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164 Cards in this Set

  • Front
  • Back
The auditor's report is generally addressed to the:
A. Chief operating officer
B. SEC
C. Stockholders of the company
D. Chief financial officer
C. Stockholders of the company
Which of the following statements is not true with respect to assurance, attest, and audit services?
A. These services are applied only to financial statements and financial statement accounts.
B. These services all involve obtaining and evaluating evidence.
C. These services all involve determining the correspondence of some information to a set of criteria.
D. These services all involve issuing a report.
A. These services are applied only to financial statements and financial statement accounts.
Which of the following is true with respect to the auditor's report?
A. The report indicates that the client's financial statements were audited in accordance with generally accepted accounting standards.
B. The report indicates that the client's financial statements were audited in accordance with applicable auditing standards.
C. The report indicates that the client's financial statements were audited with accordance with the auditor's best judgment.
D. The report indicates that the client's financial statements were audited in accordance with statements issued by the FASB.
B. The report indicates that the client's financial statements were audited in accordance with applicable auditing standards.
The basic purpose of a financial statement audit is to
A. Detect fraud
B. Examine individual transactions so that the auditor may certify as to their validity.
C. Provide assurance regarding whether the client's financial statements are fairly stated.
D. Assure the consistent application of correct accounting procedures.
C. Provide assurance regarding whether the client's financial statements are fairly stated.
Which of the following best described the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?
A. A management fraud may exist and it is more likely to be detected by auditors if they are independent.
B. Different interests may exist between the company preparing the statements and the parties using the statements.
C. A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated.
D. A poorly designed internal control system may be in place.
B. Different interests may exist between the company preparing the statements and the parties using the statements.
Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?
A. To promote an adversarial relationship between the auditor and the corporation's management.
B. To enhance auditor independence from the management of the corporation.
C. To encourage a policy of rotation of the independent auditors.
D. To give management more leverage over the auditor's decisions.
B. To enhance auditor independence from the management of the corporation.
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 cynicism
B. Independent differentialism
C.Professional skepticism
D. Impartial conservatism
C.Professional skepticism
Which assertions may be tested for the "transactions and events" category of management assertions?
A. Existence, completeness, rights and obligations, accuracy, cutoff, and classification
B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification
C. Occurrence, completeness, authorization, accuracy, cutoff and classification
D. Existence, rights and obligations, accuracy, authorization, and completeness
C. Occurrence, completeness, authorization, accuracy, cutoff and classification
The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the
A. Partner assigned to the audit engagement
B. Management of the company
C. Auditor in charge of the fieldwork
D. SEC
B. Management of the company
What is the general character of the work conducted in performing a forensic audit for a company?
A. Providing assurance that the financial statements are not materially misstated
B. Detecting or deterring fraudulent activity
C. Offering an opinion on the reliability of the specific assertions made by management
D. Identifying the causes of an entity's financial difficulties
B. Detecting or deterring fraudulent activity
The main difference between SAS and AU is:
A. They are the same except that SAS are organized chronologically and the AU are organized by topical area.
B. SAS are issued by the ASB and AU are issued by the PCAOB.
C. SAS are issued by the PCAOF and AU are issued by the ASB.
D. SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP.
A. They are the same except that SAS are organized chronologically and the AU are organized by topical area.
Which assertions may be tested for the "presentation and disclosure" category of management assertions?
A. Existence, right and obligations, cutoff and classification, completeness, accuracy and valuation
B. Occurrence, right and obligations, existence, accuracy and valuation, cutoff and classification
C. Occurrence, completeness, classification and understandability, cutoff and classification
D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation
D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation
A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
A, Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion
B. An audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud
C. The factors considered in assessing control risk indicated risk of error but only a low risk of fraud in the financial statements
D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole
A, Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion
Which of the following is a known misstatement?
A, A management estimate that is outside the range of reasonable outcomes determined by the auditor
B. A fixed asset being recorded at the incorrect cost
C. A projected misstatement resulting from errors found during sampling
D. Difference in judgment between the auditor and management
B. A fixed asset being recorded at the incorrect cost
The auditor can respond to an increased risk of fraud by doing all of the following except
A. Heavily emphasizing the importance of professional skepticism
B. Assigning more experienced personnel to the audit
C. Increasing detection risk
D. Taking steps to obtain more reliable evidence
C. Increasing detection risk
Which of the following is correct concerning required auditor communications about fraud?
A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved
B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the SEC
C. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor
D. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities
A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved
In general, material frauds perpetrated by which of the following are most difficult to detect?
A. Internal auditor
B. Keypunch operator
C. Cashier
D, Controller
D, Controller
Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
A. Potential for fraud
B. The company is close to violating loan covenants
C. Firm policy sets materiality at 4% of pretax income
D. A small misstatement would interrupt an earnings trend
C. Firm policy sets materiality at 4% of pretax income
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably
A. Disclose the fraud to the appropriate level of the client's management
B. Disclose the fraud to appropriate authorities external to the client
C. Discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud
D. Modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements
A. Disclose the fraud to the appropriate level of the client's management
An example of audit evidence with a medium level of reliability is:
A. Scanning
B. Recalculation
C. Observation
D. All of the above
A. Scanning
Audit documentation
A. Must be in electronic form
B. Must be in paper form only
C, Is not required, but is strongly recommended
D. May be in paper, electronic, or some other form
D. May be in paper, electronic, or some other form
All of the following are typically in the current file except
A. Adjusting journal entries
B. Copies of the audit report
C. Chart of accounts
D. Lead schedules
C. Chart of accounts
To test for unsupported entries in the ledger, the direction of audit testing should start from the
A. Ledger entries
B. Journal entries
C. Externally generated documents
D.Original source documents
A. Ledger entries
The permanent audit file usually includes:
A. Working trial balance
B. Organizational chart
C, Audit plan
D. Audit programs
B. Organizational chart
Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with?
A. Existence or occurrence
B. Completeness
C. Rights and obligations
D. Presentation and disclosure
B. Completeness
Before accepting an engagement to audit a new client, a CPA is required to obtain
A. an understanding of the prospective client's industry and business
B. the prospective client's signature on the engagement letter
C. a preliminary understanding of the prospective client's control environment
D. the prospective client's consent to make inquiries of the predecessor auditor, if any
D. the prospective client's consent to make inquiries of the predecessor auditor, if any
The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should
A. consider the matter a scope limitation
B. perform additional audit procedures to investigate the matter further
C. intensify the examination with the expectation of detecting management fraud
D. withdraw from the engagement
B. perform additional audit procedures to investigate the matter further
To provide for the greatest degree of independence in performing internal audit functions, an internal auditor most likely should report to the
A. financial vice-president
B. corporate controller
C. board of directors
D. corporate stockholders
C. board of directors
When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining
A. whether the predecessor's work should be utilized
B. whether the company follows the policy of rotating its auditors
C. whether, in the predecessor's opinion, the company's internal controls have been satisfactory
D. whether the engagement should be accepted
D. whether the engagement should be accepted
Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkin's decision concerning the
A. adequacy of the preplanned audit program
B. ability to establish consistency in application of accounting principles between years
C. apparent scope limitation
D. integrity of management
D. integrity of management
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
A. the prospective client's unwillingness to permit inquiry of its legal counsel
B. the inability to review the predecessor auditor's documentation
C. the CPA's lack of understanding of the prospective client's operations and industry
D. indications that management has not investigated employees in key positions before hiring them
A. the prospective client's unwillingness to permit inquiry of its legal counsel
As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
A. express an opinion which is qualified due to the inability of the client company to continue as a going concern
B. evaluate management's performance in causing this decline
C. require footnote disclosure
D. consider the possibility of an error in the financial statements
D. consider the possibility of an error in the financial statements
Analytical procedures may be classified as being primarily which of the following?
A. test of controls
B. substantive procedures
C. tests of ratios
D. detailed tests of balances
B. substantive procedures
In assessing whether to accept a client for an audit engagement, a CPA should consider the
A. entity's business risk
B. CPA's engagement risk
C. entity's business risk and CPA's engagement risk
D. neither the entity's business risk or the CPA's engagement risk
C. entity's business risk and CPA's engagement risk
After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that
A. the available evidential matter obtained through tests of controls would not support an increased level of control risk
B. a reduction in the assessed level of control risk is justified for certain financial statement assertions
C. it would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures
D. the assessed level of inherent risk exceeded the assessed level of control risk
C. it would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures
Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by
A. employment of temporary personnel to aid in the separation of duties
B. direct participation by the owner of the business in the record-keeping activities of the business
C. engaging a CPA to perform monthly bookkeeping
D. delegation of full, clear-cut responsibility to each employee for the functions assigned to cash
B. direct participation by the owner of the business in the record-keeping activities of the business
In obtaining an understanding of an entity's internal control in a financial statement audit of a non-public company, an auditor is not obligated to
A. determine whether the control activities have been placed in operation
B. perform procedures to understand the design of the internal control policies
C. document the understanding of the entity's internal control components
D. search for significant deficiencies in the operation of the internal control
D. search for significant deficiencies in the operation of the internal control
The basic concept of internal control which recognizes that the cost of internal control should not exceed the benefits expected to be derived is known as
A. reasonable assurance
B. management responsibility
C. limited liability
D. management by exception
A. reasonable assurance
The normal sequence of documents and operations on a well-prepared systems flowchart is
A. top to bottom and left to right
B. bottom to top and left to right
C. top to bottom and right to left
D. top to bottom and left to right
A. top to bottom and left to right
The concept of reasonable assurance in the context of an entitiy's internal controls reconginzes that
A. auditors mmay fail to detect material misstatements
B. proper internal controls guarantee that material misstatements will not occur
C. proper internal controls preclude fraud
D. the costs of some controls may be too high to implement in relation to potential benefits
D. the costs of some controls may be too high to implement in relation to potential benefits
The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n)
A. analytical procedure
B. test of controls
C. substantive procedure
D. functional test
B. test of controls
In a properly designed internal control system, the same employee may be permitted to
A. receive and deposit checks and also approve write-offs of customer accounts
B. approve vouchers for payment and also sign checks
C. reconcile the bank statements and also receive the deposit cash
D. sign checks and also cancel supporting documents
D. sign checks and also cancel supporting documents
A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions and that leave no transaction trail is
A. inspection
B. observation
C. reperformance
D. reconciliation
B. observation
The risk assessment component of internal controls refers to
A. the auditor's assessment of control risk
B. the auditor's assessment of client risk
C. the entity's identification and analysis of risks relevant to achievement of its objectives
D. the entity's monitoring of the potential for material misstatements
C. the entity's identification and analysis of risks relevant to achievement of its objectives
The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities, except
A. the maintenance of asset records
B. the segregation of duties
C. the authorization by management of receipts and expenditures
D. the safeguarding of assets
B. the segregation of duties
Prior to issuing a report on internal controls over financial reporting, an auditor is required to:
A. perform procedures sufficient to identify all control deficiencies
B. communication to management, in writing, all control deficiencies previously included in written communication from the internal auditors
C. communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made
D. represent that no significant deficiencies were noted during the audit of internal control
C. communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made
An auditor will use the IT test data method in order to gain certain assurances with respect to the
A. input data
B. machine capacity
C. procedures contained within the program
D. degree of keypunching accuracy
C. procedures contained within the program
The advantages of generalized audit software include all of the following except
A. it involves auditing while the data are being processed (real-time)
B. it is easy to use
C. the time to develop the application is usually short
D. an entire population can be examined in some instances
A. it involves auditing while the data are being processed (real-time)
Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion?
A. nothing has come to management's attention to suggest that the company's internal control is less than effective
B. statements suggesting only negative assurance
C. a conclusion that the company's internal control over financial reporting is effective when a material weakness exists at the end of the reporting period
D. disclosure of material weaknesses corrected during the period
D. disclosure of material weaknesses corrected during the period
Which of the following is not an element of management's assessment process for the effectiveness of internal control?
A. evaluate the likelihood that failure of a control could result in a misstatement
B. determining the locations and business units to include in the evaluation
C. determining significant deficiencies and material weaknesses in controls
D. obtaining the auditor's assessment of the internal control effectiveness
D. obtaining the auditor's assessment of the internal control effectiveness
Which of the following audit procedures would an auditor be least likely to perform using a generalized computer audit program?
A. searching records of accounts receivable balances for credit balances
B. investigating inventory balances for possible damaged goods
C. selecting accounts receivable for positive and negative confirmation
D. listing of unusually large inventory balances
B. investigating inventory balances for possible damaged goods
In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except
A. test some of the work performed by others to evaluate the quality and effectiveness of their work
B. evaluate the nature of the controls subjected to the work of others
C. evaluate the competence and objectivity of the individuals who performed the work
D. all of the above are required
D. all of the above are required
S&H Accounting has just performed an audit of Bob's Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true?
A. S&H must still assume that management has assessed the effectiveness of internal control
B. depending on other factors in the audit, S&H can still issue an unqualified opinion
C. S&H should consider this situation a limitation on the scope of the audit
D. management does not need to give S&H a letter if they have disclosed all known internal control deficiencies
C. S&H should consider this situation a limitation on the scope of the audit
The primary purpose of a generalized computer audit program is to allow the auditor to
A. use the client's employees to perform routine audit checks of the electronic data processing records that otherwise would be done by the auditor's staff accountants
B. test the logic of computer programs used in the client's electronic processing systems
C. select larger samples from the client's electronic data processing records that would otherwise be selected without the generalized program
D. independently process client electronic data processing records
D. independently process client electronic data processing records
Which of the following statements is correct concerning statistical sampling in tests of controls?
A. as the population size increases, the sample size should increase proportionately
B. deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate
C. there is an inverse relationship between the expected population deviation rate and the sample size
D. in determining tolerable deviation rate, an auditor considers detection risk and the sample size
B. deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate
Which of the following statements is correct concerning statistical sampling in compliance testing?
A. the population size has little or not effect on determining sample size except for very small populations
B. the expected population deviation rate has little or not effect on determining sample size except for very small populations
C. as the population size doubles, the sample size also should double
D. for a given tolerable deviation rate, a larger sample size should be selected as the expected population deviation rate decreases
A. the population size has little or not effect on determining sample size except for very small populations
An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and
A. evaluate the results as if the sample size had been 19
B. treat the missing check as a deviation for the purpose of evaluating the sample
C. treat the missing check in the same manner as the majority of the other 19 checks (i.e., countersigned or not)
D. choose another check to replace the missing check in the sample
B. treat the missing check as a deviation for the purpose of evaluating the sample
An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matched the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
A. constitutes a deviation
B. has been properly voided
C. cannot be located
D. represents an immaterial dollar amount
B. has been properly voided
Which of the following risks is related to efficiency of testing?
A. the risk of incorrect rejection
B. inherent risk
C. the risk of incorrect acceptance
D. none of the above
A. the risk of incorrect rejection
For a large population of cash disbursement transactions, Smith CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3%, Smith found from a table that the required sample is 400 with a tolerable deviation rate of 5% and a desired confidence level of 95%. If Smith anticipated an expected deviation rate of only 2% but closest to
A. 200
B. 400
C. 533
D. 800
A. 200
Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls?
A. number of items in the population
B. total dollar amount of the items to be sampled
C. desired confidence level
D. risk of assessing control risk too high
C. desired confidence level
An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the
A. sample deviation rate plus the allowance for sampling risk equals the tolerable deviation rate
B. sample deviation rate is less than the expected population deviation rate used in planning the sample
C. tolerable deviation rate less the allowance for sampling risk exceeds the sample deviation rate
D. sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate
D. sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate
The risk of incorrect acceptance relates to the
A. effectiveness of the audit
B. efficiency of the audit
C. preliminary estimates of materiality levels
D. tolerable misstatement
A. effectiveness of the audit
In determining the sample size for a test of controls, an auditor should consider the expected deviation rate, desired confidence level, and the
A. tolerable deviation rate
B. risk of incorrect acceptance
C. nature and cause of deviations
D. population size
A. tolerable deviation rate
While performing a substantive 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. Such a situation illustrates the risk of
A. incorrect rejection
B. incorrect acceptance
C. assessing control risk too high
D. assessing control risk too low
A. incorrect rejection
What is the primary objective of testing all individually significant items rather than sample testing?
A. to increase the audit risk at which a decision will be reached from the results of the sample selected
B. to increase sample size
C. to accept no sampling risk for items greater than tolerable misstatement
D. to increase the size of the confidence bound around the projected misstatement
C. to accept no sampling risk for items greater than tolerable misstatement
Monetary-unit sampling should not be used if
A. the population includes several large items
B. the auditor expects overstatement errors
C. many items in the account are expected to have errors
D. no items in the account are expected to have errors
C. many items in the account are expected to have errors
Which of the following would be an improper technique when using monetary-unit statistical sampling in an audit of accounts receivable?
A. combining negative and positive dollar misstatements in the appraisal of a sample
B. using a sampling technique in which the same account balance could be selected more than once
C. selecting a random starting point and then sampling every nth dollar
D. defining the sampling unit in the population as an individual dollar and not as an individual account balance
A. combining negative and positive dollar misstatements in the appraisal of a sample
For monetary-unit sampling, the number of items tested is
A. always equal to sample size
B. always greater than sample size
C. always greater than or equal to sample size
D. always less than or equal to sample size
D. always less than or equal to sample size
An account balance is $300,000 and there are 25 items in the account, six of which have balances that equal or exceed $15,000. The auditor plans to use a monetary-unit sampling plan with systematic sample selection. To ensure that all accounts with balances of at least $15,000 are selected, the sampling interval should be
A. 6
B. 20
C. 12,000
D. 15,000
D. 15,000
In monetary-unit sampling, population size is
A. the dollar balance in an account
B. the number of items in an account
C. unrelated to sample size
D. included in the denominator of the formula to determine sample size
A. the dollar balance in an account
The risk of incorrect acceptance and the risk of over reliance relate to the
A. preliminary estimates of materiality levels
B. allowable risk of tolerable error
C. efficiency of the audit
D. effectiveness of the audit
D. effectiveness of the audit
The use of the ratio projection is most effective when
A. the dollar amount of the misstatement is expected to relate to the dollar amount of items tested
B. a small number of differences exist in the population
C. estimating populations whose records consist of quantities but not book values
D. large understatement differences exist in the population
A. the dollar amount of the misstatement is expected to relate to the dollar amount of items tested
Which of the following statements best describes an inherent limitation of the monetary-unit sampling method?
A. it can only be used for substantive testing of asset accounts
B. it requires the use of a computer system to perform the required calculations
C. misstatement rates must be large and the misstatements must be overstatements
D. misstatement rates must be small and the misstatements must be overstatements
D. misstatement rates must be small and the misstatements must be overstatements
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A. the cashier prepares the daily deposit
B. the cashier makes the daily deposit at a local bank
C. the cashier posts the receipts to the accounts receivable subsidiary ledger cards
D. the cashier endorses the checks
C. the cashier posts the receipts to the accounts receivable subsidiary ledger cards
In connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?
A. selection of accounts receivable for confirmation, based upon the internal auditor's judgment as to how many accounts and which accounts will provide sufficient coverage
B. preparation of schedules for negative accounts receivable responses
C. evaluation of the internal control for accounts receivable and sales
D. determination of the adequacy of the allowance for doubtful accounts
B. preparation of schedules for negative accounts receivable responses
When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ______ assertion.
A. cutoff
B. authorization
C. occurrence
D. completeness
B. authorization
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the
A. cash receipts journal to the sales journal
B. sales journal to the cash receipts journal
C. shipping documents to the accounting records
D. accounting records to the shipping documents
D. accounting records to the shipping documents
Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because:
A. clients are more likely to overstate than understate revenues
B. clients are more likely to understate than overstate revenues
C. it is difficult to determine when services have been performed
D. the allowance for doubtful accounts often is understated
A. clients are more likely to overstate than understate revenues
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because
A. many customers merely sign and return the confirmation without verifying its details
B. recipients usually respond only if they disagree with the information on the request
C. customers may not be inclined to report understatement errors in their accounts
D. auditors typically select many accounts with low recorded balances to be confirmed
C. customers may not be inclined to report understatement errors in their accounts
Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?
A. comparing control totals for shipping documents with corresponding totals for sales invoices
B. using computer programmed controls on the pricing and mathematical accuracy of sales invoices
C. matching shipping documents with approved sales orders before invoice preparation
D. reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger
ledger
Which is not a key segregation of duties for the revenue process? Different parties should
A. prepare shipping orders and prepare bills of lading
B. perform the credit and billing functions
C. perform the shipping and billing function
D. receive cash and adjust accounts receivable
A. prepare shipping orders and prepare bills of lading
Tracing copies of sales invoices to shipping documents will provide evidence that all
A. shipments to customers were recorded as receivables
B. billed sales were shipped
C. accounts receivable ledger is complete
D, shipments to customers were billed
B. billed sales were shipped
Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely
A. send positive confirmation requests
B. send negative confirmation requests
C. examine evidence of subsequent cash receipts
D. inspect the internal records, such as copies of the tax invoices that were mailed to the residents
A. send positive confirmation requests
Which of the following audit procedures is least likely to detect an unrecorded liability?
A. analysis and recomputation of interest expense
B. analysis and recomputation of depreciation expense
C. mailing of standard bank confirmation forms
D. reading of the minutes of meetings of the board of directors
B. analysis and recomputation of depreciation expense
Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable?
A. investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for
B. receiving the client's mail, unopened, for a reasonable period of time after the year-end to search to unrecorded vendor's invoices
C. vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports
D. confirming accounts payable balances with known suppliers who have zero balances
C. vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
A. inquiry and analytical procedures
B. confirmation and observation
C. observation and inquiry
D. analytical procedures and confirmations
C. observation and inquiry
For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the
A. receiving report and the purchase
B. receiving report and the voucher
C. vendor's packing slips and purchase order
D. vendor's packing slip and the voucher
A. receiving report and the purchase
Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client's employees?
A. test footings in the accounts payable ledger
B. reconcile unpaid invoices ti vendors' statements
C. prepare a schedule of accounts payable
D. mail confirmations for selected account balances
C. prepare a schedule of accounts payable
Assertions about classes of transactions and events for the period under audit include:
A. existence, completeness, and accuracy
B. existence, completeness, and classification
C. occurrence, completeness, and cutoff
D. occurrence, completeness, and valuation and allocation
and cutoff
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all
A. merchandise received
B. vendors' invoices
C. canceled checks
D. receiving reports
B. vendors' invoices
Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time?
A. vouchers should be prepared by individuals who are responsible for signing disbursement checks
B. disbursement vouchers should be approved by at least two responsible management officials
C. the date on a disbursement voucher should be within a few days of the date the voucher is presented for payment
D. the official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid"
D. the official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid"
The accounts payable department receives the purchase order form to accomplish all of the following except to
A. compare invoice price to purchase order price
B. ensure that the purchase had been properly authorized
C. ensure that the goods had been received by the party requesting the goods
D. compare quantity ordered to quantity purchased
C. ensure that the goods had been received by the party requesting the goods
Substantive procedures to examine the completeness assertion for accounts payable include
A. selecting a sample of vouchers and agreeing them to authorized purchase orders
B. selecting a sample of vouchers and tracing them to the purchases journal
C. comparing dates on vouchers to dates in the purchases journal
D. recomputing the mathematical accuracy of a sample of vendor invoices
B. selecting a sample of vouchers and tracing them to the purchases journal
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
A. administrative controls from the internal accounting controls
B. human resources function from the controllership function
C. operational responsibility from the record-keeping responsibility
D. authorization of transactions from the custody of related assets
D. authorization of transactions from the custody of related assets
Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
A. there are significant unexplained variances between standard and actual labor costs
B. payroll checks are disbursed by the same employee each payday
C. employee time cards are approved by individual departmental supervisors
D. a separate payroll bank account is maintained on an imprest basis
A. there are significant unexplained variances between standard and actual labor costs
Which of the following procedures would normally be performed by the auditor when making tests of payroll transactions?
A. interview employees selected in a statistical sample of payroll transactions
B. vouch number of hours worked as shown on payroll to time cards and time reports signed by the foreman
C. confirm amounts withheld from employees' salaries with proper governmental authorities
D. examine signatures on paid salary checks
B. vouch number of hours worked as shown on payroll to time cards and time reports signed by the foreman
A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for
A. distributing payroll checks to employees
B. reviewing and approving time reports for subordinate employees
C. hiring subordinate employees
D. initiating requests for salary adjustments for subordinate employees
A. distributing payroll checks to employees
When examining payroll transactions, an auditor is primarily concerned with the possibility of
A. underpayments and properly authorized payments
B. posting of gross payroll amounts to incorrect salary expense accounts
C. misfootings of employee time records
D. excess withholding of amounts required to be withheld
B. posting of gross payroll amounts to incorrect salary expense accounts
In testing the payroll of a large company, the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review. What will be the best source to determine this?
A. telephone contacts with the employees
B. tracing from the payroll register to the employee's earnings records
C. confirmation with the union or other independent organization
D. examination of HR Department records
D. examination of HR Department records
Tracing a sample of time cards before and after period end to the weekly payroll report and tracing the weekly payroll report to the general ledger to verify payroll transactions are recorded in the proper period would gather evidence primarily for which assertion:
A. classification
B. occurrence
C. cutoff
D. valuation
C. cutoff
In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuring its prompt detection?
A. a control total for hours worked, prepared from time cards collected by the Timekeeping Department
B. requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the EDP department for the processing of the payroll
C. use of a check digit for employee numbers
D. use of a header label for the payroll input sheet
A. a control total for hours worked, prepared from time cards collected by the Timekeeping Department
A large retail enterprise has established a policy that requires that the paymaster deliver all unclaimed payroll checks to the Internal Auditing Department at the end of each payroll distribution day. This policy was most likely adopted in order to
A. assure that employees who were absent on a payroll distribution day are not paid for that day
B. prevent the paymaster from cashing checks which are unclaimed for several weeks
C. prevent a bona fide employee's check from being claimed by another employee
D. detect any fictitious employee who may have been placed on the payroll
D. detect any fictitious employee who may have been placed on the payroll
An auditor would consider internal control over a client's payroll procedures to be ineffective if the payroll department supervisor is responsible for
A. hiring subordinate payroll department employees
B. having custody over unclaimed paychecks
C. updating employee earnings records
D. applying pay rates to time tickets
B. having custody over unclaimed paychecks
Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities?
A. inventory cutoff errors
B. misapplication of LIFO
C. unreported scrap or spoilage
D. theft
B. misapplication of LIFO
An auditor will usually trace the details of the test counts made during the observation of the physical inventory count to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
A. owned by the client
B. not obsolete
C. physically present at the time of the preparation of the final inventory schedule
D. included in the final inventory schedule
D. included in the final inventory schedule
Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?
A. obsolete inventory
B. new product line where sales exceed production
C. manufacturing overhead was not allocated to the production process
D. manufacturing salaries were recorded as administrative expenses
A. obsolete inventory
Which of the following departments typically approves purchase requisitions?
A. raw materials stores
B. cost accounting
C. inventory management
D. IT
C. inventory management
A client's physical count of inventories was higher than the inventory quantities per the perpetual records.This situation could be the result of the failure to record
A. sales
B. sales discounts
C. purchases
D. purchase returns
C. purchases
Which of the following best described the occurrence assertion for inventory?
A. purchase requisitions initiated by authorized personnel
B. recorded inventory actually exists
C. inventory properly accumulated from journals and ledgers
D. all inventory is recorded
B. recorded inventory actually exists
An auditor generally tests physical security controls over inventory by
A. test counts and cutoff procedures
B. examination and reconciliation
C. inspection and recomputation
D. inquiry and observation
D. inquiry and observation
To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace
A. inventory tags noted during the auditor's observation to items listed in the inventory listing schedule
B. inventory tags noted during the auditor's observation to items listen in receiving reports and vendors' invoices
C. items listed in the inventory listing schedule to inventory tags and the count sheets
D. items listed in receiving reports and vendors' invoices to the inventory listing schedule
C. items listed in the inventory listing schedule to inventory tags and the count sheets
The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with
A. purchase requisitions
B. receiving reports
C. purchase orders
D. vendor payments
B. receiving reports
The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a
A. sale in the subsequent period
B. purchase in the current period
C. sale in current period
D. purchase return in the subsequent period
C. sale in current period
In testing for unrecorded retirements of equipment, an auditor most likely would
A. select items of equipment from the accounting records and then locate them during the plant tour
B. compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment
C. inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger
D. scan the general journal for unusual equipment additions and
A. select items of equipment from the accounting records and then locate them during the plant tour
Equipment acquisitions that are misclassified as maintenance expenses most likely would be detected by a control activity that provides for
A. segregation of duties of employees in the accounts payable department
B. independent verification of invoices for disbursements recorded as equipment acquisitions
C. investigation of variances within a formal budgeting system
D. authorization by the board of directors of significant equipment acquisitions
B. independent verification of invoices for disbursements recorded as equipment acquisitions
In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding
A. the capitalization vs. expensing policy
C. the need to write-off equipment that has become obsolete
D. the adequacy of depreciation expense
C. the need to write-off equipment that has become obsolete
Complex accounting issues for property, plant, and equipment include all of the following except
A. lease accounting
B. testing goodwill for impairment
C. capitalized interest
D. self-constructed assets
B. testing goodwill for impairment
Testing a sample of repairs and maintenance expense items to ensure that they were properly classified as repairs as opposed to property, plant, and equipment tests which of the following assertions for the repairs and maintenance expense account?
A. occurrence
B. completeness
C. cutoff
D. authorization
A. occurrence
Which of the following is the most important control activity over acquisitions of property, plant, and equipment?
A. establishing a written company policy distinguishing between capital and revenue expenditures
B. using a budget to forecast and control acquisitions and retirements
C. analyzing monthly variances between authorized expenditures and actual costs
D. requiring acquisitions to be made by user departments
B. using a budget to forecast and control acquisitions and retirements
Testing depreciation calculations for a sample of property, plant, and equipment tests the assertion of
A. existence
B. completeness
C. valuation and allocation
D. rights and obligations
C. valuation and allocation
The auditor may conclude that depreciation charges are insufficient by noting
A. insured values greatly in excess of book values
B. large amounts of fully depreciated assets
C. continuous trade-ins of relatively new assets
D. excessive recurring losses on assets retired
D. excessive recurring losses on assets retired
Due to a weakness observed in internal control over recording retirements of equipment, the auditor may decide to
A. inspect certain items of equipment in the plant and trace those items to the accounting records
B. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year
C. trade additions to the "other assets" account to search for equipment that is still on hand but no longer is being used
D. select certain items of equipment from the accounting records and locate them in the plant
D. select certain items of equipment from the accounting records and locate them in the plant
Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?
A. depreciation expense
B. accounts payable
C. cash
D. repairs and maintenance expense
D. repairs and maintenance expense
A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to
A. request a statement from the bond trustee as to the amount of the bonds issued and outstanding
B. confirm the results of the issuance with the underwriter or investment banker
C. trace the cash received from the issuance to the accounting records
D. verify that the net cash received is credited to an account entitled "Bonds Payable"
C. trace the cash received from the issuance to the accounting records
Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of
A. occurrence
B. completeness
C. cutoff
D. accuracy
B. completeness
An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's
A. minutes of board of directors meetings
B. transfer agent's records
C. canceled stock certificates
D. treasury stock certificate book
A. minutes of board of directors meetings
The auditor's program for the examination of long-term debt should include steps that require the
A. verification of the existence of the bondholders
B. examination of any bond agreement
C. inspection of the accounts payable subsidiary ledger
D. investigation of credits to the bond interest income account
B. examination of any bond agreement
The auditor can best verify a client's bond sinking fund transactions and year-end balance by
A. recomputation of interest expense, interest payable, and amortization of bond discount or premium
B. confirmation with individual holders of retired bonds
C. confirmation with the bond trustee
D. examination and count of the bonds retired during the year
C. confirmation with the bond trustee
During an audit, Wicks learns that the audit client was granted a 3-month waiver of the repayment of principal on the installment loan with Blank Bank without an extension of the maturity date which is one year in the future. With respect to this loan, the audit program used by Wicks i least likely to include a verification of the
A. interest expense for the year
B. balloon payment
C. total liability at year-end
D. installment loan payments
B. balloon payment
Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should
A. be defaced to prevent re-issuance and attached to their corresponding stubs
B. not be defaced, but segregated from other stock certificates and retained in a canceled certificates file
D. be defaces and sent to the Secretary of State
A. be defaced to prevent re-issuance and attached to their corresponding stubs
Before expressing an opinion concerning the results of operations, the auditor would best proceed with the examination of the income statement by
A. applying a rigid measurement standard designed to test for understatement of net income
B. analyzing the beginning and ending balance sheet inventory amounts
C. making net income comparisons to published industry trends and ratios
D. examining income statement accounts concurrently with the related balance sheet accounts
D. examining income statement accounts concurrently with the related balance sheet accounts
During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that
A. long-term debt is understated
B. discount on bonds payable is overstated
C. long-term debt is overstated
D. premium on bonds payable is understated
A. long-term debt is understated
A control that ensures that long-term borrowing is properly initiated by appropriate individuals addresses the control assertion of
A. occurrence
B. authorization
C. completeness
D. valuation
B. authorization
Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
A. tracing recorded dividend income to cash receipts records and validated deposit slips
B. utilizing analytical procedures and statistical sampling
C. comparing recorded dividends with amounts appearing on federal income forms 1099
D. comparing recorded dividends with a standard financial reporting service's record of dividends
D. comparing recorded dividends with a standard financial reporting service's record of dividends
In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding
A. existence
B. rights and obligations
C. completeness
D. all of the above
D. all of the above
Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of
A. completeness
B. disclosure
C. valuation and allocation
D. rights and obligations
D. rights and obligations
The auditor should insist that a representative of the client be present during the physical examination of securities in order to
A. lend authority to the auditor's directives
B. detect forged securities
C. coordinate the return of all securities to proper locations
D. acknowledge the receipt of securities returned
D. acknowledge the receipt of securities returned
An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether
A. the cash receipts journal was held open for a few days after the year-end
B. the last checks recorded before the year end were actually mailed by the year-end
C. cash balances were overstated because of kiting
D. any unusual payments to or receipts from related parties occurred
C. cash balances were overstated because of kiting
Auditor's will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist:
A. management is objective and transparent in their assumptions
B. management's key assumptions are subject to volatility
C. the entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an active market
D. the entity does not have control weaknesses in its valuation processes
B. management's key assumptions are subject to volatility
Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?
A. occurrence
B. completeness
C. cutoff
D, accuracy
A. occurrence
Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?
A. to determine whether securities are authentic
B. to determine whether securities are the property of the client
C. to determine whether securities actually exist
D. to determine whether securities are properly classified on the balance sheet
B. to determine whether securities are the property of the client
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the
A. chief accountant
B. internal auditor
C. cashier
D. treasurer
D. treasurer
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fun maintained on an imprest basis?
A. reimbursement vouchers are not prenumbered
B. reimbursement of the fund from the general cash account occurs twice or more each week
C. the custodian occasionally uses the cash fund to cash employee checks
D. the custodian endorses reimbursement checks
A. reimbursement vouchers are not prenumbered
Which of the following auditing procedures is ordinarily performed last?
A. Confirming accounts payable
B. Testing the purchasing function
C. Reading the minutes of directors' meetings
D. Obtaining a management representation letter
D. Obtaining a management representation letter
The refusal of a client's attorney to provide a representation on the legality of a particular act committed by the client is generally
A. Sufficient reason to issue a "subject to" qualified opinion
B. Considered to be a scope limitation
C. Insufficient reason to modify the auditor's report because of the attorney's obligation of confidentiality
D. Proper grounds to withdraw from the engagement without further consideration
B. Considered to be a scope limitation
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to
A. Extend auditing procedures
B. Accept responsibility for all events between year-end and the audit report date
C. Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report
D. Assume responsibility for events subsequent to the issuance of the auditor's report
A. Extend auditing procedures
Which of the following expressions is least likely to be included in a client's representation letter?
A. No events have occurred subsequent to the balance sheet date that require adjustment to or disclosure in, the financial statements
B. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance
C. Management acknowledges responsibility for illegal actions committed by its employees
D. Management has made available all financial statements and related data
C. Management acknowledges responsibility for illegal actions committed by its employees
An example of a Type 1 subsequent event is
A. A tornado that destroys a client's factory after the balance sheet date
B. An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the client's fiscal year) that a large portion of the client's inventory is obsolete
C. Notification of an IRS audit after the balance sheet date
D. The client's Board of Directors unexpectedly resigns after the balance sheet date
B. An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the client's fiscal year) that a large portion of the client's inventory is obsolete
An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of field work but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of field work was
A. Limited to the specific event referenced
B. Limited to include only events occurring before the date of the last subsequent event referenced
C. Extended to subsequent events occurring through the date of issuance of the report
D. Extended to include all events occurring since the completion of field work
A. Limited to the specific event referenced
Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
A. This communication is required to occur before the auditor's report on the financial statements is issued
B. This communication should include management changes in the application of significant accounting policies
C. Any significant matter communicated to those charged with governance also should be communicated to management
D. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance
B. This communication should include management changes in the application of significant accounting policies
Which of the following statements ordinarily is included among the written client representations obtained by the auditor?
A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed
B. Management acknowledges responsibility for illegal actions committed by employees
C. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion
D. Management acknowledges that there are no material weaknesses in the account balances
A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed
After an audit report containing an unqualified opinion on a nonpublic client's financial statements is issued, the auditor learns that the client has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should
A. Determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued
B. Notify the entity that the auditor's report may no longer be associated with the financial statements
C. Describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements
D. Take no action because the auditor has no obligation to make any further inquiries
D. Take no action because the auditor has no obligation to make any further inquiries
Which of the following procedures should an auditor generally perform regarding subsequent events?
A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited
B. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests
C. Communicate material weaknesses in internal controls to those charged with governance
D. Review the cutoff bank statements for several months after year-en
A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited
When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)
A. "Subject to" qualified opinion
B. Disclaimer of opinion
C. Adverse opinion
D. Unqualified opinion with a separate explanatory paragraph
B. Disclaimer of opinion
When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the
A. Periods presented plus the one preceding period
B. Current period only
C. Current period and those of the other periods presented
D. Current and immediately preceding period only
C. Current period and those of the other periods presented
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A. Inspecting title documents to verify whether any assets are pledged as collateral
B. Confirming with third parties the details of arrangements to maintain financial support
C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation
D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry
B. Confirming with third parties the details of arrangements to maintain financial support
Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report?
A. A change in accounting estimate
B. A change in accounting principle
C. A change in the companies included in combined financial statements
D. A correction of an error in principle
A. A change in accounting estimate
Which of the following would be considered a change that affects consistency
A. Change in accounting estimate
B. Change in accounting principle
C. Change in classification and reclassification
D. All of the above
B. Change in accounting principle
An auditor's report on financial statements prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles should include all of the following except
A. An opinion as to whether the basis of accounting used is appropriate under the circumstances
B. An opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting
C. Reference to the note to the financial statements that describes the basis of presentation
D. A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles
A. An opinion as to whether the basis of accounting used is appropriate under the circumstances
Abbot, CPA, as principal auditor for consolidated financial statements is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit?
A. He need make no reference
B. He must refer to the qualification of the other auditor and qualify his report likewise
C. He must include the other auditor's report with his report but need not qualify his report
D. He must include the other auditor's report with his report and give an explanation of its significance
A. He need make no reference
Which of the following would be considered a change that does not affect consistency?
A. Change expected to have a material future effect
B. Change in accounting principle
C. Correction of an error in principle
D. None of the above are considered changes that do not affect consistency
A. Change expected to have a material future effect
A scope limitation sufficient to preclude an unqualified opinion always will result when management
A. Prevents the auditor from reviewing the working papers of the predecessor auditor
B. Engages the auditor after the year-end physical inventory is completed
C. Requests that certain material accounts receivable not be confirmed
D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP
D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP
The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the
A. Ability to expand operations into new product lines in the future
B. Feasibility of plans to purchase leased equipment at less than market value
C. Marketability of assets that management plans to sell
D. Committed arrangements to convert preferred stock to long-term debt
C. Marketability of assets that management plans to sell