Entire Audit Set - Just one answer
What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?
PCAOB
Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?
Auditor judgment.
The three general standards are concerned with:
Both b and c.
Which of the following audit risk components may be assessed in qualitative terms?
Both risk of material misstatement and detection risk.
Which of the following is correct concerning required auditor communications about fraud?
Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
A dual-purpose test
Is both a substantive test of transactions and a test of controls.
According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity?
The entity's CEO and/or CFO.
Client risk as defined in the text is
The overall risk of material misstatement.
According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)?
The partner in another office in a nearby city who regularly plays golf with the engagement partner.
All of the following refer to an internal auditor's competence except:
The party in the entity to which the internal auditor reports.
Which of the following is not a characteristic of a batch processed computer system?
The posting of a transaction, as it occurs, to several files, without intermediate printouts.
An IT specialist is least likely to be necessary when
The system has not changed from the prior year.
A written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the
Chief executive officer and the chief financial officer.
Prior to issuing a report on internal controls over financial reporting, an auditor is required to
Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made.
Evaluating a prospective client requires the following step(s):
Communicate with the predecessor auditor.
Information and communication includes all of the following except:
Communicating price changes to customers.
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
Compare a sample of shipping documents to related sales invoices.
Which of the following procedures should an auditor generally perform regarding subsequent events?
Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
Firm policy sets materiality at 4% of pretax income.
Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation?
Flynt Corporation's computer systems were not working properly for two days
The risk of material misstatement includes which of the following?
Inherent risk.
Audit sampling is not used for which type of audit evidence?
Inquiry.
A confirmation is used to
Verify a representation from a third party.
An online sales order processing system most likely would have an advantage over a batch sales order processing system by:
enabling shipment of customers orders to be initiated as soon as the orders are received
Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the
Balance sheet date but prior to the date of the auditor's report.
Which of the following types of audit evidence is the most persuasive?
Bank statements obtained from the client.
An engagement to express an opinion on a system of internal control will generally
Be more extensive in scope than the assessment of control risk made during a financial statement audit
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must
Be persuasive enough to enable the auditor to form an opinion.
When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should
Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles.
In the first audit of an entity, because of the entity's record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor would
Be unable to express an opinion on the current year's results of operations and cash flows.
Of the following statements about an internal control system, which one is correct?
Because of the cost/benefit relationship, tests of controls may be applied on a test basis in some circumstances.
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of
Completeness
Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with?
Completeness.
Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and
Compliance
Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?
Computations made by the auditor.
Harvey, CPA is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?
Confirm, as of the completion of field work, accounts receivable that have increased significantly from the year-end date.
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
Confirmation of an account payable balance mailed by and returned directly to the auditor.
Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit?
Confirming purchases and sales transactions with the vendors and/or customers involved.
If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should
Consider the refusal to be a scope limitation.
A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is
Considered discreditable to the profession.
The refusal of a client's attorney to provide a representation on the legality of a particular act committed by the client is generally
Considered to be a scope limitation.
The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents'
Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards.
A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:
Read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.
When audited financial statements are presented in an entity's document containing other information, the auditor should
Read the other information to determine that it is consistent with the audited financial statements.
A violation of the profession's ethical standards would most likely occur when a CPA who
Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."
A scope limitation sufficient to preclude an unqualified opinion always will result when management
Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.
An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of
Related party transactions.
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?
Relationships involving income statement accounts.
An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by
Relative effectiveness and efficiency of the tests.
Which of the following situations will not result in modification of the auditor's report because of a scope limitation?
Reliance placed on the report of another auditor.
The auditor should consider all of the following when deciding whether substantive procedures will be performed at an interim date except:
Scheduling conflicts in the audit firm that make interim testing more convenient.
During consideration of internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to
Search for significant deficiencies in the operation of internal control.
In obtaining an understanding of an entity's internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to
Search for significant deficiencies in the operation of the internal control
Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance?
Whether management has systems in place to evaluate and effectively manage the entity's business risks
When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining
Whether the engagement should be accepted.
Footing is an example of
Recalculation.
With respect to ethics, the utilitarian theory
Recognizes that decisions involve trade-offs between costs and benefits.
When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make
Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.
An auditor would be least likely to use confirmations in connection with the examination of
Refundable income taxes.
In attributes sampling, population size has little or no effect on sample size once the population exceeds approximately
500
The achieved (actual) level of audit risk
Can never be known with certainty.
The program flowcharting symbol representing a decision is a
Diamond.
Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?
Earnings per share.
Which of the following matters generally is included in an auditor's engagement letter?
Management's responsibility for the entity's compliance with laws and regulations.
Tolerable misstatement is
Materiality allocated to a specific account.
The authoritative body designed to promulgate standards concerning an accountant's association with audited financial statements of an entity that is required to file financial statements with the SEC is the
Public Companies Accounting Oversight Board
Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following:
Reasonable assurance on both the financial statements and internal control.
A review engagement will typically
result in a statement of limited assurance about the fair presentation of the financial statements
Statistical sampling provides a technique for
Measuring the sufficiency of evidential matter.
A CPA's license to practice will ordinarily be suspended or revoked automatically for
Conviction of willful failure to file personal income tax return.
Of the following, which is the least persuasive type of audit evidence?
Copies of client sales invoices inspected by the auditor.
Which of the following professional services would be considered an attest engagement?
An engagement to report on compliance with statutory requirements.
When obtaining evidence regarding litigation against a client, the CPA would be least interested in determining
An estimate of when the matter will be resolved.
The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of
A deficiency in operation.
When an auditor expresses an adverse opinion, the opinion paragraph should include
A direct reference to a separate paragraph disclosing the basis for the opinion.
In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee?
A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.
The quality control standards are concerned primarily with
A firm's monitoring of its practice.
Which of the following is a factual misstatement?
A fixed asset being recorded at the incorrect cost.
Engagement letters include all of the following except:
A list of adjusting journal entries.
In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?
A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
Which of the following is an example of a related party transaction?
A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.
Which of the following best illustrates the concept of sampling risk?
A randomly chosen sample may not be representative of the population as a whole (regarding the characteristic being tested).
Which of the following is generally requested in a legal letter?
A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.
Section 404 of the Sarbanes-Oxley Act includes which of the following?
A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls.
An auditor may reasonably issue an "except for" qualified opinion for
A scope limitation or an unjustified accounting change.
A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is
A significant deficiency.
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?
A state board of accountancy
Communications between the auditor and those charged with governance should include all of the following except:
A summary of specific audit procedures used.
The existence of a related party transaction may be indicated when another entity
Absorbs expenses of the corporation under audit.
When an entity moves into a significant new line of business, all of the following increase except:
Acceptable audit risk.
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Accepting a commission for recommending a product to an audit client.
The control environment component of internal control includes all of the following except:
Access to computer programs.
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?
Accounting records belong to the client.
In testing the existence assertion for an asset, an auditor ordinarily works from the
Accounting records to the supporting documents. (Vouching)
Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
Accounts receivable bookkeeper to update the subsidiary accounts receivable records
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than expected.
Which of the following presumptions is correct about the reliability of audit evidence?
An effective internal control system provides more reliable audit evidence.
For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivables are calculated, which of the following best represents the conclusions to be drawn?
Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivables to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance. **This answer is correct because it includes the proper quantitative amounts and conclusion. Turnover ratios a+B207re: $1,000,000/$100,000 = 10 and $2,000,000/$300,000 = 6.67; ratios of uncollectible accounts to gross accounts receivable are: $30,000/$100,000 = .30 and $50,000/ $300,000 = .167. Also, this answer correctly suggests a possible understatement of the allowance—it is lower than the preceding year.
It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the
Achievement of the objectives of the system of internal control.
The profession's ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
Actual fee would be substantially higher.
If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end
Additional tests likely will be performed in the remaining period.
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that
Additional tests of details are required.
A major customer of an audit client suffers a fire after year-end, but just prior to completion of audit field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should
Advise management to disclose the event in the notes to the financial statements.
An auditor's primary consideration regarding an entity's internal controls is whether the policies and procedures
Affect the financial statement assertions.
Which of the following statements is false?
All controls relevant to financial reporting are accounting controls.
Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
An inquiry of the client's legal counsel concerning litigation.
An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except:
An opinion as to whether the basis of accounting used is appropriate under the circumstances.
The first standard of reporting requires that, "the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles." This passage requires
An opinion by the auditor
Unlike GAAS, the attestation standards do not contain a requirement that auditors obtain
An understanding of the clients internal control structure
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of
Analytical procedures.
For nonpublic companies not subject to the standards of the PCAOB, reports on internal control are an example of which of the following types of engagements?
Attest Engagement
Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use
Attributes sampling.
The objectivity of an internal audit department will most likely be enhanced if its reports to the client's
Audit Committee
An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the
Audit committee of the board of directors.
To provide for the greatest degree of independence in performing internal audit functions, an internal auditor most likely should report to the
Audit committee of the board of directors.
Which of the following is not a service typically provided by internal auditors
Audit of Financial statements for SEC filing
An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the
Auditor's report.
When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover
Both years.
The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
Minimize the likelihood of association with clients whose management lacks integrity.
Proper authorization of write-off's of uncollectible accounts should be approved in which of the following departments?
CFO
The general accreditation granted by the Institute of Internal Auditors is known as the:
CIA
The documentation of an auditor's understanding of internal controls
Can include any combination of narratives, questionnaires, or flowcharts.
Which of the following would be considered a change that does not affect consistency?
Change expected to have a material future effect.
Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?
Comparing a sample of shipping documents to related sales invoices.
Which of the following is not a typical analytical procedure?
Comparison of recorded amounts of major disbursements with appropriate invoices.
Which of the following statements ordinarily is included among the written client representations obtained by the auditor?
Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.
Compilation reports can be in any of the following forms except
Compilation with partial assurance
When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations
Complement, but do not replace, substantive procedures designed to support the assertion.
Tracing is used primarily to test which of the following assertions about classes of transactions?
Completeness.
Assessing control risk at a lower level involves all of the following except:
Concluding that controls are ineffective.
The four principles of the IIA Code of Ethics are:
Confidentiality, competency, objectivity, and integrity
Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments?
Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
Confirming with third parties the details of arrangements to maintain financial support.
Which of the following is not an audit procedure that is commonly used in performing tests of controls?
Confirming.
When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to
Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.
Before applying substantive procedures to the details of accounts at an interim date (a date prior to the balance sheet date), an auditor should
Consider the availability of information at a later date that will be necessary for the auditor's procedures (e.g., electronic data).
As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
Consider the possibility of an error in the financial statements.
In general, material frauds perpetrated by which of the following are most difficult to detect?
Controller.
According to the COSO definition of safeguarding of assets
Controls over financial reporting are effective if they provide reasonable assurance that losses are properly reflected in the financial statements.
The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with
Corroboration of the information furnished by management concerning litigation, claims, and assessments.
Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, and/or assessments. The primary reason for this request is to provide the auditor with
Corroborative inquiries made of the client by the auditor.
An effective control environment
Creates a commitment to competence.
General controls include all of the following except:
Data validation controls.
The date of the management representation letter should coincide with the
Date of the auditor's report.
The permanent (continuing) file of an auditor's working papers most likely would include copies of the
Debt agreements.
In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for
Deciding whether to accept or continue a client.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would
Decrease detection risk.
A control is deemed to be more important than thought at the time that attributes sampling parameters were set. The auditor is most likely to respond by
Decreasing the tolerable deviation rate.
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
Determining the extent of involvement of the client's internal auditors.
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements, provided that:
Distribution of the report is restricted to the specified users
In an audit of financial statements of a private company in accordance with generally accepted auditing standards, an auditor is required to
Document the auditor's understanding of the entity's internal control.
Internal controls are not designed to provide reasonable assurance that
Embezzlement will be eliminated.
The objectives of the engagement partner's communication with the audit team include
Emphasizing the importance of professional skepticism.
A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n)
Engagement letter.
Engagement risk can be eliminated by
Engagement risk cannot be eliminated.
An organizational structure is important for all of the following reasons except:
Ensuring a proper commitment to controls.
An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the
Entity's ability to accurately process and summarize financial data.
After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless
Evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.
When auditing contingent liabilities, which of the following procedures would be least effective?
Examining customer confirmation replies.
Which assertions may be tested for the "account balances" category of management assertions?
Existence, rights and obligations, completeness, valuation and allocation
An auditor performing an audit of internal control over financial reporting would be required to
Form an opinion on the effectiveness of internal control.
Procedures specifically outlined in an audit program are designed primarily to
Gather evidence about management's assertions.
In creating lead schedules for an audit engagement, what client information is needed to begin?
General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s)
Going concern but not "reasonable period of time, not to exceed one year."
An entity's IT infrastructure refers to
Hardware components.
An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
Has been properly voided.
An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee
Has not been paid and will not be paid for at least twelve months.
Which of the following statements best describes a relationship between sample size and other elements of auditing?
If materiality decreases, sample size will need to increase.
A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by
Implementing an appropriate system of quality control.
Audit documentation
May be in paper, electronic, or some other form.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
Inability to generate cash flows from operations while reporting substantial earnings growth.
The auditor is most likely to presume that a high risk of a fraud exists if
Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.
The auditor's communication of material weaknesses in internal control for a nonpublic company is
Incidental to the auditor's objective of forming an opinion as to the fair presentation of the financial statements.
When testing automated IT controls, the auditor is most likely to do all of the following except:
Increase sample size because the tolerable deviation rate tends to be higher for automated IT controls.
Which of the following combinations guarantees a larger sample size?
Increase the desired confidence level and decrease the tolerable deviation rate.
A substantive strategy differs from a reliance strategy in that a substantive strategy includes
Increased implementation of detailed tests of transactions and balances.
The auditor can respond to an increased risk of fraud by doing all of the following except:
Increasing detection risk.
Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8?
Independence.
Which of the following situations would most likely require special audit planning?
Inventory is comprised of precious stones.
Which of the following statements regarding the PCAOB is incorrect?
It has delegated all of its standard-setting authority to the AICPA
Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether:
It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations
Which of the following best describes the distinguishing feature of statistical sampling?
It provides a means for measuring mathematically the degree of uncertainty that results from examining only part of a population.
An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against a client except the:
Jurisdiction in which the matter will be resolved.
Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with
Knowledge required to fulfill assigned responsibilities.
In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a
Larger sample size.
An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n)
Lead schedule.
Which of the following expressions is least likely to be included in a client's representation letter?
Management acknowledges responsibility for illegal actions committed by its employees.
Auditors are most likely to use the most rigorous audit procedures to examine
Management assertions that are deemed to be of high risk.
In designing written audit programs, an auditor should plan specific audit procedures to test
Management assertions.
An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if
Management fails to take the appropriate remedial action.
A modification of the standard report is required for all of the following conditions except:
Management has concluded that internal controls are not effective.
In the context of agency theory, information asymmetry refers to the idea that
Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when
Management is dominated by one individual.
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when
Management is dominated by one individual.
The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the
Management of the company
Under Statements on Auditing Standards, which of the following would be classified as an error?
Misinterpretation by management of facts that existed when the financial statements were prepared.
The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent
Misinterpretations regarding the degree of responsibility the auditor is assuming
Potential benefits of an entity's controls in an IT environment include all of the following except:
More accurate accounting estimates.
As a result of tests of controls, an auditor incorrectly assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was
More than the deviation rate in the auditor's sample.
A special report related to compliance with contractual provisions provides
Negative assurance.
In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include
Net Income and Stockholders' Equity.
When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's
Net income.
After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless
New information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
Which of the following events occurring after the issuance of a client's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
New information is discovered concerning undisclosed lease transactions in the audited period.
After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless
New information is discovered concerning undisclosed related party transactions of the previously audited period.
A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should
Not describe the reason for lack of independence but should state specifically that the CPA is not independent.
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by
Observation and inquiry.
As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except:
Obtain knowledge about the operating effectiveness of the internal control.
Which of the following auditing procedures is ordinarily performed last?
Obtaining a management representation letter
Which of the following is not an element of management's assessment process for the effectiveness of internal control?
Obtaining the auditor's assessment of the internal control effectiveness.
Which assertions may be tested for the "transactions and events" category of management assertions?
Occurrence, completeness, authorization, accuracy, cutoff and classification
Which assertions may be tested for the "transactions and events" category of management assertions?
Occurrence, completeness, authorization, accuracy, cutoff and classification.
Which assertions may be tested for the "presentation and disclosure" category of management assertions?
Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation
Vouching is used primarily to test which of the following assertions about classes of transactions?
Occurrence.
The permanent audit file usually includes
Organizational chart.
In determining whether transactions have been recorded, the direction of the audit testing should start from the
Original source documents.
The Public Company Accounting Oversight Board's role is to
Oversee the auditors of public companies in order to protect the interests of investors
Assurance services may improve all of the following except
Periodicity.
The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should
Perform additional audit procedures to investigate the matter further.
A well-prepared flowchart should make it easier for the auditor to
Perform walkthroughs.
Preliminary engagement activities include
Performing background checks on top management.
The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as
Reasonable assurance.
The three standards of fieldwork are concerned with:
Planning and supervision and understanding the client's internal control system.
In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample?
Population size.
Which of the following types of audit evidence is the least reliable?
Prenumbered purchase order forms prepared by the client.
In order for an external auditor to complete an audit of a public company, the entity's management must comply with all of the following except:
Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.
Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of
Professional skepticism
The first general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and
Proficiency as an auditor which likely has been acquired from previous experience
An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose?
Qualified and disclaimer.
Which of the following services would be considered an attest engagement?
Reporting on compliance with a university's accreditation requirements
Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct?
Reporting.
Analytical procedures are
Required for planning and overall review of the financial statements.
In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a
Restaurant where the CPA dines frequently.
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.
Ajax, Inc., is an affiliate of the audit client and is audited by another audit firm. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees by the client of the affiliate's indebtedness have been detected?
Review client minutes and obtain a representation letter.
S&H Associates has just performed an audit of Bob's Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true?
S&H should consider this situation a limitation on the scope of the audit.
An entity's financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by:
Scanning the general journal for unusual entries
An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by
Scanning the general journal for unusual entries.
An example of audit evidence with a medium level of reliability is
Scanning.
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
Square footage of selling space.
Which of the following best describes what is meant by generally accepted auditing standards?
Standards of quality for the auditor's performance
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive procedures should increase.
Analytical procedures may be classified as being primarily which of the following?
Substantive procedures.
With respect to ethics, the rights-based approach
Suggests that an individual's actions should not violate the rights of any individual.
All of the following are inherent risk factors that are pervasive to the financial statements except:
Supplies inventory is difficult to count.
After an audit report containing an unqualified opinion on a nonpublic client's financial statements is issued, the auditor learns that the client has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should
Take no action because the auditor has no obligation to make any further inquiries.
Which of the following is not considered one of the six general categories of assurance services provided by CPA firms?
Tax Planning
The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n)
Test of controls.
A limit test is a
Test to ensure that a numerical value does not exceed some predetermined value.
Which of the following is a general audit test?
Tests of controls.
Which of the following audit tests would be regarded as a test of controls?
Tests of the signatures on canceled checks to the board of directors' authorizations.
After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities
That the auditor plans to rely on.
The audit working papers belong to
The audit firm.
For publicly-held companies, which of the following is integrated into the audit of financial statements?
The audit of internal controls.
After field work audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the working papers. This second review usually focuses on
The audit report, financial statements, and footnotes for consistency.
For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true?
The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate.
Which of the following statements is correct about an auditor's required communication with management and those charged with governance?
The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.
What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB?
The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements.
Which statement concerning audit evidence is not valid?
The auditor performs tests to collect convincing evidence that the financial statements are not misstated.
All of the following represent an increased opportunity for management to commit fraud except:
The auditor's relationship with management is strained.
Which of the following concerning the auditor's report on internal control over financial reporting is correct?
The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work.
An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes
The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.
Engagement risk is
The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
Which of the following situations would require adjustment to or disclosure in the financial statements?
The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?
The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of
The company's management
The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning
The integrity of management.
Proper monitoring within an internal control framework may include all of the following except:
The internal revenue service.
Which of the following statements concerning audit evidence is correct?
The measure of the reliability of audit evidence lies in the auditor's judgment.
Which of the following is not a concern as to whether a misstatement is qualitatively material?
The misstatement is less than 5% of pretax income.
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
The primary responsibility for preventing fraud in an organization lies with
The organization's management.
A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when
The outcome of the event is judged to be reasonably possible but the loss cannot be reasonably estimated.
Which of the following is true with respect to the auditor's report?
The report indicates that the company's financial statements were audited in accordance with applicable auditing standards.
Which of the following best describes the concept of audit risk?
The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.
Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control?
The role of the auditor in internal control.
The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities except:
The segregation of duties.
As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter?
To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed.
An auditor would issue an adverse opinion if
The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because
The work performed by internal audit personnel may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.
Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%?
There is a 5% chance that the deviation rate in the population exceeds 7%.
As the acceptable level of detection risk increases, an auditor may change the
Timing of substantive procedures from year-end to an interim date.
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
Timing of the audit.
Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?
To enhance auditor independence from the management of the corporation.
The main goal of auditing internal control is
To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.
The management letter is used
To make recommendations to the client based on observations made during the audit.
In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis?
Tolerable deviation is small and expected deviation is high.
For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control?
Tolerable deviation rate and confidence level.
In determining the sample size for a test of controls, an auditor should consider the expected deviation rate, desired confidence level, and the
Tolerable deviation rate.
An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and
Treat the missing check as a deviation for the purpose of evaluating the sample.
A CPA is most likely to refer to one or more of the three general auditing standards in determining
Whether the CPA should undertake an audit engagement
When compiling the financial statements of a nonpublic entity, an accountant should:
Understand the accounting principles and practices of the entity's industry
An auditor obtains knowledge about a new client's business and its industry in order to
Understand the events and transactions that may have an effect on the client's financial statements.
After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's
Understanding of the internal control.
If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n)
Unqualified/unmodified opinion.
Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an)
Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph.
A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice
Used a records-retention agency to store the CPA's working papers and client records.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
Usual trade credit from suppliers is denied.
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of:
Valuation
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about:
Valuation and allocation
Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same client?
When the CPA, as legal agent, consummates a business acquisition for the client.
When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?
When the auditor believes the financial statements are misleading.
In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the entity's confirmation letter
a client-prepared statement of account showing the details of the customer's account balance
What is channel stuffing?
a company induces distributors to buy substantially more inventory than they can promptly resell
Which of the following is not included in the broad category of assurance services?
accounting or review services
If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the
accounting records with the source documents
Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a listing of remittances that is forwarded to the cashier. A copy of the listing should be sent to the
accounts receivable bookkeeper to update the subsidiary accounts receivable records
Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivables?
assessing the allowance for uncollectible accounts for reasonableness
To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the
bill of lading (shipping report) file
Customers are more likely to complain to the entity if which of the following assertions for cash receipts is violated?
completeness
If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?
completeness
Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts?
current year sales to current year budgeted sales
Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations?
current-year revenue to budgeted current-year revenue
Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that
customers were billed for goods shipped to them
An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the
daily deposit slip
Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and
deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts
Smith corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to
develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
employees involved in the credit-granting function are separated from the sales function
Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to
evaluate the allowance for doubtful accounts
An aged trial balance of accounts receivable is normally used by the auditor to
evaluate the provision for bad debts.
Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion?
trace the record of shipping to inclusion in the accounts receivable subsidiary ledger
If accounts receivable turnover (credit sales/ receivables) was 7.1 times in 2013 compared to only 5.6 times in 2014, is it possible that there were
fictitious sales in 2014
While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was , in fact, not materially misstated. Such a situation illustrates the risk of
incorrect rejection
Which of the following might be detected by an auditor's review of the client's sales cutoff?
inflated sales for the year
Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests?
inspect related shipping records and sales invoices documenting the merchandise sold to customers
Which of the procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to a second requests?
inspect the shipping records documenting the merchandise sold to the debtors
Which of the following statements best describes an inherent limitation of the monetary-unit sampling method
misstatement rates must be small and the misstatements must be overstatements.
An auditor who has confirmed accounts receivables may discover that the sales journal was held open past year end if:
most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed.
Which of the following misstatements is not related to the completeness assertion for revenue?
next year's revenue is recorded this year
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
no reply to a positive confirmation request is received
Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
observe the consistency of the employee's use of cash registers and tapes
Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by:
observing the employees who are performing the control activities
An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?
one of the cashiers has been covering a personal embezzlement by lapping
Which of the following might be detected by an auditor's review of the entity's sales cutoff?
overstated sales for the year
When evaluating internal control of an entity that processes sales transactions on the internet, an auditor would be most concerned about the:
potential for computer disruptions in recording sales
In the confirmation of accounts receivables, the auditor most likely
randomly select a representative sample of accounts for confirmation
Sound internal control activities dictate that defective merchandise returned by customers be presented initially to the:
receiving clerk
Which of the following activities most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?
reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger
Mill Co uses a batch processing method to process its sales transactions. Data on Mill's sales transaction file are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer accounts balances. One of the direct outputs of the creation of this file most likely would be a:
report showing exceptions and control totals
If tolerable misstatement for those accounts receivable balance is $75,000 and the aggregate factual misstatement found by the auditor is $82,000 the auditor is most likely to
request that the entity adjusts its accounts receivable balance by $82,000
To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would
request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response
An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end?
review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end
AU-C 505, External confirmations, defines external confirmation as " a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium". The assertions for which confirmation of accounts receivable balances provides primary evidence are:
rights and obligations and existence
Which of the following internal controls would be most likely to deter the lapping of collections from customers?
segregation of duties between receiving cash and posting the accounts receivable ledger
At which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least concern to the auditor in the conduct of an audit?
selling of goods for cash
Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is ineffective. To determine the existence of the accounts receivable balances at the balance sheet date, cooper would most likely
send positive confirmation requests
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would
send the customer a second confirmation request
Which of the following internal control activities most likely would deter lapping of collections from customers?
separation of duties between receiving cash and posting the accounts receivable ledger
In a retail cash sales environment, which of the following controls is often absent?
separation of functions
Tracing shipping documents to prenumbered sales invoices provides evidence that:
shipments to customers were properly invoiced
Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue?
shipping documents
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
the billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Which of the following is not a key segregation of duties in the revenue process?
the accounts receivable function should be segregated from the invoice preparation function
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
the auditor cannot infer that all nonrespondents have verified their account information
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 4 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
the auditor should inspect transactions occurring in the last month of the fiscal year and review the related sales contracts to determine that revenue was posted in the prior period.
Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?
the billing department supervisor matches prenumbered shipping documents with entries in the sales journal
Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with sales transactions?
the nature of the credit authorization process
During the consideration of a small business client's internal control, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?
the owner reviews credit memos after they are recorded
During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness
the owner reviews credit memos before they are recorded
A CPA is gaining an understanding of the internal controls for a client that sells garden products using an internet site. Which of the following is not likely to be found on the client's organization chart?
the sales order department
which one of the following statements is true regarding two random samples, drawn in the same way, from the same population, one of size 30 and one of size 300.
the two sample are expected to have the same sample mean
Cash receipts from sales on account have been misappropriated. Which of the following acts conceal this defalcation and be least likely to be detected by an auditor?
understanding the sales journal
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
understating the sales journal
Which of the following actions would best conceal the theft of cash collections from sales on account?
understating the sales journal amounts
Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff?
unrecorded sales for the year
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of
valuation and allocation
During the process of confirming receivables as of December 31, year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, year 2" The auditor would most likely
verify that the amount was received.
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:
verify the sources and contents of the faxes in telephone calls to the senders
For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve
write-offs of customer accounts
An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Controls accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual circumstances are involved. credit memoranda are prenumbered and must correlate with receiving reports. Which of the following areas could be viewed as an internal control deficiency of the above organization?
write-offs of delinquent accounts
A flowchart is most frequently used by an auditor in connection with the
Review of the entity's internal controls.
Prime Plus engagements are mainly designed to:
Assist the elderly to maintain their financial independence and desired lifestyle as they age.
The auditor must be independent of the audit client unless:
None of the above--the auditor cannot lack independence.
The accountant provides absolute assurance to the user in the performance of:
None of the above; compilation, review, and audit
For private companies, accounting firms are prohibited from providing
None of these.
The computed upper deviation rate is
The sum of the sample deviation rate and an appropriate allowance for sampling risk.
Which of the following is the least persuasive documentation in support of an auditor's opinion?
Schedules of details of physical inventory counts conducted by the client.
Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project?
Systems documentation.
A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2011. The number of subscribers increased steadily throughout the year and at December 31, 2011, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2011 and was increased to $12 for new members on April 1, 2011. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2011, would be approximately
163800
Which of the following statements concerning control risk is correct?
Assessing control risk and obtaining an understanding of an entity's internal controls may be performed concurrently.
For a large population of cash disbursement transactions, Smith, CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a tolerable deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith anticipated an expected deviation rate of only 2 percent but wanted to maintain the same tolerable deviation rate and confidence level, the sample size would be closest to
200
Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations?
30 days.
For an attributes sampling plan, the tolerable deviation rate is 4.5%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the desired confidence level is 95%. What is the allowance for sampling risk included in the computed upper deviation rate?
4%.
An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions?
Assets and liabilities arising from cash transactions and revenue collected and expenses paid
A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be
588000
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A bank lockbox system
Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement
Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements?
A change from an unacceptable accounting principle to a generally accepted one.
Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report?
A change in accounting estimate.
For which of the following events would an auditor issue a report that does not include any reference to consistency?
A change in the service life used to calculate depreciation expense.
Which of the following statements concerning audit evidence is correct?
A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.
The current file of the auditor's working papers should generally include
A copy of the financial statements.
Which of the following is a source of detection risk?
A nonrepresentative sample.
Public reporting on the effectiveness of internal control over financial reporting, as required by the Sarbanes-Oxley Act, includes
A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting.
A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through
A system of quality control.
Which of the following is allowable for a CPA?
A used car loan from a banking client where the client has a lien on the car.
AAA & Associates recently finished auditing LinktheEarth Corporation's internal control over financial reporting. AAA found a number of material weaknesses in the company's internal control. LinktheEarth's management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end?
Adverse
In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure
Affects management's financial statement assertions.
Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?
Assigning personnel to engagements.
Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that:
All information included in the financial statements is the representation of the management of the entity.
An assurance report on information can provide assurance about the information's:
All of the above
Examples of entity-level controls include
All of the above are examples of entity-level controls.
In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except:
All of the above are required.
In assessing whether to accept a client for an audit engagement, a CPA should consider
All of the above should be considered.
All audit documentation should have a heading, which includes
All of the above.
Under the Sarbanes-Oxley Act, the audit committee of a public company has the following requirement(s):
All of the above.
Auditing standards define special purpose financial statements as including those prepared under the following base(s)
All of these.
Which of the following is required for a firm to designate itself as a "Member of the American Institute of Certified Public Accountants" on its letterhead?
All partners must be members.
If an auditor dates the auditor's report on financial statements for the year ended December 31, 2011, as of February 10, 2012, except for Note J, as to which the date is March 3, 2012, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of
All subsequent events occurring through February 10, 2012 and the specific subsequent event referred to in Note J through March 3, 2012.
The primary objective of final analytical procedures is to
Assist the auditor in assessing the validity of the conclusions reached.
A Type I subsequent event usually requires
An adjustment to the financial statements.
Which of the following statements is not correct about materiality?
An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.
Analytical procedures used in planning an audit should focus on identifying
Areas that may represent specific risks relevant to the audit.
Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet?
Assertions about presentation and disclosure.
Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should
Assess the difficulty in controlling achieved audit risk for the remainder of the period.
Which of the following procedures would an auditor most likely include in the initial planning of an examination of financial statements?
Assess the need for the use of specialists in the audit.
Reports on service organizations typically
Assess whether the service organization's controls are suitably designed to achieve internal control objectives.
Which of the following presumptions does not relate to the appropriateness of audit evidence?
An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
An example of a Type I subsequent event is
An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the client's fiscal year) that a large portion of the client's inventory is obsolete.
Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements?
An illegal payment to a foreign official that was not recorded.
Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements?
Analytical procedures.
An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that
Any disputes over significant accounting issues have been settled to the auditor's satisfaction.
Which of the following statements concerning prospective financial statements is correct?
Any type of prospective financial statement would normally be appropriate for limited use.
Where computer processing is used in significant accounting applications, internal control activities may be defined by classifying control activities into two types: general and
Application.
For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date?
At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals.
In determining estimates of fees, an auditor may take into account each of the following, except the:
Attainment of specific findings.
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that
Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion.
An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except:
Audit risk should increase.
Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?
Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability.
A high detection risk strategy includes all of the following except:
Audit work only completed at year-end.
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's
Audit working papers.
Audit documentation prepared on audits of public clients is the property of the
Auditor.
Why do auditors generally use a sampling approach to evidence gathering?
Auditors must balance the cost of the audit with the need for precision.
Due professional care requires
Auditors to plan and perform their duties with the skill and care that is commonly expected of accounting professionals
Which of the following is not considered a principle on which TRUST services were established?
Authentication
Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of
Authorization, recording, and custody.
When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the
Capability of extending the due dates of existing debt.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
Cash flows from operating activities are negative.
Which of the following ratios is least likely to assist the auditor in determining whether the client is experiencing financial difficulties?
Cash/total assets.
Which of the following would be considered a change that affects consistency?
Change in accounting principle.
All of the following are typically in the current file except:
Chart of accounts.
A customer intended to order 100 units of product Z96014, but incorrectly ordered 100 units of a nonexistent product Z96015. Which of the following controls most likely would detect this error?
Check digit verification.
Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?
Check digit.
A field test is a
Check on a field to ensure that it contains either all numeric or all alphabetic characters.
An auditor is least likely to test the internal controls that provide for
Classification of revenue and expense transactions by product line.
Which is not an attribute of an external auditor?
Client advocacy
When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the
Current period and those of the other periods presented.
Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?
Different interests may exist between the company preparing the statements and the parties using the statements.
The AICPA's Statements on Auditing Standards can be described as
Defining the minimum standards of performance for an auditor
If the size of the sample to be used in a particular test of controls has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection procedures
Depending on the size of the sample chosen, the auditor may actually achieve desired precision.
Audit documents that record the procedures used by the auditor to gather evidence should be
Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement.
Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls?
Desired confidence level.
What is the general character of the work conducted in performing a forensic audit for a company?
Detecting or deterring fraudulent activity
An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except:
Detection risk increases.
The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as
Detection risk.
Evaluating a prospective client requires the following step(s):
Determine if the firm is independent of the client.
Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
Difficulty and expense involved in testing a particular item.
Which of the following is not a Trust Services principle?
Digital certificate authorization
Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by
Direct participation by the owner of the business in the recordkeeping activities of the business.
Audit evidence concerning proper segregation of duties ordinarily is best obtained by
Direct personal observation of the employees who apply the control activities.
When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)
Disclaimer of opinion
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably
Disclose the fraud to the appropriate level of the client's management.
Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must
Disclose the reasons for any qualification in the predecessor auditor's opinion.
An auditor's client has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The client refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must
Disclose the situation in the auditor's report.
A Type II subsequent event usually requires
Disclosure in the footnotes.
Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion?
Disclosure of material weaknesses corrected during the period.
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of the audit procedures with the client's management.
Management documentation should include all of the following except:
Documentation regarding the auditor's evaluation of internal controls.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls
Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.
Which of the following is not one of the Principles in the IIA Code of Ethics?
Due Professional Care
Which of the following describes the generally accepted auditing standard requiring a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision?
Due care
The first general standard recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper
Education and experience in auditing
Which of the following is not a primary objective of internal control as established by COSO?
Effective purchasing systems.
The risk of incorrect acceptance relates to the
Effectiveness of the audit.
Which of the following parties is responsible for the fairness of the representations made in financial statements?
Entity's management.
In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that
Errors and fraud have been prevented, or detected and corrected.
Which of the following is not one of the general areas of the IIA's International Standards for the Professional Practice of Internal Accounting?
Ethical standards
Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code?
Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.
During the first phase of an audit, a CPA most likely would
Evaluate the integrity of management.
Which assertions may be tested for the "account balances" category of management assertions?
Existence, rights and obligations, completeness, valuation and allocation.
The risk of material misstatement differs from detection risk in that it
Exists independently of the actions of the auditor.
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the
Expected population deviation rate.
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to
Extend auditing procedures.
When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the
Extent of substantive tests.
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the
Extent of tests of details.
The acceptable level of detection risk is inversely related to the
Extent of the substantive procedures.
An entity's control activities include all of the following except:
External auditor's tests of controls.
Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
Facts that might bear on management integrity.
Which of the following most likely would be the result of ineffective internal control in the revenue cycle?
Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme
When documenting an entity's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a
Symbolic representation of a system or series of sequential processes
An example of an analytical procedure is the comparison of
Financial information with similar information regarding the industry in which the entity operates.
Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements?
First standard.
Auditors are most likely to gather audit evidence solely using substantive procedures
For nonrecurring, unusual transactions.
Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis should
Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.
To emphasize auditor independence from management, publicly traded corporations are required to
Have the independent auditor report to an audit committee of independent members of the board of directors.
Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit?
He need make no reference.
The tolerable deviation rate for a test of controls is generally
Higher than the expected rate of deviations in the related accounting records.
Which of the following best describes the role of corporate governance?
Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
How the results of various auditing procedures performed by the assistants should be evaluated.
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?
I believe that the action can be settled for less than the damages claimed.
The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence?
I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence.
When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to
Identify areas of relatively high risk of misstatement and plan the audit accordingly.
The five step process in the audit of ICFR includes
Identify controls to test using a top-down, risk-based approach.
An auditor will ordinarily examine invoices from lawyers primarily in order to
Identify possible unasserted litigation, claims, and assessments.
Assessing control risk at a lower level most likely would involve
Identifying specific internal controls relevant to specific assertions.
What is meant by the Code of Professional Conduct's definition of "holding out"?
Informing a client about one's status as a CPA.
The auditor generally gives most emphasis to ratio and trend analysis in the examination of the
Income Statement.
Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?
Incompatible duties.
The fourth standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements. The overall purpose of the fourth standard of reporting is to require that reports
Indicate the character of the auditor's examination and the degree of responsibility assumed by the auditor
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods
Influence the design of internal controls.
In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was
Initially concealed by a forged document.
Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if
Inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.
To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including
Inquiry.
For which of the following audit tests would an auditor most likely use attributes sampling?
Inspecting employee time cards for proper approval by supervisors.
Which of the following procedures would provide the most reliable audit evidence?
Inspection of bank statements obtained directly from the client's financial institution.
Which of the following procedures most likely would be included as part of an auditor's tests of controls?
Inspection.
Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the
Integrity of management.
Which of the following is not explicitly a part of the IIA's definition of internal auditing?
Internal auditors should help external auditors complete the annual financial statement audit
All of the following are significant deficiencies except:
Inventory is highly subject to obsolescence.
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph
Is appropriate and would not negate the unqualified/unmodified opinion.
An "integrated audit"
Is comprised of audits of internal control over financial reporting and of financial statements.
With respect to ethics, the justice-based approach
Is primarily concerned with equity and impartiality.
In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor
Is satisfied as to the other CPA's independence and professional reputation.
Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Cravens will probably
Issue a disclaimer of opinion
A violation of the profession's ethical standards would most likely have occurred when a CPA
Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling?
It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data.
After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that
It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.
An underlying feature of random-based selection of items is that each
Item in the accounting population should have an opportunity to be selected.
In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances
Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.
Key Co. plans to present comparative financial statements for the years ended December 31, 2010 and 2011, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, 2012. Key's current management team was not present until January 1, 2011. What period of time should be covered by Key's management representation letter?
January 1, 2010 through May 1, 2012.
Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?
Lead schedules.
To test for unsupported entries in the ledger, the direction of audit testing should start from the
Ledger entries.
The auditor's primary means of obtaining corroboration of management's information concerning litigation is a
Letter of audit inquiry to the client's lawyer.
The largest public accounting firms typically are structured as
Limited liability partnerships
An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of field work but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of field work was
Limited to the specific event referenced.
When a CPA firm examines projected financial statements, the firm's report should include a separate paragraph that
Limits distribution of the projections to specified users
The negative request form of accounts receivable confirmation is useful particularly when the assessed level of control risk relating to receivables is ______, the number of small balances is ______, and the consideration by the recipient is _______.
Low, High, Likely
Increased fraud risk could result in all of the following except:
Lower control risk.
A CPA, while performing an audit, strives to achieve independence in appearance in order to
Maintain public confidence in the profession.
Before accepting an engagement to audit a new entity, an auditor is required to
Make inquiries of the predecessor auditor.
A typical objective of an operational audit is for the auditor to
Make recommendations for improving performance
Who bears ultimate responsibility for the financial statements?
Management of the organization.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
Management places substantial emphasis on meeting earnings projections.
"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a(an)
Management representation letter.
"There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a
Management representation letter.
For which of the following matters should an auditor obtain written management representations?
Management's compliance with contractual agreements that may affect the financial statements.
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
Management's disregard of its responsibility to maintain an adequate control environment.
Which of the following is a performance standard from the International Standards for the Professional Practice of Internal Auditing?
Managing the internal audit activity
The negative request form of an accounts receivable confirmation is particularly useful when the number of small account balances is _____ , assessed level of CR related to receivables is _____, and consideration by the recipient is ______
Many, Low, Likely
The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the
Marketability of assets that management plans to sell.
Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?
Material changes in the quoted market prices of listed investment securities since the balance sheet date.
Which one of the following statements best describes the concept of materiality?
Materiality is largely a matter of professional judgment.
Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to
Mathematically measure uncertainty.
An attorney is responding to an independent auditor as a result of the audit client's letter of inquiry. The attorney may appropriately limit the response to
Matters to which the attorney has given substantive attention in the form of legal consultation or representation.
In the context of an audit of financial statements, substantive procedures are audit procedures that
May be either tests of details of transactions, tests of details of account balances, or analytical procedures.
When performing a test of controls with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population
May occur in a systematic pattern, thus destroying the sample randomness.
Auditors who prefer statistical sampling to nonstatistical sampling may do so because statistical sampling helps the auditor
Measure the sufficiency of the evidential matter obtained.
A primary purpose of internal controls is to
Meet objectives of maintaining reliable documents and records and accurate financial reporting.
The Audit committee consists of:
Members of the Board of Directors
As generally conceived, the audit committee of a publicly held company should be made up of
Members of the board of directors who are not officers or employees.
As a result of tests of controls, an auditor over relied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was
More than the deviation rate in the auditor's sample.
The permanent file section of the working papers that is kept for each audit client most likely contains
Narrative descriptions of the client's accounting system and control procedures.
For a complex IT system, auditors are least likely to use which of the following when documenting their understanding of internal controls?
Narratives.
As the acceptable level of detection risk decreases, an auditor may change the
Nature of substantive procedures from less effective to more effective procedures.
The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make
No reference to the report or the work of the successor auditor.
When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should | 1. Concur explicitly with the change | 2. Issue an "except for" qualified opinion | 3. Refer to the change in an explanatory paragraph
No, No, Yes | When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an explanatory paragraph following the unqualified opinion paragraph. Choices "b" and "c" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit. Choice "d" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.
Other bases of accounting (special purpose frameworks) include all of the following except:
Non-GAAP methods used for internal reporting.
On February 25, a CPA issued an auditor's report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to
Notify each member of the entity's board of directors about management's refusal to adjust the financial statements.
A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is
Observation.
Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements?
Observing the entity's personnel applying the controls
When conducting a review, the accountants work would generally not include which of the following procedures?
Observing the year-end inventory count and subsequent testing of inventory counts
An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should
Obtain a knowledge of matters that relate to the nature of the entity's business.
Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?
Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, and loss contingencies.
Which assertions may be tested for the "presentation and disclosure" category of management assertions?
Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.
In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion?
Occurrence.
Which of the following would best be described as an assurance service?
Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies.
Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include
One transaction.
Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?
Opinion based in part on the report of another auditor
Which of the following is not a type of Prime Plus service?
Systems design services
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts
Provide a visual depiction of the entity's activities.
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
Provide an objective basis for quantitatively evaluating sample risks.
The basic purpose of a financial statement audit is to
Provide assurance regarding whether the auditee's financial statements are fairly stated.
What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control?
Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.
With regard to detecting fraud, auditing standards require auditors to
Provide reasonable assurance that the financial statements are not materially misstated because of fraud
When engaged to compile the financial statements of a nonpublic entity, the CPA is required to possess a general knowledge of the entity's accounting principles and practices. This requirement will most likely include obtaining an understanding of the
Qualifications of the accounting department personnel
When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n)
Qualified opinion or an adverse opinion.
If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an)
Qualified opinion.
A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of
Quality control
A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards?
Quality control.
In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the
Quality of the internal auditor's work.
The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to
Read and consider the manner of presentation of the "other financial information."
Audit sampling is commonly used for which type of audit evidence?
Reperformance.
Of the following, the most reliable type of evidence typically is:
Reperformance.
Walkthroughs usually involve all of the following audit procedures except:
Reperformance.
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditor may
Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.
The purpose of analytical procedures at the completion of the audit includes all of the following except:
Revising the audit plan.
You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?
Rights and obligations.
You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?
Rights and obligations.
Which of the following arranges the general types of audit tests in the order they are normally performed in an audit?
Risk assessment procedures, tests of controls, and substantive procedures.
Which of the following would not necessarily be a related party transaction?
Sales to another corporation with a similar name.
An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the
Sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques?
Scanning.
An "in-charge" auditor typically holds the rank of
Senior
Typically, an external auditor first gets supervisory experience at what level of authority?
Senior
If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to
Set control risk at the maximum without sampling.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
Settlement of litigation, in excess of the previously recorded liability.
An auditor is determining whether internal control over the revenue cycle of a wholesaler is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely will select a sample of transactions from the population represented by the
Shipping document file
As opposed to a manual control, an automated control
Should function consistently in the absence of program changes.
Generally, loss contingencies that are judged to be remote
Should not be disclosed in the footnotes.
When audited financial statements are presented in a document containing other information, the auditor
Should read the other information to consider whether it is inconsistent with the audited financial statements.
In a properly designed internal control system, the same employee may be permitted to
Sign checks and also cancel supporting documents.
Evidence is reliable if it
Signals the true state of a management assertion.
Management's written representations concerning internal control are
Signed by the CEO and CFO.
Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?
Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters.
Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent
Significant design flaws in internal controls or poor implementation of internal controls.
ACL is an example of
Software that allows auditors to retrieve and evaluate data from client systems.
Which of the following is true regarding management's documentation of internal controls?
Some documentation should focus on controls designed to detect fraud.
In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the
State law.
The auditor's report is generally addressed to the
Stockholders of the company.
If auditors conducting attributes sampling found that the client deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to
Stop the test and increase control risk.
When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are
Susceptible to bias.
Who generally signs the legal letter?
The CEO of the entity being audited.
In which of the following circumstances would a CPA who audits XM Corporation lack independence?
The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.
According to the profession's ethical standards, a CPA would be considered independent in which of the following instances?
The CPA belongs to a country club client in which membership requires an annual fee.
In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except:
The PCAOB.
Which of the following is false?
The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective.
The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity states that:
The accountant is not aware of any material modifications that should be made to the financial statements.
Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity's financial statements?
The accountant is not required to obtain an understanding of internal control.
The assurance bucket is filled with all of the following types of evidence except
The audit report.
If the principal auditor decides to make reference to the other auditor's examination, the introductory paragraph must specifically indicate the
The portion of the financial statements examined by the other auditor.
The four standards of reporting are concerned with all of the following except:
The presentation of the financial statements based on GAAS.
When auditing a public company, which of the following impairs an auditor's independence?
The auditor has been a partner on the engagement for ten years
An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means
The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way.
All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except:
The auditor must perform audit procedures on this other information.
Which of the following is not true?
The auditor should not communicate with management until the audit of internal control over financial reporting is finished.
Which of the following matters is an auditor required to communicate to those charged with governance?
The process used by management in formulating sensitive accounting estimates.
The objective of the second Standard of Reporting is to provide assurance that
The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed
Which of the following is not a concept that is included in the scope paragraph of the auditor's report?
The conformance of the financial statements with generally accepted accounting principles.
The concept of reasonable assurance in the context of an entity's internal controls recognizes that
The costs of some controls may be too high to implement in relation to potential benefits.
Which of the following best describes the general character of the three generally accepted auditing standards that are classified as standards of fieldwork?
The criteria of audit planning and evidence-gathering
The term precision relates to
The difference between expected and tolerable deviation rate.
An internal auditor is likely to be more concerned with _______ than the external auditor.
The efficiency of operations
Which element(s) is/are pervasive to the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
The elements of materiality and audit risk.
Which of the following is not a misstatement of the financial statements?
The entity uses different inventory accounting methods for internal and external reporting.
Which of the following would an auditor most likely use in determining the auditor's planning materiality?
The entity's annualized interim (i.e. quarterly) financial statements.
The risk assessment component of internal control refers to
The entity's identification and analysis of risks relevant to achievement of its objectives.
The substantive analytical procedure known as trend analysis is best described by
The examination of changes in an account over time.
Which of the following assurances is not provided by compliance with Trust Services principles?
The financial statements created by the system are free of material misstatements
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?
The financial statements fail to disclose information that is required by generally accepted accounting principles.
Before accepting an engagement to audit a new client, a CPA is required to obtain
The prospective client's consent to make inquiries of the predecessor auditor, if any.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
The prospective client's unwillingness to permit inquiry of its legal counsel.
Which of the following statements about the study of auditing is NOT true?
The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.
Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?
The misstatement will cause the client to fail to meet an earnings forecast.
Which of the following statements is generally correct about the appropriateness of audit evidence?
The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.
Which of the following statements is correct concerning statistical sampling in compliance testing?
The population size has little or no effect on determining sample size except for very small populations.
In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose
The portion of the financial statements examined by the other CPA.
When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that
The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because
The records may be accurate even though they are maintained by persons having incompatible functions.
Which of the following risks is related to effectiveness of testing?
The risk of incorrect acceptance.
Which of the following risks is related to efficiency of testing?
The risk of incorrect rejection.
Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"?
There should be a well-planned approach for obtaining and evaluating evidence.
Which of the following statements is not true with respect to assurance, attest, and audit services?
These services are applied only to financial statements and financial statement accounts.
An independent auditor might consider the procedures performed by the internal auditors because
They are employees whose work might be relied upon.
External auditors are referred to as "external" because
They are not employees of the entity being audited
The main difference between SAS and AU is:
They are the same except that SAS are organized chronologically and the AU are organized by topical area
Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
This communication should include management changes in the application of significant accounting policies.
Which of the following best describes the primary purpose of audit procedures?
To gather corroborative evidence about management's assertions.
In the course of the examination of financial statements for the purpose of expressing an opinion, the auditor normally prepares a schedule of unadjusted differences for which the auditor did not propose adjustments when they were discovered. What is the primary purpose of this schedule?
To identify the potential financial statement effects of errors or disputed items that were considered immaterial when discovered.
The normal sequence of documents and operations on a well-prepared systems flowchart is
Top to bottom and left to right.
Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
Total debt divided by total assets.
Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except:
Tracing transactions through the system to determine whether procedures are being applied as prescribed.
You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases?
Tracing vendor invoices to accounting records.
In the context of an audit of internal controls, the auditor must document all of the following except:
Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur.
Which of the following procedures would not be used to obtain an understanding of the entity and its environment?
Verify proper valuation of inventory subject to technological obsolescence.
In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firm
Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.
The SEC has issued independence rules that differ from the AICPA's in all of the following areas except:
Working paper documentation.
The current audit file usually includes
Working trial balance.
Which of the following is not a typical procedure performed related to other non-trade receivables?
Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate
According to SAB 101, which of the following is not a criterion for revenue recognition?
cash is received
An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting
cash receipts and accounts receivable
An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
dates checks are deposited per bank statements with the dates remittance credits are recorded
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of managements financial statement assertion of
valuation or allocation
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to
valuation or allocation
