Connect Questions
Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? "We received this shipment on January 2." "This amount was paid on December 30." "The balance does not reflect our sales discount for paying by January 5." "These goods were returned for credit on November 15."
"These goods were returned for credit on November 15."
A person who has access to both cash and accounts receivable records may be able to take cash receipts by A kiting operation. Overstating cash receipts. Underfooting the bank reconciliation. A lapping operation.
A lapping operation.
Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor's report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least responsibility? A merger that was announced by Mays and known by Ambrose on February 12, 2018. A customer's deteriorating financial condition that was identified on February 19, 2018. A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018. The obsolescence of inventory held on December 31, 2017, that was identified on January 20, 2018.
A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018.
Which of the following would not ordinarily be included in an accountants' review report on a non-issuer's financial statements? An indication that a review engagement is substantially less in scope than an audit engagement. A statement that a review engagement was conducted in accordance with SSARS. A statement that a review engagement is greater in scope than a compilation. Limited assurance on the fairness of the financial statements.
A statement that a review engagement is greater in scope than a compilation.
The positive form of confirmation is best used when Account balances are relatively large. Accounts are not in dispute. Account balances are small in amount, but large in number. Internal control is considered effective.
Account balances are relatively large.
Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the Entity's bank to compare the list with the cashier's deposit slip. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. Internal auditor to investigate the list for unusual transactions. Treasurer to compare the list with the monthly bank statement.
Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the: Cash receipts listing. Sales journal. General ledger. Accounts receivable listing.
Accounts receivable listing.
Fraud risk factors are events or conditions that indicate which of the following? All of the choices are correct. An attitude or rationalization that justifies a fraudulent action. An incentive or pressure to perpetrate fraud. An opportunity to carry out a fraud.
All of the choices are correct.
In what way can audit procedures be modified to address assessed fraud risks? Obtain more reliable information. Perform procedures close to year-end. Apply computer-assisted techniques to all items. All of the choices are valid modifications.
All of the choices are valid modifications.
Which of the following is not included in the standard (unmodified) report on the financial statements? An identification of the financial statements that were audited. A general description of an audit. An opinion that the financial statements present financial position in accordance with GAAP. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.
An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.
When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? The Opinion Section. The Basis for Opinion Section. An emphasis-of-matter paragraph. An other-matter paragraph.
An emphasis-of-matter paragraph.
When accountants agree to perform a compilation or review of unaudited financial statements, the best way to avoid client's misunderstanding the nature of the work is to describe it completely in A management letter to the board of directors' audit committee. An engagement letter. The auditors' opinion. A report to the clients' board of directors at the close of the engagement.
An engagement letter.
Which of the following is not part of Sarbanes-Oxley? Increased penalties for destruction of records in federal investigations. Increased penalties for mail fraud and criminal violations of the Securities Exchange Act of 1934. A requirement that the CEO and CFO certify the financial statements. An increased duty on the part of auditors to identify financial statement fraud.
An increased duty on the part of auditors to identify financial statement fraud.
If audit teams are unable to apply an auditing procedure to an account balance or class of transactions, the audit team should first: Attempt to determine whether alternative auditing procedures are available and can be applied. Withdraw from the engagement and issue a disclaimer of opinion. Assess the materiality of the scope limitation. Notify individuals currently relying on the financial statements that the statements may no longer be relied upon.
Attempt to determine whether alternative auditing procedures are available and can be applied.
Which of the following statements is not true with respect to the auditors' evaluation of going-concern uncertainties? Auditors are required to gather specific evidence to assess going-concern uncertainties. Auditors are required to document the conditions or events that suggested going-concern uncertainties. If management's plans to mitigate going-concern uncertainties reduces the risk to a low level, auditors are not required to revise their opinion on the entity's financial statements. Auditors are required to evaluate the ability of an entity to continue in existence for up to one year beyond the date of the financial statements being audited.
Auditors are required to gather specific evidence to assess going-concern uncertainties.
If auditors examine all years presented in comparative form, which of the following best describes their responsibility for prior years' financial statements in their current report? Auditors are not required to address prior years' financial statements in their current report. Auditors should consider whether information has come to their attention that might affect their previous opinion on the prior years' financial statements. Auditors should not modify their previous on prior years' financial statements. Auditors are only required to consider whether new information might affect their previous opinion on prior years' financial statements if a report other than unmodified was issued.
Auditors should consider whether information has come to their attention that might affect their previous opinion on the prior years' financial statements.
Navarre, CPA has just issued his report on Big Blue's financial statements. Following the audit report release date, he learned of an event that occurred after the date of the auditors' report. What is Navarre's most appropriate response? Withdraw his report on Big Blue's financial statements and reissue the report following his substantive procedures. Because the event occurred after the date of the auditors' report, Navarre has no responsibility for the event. Inform users who are currently known to be relying on the financial statements of the nature of the event. Perform the appropriate substantive procedures related to the event and dual date the audit report.
Because the event occurred after the date of the auditors' report, Navarre has no responsibility for the event.
The Securities Act of 1933 and Securities Exchange Act of 1934 contain Both civil liability provisions applicable to auditors and criminal liability provisions applicable to auditors. Civil liability provisions applicable to auditors. Neither civil liability provisions applicable to auditors nor criminal liability provisions applicable to auditors. Criminal liability provisions applicable to auditors.
Both civil liability provisions applicable to auditors and criminal liability provisions applicable to auditors.
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events? Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests. Communicate material weaknesses in internal control to the client's audit committee. Review the cutoff bank statements for several months after the date of the financial statements. Compare the latest available interim financial statements with the financial statements being audited.
Compare the latest available interim financial statements with the financial statements being audited.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for Cutoff. Occurrence. Classification. Completeness.
Completeness.
Prenumbering invoices, shipping documents, and sales orders is a practice to achieve which of the following assertions? Accuracy. Completeness. Occurrence. Presentation or disclosure.
Completeness.
When auditing account balances of liabilities, auditors are most concerned with management's assertion about Completeness. Existence. Rights and obligations. Valuation and allocation.
Completeness.
Dale, CPA, was engaged to conduct an audit of the financial statements of AM Company (a non-issuer). After considering the scope and cost of an audit engagement, AM Company has asked Dale to modify the scope of the engagement to a review. Which of the following best describes the professional guidance for this situation? Dale would be required to issue a disclaimer of opinion on the financial statements because of the limited scope of a review engagement. Dale would be permitted to modify the scope of the engagement if AM Company's request is based on their lender's willingness to accept a review engagement rather than an audit. Dale would be permitted to modify the scope of the engagement, regardless of the reason for AM Company's request. Dale would be precluded from modifying the scope of the engagement under any circumstances.
Dale would be permitted to modify the scope of the engagement if AM Company's request is based on their lender's willingness to accept a review engagement rather than an audit.
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate? Perform the omitted procedure or an alternative procedure. Notify the board of directors and regulatory agencies that are currently relying on auditors' reports. Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements. Engage another public accounting firm to conduct a quality assurance review.
Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.
Which report would not be appropriate for a public accounting firm to provide on the ICFR for issuers? Unqualified—no material weaknesses found. Disclaimer of opinion—unable to perform all necessary procedures. Disclaimer of opinion—significant deficiencies exist. Adverse—material weaknesses exist.
Disclaimer of opinion—significant deficiencies exist.
When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: Examine shipping documents. Examine client correspondence files. Do nothing for immaterial balances. Send a second request.
Do nothing for immaterial balances.
An internal control questionnaire for evaluating the completeness objective of cash receipts would NOT include which of the following questions? Are prenumbered sales invoices or receipt books used? Does a responsible person approve discounts taken by customers with payments on account? Does the person who opens the mail make a list of cash received? Are current receipts controlled by mechanical devices?
Does a responsible person approve discounts taken by customers with payments on account?
Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices? Enables personnel to determine the proper period recording of sales revenue and receivables. Enables company personnel to determine the accuracy of each document. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions. Enables personnel to determine the validity of recorded transactions.
Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.
Which of the following parties provides a review of audit documentation for the primary purpose of ensuring that the quality of the work and reporting is consistent with the quality standards of the public accounting firm? Audit supervisor. Engagement quality reviewer. Audit manager. Engagement partner.
Engagement quality reviewer.
Which of these situations would require auditors to include an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion? Entity changed its estimated allowance for uncollectible accounts receivable. Entity corrected a prior mistake in accounting for interest capitalization. Entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year. Entity changed its inventory costing method from FIFO to LIFO.
Entity changed its inventory costing method from FIFO to LIFO.
An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that: All sales have been recorded. Sales invoices represent bona fide sales. Entries in the accounts receivable subsidiary ledger were properly invoiced. All sales invoices have been properly posted to customer accounts.
Entries in the accounts receivable subsidiary ledger were properly invoiced.
Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to: Verify the existence of the recorded receivables. Test the accuracy of recorded charge sales. Estimate credit losses. Evaluate internal control over credit sales.
Estimate credit losses.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? Examine unusual relationships between monthly accounts payable and recorded purchases. Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable. Examine a sample of invoices a few days prior to and subsequent to the year-end to ascertain whether they have been properly recorded. Examine a sample of cash disbursements in the period subsequent to year-end.
Examine a sample of cash disbursements in the period subsequent to year-end.
Which of the following is not an alternative procedure when a confirmation is not received? Examine client correspondence with the customer. Examine customer purchase orders. Examine payments received before the end of the period. Examine sales invoices and vouch them to underlying shipping documents.
Examine payments received before the end of the period.
In the audit of accounts receivable, the most important emphasis should be on the: Existence assertion. Presentation and disclosure assertion. Rights and obligations assertion. Completeness assertion.
Existence assertion.
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the: Collectability of the balances confirmed. Ownership of the balances confirmed. Internal control over balances confirmed. Existence of the balances confirmed.
Existence of the balances confirmed.
During an audit of cash, the auditor is most concerned with the management assertion of Occurrence. Existence. Rights and obligations. Valuation or allocation.
Existence.
Users of financial statements have a different perception concerning the nature of auditors' services than the actual objectives of an audit. This difference is known as Reasonable foreseeable third parties. Expectations gap. Diverse liability perception. Insurance hypothesis.
Expectations gap.
Which of the following would not overstate current-period net income? Capitalizing an expenditure that should be expensed. Failing to record a liability as an expense. Failing to record a check paying an item in Vouchers Payable. All of the choices would overstate net income.
Failing to record a check paying an item in Vouchers Payable.
Auditors' "search for unrecorded liabilities" should emphasize the large balances, especially for regular vendors. T/F
False
Checks are signed by the accounts payable department after assembling the invoice, purchase order, and receiving report. T/F
False
Evidence is much easier to obtain to verify the completeness assertion for liabilities than the existence assertion for assets. T/F
False
If control risk is assessed very low, the substantive audit procedures on account balances must be expanded. T/F
False
If the risk of material misstatement is assessed as very low, it is likely that additional substantive procedures will be required. T/F
False
It is not necessary to send confirmations on accounts that a company represents as closed during the year to get the bank to confirm zero balances. T/F
False
The emphasis is on the existence assertion because financial statement users tend to be more concerned about understated expenses and liabilities. T/F
False
When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and the obligations assertions. T/F
False
While useful, analytical procedures are not required near the end of the audit as a final review of financial statements. T/F
False
When an entity registers a security offering under the Securities Act of 1933, the law provides an investor An SEC guarantee that the information in the registration statement is true. Insurance against loss from the investment. Financial information examined by independent auditors. Inside information about the entity's trade secrets.
Financial information examined by independent auditors.
A public entity subject to the periodic reporting requirements of the Securities Exchange Act of 1934 must file an annual report with the SEC known as the Form 10-Q. Form 10-K. Form 8-K. Regulation S-X.
Form 10-K.
Under the Securities Exchange Act of 1934, entities are required to report to the public about changing auditors on Form 10-Q. Form 8-K. Form S-1. Form 10-K.
Form 8-K.
A major objective of written representations is to Impress on management its ultimate responsibility for the financial statements and disclosures. Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory. Shift responsibility for financial statements from the management to auditors. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform.
Impress on management its ultimate responsibility for the financial statements and disclosures.
Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date? Kiting bank balances. Misappropriating merchandise. Lapping year-end accounts receivable. Inflating sales for the year.
Inflating sales for the year.
The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here? Dennis's account was not yet due. Dennis's account was not with a related party. Control risk was particularly low for accounts receivable. Inherent risk was particularly high for accounts receivable.
Inherent risk was particularly high for accounts receivable.
During a review of a non-issuer's financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by SSARS? The basis for the preparation of financial statements. Internal control deficiencies. Significant transactions occurring near the end of the reporting period. Material subsequent events.
Internal control deficiencies.
In comparison to the burden of proof required of plaintiffs in civil lawsuits against independent auditors under common law, section 10(b) of the Securities Exchange Act of 1934 Does not require that plaintiffs prove that relying on the materially misstated financial statements caused their losses. Is the same regarding plaintiffs' need to prove damages or losses. Does not require that plaintiffs prove their reliance on materially misstated financial statements. Is the same regarding plaintiffs' need to establish privity or a beneficiary relationship with auditors.
Is the same regarding plaintiffs' need to prove damages or losses.
A material weakness in ICFR is a situation in which There is a remote likelihood that a material misstatement would be detected on a timely basis. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis. It is reasonably possible that a material misstatement would not be detected on a timely basis. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis.
It is reasonably possible that a material misstatement would not be detected on a timely basis.
A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form? December 31, 2017, except as to Note X, which is dated February 5, 2018. January 30, 2018, except as to Note X, which is dated February 5, 2018. February 5, 2018, except for the date of the auditor's report, for which the date is January 30, 2018. December 31, 2017, except as to Note X, which is dated January 30, 2018.
January 30, 2018, except as to Note X, which is dated February 5, 2018.
Which of the following is not required by generally accepted auditing standards? Management letter. Engagement letter. Written representations. Attorney letter.
Management letter.
Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated March 28, year 2. February 17, year 2. February 13, year 2. March 24, year 2.
March 24, year 2.
An auditor is required to confirm accounts receivable if the accounts receivable balances are Subject to valuation estimates. Smaller than expected. Older than the prior year. Material to the financial statements.
Material to the financial statements.
An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation? Send confirmations asking customers about unit prices paid for product. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices. Perform additional inquiries with sales personnel. Vouch vender invoices to payments made after year-end.
Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.
Which of the following is ordinarily performed last in the audit examination? Securing a signed engagement letter from the client. Performing tests of controls. Obtaining signed written representations. Performing a review for subsequent events.
Obtaining signed written representations.
An SOC 1 Type 2 report supporting the auditors' report on internal control over financial reporting for an issuer provides assurance with respect to: Option A - Controls in Operations Yes; Operating Effectiveness of Controls Yes Option B - Controls in Operations Yes; Operating Effectiveness of Controls No Option C - Controls in Operations No; Operating Effectiveness of Controls Yes Option D - Controls in Operations No; Operating Effectiveness of Controls No
Option A
In the standard audit report under GAAS, some responsibilities are required to be stated in the report ("explicit"), while other responsibilities are implied ("implicit"). Which combination below correctly identifies the auditors' responsibilities as explicit (E) or implicit (I)? Option A - GAAP E; Consistency I; Going Concern I; Opinion E Option B - GAAP E; Consistency E; Going Concern I; Opinion I Option C - GAAP I; Consistency E; Going Concern E; Opinion I Option D - GAAP I; Consistency I; Going Concern E; Opinion I
Option A
In which of the following instances would a qualified opinion be an appropriate option? Option A - Scope Limitation Yes; GAAP Departure Yes Option B - Scope Limitation No; GAAP Departure Yes Option C - Scope Limitation Yes; GAAP Departure No Option D - Scope Limitation No; GAAP Departure No
Option A
Locke, CPA, was engaged by Hall Inc. to audit Willow Company. Hall purchased Willow after receiving Willow's audited financial statements, which included Locke's unmodified auditors' opinion. Locke was negligent in the performance of the Willow audit engagement; this negligence was caused by failure to perform the engagement in accordance with terms of the engagement letter. As a result of Locke's negligence, Hall suffered damages of $75,000. Hall appears to have grounds to sue Locke for Option A - Breach of Contract Yes; Negligence Yes Option B - Breach of Contract Yes; Negligence No Option C - Breach of Contract No; Negligence Yes Option D - Breach of Contract No; Negligence No
Option A
Which of the following would be included in an accountants' report on an agreed-upon procedures engagement? Option A - Summary of Findings Yes; Summary of procedures performed Yes Option B - Summary of Findings Yes; Summary of procedures performed No Option C - Summary of Findings No; Summary of procedures performed Yes Option D - Summary of Findings No; Summary of procedures performed No
Option A
Which of the following best describes the scope of audit and compilation engagements compared to a review engagement? Lesser than review (LR); Greater than review (GR) Option A - Audit LR; Compilation LR Option B - Audit GR; Compilation LR Option C - Audit LR; Compilation GR Option D - Audit GR; Compilation GR
Option B
Which of the following sections of the standard report on the financial statements of a nonissuer would be modified in response to a material departure from GAAP? Option A - Basis for Opinion Yes; Auditors Responsibilities Yes Option B - Basis for Opinion Yes; Auditors Responsibilities No Option C - Basis for Opinion No; Auditors Responsibilities Yes Option D - Basis for Opinion No; Auditors Responsibilities No
Option B
Which of the following sections or paragraphs of the auditors' report would be modified if the report expresses an opinion on financial statements prepared using the cash basis of accounting rather than generally accepted accounting principles? Option A - Opinion Section Yes; Auditor's Responsibility Section Yes Option B - Opinion Section Yes; Auditor's Responsibility Section No Option C - Opinion Section No; Auditor's Responsibility Section Yes Option D - Opinion Section No; Auditor's Responsibility Section No
Option B
If the auditors decide to present separate reports on the entity's financial statements and ICFR in the audit of an issuer, which of the following should be modified to refer to the other report? Option A - Report on F/S No; Report on ICFR Yes Option B - Report on F/S Yes; Report on ICFR No Option C - Report on F/S Yes; Report on ICFR Yes Option D - Report on F/S No; Report on ICFR No
Option C
In which of the following engagements would an accountant be required to be independent of the client? Option A - Compilation engagement Yes; Preparation Engagement Yes Option B - Compilation engagement Yes; Preparation Engagement No Option C - Compilation engagement No; Preparation Engagement Yes Option D - Compilation engagement No; Preparation Engagement No
Option D
A lack of reasonable care that may be characterized by the failure of auditors to follow GAAS in the conduct of the audit is known as Ordinary negligence. Constructive fraud. Fraud. Gross negligence.
Ordinary negligence.
Immediately upon receipt of cash, a responsible employee should Record the amount in the cash receipts journal. Update the subsidiary accounts receivable records. Prepare a deposit slip in triplicate. Prepare a remittance listing.
Prepare a remittance listing.
Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? Prepare a schedule of the bank transfers. Review the composition of authenticated deposit slips. Review subsequent bank statements. Prepare a year-end bank reconciliation.
Prepare a schedule of the bank transfers.
Which of the following third parties is known by name to auditors as the audit is conducted? Foreseen third party. Foreseeable third party. Primary beneficiary. General third party.
Primary beneficiary.
Which of the following accounts is not normally part of the revenue and collection cycle? Sales. Accounts Receivable. Cash. Purchases Returns and Allowances.
Purchases Returns and Allowances.
The audit team found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? Unmodified opinion or disclaimer of opinion. Unmodified opinion or qualified opinion. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion. Qualified opinion or adverse opinion.
Qualified opinion or adverse opinion.
Which of the following normally occurs earliest in the audit examination? Review of audit documentation. Dual dating the auditor's report on the entity's financial statements for subsequent events that exist at the date of the financial statements. Discovery of an omitted audit procedure. Preparation of the management letter.
Review of audit documentation.
Accountants are permitted to express limited assurance in which of the following reports? Standard unmodified report on audited financial statements. Compilation report on unaudited financial statements. Review report on unaudited financial statements. Adverse opinion on audited financial statements.
Review report on unaudited financial statements.
An audit plan for accounts payable would not include which of the following procedures? Obtaining written client representations about related-party payables and pledges of assets as collateral for liabilities. Obtaining a trial balance of recorded accounts payable. Reviewing cash receipts for period after year-end. Sending confirmation to accounts with zero balances.
Reviewing cash receipts for period after year-end.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments? Examining legal invoices sent by the client's attorney. Reviewing the written representation letter obtained from management. Verifying attorney-client privilege through interviews. Reviewing the response from the client's lawyer to a letter of audit inquiry.
Reviewing the response from the client's lawyer to a letter of audit inquiry.
Which of the following is not ordinarily associated with the time period following the audit report release date? Omitted audit procedures. Roll-forward work. Management letters. Subsequently discovered facts.
Roll-forward work.
To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts? Miscellaneous expense. Petty cash. Sales returns. Miscellaneous income.
Sales returns.
Which of these substantive procedures is not used to obtain evidence about contingencies? Scanning expense accounts for credit entries. Examining terms of sale in sales contracts. Reading the minutes of the board of directors' meetings. Obtaining a letter from the client's attorney.
Scanning expense accounts for credit entries.
Which of the following procedures is least likely to be performed before the balance-sheet date? Confirmation of receivables. Review of internal control over cash disbursements. Search for unrecorded liabilities. Observation of inventory.
Search for unrecorded liabilities.
A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform? Why? Send out positive confirmations on a large sample of these customers. Prepare a schedule of purchases and payments for these customers. Inquire of the sales manager regarding the accounts receivable terms. Send out negative confirmations on a large sample of these customers.
Send out positive confirmations on a large sample of these customers. Positive confirmations to ensure the existence of all accounts in the sample.
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until The following year's date of the financial statements. The date of the financial statements. The date of the auditor's report. The audit report release date.
The audit report release date.
A group of investors sued Anderson, Olds, and Watershed, CPAs (AOW) for alleged damages suffered when the entity in which they held common stock went bankrupt. To avoid liability under the common law, AOW must demonstrate which of the following? The audit was conducted in accordance with generally accepted auditing standards and with due professional care. The investors' loss was a direct result of their reliance on the audited financial statements. The investors actually suffered a loss. The investors relied on the financial statements audited by AOW.
The audit was conducted in accordance with generally accepted auditing standards and with due professional care.
An investor seeking to recover stock market losses from a CPA firm associated with an initial offering of securities based on an unmodified opinion on financial statements that accompanied a registration statement, must establish that The investor relied on the financial statements. The CPA firm did not act in good faith. The audited financial statements contain a false statement or omission of material fact. The CPA firm would have discovered the false statement or omission if it had exercised due care in its examination.
The audited financial statements contain a false statement or omission of material fact.
When investors sue auditors for damages under section 11 of the Securities Act of 1933, they must allege and prove Their reliance on the materially misstated financial statements was the direct cause of their loss. Scienter on the part of auditors. The audited financial statements contained a material misstatement. They relied on the materially misstated financial statements.
The audited financial statements contained a material misstatement.
An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales. The auditor should review period-end compensation to determine whether bonuses were paid to meet earnings goals. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.
The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.
When creditors who relied on an entity's audited financial statements suffer monetary losses after a customer (the auditors' client) goes bankrupt, what must the plaintiff creditors in a lawsuit for damages show in a court that follows the doctrine in Credit Alliance? The auditors knew and specifically acknowledged identification of the creditors. The auditors could reasonably foresee them as beneficiaries of the audit because entities such as this client use financial statements to obtain credit from vendors. The plaintiffs were foreseen users of the audited financial statements because they were vendors of long standing. All of the choices are correct.
The auditors knew and specifically acknowledged identification of the creditors.
Revenues are normally considered to have been earned when: All possibility of return has expired. The cash is collected. Goods have been shipped. The company has substantially accomplished what it must to be entitled to the benefits.
The company has substantially accomplished what it must to be entitled to the benefits.
The auditing standards regarding subsequently discovered facts refers to knowledge obtained after The date interim audit work was complete. The date of the financial statements. The date the fieldwork began. The date of the auditor's report.
The date of the auditor's report.
Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities Inc. to the Securities and Exchange Commission. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. Customers have instituted legal action against Donalds based on Section 10(b) and Rule 10(b)-5 of the Securities Exchange Act of 1934. Which of the following is likely to be Donalds' best defense? The firm was not in privity of contract with the creditors. Section 10(b) does not apply to the case. The engagement letter specifically disclaimed any liability to any party that resulted from Markum's fraudulent conduct. The firm did not intentionally certify the false financial statements.
The firm did not intentionally certify the false financial statements.
West & Co., CPAs, rendered an unmodified opinion on the financial statements of Pride Corp., which were included in Pride's registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride's preferred stock as part of a public offering subject to the Securities Act of 1933. Hex has commenced an action against West based on the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Which of the following elements must Hex prove to hold West liable? Hex relied on the financial statements included in the registration statement. West performed the audit negligently. The misstatements were material. West rendered its opinion with knowledge of material misstatements.
The misstatements were material.
Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents. Disbursement vouchers should be approved by at least two responsible management officials. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time? Disbursement vouchers should be approved by at least two responsible management officials. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment. The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.
The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.
Which of the following statements is not true with respect to the auditors' report on ICFR? The auditor will issue an adverse opinion if one or more material weaknesses exist. The report may be presented with the report on the entity's financial statements as a combined report. The report will be dated as of the date of the financial statements. The report will express an opinion on the effectiveness of ICFR.
The report will be dated as of the date of the financial statements.
Which of the following is not an element or statement included in the Basis for Opinion Section of a standard (unmodified) report on the financial statements of an issuer? A broad overview of procedures performed during the audit. The responsibilities of the audit team and management in the financial reporting process. The requirement for audit teams to be independent with respect to the issuer. The tenure of the auditor.
The tenure of the auditor.
Which of the following would be consistent with an employee taking cash receipts from customers on account? The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account. The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable control account. Total cash receipts from customers for the month are less than credit sales for the month. Total cash receipts from customers for the month are greater than credit sales for the month.
The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account.
Which of the following statements regarding auditors' liability under the Securities Act of 1933 is not true? Third parties must demonstrate that they relied on misstated financial statements that were examined by auditors. Auditors' liability arises because of audited financial information filed with the SEC. The act relates to the initial issuance of securities to the public, normally through an initial public offering. Auditors may be liable if they are found to have engaged in ordinary negligence.
Third parties must demonstrate that they relied on misstated financial statements that were examined by auditors.
Which of the following best describes the role of analytical procedures near the end of the audit engagement? To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement. To gather evidence to support one or more assertion(s) related to the account balance or class of transactions. To identify possible deficiencies in the client's internal control over financial reporting. To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures.
To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
Individuals who believe they relied on misstated financial statements to make a decision and have suffered losses as a result will issue an action known as a Breach of contract. Securities litigation. Constructive fraud. Tort.
Tort.
A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to customer accounts receivable can be an audit test for lapping. T/F
True
A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses. T/F
True
An objective for an audit is to obtain evidence related to management's financial statement assertions. T/F
True
Auditors can inspect the "unmatched invoice file" and compare it to the "unmatched receiving report" file to determine whether liabilities are unrecorded. T/F
True
Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures. T/F
True
Auditors' communications with the individuals charged with governance of the client can be provided either during the audit or at the conclusion of the audit. T/F
True
Confirmations yield evidence about existence and the gross valuation of a receivable balance. T/F
True
If a necessary audit procedure has been omitted, auditors should first identify whether individuals are currently relying on the client's financial statements and auditors' reports. T/F
True
If personnel in the organization are not performing their control activities very well, auditors will need to design substantive procedures to try to detect whether control failures have produced misleading financial statement account balances. T/F
True
Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions. T/F
True
Interim testing is ordinarily done prior to the date of the financial statements. T/F
True
Normally, liabilities should be recorded on the date the goods are received and accepted. T/F
True
Proper separation of duties involves authorization of purchases by persons who do not have custody, recording, or reconciliation duties. T/F
True
Reviewing the latest interim financial statements is one method of identifying subsequent events. T/F
True
Subsequent events may provide additional information about a condition that existed at the date of the financial statements. T/F
True
The accountants who record cash receipts and credits to customer accounts should not handle the cash. T/F
True
The aging information for accounts receivable is typically used in connection with assessing the allowance for doubtful accounts. T/F
True
The client should request the bank to send a cutoff bank statement directly to the auditor. T/F
True
The company's bank reconciliation is a critical means by which an auditor completes audit procedures over the cash balance in the financial statements. T/F
True
The existence of "miscellaneous" revenue or expense accounts may signal the practice of earnings management. T/F
True
The principal goal of the physical inspection of PP&E is to determine actual existence and condition of property. T/F
True
The search for unrecorded liabilities should normally be performed up to the last day of field work in the period following the audit client's balance sheet date. T/F
True
The use of confirmations for cash balances is still considered a generally accepted audit procedure. T/F
True
The use of confirmations to test accounts receivable is considered a generally accepted audit procedure. T/F
True
Written representations should be signed by the chief executive officer, chief financial officer, or other executive-level client personnel. T/F
True
The audit team determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following report alternatives? Standard (unmodified) report or a disclaimer of opinion. Qualified opinion or adverse opinion. Standard (unmodified) report or adverse opinion. Unmodified opinion with a reference to going-concern or disclaimer of opinion.
Unmodified opinion with a reference to going-concern or disclaimer of opinion.
The control procedure "credit sales approved by credit department" is directed toward which assertion? Valuation/Accuracy. Completeness. Existence/Occurrence. Cutoff.
Valuation/Accuracy.
Smith, CPA, is the auditor for Juniper Manufacturing Corporation, a nonpublic entity that has a June 30 fiscal year. Juniper arranged for a substantial bank loan, which depended on the bank receiving audited financial statements showing a debt-to-equity ratio of no more than 2 to 1. The bank's deadline for receiving these financial statements was September 30. On September 25, just before the auditors' opinion was to be issued, Smith received an anonymous letter on Juniper's letterhead indicating that Juniper's five-year lease of a factory building that was classified in the financial statements as an operating lease was in fact a capital lease. The letter stated that Juniper had a secret written agreement with the lessor modifying the lease and creating a capital lease. Smith confronted the president of Juniper, who admitted that a secret agreement existed but said it was necessary to treat the lease as an operating lease to meet the debt-to-equity ratio requirement of the pending loan and that nobody would ever discover the secret agreement with the lessor. The president said that if Smith did not issue a report by September 30, Juniper would sue Smith for substantial damages that would result from not getting the loan. Under this pressure and because the audit documentation contained a copy of the five-year lease agreement supporting the operating lease treatment, Smith issued the report with an unmodified opinion on September 29. In spite of the fact that it received the loan, Juniper went bankrupt. The bank is suing Smith to recover its losses on the loan, and the lessor is suing Smith to recover uncollected rents. a. Is Smith liable to the bank? b. Is Smith liable to the lessor? c. Was Smith independent?
a. Yes b. No c. No
If an accountant is not independent with respect to a non-issuer and has been requested to conduct a compilation engagement, the accountant should: decline to accept the engagement because of the lack of independence. decline to accept the engagement and conduct a preparation engagement. accept the engagement and disclose the lack of independence in the compilation report. accept the engagement and express limited assurance on the financial statements because of the lack of independence.
accept the engagement and disclose the lack of independence in the compilation report.
If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by: comparing the amount written on the check face to the amount written in the cash disbursements journal. comparing the magnetic imprint of the amount paid to the amount written on the check face. examining the endorsement on the back of the check. comparing the check number on the face of the check to the check number in the cash disbursements journal.
comparing the magnetic imprint of the amount paid to the amount written on the check face.
When accountants are not independent, which of the following reports can they issue: compilation report on historical financial statements. standard unmodified audit report on historical financial statements. examination report on a financial forecast. examination of internal control over financial reporting for an issuer.
compilation report on historical financial statements.
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the: check register for the last month is reviewed. cutoff bank statement is reconciled. bank confirmation is reviewed. search for unrecorded liabilities is performed.
cutoff bank statement is reconciled.
The auditors' information source for vouching the bank reconciliation items is the accounting journal at year end. standard bank confirmation. cutoff bank statement. bank statement at audit date.
cutoff bank statement.
To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the: cutoff bank statement. general ledger. bank confirmation. year-end bank statement.
general ledger.
The inherent risk that accounts payable may be omitted or otherwise understated typically is high. low. moderate. indeterminate.
high.
Which of the following would not typically be a specific relevant assertion about fixed asset accounts? depreciation has been calculated properly, using accepted methods and reasonable estimates of useful life and other factors. fixed assets in the accounts exist and are in productive use. net carrying book values in the accounts are reflected at current market values. fixed assets are properly classified in the balance sheet under appropriate descriptive captions.
net carrying book values in the accounts are reflected at current market values.
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by: confirmation and observation. observation and inquiry. analytical procedures and confirmation. inquiry and analytical procedures.
observation and inquiry.
The transactions typically classified in the acquisition and expenditure cycle flow do not include receiving, inspecting, and accepting the assets. placing the sales order. accounting for accounts payable. requesting goods, services or assets.
placing the sales order.
The assertions by management regarding the cash accounts in the financial statements include all of the following EXCEPT all restrictions on the use of cash are disclosed. proper internal control activities exist for all cash accounts. cash balance properly reflects all cash on hand, in transit or, on deposit with third parties. cash in all accounts exists in the name of the company.
proper internal control activities exist for all cash accounts.
An audit plan of substantive procedures for cash would NOT include: request a cutoff bank statement be mailed to the client. request client to prepare bank reconciliations. prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. obtain a written client representation concerning compensating balance agreements.
request a cutoff bank statement be mailed to the client.
If a non-issuer prepares financial statements that omit substantially all footnote disclosures required by GAAP, the accountants' compilation report: is not affected, since no assurance is provided in a compilation engagement. should be modified to provide the omitted disclosures. should indicate that the disclosures are omitted and that this omission might affect users' conclusions. should disclaim an opinion on the financial statements because of a significant scope limitation.
should indicate that the disclosures are omitted and that this omission might affect users' conclusions.
Statements on Standards for Accounting and Review Services are applicable to engagements involving: audited financial statements of issuers. unaudited financial statements of issuers. unaudited financial statements of non-issuers. audited financial statements of non-issuers.
unaudited financial statements of non-issuers.
