Final (7-11, 14-15)
Which of these is not a common control for petty cash? a. Having internal audit conduct regular audits of the petty cash fund. b. Reconciling the petty cash fund before replenishing it. c. Requiring receipts for all petty cash disbursements. d. Limiting access to petty cash funds.
A
In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements in what manners? A. Qualitatively and quantitatively. B. Absolutely and proportionately. C. Haphazardly and randomly. D. Methodically and systematically.
A
In attributes sampling, which of the following does the risk of incorrect acceptance deal with? A. (a) Effectiveness. B. (b) Efficiency. C. (c) Reliability. D. (d) Both (a) and (b).
A
In which of these situations would an auditor examine a sample of the cash disbursements made by the client after the year end? a. If the liabilities were recorded in the year being audited and were properly recorded in that year. b. If the current year's disbursements are greater than the previous year's disbursements. c. If vendor agreements are being properly observed. d. If fraudulent transactions were delayed until a subsequent period.
A
The cash account is significant to the auditor for which of the following reasons? A. The cash account balance is the culmination of a large volume of transactions. B. The cash account is not as susceptible to fraud as most other accounts. C. Cash is the only account that provides opportunity for fraud. D. Automated systems do not possess the capability to maintain strong internal controls over cash.
A
Which of these is not a potential fraud risk in the revenue cycle? a. Excessive cash flow from operating activities when income from operating activities has been reported. b. Sales to customers in the last month of the fiscal period at terms more favorable than previous months. c. Customer complaints and discrepancies in accounts receivable confirmations. d. Large or unusual adjustments to sales accounts just prior to or just after the fiscal year-end.
A
T or F: An adversarial audit firm culture helps ensure audit quality by creating an atmosphere in which individual auditors will not give into pressure from clients to overlook detected misstatements.
F
T or F: Auditors all agree that controls do not need to be reperformed unless there is evidence that the control procedures are not operating effectively.
F
T or F: Because a primary concern is that cash will be stolen and thus understated, the auditor is not usually concerned about overstatements of cash.
F
T or F: Because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts.
F
T or F: Channel stuffing is a fraud in the revenue cycle that involves recording revenue after a customer has requested to purchase the inventory.
F
T or F: Complex financial instruments differ from more traditional financial instruments in that they have bundled many of the risks previously associated with one financial instrument and have marketed these bundled financial instruments separately.
F
T or F: Controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists.
F
T or F: For privately held companies, the purpose of the engagement quality review is to help assure that the audit and audit documentation are complete and support the audit opinion on the client's financial statements and internal controls.
F
T or F: If after the audit report was issued, the auditor discovers that an important audit procedure was not performed, SOX requires that the auditor file a Form 8-K with the SEC.
F
T or F: If the auditor is conducting an integrated audit, the auditor must provide both opinions in the same report.
F
T or F: In developing an audit approach, if the risk of material misstatement is assessed low, the auditor can plan more substantive testing, or can be less flexible about when the procedures are applied.
F
T or F: Lapping occurs when an employee makes a sale but does not record it, and steals the cash.
F
T or F: Strict adherence to a disclosure checklist will reliably result in complete and full disclosures.
F
T or F: The auditor is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for loss contingencies, management is responsible for determining that the auditor has properly identified, accounted for, and disclosed material loss contingencies.
F
T or F: The legal implications of a client's noncompliance with laws and regulations are ultimately a matter for the auditor to resolve before the auditor can issue the audit opinion.
F
T or F: The primary role of the auditor is altered when the auditor is conducting an audit of a foreign company in conformity with IFRS and filed with the SEC.
F
T or F: The three major categories of marketable securities are: temporary investments in debt or equity securities, short-term cash management securities, and available-for-sale securities.
F
T or F: When an auditor is seeking confirmation from a customer about an account receivable, the request should always be directed to the customer's accounts payable department.
F
T or F: When the auditor issues a disclaimer because of a lack of independence, the audit report must state the lack of independence, and must describe the reasons for the lack of independence.
F
After identifying the risks of material misstatement, the auditor develops an audit plan in response to those risks. Which of the following plans for testing revenue would be most likely when the auditor believes that control risk is high? a. The only evidence the auditor plans to obtain is from tests of details. b. The auditor plans to obtain 40% of the necessary audit evidence from tests of controls and the remaining 60% from substantive analytical procedures. c. The auditor plans to obtain the majority of the necessary audit evidence from tests of controls. d. Any of these would be an appropriate audit plan if the auditor believes that control risk is high.
A
The auditor is concerned that the client has recorded fictitious sales. Which of the following procedures would be the best audit procedure to identify fictitious sales? a. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods. b. Select a sample of customer purchase orders and trace through to the generation of a sales invoice. c. Select a sample of customer purchase orders to determine whether a valid customer actually exists. d. Select a sample of shipping documents (bills of lading) and trace to the sales invoice to determine whether the invoice was properly recorded.
A
The risk that the auditor will conclude that internal controls are effective when internal controls are actually not effective. a. The risk of incorrect acceptance of internal control reliability. b. The risk of incorrect acceptance of book value. c. The risk of incorrect rejection of internal control reliability. d. The risk of incorrect rejection of book value. e. None of these.
A
Which of the following accounts is not part of the acquisition and payment cycle? a. Accounts Receivable. b. Accounts Payable. c. Inventory. d. Cost of Goods Sold.
A
Which of the following is not a basic principle described by the AICPA related to audit reporting? a. The auditor must state if the financial statements are in full compliance with GAAP. b. By expressing an opinion on the financial statements the degree of confidence that users can place in the statements is enhanced. c. The auditor can state that an opinion cannot be expressed. d. The auditor can express an opinion that the financial statements are free of material misstatements.
A
Which of the following is the description of an allocation assertion? a. The recorded balances reflect the true underlying economic value of those assets. b. The marketable securities balances include all securities transactions that have taken place during the period. c. The company has title to marketable securities accounts as of the balance sheet date. d. Marketable securities exist at the balance sheet date. e. Marketable securities are properly classified on the balance sheet and disclosed in the notes to the financial statements.
A
Which of the following is the most relevant assertion with regards to the audit of cash? A. Existence B. Rights and obligations. C. Valuation and allocation. D. Presentation and disclosures
A
Block sampling
A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week.
Haphazard sampling
An arbitrary selection with no conscious bias.
Refer to the Why It Matters feature, "Situations Requiring a Modification to the Audit Report on ICFR." In which of the following situations would the auditor modify the audit report on ICFR? a. The unaudited financial statements did not contain any misstatements. b. The auditor concludes that management's report on ICFR is not complete or is improperly presented. c. The auditor would modify the audit report on ICFR in all of these situations. d. The auditor identifies multiple unrelated significant deficiencies in ICFR.
B
Which of the following controls over cash would an auditor expect to observe? A. Reconciliation of the general ledger to the subsidiary ledger. B.Checks permanently marked "for deposit only" with the proper routing information. C. Internal audits of marketable securities held in the company's lockbox. D. Authorization privileges given only to those employees using the accounting system
B
Which of the following is not a typical communication between the auditor and the audit committee at the end of an audit engagement? a. Discussion of the auditor's responsibility. b. Discussion of the client continuance decision. c. Discussion about auditor independence. d. Discussion about management judgments and accounting estimates.
B
Which of the following situations would normally be discovered by testing the bank reconciliation? A. Failure to bill a customer. B. Failure to include a deposit in transit on the bank reconciliation. C. Duplicate payment of a vendor's invoice. D. Payment to an employee for more hours than she worked.
B
Which of the following statements about the Medicis fraud is false? a. In 2012, the PCAOB settled a disciplinary order censuring Ernst & Young (EY), imposing a $2 million penalty against the firm and sanctioning four of its current and former partners. b. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts. c. EY did not properly evaluate Medicis' practice of reserving for most of its estimated product returns at replacement cost, instead of at gross sales price. It appears that EY accepted the company's basis for reserving at replacement cost when the auditors should have known that this approach would not be supported by the audit evidence. d. The PCAOB investigation revealed that by using replacement cost for the reserve, rather than gross sales price, Medicis' reported sales returns reserve were materially understated and its reported revenue was materially overstated. e. All of these are true.
B
Which of the following statements is false regarding materiality? a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. b. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it possible that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. c. A fact is material if there is a substantial likelihood that a reasonable investor would have viewed the fact as having significantly altered the total mix of information made available. d. All of these statements are true.
B
Which one of the following is nota fundamental internal control the auditor would expect to find in place for a cash processing system? A. Segregation of duties B.Electronic payments C. Authorization of transactions D. Periodic internal audits
B
For which of the following audit procedures would sampling be most appropriate? A. Inquiry B. Observation C. Confirmation D. Analytics
C
What is the primary reason that an auditor must add a paragraph to the audit report when the client has changed an accounting principle or method of application? a. Because substantive misstatements are likely to result during the period of transition from one accounting principle to another. b. To alert financial statement readers that the company is complying with the most recent FASB statements. c. Because the change may affect the comparability of this year's financial statements with those of previous years. d. To clarify that the client is in compliance with GAAP
C
Which of the following activities is not an activity associated with the acquisition and payment cycle? a. Purchase of goods and services. b. Approval of items for payment. c. Receive a customer purchase order. d. Receipt of goods and services.
C
Which of the following correctly defines nonsampling risk? a. The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective (also referred to as the risk of assessing control risk too low). b. The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective (also referred to as the risk of assessing control risk too high). c. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. d. The risk that the auditor's conclusion based on a sample might be different from the conclusion he or she would reach if the test were applied in the same way to the entire population.
C
Which of the following factors is not a motivation for clients to fraudulently misstate revenue? a. Management bonuses are contingent on a certain revenue goal. b. Management wants to meet publicly announced earnings expectations. c. Controls over revenue process are ineffective. d. Bankruptcy may be imminent
C
Which of the following procedures does the auditor typically perform when testing the existence of cash? A. Counting cash at the depository institution. B. Inquiry of management. C. Sending a standard bank confirmation. D. Tracing the bank reconciliation to the general ledger.
C
Which of the following statements is true regarding assertions in the revenue cycle? a. The allowance for doubtful accounts has important implications for the ownership assertion of accounts receivable. b. Audit evidence about the existence of revenues is also the most appropriate evidence about the valuation of receivables. c. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion. d. It is typical that all five assertions for revenue are equally important.
C
Which of the following statistical sampling methods is most commonly used to test control procedures? A.Variable sampling. B. Ratio estimation sampling. C. Attributes sampling. D. Dollar unit sampling.
C
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? A. Greater reliance on internal controls. B. Greater reliance on analytical procedures. C. Smaller expected frequency of misstatements. D. Smaller amount of tolerable misstatement
D
During the testing of a year-end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end did not clear the bank until the middle of the subsequent month. Which of the following is a likely explanation? A. A high probability of kiting. B. A high probability of lapping. C. The year-end cash disbursements records had been closed prior to year-end. D. Checks were issued before year-end but not mailed until the subsequent period.
D
How can ratio analysis and industry comparisons help the auditor plan the audit? a. Both types of analyses may identify areas where the auditor needs to give special audit attention. b. This information helps the auditor determine the nature, timing, and extent of planned audit procedures. c. This analysis forces the auditor to understand the "bigger picture" of the operations of the client, and helps put into context other audit findings. d. All of these correctly describe how ratio analysis and industry comparisons help the auditor plan the audit.
D
If it is discovered after the audit report is issued that the auditor failed to confirm receivables, which of the following statements is true? a. The auditor must notify the SEC immediately. b. The auditor must resign immediately. c. The auditor must notify users of the financial statements immediately. d. The auditor should try to examine subsequent collections of accounts receivable to help determine whether the accounts receivables existed and whether they were properly valued at the balance sheet date.
D
In completing the audit, the auditor should review the adequacy of the disclosures in the financial statements. When assessing the disclosures, the auditor should have reasonable assurance about which of the following? a. The disclosed events and transactions have occurred and pertain to the entity. b. All the disclosures that should have been included are included. c. The disclosures are understandable to users. d. All of these.
D
When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? A. Rights. B. Valuation. C. Existence. D. All of the above.
D
Which explanation best describes how inherent risk relates to internal controls? a. Controls exist to address the risk potential for loss to the auditor because of being associated with the client. b. Controls exist to address the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. c. Controls exist to address the risk of material misstatement including control risk, which is dependent upon client business risk. d. Controls exist to address the inherent risk of material misstatement. Therefore, it would be impossible to evaluate the effectiveness of controls without first knowing the risks, or bad outcomes, that the controls are designed to mitigate.
D
Which of the following assertions is relevant to whether the cash balances reflect the true underlying economic value of those assets? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
D
Which of these statements is false? a. A tolerable misstatement is a monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. b. A misstatement is a dollar amount of misstatement, either intentional or unintentional, that exists in a transaction or financial statement account balance. c. A factual misstatement is a misstatement that has been specifically identified and about which there is no doubt. d. If expected misstatement is smaller than tolerable misstatement, sampling is not appropriate unless it is used to estimate the size of the required adjustment to the account balance.
D
Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? a. Is an individual with access to cash or its recording experiencing financial or personal distress? b. Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. Is the company in potential violation of its debt covenants? d. Two of the three narrative answered choices given. e. All of these.
E
Which of the following definitions is true? a. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt. b. Projected misstatement—The auditor's best estimate of the misstatement in a given population based on projecting the sample results to the population. c. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. d. Expected misstatement—The level of misstatement that the auditor expects to detect. e. All of these are true.
E
Revenue cycle most important assertions
Existence and valuation
T or F: The management letter confirms responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.
F
The U.S. Supreme Court defines materiality as "the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement."
False
5 Step Process for contract to recognize revenue
Identify the contract with the customer Identifying the performance obligations in the contact (goods/services) Determine the transaction price Allocate the transaction price to the performance obligations (deliverables) Recognize revenue when (or as) you satisfy performance obligations
Overall/planning materiality
Overall statements are materially correct, minimum percent of an error that would influence a decision maker to change their mind (3-5%)
Data Analytical Tools
Qualitative and quantitative techniques and processes used to enhance productivity and effectiveness of the audit (software programs)
Management Representation Letter
Reminding management of its responsibility for the financial statements Confirming oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses Reducing the possibility of misunderstanding concerning the matters that are the subject of the representations
The sample size of a MUS sample is a function of the following factors: (1) the risk of incorrect acceptance, (2) the ratio of expected misstatement to tolerable misstatement, and (3) the ratio of tolerable misstatement to the population.
T
When the total estimated misstatement exceeds the tolerable misstatement, the auditor has available several possible courses of action. Two of the options are expanding the sample or changing the audit objective to estimating the correct value.
T
Attributes Sampling
a statistical sampling method used to estimated rate of control procedure failures based on selecting a sample and performing the appropriate audit procedure
Risk of incorrect rejection
assessing control risk too high, risk that the auditor will conclude that ICs are ineffective when ICs are actually effective
Risk of incorrect acceptance
assessing control risk too low, risk that the auditor will conclude that ICs are effective when ICs are actually ineffective
Attribute
characteristic of the population of interest to the auditor
Objective of sampling
determine whether the controls are operating effectively and to estimate the amount of misstatements in an account balance
Performance/tolerable materiality
determining significant accounts and locations, and procedures for those accounts and locations (50% of overall materiality)
Subsequent events
events occurring between the date of the financial statements and the date of the auditor's report
Systematic sampling
first item is selected randomly from the interval.
Posting materiality
misstatements identified throughout the audit will all be considered if the statements overall are materially correct (5% of overall)
4 components of sampling
population sample size sample selection sample evaluation
Engagement Quality Review
provide reasonable assurance that the audit and audit documentation are complete and support the audit opinion on the financial statements and, for integrated audits, on the client's internal controls
Management Letter
recommendations to management Not required but rather shows the auditor knows the clients business Failures in internal controls
incorrect rejection of book value
risk that the auditor will conclude that the account balance contains a material misstatement when it actually does not
incorrect acceptance of book value
risk that the auditor will conclude that the account balance does not contain a material misstatement when it actually does
Monetary Unit Sampling (MSU)
sampling method based on attributes sampling, but involving dollar misstatements rather than control failure rates
Lapping
technique used to cover up the embezzlement/theft of cash by using new customer payments to repay the customer before
Benford's Law
when we have naturally occuring numbers (no boundaries/limits), the frequency is not the same
Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following? A. Roles and activities falling within appropriate segregation of duties. B. Identification cards with picture identification. C. Encrypted passwords memorized by employees. D. The principle of "absolute knowledge".
A
The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does not typically represent a likely expected relationship for cash accounts? a. The company reports consistent profits over several years, but operating cash flows are declining. b. No unusual large cash or other liquid asset transactions are found. c. Operating cash flow is not significantly different from that of the prior year. d. Investment income is consistent with the level of and returns expected from the investments. e. All of these represent likely expected relationships.
A
What are some of the various risk assessment procedures that the auditor can perform to obtain evidence about inherent risk relating to the operations of a company? a. Make management inquiries and tour the client's plant and operations. b. Prepare Excel templates for statements of cash flow. c. Conduct horizontal and vertical analysis of the Balance sheet and Income Statement. d. Prepare an audit risk model template.
A
What kind of opinion will an auditor issue when there are no material violations of GAAP, disclosures are adequate, the auditor is independent and was able to perform the necessary procedures, there was no change in accounting principles that had a material effect on the statements, and the auditor deems that the client remains a going concern? a. Unqualified opinion. b. Qualified opinion. c. Disclaimer opinion. d. Adverse opinion.
A
Which assertion relates to the fact that the company actually owes a liability for the accounts payable as of the balance sheet date? a. Rights and obligations. b. Completeness. c. Existence/occurrence. d. Valuation or allocation.
A
Which of the following describes sampling risk? A. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect. B. The population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect. C. The auditor incorrectly applies sampling methodology. D. The sample size will be larger than needed.
A
Which of the following is not an inherent risk relating to inventory? a. Sales contracts may contain unusual terms, and revenue recognition is often complex. b. Inventory accounts typically experience a high volume of activity. c. Identifying obsolete inventory and applying the lower of cost or market principle to determine valuation are difficult. d. Inventory accounts may be valued according to various accounting valuation methods.
A
Which of the following is the best description of a management representation letter? a. The letter is signed by both the CEO and CFO, dated as of the audit report date, and prepared by the auditor. b. The letter is prepared by management and signed by the CEO and CFO. It is dated as of the audit report date. c. The letter is signed by the CFO, dated as of the balance sheet date, and prepared by the auditor. d. The letter is prepared and signed by the auditor and witnessed by the CEO and CFO, it is dated as of the balance sheet date.
A
Which of the following occurs if the risk of material misstatement decreases? a. The auditor can accept a higher detection risk and still achieve an acceptable level of audit risk. b. Detection risk is lower, and audit risk is reduced to an acceptable level. c. The auditor can accept a lower detection risk and still achieve an acceptable level of audit risk. d. None of these.
A
Which of the following statement is true about an auditor's responsibility for subsequent events (events that occur after the balance sheet date)? a. The auditor must adjust the books for subsequent events for which evidence about the conditions existed on the balance sheet date. b. The auditor must report to management all subsequent events that occur between the balance sheet date and the date of the release of the audit report, but will make no changes to the financial statements. c. The auditor has no responsibility for events that occur after the client's balance sheet date. d. The auditor must disclose in the footnotes, but not make adjustments to the books, all subsequent events for which evidence about the conditions existed and could be adequately measured on the balance sheet date.
A
Which of the following statements concerning review analytical procedures is false? a. The auditor's expectations in review analytical procedures should be more precise than those for substantive analytics. b. Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for performing review analytical procedures. c. Review analytical procedures helps auditors assess the overall presentation of the financial statements. d. Auditing standards require the use of review analytical procedures to assist in identifying ending account relationships that are unusual.
A
Which of the following statements is false regarding planning analytical procedures? a. A frequently used planning analytical procedure is regression analysis. b. The precision of the auditor's expectation tends to be less precise, and based on more aggregated data, for planning analytical procedures than for substantive analytical procedures. c. The objective for planning analytical procedures is to identify accounts with heightened risk of misstatement to provide a basis for designing and implementing responses to the assessed risks. d. For planning analytical procedures, significant unexpected differences suggest that the auditor will need to increase substantive procedures.
A
Which of the following statements is true regarding the auditor's responsibilities related to reporting? a. Auditors should obtain sufficient appropriate evidence to provide a reasonable basis for the opinion regarding the financial statements under audit. b. The audit opinion relates only to the client's financial statements, and does not relate to the required footnote disclosures. c. If the auditor has reservations about the fairness of presentation of the financial statements, the auditor does not need to provide the reason for this reservation, but needs to only state that the financial statements are not fairly presented. d. All of these statements are true.
A
Which of these guidelines helpful to maximizing the effectiveness of a brainstorming session is defined as, "Participants are encouraged to exchange ideas, further develop those ideas during the session, and to respect the opinions of others"? a. Respectful communication. b. Freedom of expression. c. Suspension of criticism. d. Quantity of idea generation.
A
Which of these is the definition of client business risk? a. Risks affecting the business operations and potential outcomes of an organization's activities. b. The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. c. The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. d. The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
A
Which statement is false? a. A misstatement is an error, only intentional, that exists in a transaction or financial statement account balance. b. Characteristics that would make a misstatement material include: The relative size of the misstatement. c. Characteristics that would make a misstatement material include: The misstatement would have been viewed by a reasonable investor to have significantly altered the total mix of information available. d. Characteristics that would make a misstatement material include: The misstatement makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
A
Assume that a U.S. nonpublic company made changes which had a material effect on the financial statements that were properly justified, accounted for, and disclosed. Which of the following is not a change for which the auditor should add a paragraph to the audit report to alert the readers? a. A change from one GAAP to another GAAP. b. A change in an accounting estimate not affected by a change in accounting principle. c. A change from non-GAAP to GAAP. d. A correction of a material misstatement in previously issued financial statements.
B
Eagle Company's financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading. Which of the following is descriptive of the type of audit report the auditor should provide? a. Unqualified opinion, with no mention of the departure in the auditor's report. b. Unqualified opinion, with a description of the departure in the audit report. c. Either unqualified opinion, with no mention of the departure in the auditor's report or unqualified opinion, with a description of the departure in the audit report. d. Neither unqualified opinion, with no mention of the departure in the auditor's report or unqualified opinion, with a description of the departure in the audit report.
B
In attributes sampling, which of the following will not affect the determination of sample size? a. The expected population deviation rate. b. The risk of incorrect rejection of book value. c. Sampling risk. d. The tolerable rate of deviation.
B
Refer to Exhibit 10.6. Which of the following represents a reasonable test of controls for cash receipts? a. Document internal controls over cash by completing the internal control questionnaire or by flowcharting the process. b. Segregation of duties between those handling cash and those recording cash transactions. c. Obtain a bank confirmation. d. Obtain a bank cutoff statement. e. All of these.
B
When examining a common-sized income statement, in which of these situations can an auditor's expectation for an expense account be confirmed? a. The total expenses are in line with industry data, even if there are substantial differences from account to account. b. The balance is in line with prior years, industry information, and the auditor's knowledge of the business. c. The vendor statements confirm the account's balance. d. The percentage difference between the auditor's expectations and the actual balance is positive.
B
Which of the accounting changes would require the auditor to issue a qualified or adverse opinion? a. A change in entity. b. A change in accounting principle from a GAAP to a non-GAAP principle. c. A change in estimate. d. A correction of an error in previously issued financial statements for which the auditor had issued an unqualified opinion.
B
Which of the following audit procedures would an auditor use to test the existence assertion for inventory? a. Perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the client takes physical inventory. b. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory. c. Make inquiries of the client regarding the segregation of duties between the purchasing department and the receiving department. d. Make inquiries of the client regarding allowances made for expected returns.
B
Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail? A. Custody of receipts by the accounts receivable manager. B. Restrictive endorsements placed on checks as soon as they arrive. C.Weekly deposits to a secure bank. D. Reconciliation of bank accounts each month.
B
Which of the following is not a matter that auditors would choose to emphasize when issuing an unqualified opinion? a. Important subsequent events, such as a board of directors' decision to divest a segment of the business. b. An inability to gather sufficient appropriate evidence during the engagement period. c. A change in the fiscal year end. d. Significant transactions with related entities.
B
Which of the following statements is true concerning performance materiality? a. If performance materiality is set too high, the auditor might perform more substantive procedures than necessary. b. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence to obtain. c. Performance materiality is essentially the same as overall materiality. d. If performance materiality is set too low, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements.
B
Which of the following would be used by the auditor to address the possibility of kiting? A. Cut-off bank reconciliations. B. Interbank transfer schedules. C. Bank confirmations of account balances. D. Bank confirmations of loan guarantees.
B
Which of these is a control related to existence or occurrence? a. Limiting access to the files to authorized individuals. b. Distributing monthly statements. c. Printing a list of changed prices for review by the department that authorized the changes. d. Use of prenumbered shipping documents and sales invoices.
B
Which of these is not a reason why management might decide to fraudulently overstate revenue? a. To achieve bonuses or stock options tied to revenue. b. To discourage investors from investing in the company. c. To be able to negotiate a higher price in a merger. d. Bankruptcy is imminent.
B
Which of these is the correct definition of sampling units? a. Sampling units refer to the group of transactions or the items that make up an account balance for which the auditor wants to estimate some characteristic. b. Sampling units refer to the individual items making up the population. c. Both of these are correct. d. Neither of these is correct.
B
Which statement is false regarding the use of sampling and data analytics tools by auditors? a. Sampling techniques would be appropriate when an auditor wants to perform procedures such as examining documents, reperforming calculations, or sending confirmations. b. Sampling involves looking at all of the transactions that occurred during the period under audit. c. Auditors use sampling in testing controls. d. Auditors use sampling in testing account balances and assertions.
B
In completing the audit, the auditor communicates with management via the management letter. Which of the following statements is false about management letters? a. The management letter is used to make significant operational or control recommendations to management. b. The management letter is not required but simply a added document to make the audit more reliable. c. The management letter is required for publicly traded companies in the U.S., but not privately held companies. d. Many audit firms consider management's inattention to addressing comments in the letter to be an important risk factor in subsequent-year audits.
C
In selecting a sample for attributes testing, haphazard selection involves which of the following approaches? A. Each item in the population having an equal chance of selection. B. Every nth item being selected after a random start. C. An arbitrary selection with no conscious bias. D. Selecting all items on a day or week.
C
Refer to Exhibit 10.15. Which of the following assertions is relevant to the audit procedure for marketable securities that requires the auditor to examine selected documents to identify any restrictions on the securities? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
C
The auditor will do which of the following when the results of sample testing conclude that there is misstatement in excess of the tolerable misstatement? A. Issue a disclaimer of opinion. B. Throw out the sample. C. Propose adjustments to the client. D. Disclose the misstatement in the client's financial statements.
C
Which assertion relates cash balances including all cash transactions that have taken place during the period? a. Valuation or allocation. b. Rights and obligations. c. Completeness. d. Presentation and disclosure. e. Existence/occurrence.
C
Which assertion relates to the fact that inventory balances include all inventory transactions that have taken place during the period? a. Valuation or allocation. b. Existence/occurrence. c. Completeness. d. Rights and obligations.
C
Which of the following statements is false regarding the nature, timing, and extent of risk responses? a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance. b. The extent of risk response refers to the sufficiency of evidence that is necessary given the client's assessed risks, materiality, and the acceptable level of audit risk. c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year-end, on an unannounced basis, and includes more elements of unpredictability in the procedures. d. The timing of risk response refers to when the auditor performs the audit procedures.
C
Which of these is not a control over the shipment and recording of sales transactions that an auditor might examine to assess whether all transactions are recorded correctly, and in the correct period. a. Signed authorization of transaction before recorded. b. Use and reconciliation of pre-numbered documents. c. Distribute monthly statements. d. Supervisory review of transactions before recording.
C
Which one of the following risks is not a risk associated with cash? A. Large volume of transactions. B. Importance of meeting debt covenants. C. Complex valuation issues. D. Easy to manipulate.
C
Assume that the auditor sets audit risk at 1%. What is the most appropriate interpretation of this level of audit risk? a. The auditor is 99% confident that the audit opinion is correct. b. The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement. c. The auditor is 99% confident that the audit procedures will detect a material misstatement. d. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated.
D
In which of the following situations will an auditor evaluate the likelihood of a client being a going concern? a. Only when negative trends within the business are present. b. Only when there are significant internal matters such as the loss of key personnel. c. An auditor will evaluate both the client's industry and the overall health of the economy in deciding whether to assess the likelihood of a client being a going concern. d. Each audit will include an assessment of the client being a going concern
D
The analytical procedures of the financial statements of Koss Corporation that are depicted in Exhibit 14.3 reveal which of the following indicators of the fraud? a. Cash balances had declined to their lowest level since FYE 2004. b. Cost of goods sold as a percentage of sales had risen sharply over the period, with a particularly significant increase from FYE 2008 to 2009. c. Net income as a percentage of sales had decreased sharply over the period, with a particularly significant decrease from FYE 2008 to 2009. d. All of these narrative answers are correct.
D
What is simple random sampling? a. It involves systematic sampling in which the first item is selected randomly from the interval. b. A nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias or special reason for including or omitting certain items from the sample. c. A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week. d. Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.
D
Which of the following audit procedures would an auditor use to test the valuation or allocation assertion for inventory? a. Inquire of production and warehouse personnel about the existence of obsolete inventory. b. Test inventory cost by taking a sample of recorded inventory, and trace to source documents indicating cost of inventory. c. Inquire of the client about sales adjustments (markdowns) that have been offered to sell any products. d. All of these.
D
Which of the following explanations best describes the purpose of lapping? a. Lapping is a procedure used by the auditor to obtain evidence the client's customer does return a positive confirmation. b. Lapping is an agreement containing contract terms that are not part of a formal sales contract. c. Lapping is an approach used by client personnel to eliminate differences between a customer's records and the client's records reported on confirmations. d. Lapping is a technique used by client personnel to cover up the embezzlement of cash.
D
Which of the following is an example of fraud in the acquisition and payment cycle? a. Theft of inventory by an employee. b. Employee schemes involving fictitious vendors as means to transfer payments to themselves. c. Executives recording fictitious inventory or inappropriately recording higher values for existing inventory. d. All of these.
D
Which of the following is not a change in the audit report as a result of the new reporting standard (AS 3101)? a. An affirmative statement that the audit firm is registered with the Public Company Accounting Oversight Board (PCAOB). b. A disclosure of the year the auditor began serving consecutively as the company's auditor. c. Specific mention of comprehensive income and notes to the financial statements. d. A statement that the financial statements are the responsibility of the client's management.
D
Which of the following provisions of the Foreign Corrupt Practices Act is known as the anti-bribery provision? a. Grease payments in which an official is paid to expedite the performance of duties that the official would already be bound to perform are impermissible. b. Companies that have securities listed on U.S. markets must design and maintain an adequate system of internal accounting controls. c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the company's transactions. d. No U.S. person or company that has securities listed on U.S. markets may make a payment to a foreign official to obtain or retain business.
D
Which of the following represents the calculation of the sampling interval? a. Tolerable error ÷ Risk of incorrect acceptance. b. Sample size ÷ Population size. c. Tolerable error × Risk of incorrect acceptance. d. Population size ÷ Sample size
D
Which of the following statements is false regarding audit reporting? a. Auditing standards require auditors to provide positive assurance—that is, an explicit statement as to whether the financial statements are presented fairly. b. The auditor should provide an opinion in accordance with the auditor's findings or state that an opinion cannot be expressed. c. The auditor's opinion should state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. d. None of these statements is false.
D
Which of the following statements is false? a. Posting materiality is the materiality amount that signifies the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct. b. An auditor should use the result of the calculation as a starting point for planning materiality and then adjust as necessary for qualitative characteristics of the particular audit client. c. Quantitative materiality is based on a specific numeric cutoff, like 5% of net income or 1% of total assets. d. Performance materiality is the materiality amount that the auditor uses in in determining whether the financial statements overall are materially correct.
D
Which of the following statements is true of the tolerable rate of deviation? a. It is a rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set is not exceeded by the actual rate of deviation in the population. b. This term is sometimes referred to as the tolerable failure rate. c. The auditor's tolerable rate of deviation is the level at which the control's failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor's planned assessment of control risk in performing tests of account balances. d. All of these statements are true.
D
Which of these is an audit document that lists all transfers between client bank accounts starting a short period before year end and continuing for a short period after year end? a. Bank deposit slip b. Bank confirmation. c. Cutoff bank statement. d. Interbank transfer statement.
D
Which of these is not a factor that influences the reliability of data used in planning analytical procedures in the revenue cycle? a. The source of the data and the nature of information available about the data. b. The comparability of the data. c. The controls over the preparation of the data. d. All of these are factors that influence the reliability of this data.
D
Which type of account is used to process most cash transactions, including regular cash receipts and disbursements? a. cash management account b. savings account c. petty cash account d. general checking account
D
Refer to Exhibit 8.4 and determine which of the following statements is true. a. In nonstatistical sampling, sample size is determined by auditor judgment. b. In statistical sampling, the sample must be randomly selected to give each unit in the population an equal chance to be included in the sample. c. In nonstatistical sampling, evaluation is based on auditor judgment and projections are based on sample results. d. In statistical sampling, the auditor is required to define acceptable risk in advance. e. All of these are true.
E
Which of these describes the audit procedure(s) to be performed to test the client's bank reconciliation at year-end for a customer note collected by the bank? a. Confirm directly with the bank b. Trace to cash disbursements journal,inquire of client as to the reason for the delay,trace items to a bank cutoff statement c. Agree balance on reconciliation with the amount recorded on the client's general ledger d. Trace cash receipts to cash journal, inquire of client as to the reason for the delay, trace items to a bank cutoff statement e. Inspect documentation related to the bank's credit memo
E
5 Assertions for Cash
Existence/occurrence → cash balances exist Completeness → cash balances include all cash transactions Rights and Obligations → title to all cash accounts and balances Valuation/allocation → recorded balances reflect the true value of all assets Presentation and disclosure → properly classified on the balance sheet and disclosed in the notes of the financial statements
5 Assertions for Revenue
Existence/occurrence → recorded sales and A/R are valid Completeness → all sales are recorded Rights and obligations → the A/R are owned by the organization Valuation/allocation → sales and A/R are properly valued and recorded in the correct period, revenue has been recognized according to GAAP Presentation & disclosure → credit balance and related-party A/R are properly disclosed and classified, revenue recognition policies have been properly disclosed
5 Assertions for A/P
Existence/occurrence—Accounts payable balances exist at the balance sheet date. Completeness—Accounts payable balances include all accounts payable transactions that have taken place during the period. Rights and obligations—The organization actually owes a liability for the accounts payable as of the balance sheet date. Valuation or allocation—The recorded balances reflect the true underlying economic value of those liabilities. Presentation and disclosure—Accounts payable is properly classified on the balance sheet and disclosed in the notes to the financial statements.
5 Assertions for Inventory
Existence/occurrence—Inventory balances exist at the balance sheet date. Completeness—Inventory balances include all inventory transactions that have taken place during the period. Rights and obligations—The organization has title to the inventory as of the balance sheet date. Valuation or allocation—The recorded balances reflect the true underlying economic value of those assets. Presentation and disclosure—Inventory is properly classified on the balance sheet and disclosed in the notes to the financial statements.
T of F: An employee is involved in vendor fraud when he or she creates false records for items that do not exist, such as inflated inventory count sheets or bogus receiving reports
F
T or F: A client has an established control procedure in which recorded accounts payable are reconciled to monthly statements received from suppliers, substantive tests indicate that the control is functioning appropriately. The auditor must, for the sake of thoroughness, reperform the reconciliations.
F
T or F: A fake cash problem relates to management's cash valuation assertion.
F
T or F: A substantive procedure appropriate for testing the existence of inventory would be to perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the physical inventory count is taken.
F
Revenue Cycle Steps
Receiving a customer's purchase order Approving credit for a sale Determining whether the goods are available for shipment (in stock?) Shipping the goods and packing documents Billing the customer with monthly statements Collecting cash Recognizing the effect of this process on revenue and other related accounts such as A/R, Inventory, and Sales commission expense
5 Step Acquisition and Payment Cycle
Requisition (request) for goods or services Purchase of goods and services (purchase order with quantity and price) Receipt of goods and services Approval of items for payment to set up A/P Cash disbursements
Simple Random Sampling
Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.
An example of an attribute of interest to an auditor would be evidence that the client has matched vendor invoice details with the purchase order and receiving report before payment approval and noted that they match before authorizing a payment for the goods received.
T
If engagement risk is higher, the auditor will set audit risk at a low level (e.g., 1%), whereas the auditor might be willing to set audit risk at a higher level (e.g., 5%) for a client with lower engagement risk.
T
One example of the circumstances in which the auditor might use MUS includes accounts receivable confirmations when credit balances are not significant.
T
T or F: A planning analytical procedure in the acquisition and payment cycle that might indicate fraud is that inventory is growing at a rate greater than sales.
T
T or F: A substantive audit procedure that would reveal ownership and related disclosure issues includes scanning the cash receipts journal for relatively large inflows of cash that from unusual sources.
T
T or F: An auditor's professional skepticism would be heightened if the client does not perform a periodic reconciliation of cash.
T
T or F: An example of a situation in which the auditor discovers omitted procedures after the audit report was issued would be one in which the auditor failed to confirm receivables, and this fact comes to light as part of an internal review program.
T
T or F: Calculating the inventory per square foot of store space is an example of a cross-sectional analysis performed as a planning analytical procedure to help the auditor identify potential inventory misstatements for a multi-location retail client.
T
T or F: For accounts receivable, the more relevant assertions are usually existence and valuation.
T
T or F: In its Observations Related to the Implementation of the Auditing Standard on Engagement Quality Review report, the PCAOB noted significant defects in detecting audit deficiencies by the engagement quality review.
T
T or F: In testing controls over whether sales are properly valued, the auditor could take a sample of recorded sales invoices and agree the price on the invoice to an authorized price list.
T
T or F: Objective criteria for evaluating the quality of the client's accounting policies is not available, assessing the quality, not just the acceptability of the significant accounting policies, is a matter of professional judgment.
T
T or F: One step an auditor can take to recognize fraud risk is to consider the fact that not all fraud is instigated by management.
T
T or F: Review analytical procedures are performed to provide evidence on whether certain relationships make sense in light of the knowledge obtained and documented during the audit.
T
T or F: The audit of inventory can be complex because inventory is easily transportable, exists at multiple locations, may become obsolete, and may be difficult to value.
T
T or F: The audit report is important to the audit opinion formulation process since it communicates relevant information to the financial statement users, both internal and external, resulting from the audit.
T
T or F: The documentation of an engagement quality review should contain sufficient information to enable an experienced auditor, having no previous connection with the engagement, to understand the procedures performed by the engagement quality reviewer to comply with PCAOB's AS 1220 Engagement Quality Review standard.
T
T or F: The going-concern evaluation is based on information obtained from normal audit procedures performed to test management's assertions, no separate procedures are required, unless the auditor believes that there is substantial doubt about the client's ability to continue as a going concern
T
T or F: The primary reason for issuing an adverse audit opinion is that the client's financial statements contain a pervasive and material unjustified departure from GAAP.
T
T or F: To make an existence/occurrence assertion about inventory, auditors may either observe the client's personnel taking the year-end physical inventory in its entirety or on a cycle basis throughout the year.
T
T or F: Two important complexities in auditing inventory arise because inventory accounts experience a high volume of activity and are valued according to various inventory valuation methods.
T
T or F: When a client has a justified departure from GAAP, the audit report should include a paragraph describing the departure, its approximate effects (if they can be practicably determined), and the reasons for which compliance with GAAP would result in misleading statements.
T
T or F: When a heightened risk of fraud exists, auditors will likely decide to observe the inventory at all of the client's locations at the same time.
T
T or F: When assessing fraud risks, the auditor should consider the client's motivation to increase revenue due to both internal and external pressures.
T
T or F: When conducting the audit of acquisition and payment cycle accounts, the auditor will likely conduct less substantive tests for companies with effective internal controls than for companies with ineffective internal controls.
T
T or F: When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable.
T
Inherent Risks in Cash Accounts
Volume of activity Liquidity Automated systems Debt covenants are often tied to cash Misrepresentation and outright theft Authorization of disbursements/payments
