Auditing Practice Exam #3

Which of the following scope limitations is caused by a circumstance relating to the nature or timing of the auditor's work? A. An auditor is engaged in the middle of the fiscal year and is unable to observe the beginning inventory or perform alternative procedures. B. Management prevents the auditor from observing the counting of physical inventory. C. Management prevents the auditor from requesting external confirmation of specific account balances. D. The accounting records of a significant component of the entity have been seized indefinitely by governmental authorities.

A. An auditor is engaged in the middle of the fiscal year and is unable to observe the beginning inventory or perform alternative procedures.

Which of the following is not an example of a feature that would be indicative of a strong system of internal control? A. An independent auditor receives accounts receivable confirmations directly from external parties. B. An independent accounting clerk receives bank statements directly from the bank for comparison to the cash account in the general ledger. C. Access controls that prevent unauthorized access to physical assets. D. Access controls that prevent unauthorized access to computer records.

A. An independent auditor receives accounts receivable confirmations directly from external parties. Confirming accounts receivable is a generally accepted auditing procedure. The fact that the auditor sends out confirmations does not indicate the strength of the client's internal controls.

A condition that may result in a higher risk of material misstatement is: A. Application of new accounting pronouncements. B. The existence of simple alliances and joint ventures. C. High tenure of employees. D. Abundant availability of capital and credit.

A. Application of new accounting pronouncements.

Before accepting a new client engagement, an auditor should: A. Assess the auditor's ability to appropriately staff the potential engagement. B. Establish an understanding with the potential client as to a preliminary measure of materiality. C. Contact the predecessor auditor and arrange to review the audit files from the previous year's audit. D. Evaluate management's integrity through review of the management representation letter.

A. Assess the auditor's ability to appropriately staff the potential engagement.

An auditor wishes to collect sales data for all client sales exceeding a certain amount. Which method might he or she use? I. A generalized audit software package. II. An embedded audit module. A. Either I or II. B. I only. C. II only. D. Neither I nor II.

A. Either I or II.

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables: A. Existence. B. Completeness. C. Classification. D. Valuation.

A. Existence. A confirmation addresses whether the entity replying to the confirmation believes that a debt exists.

Henry, CPA, is auditing Tafco Industries. Alice is the staff person assigned to the job, Sam is an internal audit professional from Tafco who will be providing assistance in the audit of payroll, and Justin is a specialist who will aid in the valuation of inventory. Which of the following statements is true about Henry's responsibility with respect to the three professionals assisting on this engagement? A. Henry must evaluate the qualifications of all three professionals. B. If the work performed by any of the three professionals results in a modified opinion, Henry may refer to that professional in the auditor's report. C. Henry must clearly state in the auditor's report that Sam and Justin assisted in the audit, since they are outside professionals, but need not mention Alice's involvement. D. Henry must ensure that all three professionals are independent of Tafco.

A. Henry must evaluate the qualifications of all three professionals.

The group engagement partner decides to not assume responsibility for the component auditor's work. In this situation, the group engagement team should request that the component auditor, at a minimum, communicate matters related to: A. Identification of the financial information of the component. B. The extent of internal auditor use. C. The number of confirmations received. D. The nature of substantive procedures performed on revenue.

A. Identification of the financial information of the component.

The summary of uncorrected misstatements should: A. Include misstatements that management elected not to book. B. Not be provided to management, because it is audit documentation created by the auditor. C. Include all misstatements identified, other than those clearly trivial. D. Include an evaluation of uncorrected misstatements related to the most recent interim period after the balance sheet date.

A. Include misstatements that management elected not to book.

During planning, the auditor learns that competitive bids are not obtained by the purchasing department. This knowledge may result in the auditor: A. Increasing the assessment of control risk. B. Decreasing the assessment of inherent risk. C. Decreasing the assessment of control risk. D. Increasing the assessment of inherent risk.

A. Increasing the assessment of control risk.

In a financial statement audit, the auditor decides to document their understanding of internal controls using a system flowchart. An advantage of using system flowcharts to document information about internal control instead of using narratives is that systems flowcharts: A. Provide a symbolic diagram depicting the flow of the internal control system. B. Indicate whether control activities are operating effectively. C. Provide greater assurance than narratives. D. Easily draw attention to a possible weakness in internal control.

A. Provide a symbolic diagram depicting the flow of the internal control system.

Audit documentation serves mainly to: A. Provide the principal support for the auditor's report. B. Satisfy the auditor's responsibilities concerning the Code of Professional conduct. C. Document the level of independence maintained by the auditor. D. Monitor the effectiveness of the CPA firm's quality control activities.

A. Provide the principal support for the auditor's report.

Kent is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Kent detected noncompliance with requirements that have a material effect on that program. Kent's report on compliance should express a(n): A. Qualified opinion or an adverse opinion. B. Limited assurance on the items tested. C. Adverse opinion or a disclaimer of opinion. D. Unqualified opinion with a separate explanatory paragraph.

A. Qualified opinion or an adverse opinion.

Which of the following is the best measure of a client's short-term ability to pay debts as they come due? A. Quick ratio. B. Debt-to-equity ratio. C. Working capital turnover. D. Net operating margin percentage.

A. Quick ratio. Liquidity ratios such as the quick ratio are measures of a firm's short-term ability to pay maturing obligations.

An accountant has been engaged by a nonissuer to compile financial statements that omit substantially all disclosures required by GAAP. The accountant may comply with this request provided that the omission is not intended to mislead users of the financial statements and: A. The omission is clearly indicated in the compilation report. B. The reason for omitting the disclosures is acknowledged in the notes to the financial statements. C. The compilation contains a restricted use paragraph. D. An adverse opinion is rendered on the financial statements.

A. The omission is clearly indicated in the compilation report. The accountant may compile financial statements that omit substantially all disclosures provided that: 1. The accountant's report clearly indicates the omission by including a fourth paragraph disclosing such omissions; and 2. To the accountant's knowledge, the omission is not intended to mislead any person who might be expected to use the financial statements.

What is the allowable form of the understanding with a client when an audit is being performed? A. The understanding should be documented through a written communication with the client. B. No requirement exists that the auditor establish an understanding with the client. C. Either an oral understanding or a written understanding is acceptable. D. An oral understanding is acceptable as long as it is referenced in the audit documentation.

A. The understanding should be documented through a written communication with the client.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an: A. Understatement of revenues and receivables, and an overstatement of inventory. B. Understatement of revenues and receivables, and inventory. C. Overstatement of revenues and receivables, and an understatement of inventory. D. Overstatement of revenues and receivables, and inventory.

A. Understatement of revenues and receivables, and an overstatement of inventory.

Which of the following statements is correct concerning the use of negative confirmation requests? A. Unreturned negative confirmation requests rarely provide significant explicit evidence. B. Unreturned negative confirmation requests indicate that alternative procedures are necessary. C. Negative confirmation requests are effective when understatements of account balances are suspected. D. Negative confirmation requests are desirable when a low level of detection risk is required.

A. Unreturned negative confirmation requests rarely provide significant explicit evidence.

An auditor testing controls in the revenue cycle would be least likely to inspect: A. Vendor invoices. B. Shipping documents. C. Sales orders. D. Customer invoices.

A. Vendor invoices.

An auditor is gathering evidence regarding the valuation of trading securities as of the balance sheet date. Which of the following procedures is the auditor most likely to perform? A. Verify the quoted year-end fair value to NASDAQ. B. Obtain the audited financial statements of the investee. C. Perform analytical procedures to determine if the trading securities are properly valued. D. Recommend the best investment strategy for the entity.

A. Verify the quoted year-end fair value to NASDAQ.

The current chief executive officer and chief financial officer have only been employed by ABC Company for the last five months of year 2. ABC Company is presenting comparative financial statements for Year 1 and 2, both of which were audited by William Jones, CPA. For which year(s) should Jones obtain written representation from these two individuals? Year 1 Year 2 Yes Yes No No Yes No No Yes

A. Yes Yes

Which of the following restrictive language contained in an external confirmation response may cast doubt about the completeness of the information and require the auditor to obtain further audit evidence to resolve those doubts? A. "The reply is given solely for the purpose of the audit without any responsibility on the part of the respondent, its employees, or its agents, and it does not relieve the auditor from any other inquiry or the performance of any other duty." B. "Information is obtained from electronic data sources, which may not contain all information in the respondent's possession." C. "Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, express or implied." D. "This information is solely for use of the auditors and should not be used by anyone other than the auditors."

B. "Information is obtained from electronic data sources, which may not contain all information in the respondent's possession."

Which of the following types of audit evidence generally is the most reliable? A. Analytical procedures. B. A bank confirmation. C. A bank statement. D. Inquiries made of the audit committee.

B. A bank confirmation. Bank confirmations are among the most reliable evidence because confirmations represent external evidence sent directly to the auditor.

Which of the following is not true about the relationship between quality control standards and professional standards such as GAAS? A. A firm that has not adopted an appropriate system of quality control may still be in compliance with professional standards with respect to individual engagements. B. A firm's failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements. C. The adoption of quality control standards increases the likelihood of compliance with professional standards on individual engagements. D. Quality control standards relate to the conduct of a firm's entire practice whereas professional standards such as GAAS relate to the conduct of an individual engagement.

B. A firm's failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements.

Which of the following internal control activities is usually performed in the accounts payable department? A. Count the goods received and prepare the receiving report. B. Approve the voucher for payment and record the payment when made. C. Record the payable and mail the signed check. D. Match the vendor's invoice with the related internal shipping report.

B. Approve the voucher for payment and record the payment when made.

Which of the following procedures most likely would be performed during an engagement to review the annual financial statements of a nonissuer? A. Observation of an inventory count. B. Comparison of the current financial statements with prior period financial statements. C. Communication with the predecessor accountant. D. Confirmation of notes receivable.

B. Comparison of the current financial statements with prior period financial statements.

Jett, CPA, is auditing the inventory of Calico Company. Which of the following is an audit procedure Jett would be likely to perform? A. Ascertain that consigned goods provided by Calico's suppliers (for resale to third parties) are included in inventory. B. Examine the shipping documents and receiving reports for several days before and after year-end. C. Ascertain that consigned goods held by Calico's customers (for resale to third parties) are excluded from inventory. D. Physically count Calico's inventory as of the year-end date.

B. Examine shipping documents and receiving reports for several days before and after year-end. Examining shipping documents and receiving reports for several days before and after year-end will help Jett determine whether purchases and sales were recorded in the proper period. Achieving an appropriate cutoff is important to the fair statement of inventory.

Confirmation of accounts receivable generally provides evidence regarding: A. Valuation. B. Existence. C. Completeness. D. Understandability of presentation and classification.

B. Existence. Confirmation of accounts receivable provides evidence regarding existence.

In which of the following situations would a CPA's independence by considered to be impaired? I. The CPA maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. II. The CPA has a direct financial interest in an audit client, but the interest is maintained in a blind trust. III. The CPA owns a commercial building and leases it to an audit client. The rental income is material to the CPA. A. I, II, and III. B. II and III. C. I and III. D. I and II.

B. II and III.

An auditor most likely would apply analytical procedures in the overall review stage of an audit to: A. Obtain an understanding of high risk areas. B. Identify unusual or unexpected balances that were not previously identified. C. Identify related party transactions that may not have been previously identified. D. Evaluate the design and implementation of internal control.

B. Identify unusual or unexpected balances that were not previously identified.

As compared to a nonstatistical sampling plan, a statistical sampling plan: A. Emphasizes qualitative evaluation of results as opposed to quantitative evaluations. B. Makes greater use of mathematical methods in determining an appropriate sample size. C. Provides a more representative sample from the population. D. Eliminates the need to apply professional judgment in determining sample size.

B. Makes greater use of mathematical methods in determining an appropriate sample size. Statistical sampling makes greater use of mathematical methods in determining an appropriate sample size.

Carson, CPA, is the group engagement partner for a multinational corporation. Johnson, CPA, audits a wholly owned subsidiary of this corporation. Carson decides not to assume responsibility for the work of Johnson. Among other requirements, Carson is required to: A. Review Johnson's audit documentation and assume responsibility for Johnson's work. B. Obtain an understanding of Johnson's professional competence and independence. C. Obtain written permission from the component auditor to reference Johnson as "other auditors" in the group engagement auditor's report. D. Verify that Johnson's audit report is restricted.

B. Obtain an understanding of Johnson's professional competence and independence. Carson is required to obtain an understanding of Johnson's professional competence and independence.

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should: A. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. B. State that the basis of presentation is a comprehensive basis of accounting other than GAAP. C. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. D. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

B. State that the basis of presentation is a comprehensive basis of accounting other than GAAP.

What is the primary objective of using stratification as a sampling method in auditing? A. To determine the occurrence rate for a given characteristic in the population being studied. B. To decrease the effect of variance in the total population. C. To increase the confidence level at which a decision will be reached from the results of the sample selected. D. To determine the precision range of the sample selected.

B. To decrease the effect of variance in the total population.

When assessing control risk, an auditor is required to document the auditor's: Underst. of Basis for Entity's cont. the auditor's environ. risk assessm. Yes No Yes Yes No Yes No No

B. Yes Yes

A practitioner's report on agreed-upon procedures should contain: A. A statement that the practitioner conducted an examination of the subject matter. B. A statement that the engagement was conducted in accordance with generally accepted auditing standards established by the American Institute of Certified Public Accountants. C. A description of procedures performed and related findings. D. A disclaimer of opinion on the financial statements.

C. A description of procedures performed and related findings. A practitioner's report on agreed-upon procedures should contain a description of procedures performed and related findings.

Which of the following identified misstatements would most likely result in the auditor still concluding that the financial statements are free of material misstatement? A. A misclassification amount, which is below the materiality of the financial statements as a whole, between balance sheet line items that results in the company meeting its debt covenant. B. A factual misstatement of an accounts receivable sample that is below the materiality of the financial statements, but where the projected misstatement is above the materiality level of the financial statements as a whole. C. A misstatement in cash that is clearly trivial. D. A material overstatement in revenue that is offset by an equivalent overstatement of expenses.

C. A misstatement in cash that is clearly trivial.

Which of the following would least likely require the auditor to verify that the accounting estimates used by management are reasonable? A. Income tax disputes. B. Product warranties. C. Accounts payable. D. Threatened litigation.

C. Accounts payable. Accounts payable typically does not involve accounting estimates. Accounts payable evidence is often verified by reviewing the related vendor invoice, receiving reports, and purchase orders.

To exercise due professional care, a CPA must: I. Possess the same degree of skill commonly possessed by others in the field. II. Critically review work done and judgment exercised by others assisting in the engagement. A. I only. B. Neither I nor II. C. Both I and II. D. II only.

C. Both I and II. One of the four general standards that apply to all engagements is the requirement to exercise due professional care. To exercise due professional care a CPA must possess the same degree of skill commonly possessed by others in the field and must critically review the work done by others assisting in the engagement.

In designing an audit plan, an auditor should establish specific audit objectives that relate primarily to the: A. Inherent risk of the organization. B. Internal controls of the organization. C. Financial statement assertions. D. Nature of audit procedures.

C. Financial statement assertions.

According to the profession's ethical standards, which of the following events may justify a departure from GAAP? I. New legislation. II. Conflicting industry practices. III. Evolution of a new form of business transaction. A. I, II, and III. B. II and III. C. I and III. D. I and II.

C. I and III. Unusual circumstances may justify a departure from GAAP if compliance would cause the financial statements to be misleading. The Code of Conduct specifically recognizes new legislation and the evolution of a new form of business transaction as events that may justify departure. The Code specifically states that conflicting industry practices and unusual degree of materiality are not events that would justify a departure.

In a probability-proportional-to-size sample with a sampling interval of $3,000, which of the following is true? I. An overstatement error of $200 in an item recorded at $300 will result in a projected error of $2,000. II. An overstatement error of $700 in an item recorded at $3,500 will result in a projected error of $600. A. Both I and II. B. II only. C. I only. D. Neither I nor II.

C. I only. In item I, an overstatement error of $200 results in a tainting factor of 2/3 (=200/300), or a projected error of $2,000 (=2/3 x 3,000). In item II, since the recorded value of the item (3,500) exceeds the sampling interval, no tainting factor is used. The entire error in the item ($700) will be included as projected error.

An adverse opinion and a disclaimer of opinion: A. Both require modification of the auditor's responsibility section. B. Result in the auditor's withdrawal from the engagement. C. Indicate situations in which there are material departures from standards. D. May be used interchangeably.

C. Indicate situations in which there are material departures from standards.

According to PCAOB standards, analytical procedures performed during the overall review stage: A. Should include performing tests of transactions to corroborate management's financial statement assertions. B. Must be different from procedures performed as risk assessment procedures in the planning stage. C. May be similar to procedures performed as risk assessment procedures in the planning stage. D. Should include analytical procedures relating to cash.

C. May be similar to procedures performed as risk assessment procedures in the planning stage.

Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk? A. Modern Home purchased expensive new equipment in the current year. B. Modern Home experienced an increase in working capital. C. Modern Home recently engaged in a complex derivative transaction. D. The furniture industry has experienced an overall increase in demand.

C. Modern Home recently engaged in a complex derivative transaction.

In which of the following situations would a CPA's independence be considered to be impaired? I. The CPA obtains a fully collateralized automobile loan from a financial institution client. II. The CPA is in litigation with an audit client relating to billing for consulting services for which the amount is immaterial. A. I only. B. Both I and II. C. Neither I nor II. D. II only.

C. Neither I nor II. Independence is not impaired by a fully collateralized automobile loan with a financial institution client. Independence is not impaired by litigation with an audit client if the dollar amount is immaterial and unrelated to the audit work.

Which of the following correctly describes an internal control component? A. Control activities set the tone of the organization. B. Information and communication systems have to do with management's analysis of risk. C. None of the answer choices are correct. D. Risk assessment relates to assessing the quality of the internal control structure over time.

C. None of the answer choices are correct.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements? A. Reperforming the activities for a sample of transactions. B. Vouching a sample of transactions directly related to the activities. C. Observing the entity's personnel applying the activities. D. Tracing from source documents forward to the accounting records.

C. Observing the entity's personnel applying the activities.

The Lawrence Center for the Performing Arts receives government financial assistance and is subject to Government Auditing Standards. The auditor's responsibilities associated with this engagement include all of the following, except: A. Obtain an understanding of the effect of laws and regulations that have a direct and material effect on the determination of financial statement amounts. B. Assess whether management has identified laws and regulations that have a direct and material effect on determination of amounts in the financial statements. C. Obtain sufficient evidences to form an opinion on internal control over compliance. D. Communicate to management and the audit committee that an audit performed purely in accordance with generally accepted auditing standards may not be sufficient if there are additional regulatory requirements.

C. Obtain sufficient evidences to form an opinion on internal control over compliance. Audits performed in accordance with Government Auditing Standards do not include expression of an opinion on internal control over compliance. A GAAS compliance audit would include accumulating sufficient evidence to form an opinion regarding compliance but not internal control over compliance.

An auditor is engaged to issue a report on the client's compliance with regulatory requirements in connection with a financial statement audit. The auditor issues a qualified opinion on the financial statements. The auditor was unable to identify instances of noncompliance. In this situation, the auditor should: A. Withdraw from the engagement. B. Provide positive assurance on the client's compliance with regulatory requirements. C. Provide negative assurance on the client's compliance with regulatory requirements. D. Only issue a report on compliance when there are identified instances of noncompliance.

C. Provide negative assurance on the client's compliance with regulatory requirements. Negative assurance may be rendered on the client's compliance with regulatory requirements when the auditor has expressed an unmodified or qualified opinion on the financial statements, there are no identified instances of noncompliance, and the regulatory requirements have been subjected to the audit procedures as part of the audit.

In which of the following reports does the auditor provide negative assurance? A. Reports on specific elements, accounts, or items in audited financial statements. B. Reports on an audited incomplete presentation of financial statements that is otherwise in accordance with GAAP. C. Reports on compliance with contractual agreements or regulatory requirements related to audited financial statements. D. Reports on audited financial statements prepared using special purpose frameworks.

C. Reports on compliance with contractual agreements or regulatory requirements related to audited financial statements.

An auditor observed that the gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. The most likely explanation would be: A. Sales increased at a greater percentage than cost of goods sold increased, as compared to the prior year. B. None of the above choices are correct. C. Sales increased at the same percentage as cost of goods sold, as compared to the prior year. D. Sales increased at a lower percentage than costs of goods sold increased, as compared to the prior year.

C. Sales increased at the same percentage as cost of goods sold, as compared to the prior year.

Which of the following procedures would an auditor normally use to identify an unusual year-end balance? A. Agree the subsidiary ledger to the general ledger. B. Foot the financial statements. C. Scanning the trial balance. D. Review the management representation letter.

C. Scanning the trial balance. Scanning the trial balance may help the auditor identify unusual year-end balances.

Which of the following is true regarding the audit process? A. The auditor must perform some level of substantive tests before making a final assessment of control risk. B. Evaluating management's representations (as included in the representation letter) is an important part of assessing control risk. C. The auditor must assess control risk before performing substantive tests. D. Evaluating management's integrity is an important part of the planning process.

C. The auditor must assess control risk before performing substantive tests. The auditor must assess the risk of material misstatement, which includes both inherent risk and control risk, in order to determine the appropriate level of detection risk. The level of detection risk is then used to determine the nature, timing, and extent of substantive tests.

According to PCAOB standards, which of the following factors is least likely to be relevant to the conclusions on whether sufficient appropriate audit evidence has been obtained? A. The significance of uncorrected misstatements and the likelihood of misstatements having a material effect, individually or in combination, on the financial statements. B. The results of audit procedures performed in the audit of financial statements. C. The quantity of pages of audit evidence included in the current audit file. D. The results of audit procedures performed in the audit of internal control over financial reporting.

C. The quantity of pages of audit evidence included in the current audit file.

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of an entity's complete set of financial statements) to audit an entity's: Stat. of inc. Stat. of changes in OE No Yes Yes No Yes Yes No No

C. Yes Yes

Which of the following factors are included in an entity's control environment? Participation of those charged integrity & organ. w/ gov ethical val. struct. No Yes Yes Yes Yes No Yes Yes Yes Yes No Yes

C. Yes Yes Yes

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? A. "I believe that the possible liability to the company is nominal in amount." B. "I believe that the plaintiff's case against the company is without merit." C. "I believe that the company will be able to defend this action successfully." D. "I believe that the action can be settled for less than the damages claimed."

D. "I believe that the action can be settled for less than the damages claimed." The auditor is concerned with preventing an understatement of contingent liabilities. The auditor would therefore request clarification before determining that a reduction in such liability is reasonable.

Which of the following procedures most likely represents an internal control designed to reduce the risk of errors in the billing process? A. Matching receiving documents with approved sales orders before invoice preparation. B. Requiring customers that purchase on account to be approved by the credit department. C. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. D. Comparing control totals for shipping documents with corresponding totals for sales invoices.

D. Comparing control totals for shipping documents with corresponding totals for sales invoices.

In establishing the existence and ownership of a long-term investment in the form of publicly traded stock, an auditor should inspect the securities or: A. Inspect the audited financial statements of the investee company. B. Determine that the investment is carried at the lower of cost or market. C. Correspond with the investee company to verify the number of shares owned. D. Confirm the number of shares owned that are held by an independent custodian.

D. Confirm the number of shares owned that are held by an independent custodian. Confirmation of the number of shares owned that are held by an independent custodian on behalf of the client is an effective means of testing existence and ownership.

To exercise due professional care an auditor should: A. Examine all available corroborating evidence supporting management's assertions. B. Attain the proper balance of professional experience and formal education. C. Design the audit to detect all instances of illegal acts. D. Critically review the judgment exercised by those assisting in the audit.

D. Critically review the judgment exercised by those assisting in the audit. The General Standards Rule applies to all engagements, specifically including audits. Due professional care requires a CPA to critically reveiw the work done by others.

Melvin, CPA, was recently engaged to review and report on pro forma financial statements that hypothetically assumes that a major business acquisition occurred on January 1st, Year 1 rather than the actual closing of the acquisition on July 1st, Year 1. Other than the procedures applied to the historical financial statements, Melvin is most likely to: A. Obtain evidence that the results of operations and related effects on financial position would have been attained if the acquisition occurred on January 1st, Year 1. B. Confirm significant accounts receivable of the acquired entity. C. Reassess inherent risk. D. Determine that the computations of the pro forma adjustments are mathematically correct.

D. Determine that the computations of the pro forma adjustments are mathematically correct. One of the procedures that should be performed in pro forma engagement is to determine that the computations of the pro forma adjustments are mathematically correct.

According to generally accepted auditing standards, audit documentation for nonissuers must be retained for: A. Seven years. B. Three years. C. One year. D. Five years.

D. Five years. According to generally accepted auditing standards, audit documentation for nonissuers must be retained for five years.

The diagram below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate. I. Maximum deviation rate is less than the tolerable rate and deviation rate is less than tolerable rate. II. Maximum deviation rate exceeds the tolerable rate and deviation rate is less than tolerable rate. III. Maximum deviation rate is less than the tolerable rate and deviation rate exceeds tolerable rate. IV. Maximum deviation rate exceeds the tolerable rate and deviation rate exceeds tolerable rate. As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by which situation? A. IV. B. I. C. II. D. III.

D. III.

What is the primary objective of obtaining an understanding of the company's objectives, strategies, and related business risks in a financial statement audit? A. Provide a basis for issuing an opinion the financial statements. B. Identify suggestions for addressing the risks. C. Determine whether sufficient objectives have been created. D. Identify risks that may result in material misstatement of financial statements.

D. Identify risks that may result in material misstatement of financial statements.

Which of the following matters most likely would be included in a management representation letter for an integrated audit? A. Sufficient audit evidence has been made available to permit the issuance of an unmodified opinion. B. A detailed evaluation of the riskiest areas of the audit. C. Acknowledgment that management relied on the auditor's procedures as the basis for management's conclusion on internal control. D. Identifying whether significant deficiencies and material weaknesses identified and communicated to management and those charged with governance during previous engagements have been resolved.

D. Identifying whether significant deficiencies and material weaknesses identified and communicated to management and those charged with governance during previous engagements have been resolved. In an integrated audit, the management representation letter should disclose whether significant deficiencies and material weaknesses identified and communicated to management and those charged with governance during previous engagements have been resolved.

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? A. Data entry monitor. B. Parallel simulation. C. Input controls matrix. D. Integrated test facility.

D. Integrated test facility. An integrated test facility uses test data commingled with actual data to test transactions. Choice A is incorrect because a data entry monitor is an input control. Choice B is incorrect because parallel simulation involves writing a computer program that duplicates the logic of a client's program, using identical data as input, and comparing output. Choice C is incorrect because an input controls matrix is an input control.

With respect to planning an audit, which of the following statements is always true? A. An engagement should not be accepted after the client's year-end. B. An inventory count must be observed at year-end. C. Final staffing decisions must be made prior to completion of the planning stage. D. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

D. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

Which of the following is true about the term "judgmental misstatements?" A. It includes both identified misstatements and an estimate of unidentified misstatements. B. It refers to misstatements that have been specifically identified by the auditor. C. It refers to the cumulative effect of misstatements from prior years on the current year's financial statements. D. It refers to misstatements due to differences arising from accounting estimates that the auditor considers unreasonable or due to the inappropriate selection of accounting policies.

D. It refers to misstatements due to differences arising from accounting estimates that the auditor considers unreasonable or due to the inappropriate selection of accounting policies.

The accountant-client privilege: A. Is as widely recognized as the attorney-client privilege. B. Does not apply to oral statements. C. Will prevent disclosure of a client's statements to a state CPA society quality review team. D. May be waived by the client.

D. May be waived by the client.

Which of the following would best assist an auditor in identifying whether management has identified all material accounting financial statement estimates? A. Determine if the accounting estimates are performed by qualified personnel. B. Confirm via a management representation letter that management has disclosed all significant estimates. C. Evaluate whether the estimate is sensitive to variations. D. Read available minutes of the stockholder and director meetings.

D. Read available minutes of the stockholder and director meetings. Reading available minutes of stockholder and director meeting minutes would best identify all material accounting estimates. Material contingencies are often discussed at these meetings.

Which of the following statements is correct concerning an auditor's use of the work of an auditor's specialist? A. The client must approve the auditor using the work of the specialist as audit evidence. B. If the specialist has a relationship with the client, the auditor may not use the work of the specialist as audit evidence. C. An unresolved disagreement between the auditor and the specialist may result in a qualified or adverse opinion on the financial statements. D. The auditor should evaluate the adequacy of the specialist's work.

D. The auditor should evaluate the adequacy of the specialist's work. When an auditor uses the work of an auditor's specialist, the auditor must evaluate the adequacy of the specialist's work.

A CS staff auditor had been employed as the assistant controller of one of CS's current audit clients eighteen months ago. The auditor worked as a senior auditor on a recent engagement with that company. Independence impaired?

No

A senior auditor who performed work on an existing audit client has a cousin who works in a financial reporting capacity for a subsidiary of that audit client. Upon further review, the compliance department determined that the subsidiary's financial results were not consolidated with the audit client's financial statements. Independence impaired?

No

An audit partner assigned to a new audit client was deemed to hold 1,000 shares of the capital's stock. It was determined that her stock interest in the company was liquidated prior to CS officially signing the initial audit engagement letter. Independence impaired?

No

The compliance department verified that during the past year the lead audit partner on every audit engagement met with the respective audit committee prior to and after the completion of the audit field work. Prior to commencing each audit, the lead auditor had discussions with the audit committee regarding significant accounting policies and practices used by the client as well as the financial statement impact of any alternative accounting treatment used by the client. After completing the audit field work on each audit engagement, the lead auditor met again with the audit committee to discuss any material written documentation shared between CS and client management to provide a schedule of unadjusted audit differences that remain at the close of the audit. Independence impaired?

No

A retired CS partner now serves on the board of directors of a new audit client. The CS auditors did not have any direct contact with any of the directors during the recent audit engagement. The retired partner does not serve on the client's audit committee. Independence impaired?

Yes

Prior to each new audit engagement, CS provided a written list to the respective audit committees with all relationships that the partners and senior audit managers had with the client that could impact potential audit independence. This written document was updated and provided to the audit committee of existing clients every 2 years. Independence impaired?

Yes

The compliance department noted that CS had performed actuarial services for one of its audit clients over the past 2 years. After further investigation it was deemed that these services were not material in nature. Independence impaired?

Yes

The partner in-charge for one of the audit firm's most visible corporate clients was the lead auditor for that company's annual audit for five consecutive years ending 4 years ago. Given his knowledge of the industry, he was re-assigned as the lead audit partner on this year's engagement. Independence impaired?

Yes