Exam 2 Audit
A 100 percent sample would have to be taken to eliminate sampling risk. T or F
True
In general, all items in excess of a material misstatement need to be examined and sampling of them is inappropriate T or F
True
It is likely that five different random samples from the same population could produce five different estimates of the true population mean. T or F
True
The effect of the inclusion by chance of a very large or very small item in a random sample can be lessened by increasing the size of the sample. T or F
True
The standard deviation is a measure of the variability of items in a population. T or F
True
To be random, every item in the population must have an equal chance of being selected for inclusion in the sample. T or F
True
Unrestricted random sampling with replacement may result in a larger sample size than unrestricted random sampling without replacement. T or F
True
When sampling from the population of accounts receivable for certain objectives, the auditor might sample only active accounts with balances. T or F
True
The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875. Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be: a) $37,500 b) $41,600 c) $38,462 d) $38,500
a) $37,500
Which of the following best illustrates the concept of sampling risk? a) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. b) An auditor may fail to recognize deviations in the documents examined for the chosen sample. c) The documents related to the chosen sample may not be available for inspection. d) An auditor may select audit procedures that are not appropriate to achieve the specific objective.
a) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
Tracing of a transaction from source documents to the accounting records is generally an audit procedure that is designed to establish: a) Completeness b) Rights c) Valuation d) Existence
a) Completeness
An advantage of using statistical sampling techniques is that such techniques: a) mathematically measure risk b) eliminate the need for judgement decisions c) define the values of the allowance for sampling risk and tolerable misstatement required to provide audit satisfaction d) have been established in the courts to be superior to judgmental sampling
a) mathematically measure risk
If the economy is experiencing a recession, an auditor should focus increased attention on which of the following accounts? a) Common stock. b) Allowance for doubtful accounts. c) Noncontrolling interest of a subsidiary purchased during the year. d) Purchase returns and allowances.
b) Allowance for doubtful accounts.
Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? a) Questionnaire b) Confirmations c) Flowchart d) Checklists
b) Confirmations
Test of controls do not address a) by what means controls were applied b) how controls were originated c) how controls were applied d) the consistency with which controls were applied
b) How controls were originated
At the completion of the audit, the auditors are least likely to know: a) the planned assessed level of control risk b) the assessed level of control risk c) Actual control risk d) the scope of tests of control
c) Actual control risk
Which of the following sampling techniques is typically used for tests of controls? a) Difference sampling. b) Mean-per-unit sampling. c) Attribute sampling. d) Probability-proportional-to-size sampling.
c) Attribute sampling.
An auditor may compensate for a weakness in internal control by increasing the extent of: a) detection risk b) test of controls c) Substantive tests of details. d) Inherent risk.
c) Substantive tests of details.
Which of the following procedures is not performed as a part of planning an audit engagement? a) reviewing the working papers of the prior year b) developing an overall audit strategy c) confirmation of all major accounts d) designing an audit plan
c) confirmation of all major accounts
Which of the following conditions identified during the audit increases the risk of employee fraud? a) large amounts of cash in the bank b) existence of a mandatory vacation policy for employees performing key functions c) inventory items of small size, but high value d) presence of reconciling items on a client prepared year-end proof of cash
c) inventory items of small size, but high value
An auditor's flowchart of a client's internal control is a diagrammatic representation that depicts the auditor's a) planned test of controls b) documentation of control risk c) understanding of the system d) program for test of controls
c) understanding of the system
Which of the following risk factors indicates an increased risk of misappropriation of assets? a) Overly complex organizational structure. b) High turnover of senior management. c) Strained relationships between management and auditors. d) Lack of mandatory vacations for employees performing key functions.
d) Lack of mandatory vacations for employees performing key functions.
the auditors' failure to recognize a misstatement in an account is described as a: a)statistical error b) sampling misstatement c) standard error of the mean d) nonsampling error
d) nonsampling error
Effective internal controls requires organizational independence of departments. Organizational independence would be impaired in which of the following situations? a) the internal auditors report to the audit committee of the BOD b) the cashier reports to the treasurer c) the payroll accounting department reports to the chief accountant d) the controller reports to the vice president of production
d) the controller reports to the vice president of production
Test of controls do not ordinarily address a) by whom a control was applied b) how a control was applied c) the consistency with which a control was applied d) the cost effectiveness of the way a control was applied
d) the cost effectiveness of the way a control was applied
Tests for unrecorded assets typically involve tracing from: A) Source documents to recorded journal entries. B) Source documents to observations. C) Recorded journal entries to documents. D) Recorded journal entries to observations.
A) Source documents to recorded journal entries.
The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: A) Substantive procedures. B) Tests of controls. C) Internal control. D) Statistical analysis.
A) Substantive procedures.
Unrestricted random sampling normally results in a smaller sample size than does stratified sampling. T or F
False
Which of the following is an example of fraudulent financial reporting? a) Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. b) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. c) An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. d) An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.
a) Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: a) Consider the organizational level to which the internal auditors report the results of their work. b) Review the internal auditors' work. c) Consider the qualifications of the internal audit staff. d) Review the training program in effect for the internal audit staff.
a) Consider the organizational level to which the internal auditors report the results of their work.
In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: a) Efficiency of the audit b) Selection of the sample c) Effectiveness of the audit d) Audit Quality Controls
a) Efficiency of the audit
To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: a) Establish internal control with no material weakness. b) Support the evaluation with sufficient evidence. c) Accept responsibility for the effectiveness of internal control. d) Evaluate the effectiveness of internal control using suitable control criteria.
a) Establish internal control with no material weakness.
Which of the following is correct concerning requirements about auditor communications about fraud? a) Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. b) All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. c) Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report d) The auditor has no responsibility to disclose fraud outside the entity under any circumstances.
a) Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
A decrease in the tolerable misstatement has what effect on the required sample size? a) Increase b) Decrease c) No Effect d) Indeterminate
a) Increase
A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: a) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. b) A basis for modifying tests of controls. c) An evaluation of the consistency of application of management policies. d) Audit evidence to use in reducing detection risk.
a) Knowledge necessary to determine the nature, timing, and extent of further audit procedures.
The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year? a) Larger variance in the dollar value of accounts. b) Smaller population size. c) Higher risk of incorrect acceptance. d) Larger tolerable misstatement.
a) Larger variance in the dollar value of accounts.
An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate? a) Mean-Per-Unit b) Probability-proportional-to-size. b) Ratio d) Difference
a) Mean-Per-Unit
Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control? a) Observation of client personnel applying the control b) inquiry of client personnel c) Confirmation with outside parties d) Precomputation of account balance amounts
a) Observation of client personnel applying the control
Which of the following must the auditor communicate to the audit committee? a) Significant deficiencies and material weaknesses. b) Only material weaknesses. c) Neither significant deficiencies nor material weaknesses. d) Only significant deficiencies.
a) Significant deficiencies and material weaknesses.
Which of the following would be least likely to be regarded as a test of a control? a) Tests of the additions to property by physical inspection b) comparisons of the signatures on cancelled checks to the authorized check signer list c) tests of signatures on purchase orders d) recalculation of payroll deductions
a) Tests of the additions to property by physical inspection
In which of the following circumstances is it least likely that tests of controls will be performed? a) The expected deviation rate exceeds the tolerable deviation rate. b) The risk of assessing control risk too low is less than the expected deviation rate. c) The planned assessed level of control risk is at a level slightly below the maximum. d) The tolerable deviation rate exceeds the risk of assessing control risk too low.
a) The expected deviation rate exceeds the tolerable deviation rate.
When a company has changed auditors, according to the Professional Standards: a) The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. b) The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. c) The successor may choose not to attempt any communication with the predecessor auditor. d) The predecessor must always respond fully to all inquiries made by the successor auditor.
a) The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.
Which of the following is accurate regarding tolerable misstatement? a) Tolerable misstatement is directly related to materiality. b) Tolerable misstatement does not affect sample size. c) Tolerable misstatement is a measure of reliability of the sample. d) Tolerable misstatement cannot be determined until the sample results are evaluated.
a) Tolerable misstatement is directly related to materiality.
When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate? a) attributes b) ratio c) stratified d) variable
a) attributes
The definition of internal control developed by the COSO includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations and: a) compliance with applicable laws and regulations b) effectiveness of prevention of fraudulent occurrences c) safeguarding of entity equity d) incorporation of ethical business practice standards
a) compliance with applicable laws and regulations
A situation when the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis is referred to as a(n): a) control deficiency b) inherent limitation of internal control c) significant deficiency d) material weakness in internal control
a) control deficiency
When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample? a) Exceed b) Indefinite c) Equal d) Be less than
a) exceed
If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size? a) increase b) Remain the same c) decrease d) Indeterminate, depends upon exact change being made.
a) increase
Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is more likely obtained in part by: a) inspecting documents b) preparing flowcharts c) performing substantive procedures d) analyzing tests of trends and ratios
a) inspecting documents
Which of the following matters is generally included in an auditor's engagement letter? a) limitations of the engagement b) factors to be considered in establishing preliminary judgements about materiality c) management's liability for illegal acts committed by its employees d) the auditors responsibility to obtain negative assurance relating to non-compliance with laws and regulations
a) limitations of the engagement
The portions of the auditors' audit plans relating to internal control are generally organized around the: a) major transaction cycles. b) substantive procedures. c) inherent risk assessment. d) analytical procedures.
a) major transaction cycles.
Taylor Sales Co. maintains a large full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that internal control is functioning as it should and that the accounting records are reliable. The external auditor will probably: a) make limited use of the work performed by the internal audit staff. b) increase the depth of the consideration of administrative controls. c) avoid duplicating the work performed by the internal audit staff. d) eliminate tests of controls.
a) make limited use of the work performed by the internal audit staff.
A successor auditor should attempt communication with a predecessor auditor: a) prior to accepting the engagement. b) both prior to acceptance of the engagement and after the engagement has been accepted. c) only if the successor auditor desires to do so. d) after the engagement has been accepted.
a) prior to accepting the engagement.
Which of the following topics is not normally included in an engagement letter? a) the auditors preliminary assessment of internal control b) the auditors estimate of the fee for the engagement c) limitations on the scope of the engagement d) a description of responsibility for the detection of fraud
a) the auditors preliminary assessment of internal control
which of the following types of risk is of critical importance to auditors in performing tests of controls? a) the risk of assessing control risk too low b) the risk of assessing control risk too high c) the risk of incorrect acceptance d) the risk of incorrect rejection
a) the risk of assessing control risk too low
The Sarbanes-Oxley Act of 2002 requires that the audit committee: a) Require that the company's CPA firm rotate the partner in charge of the audit. b) Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm. c) Review the level of management compensation. d) Annually reassess control risk using information from the CPA firm.
b) Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.
Which of the following statistical sampling techniques is least desirable for use by the auditors? a) Random Number Table Selection b) Block Selection c) Systematic Selection d) Random number generator selection.
b) Block Selection
Which of the following is an element of sampling risk? a) Failing to detect an error on a document that has been inspected by an auditor. b) Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. c) Failing to perform audit procedures that are required by the sampling plan. d) Choosing an audit procedure that is inconsistent with the audit objective.
b) Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.
Which of the following is least likely to be evidence of operating effectiveness of controls? a) Records documenting usage of computer programs. b) Confirmations of accounts receivable. c) Signatures on authorization forms. d) Cancelled supporting documents.
b) Confirmations of accounts receivable.
Which of the following is the best examples of a substantive procedure? a) Comparing signatures on checks to a list of authorized check signers. b) Confirming balances of accounts receivable. c) Flowcharting a client's cash receipts system. d) Examining a sample of cash disbursements to test whether expenses have been properly approved.
b) Confirming balances of accounts receivable.
Of the following statements about internal control, which one is not valid? a) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. b) Control activities reasonably ensure that collusion among employees cannot occur. c) Transactions must be properly authorized before such transactions are processed. d) Because of the cost benefit relationship, a client may apply controls on a test basis.
b) Control activities reasonably ensure that collusion among employees cannot occur.
Decreases in the estimated standard deviation have what effect on required sample size? a) Indeterminate b) Decreases c) Increases d) No effect
b) Decreases
Which of the following is not a basic principle to control activities? a) c) Select and develop general control activities that establish what is expected to effect the organization's policies b) Design controls that restrict board of director oversight c) Select and develop control activities that migrate risks of the achievement of organizational objectives to acceptable levels d) Deploy control activities that establish what is expected to the effect the organization's policies
b) Design controls that restrict board of director oversight
Which of the following would be least likely to be considered an objective of internal control? a) Checking the accuracy and reliability of accounting data. b) Detecting management fraud. c) Safeguarding assets. d) Encouraging adherence to managerial policies.
b) Detecting management fraud.
Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: a) Employment of temporary personnel to aid in the separation of duties. b) Direct participation by the owner in key record-keeping and control activities of the business. c) Engaging a CPA to perform monthly write-up work. d) Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.
b) Direct participation by the owner in key record-keeping and control activities of the business.
Which of the following is most likely to be included in an auditor's inquiry of management while obtaining information to identify the risk of material misstatement due to fraud? a) Has the possibility of management override been assessed? b) Does management have knowledge of fraud or suspect fraud? c) Does the company have insurance against all forms of fraud? d) Are financial reporting operations controlled by and limited to one location?
b) Does management have knowledge of fraud or suspect fraud?
Which of the following is ordinarily considered a test of control? a) Obtain or prepare reconciliations of bank accounts as of the balance sheet date. b) Examine signatures on checks. c) Send confirmation letters to financial institutions. d) Count and list cash on hand.
b) Examine signatures on checks.
Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? a) Low turnover of senior management. b) Extreme degree of competition within the industry. c) Capital structure including various operating subsidiaries. d) Sales goals in excess of any of the preceding three years.
b) Extreme degree of competition within the industry.
Which of the following is least likely to be required on an audit? a) Review accounting estimates for biases. b) Make a legal determination of whether fraud has occurred. c) Evaluate the business rationale for significant, unusual transactions. d) Test appropriateness of journal entries and adjustments.
b) Make a legal determination of whether fraud has occurred.
Which of the following statements regarding auditor documentation of the client's internal control is correct? a) No documentation is necessary although it is desirable. b) No one particular form of documentation is required, and the extent of documentation may vary. c) Documentation must include flowcharts. d) Documentation must include procedural write-ups.
b) No one particular form of documentation is required, and the extent of documentation may vary.
In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient? a) mean per unit estimation b) Ratio Estimation c) difference estimation d) Sequential sampling estimation.
b) Ratio Estimation
Which of the following is not a component of the control environment? a) Organizational Structure b) Risk Assessment c) Commitment to attracting, developing, and retaining competent employees. d) Integrity and ethical values.
b) Risk Assessment
Which of the following statistical sampling techniques involves taking samples in a series of stages? a) Continuous sampling. b) Sequential sampling. c) Multiple location sampling. d) Systematic sampling.
b) Sequential sampling.
Discovery sampling is particularly effective when: a) The auditors know where deviations are likely to occur. b) The auditors are looking for critical deviations that are not expected to be frequent in number. c) The population is large in size. d) There are a large number of errors in the population.
b) The auditors are looking for critical deviations that are not expected to be frequent in number.
Which of the following statements is correct regarding the auditor's determination of materiality for a public company audit? a) Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. b) The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. c) The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. d) The amount used for the planning should equal that used for evaluation.
b) The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.
The preliminary assessments of control risk are often referred to as: a) Control Risk b) The planned assessed level of control risk c) Internal Control Objectives Risk d) The assessed level of control risk
b) The planned assessed level of control risk
The auditors' understanding established with a client should be confirmed through a(an): a) Oral communication with the client. b) Written communication with the client. c) Written or oral communication with the client. d) Completely detailed audit plan.
b) Written communication with the client.
Monitoring is considered: a) an element of control environment b) a component of internal control c) the primary asset safeguarding technique d) a portion of the information and communication system
b) a component of internal control
When performing an audit of internal control, the period or date on which the opinion relates under PCAOB standards is the: a) last day of significant fieldwork b) as of date c) entire period under audit d) end of each quarter of the year
b) as of date
The purpose of test of controls is to provide reasonable assurance that the: a) entity has complied with disclosure requirements of GAAP b) controls are operating effectively c) entity has complied with requirements of quality control d) accounting treatment of transactions and balances is valid and proper
b) controls are operating effectively
When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: a) be less than the preliminary assessed level of control risk b) equal the preliminary assessed level of control risk c) equal the actual control risk d) be less than the actual control risk
b) equal the preliminary assessed level of control risk
Which of the following is not an example of a likely adjustment in the auditors overall audit approach when a significant risk is found to exist? a) apply increased professional skepticism about material transactions b) increase the assessed level of detection risk c) assign personnel with particular skill to areas of high risk d) obtain increased evidence about the appropriateness of management's selection of accounting principles
b) increase the assessed level of detection risk
On financial statement audits, it is required that the auditors obtain an understanding of internal control, including: a) Performing tests of controls for all material controls. b) its operating effectiveness (placed in operation) c) whether it has been implemented d) Its ability to provide reasonable assurance.
b) its operating effectiveness (placed in operation)
The effectiveness of controls is not generally tested by: a) inspection of documents and reports b) performance of analytical procedures c) observation of the application of accounting policies and procedures d) inquiries of appropriate client personnel
b) performance of analytical procedures
which of the following is not considered one of the five major components of internal control? a) risk assessment b) physical controls c) control activities d) monitoring
b) physical controls
Which of the following is not considered one of the five major components of internal control? a) risk assessment b) segregation of duties c) control activities d) monitoring
b) segregation of duties
Which of the following best describes what is meant by the term "fraud risk factor"? a) Factors that, when present, indicate that risk exists. b)Factors often observed in circumstances where frauds have occurred. c) Weaknesses in internal control identified during an audit. d) Factors that, when present, require modification of planned audit procedures.
b)Factors often observed in circumstances where frauds have occurred.
Which of the following is correct concerning audit plans? a) It is essential that the audit engagement team perform every audit step. b)They are often revised throughout the audit. c)They are generally less detailed than are audit engagement letters. d)Plans are required for public company audits, but not for non-public company audits.
b)They are often revised throughout the audit.
Which of the following is most likely to be an overall response to fraud risks identified in an audit? a) Use only certified public accountants on the engagement. b)Use less predictable audit procedures. c)Place increased emphasis on the audit of objective transactions rather than subjective transactions. d)Supervise members of the audit team less closely and rely more upon judgment.
b)Use less predictable audit procedures.
The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated total audited value of the population using the difference method? a) $200,000 b) $198,000. c) $201,000 d) $203,000
c) $201,000 203-200 = 3 3*1,000= 3,000 198K+3K= 201K
The auditors' primary objective in selecting a sample of items from an audit population is to obtain: a) A large sample. b) A random sample c) A representative sample. d) A stratified sample.
c) A representative sample.
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? a) Management preoccupation with increased financial performance. b) Strained relationships between management and the auditors. c) An unreliable accounting system. d) Generous performance-based compensation systems.
c) An unreliable accounting system.
Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? a) Arrange to make copies, for inclusion in the working papers, of those client supporting documents examined by the auditors. b) Arrange to have the auditors prepare and post any necessary adjusting or reclassification entries prior to final closing. c) Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information. d) Arrange to provide the client with copies of the audit plans to be used during the audit.
c) Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
Which of the following is most likely to be an overall response to fraud risks identified in an audit? a) Decrease the use of professional skepticism and increase the use of internally generated evidence. b) Supervise members of the audit team less closely and rely more upon judgment. c) Consider further management's selection and application of significant accounting principles. d) Use predictable, well-established audit procedures.
c) Consider further management's selection and application of significant accounting principles.
The primary objective of tests of details of transactions performed as substantive procedures is to: a) Comply with generally accepted auditing standards. b) Evaluate whether management's policies and procedures are operating effectively. c) Detect material misstatements in the financial statements d)Attain assurance about the reliability of the accounting system.
c) Detect material misstatements in the financial statements.
Which of the following is not an advantage of establishing an enterprise risk management system within an organization? a) Provides integrated responses to multiple risks. b)Identifies opportunities. c) Eliminates all risks. d) Reduces operational surprises.
c) Eliminates all risks.
Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? a) Recurring operating losses that may indicate going concern problems. b) Management's failure to renegotiate unfavorable long-term purchase commitments. c) Evidence of a lack of objectivity by those responsible for accounting decisions. d) Management's current plans to reduce its ownership equity in the entity.
c) Evidence of a lack of objectivity by those responsible for accounting decisions.
Which of the following is not an assertion that is made in the financial statements by management concerning major account balances? a) Completeness b) Rights and Obligations c) Legality d) Valuation
c) Legality
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a) Client acceptance. b) Adequate disclosure. c) Materiality and audit risk. d) Quality Control.
c) Materiality and audit risk.
Which of the following is least likely to be a test of controls? a)Inspection of Documents b) Inquiries of client personnel c) Observation of confirmations d) Reperformance of controls
c) Observation of confirmations
Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? a) Requiring approval of purchase transactions. b) Maintaining backup copies of key transactions. c) Preparing bank reconciliations. d) Segregation of duties over cash disbursements.
c) Preparing bank reconciliations.
Which portion of an audit is least likely to be completed before the balance sheet date? a) Tests of controls. b) Assessment of control risk. c) Substantive procedures. d) Issuance of an engagement letter.
c) Substantive procedures.
Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. a) Attitude. b) Incentive or pressure. c) Supervisory position. d) Opportunity.
c) Supervisory position.
When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: a) Use a "bottom-up" approach to identify controls to test. b) Modify their report for any significant deficiencies identified. c) Test controls for all significant accounts. d) Perform a separate assessment of controls over operations.
c) Test controls for all significant accounts.
Which of the following statements is not correct regarding the auditor's determination of materiality? a) Auditing standards require auditors to consider materiality in planning the audit. b) The appropriate financial statement base for computing materiality may vary based on the nature of the client's business. c) The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement. d) It is the smallest amount of misstatement that would probably influence the judgment of a reasonable person relying upon the financial statements.
c) The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement.
Which of the following is the most likely first step the auditors would perform at the beginning of an initial audit engagement? a) Consider internal control. b) Consult with and review the work of the predecessor auditors prior to discussing the engagement with the client management. c) Tour the client's facilities and review the general records. d) Prepare a rough draft of the financial statements and of the auditors' report.
c) Tour the client's facilities and review the general records.
Determining that receivables are presented at net realizable value is most directly related to which management assertion? a) Existence b) Rights c) Valuation d) Presentation and Disclosure
c) Valuation
After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform test of controls. The auditor most likely decided that: a) Additional evidence to support a reduction in the assessed level of control risk is not available. b)an increase in the assessed level of control risk is justified for certain financial statement assertions c) it would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures d) there were many internal control deficiencies that would allow misstatements to enter the accounting system
c) it would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures
Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is: a) adverse b) qualified c) unqualified d) disclaimer
c) unqualified
The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method? a) $200,000 b) $198,000. c) $201,000 d) $203,000
d) $203,000 203*1,000
During the final planning of the accounts receivable plan a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit plan. What would be the impact of this change? a) An increase in sample standard deviation b) A decrease in population standard deviation. c) An increase in required sample size. d) A decrease in the required sample size
d) A decrease in the required sample size
Which of the following should not normally be included in the engagement letter for an audit? a) An indication of the amount of the audit fee. b) A description of the responsibilities of client personnel to provide assistance. c)A description of the limitations of an audit. d)A listing of the client's branch offices selected for testing.
d) A listing of the client's branch offices selected for testing.
Which of the following topics is not normally included in an engagement letter? a) The auditors' responsibilities with respect to the audit. b) Client responsibilities regarding the audit. c) A request that the client sign a copy of the letter. d) A schedule of individual audit team member billing rates.
d) A schedule of individual audit team member billing rates.
A successor auditor is required to make an effort to communicate with the predecessor auditor prior to: a) Testing beginning balances for the current year. b) Performing test of controls. c) Making a proposal for the audit engagement. d) Accepting the engagement.
d) Accepting the engagement.
Which of the following is a basic tool used by the auditors to control the audit work and review the progress of the audit? a) Process Flowchart b) Time and expense summary. c) Engagement Letter d) Audit Plan
d) Audit Plan
The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as a) Engagement risk. b) Control risk. c) Business risk. d) Detection risk.
d) Detection risk.
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? a) Analysis of income statement accounts. b) All matters of continuing accounting significance. c) Analysis of balance sheet accounts. d) Facts that might bear on the integrity of management.
d) Facts that might bear on the integrity of management.
A significant deficiency a) Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. b) Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. c) Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. d) Is less severe than a material weakness.
d) Is less severe than a material weakness.
Which of the following situations would lead a CPA to conclude that a potential audit engagement should not be accepted? a) There are significant related party transactions that management claims occurred in the ordinary course of business. b) Internal control activities requiring the segregation of duties are subject to management override. c) Management continues to employ an inefficient system of information technology to record financial transactions. d) It is unlikely that sufficient evidence is available to support an opinion on the financial statements.
d) It is unlikely that sufficient evidence is available to support an opinion on the financial statements.
An entity's ongoing monitoring activities often include: a) Periodic audits by internal auditors. b) Approval of cash disbursements. c) The audit of the annual financial statements. d) Management review of weekly performance reports.
d) Management review of weekly performance reports.
A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? a) Low b) Moderate c) Zero d) Maximum
d) Maximum
The audit committee of a company must be made up of: a) The audit partner, the chief financial officer, the legal counsel, and at least one outsider. b) Representatives of the major equity interests, such as preferred and common stockholders. c) Representatives from the client's management, investors, suppliers, and customers. d) Members of the board of directors who are not officers or employees.
d) Members of the board of directors who are not officers or employees.
As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: a) All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. b) All sales have been recorded in the sales journal. c) Each recorded sale represents a bona fide transaction. d) Recorded sales have been properly posted to customer accounts.
d) Recorded sales have been properly posted to customer accounts.
The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures: a) Need not consider the risk of assessing control risk too low. b) Has committed a nonsampling error. c) Will have to use discovery sampling techniques to evaluate the results. d) Should compare the deviation rate of the sample to the tolerable rate.
d) Should compare the deviation rate of the sample to the tolerable rate.
Which of the following is least likely to be considered a risk assessment procedure in a financial statement audit? a) Observation and inspection relating to client activities. b) Inquiries of management. c) Analytical Procedures. d) Tests of controls.
d) Tests of controls.
Test of controls are most likely in which of the following situations? a) Few transactions have occurred, but for very material amounts. b) When substantive procedures are being used as the only further audit procedures. c) The cost of tests of controls is likely to exceed the savings brought about by a resulting decrease in the scope of substantive procedures. d) The assessed level of the risk of misstatement includes a presumption that controls operate effectively.
d) The assessed level of the risk of misstatement includes a presumption that controls operate effectively.
Which of the following is most likely to be considered a risk assessment procedure relating to internal control? a) Perform a test of a control relating to payroll. b) Take test counts of the year-end inventory. c) Confirm accounts receivable. d) Trace a transaction through the information system relevant to financial reporting.
d) Trace a transaction through the information system relevant to financial reporting.
Which is most likely when the assessed level of control risk increases? a) Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. b) Use the maximum number of dual purpose tests. c) Change from performing substantive procedures at year-end to an interim date. d) Use larger sample sizes for substantive procedures.
d) Use larger sample sizes for substantive procedures.
An audit committee's responsibilities normally would not include: a) discussing problems and experience with independent auditors in completing the audit of annual financial statements. b) nominating the independent auditors. c) discussing the meaning and significance of audited financial statements. d) discussing all details of the audit plans of the independent auditors.
d) discussing all details of the audit plans of the independent auditors.
The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: a)Account Risk b) Control Risk c) Detection risk d) inherent risk
d) inherent risk
Hawkins, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: a) adequacy of the preplanned audit plan. b) apparent scope limitation. c) ability to establish consistency in application of accounting principles between years. d) integrity of management.
d) integrity of management.
which of the following situations would an auditor consider a potential risk factor for misstatements from fraudulent financial reporting? a) several members of management have recently purchased additional shares of the entity's stock b) several members of the BOD have recently sold shares of the entity's stock? c) the entity distributes financial forecasts to financial analysts that predict conservative operating results d) management is interested in maintaining the entity's earnings trend by using aggressive accounting practices
d) management is interested in maintaining the entity's earnings trend by using aggressive accounting practices
If the auditors do not perform tests of controls for certain assertions: a) they have performed a substandard audit b) they are not required to communicate significant deficiencies relating to those accounts to management and the BOD c) they must issue a qualified opinion d) they must assess control risk at the maximum level for those assertions
d) they must assess control risk at the maximum level for those assertions
Auditors must communicate internal control "significant deficiencies" to: A. The PCAOB B. The shareholders. C. The SEC. D. The audit committee.
d. The audit committee.
To best test existence, an auditor would sample from the: A) General ledger to source documents. B) General ledger to the financial statements. C) Source documents to the general ledger. D) Source documents to journals.
A) General ledger to source documents.
Which of the following is not one of the assertions made by management about an account balance? A) Relevance B) Existence C) Valuation D) Rights and Obligations
A) Relevance
When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample? A) Sample size. B) Risk of assessing control risk too low. C) Number of deviations in the population. D) Number of deviations found in the sample.
C) Number of deviations in the population.
Test of controls ordinarily are designed to provide evidence of: a) balance correctness b) control implementation c) disclosure adequacy d) operating effectiveness
D) operating effectiveness
The larger the standard deviation of a population, the smaller the required sample size. T or F
False