
After obtaining an understanding of the entity and its environment, including its internal control, the auditor assesses A. The need to apply auditing standards B. Detection risk to determine the acceptable level of inherent risk. C. Detection risk and inherent risk to determine the acceptable level of control risk. D. Control risk and inherent risk to determine the acceptable level of detection risks.
D. Control risk and inherent risk to determine the acceptable level of detection risk.
Firms subject to the reporting requirement of the SEC Act of 1934 are required by the Foreign Corrupt Practices Act of 1977 to maintain satisfactory internal control. Moreover, the Sarbanes-Oxley Act of 2002 requires that annual reports include (1) a statement of management's responsibility for establishing and maintaining adequate internal control and procedures for financial reporting, and (2) management's assessment of their effectiveness. The role of the registered auditor relative to the assessment made by management is to A. Express an opinion on the assessment B. Report clients with unsatisfactory internal control to the SEC C. Express an opinion on whether the client is subject to the SEC Act of 1934 D. Determine whether management's report is complete and properly presented.
D. Determine whether management's report is complete and properly presented.
Which of the following is likely to be least important to an auditor who is considering internal control for the automated data processing function? A. Ancillary program functions. B. Disposition of source documents C. Operator competence D. Disk capacity
D. Disk capacity
During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment A. Must state an overall judgment about whether an identified risk is high, medium, or low. B. Requires an observation that the three fraud conditions are present. C. Follows the auditor's determination that the related controls are operating effectively. D. Is based on evaluating whether the entity's related controls have been suitably designed and implemented.
D. Is based on evaluating whether the entity's related controls have been suitably designed and implemented.
In developing an audit plan, an auditor should A. Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. B. Evaluate findings from substantive procedures performed at interim dates. C. Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. D. Perform risk assessment procedures.
D. Perform risk assessment procedures.
Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should A. Reduce audit risk by lowering initial levels of materiality. B. Design special substantive procedures to compensate for the lack of industry expertise. C. Engage financial experts familiar with the nature of the industry. D. Perform risk assessment procedures.
D. Perform risk assessment procedures.
JP Industries conducts its businesses using IT, and the only documentation of transactions is produced through the IT system. The auditor has concluded that it is not possible to obtain sufficient appropriate audit evidence by performing only substantive procedures for a number of financial statement assertions. The auditor's alternative strategy is to A. Increase the acceptable audit risk B. Focus audit tests on other assertions for which substantive procedures prove to be effective C. Require management to change its information system to provide appropriate evidence D. Perform tests of controls
D. Perform tests of controls
Proper segregation of duties reduces the opportunities to allow persons to be in positions both to A. Journalize entries and prepare financial statements. B. Record cash receipts and cash disbursements. C. Establish internal control and authorize transactions. D. Perpetrate and conceal fraud and error.
D. Perpetrate and conceal fraud and error.
A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
The Sarbanes-Oxley Act of 2002 (SOX) requires management of issuers to do all of the following except A. Establish and document internal control procedures and to include in their annual reports a report on the company's internal control over financial reporting. B. Provide a report to include a statement of management's responsibility for and assessment of control C. Provide an identification of the framework used to evaluate the effectiveness of internal control. D. Provide a statement that the board approves changes in internal control procedures.
D. Provide a statement that the board approves changes in internal control procedures.
The primary reason for an audit by an independent, external audit firm is to A. Satisfy governmental regulatory requirements B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. C. Relieve management of responsibility for the financial statements. D. Provide increased assurance to users as to the fairness of the financial statements.
D. Provide increased assurance to users as to the fairness of the financial statements.
If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit or an issuer, then the auditor should A. Not change the materiality level once is has been established B. Lower the materiality level, but not raise it C. Raise the materiality level, but not lower it D. Raise or lower the materiality level as appropriate to the situation.
D. Raise or lower the materiality level as appropriate to the situation.
A practitioner has been engaged to examine the effectiveness of a nonissuer's internal control. The practitioner has obtained from the responsible party a written assertion about the effectiveness of internal control. The assertion is contained in a separate report that will accompany the practitioner's report and is based on control criteria issued by experts that follow due process procedures. What restrictions, if any, should the practitioner place on the use of this report? A. This report should be restricted for use by management. B. This report should be restricted for use by the audit committee. C. This report should be restricted for use by a specified regulatory agency. D. The practitioner does not need to place any restrictions on the use of this report.
D. The practitioner does not need to place any restrictions on the use of this report.
Which of the following is correct regarding the communication between successor and predecessor auditors? A. The successor and predecessor auditors should communicate with each other in writing regarding potential problems. B. The successor auditor should contact the predecessor auditor prior to proposing an audit engagement. C. The client should be present during the communications between the predecessor auditor and the successor auditor. D. The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.
D. The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? A. Management fails to modify prescribed internal controls for changes in information technology. B. Internal control activities requiring segregation of duties are rarely monitored by management. C. Management is dominated by one person who is also the majority shareholder. D. There is a substantial risk of intentional misapplication of accouting principles.
D. There is a substantial risk of intentional misapplication of accounting principles.
Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity's financial statements? A. Management places little emphasis on meeting earnings projections of external parties. B. The board of directors oversees the financial reporting process and internal control. C. Control deficiencies previously communicated to management are not corrected. D. Transactions selected for testing are not supported by proper documentation.
D. Transactions selected for testing are not supported by proper documentation.
