Full Midterm 2

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HO2.1 Identify the applicable element of quality control: j. the firm's mission statement indicates its commitment to quality, and this commitment is emphasized in all staff training programs

"tone at the top" - leadership

Assume that auditors list a civil lawsuit for damages and the court found total losses of 5 million. if the auditors were determined to be 30 percent at fault and were the only solvent defendants, what is the auditors' likely obligation under proportionate liability?

$2,250,000

Suppose that the auditors in the preceding question participated knowingly ini commission of violations of securities laws (with managers and directors of the audit client). What is the auditors' likely obligation?

$5,000,000

Control activities are the component of internal control that includes control actions that have been established by policies and procedures a. True b. False

Under the Securities Exchange act of 1934, entities are required to report to the public about changing auditors on

Form 8-K

Under the Securities Exchange Act of 1934, entities are required to report to the public about changing auditors on

Form 8-K.

Generally accepted auditing standards are a. Specific actions performed by auditors during an examination b. Standards that guide the conduct of an audit examination c. legal requirements auditors must observe during the audits of public entities d. standards used by entities in deciding whether to engage or retain the services of auditors

Independence is not required for this service a. Attestation b. Assurance c. Consulting

Independent auditors are employees of the client a. True b. False

The appropriate percentage of an asset or liability balance being recorded on the income statement in accordance with GAAP or IRFS is referred to as ____________ and ___________ refers to the appropriate recording of related transactions

allocation, accuracy

When assertions are embodied in a company's financial statements, the attestation is referred to as ____________.

auditing

the purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the

authorization of transactions from the custody of related assets

Entities desiring to issues equity or debt must provide a set of financial statements to an prospective purchaser. This set of financial statements and other information for prospective purchasers is known as a

prospectus.

which of the following is a definition of control risk?

the risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable? (A) Comparing receivable turnover rates to industry statistics for reasonableness. (B) Inquiring about receivables pledged under loan agreements. (C) Assessing the allowance for uncollectible accounts for reasonableness. (D) Tracing amounts in the subsidiary ledger to details on shipping documents.

A vendor's invoice received and held by the client would be considered what type of evidence? (A) Written representation (B) External (C) Internal (D) External-Internal

(D) External-Internal

Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the ASB balance assertion of: (A) existence (B) valuation (C) completeness (D) presentation (E) rights and obligations

(B) valuation

The type of financial analysis that expresses balances sheet accounts as percentages of total assets is known as: (A) net worth analysis (B) vertical analysis (C) horizontal analysis (D) expenditure analysis

(B) vertical analysis

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely: (A) consult with fraud examiners (B) withdraw from the engagement (C) report directly to the SEC within one day (D) perform extended audit procedures

(B) withdraw from the engagement

In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating: (A) $15,000 (B) $30,000 (C) $10,000 (D) $20,000

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: d. the auditors' evaluation of the magnitude of a misstatement that would impact perceptions of the entity's profitability

performance

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: g. the inability of an audit examination to provide absolute assurance with respect to detecting all material misstatements

performance

26. Which of the following categories of principles is most likely closely related to gathering audit evidence?

performance

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: b. an auditor has raised some questions with respect to management's response to various inquiries concerning pending litigation facing the client

responsibilities

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: j. the auditors' issuance of a qualified opinion because of a departure from GAAP

reporting

Guidance for "communicating the results" are covered under the GAAS __________ principal

reporting

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: f. One of your clients is currently a potential defendant in several cases because of the damage caused by one of its products. Because this entity does not believe that it is likely to receive an unfavorable outcome from this litigation, it did not disclose the potential litigation in the footnotes accompanying their financial statements.

reporting principle - GAAP

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: a. the need for auditors to consider their financial relationships with prospective clients

responsibilities

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: f. relevant education and experience requirements for CPA licensure

responsibilities

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: h. the requirement that auditors possess the skills and knowledge of others in their profession

responsibilities

The fundamental principal of _________ relates to auditors integrity and professional qualifications

responsibilities

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: a. an entity has contacted you about performing its audit engagement. you have not previously served a client in the entity's industry, which has many industry-specific accounting issues that are both technical and complex

responsibility - competence and capabilities

When a CPA performs a(n) ___________, limited- evidence gathering work is done, but the scope is narrower than in a audit

review

when obtaining an understanding of an entity's internal control in a financial statement audit at a non-public company, an auditor is not obligated to

search for significant deficiencies in the operation of the internal control system

A company's internal auditing function should not be considered when assessing the effectiveness of internal controls. a. True b. False

An engagement letter is used primarily to a. Ensure a clear contractual understanding of the services to be provided by the CPA b. Express an opinion on the financial statements. c. Provide management representations to be included in the audit evidence. d. Disclaim liability.

When accountants agree to perform a compilation or review of unaudited financial statements, the best way to avoid client's misunderstanding the nature of the work is to describe it completely in

An engagement letter.

Which of the following is not part of Sarbanes-Oxley

An increased duty on the part of auditors to identify financial statement fraud.

Auditors are expected to be unbiased and impartial with respect to information they audit which is referred to as independence in A. appearance B. Fact C. actions

The auditor jargon, the cutoff date generally refers to the A. date the audit engagement begins B. clients year-end balance sheet date C. date the audit opinion is issued D. evidence collection end date

Preparing financial statements from a clients books and records without performing any evidence gathering work is a(n) A. review B. attestation C. Compilation D. assurance service

Responsibility for setting all audit standards to be followed on audit's of public companies rates with the A. GASB B. ASB C. PCAOB D. FASB

The fundamental GAAS principal that defines objectivity and the role it plays in the audit is the ________ principal A. performance B. Reporting C. responsibilities

The probability that a material misstatement caused by error or fraud will not be prevented or detected on a timely basis of the entities internal control is A. inherit risk B. risk of material misstatement C. control risk

The probability that either an error or fraud will result in a material misstatement is A. risk of material misstatement B. Control risk C. inherit risk

The two general types of relationships that are are believed to compromise independence are: A. financial and friendship B. financial and family C. financial and managerial D. managerial and family

This Act was passed in 2002 as a direct response to several statement frauds A. Public company accounting oversight B. foreign corrupt practices C. sarbanes- oxley D. Dodd - Frank

The study of business activities for the purpose of making recommendations about the efficient and effective use of resources, effective achievement of business objectives and compliance with company policies is ______________ auditing A. regulatory B. governmental C. Internal D. operational

The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from a. Acting in a managerial decision-making role for an audit client. b. Auditing the firm's own work on an audit client. c. Providing tax consulting to an audit client without audit committee approval. d. All of the above

When an entity registers a security offering under the Securities Act of 1933, the law provides an investor

Financial information examined by independent auditors.

Financial information is appropriately presented and described, and disclosures are clearly expressed. a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

GAAP, IFRS and special purpose (cash or tax bases) are examples of ___________ frameworks

Financial reporting

28. One of the accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following:

Focusing on items that have a more significant quantitative effect on the entity's financial statements

A public entity subject to the periodic reporting requirements of the Securities Exchange Act of 1934 must file an annual report with the SEC known as the

Form 10-K

A public entity subject to the periodic reporting requirements of the Securities Exchange Act of 1934 must file an annual report with the SEC known as the

Form 10-K.

Generally, highly regulated entities have more complex control activities than less-regulated entities. a. True b. False

33. Which of the following procedures would provide the most reliable audit evidence?

Inspection of bank statements obtained directly from the client's financial institution

Internal auditors perform only operational audits. a. True b. False

Internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and ineffective and inefficient operations a. True b. False

Internal control is a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. a. True b. False

Internal evidence a. is obtained directly from third parties independent of the client b. originates outside of the client's system but has been received and processed by the client c. Consists of documents that are produced, used, and stored within the client's information system. d. Consists of representations made by the client's officers, directors, owners, employees.

Auditing standards include ___________ which include AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position

Interpretive Publications

The PCAOB audit objective related to the completeness assertion is to establish evidence that assets, liabilities, and equities actually exist. a. True b. False

One objective of internal auditing is to ultimately assist members of an organization to perform their work more effectively and efficiently a. True b. False

A lack of reasonable care that may be characterized by the failure of auditors to follow GAAS in the conduct of the audit is known as

Ordinary negligence.

Which of the following would probably not be considered an indication of a material weakness? Immaterial fraud committed by senior management. Overproduction by the manufacturing plant. Ineffective oversight by the audit committee. Evidence of a material misstatement.

Overproduction by the manufacturing plant.

46. Which of the following is true with respect to PCAOB inspections of accounting firms?

PCAOB inspections review a sample of audits conducted by firms as well as the firms' systems of quality control

The most important fundamental component of an entity's internal control is: People who operate the control system. Compliance with applicable laws and regulations. Reliability of financial reporting. Effectiveness and efficiency of operations.

People who operate the control system.

Auditors are required to plan the work and "obtain and evaluate evidence" as part of the GAAS ________ principal

Performance

General quality criteria for conducting an audit is set forth in the fundamental principal of _____________

Performance

General quality for conducting an audit is set for in the fundamental principal of _______________

Performance

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: h. One of your supervisors has requested a number of clarifications based on her review of your work on an audit engagement. A subsequent meeting with her has resolved these clarifications, and you both have concluded that your work supports the opinion on the client's financial statements

Performance - planning and supervision

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: g. You are performing tests of the client's controls over the processing of revenue transactions to determine whether these controls are operating effectively and can be relied upon to prevent or detect misstatements

Performance - risk management

Effectiveness of audit procedures would be reduced by: Deciding to obtain external evidence instead of internal evidence. Performing procedures during the interim period as opposed to at the fiscal year-end date. Selecting larger sample sizes for audit. Performing audit procedures at the fiscal year-end date as opposed to the interim period.

Performing procedures during the interim period as opposed to at the fiscal year-end date.

Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and theft. a. True b. False

32. The most reliable evidence regarding the existence of newly-acquired computer equipment is

Physical observation

37. Auditors' understanding of the internal control in an entity provides information for

Planning the nature, timing, and extent of substantive procedures of the audit team

Preventive controls are designed to prevent the occurrence of a misstatement. a. True b. False

Which of the following third parties is known by name to auditors as the audit is conducted?

Primary beneficiary.

27. Which of the following is not related to ethical requirements of auditors?

Professional judgement

A state of mind characterized by appropriate questioning and a critical assessment of audit evidence is ___________

Professional skepticism

Having an attitude that "includes a questioning mind and a critical assessment of evidence" is the definition of _______________________

Professional skepticism

Professional skepticism is an auditor's tendency not to believe anyone a. True b. False

Standards and standard-setters: 1. Who is the rule making body for PUBLIC entities? 2. What rules do they help create

Public Company Accounting Oversight Board (PCAOB) Auditing Standards (ASs)

Name the purpose (control/substantive/dual) and assertion related to the test: Calculate an estimate of the allowance for doubtful accounts using prior relations of write-offs and sales.

Substantive test Valuation

According to the American Accounting Association, auditing is a(n) _______________________ of objectively obtaining and evaluating evidence

Systematic process

Which of the following does not accurately summarize auditors' requirements regarding internal control? Public Entity Nonpublic Entity Evaluating control risk Yes Yes Understanding Yes Yes Test controls Yes Yes Documenting Yes Yes

Test controls Yes Yes

Which of the following does not accurately summarize auditors' requirements regarding internal control?

Test controls: public entity- yes; nonpublic entity-yes

Name the purpose (control/substantive/dual) and assertion related to the test: Scan recorded sales invoices and shipping documents for missing numbers in sequence.

Test of controls ???

Name the purpose (control/substantive/dual) and assertion related to the test: Vouch recorded sales invoices prices to the approved price list.

Test of controls Accuracy

Name the purpose (control/substantive/dual) and assertion related to the test: Inspect recorded sales invoices for credit approval.

Test of controls Valuation,Occurrence

The ASB balance audit objective related to valuation or accuracy is to determine whether proper values have been assigned to assets, liabilities, equities, revenues, and expenses. a. True b. False

Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board?

The PCAOB develops Auditing Standards for the audit of public entities.

Which of the following is most closely related to the relevance of audit evidence?

The aging of accounts receivable will evaluate valuation, which is not directly evaluated through confirmation. Therefore, aging provides relevant evidence with respect to the valuation assertion.

The audit objective that all transactions and accounts should be presented in the financial statements are in fact included is related to which of the PCAOB assertions? a. Existence b. Rights and obligations c. Completeness d. Valuation

The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions? a. Existence b. Rights and obligations c. Completeness d. Valuation

A group of investors sued Anderson, Olds, and Watershed, CPAs (AOW) for alleged damages suffered when the entity in which they held common stock went bankrupt. To avoid liability under the common law, AOW must demonstrate which of the following?

The audit was conducted in accordance with generally accepted auditing standards and with due professional care.

An investor seeking to recover stock market losses from a CPA firm associated with an initial offering of securities based on an unmodified opinion on financial statements that accompanied a registration statement, must establish that

The audited financial statements contain a false statement or omission of material fact.

When investors sue auditors for damages under section 11 of the Securities Act of 1933, they must allege and prove

The audited financial statements contained a material misstatement.

The auditor may make suggestions about the form or content of the financial statements. a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

The auditor must be independent a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

The auditor must follow GAAS in an audit of a non-issuer a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

The auditor should document the evidence obtained in the audit a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

The auditor should obtain sufficient appropriate evidence to support the opinion. a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

The auditor should test management's assertions relating to the financial statements a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

36. An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a. Schedules and analyses to be prepared by the client's employees b. Methods of statistical sampling the auditor will use c. Specification of litigation in progress against the client d. Client representations about availability of all minutes of meetings of the board of directors

a. Schedules and analyses to be prepared by the client's employees

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a. Schedules and analyses to be prepared by the client's employees b. Methods of statistical sampling the auditor will use c. Specification of litigation in progress against the client d. Client representations about availability of all minutes of meetings of the board of directors Chp. 3

a. Schedules and analyses to be prepared by the client's employees

a transaction-level internal control activity is best described as

an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

When accountants agree to perform a compilation or review of unaudited financial statements, the best way to avoid client's misunderstanding the nature of the work is to describe in completely in

an engagement letter.

which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?

an internal control questionnaire

Evidence must be trustworthy (reliable) and provide the audit team with information of interest (relevant) in order to be considered _________

appropriate

To be considered _________, evidence must be reliable and relevant

appropriate

To be considered __________ evidence must be reliable and relevant

appropriate

Regarding evidence __________ refers to evidence quality and ___________ relates to evidence quantity

appropriateness, sufficiency

When audit procedures are specified, the evidence produced by each procedure must relate to one or more specific management ____

assertions

The broadest set of information, including non financial information is covered by ________________ services

assurance

Financial statement auditing and _________ services are both types of assurance services but ________ services are not

attestation, consulting

Generally accepted government auditing standards define and describe three board types of audits that may be performed: financial audits, ____________ engagements and _______________ audits

attestation, performance

A list of the procedures auditors need to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements is a(n) _________

audit plan

in most audits of large entities, control risk assessment contributes to audit efficiency, which means that

auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs

When completing the audit of internal controls for a public company, AS 5 requires auditors to test: a. Operating effectiveness only. b. Design effectiveness only. c. Both operating and design effectiveness. d. Neither operating nor design effectiveness

c. Both operating and design effectiveness.

43. The revenue cycle of a company generally includes which accounts? a. Inventory, accounts payable, and general expenses b. Inventory, general expenses, and payroll c. Cash, accounts receivable, and sales d. Cash, notes payable, and capital stock

c. Cash, accounts receivable, and sales

The revenue cycle of a company generally includes which accounts? a. Inventory, accounts payable, and general expenses b. Inventory, general expenses, and payroll c. Cash, accounts receivable, and sales d. Cash, notes payable, and capital stock Chp. 3

c. Cash, notes payable, and sales

49. Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a. Make inquiries of the client's lawyer concerning pending litigation b. Perform cutoff tests of cash receipts and disbursements c. Compare financial information with nonfinancial operating data d. Recalculate the prior-years' accruals and deferrals

c. Compare financial information with nonfinancial operating data

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. Unqualified—no material weaknesses found. b. Disclaimer of opinion—unable to perform all necessary procedures. c. Disclaimer of opinion—significant deficiencies exist. d. Adverse—material weaknesses exist.

c. Correct A disclaimer is used when the auditor's scope is limited but not when significant deficiencies exist, so it is not an appropriate report.

When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations. b. Compliance with regulations. c. Financial reporting. d. All of the above.

c. Correct AS 5 applies to financial reporting controls only.

When completing the audit of internal controls for a public company, AS 5 requires auditors to report on Management's Report on Internal Control An Audit of Internal Control a. No No b. Yes No c. No Yes d. Yes Yes

c. Correct AS 5 requires auditors to issue a report on the audit of internal controls.

When completing the audit of internal controls for a public company, AS 5 requires auditors to test a. Operating effectiveness only. b. Design effectiveness only. c. Both operating and design effectiveness. d. Neither operating nor design effectiveness

c. Correct AS 5 requires testing for both design effectiveness and operating effectiveness.

A material weakness is a situation in which a. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. b. There is a remote likelihood that a material misstatement would be detected on a timely basis. c. It is reasonably possible that a material misstatement would not be detected on a timely basis. d. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis.

c. Correct By definition, a material weakness in internal control is defined as a deficiency, or combination of deficiencies that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis.

Which of the following combinations would provide the auditor the most reliable evidence? Source of Evidence a. Internal b. Internal c. External d. External Effectiveness of Internal control More effective Less effective More effective Less effective

c. Correct Evidence is most reliable when the source of the evidence is external and when the evidence is developed under more effective internal control.

Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? a. Independence. b. Adequate competence and capabilities. c. Adequate planning and supervision. d. Gathering sufficient appropriate evidence.

c. Correct Initials of the preparer and reviewer provide evidence that the documentation was reviewed, which relates to planning and supervision.

39. Which of the following communications is most likely to be written before the balance sheet date? a. A report to the audit committee on the results of testing of internal control over cash receipts b. Confirmation letters to vendors confirming the amounts they owe to the client c. An attorney's letter regarding contingent liabilities d. An engagement letter

d. An engagement letter

When a client sues an accountant for failure to perform consulting work properly, the accountants' best defense is probably based on the doctrine of

contributory negligence on the part of the client.

the "obtaining an understanding" work phase (Phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client's

control activity effectiveness

control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of

cutoff

41. Prior to accepting a new audit engagement, a public accounting firm should a. Attempt to contact the predecessor auditors b. Evaluate the integrity of management c. Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement d. All of the above

d. All of the above

Prior to accepting a new audit engagement, a public accounting firm should a. Attempt to contact the predecessor auditors b. Evaluate the integrity of management c. Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement d. All of the above Chp. 3

d. All of the above

When initiating communications with predecessor auditors, prospective auditors should expect a. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits b. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement c. To obtain copies of some or all of the predecessor auditors' audit documentation d. All of the above Chp. 3

d. All of the above

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including: a. The auditor's testing of controls for the audit of internal control on a public company. b. Misstatements detected during the financial statement audit. c. Any control deficiencies identified during the audit. d. All of the above.

d. All of the above.

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? a. A narrative memorandum describing the control system. b. An internal control questionnaire. c. A flowchart of the documents and procedures used by the company. d. All of the above.

d. All of the above.

The most important fundamental component of an entity's internal control is a. Reliability of financial reporting. b. Effectiveness and efficiency of operations. c. Compliance with applicable laws and regulations. d. People who operate the control system

d. People who operate the control system

Effectiveness of audit procedures would be reduced by a. Deciding to obtain external evidence instead of internal evidence. b. Performing procedures during the interim period as opposed to at the fiscal year-end date. c. Selecting larger sample sizes for audit. d. Performing audit procedures at the fiscal year-end date as opposed to the interim period

d. Performing audit procedures at the fiscal year-end date as opposed to the interim period

HO2.1 Identify the applicable element of quality control: e. audit engagement team members enter their electronic signatures in the firm's engagement management software to indicate the completion of specific audit program steps; at the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed

engagement performance

The likelihood that an error or fraud will exist in the financial statements prior to be considering the auditors work is the risk of ___________

material misstatement

The likelihood that an error or fraud will exist in the financial statements prior to considering the auditors work is the risk of ____________________

material misstatement

HO2.1 Identify the applicable element of quality control: b. each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing; procedures to be undertaken by the reviewers are illustrated by the office review program

monitoring

The primary purpose of assessing the risk of material misstatement is to help auditors determine the _______, ______ and ______ of further audit procedures needed to gather evidence about the fairness of the entity's financial statements

nature, timing, extent

if the audits plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must

obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance

as part of understanding the internal control, an auditor is not required to

obtain knowledge about the operating effectiveness of the client's internal control activities

tests of controls in a GAAS audit are required for

obtaining evidence about the operating effectiveness of client control activities

Auditors compete procedures to ensure reported sales transactions were created to fraudulently inflate profits to in ore to test the ________ assertion

occurrence

A lack f reasonable care that may be characterized by the failure of auditors to follow GAAS in the conduct of the audit is known as

ordinary negligence

which of the following would probably not be considered an indication of a material weakness?

overproduction by the manufacturing plant

the most important fundamental component of an entity's internal control is

people who operate the control system

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: I. the preparation of a written audit plan that guides the conduct of the audit engagement

performance

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: c. the auditors' consideration of the effectiveness of the entity's internal control on the nature, timing and extent of substantive procedures

performance

if the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate?

disclaimer of opinion

which report would not be appropriate for a public accounting firm to provide on financial reporting controls?

disclaimer of opinion-significant deficiencies exist

which of the following should an auditor do when control risk is assessed at the maximum level?

document the assessment

HO2.1 Identify the applicable element of quality control: a. appropriate accounting and auditing research requires adequate technical reference materials; each firm professional has online password access through the firm's internet website to electronic reference materials on accounting, auditing, tax, SEC and other technical information, including industry data

engagement performance

HO2.1 Identify the applicable element of quality control: d. each audit engagement must include a concurring partner review of critical audit decisions

engagement performance

which of the following is a preventive control?

separation of duties between the payroll and personnel departments

When an auditor is perceived to by others to be unbiased, the possesses _________ in ________

indepence, appearance

When an auditors state of mind leaves him or her unbiassed and impartial with respect to information being audited, the auditor is said to possess ________ in _______

independence, fact

which of the following would most likely be classified as a material weakness?

ineffective oversight of the financial reporting process by the company's audit committee

The probability that data circulated by a company will be false or misleading is ___________

information risk

The risk of material misstatement is a combination of ___________ risk and _______ risk

inherent and control

which of the following is not a component of internal controls?

inherent risk

An independent, objective assurance and consulting activity designed to add value and improve an organization's operations is the definition of _________________ auditing

internal

The objective of _________________ auditing is to help an organization' accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes

internal

Policies and procedures implemented to prevent or detect material accounting frauds and errors and provide for timely correction is the definition of ___________

internal control

In comparison to the burden of proof required of plaintiffs in civil lawsuits against independent auditors under common law, section 10 (b) of the Securities Exchange Act of 1934

is the same regarding plaintiffs' need to prove damages or losses.

a material weakness is a situation in which

it is reasonably possible that a material misstatement would not be detected on a timely basis

after obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. the auditor most likely decided that

it would be efficient to perform tests of controls that would result in a reduction decided that

the primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with

knowledge necessary for audit planning

Which of the following should an auditor do when control risk assessed at the maximum level? (A) Document the assessment (B) Perform fewer substantive tests of details (C) Document the control structure more extensively (D) Perform more tests of controls

(A) Document the assessment

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? (A) Inquiry and inspection of records. (B) Analytical procedures and reperformance. (C) Confirmation and reporformance (D) Observation and inspection of records.

(A) Inquiry and inspection of records.

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks? (A) Testing the operating effectiveness of the relevant controls would not be efficient. (B) The internal auditor already has tested the relevant controls and found them effective. (C) The cost of substantive procedures will exceed the cost of testing the relevant controls. (D) The relevant internal control components are not well documented.

(A) Testing the operating effectiveness of the relevant controls would not be efficient.

This year, Blakeney Enterprise engaged a new auditor who must: (A) attempt to communicate with the predecessor auditor before accepting the engagement. (B) reject the engagement if the change in auditors resulted from a dispute with the predecessor. (C) seek the SEC's permission to accept the engagement if Blakeney is publicly owned. (D) review the predecessor's audit documentation if the audit is to be in accordance with GAAS.

(A) attempt to communicate with the predecessor auditor before accepting the engagement.

The existence of audit risk is recognized by the statement in the auditor's standard report that the: (A) auditor obtains reasonable assurance about whether the financial statements are free of material misstatement (B) auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. (C) audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements (D) financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework

(A) auditor obtains reasonable assurance about whether the financial statements are free of material misstatement

Management fraud generally refers to: (A) intentional distortions of financial statements (B) violations of GAAS. (C) noncompliance (D) unintentional mistakes

(A) intentional distortions of financial statements

The role of the Public Company Accounting Oversight Board in the standard-settting process is to develop: (A) Governmental Auditing Standards for the audits of governmental entities (B) Auditing Standards for the audits of public entities (C) International Standards on Auditing for the audits of foreign entities. (D) Statements on Auditing Standards for the audits of nonpublic entities.

(B) Auditing Standards for the audits of public entities

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using: (A) independently prepared mailroom prelists. (B) a bank lockbox system. (C) daily check summaries. (D) employee fidelity bonds.

(B) a bank lockbox system

The appropriate separation of duties does not include: (A) recording of transactions (B) data preparation (C) authorization to execute transactions (D) custody of assets involved in the transactions

(B) data preparation

During the initial planning phase of an audit, a CPA most likely would: (A) test specific internal control activities that are likely to prevent fraud. (B) discuss the timing of the audit procedures with the client's management. (C) inquire of the client's attorney as to whether any unrecorded claims are probable of assertion. (D) evaluate the reasonableness of the client's accounting estimates of inventory obsolescence.

(B) discuss the timing of the audit procedures with the client's management.

Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs) to determine whether comparable information is in agreement. Examples of such comparisons would not include: (A) current and prior inventory to details of purchases and sales. (B) observation of inventory accounts (C) payroll details with personnel records (D) paid vouchers to disbursements.

(B) observation of inventory accounts

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should: (A) intensify the audit with the expectation of detecting management fund (B) perform additional audit procedures to investigate the matter further. (C) consider the matter a scope limitation (D) withdraw from the engagement.

(B) perform additional audit procedures to investigate the matter further.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if: (A) the auditor's assessed level of detection risk is low. (B) the results of alternative procedures that were performed compensate for the omission. (C) the omission is documented in a communication with the audit committee. (D) no individual investment is material to the financial statements taken as a whole.

(B) the results of alternative procedures that were performed compensate for the omission.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit? (A) Perform cutoff tests of cash receipts and disbursements (B) Make inquiries of the client's lawyer concerning pending litigation. (C) Compare financial information with nonfinancial operating data. (D) Recalculate the prior year's accurals and deferrals

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected? (A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable. (B) Direct effect noncompliance: Limited; Indirect effective noncompliance: Reasonable (C) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None (D) Direct effect noncompliance: Limited; Indirect effect noncompliance: None

Which of the following outcomes is a likely benefit of information technology used for internal control? (A) Recording of unauthorized transactions. (B) Processing of unusual or nonrecurring transactions (C) Enhanced timeliness of information (D) Potential loss of data

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? (A) Establish procedures that comply with the standards of the Sarbanes-Oxley Act. (B) Consider inherent risk and control risk before determining selection risk. (C) Establish policies to ensure that the audit work meets applicable professional standards. (D) Use attributes sampling techniques in testing internal controls

Which of the following statements is true with respect to the quality of audit evidence? (A) Evidence is considered of higher quality when gathered prior to year-end than following year-end (B) In evaluating quality, sufficiency of evidence is of greater importance than appropriateness of evidence (C) Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control (D) Quality is related to the relevance of evidence, but not the reliability of evidence.

(C) Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control

At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called: (A) Pay-As-You-Go (B) PayChex (C) Positive Pay (D) Pay Master

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit? (A) Reading specialized industry journals (B) Reevaluating the client's internal control environment (C) Reviewing prior year audit documentation and the permanent file for the client (D) Performing tests of details of transactions and balances.

Which of the following is a definition of control risk? (A) The susceptibility of material misstatement assuming there are no related internal controls, policies, or procedures. (B) The risk that the auditor's assessment of internal controls will be at less than the maximum level. (C) The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. (D) The risk that the auditor will not detect a material misstatement

(C) The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.

Which of the following types of auditors' reports does not require an additional paragraph to support the opinion? (A) Adverse opinion (B) Disclaimer of opinion (C) Unmodified opinion (D) Qualified opinion

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of: (A) occurence (B) valuation or allocation (C) cutoff (D) accuracy

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to: (A) recommend remedial actions to the audit committee (B) consider whether other similar acts may have occurred (C) evaluate the effect on the financial statements (D) determine the reliability of mangement's representations

Assessing control risk at below maximum level most likely would involve: (A) reducing inherent risk for most of the assertions relevant to significant account balances. (B) performing more extensive substantive tests with larger sample sizes than originally planned. (C) identifying specific internal control activities that are relevant to specific financial statement assertions. (D) changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end.

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on: (A) employee misappropriation of assets (B) employee embezzlement (C) management fund (D) client fraud on customers

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent: (A) irregular endorsement (B) theft (C) replacement or substitution of stolen assets (D) deposits in transit

Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? (A) Motive (B) Liquidity (C) Opportunity (D) Capability

(D) Capability

The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions? (A) Occurence (B) Accuracy (C) Completeness (D) Classification

(D) Classification

Inherent risk and control risk differ from detection risk in which of the following ways? (A) Inherent risk and control risk exist as a result of the auditor's judgment about materiality (B) Inherent risk and control risk are controlled by the auditor (C) Inherent risk and control risk are calculated by the client (D) Inherent risk and control risk exist independently of the audit

(D) Inherent risk and control risk exist independently of the audit

Which of the following accounts tends to be most predictable for purposes of analytical procedures? (A) Accounts receivable (B) Income Taxes payable (C) Travel and entertainment expense (D) Interest expense

(D) Interest expense

An auditor would most likely use word processing software for what purpose? (A) Obtaining a sample selection (B) Preparing a trial balance (C) Performing analytical procedures (D) Preparing an audit plan

(D) Preparing an audit plan

The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions? (A) Occurrence (B) Rights and obligations (C) Comprehensibility (D) Understandability

(D) Understandability

A proof of cash: (A) always detects lapping. (B) is most helpful when control risk for cash is low (C) is required by GAAS. (D) can be used to test the transactions process.

(D) can be used to test the transaction process

An auditor selected items from the client's detailed inventory listing (that agreed to the financial statements). During the physical inventory observation, the auditor then found each item selected and counted the number of units on hand. Assuming that the amount on hand was the same as the amount in the client's detailed inventory listing, this procedure most likely would provide evidence concerning management's assertion of: (A) presentation and disclosure (B) rights and obligations (C) valuation (D) existence (E) completeness

(D) existence

An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them. This procedure most likely obtained evidence concerning management's assertion of: (A) completeness (B) rights and obligations (C) valuation (D) existence or occurence

(D) existence or occurence

The mail which includes payments should be opened by two people. This control is called: (A) anti-collusion (B) lapping (C) separation of duties (D) joint custody

(D) joint custody

3. During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements or state law. This audit procedure most likely is intended to verify management's assertion of (A) existence or occurrence. (B) completeness. (C) valuation or allocation. (D) presentation and disclosure.

(D) presentation and disclosure.

An auditor who uses 7 percent of income before taxes as a basis for overal materiality would be basing judgment on: (A) cummulative effects (B) absolute size (C) nature of the item (D) relative size

(D) relative size

An audit plan of substantive procedures for cash would not include: (A) prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. (B) obtain a written client representation concerning compensating balance agreements (C) request client to prepare bank reconciliations (D) request a cutoff bank statement be mailed to the client.

(D) request a cutoff bank statement be mailed to the client

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: (A) factors that raise doubts about the auditability of the financial statements. (B) operating effectiveness of internal control policies and procedures. (C) possibility that the nature and extent of substantive tests may be reduced (D) risk that material misstatements exist in the financial statements

(D) risk that material misstatements exist in the financial statements

Tracing bills of lading to sales invoices provides evidence that: (A) shipments to customers were recorded as sales. (B) invoiced sales were recorded as sales (C) recorded sales were shipped (D) shipments to customers were invoiced

(D) shipments to customers were invoiced

Regardless of the assessed level of control risk, an auditor of a non-public company would perform some: (A) dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk (B) analytical procedures to verify the design of internal control activities (C) tests of controls to determine the effectiveness of internal control policies. (D) substantive tests to restrict detection risk for significant transaction classes.

(D) substantive tests to restrict detection risk for significant transaction classes.

6 elements of quality control system:

1. "Tone at the top" - leadership 2. Relevant ethical requirements - due professional care, independence 3. acceptance & continuance of client's relationships and specific engagements 4. Human Resources 5. Engagement performance 6. Monitoring

List the 5 components of the COSO Framework

1. Control Environment 2. Risk Assessment 3. Control Activities 4. Info & Communications 5. Monitoring

Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit procedures listed 1-5. For each audit procedure select the ASB balance assertion that is most likely being tested. a.Existence b. Rights and obligations c. Completeness d. Accuracy e. Valuation 1. the auditors walked through the warehouse looking for obsolete inventory 2. the auditors compared inoices received from suppliers with the cost of inventory listed in the inventory accounts 3. the auditors reviewed purchase orders to determine if any inventory was on consignment 4. the auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs had been included in inventory costs. 5. the auditors selected items from the inventory and reviewed inventory records to ensure these items were included in those records

1. E 2. D 3. B 4. E 5. C

3 principles and related elements of GAAS:

1. Responsibilities - competence and capabilities - relevant ethical requirements (independence and due care) - professional skepticism - professional judgment 2. Performance - planning & supervision - determine and apply materiality - obtain sufficient, appropriate evidence - assessing risk (IR x CR) of material misstatements 3. Reporting - consistent with GAAP - opinion; or opinion can not be reached

As the year 2020 approaches, most states require students to take _________ semester hours of college before receiving a CPA certificate but some states allow students to take the CPA exam after only _________ semester hours of college

150, 120

Analyzing repair and maintenance expenses to ensure they should not have been capitalized test for the assertion of proper A. classification B. cutoff C. rights and obligations D. allocation

Audit reports refer to an audit being conducted in accordance with _________ of the public company accounting oversight board A. standards B. Procedures

PCAOB Auditing Standards apply to A. public entities only B. non public entities only C. both public and nonpublic entities

PCAOB inspections are conducted on an annual basis for: A. firms performing audits of more than 100 public entities B. firms performing audits of less than 100 public entities C. firms that have had substandard work identified in previous inspections D. all firms that audit public entities

Rapid changes in the business world has led to the need for entry level auditing professionals to have proficiency in A. Data analytics and technology B. Complex IRS rules and regulations C. generally accepted accounting principles

Reasonable assurance is: A. a high, but not absolute level of assurance B. absolute level of assurance C. based on what a typical investor would consider to be resonable

Sarbanes- Oxley requires that _________ must certify the correctness of financial statements and the effectives of the internal control system A. upper management B. internal auditors C. the board of directors

The fundamental principle of _______ requires that the auditor obtains resonable assurance about whether the financial statements as a whole are free from material misstatement whether due to fraud or error a. performance b. reporting c. responsibilities

The incentive for company management to provide overly optimistic information results in a potential ___________ between information provides and users A. conflict of interest B. audit risk C. information risk D. natural skepticism

The ownership assertion A. includes capitalized lease property B. Extends to accounts liabilities the company is not yet obligate to pay C. only includes assets for which the company holds the title D. does not apply to intangible assets

The probability that data circulated by a company will be false or misleading is ____________ risk A. information B. consequence C. Business D. Reliability

When auditing large entities, a sample of transactions is examined when drawing conclusions. The number of transaction evaluated relates to the issue of: A. sufficiency B. relevance C. reliability D. appropriateness

Which of the following is not related to the responsibilities principle? A. Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting B. Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession C. The auditors' use of professional judgment throughout the examination D. Firm-wide policies to evaluate the financial and professional relationships of its professionals

Which of the following presumptions does not relate to the reliability of audit evidence? A. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. B. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. C. The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly. D. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.

Which of the following presumptions is correct about the reliability of audit evidence? A. An effective system of internal control provides more assurance about the reliability of audit evidence. B. Reliability of audit evidence refers to the amount of corroborative evidence obtained. C. Information obtained indirectly from outside sources is the most reliable form of audit evidence. D. To be reliable, audit evidence should be convincing rather than persuasive.

Which of the following statements is correct A. some public accounting firms describe their organizations as a professional service firms B. a public accounting firm is required to designate itself as a CPA firm

Which of the following types or services relate to a board set of information, including non financial information A. assurance B. attestation C. auditing

41. Which of the following topics is not addressed in the auditors' report for a public entity?

A description of an audit engagement

A material weakness in internal control is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. a. True b. False

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance? a. Statement of Auditing standards. b. Statements on Standards for Attestation Engagements c. Statements on Standards for Accounting and Review Services d. Statements on Standards for Consulting Services.

In the audit report, an audit opinion: Check all that apply A. is expressed in accordance with the applicable financial reporting framework B. must always be expressed even if the auditor is inable to complete the audit C. states if the financial statements are presented fairly in al material respect.

A, B

The obligation assertion (check all that apply) A. includes ensuring proper footnote disclosure B. only includes accounting liabilities the company is legally obligated to currently pay C. includes an estimate for product warranty

A, C

When making a decision to accept a new client engagement or continuing to perform an engagement for an existing client, the most important issues that firms should focus on are A. firms ability to comply with legal and ethical requirements related to the engagements B. Clients ability to pay for an engagement that will meet all legal, ethical and professional requirements C. integrity and business reputation of the client D. firms ability to adequately perform the engagement

A, C,D

AICPA statements on Auditing Procedures: Check all that apply A. were developed in response of an auditing scandal B. served as the basis for audits of public and nonpublic companies C. are still being issued by the american standards board

A,B

Reasonable assurance A. requires auditors to consider various material misstatement risks B. Recognizes a GAAS audit may not detect all material misstatements C. Requires audit procedures to limit the overall risk to a moderate level D. Recognizes auditors cannot provide a high level of assurance regarding their work

A,B

The Public Company Accounting Oversight Board (PCAOB) A. provides independent oversight over the audits of public entities B. establishes and enforces standards for audit engagements C.inspects the quality of audits conducted by all public accounting firms

A,B

The completeness assertion. Check all that apply A. requires the auditor to obtain persuasive evidence B. includes determining if all expenses are recorded C. may be verified by management representation only

A,B

Which of the following statements are correct? Check all that apply A. assurance services involve lending credibility to both financial and non financial information B. Financial statement auditing is the dominant assurance service provided by CPA firms C. the AICPA does not support non-auditing assurance services D. CPAs who provide auditing services are prohibited from providing other types of assurance services

A,B

A system of quality control provides reasonable assurance that an audit firm: Check all that apply A. complies with professional standards B. issues appropriate reports C. complies with regulatory and legal requirements D. only allows experienced, licensed CPAs to work with their audit clients

A,B,C

Auditing: check all that apply A. has a logical conclusion B. has a logical starting point C. proceeds along established guidelines D. is unplanned and unstructured

A,B,C

Designations for accountants within public accounting other than a CPA include. check all that apply A. certified fraud examiner (CFE) B. certified forensic accountant (CFA) C. certified internal auditor (CIA) D. certified management accountant (CMA)

A,B,C

For quality control standards to be effective it is important that firm management A. demonstrates its commitment to quality control B. devotes sufficient resources to quality control policies and procedures C. ensures that financial considerations do not override work quality D. does not base personal decision on the quality or work performed

A,B,C

Internal auditors A. perform auditors of financial reports for limited external distribution B. review internal control systems to ensure compliance with company policies C. Review the effectiveness of achieving results compared to established objectives D. examine evidence and issue an opinion on the fairness of financial statements

A,B,C

The U.S. Government Accountability office (GAO). Check all that apply A. is organizationally independent of the agencies it audits B. auditors may be considered the highest level of internal auditors for the federal government C. Is headed by the U.S. comptroller General D. is an agency of the united states federal judicial branch

A,B,C

When making a decision to accept a new client engagement or continuing to perform an engagement for an existing client, the most important issues that firms should focus on are. Check all that apply A. integrity and business reputation of the client B. firms ability to comply with legal and ethical requirements related to the engagement C. firms ability to adequately perform with engagement D. clients ability to pay for an engagement that will meet all legal, ethical and performance requirements

A,B,C

Assurance services include. check all that apply A. regulatory compliance B. internal audit outsourcing C. cyber risk assessment D. customer satisfaction surveys E. consulting services

A,B,C,D

Services that public accounting firms are prohibited from providing to audit clients under Sarbanes- Oxley include: Check all that apply A. investment services B. legal and expert services C. actuarial services D. internal audit outsourcing E. corporate tax return preparation services

A,B,C,D

Elements of the performance principle include A. reasonable assurance B. materiality C. audit evidence D. planning and supervision E. risk assessment F. understandable reporting

A,B,C,D,E

To obtain reasonable assurance the auditor must: Check all that apply A. identify and assess risks of material misstatements B. obtain sufficient appropriate audit evidence C. apply appropriate materiality levels throughout the audit D. issue a modified opinion at the conclusion of the audit E. plan to work and supervise assistants

A,B,C,E

When management provides an independent auditor with prepared financial statements, they are making assertions that Check all that apply A. revenue transactions on the income statements occurred B. disclosures are fairly presented C. reported liabilities are complete D. Financial statements are error- free E. inventory on the balance sheet exists

A,B,C,E

When management provides an independent auditor with prepared financial statements, they are making assertions that: check all that apply A. disclosures are fairly presented B. reported liabilities are complete C. inventory on the balance sheet exists D. financial statements are error- free E. revenue transactions on the income statement occurred

A,B,C,E

Generally Accepted Auditing Standards (GAAS) Check all that apply A. guide the conduct of audit examinations B. identify necessary qualifications and characteristics of auditors C. only include pronouncements issued by the PCAOB D. have a purpose to meet the objective of audit emainations

A,B,D

Knowledge of the clients business and industry helps auditors. Check all that apply A. make judgments about the clients accounting principal choices B. evaluate the reasonableness of management estimates C. write an audit report that is appropriate for the industry D. identify areas for special attention

A,B,D

interpretive publications: check all that apply A. must be followed unless an auditor can justify any departures B. are part of auditing standards C. are as authoritative and binding as the guidance in SAS and auditing standards D. provide guidance on the application of GAASin specific circumstances

A,B,D

Materiality: Check all that apply A. is part of the objective of the audit B. recognizes auditors should focus on matters important to financial statment users C. Recognizes auditors do no expect account balances to be accuate to the penny D. is commonly established based on dollar amounts of key financial statement subtotals

A,B.C

Prior to the year 2002, which of the following is correct. Check all that apply A. the accounting profession was self regulated B. the institute of certified Auditors was responsible for auditing regulations C. standards governing audits were established by members of the accounting profession

A,C

Sarbanes- Oxley require that upper management certify the: Check all that apply A. correctness of financial statements B. education of internal auditors C. effective of internal controls for financial reporting D. qualifications of the external audit team

A,C

The objectives of an audit are to: check of all that apply A. issue a report on the financial statements B. obtain absolute assurance that the financial statements do no contain material misstatements due to error C. obtain reasonable assurance about whether the financial statements as a whole are free of material misstatements due to fraud

A,C

The obligation assertion. Check all that apply A. Includes ensuring proper footnote disclosure B. only includes accounting liabilities the company is legally obligated to currently pay C. includes an estimate for product warranty

A,C

To ensure personal assigned to engagements are independent in both fact and appearance firms should. Check all that apply A. identify threats to independence and take actions to eliminate or reduce them to an acceptable level B. obtain verbal confirmation from all firm personnel with respect to their compliance with independence requirements C. communicate independence requirements to personnel

A,C

The PCAOB prohibits an accounting firm from providing auditing services to a public company if the accounting firm. Check all that apply A. provides tax services for key company executives B. provides normal tax advance to the company C. accepts fees that are based on tax outcomes D. consults on "listed transaction tax strategies

A,C,D

When exercising professional skepticism auditors A. consider the reliability of information obtained from the audit committee B. assume management is dishonest when providing information C. evaluates the reliability of documentary evidence D. evaluate and consider contradictory evidence

A,C,D

For independent auditors, established criteria essential for effective communication may be found in. Check all that apply A. GAAP B. IRS code C. Regulatory agency rules D. IRFS

A,D

Reasonable assurance: A. requires auditors to consider various material misstatement risks B. requires audit procedures to limit the overall to a moderate level C. recognizes auditors cannot provide a high level of assurance regarding their work D. recognizes a GAAS audit may not detect all material misstatement

A,D

Which of the following is an advantage of computer-assisted audit techniques (CAATs)? a. The software can be used for audits of clients that use differing computer equipment and file formats. b. The use of CAATs can be substituted for a relatively large part of the required testing. c. The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures. d. The CAATs programs are all written in one computer language.

A. CAATs can be transported and used on different types of clients that utilize different types of computing systems.

With respect to the concept of materiality, which of the following statements is correct? a. Materiality is a matter of professional judgment. b. Materiality is determined by reference to AICPA guidelines. c. Materiality depends only on the dollar amount of an item relative to other items in the financial statements. d. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.

A. Most definitely, materiality is always a matter of professional judgment.

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that a. A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. b. The professional status of the independent auditor imposes commensurate professional obligations. c. In audits of financial statements, the auditor acts exclusively in the capacity of an auditor. d. Financial statements and financial data are verifiable.

A. The management team is generally trying to put its "best foot forward" when reporting their financial statement information. The auditor must make sure that the management team does not violate the accounting rules when doing so. In essence, this statement characterizes why professional skepticism is required to be exercised by auditors.

Auditors are not responsible for accounting estimates with respect to a. Making the estimates. b. Determining the reasonableness of estimates. c. Determining that estimates are presented in conformity with GAAP. d. Determining that estimates are adequately disclosed in the financial statements.

A. Correct Management is responsible for making the estimates in the first place, just as management is primarily responsible for all the financial statement elements.

3.30 Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the A. Current file audit documentation. B. Permanent file audit documentation. C. Administrative audit documentation in the current file. D. Planning memorandum in the current file.

A. Current file audit documentation.

Standards and standard-setters: 1. Who is the rule making body for PRIVATE entities? 2. What rules do they help create

AICPA Auditing Standards Board (ASB) Statements on Auditing Standards (SASs)

According to auditing standards, external auditor's responsibilities for indirect noncompliance do not include a. Designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors attention. b. Performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements c. Considering the qualitative materiality of known and suspected noncompliance. d. Obtaining written management representations concerning the absence of violations of laws and regulations.

According to the AICPA, the purpose of an audit of financial statements is to a. Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the financial accounting standards board. b. Enhance the degree of confidence that intended users can place in the financial statements. c. Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange commission. d. Obtain systematic and objective evidence about financial assertions and report the results to interested users.

According to the American Accounting Association, the definition of auditing includes the following statement. a. a process of reducing to a socially acceptable level the information risk to users of financial statements. b. an independent appraisal function established within an organization to examine and evaluate its activities c. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events. d. an expression of opinion on the fairness of financial statements.

An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to. a. Certify the correctness of Camden's financial statements b. make a complete examination of Camden's records and verify all of Camden's transactions c. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.d., GAAP, IFRS) d. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

34. Breaux & Co. CPA's require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?

Adequate planning and supervision

When an auditor concludes that the financial statements are not presented fairly in conformity with GAAP, a(n _________ opinion will be issued

Adverse

50. Which of the following opinions would be issued if auditors believed that the entity's financial statements were not presented in conformity with GAAP?

Adverse Opinion

All assets, liabilities, and equity interests that should have been recorded were recorded a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: The frequency of the performance of the control by the company during the period being audited. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. The expected rate of deviation for a control activity. All of the above are matters that could affect the necessary extent of testing of a control.

All of the above are matters that could affect the necessary extent of testing of a control.

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including: The auditor's testing of controls for the audit of internal control on a public company. Misstatements detected during the financial statement audit. Any control deficiencies identified during the audit. All of the above.

All of the above.

Amounts and other data were recorded appropriately a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

A transaction-level internal control activity is best described as: An action taken by auditors to obtain evidence. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. A method for recording, summarizing, and reporting financial information. The functioning of the board of directors in support of its audit committee.

An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

Which of the following opinions would be issued if auditors believed that the entity's finan- cial statements were not presented in conformity with GAAP?

An adverse opinion is issued for material and pervasive departures from GAAP.

An auditor needs to understand a company's internal controls in order to anticipate the types of material misstatements that may occur a. True b. False

when completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on

both a and c are correct

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? A narrative memorandum describing the control system. An internal control questionnaire. A flowchart of the documents and procedures used by the company. All of the above.

An internal control questionnaire.

An organization's commitment to integrity is demonstrated through the tone set by the board and management. a. True b. False

An organization's control environment is established and maintained by the internal auditing department. a. True b. False

Assets, liabilities, and equity interest are included at appropriate amounts, and adjustments are appropriately recorded a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

Assets, liabilities, and equity interests are bona fide a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

Providing assurance for specific management assertions is referred to as ___________.

Attestation

Sustainability is a prominent type of __________ engagement

Attestation

When a practitioner is engaged to issue a report on a subject matter or an assertion about subject matter that is the responsibility of another party is a(n) ___________________

Attestation engagement

47. The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as

Audit procedures

The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as

Audit procedures are particular and specialized actions that auditors take to obtain evidence during a specific engagement.

45. Which of the following statements is not true with respect to the performance principle?

Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits

Which of the following topics is not addressed in the auditors' report for a public entity?

Auditors provide reasonable (but not absolute) assurance in an audit engagement (this is noted in the scope paragraph of the auditors' report).

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that: Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls. The cost of control evaluation work will exceed the cost of substantive procedures. The cost of substantive procedures will exceed the cost of control evaluation work.

Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the: Operational responsibility from the record-keeping responsibility. Administrative controls from the internal accounting controls. Authorization of transactions from the custody of related assets. Human resources function from the controllership function.

Authorization of transactions from the custody of related assets.

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance? A. statements on standards for accounting and review services B. statements on standards for attestation engagements C. statements on standards for consulting services D. statement of auditing standards

An audit is a specific type of: A. assertion B. assertion engagement C. internal control D. explicit representation

CPA certificates and licenses to practice are issued by: A. The AICPA B. state boards

Comparing vendor invoices to inventory prices, obtaining lower of cost or market data and recalculating depreciation schedules relate to the _________ assertion A. presentation and disclosure B. valuation and allocation C. occurence D. rights and obligations

Explicit representations A. must be developed by all types of auditors B. are provided to external auditors but ofter not to internal auditors C. are provided to internal auditors but often not to external auditors D. are provided to all types of auditors

High- quality information to make educated financial decisions is demanded by: A. informational professionals B. investors and creditors C. auditors

Obtaining evidence about estimated liabilities relates to the ______ assertion A. valuation and allocation B. rights and obligations C. presentation and disclosure D. occurrence

Providing assurance is A. performing a complication B. lending credibility to information C. opining on specific management assertions D. Supplying an opinion as to the fairness of financial statements

Satisfactory internal control _______ the probability of errors or frauds in the accounts A. eliminates B. reduces C. has no impact on

The PCAOB argues that auditor independence would be impaired if the firm: A. prepares the company's corporate tax return B. Provides tax services to key executives C. Provides any type of tax advice to the company

The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing? A. rights and obligations B. valuation C. Existence D. Completness

The fundamental principal of _______ requires that the auditors obtain reasonable assurance about whether the financial statement as a whole are free from material misstatement, whether due to fraud or error. A. reporting B. performance C. responsibilities

The most reliable evidence is. A. internal evidence B. direct personal knowledge C. external evidence

The performance principle would include all of the following except: A. the auditors' determination of materiality levels B. the auditors' evaluation of independence with respect to their clients. C. the auditors' evaluation of the risk of material misstatement. D. the auditors' determination of the nature, timing, and extent of further audit procedures.

The probability that data circulated by a company will be false or misleading is _____ risk A. consequence B. Information C. Business D. Reliability

The purpose of monitoring is to A. review significant judgements made by audit teams and the conclusions reached in formulating the report B. provide the firm reasonable assurance that quality control policies and procedures are operating effectively and complied with in practice C. ensure the firm will pass all PCAOB inspections D. hire the most qualified auditing personal

When planning the audit engagement, auditors use management assertions to: A. develop an opinion on the fairness of financial statements B. Assess external financial reporting risks C. render an opinion on the effectiveness of internal controls

Which of the following refers to the nature of information provided by the audit evidence A. Appropriateness B. Relevance C. Reliability D. Sufficiency

in the audit report the term "financial statements" A. only includes the four basic financial statements B. includes all footnote disclosures and additional information required by GAAp C. can exclude footnotes disclosures and additional information if stated in the audit report

Reasonable assurance. Check all that apply A. requires audit procedures to limit the overall risk to a moderate level B. Recognizes a GAAS audit may not detect all material misstatements C.requires auditors to consider varios material misstatement risks D. recognizes auditors cannot provide a high level of assurance regarding their work

B,C

Substantive procedures are: check all that apply A. unnecessary when the risk of material misstatement is low B. used to obtain evidence about account balances C. reflected in the determination of detection risk

B,C

The Public Company Accounting Oversight board (PCAOB). Check all that apply A. provides external, independent oversight to audits of public and private entities B. is responsible for registering public accounting firms C. was created by Sarbanes- Oxley

B,C

The probability that either an error or fraud will result in a material misstatement is A. control risk B. risk of material misstatment C. inherent risk

B,C

The public company accounting oversight boards (PCAOB) A. Provides external, independet oversight to audits of public and private entities B. Was created by Sarbanes- Oxley C. Is responsible for registering public accounting firm

B,C

The risk assessment process requires an understanding of: Check all that apply A. the client but not the clients industry B. internal controls in the accounting information system C. the clients operation environment

B,C

reasonable assurance A. recognizes auditors cannot provide a high level of assurance regarding their work B. recognizes a GAAS audit may not detect all material misstatements C. requires auditors to consider various material misstatement risks D. requires audit procedures to limit the overall risk to a moderate level

B,C

Auditing: Check all that apply A. is unplanned and unstructured B. has a logical starting point C. has a logical conclusion D. proceeds along established guidelines

B,C,D

Auditors are responsible for: A. exercising professional judgement in the reporting stage of the audit only B. having appropriate competence and capabilities to perform the audit C. maintaining professional skepticism through audit planning and performance D. complying with relevant ehtical requirements

B,C,D

Conditions that present challenges to an auditor's professional skepticism include: Check all that apply A. contradictory audit evidence obtained through different procedures B. financial incentives and pressures C. time deadlines for completing the audit D. personal relationships developed with clients

B,C,D

Cutoff procedures provide evidence about: check all that apply A. Rights and obligations B. Valuation C. existence D. completeness

B,C,D

Cuttoff procedures provide evidence about A. rights and obligations B. valuation C. completeness D. existence

B,C,D

Due Care: A. expects auditors to be infallible B. relates to auditor competence and capabilities C. requires an appropraite level of professional skepticism D. Reflects a resonable level of performance

B,C,D

Operational audits are: A. often provided by external auditors to their public audit clients as part of the annual audit B. a type of assurance service provided by public accounting firms C. intergral to internal auditing D. performed by both internal and external auditors

B,C,D

Professional judgment: Check all that apply A. is a state of mind characterized by appropriate questioning and a critical assessment of audit evidence B. is particularly important when evaluating management estimates used in financial statements C. relates to evidence obtained and conclusions reached D. must be demonstrated throughout the entire audit process

B,C,D

The U.S. Government Accountability Office (GAO): Check all that apply A. performs attestation engagements but not financial audits B. provides a wide range of performance audits C. emphasizes the accountability of public officials in regards to public funds and other resources D. provides a compliance audit function with respect to laws and regulations

B,C,D

Services that public accounting firms prohibited from providing to audit clients under Sarbanes- Oxley include. Check all that apply A. Tax return preparation advice B. financial information system design and implementation C. bookkeeping and related services D. management or human resource services E. appraisal or valuation services

B,C,D,E

An audit plan is a: Check all that apply A. only required if assistants will be used during the audit B. stated in enough detail to understand about the work to be done C. only required for the audit of public companies D. A list of the audit procedures auditors need to perform

B,D

The public company accounting oversight board (PCAOB). Check all that apply A. passed the Sarbanes- Oxley Act in 2002 B. inspects audit firms' quality control processes C. performs inspections of completed audit work D. performs inspections of completed audit work E. Sets all audit standards for audits of public companies

B,D

Which of the following statements are correct? Check all that apply A. Auditors want to present a company's financial condition in the best possible light B. Auditors must not accept management assertions without corroboration C. Conflicts of interest between auditors and company management only exist in first year audits D. Documentary evidence is required to prove each management assertion

B,D

The revenue cycle of a company generally includes which accounts? a. Inventory, general expenses, and payroll. b. Cash, accounts receivable, and sales. c. Cash, notes payable, and capital stock. d. Inventory, accounts payable, and general expenses.

B. These accounts are part of the revenue cycle.

40. Kramer, the CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would:

Be considered exercising proper due care

Before accepting an engagement to audit a new client, an auditor is required to a. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. b. Obtain the prospective client's signature to the engagement letter c. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. d. Discuss the management representation letter with the prospective client's audit committee.

The Securities Act of 1933 and Securities Exchange Act of 1934 contain

Both civil liability provisions applicable to auditors and criminal liability provisions applicable to auditors.

When completing the audit of internal controls for a public company, AS 5 requires auditors to test: Operating effectiveness only. Design effectiveness only. Both operating and design effectiveness. Neither operating nor design effectiveness

Both operating and design effectiveness.

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. Whether the account has a history of errors. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. All of these are correct.

Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure.

Locke, CPA, was engaged by Hall Inc. to audit Willow Company. Hall purchased Willow after receiving Willow's audited financial statements, which included Locke's unmodified auditors' opinion. Locke was negligent in the performance of the Willow audit engagement; this negligence was caused by failure to perform the engagement in accordance with terms of the engagement letter. As a result of Locke's negligence, Hall suffered damages of $75,000. Hall appears to have grounds to sue Locke for

Breach of Contract : YES Negligence: YES

The chance that customers will buy from competitors or product lines will become obsolete are examples of ________________ risk.

Business Risk

The possibility that an entity will fail to meet its objectives is ________________

Business risk

PCAOB auditing standards are subject to the formal approval of the A. Audition standards board B. IRS C. Sec D. AICPA

To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process? A. Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality. B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes. c. Recognize the financial assertions made in management's financial statements and footnotes. d. Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes.

When auditors confirm accounts receivables with customers , evidence is provided about the legitimacy of the sales, but does not provide evidence the accounts collectible. This addresses the issue of. A. Sufficiency B. Reliability C. Relevance D. Appropriateness

When auditors confirm accounts receivables with customers, evidence is provided about the legitimacy of the sales, but does not provide evidence that accounts are collectible. This addresses the issue of: A. sufficiency B. appropriateness C. relevance D. reliability

Which of the following is not a recommendation usually made following the completion of an operational audit? A. Compliance with company policies B. effective achievement of business objectives C. attesting to the fairness of the financial statements D. economic and efficient use of resources

Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors obtain expertise in their client's industry as they are conducting the audit examination. B. Auditors fail to document their assessment of control risk following their study of internal control. C. Auditors are directly involved with a client manager in a strategic decision-making capacity. D. Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors.

Sarbanes- oxley prohibits public accounting firms from performing Check all that apply A. any type of consulting services to public companies B. consulting services for companies they do not audit C. services that would result in a firm auditing its own work D. consulting services that require auditors to make managerial decisions

C,D

Which of the following statements are correct. Check all that apply A. Larger CPA firms usually provide more non audit and attestation services for their clients that smaller firms B. The level of auditing activity provided increases as the size of the public accounting firm decreases C. Auditing and assurance services are the largest source of revenue for most of the big 4 accounting firms D. Traditional financial statement audits are the most frequent assurance engagement requested by most non public companies

C,D

Which of the following statements are correct? A. for assurance services, improving the context of information refers to the information itself B. objectivity is not important when performing assurance services C. An assurance engagement is a type of professional service D. The consumers of assurance services may be either a very small or very large targeted group

C,D

Due to multiple and sometimes conflicting standards, auditors and regulators have much interest in _______ which is making the standards coordinated or uniform throughout the world

Convergence

When auditing an investment in another company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion? a. Inspect the stock certificates evidencing the investment. b. Review the broker's advice or canceled check for the investment's acquisition. c. Obtain market quotations from The Wall Street Journal or another independent source. d. Examine the audited financial statements of the investee company.

C. Always remember that management is more likely to overstate assets. As a result, when auditing an asset balance like investments, a relevant assertion is likely to be valuation. In this situation, to answer the question of what the investment should be valued at in the balance sheet, an auditor would first seek to obtain a market quotation from an independent source like the Wall Street Journal.

When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? a. Yes, the auditors' report should mention the fact that an audit specialist was used. b. The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings. c. The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions. d. The use of an audit specialist need not be mentioned if the auditors decide not to take responsibility for the audit specialist's findings.

C. The auditors' report should only mention the use of the specialist when the specialist's findings affect the auditors' conclusions.

According to the AICPA, the purpose of an audit of financial statements is to a. Obtain systematic and objective evidence about financial assertions and report the results to interested users. b. Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board. c. Enhance the degree of confidence that intended users can place in the financial statements. d. Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission.

C. According to the AICPA definition found in AU 200 (paragraph 11) and in your book, "the purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. As a result, this is the correct response.

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date? a. Reviewing accounting records for recurring transactions occurring near year-end. b. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities. c. Scanning the minutes for significant transactions with members of the board of directors. d. Interviewing internal auditors about their reporting responsibilities.

C. Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because a. Financial statements are too complex for the bankers to analyze themselves. b. The consequences of making a bad loan are very undesirable. c. They generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements. d. They are too far away from company headquarters to perform accounting and auditing themselves.

C. The potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. Consider for example a company that was desperate for cash in order to survive. Would it be possible that the management team would present unreliable financial statements to the bank in order to get a desperation loan? Because of this possibility, a financial statement audit is needed to add credibility to the financial statements

3.28 Generally accepted auditing standards require that auditors always prepare and use A. A written planning memorandum explaining the auditors' understanding of the client's business. B. A written client consent to discuss audit matters with prospective auditors. C. A written audit plan. D. The written time budgets and schedules for performing each audit.

C. A written audit plan.

3.32 Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? A. Being able to fine-tune the audit work for effectiveness and efficiency. B. Avoiding the problem of doing more work than necessary (overauditing). C. Being able to decide early what type of audit opinion to issue. D. Avoiding the problem of doing too little work (underauditing).

C. Being able to decide early what type of audit opinion to issue.

A(n) ________ opinion contains the words "except for" A. unqualified B. adverse C. disclaimer of D. qualified

3.29 When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? A. The auditors' need to document compliance with generally accepted auditing standards. B. The auditors' need to verify the existence of new sales contracts important for the client's business. C. The auditors' judgment about their independence with regard to the client. D. The auditors' judgments about materiality.

C. The auditors' judgment about their independence with regard to the client.

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance? a. Unfavorable industry conditions b. lack of working capital c. High liquidity d. Slow customer collections

A, D

Choose (option 1, option2) Agreed-upon procedures Option 1 a. Independence required b. Independence not required Option 2 a. No assurance provided b. limited assurance provided c. Positive assurance provided d. Neither positive nor limited assurance provided, but results of procedures provided.

A, C

Choose (option 1, option2) Audit Option 1 a. Independence required b. Independence not required Option 2 a. No assurance provided b. limited assurance provided c. Positive assurance provided d. Neither positive nor limited assurance provided, but results of procedures provided.

B, A

Choose (option 1, option2) Compilation Option 1 a. Independence required b. Independence not required Option 2 a. No assurance provided b. limited assurance provided c. Positive assurance provided d. Neither positive nor limited assurance provided, but results of procedures provided.

B, A

Choose (option 1, option2) Preparation Option 1 a. Independence required b. Independence not required Option 2 a. No assurance provided b. limited assurance provided c. Positive assurance provided d. Neither positive nor limited assurance provided, but results of procedures provided.

A, B

Choose (option 1, option2) Review Option 1 a. Independence required b. Independence not required Option 2 a. No assurance provided b. limited assurance provided c. Positive assurance provided d. Neither positive nor limited assurance provided, but results of procedures provided.

The most common attestation engagement are ________ and _______

Compilations, reviews

Environment conditions that increase user demand for relevant and reliable information include _____________, remoteness time sensitivity and ______________

Complexity, consequences

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: Inquiry of client personnel. Inspection of documentation. Observation of company operations. Confirmation of balances.

Confirmation of balances.

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would

Consultation with an appraiser demonstrates due care if auditors do not have expertise in the area in question.

For Assurance Services, improving the quality or ________ of information refers not to the information itself, but to how the information is used in decision making

Context

For assurance services, improving the quality or _________ of information refers not to the information itself, but to how the information is used in decision making

Context

When a client sues an accountant for failure to perform consulting work properly, the accountants' best defense is probably based on the doctrine of

Contributory negligence on the part of the client.

Control activities implemented to mitigate transaction processing risk that typically affect only certain processes, transactions, accounts, and assertions are referred as transaction or application controls. a. True b. False

Controls to monitor results of operations are considered to be transaction controls a. True b. False

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including a. The auditor's testing of controls for the audit of internal control on a public company. b. Misstatements detected during the financial statement audit. c. Any control deficiencies identified during the audit. d. All of the above.

Correct Evidence obtained during the test of controls would be relevant to the assessment of control risk (response a); misstatements detected during the audit (response b); and control deficiencies detected during the audit (response c) would all be relevant. As a result, the correct answer is all of the above.

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of a. Presentation and disclosure b. Completeness c. Rights and obligations d. Existence

All of the following are examples of procedures a firm can use to monitor its system of quality control except: A. assessing compliance with independence policies and procedures. B. discussions with firm personnel. C. conducting reviews of engagement documentation. D. devoting sufficient resources to developing a system of quality control.

An engagement quality control review. A. ensures the firm will pass all PCAOB inspections B. provides the firm reasonable assurance hat quality control policies and procedures are are operating effectively and complied with in practice C. is designed to ensure that upper management is committed to quality control D. evaluates significant audit team judgements and the conclusions reached in formulating the report

Audit evidence is usually considered sufficient when A. it has the qualities of being relevant, objective, and free from unknown bias. B. it is reliable C. it has been obtained through random selection methods. D. there is enough quantity to afford a reasonable basis for an opinion on financial statements.

Auditing is: A. opining on specific assertions made by management B. Performing a compilation C. Lending credibility to information D. supplying an opinion as to the financial statements

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of: A. objective judgment B. impartial conservatism C. independent integrity D. Professional skepticism

IRS agents and state and federal bank examiners are examples of _____________ auditors a. internal B. public C. External D. Regulatory

In auditing the long-term debt account, an auditor's procedures most likely would focus primarily on management's assertion of: A. allocation B. existence C. rights and obligations D. Completeness

True or False: The competence and capabilities required to become an auditor are developed and maintained strictly through the auditors college education and CPE ( continuing professional education)

False

Ineffective Internal Controls A. decreases control risk but not the necessary effectiveness of further audit procedures B. increases control risk but not the necessary effectiveness of further audit procedures C. has no effect on control risk or the necessary effectiveness of further audit procedures D. increases control risk and the necessary effectiveness of further audit procedures E. decreases control risk and the necessary effectiveness of further audit procedures

Management assertions about financial statement presentation and disclosure are primarily found: A. on the statement of comprehensive income B. on the income statement C. on the balance sheet D. in the footnotes

Procedures performed to ensure recorded sales transactions actually happened are done to test the ______ assertion A. valuation and allocation B. existence C. presentation and disclosure D. occurrence

The audit objective that all transactions are recorded in the proper period is related most closely to which of the Audit Standards Board (ASB) transaction assertions? A. accuracy B. Completness C. occurrence D. Cutoff

The chance that the audit team's substantive procedures will fail to uncover a material misstatement is called _________ risk A. appropriate B. reliablity c. Suffciency D. detection

The fundamental principles developed by the Auditing Standards Board are best described as: A. standards that apply only to audits of public entities. B. industry-specific guidance on how audit procedures should be conducted. C. ten basic standards underlying an audit. D. guidelines for the general conduct of audit engagements.

True or false: when considering established criteria for effective communication, external auditors rely on financial and managerial models of efficiency and effectiveness

False

The study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policies is referred to as A. environmental auditing B. financial auditing C. compliance auditing D. Operational auditing

Verifying accounts receivable balances with customers and counting physical inventories are done to test the __________ assertion A. occurrence B. presentation and disclosure C. valuation and allocation D. existence

Which of the following is least related to the concept of independence in appearance? A. The ownership of a financial interest in a client by the auditor B. The employment of the auditor's family member in an important position with the client C. The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements D. The auditors' objectivity and ability to act impartially toward the client

Financial decision makers demand reliable information that is provided by accountants a. True b. False

When initiating communications with predecessor auditors, prospective auditors should expect a. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. b. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement. c. To obtain copies of some or all of the predecessor auditors' audit documentation. d. All of the above.

In auditing the accrued liabilities account on the Balance Sheet, an auditor's procedures most likely would focus primarily on management's assertion of a. Valuation or allocation. b. Existence or occurrence. c. Presentation and disclosure. d. Completeness.

D. Management is more likely to understate liabilities. As a result, when auditing the accrued liabilities account, the most relevant assertion is likely to be completeness.

Which of the following best describes the relationship between auditing and attestation engagements? a. Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement. b. Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support. c. Attestation is a subset of auditing that improves the quality of information or its context for decision makers. d. Auditing is a subset of attestation engagements that focuses on the certification of financial statements.

D. Auditing is a subset of attestation engagements that focuses on the certification of financial statements. The subject matter is the set of financial statements from management and the criteria is GAAP in the United States.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a. Specification of litigation in progress against the client. b. Methods of statistical sampling the auditor will use. c. Client representations about availability of all minutes of meetings of the board of directors. d. Schedules and analyses to be prepared by the client's employees.

D. Client cooperation should be specified in the engagement letter. This is a key purpose of the letter.

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? a. Being able to fine-tune the audit work for effectiveness and efficiency. b. Avoiding the problem of doing more work than necessary (overauditing). c. Avoiding the problem of doing too little work (underauditing). d. Being able to decide early what type of audit opinion to issue.

D. The kind of opinion to issue cannot be determined until all the evidence is obtained and evaluated.

The primary objective of compliance auditing is to a. Develop a basis for a report on internal control. b. Perform a study of effective and efficient use of resources. c. Give an opinion on financial statements. d. Determine whether client personnel are following laws, rules, regulations, and policies.

D. A compliance audit refers to procedures that are designed to ascertain that the company's personnel are following laws, rules, regulations, and policies.

Independent auditors of financial statements perform audits that reduce a. Business risks faced by investors. b. Complexity of financial statements. c. Timeliness of financial statements. d. Information risk faced by investors.

D. After completing a financial statement audit, information risk has been reduced for investors.

Which of the following communications is most likely to be written before the balance-sheet date? a. An attorney's letter regarding contingent liabilities. b. A report to the audit committee on the results of testing of internal control over cash receipts. c. Confirmation letters to vendors confirming the amounts they owe to the client. d. An engagement letter.

D. An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date.

The risk to investors that a company's financial statements may be materially misleading is called a. Client acceptance risk. b. Business risk. c. Moral hazard. d. Information risk.

D. By definitinon, information risk is the probability that the information circulated by a company will be false or misleading.

During an audit of a company's cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion? a. Rights and Obligations. b. Valuation or Allocation. c. Occurrence d. Existence.

D. Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of cash and the fact that is no foreign currency translation calculation, the existence assertion is clearly the most important assertion.

Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard a. Should be disregarded because it is not in writing. b. Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion. c. Is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses. d. Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

D. Rhonda's assertions are nice. However, to be considered as sufficient to conclude that all expenses have been recorded, they will need corroboration with documentary evidence.

The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client? a. Bookkeeping services. b. Internal audit services. c. Valuation services. d. All of the above.

D. Sarbanes-Oxley prohibits the provision of bookkeeping, valuation, and internal audit services; therefore "all of the above" is the best response.

Substantial equivalency refers to a. Providing consulting work for another firm's audit client in exchange for the other firm's providing consulting services to one of your clients. b. The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization. c. An auditor's tendency not to believe management's assertions without sufficient corroboration. d. Permitting a CPA to practice in another state without having to obtain a license in that state.

D. Substantial equivalency relates to the practice of public accountancy in states other than a CPA's state of licensure. Under the concept of substantial equivalency, as long as the licensing (home) state requires (1) 150 hours of education, (2) successful completion of the CPA exam, and (3) one year of experience, a CPA can practice (either in person or electronically) in another substantial equivalency state without having to obtain a license in that state.

The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the a. Governmental Internal Audit Agency (GIAA). b. Central Internal Auditors (CIA). c. Securities and Exchange Commission (SEC). d. Government Accountability Office (GAO).

D. The mission of the U.S. Government Accountability Office is to ensure that public officials are using public funds efficiently, effectively, and economically.

When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion? a. Rights and obligations. b. Valuation and allocation. c. Existence. d. Cutoff. e. Occurrence.

D. This is clearly a test of the completeness as the assertion always includes any issues of transaction cutoff, which means that the recording of all revenue, expense, and other transactions must be included in the proper period in accordance with GAAP.

Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of rights and obligations for the inventory account? a. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. b. Inspect the open PO file for significant commitments to consider for disclosure. c. Trace test counts noted during physical count to the summarization of quantities. d. Inspect agreements for evidence of inventory held on consignment.

D. This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that the inventory reported as assets really is owned by the company. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

An audit plan contains a. Specifications of audit standards relevant to the financial statements being audited. b. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. d. Specifications of procedures the auditors believe appropriate for the financial statements under audit.

D. This is exactly what an audit plan consists of - that is, an audit plan contains specifications of procedures the auditors believe appropriate for the financial statements under audit.

The primary difference between operational auditing and financial auditing is that in operational auditing a. The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards. b. The operational auditor can use analytical skills and tools that are not necessary in financial auditing. c. The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them. d. The operational auditor is seeking to help management use resources in the most effective manner possible.

D. This statement exactly characterizes the goal of an operational audit. In addition, the statement is part of the basic definition of operational auditing.

27. When initiating communications with predecessor auditors, prospective auditors should expect a. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits b. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement c. To obtain copies of some or all of the predecessor auditors' audit documentation d. All of the above

D. All of the above

3.27 When initiating communications with predecessor auditors, prospective auditors should expect A. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. B. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement. C. To obtain copies of some or all of the predecessor auditors' audit documentation. D. All of the above.

D. All of the above.

3.31 An auditor's permanent file audit documentation most likely will contain A. Internal control analysis for the current year. B. The most recent engagement letter. C. Memoranda of conference with management. D. Excerpts of the corporate charter and bylaws.

D. Excerpts of the corporate charter and bylaws.

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to: Determine whether the company's controls are processing company data effectively. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. Determine that the company's employees are processing the controls according to the policy and procedure manuals at the company. None of the above.

Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to: Provide a basis for making constructive suggestions in a management letter. Provide information for a communication of internal control-related matters to management. Determine the nature, timing, and extent of further audit tests to be performed in the audit. Provide the rationale for the inherent risk assessment at the financial statement assertion level.

Determine the nature, timing, and extent of further audit tests to be performed in the audit.

48. Which of the following combinations of standards and types of audits are most closely related to the activities of the PCAOB

Develop Auditing Standards for the audit of public entities

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of a. Existence or occurrence b. Completeness c. valuation or allocation d. presentation and disclosure

Financial decision makers obtain their accounting information from lenders of funds. a. True b. False

36. The evidence considered most appropriate by auditors is best described as:

Direct personal knowledge obtained through physical observation and mathematical recalculation

The evidence considered most appropriate by auditors is best described as

Direct, personal knowledge of auditors is the most appropriate form of evidence.

If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? Unqualified opinion or adverse opinion. Qualified opinion or adverse opinion. Unqualified opinion or disclaimer of opinion. Disclaimer of opinion.

Disclaimer of opinion.

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? Unqualified—no material weaknesses found. Disclaimer of opinion—unable to perform all necessary procedures. Disclaimer of opinion—significant deficiencies exist. Adverse—material weaknesses exist.

Disclaimer of opinion—significant deficiencies exist.

Name the purpose (control/substantive/dual) and assertion related to the test: Vouch recorded sales invoices to supporting shipping documents.

Dual purpose Occurence/existence

Name the purpose (control/substantive/dual) and assertion related to the test: Select a sample of shipping documents from the shipping department file and trace shipments to recorded sales invoices.

Dual-Purpose Completeness

Name the purpose (control/substantive/dual) and assertion related to the test: Trace recorded sales invoices to posting in the general ledger control account and in the correct customer's account.

Dual-Purpose Completeness

Name the purpose (control/substantive/dual) and assertion related to the test: Vouch sales invoices and shipping documents.

Dual-Purpose Occurence/existence

Name the purpose (control/substantive/dual) and assertion related to the test: Recalculate the arithmetic accuracy of the recorded sales invoices.

Dual-Purpose Accuracy/Valuation

Name the purpose (control/substantive/dual) and assertion related to the test: Compare the shipment date of recorded sales invoices with the invoice record date.

Dual-Purpose Cut-off/completeness

True or False: A specific error in a financial statement affects only one management assertion

False

True or False: Providing assurance is a form of attestation

False

During the initial planning phase of an audit, a CPA most likely would a. Test specific internal control activities that are likely to prevent fraud b. Evaluate the reasonableness of the client's accounting estimates of inventory obsolescence c. Discuss the timing of the audit procedures with the client's management d. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

Which of the following would be considered an assurance engagement ? a. Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past. b. Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles. c. Giving an opinion on the fair presentation of a newspaper's circulation data. d. Giving assurance about the average drive length achieved by golfers with a client's golf balls. e. All of the above.

E. Because attestation and audit engagements are subsets of assurance engagements, all of the responses are examples of assurance engagements.

Effective control not only identifies risk but also responds to these risks appropriately a. True b. False

Which of the following cases upheld the requirement that plaintiffs demonstrate scienter when bringing action under the Securities Exchange Act of 1934.

Ernst & Ernst vs. Hochfelder.

Once the auditor detects a control deficiency, which of the following steps must he or she take first? Test the deficient control, assuming a maximum level of risk. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. Modify the planned substantive procedures as a result of the deficiency. Perform tests of other controls related to the same assertion as the control deemed ineffective.

Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.

The information auditors use to arrive at conclusions and form the audit opinion is called _______

Evidence

Which of the following combinations would provide the auditor the most reliable evidence? Source of Evidence

Evidence is most reliable when the source of the evidence is external and when the evidence is developed under more effective internal control.

Evidential matter consists of assertions about economic actions and events. a. True b. False

External auditors are responsible a. for authenticating documents b. for reporting immaterial frauds to a level of management at least one level above the people involved c. for finding all intentional misstatements concealed by collusion d. for reporting all frauds to outside agencies or parties

Standards and standard-setters: 1. Who is the rule making body for INTERNATIONAL/FOREIGN entities? 2. What rules do they help create

IFAC International Auditing and Assurance Standards Board (IAASB) International Standards on Auditing (ISAs)

When planning the audit of internal controls for an issuer, the audit team should: Identify significant accounts, locations, and assertions. Conduct a walkthrough of the internal control process. Make inquiries of employees regarding the existence of control activities. Reperform control activities performed by client employees to determine their effectiveness.

Identify significant accounts, locations, and assertions.

Which of the following is true with respect to PCAOB inspections of accounting firms?

In a PCAOB inspection, a sample of audits as well as the firm's system of quality control are reviewed by the inspection team.

44. Which of the following is most closely related to the relevance of audit evidence?

In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collect ability of accounts receivable

In an attestation engagement, a CPA practitioner is engaged to a. Give expert testimony in court on particular facts in a corporate income tax controversy. b. Prepare a written report Containing a conclusion about the reliability of a management assertion. c. Compile a company's financial forecast based on management's assumptions without expressing any form of assurance. d. Prepare a tax return using information the CPA has not audited or reviewed.

In some cases, the auditor could apply one audit procedure to test more than one assertion a. Unconditional requirement b. Presumptively mandatory requirement c. Requirement to consider

Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?

Independence confirmations would ensure that all firm personnel are independent with respect to that firm's clients, which is related to the "Relevant Ethical Requirements" element of a system of quality control. It would not relate to acceptance and continuance of client relationships and specific engagements (a), engagement performance (b), or monitoring (c).

When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include Inquiry of appropriate personnel and reperformance of the control activity. Reading over the company's code of conduct. Inquiry of appropriate personnel. Reperformance of the control activity.

Inquiry of appropriate personnel and reperformance of the control activity.

31. Ordinarily, what source of evidence should least affect audit conclusions?

Inquiry of management

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that a. Financial statements and financial data are verifiable b. The professional status of the independent auditor imposes commensurate professional obligations. c. A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. d. In audits of financial statements, the auditor acts exclusively in the capacity of an auditor.

A material weakness is a situation in which: It is reasonably possible that an immaterial misstatement would not be detected on a timely basis. It is reasonably possible that a material misstatement would not be detected on a timely basis. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. There is a remote likelihood that a material misstatement would be detected on a timely basis.

It is reasonably possible that a material misstatement would not be detected on a timely basis.

If a CPA firm is being sued for common law fraud by a third party based upon materially false financial statements, which of the following is the best defense the auditors could assert?

Lack of reliance

When completing the audit of internal controls for a public company, AS 5 requires auditors to report on Management's Report on Internal Control An Audit of Internal Control Yes Yes No No No Yes Yes No

Management's Report on Internal Control An Audit of Internal Control No Yes

when completing the audit of internal controls for a public company, AS 5 requires auditors to record on

Management's report on internal control- no; an audit on internal control- yes

Monitoring of the internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions. a. True b. False

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must Assess control risk at less than the maximum for all relevant assertions. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting. Perform only substantive procedures. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

Tests of controls in a GAAS audit are required for: Obtaining evidence about the operating effectiveness of client control activities. Obtaining evidence about the financial statement assertions. Accomplishing control over the occurrence of recorded transactions. Applying analytical procedures to financial statement balances.

Obtaining evidence about the operating effectiveness of client control activities.

As a general rule the ________ assertion relates to events, transactions, presentations and footnote disclosures and the __________ assertion relates to account balances

Occurrence, Existence

35. Which of the following concepts is least related to the standard of due care?

Reasonable assurance

42. Which of the following recognizes that an audit conducted under generally accepted audit standards may not detect all material misstatements?

Reasonable assurance

Which of the following recognizes that an audit conducted under generally accepted audit- ing standards may not detect all material misstatements?

Reasonable assurance recognizes that an audit conducted under GAAS may fail to detect all material misstatements.

Recorded transactions and events actually took place a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

The Securities and Exchange Commission document that governs accounting in financial statements filed with the SEC is

Regulation S-X

38. Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?

Relevant ethical requirements

51. Which of the following principles is most closely associated with the auditors conclusion as to the fair presentation of the entity's financial statements?

Reporting Principle

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: e. An entity has contacted you about performing their audit engagement. This entity became aware of your firm because the husband of one of your partners is currently serving as the entity's chief financial officer.

Responsibilities - independence

When a CPA performs a(n) ____________, limited-evidence gathering work is done, but the scope is narrower than in an audit

Review

which of the following cases provides auditors the broadest exposure for liability to third parties for ordinary negligence under common law?

Rosenblum Inc. V. Alder.

Name the purpose (control/substantive/dual) and assertion related to the test: Send confirmations to all customers regarding accounts receivable.

Substantive test Existence

Name the purpose (control/substantive/dual) and assertion related to the test: Evaluate the adequacy of the allowance for doubtful accounts.

Substantive test Valuation

Name the purpose (control/substantive/dual) and assertion related to the test: Obtain financial statements or credit reports on large past due accounts and inquire of the credit manager about collections.

Substantive test Valuation

Which of the following is a preventive control? Detailed fluctuation analysis completed by the CFO for revenue. Separation of duties between the payroll and personnel departments. Reconciliation of a bank account. Recalculation of a sample of payroll entries by internal auditors.

Separation of duties between the payroll and personnel departments.

43. Which of the following combinations would provide the auditor the most reliable evidence?

Source of evidence: External Effectiveness of Internal Control: More effective

49. Which of the following best describes the general contents of the introductory paragraph of the auditors report?

Statements identifying the responsibility of auditors and management in the financial reporting process

Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? A reference to the auditors' report and opinion on the entity's financial statements. The fact that the auditors conducted an audit of the entity's financial statements. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. The definition of a material weakness in internal control over financial reporting.

Statements identifying the responsibility of the auditors and management for internal control over financial reporting.

Audit procedures used to obtain evidence with respect to the fairness of an account balance are referred to as _________ procedures

Substantive

The auditor was conducted in accordance with generally accepted auditing standards and with due professional care.

Which of the following would be the auditors' most likely defense in an action brought under the Securities Exchange Act of 1934?

The auditors acted in good faith and were not aware of the materially misstated financial statements.

When credits who relied on an entity's audited financial statements suffer monetary losses after a customer (the auditors' client) goes bankrupt, what must the plaintiff creditors in a lawsuit for damages show in a court that follows the doctrine in Credit Alliance?

The auditors knew and specifically acknowledged identification of the creditors.

Which of the following is most closely related to the responsibilities principle?

The auditors' compliance with independence and due care is related to the responsibilities principle.

39. Which of the following is most closely related to the responsibilities principle?

The auditors' compliance with relevant ethical requirements of independence and due care

The better the quality of the internal controls, the more an auditor can rely on the controls. a. True b. False

The concept of "professional skepticism" requires that auditors assume that management is honest and should be trusted a. True b. False

The concept of ____________ recognizes that a GAAS audit may fail to detect all material misstatements a. absolute assurance b. due care c. reasonable assurance d. Risk of material misstatement

The entity owns the assets, and liabilities are its obligations a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities Inc. to the securities and Exchange Commission. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. Customers have instated legal action against Donalds based on Section 10(B) and Rule 10(B)-5 of the Securities Exchange Act of 1934. Which of the following is likely to be Donalds' best defense?

The firm did not intentionally certify the false financial statements.

The five major components of an organization's internal control are: The control environment, risk assessment, control activities, information and communication, and monitoring. a. True b. False

The major emphasis in GAAS related to consideration of fraud in a financial statement audit is on a. Employee misappropriation of assets b. management fraud c. client fraud on customers d. employee embezzlement

West & Co., CPAs, rendered an unmodified opinion on the financial statements of Pride Corp., which were included in Pride's registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride's preferred stock as part of a public offering subject to the Securities Act of 1933. Hex has commenced an action against West based on the Securities Act of 19333. Hex has commenced an action against West based on the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Which of the following elements must Hex prove to hold West liable?

The misstatements were material.

Section 11(b) of the Securities Act of 1933 provides that individuals can be sued and may be liable for investors' losses in connection with a public securities offering under which of these circumstances?

The officers of the issuing entity were relieved that the independent auditors did not make an issue about the excessive valuation of inventory held to support construction in progress.

The primary difference between operational auditing and financial auditing is that in operational auditing a. The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them. b. The operational auditor is seeking to help management use resources in the most effective manner possible. c. The operational auditor can use analytical skills and tools that are not necessary in financial auditing d. The operational auditor is not concerned with whether the audited activity is generating information in compliance with the financial accounting standards.

Auditors' understanding of the internal control in an entity provides information for

The primary purpose of obtaining an understanding of a client's internal control is to plan the nature, timing, and extent of further audit procedures on an engagement.

The purpose of obtaining and evaluating evidence is to ascertain the degree of correspondence between the assertions and established criteria a. True b. False

The quality of an organization's internal control will affect both he audit approach and the amount of testing needed for an engagement. a. True b. False

Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? The auditor will issue an adverse opinion if one or more material weaknesses exist. The report may be presented with the report on the entity's financial statements as a combined report. The report will be dated as of the date of the financial statements. The report will express an opinion on the effectiveness of internal control over financial reporting.

The report will be dated as of the date of the financial statements.

Which of the following best describes the general contents of the introductory paragraph of the auditors' report?

The responsibility of auditors and management in the financial reporting process is described in the introductory paragraph.

The three fundamental principals underlying GAAS include all of the following except a. general principle b. performance principle c. Reporting principle d. Responsibilities principle

Which of the following statements regarding auditors' liability under the Securities Act of 1933 is not true?

Third parties must demonstrate that they relied on misstated financial statements that were examined by auditors.

This service improves the quality of information, or its context, for decision makers a. Attestation b. Assurance c. Consulting

This service provides for a level of assurance based on an examination a. Attestation b. Assurance c. Consulting

This service provides recommendations based on the objectives of the engagement a. Attestation b. Assurance c. Consulting

This service results in a written conclusion about subject matter a. Attestation b. Assurance c. Consulting

This year, Blakeney Enterprises engaged a new auditor who must a. attempt to communicate with he predecessor auditor before accepting the engagement. b. Review the predecessor's audit documentation if the audit is to be in accordance with GAAS c. Seek the SEC's permission to accept the engagement if Blakeney is publicly owned. d. Reject the engagement if the change in auditors resulted from a dispute with the predecessor.

What type of evidence would provide the highest level of assurance in an attestation engagement? a. Evidence secured solely from within the entity b. Evidence obtained from independent sources. c. Evidence obtained indirectly d. Evidence obtained from multiple internal inquiries

30. The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is

To determine the nature, timing, and extent of substantive procedures to be performed

Individuals who believe they relied on misstated financial statements to make a decision and have suffered losses as a result will issue an action known as a

Tort

Transactions and events were recorded in the proper period a. Valuation and allocation b. cutoff c. Rights and obligations d. Accuracy e. Existence f. Classification and understandability g. Occurrence h. Completeness

True of false: Any information that permits auditors to reach valid logical conclusions can be considered evidence

True

True or False: Auditing is critical to help ensure the liability of the worlds capital markets

True

True or False: Human resources is an important aspect of a system of quality control

True

True or False: Understanding management assertions is a key component of planning an audit

True

True or False: any information that permits auditors to reach valid logical conclusions can be considered evidence

True

True or False: auditors can read business periodicals and textbooks to help obtain an understanding of a clients business

True

Standards and standard-setters: 1. Who is the rule making body for GOVERNMENT entities? 2. What rules do they help create

U.S. Government Accountability Office (GAO) Government Auditing Standards (The Yellow Book)

Under generally accepted auditing standards, which of the following relates to the responsibilities principal? a. The initial planning of the audit engagement b. The confirmation of accounts receivable c. The completion of an internal control questionnaire d. maintaining professional skepticism and exercising professional judgement

West was not in privity of contract with Hex.

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations? a. Considering unaudited account balances and ratios to calculate what adjusted balances should be b. Identifying reasonable explanations for unexpected differences before talking to client management c. Considering the pattern of several unusual changes without trying to explain what caused them d. Comparing client data with client determined expected results to reduce detailed tests of account balances

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted? a. The entity has no formal written code of conduct b. The integrity of entity's management is suspect c. Procedures requiring separation of duties are subject to management override d. Management fails to modify prescribed controls for changes in conditions

Which of the following best demonstrates teh concept of professional skepticism? a. Focusing on items that have a more significant quantitative effect on the entity's financial statements b. Relying more extensively on external evidence rather than internal evidence. c. Evaluating potential financial interests held by auditors in the client. d. Critically assessing verbal evidence received from the entity's management.

Which of the following is an underlying condition that in part creates the demand by users for reliable information? a. Economic transactions that are numerous and complex b. Decisions are time-sensitive c. Users separate from accounting records by distance and time d. Financial decisions that are important to investors and users. e. All of these

Which of the following is not a major element of assurance services? a. Improving profitability of the client. b. Improving the quality of information c. Independence d. Improving the context of information.

Which of the following is not related to ethical requirements of auditors? a. Due Care b. Professional judgement c. Independence in appearance d. Independence in fact.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? a. The entity has rights to the inventory b. Inventory is properly valued c. Inventory is properly presented in the financial statements d. Inventory is complete

Which of the following matters does an auditor usually include in the engagement letter? a. Arrangements regarding fees and billing b. Analytical procedures that the auditor plans to perform. c. Indications of negative cash flows from operating activities. d. Identification of working capital deficiencies.

Which of the following presumptions does not relate to the reliability of audit evidence? a. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements b. The auditors' opinion, to be economically useful, is formed within reasonable time and based evidence obtained at a reasonable cost. c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. d. The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit? a. Make inquiries of the client's lawyer concerning pending litigation. b. Perform cutoff tests of cash receipts and disbursements. c. Compare financial information with non financial operating data. d. Recalculate the prior year's accruals and deferrals.

Which of the following statements is most accurate regarding sufficient and appropriate documentation? a. Accounting estimates are not considered sufficient and appropriate documentation b. sufficient and appropriate documentation should include evidence that the audit working papers have been review c. If additional evidence is required to document significant findings or issues d. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

Which of the following would be considered an assurance engagement a. Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past. b. Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles. c. Giving an opinion on the fair presentation of a newspaper's circulation data. d. Giving assurance about the average drive length achieved by golfers with a client's golf balls. e. All of the above

the auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including

all of the above

While performing an audit on the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue? a. There is a broad indication of misappropriation of assets. b. There is an indication of theft of the entity's assets. c. There is an indication of embezzling receipts. d. There is a broad indication of financial reporting fraud.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? a. Move detailed analytical procedures from year end to interim b. Increase the dollar threshold of vouching customer invoices. c. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations d. Use more experienced audit team members to perform year-end testing.

Which of the following statements is not true with respect to the performance principle?

Written audit plans are required in both initial and continuing audits.

51. The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may a. Allow the internal auditor to perform tests of internal controls b. Allow the internal auditor to audit a major subsidiary of the company c. Not assign any task to the internal auditor because of the internal auditor's lack of independence d. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details

a. Allow the internal auditor to perform tests of internal controls

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may a. Allow the internal auditor to perform tests of internal controls b. Allow the internal auditor to audit a major subsidiary of the company c. Not assign any task to the internal auditor because of the internal auditor's lack of independence d. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details Chp. 3

a. Allow the internal auditor to perform tests of internal controls

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that: a. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. b. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls. c. The cost of control evaluation work will exceed the cost of substantive procedures. d. The cost of substantive procedures will exceed the cost of control evaluation work.

a. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

when testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include

both a and c are correct

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must a. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. b. Assess control risk at less than the maximum for all relevant assertions. c. Perform only substantive procedures. d. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting.

a. Correct

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the a. Authorization of transactions from the custody of related assets. b. Operational responsibility from the record-keeping responsibility. c. Human resources function from the controllership function. d. Administrative controls from the internal accounting controls.

a. Correct

Which of the following opinions would be issued if auditors believed that the entity's finan- cial statements were not presented in conformity with GAAP? a. Adverse opinion. b. Disclaimer of opinion c. Qualified opinion d. Unmodified opinion.

a. Correct An adverse opinion is issued for material and pervasive departures from GAAP.

The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as a. Audit procedures. b. Audit standards. c. Interpretive publications. d. Statements on Auditing Standards.

a. Correct Audit procedures are particular and specialized actions that auditors take to obtain evidence during a specific engagement.

The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is a. To determine the nature, timing, and extent of substantive procedures to be performed. b. To make consulting suggestions to the entity's management. c. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. d. To determine whether the entity has changed any accounting principles.

a. Correct Auditors study internal control to determine the nature, timing, and extent of further audit procedures.

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would a. Be considered as exercising proper due care. b. Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement. c. Not be considered a violation of GAAS because GAAS does not apply to not-for-profit entities. d. None of the above.

a. Correct Consultation with an appraiser demonstrates due care if auditors do not have expertise in the area in question.

Which of the following categories of principles is most closely related to gathering audit evidence? a. Performance. b. Reasonable assurance. c. Reporting. d. Responsibilities.

a. Correct Gathering audit evidence is a component of the performance principle.

When planning the audit of internal controls for an issuer , the audit team should a. Identify significant accounts, locations, and assertions. b. Conduct a walkthrough of the internal control process. c. Make inquiries of employees regarding the existence of control activities. d. Reperform control activities performed by client employees to determine their effectiveness.

a. Correct The audit team identifies significant accounts, locations, and assertions in the planning stage of an audit of internal controls.

Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? a. The report will be dated as of the date of the financial statements. b. The report will express an opinion on the effectiveness of internal control over financial reporting. c. The auditor will issue an adverse opinion if one or more material weaknesses exist. d. The report may be presented with the report on the entity's financial statements as a combined report.

a. Correct The report would be dated as of the day that enough evidence has been gathered to support the auditors' opinion on the effectiveness of the entity's internal control.

Which of the following statements is not true with respect to the performance principle? a. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits. b. Audit teams consider materiality in planning the audit,performing the audit,and evaluating the effect of misstatements on the entity's financial statements. c. In assessing the risk of material misstatements,the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements. d. Auditors are required to consider both the relevance and reliability of evidence in evalu- ating whether the evidence they have gathered is appropriate.

a. Correct Written audit plans are required in both initial and continuing audits.

It is acceptable under generally accepted auditing standards for an audit team to a. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. b. Assess control risk at zero and perform a minimum of detection work. c. Assess inherent risk at zero and perform a minimum of detection work. d. Decide that audit risk can be 40 percent.

a. Correct. The objective is to perform a quality audit and keep audit risk low.

The risk of material misstatement is composed of which audit risk components? a. Inherent risk and control risk. b. Control risk and detection risk. c. Inherent risk and detection risk. d. Inherent risk, control risk, and detection risk.

a. Correct. The risk of material misstatement is composed of inherent risk and control risk.

30. Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the a. Current file audit documentation b. Permanent file audit documentation c. Administrative audit documentation in the current file d. Planning memorandum

a. Current file audit documentation

When planning the audit of internal controls for an issuer, the audit team should: a. Identify significant accounts, locations, and assertions. b. Conduct a walkthrough of the internal control process. c. Make inquiries of employees regarding the existence of control activities. d. Reperform control activities performed by client employees to determine their effectiveness.

a. Identify significant accounts, locations, and assertions.

Tests of controls in a GAAS audit are required for: a. Obtaining evidence about the operating effectiveness of client control activities. b. Obtaining evidence about the financial statement assertions. c. Accomplishing control over the occurrence of recorded transactions. d. Applying analytical procedures to financial statement balances.

a. Obtaining evidence about the operating effectiveness of client control activities.

2.50 Which of the following opinions would be issues if auditors believed that the entity's financial statements were not presented in conformity with GAAP? a. adverse opinion b. disclaimer of opinion c. qualified opinion d. unmodified opinion

a. adverse opinion

2.47 The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as: a. audit procedures b. audit standards c. interpretive publications d. Statements on Auditing Standards

a. audit procedures

2.45 Which of the following statements is not true with respect to the performance principle? a. auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits b. audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements c. in assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements d. auditors are required to consider both the relevance and reliability of evidence in evaluating whether the evidence they have gathered is appropriate

a. auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits

2.40 Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would: a. be considered as exercising proper due care b. be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement c. not be considered a violation of GAAS because GAAS does not apply to not-for-profit entities d. none of the above

a. be considered as exercising proper due care

2.26 Which of the following categories of principles is most closely related to gathering audit evidence? a. performance b. reasonable assurance c. reporting d. responsibilities

a. performance

2.30 The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is: a. to determine the nature, timing and extent of substantive procedures to be performed b. to make consulting suggestions to the entity's management c. to obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements d. to determine whether the entity has changed any accounting principles

a. to determine the nature, timing and extent of substantive procedures to be performed

HO2.1 Identify the applicable element of quality control: c. all potential new clients are reviewed before acceptance; the review includes consultation with predecessor auditors, and background checks; all new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement

acceptance and continuance

after obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. the auditor most likely concluded that the

additional evidence to support a further reduction in control risk was not cost beneficial

When an auditor concludes that the financial statements are not presented fairly in conformity with GAAP, an __________ opinion will be issued

adverse

in an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity

affects management's financial statement assertions

A transaction-level internal control activity is best described as: a. An action taken by auditors to obtain evidence. b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. c. A method for recording, summarizing, and reporting financial information. d. The functioning of the board of directors in support of its audit committee.

b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

48. Which of the following would be considered an analytical procedure? a. Testing purchasing, shipping, and receiving cutoff activities b. Comparing inventory balances to recent sales activities c. Projecting the deviation rate of a statistical sample to the population d. Reconciling physical counts to perpetual records and general ledger balances

b. Comparing inventory balances to recent sales activities

Which of the following would be considered an analytical procedure? a. Testing purchasing, shipping, and receiving cutoff activities b. Comparing inventory balances to recent sales activities c. Projecting the deviation rate of a statistical sample to the population d. Reconciling physical counts to perpetual records and general ledger balances Chp. 3

b. Comparing inventory balances to recent sales activities

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. Inquiry of client personnel. b. Confirmation of balances. c. Observation of company operations. d. Inspection of documentation

b. Confirmation of balances.

The most important fundamental component of an entity's internal control is a. Effectiveness and efficiency of operations. b. People who operate the control system. c. Reliability of financial reporting. d. Compliance with applicable laws and regulations.

b. Correct "People" is the most important fundamental component.

Which of the following topics is not addressed in the auditors' report for a public entity? a. Responsibilities of the auditor and management in the financial reporting process. b. Absolute assurance regarding the fairness of the entity's financial statements in accor- dance with GAAP. c. A description of an audit engagement. d. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.

b. Correct Auditors provide reasonable (but not absolute) assurance in an audit engagement (this is noted in the scope paragraph of the auditors' report).

Which of the following is true with respect to PCAOB inspections of accounting firms? a. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. b. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. c. All results of PCAOB inspections are made available to the public following the inspection. d. Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection.

b. Correct In a PCAOB inspection, a sample of audits as well as the firm's system of quality control are reviewed by the inspection team.

Ordinarily, what source of evidence should least affect audit conclusions? a. External documentary evidence. b. Inquiry of management. c. Documentation prepared by the audit team. d. Inquiry of entity legal counsel.

b. Correct Inquiry of management is a form of internal evidence, which is the least reliable form of evidence.

One of an accounting firm's basic objectives is to provide professional services that con- form to professional standards. Reasonable assurance of achieving this objective can be obtained by following a. Generally accepted auditing standards. b. Standards within a system of quality control. c. Generally accepted accounting principles. d. International auditing standards.

b. Correct Standards within a system of quality control are firm- (rather than auditor-) related.

Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a. Develop Auditing Standards for the audits of nonpublic entities. b. Develop Auditing Standards for the audits of public entities. c. Develop Statements on Auditing Standards for the audits of nonpublic entities. d. Develop Statements on Auditing Standards for the audits of public entities.

b. Correct The PCAOB develops Auditing Standards for the audit of public entities.

Which of the following is most closely related to the relevance of audit evidence? a. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. b. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. c. In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year. d. Because of a large number of transactions occurring near year-end,auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.

b. Correct The aging of accounts receivable will evaluate valuation, which is not directly evaluated through confirmation. Therefore, aging provides relevant evidence with respect to the valuation assertion.

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that a. The cost of substantive procedures will exceed the cost of control evaluation work. b. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. c. The cost of control evaluation work will exceed the cost of substantive procedures. d. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls.

b. Correct The cost savings of substantive testing exceeds the control evaluation cost.

Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. Perform tests of other controls related to the same assertion as the control deemed ineffective. b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. c. Modify the planned substantive procedures as a result of the deficiency. d. Test the deficient control, assuming a maximum level of risk.

b. Correct The first step an auditor is likely to take after detecting a control deficiency is to determine the impact of the severity of the deficiency on the auditor's control risk assessment for that assertion. The additional steps to be taken will depend in large part on this determination.

b. Correct The internal control questionnaire is a device for collecting evidence in the form of answers to control questions.

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to a. Determine whether the company's controls are processing company data effectively. b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. c. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company. d. None of the above.

b. Correct The testing of design effectiveness relates primarily to whether the control has been properly put in place to prevent or detect errors or fraud. In AS5, this is exactly the objective of testing the design effectiveness of a control as per paragraph 42 of the standard.

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to a. Provide a basis for making constructive suggestions in a management letter. b. Determine the nature, timing, and extent of further audit tests to be performed. c. Provide the rationale for the inherent risk assessment at the financial statement assertion level. d. Provide information for a communication of internal control-related matters to management.

b. Correct These are the auditors' responsibilities under GAAS.

Which of the following is a major difference in auditors' liability under the Securities Act of 1933 and the Securities Exchange Act of 1934?

both of the above

A transaction-level internal control activity is best described as a. An action taken by auditors to obtain evidence. b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. c. A method for recording, summarizing, and reporting financial information. d. The functioning of the board of directors in support of its audit committee.

b. Correct This is one way to describe the purpose of a transaction-level control activity.

An audit strategy memorandum contains a. Specifications of auditing standards relevant to the financial statements being audited. b. Specifications of procedures the auditors believe appropriate for the financial statements under audit. c. Documentation of the assertions under audit,the evidence obtained,and the conclusions reached. d. Reconciliation of the account balances in the financial statements with the account bal- ances in the client's general ledger.

b. Correct. An audit strategy contains specifications of procedures the auditors believe appropriate for the financial statements under audit.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? a. The entity's fiscal year ends on June 30. b. The entity enters into significant derivative transactions as hedges. c. The entity's financial statements are generated at an outside service center. d. The entity's financial data is available only in computer-readable form.

b. Correct. By their very nature, derivative transactions are designed to be used as hedges for exposure on existing contracts are quite complex. The accounting rules that provide the basis for GAAP in this area are also complex. As a result of this complexity, the inherent risk of material misstatement is higher.

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? a. 0.20. b. 0.10. c. 0.75. d. 0.00.

b. Correct. DR = AR/ (IR x CR) = 0.05/0.50 = 0.10.

Which of the following circumstances would most likely cause an audit team to perform extended procedures? a. Supporting documents are produced when requested. b. The client made several large adjustments at or near year-end. c. The company has recently hired a new chief financial officer after the previous one retired. d. The company maintains several different petty cash funds.

b. Correct. If the client made several large adjustments at year-end (a red flag), extended procedures would be considered necessary to ensure that fraud was not taking place.

One of the typical characteristics of management fraud is a. Falsification of documents in order to misappropriate funds from an employer. b. Victimization of investors through the use of materially misleading financial statements. c. Illegal acts committed by management to evade laws and regulations. d. Conversion of stolen inventory to cash deposited in a falsified bank account.

b. Correct. Management fraud is victimization of investors through the use of materially misleading financial statements.

Under the Private Securities Litigation Reform Act (the Act), independent auditors are required to first a. Report in writing all instances of noncompliance with the Act to the client's board of directors. b. Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC. c. Report clearly inconsequential noncompliance with the Act to the audit committee of the client's board of directors. d. Resign from the audit engagement and report the instances of noncompliance with the Act to the SEC.

b. Correct. Once informed, the board of directors has the first responsibility to report to the SEC. If the board does not report these items to the SEC, the law then requires the auditors to do so.

When evaluating whether accounting estimates made by management are reasonable, audi- tors would be most interested in which of the following? a. Key factors that are consistent with prior periods. b. Assumptions that are similar to industry guidelines. c. Measurements that are objective and not susceptible to bias. d. Evidence of a conservative systematic bias.

b. Correct. Once informed, the board of directors has the first responsibility to report to the SEC. If the board does not report these items to the SEC, the law then requires the auditors to do so.

When auditors become aware of noncompliance with a law or regulation committed by cli- ent personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to a. Recommend remedial actions to the audit committee. b. Evaluate the effect of the noncompliance on the financial statements. c. Determine whether to contact law enforcement officials. d. Determine whether other similar acts could have occurred.

b. Correct. The audit team's first concern is the effect of the noncompliance on the financial statements.

When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will a. Increase. b. Decrease. c. Remain unchanged. d. Not be able to be determined with the information provided.

b. Correct. The numerator (cost of goods sold) increases relatively less than the denominator (sales) increases.

Auditors perform analytical procedures in the planning stage of an audit for the purpose of a. Deciding the matters to cover in an engagement letter. b. Identifying unusual conditions that deserve more auditing effort. c. Determining which of the financial statement assertions are the most important for the client's financial statements. d. Determining the nature,timing,and extent of further audit procedures for auditing the inventory.

b. Correct. This is the "attention directing" purpose.

Which of the following would probably not be considered an indication of a material weakness? a. Immaterial fraud committed by senior management. b. Overproduction by the manufacturing plant. c. Ineffective oversight by the audit committee. d. Evidence of a material misstatement.

b. Overproduction by the manufacturing plant.

when completing the audit of internal controls for a public company, AS 5 rehires auditors to test

both orating and design effectiveness

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to a. Determine whether the company' controls are processing company data effectively b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed c. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company d. None of the above

b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to a. Provide the rational for the inherent risk assessment at the financial statement assertion level. b. Determine the nature, timing, and extent of tests to be performed in the audit. c. Provide information for a communication of internal control-related matters to management. d. Provide a basis for making constructive suggestions in a management letter

b. Determine the nature, timing, and extent of tests to be performed in the audit.

Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. Test the deficient control, assuming a maximum level of risk. b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. c. Modify the planned substantive procedures as a result of the deficiency. d. Perform tests of other controls related to the same assertion as the control deemed ineffective.

b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.

A material weakness is a situation in which: a. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis. b. It is reasonably possible that a material misstatement would not be detected on a timely basis. c. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. d. There is a remote likelihood that a material misstatement would be detected on a timely basis.

b. It is reasonably possible that a material misstatement would not be detected on a timely basis.

Finance statement frauds and potential _______________ of __________________ between information provides and users leads to a natural Skepticism on the part of users

conflict, interest

2.46 Which of the following is true with respect to PCAOB inspections of accounting firms? a. all firms performing audits of public companies are required to have annual inspections conducted by the PCAOB b. PCAOB inspections review a sample of audits conducted by firms as wells as the firm's systems of quality control c. all results of PCAOB inspections are made available to the public following the inspection d. firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection

b. PCAOB inspections review a sample of audits conducted by firms as wells as the firm's systems of quality control

Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a. Make inquiries of the client's lawyer concerning pending litigation b. Perform cutoff tests of cash receipts and disbursements c. Compare financial information with nonfinancial operating data d. Recalculate the prior-years' accruals and deferrals Chp. 3

b. Perform cutoff tests of cash receipts and disbursements

42. An audit plan contains a. Specifications of audit standards relevant to the financial statements being audited b. Specifications of procedures the auditors believe appropriate for the financial statements c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached d. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger

b. Specifications of procedures the auditors believe appropriate for the financial statements

An audit plan contains a. Specifications of audit standards relevant to the financial statements being audited b. Specifications of procedures the auditors believe appropriate for the financial statements c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached d. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger Chp. 3

b. Specifications of procedures the auditors believe appropriate for the financial statements

37. When auditing Vandalay Jewlery, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? a. Yes, the auditors' report should mention the fact that an audit specialist was used b. The auditor's report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions c. The use of an audit specialist need not to be mentioned if the auditors decide not to take responsibility for the audit specialist's findings d. The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings

b. The auditor's report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions

34. Which of the following is an advantage of computer-assisted audit techniques (CAATs)? a. The CAATs programs are all written in one computer language b. The software can be used for audits of clients that use different computer equipment file formats c. The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures d. The use of CAATs can be substituted for a relatively large part of the required testing

b. The software can be used for audits of clients that use different computer equipment file formats

52. Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? a. Staff will need to be rescheduled to cover this new client b. There will be a client-imposed scope limitation c. The firm will have to hire a specialist in one audit area d. The client's financial reporting system has been in place for 10 years

b. There will be a client-imposed scope limitation

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? a. Staff will need to be rescheduled to cover this new client b. There will be a client-imposed scope limitation c. The firm will have to hire a specialist in one audit area d. The client's financial reporting system has been in place for 10 years Chp. 3

b. There will be a client-imposed scope limitation

50. Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a. They often replace the tests of controls that are performed to assess control risk b. They typically use financial and nonfinancial data aggregated at a high level c. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor d. They are often used to develop an auditor's preliminary judgment about materiality

b. They typically use financial and nonfinancial data aggregated at a high level

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a. They often replace the tests of controls that are performed to assess control risk b. They typically use financial and nonfinancial data aggregated at a high level c. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor d. They are often used to develop an auditor's preliminary judgment about materiality Chp. 3

b. They typically use financial and nonfinancial data aggregated at a high level

35. A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to a. Substantiate the accuracy of data through self-checking digits and hash totals b. Utilize the speed and accuracy of the computer c. Verify the performance of machine operations that leave visible evidence of occurrence d. Gather and store large amounts of supportive audit evidence in machine-readable form

b. Utilize the speed and accuracy of the computer

2.41 Which of the following topics is not addressed in the auditors' report for a public entity? a. responsibilities of the auditor and management in the financial reporting process b. absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP c. a description of an audit engagement d. a summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting

b. absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP

2.48 Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a. develop Auditing Standards for the audits of nonpublic entities b. develop Auditing Standards for the audits of public entities c. develop Statements on Auditing Standards for the audits of nonpublic entities d. develop Statements on Auditing Standards for the audits of public entities

b. develop Auditing Standards for the audits of public entities

the securities act of 1933 and securities exchange age of 1934 contain

both a and b

2.44 Which of the following is most closely related to the relevance of audit evidence? a. auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian b. in addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable c. in response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year d. because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period

b. in addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable

2.31 Ordinarily, what source of evidence should least affect audit conclusions? a. external documentary evidence b. inquiry of management c. documentation prepared by the audit team d. inquiry of entity legal counsel

b. inquiry of management

2.28 One of the accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following: a. generally accepted auditing standards b. standards within a system of quality control c. generally accepted accounting principles d. international auditing standards

b. standards within a system of quality control

Locke, CPA was engaged by Hall Inc. to audit Willow Company. Hall purchased Willow after receiving Willow's audited financial statements, which included Locke's unmodified auditors' opinion. Locke was negligent in the performance of the Willow audit engagement; this negligence was cause by failure to perform the engagement in accordance with terms of the engagement letter. As a result of Locke's negligence, Hall suffered damages of $75,000. Hall appears to have grounds to sue Locke for

breach of contract- yes; negligence- no.

The chance that customers will buy from competitors or product lines will become obsolete are examples of

business risk

Considering whether disclosures have been written in plain english tests the assertion of A. existence B. completeness C. understandability D. presentation

Perceptions of auditors' independence is the focus of indepence in: A. fact B. Actions C. Apperance

28. Generally accepted auditing standards require that auditors always prepare and use a. A written planning memorandum explaining the auditor's understanding of the client's business b. A written client consent to discuss audit matters with prospective auditors c. A written audit plan d. The written time budgets and schedules for performing each audit

c. A written audit plan

Generally accepted auditing standards require that auditors always prepare and use a. A written planning memorandum explaining the auditor's understanding of the client's business b. A written client consent to discuss audit matters with prospective auditors c. A written audit plan d. The written time budgets and schedules for performing each audit Chp. 3

c. A written audit plan

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the: a. Operational responsibility from the record-keeping responsibility. b. Administrative controls from the internal accounting controls. c. Authorization of transactions from the custody of related assets. d. Human resources function from the controllership function.

c. Authorization of transactions from the custody of related assets.

32. Which of the following is NOT a benefit claimed for the practice of determining materiality of the initial planning stage of an audit? a. Being able to fine-tune the audit work for effectiveness and efficiency b. Avoiding the problem of doing more work than necessary (overauditing) c. Being able to decide early what type of audit opinion to issue d. Avoiding the problem of doing too little work (underauditing)

c. Being able to decide early what type of audit opinion to issue

Which of the following is NOT a benefit claimed for the practice of determining materiality of the initial planning stage of an audit? a. Being able to fine-tune the audit work for effectiveness and efficiency b. Avoiding the problem of doing more work than necessary (overauditing) c. Being able to decide early what type of audit opinion to issue d. Avoiding the problem of doing too little work (underauditing) Chp. 3

c. Being able to decide early what type of audit opinion to issue

Which of the following best demonstrates the concept of professional skepticism? a. Relying more extensively on external evidence rather than internal evidence. b. Focusing on items that have a more significant quantitative effect on the entity's finan- cial statements. c. Critically assessing verbal evidence received from the entity's management. d. Evaluating potential financial interests held by auditors in the client.

c. Correct Professional skepticism is characterized by appropriate questioning and a critical assessment of audit evidence.

Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? a. The fact that the auditors conducted an audit of the entity's financial statements. b. The definition of a material weakness in internal control over financial reporting. c. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. d. A reference to the auditors' report and opinion on the entity's financial statements.

c. Correct Statements identifying the responsibility of the auditor and management for internal control over financial reporting would be included in the introductory paragraph.

Which of the following is most closely related to the responsibilities principle? a. The auditors' responsibility to issue a report as a result of their examination. b. The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements. c. The auditors' compliance with relevant ethical requirements of independence and due care. d. The auditors' responsibility to plan the audit and properly supervise assistants.

c. Correct The auditors' compliance with independence and due care is related to the responsibilities principle.

Which of the following principles is most closely associated with the auditors' conclusion as to the fair presentation of the entity's financial statements? a. Communication principle. b. Performance principle. c. Reporting principle. d. Responsibilities principle.

c. Correct The reporting principle is related to the contents of the auditors' report, which expresses an opinion on the entity's financial statements (or indicates that an opinion cannot be expressed).

Which of the following best describes the general contents of the introductory paragraph of the auditors' report? a. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. b. The auditors' conclusion with respect to the fairness of the entity's financial statements. c. Statements identifying the responsibility of auditors and management in the financial reporting process. d. The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting.

c. Correct The responsibility of auditors and management in the financial reporting process is described in the introductory paragraph.

Which of the following is a preventive control? a. Reconciliation of a bank account. b. Recalculation of a sample of payroll entries by internal auditors. c. Separation of duties between the payroll and personnel departments. d. Detailed fluctuation analysis completed by the CFO for revenue.

c. Correct This is a preventive control.

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. Inquiry of client personnel. b. Observation of company operations. c. Confirmation of balances. d. Inspection of documentation.

c. Correct This is a substantive test, not a test of a control's operating effectiveness.

Failure to meet company objectives is a result of a. Information risk. b. Audit risk. c. Business risk. d. Inherent risk.

c. Correct This is the definition of business risk.

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to a. Change from 0.1 to 0.04. b. Change from 0.2 to 0.3. c. Change from 0.25 to 0.1. d. Be unchanged.

c. Correct This solution is both mathematically and practically correct.

An audit committee is a. Composed of internal auditors. b. Composed of members of the audit team. c. Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company. d. A committee composed of persons not associating in anyway with the client or the board of directors.

c. Correct. An audit committee is composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

Analytical procedures are generally used to produce evidence from a. Confirmations mailed directly to the auditors by client customers. b. Physical observation of inventories. c. Relationships among current financial balances and prior balances, forecasts, and nonfi- nancial data. d. Detailed examination of external, external-internal, and internal documents.

c. Correct. Analytical procedures incorporate information from a variety of sources.

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation? a. The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. b. Auditors must design tests to detect all material noncompliance that indirectly affects the financial statements. c. Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected. d. Auditors must design tests to detect all noncompliance that directly affects the financial statements.

c. Correct. Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Inherent. b. Control. c. Detection. d. Sampling.

c. Correct. The decision to perform substantive analytical procedures (as compared to a test of details) at interim (as compared to the balance sheet date) would increase detection risk.

What is the primary objective of the fraud brainstorming session? a. Determine audit risk and materiality. b. Identify whether analytical procedures should be applied to the revenue accounts. c. Assess the potential for material misstatement due to fraud. d. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives.

c. Correct. The fraud brainstorming session is primarily focused on fraud risk assessment, which is the potential for material misstatement due to fraud in the financial statements. This is the primary objective of the session, according to professional standards (i.e., SAS No. 99).

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? a. Exercising more professional skepticism. b. Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud. c. Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis. d. Studying management's selection and application of accounting principles more carefully.

c. Correct. This is a specific procedural response mentioned in audit standards.

c. Disclaimer of opinion—significant deficiencies exist.

45. Confirmations of accounts receivable provide evidence primarily about which two assertions? a. Completeness and valuation b. Valuation and rights and obligations c. Existence and rights and obligations d. Existence and completeness

c. Existence and rights and obligations

Confirmations of accounts receivable provide evidence primarily about which two assertions? a. Completeness and valuation b. Valuation and rights and obligations c. Existence and rights and obligations d. Existence and completeness Chp. 3

c. Existence and rights and obligations

When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations b. Compliance with Regulations c. Financial reporting d. All of the above

c. Financial reporting

44. When auditing the existence assertion for an asset, auditors proceed from the a. Financial statement amounts back to the potentially unrecorded items b. Potentially unrecorded items forward to the financial statement amounts c. General ledger back to the supporting original transaction documents d. Supporting original transaction documents to the general ledger

c. General ledger back to the supporting original transaction documents

When auditing the existence assertion for an asset, auditors proceed from the a. Financial statement amounts back to the potentially unrecorded items b. Potentially unrecorded items forward to the financial statement amounts c. General ledger back to the supporting original transaction documents d. Supporting original transaction documents to the general ledger Chp. 3

c. General ledger back to the supporting original transaction documents

When completing the audit of internal controls for a public company, AS 5 requires auditors to report on Management's Report on Internal Control / An Audit of Internal Control a. Yes Yes b. No No c. No Yes d. Yes No

c. No Yes

33. Spreadsheet software would be most useful for which of the following audit activities? a. Testing internal controls over computerized accounting applications b. Preparing an audit plan c. Preparing a comparison of current-year expenses with those from the previous year d. planning a drafting memorandum

c. Preparing a comparison of current-year expenses with those from the previous year

Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? a. A reference to the auditors' report and opinion on the entity's financial statements. b. The fact that the auditors conducted an audit of the entity's financial statements. c. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. d. The definition of a material weakness in internal control over financial reporting.

c. Statements identifying the responsibility of the auditors and management for internal control over financial reporting.

Which of the following does not accurately summarize auditors' requirements regarding internal control? Public Entity / Nonpublic Entity a. Evaluating control risk: Yes Yes b. Understanding: Yes Yes c. Test controls: Yes Yes d. Documenting: Yes Yes

c. Test controls: Yes Yes

29. When planning an audit, which of the following is NOT a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? a. The auditors' need to document compliance with generally accepted auditing standards b. The auditors' need to verify the existence of new sales contracts important for the client's business c. The auditors' judgment about their independence with regard to the client d. The auditors' judgments about materiality

c. The auditors' judgment about their independence with regard to the client

When planning an audit, which of the following is NOT a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? a. The auditors' need to document compliance with generally accepted auditing standards b. The auditors' need to verify the existence of new sales contracts important for the client's business c. The auditors' judgment about their independence with regard to the client d. The auditors' judgments about materiality Chp. 3

c. The auditors' judgment about their independence with regard to the client

Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? a. The auditor will issue an adverse opinion if one or more material weaknesses exist. b. The report may be presented with the report on the entity's financial statements as a combined report. c. The report will be dated as of the date of the financial statements. d. The report will express an opinion on the effectiveness of internal control over financial reporting.

c. The report will be dated as of the date of the financial statements.

When auditing Vandalay Jewlery, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? a. Yes, the auditors' report should mention the fact that an audit specialist was used b. The auditor's report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions c. The use of an audit specialist need not to be mentioned if the auditors decide not to take responsibility for the audit specialist's findings d. The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings Chp. 3

c. The use of an audit specialist need not to be mentioned if the auditors decide not to take responsibility for the audit specialist's findings

2.34 Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? a. independence b. adequate competence and capabilities c. adequate planning and supervision d. gathering sufficient appropriate evidence

c. adequate planning and supervision

2.29 Which of the following best demonstrates the concept of professional skepticism? a. relying more extensively on external evidence rather than internal evidence b. focusing on items that have a more significant quantitative effect on the entity's financial statements c. critically assessing verbal evidence received from the entity's management d. evaluating potential financial interests held by auditors in the client

c. critically assessing verbal evidence received from the entity's management

2.51 Which of the following principles is most closely associated with the auditors' conclusion as to the fair presentation of the entity's financial statements? a. communication principle b. performance principle c. reporting principle d. responsibilities principle

c. reporting principle

2.43 Which of the following combinations would provide the auditor the most reliable evidence? a. source of evidence - internal effectiveness of internal control - more effective b. source of evidence - internal effectiveness of internal control - less effective c. source of evidence - external effectiveness of internal control - more effective d. source of evidence - external effectiveness of internal control - less effective

c. source of evidence - external effectiveness of internal control - more effective

2.49 Which of the following best describes the general contents of the introductory paragraph of the auditors' report? a. a description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB b. the auditors' conclusion with respect to the fairness of the entity's financial statements c. statements identifying the responsibility of auditors and management in the financial reporting process d. the auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting

c. statements identifying the responsibility of auditors and management in the financial reporting process

2.39 Which of the following is most closely related to the responsibilities principle? a. the auditors' responsibility to issue a report as a result of their examination b. the requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements c. the auditors' compliance with relevant ethical requirements of independence and due care d. the auditors' responsibility to plan the audit and properly supervise assitants

c. the auditors' compliance with relevant ethical requirements of independence and due care

to test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for

confirmation of balances

Which of the following communications is most likely to be written before the balance sheet date? a. A report to the audit committee on the results of testing of internal control over cash receipts b. Confirmation letters to vendors confirming the amounts they owe to the client c. An attorney's letter regarding contingent liabilities d. An engagement letter Chp. 3

d. An engagement letter

When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include a. Inquiry of appropriate personnel b. Reading over the company's code of conduct c. Reperformance of the control activity d. Both A and C are correct

d. Both A and C are correct

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: a. Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. b. Whether the account has a history of errors. c. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. d. Both a & c e. All of these are correct.

d. Both a & c

The most reliable evidence regarding the existence of newly-acquired computer equipment is a. Inquiry of management. b. Documentation prepared externally. c. Evaluation of the client's procedures. d. Physical observation.

d. Correct Auditors' personal knowledge through physical observation provides the most reliable form of evidence; in addition, unlike evaluation of client procedures (choice c), this relates directly to verifying the existence of newly-acquired equipment.

Which of the following procedures would provide the most reliable audit evidence? a. Inquiries of the client's internal audit staff. b. Inspection of prenumbered client purchase orders filed in the vouchers payable department. c. Inspection of vendor sales invoices received from client personnel. d. Inspection of bank statements obtained directly from the client's financial institution.

d. Correct Because the statements were received directly from outside parties, this is a more reliable form of evidence than internal forms of evidence (choices a and b) or external evidence received indirectly by the auditor (choice c).

d. Correct Both (a) and (c) are factors.

The evidence considered most appropriate by auditors is best described as a. Internal documents such as sales invoice copies produced under conditions of strong internal control. b. Written representations made by the president of the entity. c. Documentary evidence obtained directly from independent external sources. d. Direct personal knowledge obtained through physical observation and mathematical recalculation.

d. Correct Direct, personal knowledge of auditors is the most appropriate form of evidence.

Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? a. Acceptance and continuance of client relationships and specific engagements. b. Engagement performance. c. Monitoring. d. Relevant ethical requirements.

d. Correct Independence confirmations would ensure that all firm personnel are independent with respect to that firm's clients, which is related to the "Relevant Ethical Requirements" element of a system of quality control. It would not relate to acceptance and continuance of client relationships and specific engagements (a), engagement performance (b), or monitoring (c).

Effectiveness of audit procedures would be reduced by a. Selecting larger sample sizes for audit. b. Performing audit procedures at the fiscal year-end date as opposed to the interim period. c. Deciding to obtain external evidence instead of internal evidence. d. Performing procedures during the interim period as opposed to at the fiscal year-end date.

d. Correct Performing procedures at an interim date is less effective.

Which of the following concepts is least related to the standard of due care? a. Independence in fact. b. Professional skepticism. c. Prudent auditor. d. Reasonable assurance.

d. Correct Reasonable assurance is related to the auditors' responsibility for detecting misstatements and procedures performed during the examination, not the concept of due care.

Which of the following recognizes that an audit conducted under generally accepted audit- ing standards may not detect all material misstatements? a. Absolute assurance. b. Professional judgment. c. Reliability of audit evidence. d. Reasonable assurance.

d. Correct Reasonable assurance recognizes that an audit conducted under GAAS may fail to detect all material misstatements.

Which of the following does not accurately summarize auditors' requirements regarding internal control? Public Entity Nonpublic Entity a. Understanding Yes Yes b. Documenting Yes Yes c. Evaluating control risk Yes Yes d. Test Controls Yes Yes

d. Correct Testing controls is required only for audits of public companies under AS 5.

Tests of controls in a GAAS audit are required for a. Obtaining evidence about the financial statement assertions. b. Accomplishing control over the occurrence of recorded transactions. c. Applying analytical procedures to financial statement balances. d. Obtaining evidence about the operating effectiveness of client control activities.

d. Correct Tests of controls produce the evidence about actual operation of company control activities.

Auditors' understanding of the internal control in an entity provides information for a. Determining whether members of the audit team have the required competence and capabilities to perform the audit. b. Ascertaining the independence in mental attitude of members of the audit team. c. Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. d. Planning the nature, timing, and extent of substantive procedures on an audit.

d. Correct The primary purpose of obtaining an understanding of a client's internal control is to plan the nature, timing, and extent of further audit procedures on an engagement.

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: a. The frequency of the performance of the control by the company during the period being audited. b. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. c. The expected rate of deviation for a control activity. d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity.

d. Correct The relevance and reliability of the evidence to be obtained would not have an impact on the extent of testing to be completed. The extent of testing required should be determined and then the necessary evidence should be gathered.

If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? a. Unqualified opinion or adverse opinion. b. Qualified opinion or adverse opinion. c. Unqualified opinion or disclaimer of opinion. d. Disclaimer of opinion.

d. Correct The reporting option when a scope limitation exists is a disclaimer of opinion.

Which of the following would probably not be considered an indication of a material weakness? a. Evidence of a material misstatement. b. Ineffective oversight by the audit committee. c. Immaterial fraud committed by senior management. d. Overproduction by the manufacturing plant.

d. Correct This does not directly relate to a material misstatement of the financial statements but is an operational issue.

The risk that the auditors' own testing procedures will lead to the decision that material mis- statements do not exist in the financial statements when in fact such misstatements do exist is a. Audit risk. b. Inherent risk. c. Control risk. d. Detection risk.

d. Correct This is the definition of detection risk.

When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include a. Inquiry of appropriate personnel. b. Reading over the company's code of conduct. c. Reperformance of the control activity. d. Both a and c are correct.

d. Correct When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance. Thus, response (a) and response (c) are appropriate responses. Thus, this is the correct answer.

Which of the following is not related to ethical requirements of auditors? a. Due care. b. Independence in appearance. c. Independence in fact. d. Professional judgment.

d. Correct While professional judgment is part of the responsibilities principle, it is not related to the ethical requirements of auditors.

Auditing standards do not require auditors of financial statements to a. Understand the nature of errors and frauds. b. Assess the risk of occurrence of errors and frauds. c. Design audits to provide reasonable assurance of detecting errors and frauds. d. Report all errors and frauds found to police authorities.

d. Correct. Auditors are not required to report all finding of errors and frauds to police authorities.

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? a. Inventory. b. Cost of goods sold. c. Bad debt expense. d. Accounts receivable

d. Correct. In (fictitious) credit sales and (fictitious) receivables.

Analytical procedures can be used in which of the following ways? a. As a means of overall review near the end of the audit. b. As "attention-directing" methods when planning an audit at the beginning. c. As substantive audit procedures to obtain evidence during an audit. d. All of the above.

d. Correct. The answer is all of the above. Analytical procedures can be used when planning the audit, when performing substantive procedures

A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement assertions. c. Detect fraud that may cause the financial statements to be misstated. d. Assist the auditor in evaluating the overall financial statement presentation.

d. Correct. This is the correct answer. At the final review stage, analytical review procedures are designed to provide an overall test of reasonableness about the financial statements being reviewed, in light of all available evidence.

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as a. Inherent risk. b. Control risk. c. Detection risk. d. Risk of material misstatement.

d. Correct. This is the definition of the risk of material misstatement.

Analytical procedures used when planning an audit should concentrate on a. Weaknesses in the company's internal control activities. b. Predictability of account balances based on individual significant transactions. c. Management assertions in financial statements. d. Accounts and relationships that can represent specific potential problems and risks in the financial statements.

d. Correct. With preliminary analytical procedures, the auditors are looking for signs of accounts and relationships that may represent specific potential problems and risks in the financial statements.

If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? a. Unqualified opinion or adverse opinion. b. Qualified opinion or adverse opinion. c. Unqualified opinion or disclaimer of opinion. d. Disclaimer of opinion.

d. Disclaimer of opinion.

47. When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? a. Key factors that are consistent with prior periods b. Assumptions that are similar to industry guidelines c. Measurements that are objective and not susceptible to bias d. Evidence of a conservative systematic bias

d. Evidence of a conservative systematic bias

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? a. Key factors that are consistent with prior periods b. Assumptions that are similar to industry guidelines c. Measurements that are objective and not susceptible to bias d. Evidence of a conservative systematic bias Chp. 3

d. Evidence of a conservative systematic bias

31. An auditor's permanent file audit documentation most likely will contain a. Internal Control analysis b. The most recent engagement letter c. Memoranda of the conference with management d. Excerpts of the corporate charter and bylaws

d. Excerpts of the corporate charter and bylaws

40. Which of the following procedures would most likely be performed during planning? a. Surprise counts of the client's petty cash fund b. Reporting internal control deficiencies to the audit committee c. Performing a search for unrecorded liabilities d. Identifying related parties

d. Identifying related parties

Which of the following procedures would most likely be performed during planning? a. Surprise counts of the client's petty cash fund b. Reporting internal control deficiencies to the audit committee c. Performing a search for unrecorded liabilities d. Identifying related parties Chp. 3

d. Identifying related parties

46. With respect to the concept of materiality, which of the following statements is correct? a. Materiality depends only on the dollar amount of an item relative to other items in the financial statements b. Materiality depends of the nature of a transaction rather than the dollar amount of the transaction c. Materiality is determined by reference to AICPA guidelines d. Materiality is a matter of professional judgment

d. Materiality is a matter of professional judgment

With respect to the concept of materiality, which of the following statements is correct? a. Materiality depends only on the dollar amount of an item relative to other items in the financial statements b. Materiality depends of the nature of a transaction rather than the dollar amount of the transaction c. Materiality is determined by reference to AICPA guidelines d. Materiality is a matter of professional judgment Chp. 3

d. Materiality is a matter of professional judgment

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must a. Assess control risk at less than the maximum for all relevant assertions. b. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting. c. Perform only substantive procedures. d. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

d. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

the primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to

determine the nature, timing, and extent of further audit tests to be performed

38. Which of the following engagement planning procedures would most likely assist the auditor in identifying related-parties transactions before the balance-sheet date? a. Interviewing internal auditors about their reporting responsibilities b. Reviewing accounting records for recurring transactions occurring near year-end c. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities d. Scanning the minutes for significant transactions with members of the board of directors

d. Scanning the minutes for significant transactions with members of the board of directors

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-parties transactions before the balance-sheet date? a. Interviewing internal auditors about their reporting responsibilities b. Reviewing accounting records for recurring transactions occurring near year-end c. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities d. Scanning the minutes for significant transactions with members of the board of directors Chp. 3

d. Scanning the minutes for significant transactions with members of the board of directors

Which of the following is a preventive control? a. Detailed fluctuation analysis completed by the CFO for revenue. b. Reconciliation of a bank account. c. Recalculation of a sample of payroll entries by internal auditors. d. Separation of duties between the payroll and personnel departments.

d. Separation of duties between the payroll and personnel departments.

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: a. The frequency of the performance of the control by the company during the period being audited. b. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. c. The expected rate of deviation for a control activity. d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity

d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity

which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

incompatible duties

2.36 The evidence considered most appropriate by auditors is best described as: a. internal documents such as sales invoice copies produced under conditions of strong internal control b. written representations made by the president of the entity c. documentary evidence obtained directly from independent external sources d. direct personal knowledge obtained through physical observation and mathematical recalculation

d. direct personal knowledge obtained through physical observation and mathematical recalculation

2.33 Which of the following procedures would provide the most reliable audit evidence? a. inquiries of the client's internal audit staff b. inspection of prenumbered client purchase orders filed in the vouchers payable department c. inspection of vendor sales invoices received from client personnel d. inspection of bank statements obtained directly from the client's financial institution

d. inspection of bank statements obtained directly from the client's financial institution

2.32 The most reliable evidence regarding the existence of newly-acquired computer equipment is: a. inquiry of management b. documentation prepared externally c. evaluation of the client's procedures d. physical observation

d. physical observation

2.37 Auditor's understanding of the internal control in an entity provides information for: a. determining whether members of the audit team have the required competence and capabilities to perform the audit b. ascertaining the independence in mental attitude of members of the audit team c. planning the professional development courses the audit staff needs to keep up to date with new auditing standards d. planning the nature, timing and extent of substantive procedures on an audit

d. planning the nature, timing and extent of substantive procedures on an audit

2.27 Which of the following is not related to ethical requirements of auditors? a. due care b. independence in appearance c. independence in fact d. professional judgment

d. professional judgment

2.35 Which of the following concepts is least related to the standard of due care? a. independence in fact b. professional skepticism c. prudent auditor d. reasonable assurance

d. reasonable assurance

2.42 Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements? a. absolute assurance b. professional judgment c. reliability of audit evidence d. reasonable assurance

d. reasonable assurance

2.38 Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? a. acceptance and continuance of client relationships and specific engagements b. engagement performance c. monitoring d. relevant ethical requirements

d. relevant ethical requirements

the appropriate separation of duties does not include

data preparation

if a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application

department numbers

an audit team's responsibility wold not include

designing client's internal controls

according to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to

determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed

HO2.1 Identify the applicable element of quality control: f. at all stages of any engagement, an effort is made to involve professional staff at appropriate levels in the accounting and auditing decisions; various approvals of the manager or senior accountant are obtained throughout the audit

engagement performance

once the auditor detects a control deficiency, which of the following steps must he or she take first?

evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion

All types of information that guide auditors decisions and relation to management assertions about economic actions and events is known as

evidence

The information auditors use to arrive at conclusions and form the audit opinion is called _________

evidence

The information auditors use to arrive at conclusions and form the audit opinion is called _____________

evidence

The assertions about the actually of each balance sheet and income statement balance is ________, while ___________ asserts that each event and transaction actually happened

existence, occurrence

Users of financial statements have a different perception concerning the nature of auditors' services than the actual objectives of an audit. This difference is known as

expectations gap

When an entity registers a security offering under the Securities Act of 1933, the law provides an investor

financial information examined by independent auditors.

Providing balance sheets, income statements, and statements of shareholders equity, comprehensive income and cash flows is the function of _______________________.

financial reporting

when completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over

financial reporting

sound internal control can be described as separating all of the following duties and responsibilities except for

hiring of employees

HO2.1 Identify the applicable element of quality control: I. through our continuing employee evaluation and counseling program and through quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs; at the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm's director of personnel

human resources

HO2.1 Identify the applicable element of quality control: h. individual partners submit the nominations of those persons whom they wish to be considered for partner; to become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which her or she is assigned

human resources - transitions throughout the company ; hiring/firing/promotions, etc

when planning the audit of internal controls for an issuer, the audit team should

identify significant accounts, locations, and assertions.

which of the following is a step in an auditor's decision to assess control risk at below the maximum?

identify specific internal control policies and activities that are likely to detect or prevent material misstatements

obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been

impleneted

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: c. Because of a disagreement with its current auditors, an entity has contacted you about conducting its current-year audit. However, because the previous auditors have just recently resigned from the engagement, you have some questions as to whether an audit can be completed in time to meet the entity's deadlines for providing audited financial statements to a lender.

performance - planning and supervision

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: d. Based on the effectiveness of the entity's internal control, you have assessed control risk at low levels and decided that a smaller number of customer accounts need to be confirmed.

performance - sufficient, appropriate evidence

effectiveness of audit procedures would be reduced by

performing procedures during the interim period as opposed to at the fiscal year-end date

proper separation of duties reduces the opportunities to allow persons to be in positions to both

perpetrate a fraud and then conceal it in the books

when auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements

prepare auditing working papers that document the auditor's understanding of the company's internal control

which of the following third parties is known by name to auditors as the audit is conducted

primary beneficiary.

The application of relevant training knowledge and experience in making informed decisions during the audit engagement is _________

professional judgment

Pressures to keep audit fees low and the desire to achieve high levels of client satisfaction present challenges for auditors maintaining appropriate levels of ____________

professional skepticism

From the auditors' point of view, which of the following is a preferable provision for imposition of civil liability in a lawsuit for financial damages?

proportionate liability

A company that offers registered securities for sale to the general population is called a(n) _________

public entity

The fact that a small misstatement (in absolute terms) is likely to influence investment decisions referred to as ____________ factors

qualitative materiality

The concept of __________ recognizes that auditors are not "insures" or "guarantors" regarding the fairness of the entity's financial statements

reasonable assurance

The concept of ________________ recognizes that auditors are not insures or guarantors regarding the fairness on the entity financial statements

reasonable assurance

which of the following is not an input control activity

reasonableness tests

each of the following types of controls is considered to be an entity-level control, except those

regarding the company's annual stockholder meeting

HO2.1 Identify the applicable element of quality control: g. no employee will have any direct or indirect financial interest, association, or relationship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm's best interest

relevant ethical requirement

2.65 In each of the following, identify which of the elements of the fundamental principles is most applicable: b. an entity has entered into a number of lease agreements. based on the requirements of GAAP, you believe that these obligations meet the criteria for being classified as capital leases; however, the entity has elected to treat these leases as operating leases, providing full and complete disclosure of this treatment in the footnotes to the financial statements

reporting

2.66 Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: e. the auditors' issuance of a disclaimer of opinion because of a significant scope limitation

reporting

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is: (A) prenumbered and accounted for. (B) approved for authorized purchases. (C) stamped "paid" by the check signer. (D) supported by a vender invoice.

stamped "paid" by the check signer.

which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements?

statements identifying the responsibility of the auditors and management for internal control over financial reporting

regardless of the assessed level of control risk, an auditor of a non-public company would perform some

substantive tests to restrict detection risk for significant transaction classes

Today activist shareholders are increasingly pressuring boards and upper management teams regarding social responsibility, the environment and other issues related to ________

sustainability

which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

testing the operating effectiveness of the relevant controls would not be efficient

the audited financial statements contain a false statement or omission of material fact.

When investors sue auditors for damages under section 11 of the Securities Act of 1993, they must allege and prove

the audited financial statements contained a material misstatement.

which of the following would be the auditors' most likely defense in an action brought under the Securities Exchange Act of 1934?

the auditors acted in good faith and are not aware of the materially misstated financial statements.

a set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as

the control environment

which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls

the degree to which information technology is used in the accounting function

matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following:

the relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity

which of the following statements is not true with respect to the auditors' report on internal control over financial reporting?

the report will be dated as of the date of the financial statements.

Which of the following statements regarding auditors liability under the Securities Act of 1933 is not true

third parties must demonstrate that they relied on misstated financial statements that were examined by auditors.

which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control

to serve as a basis for constructive suggestions

individuals who believe they relied on misstated financial statements to make a decision and have suffered losses as a result will issue an action known as

tort

an auditor is evaluating a client's internal controls. which of the following situations would be the most difficult internal control issue for an auditor to detect?

two employees, who work in different departments, are circumventing an internal control

When an auditor concludes that the financial statements are presented fairly in all material respects a(n) _________ opinion will be issued

unmodified

When an auditor concludes that the financial statements are presented fairly in all material respects, a(n) ___________ option will be issued

unmodified

an auditor is concerned about a policy of management override as a limitation of internal control. which of the following tests would best assess the validity of the auditor's concern?

verifying that approved spending limits are not exceeded

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