External Auditing Final Exam
Which of the following items would be the least persuasive type of audit evidence? a. A letter of representation signed by the client's president and chief executive officer. b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. c. A confirmation of bank balances as of year-end received by the auditor directly from the bank. d. A copy of a bank statement provided to the auditor by the client.
a. A letter of representation signed by the client's president and chief executive officer.
Which of the following fraud schemes might be detected through the use of a bank cutoff statement? a. Checks were written near year-end to reduce the balance in accounts payable, but were not mailed until a week after year-end. b. Checks received by the cashier were not deposited and accounts receivable was not appropriately reduced. c. Checks were written in amounts in excess of invoice amounts in a collusion scheme in which the accounts payable clerk was misappropriating refunds of excess payments. d. Checks were written to nonexistent payees and mailed to the home addresses of officers.
a. Checks were written near year-end to reduce the balance in accounts payable, but were not mailed until a week after year-end.
When testing investments in equity securities of publicly held entities, the auditor prepares a schedule of dividends received and compares it to dividend information available to the public. Which assertion is the auditor testing? a. Completeness b. Existence c. Valuation and allocation d. Rights and obligation
a. Completeness
Which of the following describes the relationship between an increase or decrease in one of the following and how the auditor will assess the level of materiality to be used in an audit: Audit Risk Detection Risk Inherent Risk a. Direct Direct Inverse b. Direct Inverse Direct c. Inverse Direct Inverse d. Direct Inverse Inverse
a. Direct Direct Inverse
Choose the answer which best describes the relationship between the attribute given for a financial statement account and the likely reliance on substantive analytical procedures for that account within an audit: Adequacy of Internal Controls Risk of Material Misstatement Predictability of Relationships Among Data a. Direct Inverse Direct b. Inverse Inverse Direct c. Inverse Direct Inverse d. Direct Direct Inverse
a. Direct Inverse Direct
An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take? a. Document the errors and the conclusion that the financial statements are free from material misstatement. b. Withdraw from the engagement because the client's refusal to correct the errors is a scope limitation. c. Issue a qualified, "except for" opinion on the financial statements because the client refuses to correct the errors. d. Correct the errors on the client's behalf, and then issue the audit report.
a. Document the errors and the conclusion that the financial statements are free from material misstatement.
Which of the following audit procedures is most likely to be conducted only after year-end? a. Evaluation of management's adjusting journal entries to the financial statements. b. Accounts receivable confirmations as evidence of existence and valuation of balance sheet accounts receivable balance. c. Testing of property, plant, and equipment disposals to validate balance sheet PP&E account. d. Analysis of stockholders' equity transactions to validate balance sheet equity accounts.
a. Evaluation of management's adjusting journal entries to the financial statements.
An auditor performs a procedure in which the volume produced by a manufacturing entity is compared to the capacity of the entity's manufacturing equipment to determine if the entity is operating within its relevant range. This procedure will provide evidence about which assertion? a. Existence b. Rights and obligations c. Valuation and allocation d. This is a review procedure and is not appropriate for an audit engagement.
a. Existence
During the course of an examination, an auditor detected a control deficiency that was currently a significant deficiency that could potentially result in a misstatement to the financial statements. The client has indicated that the cost of developing controls to remedy that deficiency would exceed the benefit and, instead, has initiated certain additional controls to partially mitigate the weakness. As a result: I. The auditor may decide that internal controls may not be relied upon and enhance the nature, timing, and extent of substantive testing. II. The auditor may conclude that the additional controls are sufficient and decide to test controls and, based on the outcome, may decide to reduce the nature, timing, and extent of substantive testing. III. The auditor may issue a modified opinion due to a scope limitation. a. I and II only b. I and III only c. II and III only d. I, II, and III
a. I and II only
Choose the incentive(s) for fraud, if any, listed below: I. Promotions, compensation, or other rewards inconsistent with expectations. II. Access to valuable inventory that is easy to resell. III. Known or anticipated layoffs. a. I and III only b. II only c. I, II, and III d. None of the above
a. I and III only
According to Title III of the Sarbanes-Oxley Act of 2002, the CEO and CFO of a public company must explicitly certify in each annual or quarterly report which of the following? I. That the signing officers reviewed the report. II. That the signing officers cooperated fully with the audit performed by the auditing firm. III. That the signing officers have evaluated the effectiveness of internal controls within 90 days prior to the report. a. I and III only. b. I, II and III. c. None of the above. d. I and II only.
a. I and III only.
Identify the correct statement(s) regarding threats to independence: I. The management participation threat involves a risk of the auditor essentially reviewing the reports indicating the results of decisions that the auditor participated in when serving in an attest client management role. II. The advocacy threat involves an appearance of preferentially serving the audit firm and its interests over the interests of the client and the investing public. III. The AICPA requires audit partner rotation every three years as a safeguard to independence. a. I only b. II only c. II and III only d. I, II, and III
a. I only
Which of the following are factors associated with the control environment? I. Commitment to competence II. Participation of those charged with governance III. Ethical values and integrity a. I, II, and III b. I and II only c. II and III only d. I and III only
a. I, II, and III
For effective internal control, the treasurer generally should I. Act as the ultimate authority for purchases. II. Sign checks prepared by the accounts payable department. III. Mail signed checks. a. II and III only b. I only c. I and II only d. II only
a. II and III only
Which of the following actions might management of a company take in an attempt to fraudulently overstate income? I. Lapping of accounts receivable. II. Increasing product warranty periods without increasing warranty reserves. III. Relaxing credit policies without changing accounts receivable collectability assumptions. a. II and III only b. III only c. I and III only d. I, II, and III
a. II and III only
A client has accounts receivable that consist of many small accounts, each of which is not significant. The company has a collection period of approximately one month and cash flows generally correspond to the previous month's sales. As a result, the auditor considers the risk of material misstatement to be relatively low. Which type of accounts receivable confirmation is likely to be used by the auditor in these circumstances? a. Negative confirmations b. Positive confirmations c. Open ended confirmations d. Blank confirmations
a. Negative confirmations
Which of the following statements are true regarding the ethical requirements of the profession? I. In some circumstances it may be reasonable and necessary for the accountant to retain client records in order to ensure client payment for work performed. II. It is acceptable to charge a contingent fee for filing an amended tax return in a case where the client had inadvertently omitted a common deduction in the original return. a. Neither I nor II b. II only c. I only d. Both I and II
a. Neither I nor II
In testing management's rights and obligations assertion in relation to inventories, which of the following procedures would the auditor most likely consider most reliable? a. Review consignment agreements. b. Trace inventory counts to accounting records. c. Vouch inventory in accounting records to inventory counts. d. Make inquiries and analyze inventory turnover to identify slow-moving or obsolete items.
a. Review consignment agreements.
Which of the following procedures would not be effective for obtaining evidence of the accuracy of the amount recorded as interest expense? a. Reviewing minutes of meetings of the board of directors. b. Calculating an estimate of interest expense based on average liability balances and comparing the amount to recognized interest expense. c. Sending confirmations to a sample of creditors. d. Tracing loans and notes payable to original loan documents.
a. Reviewing minutes of meetings of the board of directors.
An auditor has assessed risk of material misstatement as low because the client has established meaningful internal controls to prevent a material misstatement to the financial statements. The auditor has performed walk-throughs to determine if the policies have been put into place. As a result: a. The auditor should perform tests of controls and, if results are satisfactory, may reduce the nature, extent, and timing of substantive procedures. b. As a result of the walk-throughs, the auditor may reduce the nature, extent, and timing of substantive procedures without performing additional tests of controls. c. The auditor will perform substantive tests to determine whether or not the controls have been effective during the period being audited. d. The auditor should perform tests of controls as a basis for determining if there are control deficiencies that should be communicated to governance.
a. The auditor should perform tests of controls and, if results are satisfactory, may reduce the nature, extent, and timing of substantive procedures.
X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that that were recorded during the period actually occurred. Which of the following procedures would likely be most effective for that purpose? a. Trace entries from the sales journal to sales invoices and bills of lading. b. Trace a sample of receiving reports to the sales journal. c. Trace a sample of sales invoices to bills of lading. d. Trace a sample of bills of lading to the sales journal.
a. Trace entries from the sales journal to sales invoices and bills of lading.
Weller, CPA is conducting an audit of Wadd, LLC. Weller wishes to independently perform procedures to validate assumptions inherent in certain reserve accounts on Wadd's balance sheet. The CEO of Wadd asks if Weller could rely primarily on Wadd's own internal support for the accounts, citing a pressing need to provide audited financial statements to prospective investors as soon as possible, and as a sign of Wadd's gratitude, presents Weller with valuable tickets to a sporting event. What category of threat to independence is Weller being subjected to? a. Undue influence threat b. Adverse interest threat c. Familiarity threat d. Advocacy threat
a. Undue influence threat
Based on the following cash transfer schedule, by how much will cash be overstated as a result of kiting? "Table" a. $3,500 b. $7,600 c. $10,300 d. $13,300
b. $7,600
Which of the following items would be the most persuasive type of audit evidence? a. A letter of representation signed by the client's president and chief executive officer. b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. c. A confirmation of bank balances as of year-end received by the auditor directly from the bank. d. A copy of a bank statement provided to the auditor by the client.
b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance.
When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account? a. Existence b. Completeness c. Valuation and allocation d. Rights and obligations
b. Completeness
Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of? a. Rights and obligations b. Completeness c. Allocation and valuation d. Existence
b. Completeness
Which of the following auditing procedures will provide evidence to support management's assertions regarding the allocation and valuation of inventories? a. Vouching inventories to receiving documents. b. Determining the replacement cost of inventories. c. Tracing inventory counts to accounting records. d. Vouching items reported in the accounting records to inventory counts.
b. Determining the replacement cost of inventories.
Choose the correct statement(s) regarding the Public Company Accounting Oversight Board (PCAOB): I. Public accounting firms must register with the PCAOB in order to perform audits of public companies. II. The PCAOB is a private, nonprofit organization established in 1933. III. Two of the five board members of the PCAOB are CPAs. a. I only b. I and III only c. I and II only d. I, II, and III
b. I and III only
Choose the correct statement(s), if any, regarding fraud risk factor(s) from the following: I. Needlessly complex transactions present an opportunity for fraud. II. Ineffective oversight by those charged with governance provides an incentive for fraud. III. Stock options that expire soon after the release of financial statements present an opportunity for fraud. a. I and III only b. I only c. I, II, and III d. None of the above
b. I only
Choose the correct statement(s) regarding corporate audit committees: I. Corporate audit committees are responsible for establishing and maintaining effective internal control. II. As established by the Sarbanes-Oxley Act of 2002, audit committees of issuer companies must be independent. III. The audit committee consists of managers assigned from within the company to serve terms that usually last one year. a. I and III only b. II only c. I and II only d. I only
b. II only
Which of the following are considered elements of an internal control structure? I. Segregation of duties II. Risk assessment III. Performance indicators a. I only b. II only c. III only d. I and II only
b. II only
Which of the following would impair a CPA's independence in regards to attest clients? I. The CPA is a member of the same exclusive country club as the CEO of the client company. II. The CPA prepares routine invoices for the client. III. The CPA has a money market account with a financial institution client; the account in excess of insured amounts is immaterial to the CPA's net worth. a. I only b. II only c. III only d. Both I and III
b. II only
Choose the correct statement(s) regarding the auditing of debt obligations. I. A typical audit plan for debt obligations will rely heavily on sampling. II. An auditor will focus on the management assertion of existence in order to determine that debt obligations are not understated. III. Common analytical procedures performed while auditing debt obligations include analyzing ratios between related accounts such as interest expense and notes payable. a. II and III only b. III only c. I and II only d. I, II, and III
b. III only
Which of the following is an example of an auditor's response to the risk of material misstatement at the financial statement level? a. Determine if existing control procedures will prevent the theft of inventory. b. Increase the need for professional skepticism among members of the engagement team. c. Trace recorded transactions to shipping documents. d. Test the shipping terms of sales near the end of the year.
b. Increase the need for professional skepticism among members of the engagement team.
As part of its system of internal control, X Company requires that all sales orders received from customers receive approval from the credit department before they are fulfilled. What type of control activity is this? a. Physical control b. Information processing control c. Performance indicator d. Segregation of duties
b. Information processing control
X Company is concerned that it does not have enough employees to ensure adequate segregation of duties in its revenue cycle. Which of the following may be performed by the same individual? a. Approving sales and delivering the inventory from the storage area to the shipping area. b. Opening the mail and reconciling the perpetual inventory records to the physical count. c. Opening the mail and recording entries in the sales journal. d. Recording entries in the sales journal and delivering inventory from the storage area to the shipping area.
b. Opening the mail and reconciling the perpetual inventory records to the physical count.
In testing controls over purchases, an auditor most likely would determine that the person who receives inventory a. Already has advance copies of purchase orders with the quantity of goods to expect. b. Prepares receiving reports for all good received. c. Conducts periodic comparisons of receiving reports to general ledger postings. d. Posts to the general ledger to reflect the receipt of goods.
b. Prepares receiving reports for all good received.
Which of the following financial ratios would be most useful to an auditor seeking information on a company's ability to cover current obligations? a. Earnings per share b. Quick ratio c. Gross profit margin d. Sales to assets
b. Quick ratio
A client has recently granted stock options to its employees and the auditor is developing an audit program for their examination. Which of the following procedures will the auditor likely perform? a. Examine payroll records or stock ledgers to verify the existence of the option holders. b. Review minutes of board of director meetings to verify authorization of the grant. c. Evaluate treasury stock to determine if there is a sufficient amount to cover the stock options. d. Send a confirmation to the Secretary of State in the state of incorporation.
b. Review minutes of board of director meetings to verify authorization of the grant.
Which assertions may be supported by evidence obtained when an auditor traces items recorded in inventory to purchase documents? a. Rights & obligations and completeness b. Rights & obligations and valuation & allocation c. Valuation & allocation and completeness d. Valuation & allocation and existence
b. Rights & obligations and valuation & allocation
X Company recognizes the need to stay current on all accounting pronouncements to make certain that the company's financial statements are being prepared in accordance with current GAAP. This relates to which internal control element? a. Control environment b. Risk assessment c. Control activities d. Monitoring
b. Risk assessment
As specified in Title I of the Sarbanes-Oxley Act of 2002, which organization has oversight and enforcement authority over the Public Company Accounting Board (PCAOB) and its decisions? a. The AICPA b. The SEC c. The FASB d. The Treasury Department
b. The SEC
In deciding whether or not to accept a prospective audit client, which of the following would have the biggest impact on the auditor's decision? a. The auditor is not familiar with the industry in which the client operates. b. The client's predecessor auditor indicated that the client's management lacks integrity. c. The client's accounting department is staffed by two people who performing many overlapping duties that should be segregated. d. The client's controller is a former manager of the auditing firm.
b. The client's predecessor auditor indicated that the client's management lacks integrity
To obtain assurance that the accounting records accurately reflect only transactions that actually occurred, supporting management's occurrence assertion, the auditor would most likely examine a sample of general ledger postings and a. Verify their proper reconciliation to the applicable sub-ledgers. b. Trace them back to the supporting source documentation. c. Vouch for the proper authorization and training of the personnel who prepared them. d. Use professional judgment to come to a reasoned conclusion as to their reasonableness and accuracy.
b. Trace them back to the supporting source documentation.
Which of the following cannot be determined by performing analytical procedures involving the quick ratio? a. Collection of an account receivable was incorrectly recorded with a credit to accounts payable. b. The amount indicated as the current portion of long-term debt has not been adjusted from the previous year's higher amount. c. A collection of a payment on account from one of the entity's regular customers was never recorded. d. A collection of a payment on account from one of the entity's regular customers was recognized as a cash sale rather than a payment on account.
c. A collection of a payment on account from one of the entity's regular customers was never recorded.
According to professional standards, which of the following circumstances will impair a CPA's independence? a. The CPA's nondependent stepchild recently inherited, from a party unrelated to the CPA, an immaterial amount of stock in the client. b. The CPA's firm acts as administrator of a trust which owns 5% of the client's stock, which makes up 7% of the total assets of the trust. c. A partner in the firm who works in the same office as the CPA, but performs no services for the client, has a material investment in a mutual fund which invests in the client. d. The CPA accepted free pizza from the client for working late hours on the audit.
c. A partner in the firm who works in the same office as the CPA, but performs no services for the client, has a material investment in a mutual fund which invests in the client.
Which of the following statements is true regarding confidentiality? a. Most states recognize auditor-client privilege. b. An auditor may not provide confidential information to members of the auditor's firm who are not on the audit engagement team. c. An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review. d. An auditor will generally refuse a request for confidential information made by the AICPA's professional ethics division.
c. An auditor may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review.
Vinson, CPA is supervisor to Elkins, CPA. Under Vinson's direction, Elkins signed a document containing materially false and misleading information. Who has committed an act discreditable to the profession? a. Vinson b. Elkins c. Both Vinson and Elkins d. Neither Vinson nor Elkins
c. Both Vinson and Elkins
A company employs three clerks and one purchasing manager. Their responsibilities are as follows: Employee Responsibility Purchasing Manager: Approves purchase requests before they are processed and negotiates terms with vendors. Clerk 1, Purchasing: Places orders with vendors. Clerk 2, Accounts Payable: Prepares payment vouchers after verifying accuracy of vendor invoices and comparing supporting documents. Clerk 3, Receiving: Receives delivery of goods from vendors Which of the following would indicate a weakness in the company's internal control? a. Clerk 3 conducts manual counts of goods received, unaware of the quantities actually ordered. b. The Purchasing Manager frequently attends vendor events with all expenses-paid by the company. c. Clerk 2 has access to unused purchase orders. d. Clerk 1 reports to the Purchasing Manager, who has significant influence over Clerk 1's pay and career progression.
c. Clerk 2 has access to unused purchase orders.
An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property's depreciable base? a. Deed b. Bank confirmation of mortgage loan c. Closing statement d. Flood insurance policy
c. Closing statement
An auditor observes new equipment while walking around a client's factory and traces the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained? a. Existence b. Rights and obligation c. Completeness d. Valuation and allocation
c. Completeness
Which of the following statements regarding fraud is not true? a. Professional skepticism requires that an audit team begin an engagement with a conscious recognition of the possibility of material misstatement due to fraud. b. Fraud resulting in material misstatement may not involve direct personal financial gain to the person(s) committing the fraud. c. Criminal intent is what distinguishes fraud from error. d. The Fraud Triangle consists of Incentive, Opportunity, and Rationalization.
c. Criminal intent is what distinguishes fraud from error.
Which of the following financial ratios would be most useful to an auditor seeking information on a company's ability to sustain losses? a. Inventory turnover b. Earnings per share c. Debt to equity d. Days' sales in accounts receivable
c. Debt to equity
X Company's internal control policies require that a transaction be analyzed and, depending on the nature of the transaction, the size of the transaction, and the company's relationship with the customer, the credit department, upon approval of the customer's credit, will transfer the order to one of several departments to be fulfilled. Which means of documenting internal control would likely be most effective to illustrate this process? a. Flow chart b. Narrative c. Decision table d. Internal control questionnaire
c. Decision table
Which of the following is not an inherent risk of investments in derivative securities? a. Reliance on outside parties. b. Technical complexity. c. Ease of theft. d. Credit risk.
c. Ease of theft.
An auditor is seeking evidence in an examination of bonds payable. Which of the following procedures would the auditor likely perform? a. Send confirmations to bondholders. b. Trace assets purchased with bond proceeds to documentation for evidence of liens. c. Evaluate reasonableness of interest expense in relation to bonds payable balances. d. Perform analytical procedures relative to bond discount or premium.
c. Evaluate reasonableness of interest expense in relation to bonds payable balances.
Which of the following procedures would an auditor most likely follow to assess the client's rights and obligations regarding its inventory? a. Review supplier catalogs to estimate the replacement cost of the inventory on hand b. Inspect the inventory on hand c. Examine vendor invoices for the inventory d. Read the financial statements and trace purchases into the purchases journal
c. Examine vendor invoices for the inventory
Watt & Foster LLC is a CPA firm that wants to ensure that it only associates with clients whose management has integrity. To achieve this, Watt & Foster should: I. Establish quality control policies and procedures for accepting and continuing client relationships. II. Communicate with a potential client's predecessor auditor. III. Refuse to accept a client who has been issued an adverse opinion in the last three years. a. I only b. II only c. I and II d. I, II, and III
c. I and II
Choose the correct statement(s) regarding the Sarbanes-Oxley Act of 2002: I. It established the Public Company Accounting Oversight Board (PCAOB). II. It changed rules on auditor independence, adopting a more flexible, principles-based approach rather than one based on prohibitions of certain types of non-audit services to audit clients. III. It mandated integrated audits for public companies. a. I only b. I and II only c. I and III only d. I, II, and III
c. I and III only
Identify the correct statement(s) regarding analytical procedures conducted while obtaining an understanding of the entity and its environment, including its internal controls, during an audit: I. Analytical procedures conducted while obtaining an understanding of the entity and its environment are considered risk assessment procedures and are required. II. As a planning analytical procedure an auditor may plan walkthroughs of internal control processes in order to gather information for risk assessment on the client's internal control environment. III. As a planning analytical procedure an auditor may develop an expectation for the current period's net income on the basis of the client's interim forecasts and interim financial statements. a. II and III only b. III only c. I and III only d. I, II, and III
c. I and III only
Audits of which of the following organizations are subject to the Sarbanes-Oxley Act? I. All public companies II. Private companies with yearly revenues of $100 million or more. III. All issuer companies a. I only. b. I, II, and III. c. I and III only. d. III only.
c. I and III only.
Choose the correct statement(s) regarding detection risk and the audit risk model: I. There is an inverse relationship between the risk of material misstatement and detection risk. II. The two components of detection risk are test of details risk and inherent risk. III. Detection risk is equal to risk of material misstatement divided by audit risk. a. I and III only b. II and III only c. I only d. I, II, and III
c. I only
Identify the correct statement regarding analytical procedures used in a review conducted at the conclusion of an audit. a. The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit. b. Typically a more junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required. c. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit. d. Analytical procedures used in the review near the conclusion of the audit are not required.
c. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
An audit client maintains an expensive, high powered computer system that is designated for a specific purpose. To limit access, the company requires all users to sign a log indicating the date and times they were using the computer. What type of test of controls might the auditor use to obtain evidence as to whether or not this control is being followed? a. Reperformance b. Inquiry c. Inspection d. Observation
c. Inspection
Which of the following would be considered corroborative evidence? a. Checks, invoices, and contracts. b. General and subsidiary ledgers. c. Minutes from meetings of the board of directors. d. Worksheets and spreadsheets supporting cost allocations.
c. Minutes from meetings of the board of directors.
An opportunity for fraud involving lapping of accounts receivable is more likely when which two duties involving accounts receivable are not segregated? a. Authorization and reconciliation. b. Receipt of returned goods and recording. c. Opening the mail and recording. d. Recording and reconciliation.
c. Opening the mail and recording.
Which of the following audit procedures is most likely to be included in an audit program to examine long-term debt? a. Comparing the carrying value of debt to its market value as of the balance sheet date. b. Sending confirmations to verify the existence of the individual holders of the entity's bonds. c. Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances. d. Inspecting the subsidiary ledger for unrecorded liabilities.
c. Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances.
Which of the following procedures would be appropriate for an auditor testing management's assertion related to the existence of investments in securities? a. Review bank confirmations for information about collateral arrangements. b. Compare recorded amounts with published market value information. c. Reconcile interest and dividends received. d. Review financial statements of investees accounted for under the equity method.
c. Reconcile interest and dividends received.
Which of the following audit procedures would most likely provide evidence regarding the existence of cash and cash equivalents? a. Review bank reconciliations to verify amounts b. Perform analytical procedures to determine if amounts and volume of transactions match expectations c. Review bank confirmations to verify bank balances d. Test translation of foreign currency transactions.
c. Review bank confirmations to verify bank balances
An auditor is unable to observe the physical count of inventory. Which of the following would not be an appropriate alternate procedure? a. Perform test counts to items in inventory. b. Apply procedures to transactions occurring between the count date and the date of the financial statements. c. Review shipping terms for all inventory in transit on the balance sheet date. d. Evaluate internal controls related to the maintenance of perpetual inventory records.
c. Review shipping terms for all inventory in transit on the balance sheet date.
An auditor determines that, due to accounting errors, both a company's expenses and revenues are materially understated, each by approximately the same amount. What is the auditor's most likely course of action in response to these findings? a. Document these findings but take no further action because net income will still be correct. b. Suggest adjusting entries to correct the understated expenses only. c. Suggest adjusting entries to correct both the understated expenses and understated revenues. d. Report the possible fraud scheme to the audit committee.
c. Suggest adjusting entries to correct both the understated expenses and understated revenues.
According to professional standards, which of the following circumstances will impair a CPA's independence? a. A partner in the CPA's firm who works in another state and does no work for the client has a material indirect financial interest in the client. b. The CPA has a car loan with a financial institution client. c. The CPA's nondependent stepchild has a material indirect financial interest in the client. d. The client recently exceeded the 90-day limit for outstanding unpaid invoices due to the CPA.
c. The CPA's nondependent stepchild has a material indirect financial interest in the client.
Communicating which of the following to the audit committee is not typically required of an auditor? a. Any disagreements with management. b. Any significant reclassifying journal entries proposed as adjustments by the auditor. c. The auditor's judgment of management integrity. d. The process used by management to make accounting estimates.
c. The auditor's judgment of management integrity.
Which of the following will generally not be included in a standard bank confirmation? a. Balances in deposit accounts as of the balance sheet date. b. Balances of outstanding loan as of the balance sheet date. c. The dates on which inactive accounts were closed. d. Agreements related to compensating balances and collateral for loans.
c. The dates on which inactive accounts were closed.
Which of the following would be a potential control deficiency because of a lack of segregation of duties? a. The person responsible for maintaining the accounts receivable subsidiary ledger is also responsible for maintaining the accounts payable subsidiary ledger. b. The person who reconciles the bank accounts is also responsible for reconciling the accounts receivable subsidiary ledger to the control account in the general ledger. c. The person who is responsible for ordering equipment is also responsible for inspecting the equipment when it is received before it is released to the shop floor. d. The person who is responsible for receiving inventory ordered is also responsible for custody of the inventory and releasing it to the factory as authorized requisitions are received.
c. The person who is responsible for ordering equipment is also responsible for inspecting the equipment when it is received before it is released to the shop floor.
A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises question as to which assertion in regard to property, plant, and equipment? a. Existence b. Rights and obligations c. Valuation and allocation d. Completeness
c. Valuation and allocation
The fact that a company has significant amounts of cash in the form of foreign currency would raise the inherent risk of which management assertion regarding cash? a. Completeness b. Rights and obligations c. Valuation or allocation d. Presentation and disclosure
c. Valuation or allocation
Which of the following statements would be least likely to be included in an audit engagement letter? a. The fees for our services will be at our regular per diem rates plus out-of-pocket expenses. b. We will provide you with a list of schedules and information needed by our staff during the audit. c. We will not disclose any advice provided under the terms of this engagement letter to third parties unless instructed to do so. d. Our audit will be conducted with the objective of our expressing an opinion on the financial statements.
c. We will not disclose any advice provided under the terms of this engagement letter to third parties unless instructed to do so.
Which of the following relates to the sufficiency of audit evidence? a. The client maintains good perpetual inventory records, enabling the auditor to reconcile amounts to inventory counts that were taken prior to year-end. b. Because of a large number of small balances, the auditor decides to use negative accounts receivable confirmations rather than positive confirmations. c. When no exceptions were discovered in a preliminary sample, the auditor decided that no further testing was necessary. d. The auditor reviewed vendor invoices to support a sample of purchases rather than rely exclusively on the client's receiving reports.
c. When no exceptions were discovered in a preliminary sample, the auditor decided that no further testing was necessary.
Which of the following are components of the risk of material misstatement (RMM) and can be expressed in both quantitative and qualitative terms? Control Risk Detection Risk Inherent Risk a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes
c. Yes No Yes
An auditor has determined a $10 million materiality level for a client's balance sheet and a $3 million materiality level for the client's income statement. As a result, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of a. $6.5 million or more b. $10 million or more c. Unknown; impossible to determine from information given d. $3 million or more
d. $3 million or more
For effective internal control, the purchasing manager generally should a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. b. Defer to the accounts payable department for authorization of purchases. c. Establish the agreement of the vendor's invoice with the receiving report and purchase order. d. Be responsible for negotiating terms with vendors.
d. Be responsible for negotiating terms with vendors.
An auditor is establishing procedures for testing management's assertions regarding existence in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about existence? a. Confirmations only b. Observation only c. Neither confirmations nor observation d. Both confirmations and observation
d. Both confirmations and observation
King Corporation often transfers funds from its general account into a special account that is used exclusively to make debt payments. Near the end of the year, the company had the following transfers: "Table" a. Cash is fairly stated. b. Cash is overstated by $15,000. c. Cash is overstated by $40,000. d. Cash is overstated by $20,000.
d. Cash is overstated by $20,000.
Which of the following assertions applies to an audit of inventory? a. Occurrence b. Classification c. Cutoff d. Completeness
d. Completeness
Which of the following would not be an appropriate use of confirmations? a. Confirming accounts receivable balances with customers. b. Confirming inventories on hand with warehouses. c. Confirming loan terms and amounts with lenders. d. Confirming authorization for major transactions with directors.
d. Confirming authorization for major transactions with directors.
Which of the following is not one of the seven categories of threats to independence identified by the AICPA in its conceptual framework on independence? a. Familiarity threat b. Undue influence threat c. Advocacy threat d. Conflict of interest threat
d. Conflict of interest threat
According to the COSO Integrated Framework, reviews of operating performance are an example of which of the five elements of internal control? a. Risk assessment b. Control environment c. Monitoring d. Control activities
d. Control activities
Even though an audit is well planned and properly executed, a material misstatement due to fraud may not be detected. This may be due to: I. Fraud may involve collusion or false documentation making it more difficult to detect. II. Auditing employs the use of sampling and a sample without evidence of fraud may not be representative of the population. III. The evaluation of fraud risk factors requires the application of judgment and is not precise a. I and II only b. I and III only c. II and III only d. I, II, and III
d. I, II, and III
From the following, choose the statement(s) which describe an inherent risk in an audit: I. The financial statements include assets which are highly susceptible to theft. II. The financial statements include items which are complex or involve very high volumes of transactions. III.The financial statements include assets which require significant estimates requiring high levels of judgement to determine their carrying values. a. II and III only b. I only c. I and II only d. I, II, and III
d. I, II, and III
Choose the correct statement(s), if any, regarding fraud risk factor(s) from the following: I. The fact that valuable inventory is left unattended provides a rationale for fraud. II. Personal greed provides an opportunity for fraud. III. Perceived mistreatment by management provides an opportunity for fraud a. I and III only b. II only c. I, II, and III d. None of the above
d. None of the above
According to the Sarbanes Oxley Act (SOX) Title ll, which of the following non-audit services to audit clients are not prohibited from being performed by a registered public accounting firm? I. Legal services or expert services unrelated to the audit II. Human resources services III. Internal audit outsourcing services a. I only. b. II only. c. I and II only. d. None of the above.
d. None of the above.
When would it not be appropriate to apply analytical procedures in an audit of financial statements? a. Planning the engagement. b. Performing substantive testing c. Overall engagement review. d. Performing tests of controls.
d. Performing tests of controls.
An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the period. During the period, the entity had several transactions involving the purchase and disposal of equipment. Which of the following would be the most effective in providing evidence that all equipment reported in the financial statements actually exists? a. Select items on the factory floor and trace them to the accounting records. b. Select items from the accounting records and trace them to purchase documents. c. Evaluate the entity's policies for capitalizing and expensing costs related to the acquisition of equipment. d. Select items from the accounting records and observe them in the entity's factory.
d. Select items from the accounting records and observe them in the entity's factory.
According to Title II of the Sarbanes Oxley Act (SOX) of 2002, which of the following non-audit services is not prohibited from being performed for an audit client by a registered public accounting firm? a. Bookkeeping services. b. Appraisal or valuation services. c. Internal audit services. d. Tax services.
d. Tax services.
When evaluating the sufficiency and appropriateness of audit evidence, the auditor should consider all of the following except: a. Management's responses to auditor inquiries. b. Knowledge of the client from previous engagements. c. The results of tests of controls evaluating the effectiveness of internal controls over financial reporting. d. The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements.
d. The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements.
Which of the following best describes why an auditor is always required to document the auditor's understanding of internal controls? a. To support the auditor's opinion. b. To avoid performing substantive procedures. c. To lower control risk. d. To document the basis for risk assessment.
d. To document the basis for risk assessment.
X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that occurred during the period were actually recorded. Which of the following procedures would likely be most effective for that purpose? a. Trace entries from the sales journal to sales invoices and customer purchase orders. b. Trace a sample of receiving reports to the sales journal. c. Trace a sample of sales invoices to bills of lading. d. Trace a sample of bills of lading to the sales journal.
d. Trace a sample of bills of lading to the sales journal.
Upon examining repair and maintenance costs recorded by Cane Company during the year, an auditor finds a material amount that should have been capitalized in property, plant and equipment. If this error is left uncorrected, how would it affect Cane's reported net income and assets in its year-end financial statements? Net Income Assets a. Overstate Understate b. Understate Overstate c. Overstate Overstate d. Understate Understate
d. Understate Understate
While auditing inventory, the auditor analyzed inventory turnover rates and made inquiries of production supervisors and inventory control personnel about slow-moving or obsolete items in inventory. These procedures are designed to provide evidence to support management's assertion regarding: a. Rights and obligations b. Completeness c. Existence d. Valuation and allocation
d. Valuation and allocation
