Exam 1 - McGraw Hill Review
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
Accounts receivable
Analytical procedures can be used in which of the following ways?
All of the choices are correct.
Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?
Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.
When a public accounting firm audits FUND-A in a mutual fund complex that has sister funds FUND-B and FUND-C, independence for the audit of FUND-A is not impaired when:
Both of the choices are correct.
Which of the following procedures would a CPA most likely perform in planning a financial statement audit?
Compare financial information with nonfinancial operating data.
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities
Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
Detection
When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?
Evidence of a conservative systematic bias
When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following? Multiple Choice
Evidence of a conservative systematic bias
Confirmations of accounts receivable provide evidence primarily about which two assertions?
Existence and rights and obligations
When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management's assertion regarding:
Existence.
The risk of material misstatement is composed of which audit risk components?
Inherent risk and control risk
Ordinarily, what source of evidence should least affect audit conclusions?
Inquiry of management.
Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of rights and obligations for the inventory account?
Inspect agreements for evidence of inventory held on consignment.
When auditing an investment in a publicly traded company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion?
Obtain market quotations from The Wall Street Journal or another independent source. Correct
Which of the following is considered a close relative (but not an immediate family member) as defined by the AICPA?
Parent
Which of the following is not related to ethical requirements of auditors?
Professional judgment
Which of the following concepts is least related to the standard of due care?
Reasonable assurance
In testing inventory at an audit client in the retail industry, you note that some of the inventory is contracted to be held on consignment. As a result, which financial statement assertion is now relevant?
Rights and obligations.
When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion?
Rights and obligations.
Which of the following is not identified as a principle in the AICPA Code of Professional Conduct?
Risk assessment
AICPA members who work in industry and government must always uphold which two of the following AICPA rules of conduct?
The Confidential Client Information Rule. The Acts Discreditable Rule.
When a CPA knows that a tax client has skimmed cash receipts and not reported the income in the federal income tax return but signs the return as a CPA who prepared the return, the CPA has violated which of the following AICPA Rules of Conduct?
The Integrity and Objectivity Rule
Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The entity enters into significant derivative transactions as hedges.
Which of the following is true?
The public accounting firm must discuss with the audit client's board or its audit committee the independence implications of the client's having hired the audit engagement team manager as its financial vice president.
Which of the following is true if an auditor performs nonaudit services for a government entity?
The scope of the audit cannot be reduced because the nonaudit work was performed by the public accounting firm.
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They typically use financial and nonfinancial data aggregated at a high level.
An auditor seeks to test the accuracy of the amount recorded as revenue on a contract with a customer under ASC 606. Which PCAOB assertion is most likely being tested?
Valuation or Allocation.
In testing the goodwill at an audit client in the retail industry, an auditor may seek to determine whether the account balance had been impaired. Such impairment procedures would be designed to test which financial statement assertion?
Valuation or allocation.
The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about:
Valuation or allocation.
Analytical procedures used when planning an audit should concentrate on:
accounts and relationships that can represent specific potential problems and risks in the financial statements.
It is acceptable under generally accepted auditing standards for an audit team to:
assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.
A primary objective of analytical procedures used in the final review stage of an audit is to:
assist the auditor in evaluating the overall financial statement presentation.
Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would:
be considered as exercising proper due care.
If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from low to high and audit risk and inherent risk remain constant, the acceptable level of detection risk is most likely to:
change from high to moderate.
An accountant recommends a local computer company to a client that is trying to upgrade its computerized sales records. The client purchases $25,000 worth of equipment and sends a check to the accountant for 5 percent of the total sales. This is an example of a:
commission.
An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of:
completeness.
Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management's assertion of:
completeness.
In auditing the accrued liabilities account on the Balance Sheet, an auditor's procedures most likely would focus primarily on management's assertion of:
completeness.
The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:
detection risk.
According to the AICPA, the purpose of an audit of financial statements is to
enhance the degree of confidence that intended users can place in the financial statements.
When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:
evaluate the effect of the noncompliance on the financial statements.
When auditing the accounts receivable account on the Balance Sheet, an auditor's procedures most likely would focus primarily on management's assertion of:
existence.
When auditing the existence assertion for an asset, auditors proceed from the:
general ledger back to the supporting original transaction documents.
Auditors perform analytical procedures in the planning stage of an audit for the purpose of:
identifying unusual conditions that deserve more auditing effort.
An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about:
presentation and disclosure.
During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of:
presentation and disclosure.
Analytical procedures are generally used to produce evidence from:
relationships among current financial balances and prior balances, forecasts, and nonfinancial data.
Under the Private Securities Litigation Reform Act (the act), independent auditors are required to first:
report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as:
risk of material misstatement.
Under Sarbanes-Oxley and PCAOB rules, ensuring that the auditor is independent in appearance is the responsibility of:
the audit committee.
When a client's financial statements contain a material departure from a FASB Statement on Accounting Standards and the public accounting firm believes the departure is necessary to ensure that the statements are not misleading,
the public accounting firm can explain why the departure is necessary and then give an unmodified opinion paragraph in the auditors' report.
Phil Greb has a thriving practice in which he assists attorneys in preparing litigation dealing with accounting and auditing matters. He is "practicing public accounting" if he:
uses his CPA designation on his letterhead and business card.
