Gleim Quizzes - Chapters 1-5, and Modules B, E, F
Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Which of the cash transfers would appear as a deposit in transit on the December 31 bank reconciliation? See image for question and answer
Option 4
Which of the following cash transfers results in a misstatement of cash at December 31, Year 1? See image for question and answer
Option D - see image
Which of the following factors are included in an entity's control environment? Answer yes or no for each. Audit committee participation, integrity and ethical values, organizational stucture.
Yes, Yes, Yes
For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent Answer yes or no for these three - As risk assessment procedures, as substantive procedures, to assist in forming an overall conclusion
Yes, no, yes
Notes that are included with financial statements are the responsibility of the a)Company's management. b)Internal auditor. c)Independent auditor. d)Securities and Exchange Commission.
a)Company's management.
An auditor uses the knowledge provided by the understanding of the system of internal control and the assessed risks of material misstatement primarily to a)Determine the nature, timing, and extent of substantive procedures for financial statement assertions. b)Determine whether procedures and records concerning the safeguarding of assets are reliable. c)Determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. d)Modify the initial assessments of inherent risk and judgments about materiality levels for planning purposes.
a)Determine the nature, timing, and extent of substantive procedures for financial statement assertions.
In which of the following situations is attribute sampling likely to be used? a)Determining the estimated number of occurrences of improperly authorized cash disbursements. b)Examining invoices and canceled checks in support of recorded operating expenses. c)Inquiring of the client the number of occurrences of fraud during the year. d)Making selections from a cash disbursements journal to test liabilities for understatement.
a)Determining the estimated number of occurrences of improperly authorized cash disbursements.
When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the a)Extent of tests of details. b)Level of detection risk. c)Level of inherent risk. d)Extent of tests of controls.
a)Extent of tests of details.
Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances most likely impairs Kar's independence? a)Kar's sibling is the director of internal auditing for Fort. b)Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns. c)During the period of the professional engagement, Fort gives Kar tickets to a football game worth $25. d)Kar owns stock in a corporation that Fort's 401(k) plan also invests in. These interests are immaterial.
a)Kar's sibling is the director of internal auditing for Fort.
A financial statement audit is designed to a)Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. b)Obtain absolute assurance on the financial statements and express an opinion on the financial statements. c)Provide assurance on internal control and to identify significant deficiencies and material weaknesses. d)Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material.
a)Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.
Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of the risks of material misstatement? a)The suitability of the client's lines of reporting. b)The organization's recruiting and hiring practices. c)Management's attitude toward information processing and accounting departments. d)Physical proximity of the accounting function to upper management.
a)The suitability of the client's lines of reporting.
Audit risk is a)Substantially controlled by the auditor. b)An aggregate of the risk of material misstatement and detection risk. c)The risk that internal control will not prevent a material misstatement of an assertion on a timely basis. d)Beyond the auditor's control.
b)An aggregate of the risk of material misstatement and detection risk.
CPAs are required to complete engagements competently. Competence includes all of the following except a)The ability to research subject matter and consult with others. b)An unbiased mental attitude. c)The capacity to exercise judgment. d)The technical qualifications of the CPA's staff.
b)An unbiased mental attitude.
Analytical procedures are required for which of the following? a)Internal control evaluation. b)Audit planning. c)Tests of balances. d)Client retention decision.
b)Audit planning.
Who establishes generally accepted auditing standards? a)State Boards of Accountancy. b)Auditing Standards Board and the Public Company Accounting Oversight Board. c)Financial Accounting Standards Board and the d)Governmental Accounting Standards Board. Securities and Exchange Commission.
b)Auditing Standards Board and the Public Company Accounting Oversight Board.
An auditor finds that inventory shipped FOB shipping point before the end of Year 1 was incorrectly recorded as a sale in Year 2, when the shipped goods arrived to the customer. Which auditing assertion regarding transactions and events does this most likely relate to? a)Completeness. b)Cutoff. c)Classification. d)Accuracy.
b)Cutoff.
The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is a)Control risk. b)Detection risk. c)Audit risk. d)Inherent risk.
b)Detection risk.
Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, i.e., sampling risk, is introduced. An example of sampling risk is a)Improperly applying a proper audit procedure to sample data. b)Drawing an erroneous conclusion from sample data. c)Projecting the results of sampling beyond the population tested. d)Properly applying an improper audit procedure to sample data.
b)Drawing an erroneous conclusion from sample data.
Which of the following best characterizes an auditor's exercise of professional skepticism? a)Obtaining adequate conclusive evidence in support of the fairness of the financial statements. b)Having an attitude that includes a questioning mind. c)Taking into account past relationships and experiences with management. d)Conducting all fraud-related inquiries in a nonconfrontational manner.
b)Having an attitude that includes a questioning mind.
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a)Underreliance. b)Incorrect acceptance. c)Incorrect rejection. d)Overreliance.
b)Incorrect acceptance.
The control environment may decrease the effectiveness of control activities when a)The board of directors is independent of management. b)Management has substantial incentives for meeting earnings projections. c)The audit committee actively oversees the financial reporting process. d)The internal auditor reports directly to the audit committee.
b)Management has substantial incentives for meeting earnings projections.
An auditor is testing the valuation and allocation assertion about cash. For this purpose, the auditor should a)Compare general ledger balances with the financial statement balances. b)Ordinarily assign a lower inherent risk to U.S. currency than foreign currency. c)Count all cash and negotiable securities. d)Determine whether the ending balance reflects all transactions.
b)Ordinarily assign a lower inherent risk to U.S. currency than foreign currency.
According to the standards of the profession, which of the following activities most likely does not impair a CPA's independence? a)Contracting with a client to supervise the client's office personnel. b)Providing extensive advisory services for a client. c)Accepting a luxurious gift from an attest client. d)Signing a client's checks in emergency situations.
b)Providing extensive advisory services for a client.
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a)Smaller expected frequency of deviations. b)Smaller measure of tolerable misstatement. c)Increased use of analytical procedures to obtain evidence about particular assertions. d)A lower assessed risk of material misstatement.
b)Smaller measure of tolerable misstatement.
A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client? a)The CPA records transactions in accordance with classifications determined by management. b)The CPA authorizes client transactions and reports them to management. c)The CPA posts adjusting journal entries prepared by management to the trial balance. d)The CPA prepares financial statements from a trial balance provided by management.
b)The CPA authorizes client transactions and reports them to management.
A bank confirmation request should be authorized and sent by whom? a)The client should both authorize and send the bank confirmation request. b)The client should authorize the request and the auditor should send it. c)The auditor should authorize the request and the client should send it. d)The auditor should both authorize and send the bank confirmation request.
b)The client should authorize the request and the auditor should send it.
Which of the following best describes the reason an independent auditor reports on financial statements? a)A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work. b)The company preparing the statements and the persons using the statements may have different interests. c)The company preparing the statements may have poorly designed internal control. d)A management fraud may exist, and it is more likely to be detected by independent auditors.
b)The company preparing the statements and the persons using the statements may have different interests.
An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? a)The internal auditor did not sign the form. b)The form was mailed by the controller. c)The account was closed, so the balance was zero. d)The form was prepared by the internal auditor.
b)The form was mailed by the controller.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a)The audit committee's approval of the initial selection of accounting principles. b)Year-end adjustments by the entity that significantly affect financial results. c)Management's disclosure of unresolved litigation and contingent liabilities. d)A lack of competition in the entity's industry, accompanied by increasing profit margins.
b)Year-end adjustments by the entity that significantly affect financial results.
A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Is the independence of the CPA considered to be impaired with respect to the client? a)No, because the CPA is not considered to have a material indirect financial interest in the client. b)Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor. c)No, because the CPA is not considered to have a direct financial interest in the client. d)Yes, because the stock is considered an indirect financial interest that is material to the CPA's child.
b)Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor.
Which of the following statements correctly defines the term "reasonable assurance"? a)A substantial level of assurance to allow an auditor to detect a material misstatement. b)An absolute level of assurance to allow an auditor to detect a material misstatement. c)A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. d)A significant level of assurance to allow an auditor to detect a material misstatement.
c)A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.
An auditor's independence is most likely considered impaired if the auditor has a)An immaterial, indirect financial interest in a client. b)A cousin as the CFO of a client. c)A joint, closely held business investment with the client that is material to the auditor's net worth. d)An automobile loan from a client bank, collateralized by the automobile.
c)A joint, closely held business investment with the client that is material to the auditor's net worth.
Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk? a)The client's internal auditor. b)The audit committee. c)An appropriate level of management. d)The client's legal counsel.
c)An appropriate level of management.
Which of the following statements reflects an auditor's responsibility for detecting fraud and errors? a)An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. b)An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework. c)An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements. d)An auditor is not responsible for detecting fraud unless the application of GAAS would result in such detection.
c)An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements.
One difference between an examination and a review is that a)Independence is required only for a review. b)Documentation is required for an examination but not a review. c)An examination results in the issuance of an opinion. d)An examination offers only a limited level of assurance.
c)An examination results in the issuance of an opinion.
Which of the following is an inherent limitation of internal control? a)Segregation of duties. b)Employee peer review. c)Collusion. d)Judgmental sampling.
c)Collusion.
Which of the following is not a component of a system of internal control? a)Monitoring of controls. b)Information system. c)Control risk. d)The control environment.
c)Control risk.
Inherent risk and control risk differ from detection risk in that inherent risk and control risk are a)Considered at the assertion level, but detection risk is not. b)Functions of the client and its environment, but detection risk is not. c)Elements of audit risk, but detection risk is not. d)Changed at the auditor's discretion, but detection risk is not.
c)Elements of audit risk, but detection risk is not.
In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion a)Must include all members of the audit team. b)Normally excludes consideration of how fraud might be concealed. c)Includes brainstorming about how assets can be misappropriated. d)Must be deferred until the auditor begins information-gathering procedures.
c)Includes brainstorming about how assets can be misappropriated.
Which of the following is considered a fraudulent activity? a)A mistake in gathering or processing accounting data from which financial statements are prepared. b)An incorrect accounting estimate arising from oversight or misinterpretation of facts. c)Misappropriation of assets. d)A mistake in the application of accounting principles relating to amount, classification, manner of presentation, or disclosure.
c)Misappropriation of assets.
Bingham, a CPA, has been asked to join a local bank's board of directors. In which of the following scenarios would such a position be acceptable for Bingham? a)Several of Bingham's clients are in negotiations with this and other banks for operating loans. b)One of Bingham's clients, who is struggling financially, is in the loan application process at the bank. c)Several of Bingham's clients have savings accounts at the bank. d)One of Bingham's clients has several business loans outstanding with the bank.
c)Several of Bingham's clients have savings accounts at the bank.
All of the following are audit quality control requirements contained in the Sarbanes-Oxley Act of 2002 except a)The Public Company Accounting Oversight Board will periodically inspect registered CPA firms. b)The audit report must be reviewed and approved by a second partner. c)The audit report must be submitted to the Public Company Accounting Oversight Board prior to issuance. d)The lead audit partner must rotate off the audit every 5 years.
c)The audit report must be submitted to the Public Company Accounting Oversight Board prior to issuance.
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? a)The anticipated sample size of the planned substantive procedures. b)The contents of the representation letter. c)The entity's year-to-date financial results and position. d)The results of the internal control questionnaire.
c)The entity's year-to-date financial results and position.
In planning the audit engagement, the auditor should consider each of the following except a)The auditor's independence. b)Risks of material misstatement due to fraud. c)The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed. d)Anticipated levels of audit risk and materiality.
c)The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
Which of the following is a definition of control risk? a)The risk that the auditor's assessment of internal controls will be at less than the maximum level. b)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. d)The susceptibility of material misstatement assuming there are no related internal control policies or procedures.
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 sampling methods would an auditor use to estimate a numerical measurement of a population, such as the dollar value of inventory? a)Attribute sampling. b)Discovery sampling. c)Variable sampling. d)Random-number sampling.
c)Variable sampling.
At 12:01 a.m. on the first day of the new year, the cash receipts journal for the year just ended is electronically locked down. The new year's cash receipts journal can only be opened by a manager, and the manager notes the time and amount of the first receipt of the new year. This control would best alleviate concerns regarding which assertion? a)Existence. b)Cutoff. c)Classification. d)Accuracy, valuation, and allocation.
d)Accuracy, valuation, and allocation.
In developing an audit plan, an auditor should a)Evaluate findings from substantive procedures performed at interim dates. b)Determine whether the allowance for sampling risk exceeds the achieved upper precision limit. c)Perform risk assessment procedures. d)Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.
d)Consider whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.
Most substantive audit procedures performed on cash are directed toward which assertion? a)Completeness. b)Accuracy, valuation, and allocation. c)Accuracy. d)Existence.
d)Existence.
In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the a)Financial statements as a whole. b)Timing of the audit. c)Costs and benefits of gathering evidence. d)Financial statement assertions.
d)Financial statement assertions.
While performing a test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of a)Incorrect acceptance. b)Overreliance. c)Underreliance. d)Incorrect rejection.
d)Incorrect rejection.
An attestation engagement is one in which a CPA is engaged to a)Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts. b)Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. c)Assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance. d)Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
d)Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
Which of the following must an auditor document with respect to the consideration of fraud in a financial statement audit? a)Instances of the auditor's exercise of professional skepticism during the consideration of fraud. b)Reasons for not identifying management override as a fraud risk. c)Reasons for not identifying collusion as a fraud risk. d)Reasons for not identifying improper revenue recognition as a fraud risk.
d)Reasons for not identifying improper revenue recognition as a fraud risk.
Various situations create threats to auditor independence. Which type of threat most likely results from an auditor's financial interest in a client? a)Self-review threat. b)Advocacy threat. c)Management participation threat. d)Self-interest threat.
d)Self-interest threat.
According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors? a)The CPA performs attestation services for a nonpublic company. b)The CPA audits a bank to which the company has applied for financing, and board approval is required for said financing to occur. c)The CPA is asked by the company to test the internal controls of the company and is offered compensation for said services. d)The CPA does not audit the company and has no other business connection with the company.
d)The CPA does not audit the company and has no other business connection with the company.
A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, Year 3. Many of the firm's former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit? a)The client's chief accounting officer was the concurring partner on the audit until April 15, Year 2. b)The client's CEO was a manager on the audit until June 30, Year 2. c)The client's controller was a staff accountant on the audit for 2 weeks during Year 2. d)The client's CFO was the lead partner on the audit until December 31, Year 1.
d)The client's CFO was the lead partner on the audit until December 31, Year 1.
Internal control can provide only reasonable assurance of achieving an entity's control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to a system of internal control? a)The board of directors is active and independent. b)The auditor's primary responsibility is the detection of fraud. c)Management monitors internal control. d)The cost of internal control should not exceed its benefits.
d)The cost of internal control should not exceed its benefits.
In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? a)The internal audit department's objectivity in reporting to the audit committee a material misstatement of a financial statement assertion it detects. b)The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. c)The risk that the internal control system will not detect a material misstatement of a financial statement assertion. d)The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.
d)The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? a)Interest expense. b)Accounts receivable. c)Accounts payable. d)Travel and entertainment expense.
d)Travel and entertainment expense.
The objective of performing analytical procedures in planning an audit is to identify the existence of a)Recorded transactions that were not properly authorized. b)Noncompliance with laws and regulations that went undetected because of internal control deficiency. c)Related party transactions. d)Unusual transactions and events.
d)Unusual transactions and events.
