Which of the following is least likely to be considered a risk assessment procedure?

Analytical procedures.

Confirmation of ending accounts receivable.

Inspection of documents.

Observation of the performance of certain accounting procedures.

 

An auditor’s engagement letter most likely would include a statement regarding

Management’s responsibility to provide certain written representations to the auditor.

Conditions under which the auditor may modify the preliminary judgment about materiality.

Internal control activities that would reduce the auditor’s assessment of control risk.

Materiality matters that could modify the auditor’s preliminary assessment of fraud risk.

 

Which of the following describes a weakness in accounts payable procedures?

The accounts payable clerk files invoices and supporting documentation after payment.

The accounts payable clerk manually verifies arithmetic on the vendor invoice.

The accounts payable system compares the receiving report to the vendor invoice.

The accounts payable manager issues purchase order

 

Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Assess control risk.

Obtain a management representation letter.

Confirm account balances.

Perform a physical inventory observati

 

Which of the following procedures would least likely result in the discovery of possible illegal acts?

Reading the minutes of the board of directors’ meetings.

Making inquiries of the client’s management.

Performing tests of details of transactions.

Reviewing an internal control questionnaire.

 

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year's financial statements and compiled those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year's audited financial statements. This separate paragraph should indicate

The type of opinion expressed previously.

That the CPA did not update the assessment of control risk.

The reasons for the change from an audit to a review.

That the audit report should no longer be relied on.

 

Individuals who commit fraud are ordinarily able to rationalize the act and also have an

  Incentive    Opportunity  

Yes Yes

Yes No 

No Yes 

No No

 

An engagement in which a CPA considers security, availability, processing integrity, online privacy, and/or confidentiality over any type of defined electronic system is most likely to considered which of the following types of engagements?

Internal control over financial reporting.

SysTrust.

Web-site Associate.

WebTrust

 

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?

Are purchase requisitions prenumbered and independently matched with vendor invoices?

Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

 

Which of the following statements is correct about an auditor's required communication with those charged with governance of an audit client?

Any matters communicated to the entity's audit committee also are required to be communicated to the entity's management.

The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management.

Disagreements with management about the application of accounting principles are required to be communicated in writing to those charged with governance.

Weaknesses in internal control previously reported to those charged with governance need not be recommunicated.

 

Comfort letters ordinarily are signed by the client's

Independent auditor.

Underwriter of securities.

Audit committee.

Senior management.

 

Following the Professional Standards which of the following is not one of the assertions made by management for account balances?

Completeness.

Existence.

Valuation and allocation.

Relevance and reliability.

 

Under Statements on Auditing Standards, which of the following would be classified as an error?

Misappropriation of assets for the benefit of management.

Misinterpretation by management of facts that existed when the financial statements were prepared.

Preparation of records by employees to cover a fraudulent scheme.

Intentional omission of the recording of a transaction to benefit a third party

 

Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of control policies and procedures.

One of the techniques involved in this approach makes use of

 

Controlled reprocessing.

 

An integrated test facility.

 

Input validation.

 

Program code checking.

 

Which of the following statements is correct regarding the auditor’s consideration of the possibility of illegal acts by clients?

 

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that no illegal acts have been committed by clients.

 

The auditor’s training, experience, and understanding of the client should be used to provide a basis for the determination as to whether illegal acts have occurred.

 

If specific information concerning an illegal act comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

 

If an illegal act has occurred, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole.

 

 

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of

 

Valuation or allocation.

 

Existence or occurrence.

 

Completeness.

 

Rights and obligations.

 

 

An auditor's primary consideration regarding an entity's internal control structure policies and procedures is whether the policies and procedures

 

Affect the financial statement assertions.

 

Prevent management override.

 

Relate to the control environment.

 

Reflect management's philosophy and operating style

 

 

A violation of the profession’s ethical standards least likely would have occurred when a CPA

 

Purchased another CPA’s accounting practice and based the price on a percentage of the fees accruing from clients over a 3-year period.

 

Received a percentage of the amounts invested by the CPA’s audit clients in a tax shelter with the client’s knowledge and approval.

 

Had a public accounting practice and also was president and sole stockholder of a corporation that engaged in data processing services for the public.

 

Formed an association, not a partnership, with two other sole practitioners and called the association "Adams, Betts and Associates."

 

 

 

When assessing the internal auditor's competence, the independent CPA should obtain information about the

 

Organizational level to which the internal auditors report.

 

Educational background and professional certification of the internal auditors.

 

Policies prohibiting the internal auditors from auditing areas where relatives are employed.

 

Internal auditors' access to records and information that is considered sensitive.

 

Which of the following is an inherent limitation of internal controls?

 

Judgmental sampling.

 

Collusion.

 

Segregation of duties.

 

Employee peer review.

 

 

A PCAOB engagement that focuses on the sufficiency of a CPA firm's quality control system is most likely to be referred to as a(n)

 

Financial statement audit.

 

Inspection.

 

Peer review.

 

Quality control.

 

 

After issuance of the auditor’s report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless

 

A final resolution of a contingency that had resulted in a qualification of the auditor’s report is made.

 

A development occurs that may affect the client’s ability to continue as a going concern.

 

An investigation of the auditor’s practice by a peer review committee ensues.

 

New information is discovered concerning undisclosed related-party transactions of the previously audited period.

 

 

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard report for which of the following matters?

  Inability to assess 

the risk of material 

misstatement 

due to fraud    Discovery of significant 

deficiencies in the 

design of the entity's 

internal control  

 

 Yes Yes 

 

 Yes No 

 

 No Yes 

 

 No No 

 

 

 

A CPA’s standard report on a nonpublic company's audited financial statements would be inappropriate if it referred to

 

Management’s responsibility for the financial statements.

 

An assessment of the entity’s accounting principles.

 

Significant estimates made by management.

 

The CPA’s assessment of sampling risk factors

 

 

In order to safeguard the assets through proper internal control, accounts receivable that are written off are transferred to a(n)

 

Separate ledger.

 

Attorney for evidence in collection proceedings.

 

Tax deductions files.

 

Credit manager since customers may seek to reestablish credit by paying.

 

Which of the following statements is correct concerning related-party transactions?

 

In the absence of evidence to the contrary, related-party transactions should be assumed to be outside the ordinary course of business.

 

An auditor should determine whether a particular transaction would have occurred if the parties had not been related.

 

An auditor should substantiate that related-party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions.

 

The audit procedures directed toward identifying related-party transactions should include considering whether transactions are occurring, but are not being given proper accounting recognition.

 

 

 

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when

 

I.  Reproducing client-prepared financial statements, without modification, as an accommodation to a client.

II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.

 

I only.

 

II only.

 

Both I and II.

 

Neither I nor II

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an

 

Understatement of revenues, receivables, and inventory.

 

Overstatement of revenues and receivables, and an understatement of inventory.

 

Understatement of revenues and receivables, and an overstatement of inventory.

 

Overstatement of revenues, receivables, and inventory.

Before performing a review of a nonpublic entity’s financial statements, an accountant should

 

Complete a series of inquiries concerning the entity’s procedures for recording, classifying, and summarizing transactions.

 

Apply analytical procedures to provide limited assurance that no material modifications should be made to the financial statements.

 

Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.

 

Inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except

 

Cutoff bank statement.

 

Year-end bank statement.

 

Bank confirmation.

 

General ledge

Which of the following statements concerning audit evidence is correct?

 

To be appropriate, audit evidence should be both relevant and reliable.

 

Reliable evidence is equivalent to sufficient evidence.

 

The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.

 

A client’s accounting data can be sufficient audit evidence to support the financial statements.

 

Which of the following statements is correct?

 

Client-prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received.

 

CPA working papers are the joint property of the CPA and the client.

 

CPA working papers that include copies of client’s records are not available to third parties under any circumstances.

 

Supporting records not reflected in the client’s records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.

 

 

After obtaining an understanding of internal control and assessing control risk of an entity, an auditor decided not to perform tests of controls. The auditor most likely decided that

 

The available audit evidence obtained through tests of controls would not support an increased level of control risk.

 

A reduction in the assessed level of control risk is justified for certain financial statement assertions.

 

It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.

 

The assessed level of inherent risk exceeded the assessed level of control risk

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs

 

Tests of controls and extensive tests of property and equipment balances at the end of the year.

 

Analytical procedures for current year property and equipment transactions.

 

Tests of controls and limited tests of current year property and equipment transactions.

 

Analytical procedures for property and equipment balances at the end of the year

 

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?

 

Inspect checks included with the client’s cutoff bank statement.

 

Obtain a letter of representations from the client’s underwriter of securities.

 

Apply ratio analysis on the current year’s liability accounts.

 

Read the file of correspondence from taxing authorities.

 

For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent

  In the 

risk assessment 

stage    As a 

substantive 

procedure    Near-audit 

completion  

 

 Yes No Yes 

 

 No Yes No 

 

 No Yes Yes 

 

 Yes No No 

 

According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?

 

Refusing to provide the client with copies of the CPA's workpapers.

 

Auditing financial statements according to governmental standards despite the client's preferences.

 

Accepting a commission from a nonattest function client.

 

Retaining client records after the client demands their return.

 

 

A CPA in public practice may not disclose confidential client information regarding auditing services without the client’s consent in response to which of the following situations?

 

A review of the CPA’s professional practice by a state CPA society.

 

A letter to the client from the IRS.

 

An inquiry from the professional ethics division of the AICPA.

 

A court-ordered subpoena or summons.

 

 

Which of the following is most likely to be presumed to represent fraud risk on an audit?

 

Capitalization of repairs and maintenance into the property, plant, and equipment asset account.

 

Improper revenue recognition.

 

Improper interest expense accrual.

 

Introduction of significant new products.

 

 

When the auditor of group financial statements (the “principal auditor”) is performing an audit in conformity with International Auditing Standards and a component (other) auditor is involved, which of the following is correct?

 

The auditor of the group financial statements must refer to the component auditor and must name that auditor.

 

The auditor of the group financial statements may, but is not required to, refer to the component auditor.

 

The component auditor must issue its report on the portions of the financial statements it has audited and this report must be included with the report on the group financial statements.

 

The auditor of the group financial statements may not refer to the component auditor

 

 

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States?

 

All companies.

 

SEC registrants.

 

All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth.

 

All nonissuer companies.

 

 

International Auditing and Assurance Standards Board pronouncements govern

  Audits       Other assurance engagements  

 

 Yes Yes 

 

 Yes No 

 

 No Yes 

 

 No No 

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?

 

Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.

 

Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.

 

Determine whether inadequate provisions for the safeguarding of assets have been corrected.

 

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.

 

 

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatement arising from fraudulent financial reporting?

 

There is a lack of interest by management in maintaining an earnings trend.

 

Computer hardware is usually sold at a loss before being fully depreciated.

 

Management had frequent disputes with the auditor on accounting matters.

 

Monthly bank reconciliations usually include several large checks outstanding.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during risk assessment?

 

Turnover of personnel in the accounting department.

 

Objectivity of audit committee members.

 

Square footage of selling space.

 

Management's plans to repurchase stock.

 

 

Which of the following is not a financial statement assertion relating to account balances?

 

Completeness.

 

Existence.

 

Rights and obligations.

 

Valuation and competence.

 

 

A primary purpose of performing analytical procedures as risk assessment procedures is to identify the existence of

 

Unusual transactions and events.

 

Illegal acts that went undetected because of internal control weaknesses.

 

Related-party transactions.

 

Recorded transactions that were not properly authorized

 

 

When considering internal control to determine whether the necessary procedures are designed and operating effectively, an auditor must

 

Develop questionnaires and checklists.

 

Perform tests of controls.

 

Perform analytical procedures.

 

Perform substantive tests.

 

The use of fidelity bonds protects a company from embezzlement losses and also

 

Minimizes the possibility of employing persons with dubious records in positions of trust.

 

Reduces the company’s need to obtain expensive business interruption insurance.

 

Allows the company to substitute the fidelity bonds for various parts of internal control.

 

Protects employees who made unintentional errors from possible monetary damages resulting from such errors.

 

 

What body establishes international auditing standards?

 

The Public Company Accounting Oversight Board.

 

The International Federation of Accountants.

 

The World Bank.

 

The International Assurance Body.

 

 

 

The objective of tests of details of transactions performed as substantive procedures is to

 

Comply with generally accepted auditing standards.

 

Attain assurance about the reliability of the accounting system.

 

Detect material misstatements in the financial statements.

 

Evaluate whether management's policies and procedures operated effectively.

If an accountant submits compiled financial statements to a client that are reasonably expected to be used by a third party, which of the following is correct?

 

A compilation report is required.

 

No compilation report is required, but an engagement letter must indicate that the financial statements are to be used by a third party.

 

Notes describing the compilation must be included with the financial statements.

 

Compilations are not allowable under such a circumstance

 

 

Which of the following client information technology (IT) systems generally can be audited without examining or directly testing the IT computer programs of the system?

 

A system that performs relatively uncomplicated processes and produces detailed output.

 

A system that affects a number of essential master files and produces a limited output.

 

A system that updates a few essential master files and produces no printed output other than final balances.

 

A system that performs relatively complicated processing and produces very little detailed output.

 

 

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the

 

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

 

Daily cash summaries with the sums of the cash receipts journal entries.

 

Individual bank deposit slips with the details of the monthly bank statements.

 

Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

 

 

What assurance does the auditor provide that misstatements due to errors, fraud, and direct effect illegal acts that are material to the financial statements will be detected?

  Errors    Fraud    Direct effect 

illegal acts  

 

 Limited Negative Limited 

 

 Limited Limited Reasonable 

 

 Reasonable Limited Limited 

 

 Reasonable Reasonable Reasonable 

 

 

 

 

Audits of financial statements are designed to obtain assurance of detecting misstatement due to

  Errors    Fraudulent financial 

reporting    Misappropriation 

of assets  

 

 Yes Yes Yes 

 

 Yes Yes No 

 

 Yes No Yes 

 

 No Yes No 

 

In verifying the amount of goodwill recorded by a client, the most convincing evidence which an auditor can obtain is by comparing the recorded value of assets acquired with the

 

Assessed value as evidenced by tax bills.

 

Seller’s book value as evidenced by financial statements.

 

Insured value as evidenced by insurance policies.

 

Appraised value as evidenced by independent appraisals.

 

 

When an auditor discovered that certain control activities were ineffective, the auditor most likely would increase the

 

Level of detection risk.

 

Extent of tests of details.

 

Level of inherent risk.

 

Extent of tests of controls.

 

Which of the following is not a likely response when an auditor has determined that a misstatement is, or may be, the result of fraud, and has determined that the effect on the financial statements may be material?

 

Consider the implications for other aspects of the audit.

 

Discuss the matter and approach to further investigation with an appropriate level of management.

 

Attempt to obtain additional evidential matter to determine whether material fraud has occurred or is likely to have occurred.

 

Suggest that the client contact a local law enforcement authority to report the possible fraud.

 

 

A written representation from a client's management which, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

 

Chief executive officer and the chief financial officer.

 

Chief financial officer and the chairman of the board of directors.

 

Chairman of the audit committee of the board of directors.

 

Chief executive officer, the chairman of the board of directors, and the client's lawyer.

 

 

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are

 

Susceptible to bias.

 

Consistent with prior periods.

 

Insensitive to variations.

 

Similar to industry guidelines

 

 

Locke, CPA, was engaged to perform an audit for Vorst Co. During the audit, Locke discovered that Vorst's inventory contained stolen goods. 

Vorst was indicted and Locke was validly subpoenaed to testify at the criminal trial. Vorst has claimed accountant-client privilege to prevent Locke from testifying.

Locke may be compelled to testify

 

Only with Vorst's consent.

 

In any federal court located in the 50 states.

 

In any state court.

 

Only about the nature of the work performed in the audit

 

 

Which of the following is not true about international auditing standards?

 

International auditing standards do not require an audit of internal control.

 

International auditing standards do not allow reference to division of responsibilities in the audit report.

 

International auditing standards require obtaining an attorney's letter.

 

International auditing standards are based on a risk assessment approach.

 

 

When a client will not make essential corporate minutes available to the auditor, the audit report will probably contain a(n)

 

Unmodified opinion.

 

Adverse opinion.

 

Qualified opinion.

 

Disclaimer of opinion.

 

 

When using a statistical sampling plan, the auditor would probably require a smaller sample if the

 

Population increases.

 

Desired sampling risk decreases.

 

Desired sampling risk increases.

 

Expected error occurrence rate increase

 

 

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

 

Turnover of senior accounting personnel is low.

 

Insiders recently purchased additional shares of the entity's stock.

 

Management places substantial emphasis on meeting earnings projections.

 

The rate of change in the entity's industry is slow.

 

 

According to the requirements of the public accounting profession, which of the following activities may be required in exercising due care?

  Consulting 

with experts    Obtaining 

specialty accreditation  

 

 Yes Yes 

 

 Yes No 

 

 No Yes 

 

 No No 

 

 

Which of the following may not be required on a particular audit of a nonissuer (nonpublic) company?

 

Risk assessment procedures.

 

Tests of controls.

 

Substantive procedures.

 

Analytical procedures

 

 

A client is a defendant in a patent infringement lawsuit against a major competitor.  Which of the following items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?

 

A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.

 

A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.

 

An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.

 

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

 

 

 

Which of the following is least likely to be considered a risk assessment procedure?

 

Analytical procedures.

 

Confirmation of ending accounts receivable.

 

Inspection of documents.

 

Observation of the performance of certain accounting procedures.

576 quiz answers

Week 1

Question #1 (AICPA.900546AUD-AU) ________________________________________

The first general standard requires that an audit of financial statements is to be performed by a person or persons having

  A.  Seasoned judgment in varying degrees of supervision and review.

  B.  Adequate technical training and proficiency.

The first general standard requires that the audit be performed by individuals with adequate technical training and proficiency as an auditor. The auditor must have obtained a proper education in accounting and auditing and then increase his/her knowledge and proficiency through experience.

  C.  Knowledge of the standards of field work and reporting.

  D.  Independence with respect to the financial statements and supplementary disclosures.

Question #2 (AICPA.901139AUD-AU) ________________________________________

Which of the following standards requires a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision?

  A.  Proficiency.

  B.  Audit risk.

  C.  Inspection.

  D.  Due care.

The third general standard, due care in the performance of work, requires critical review at every level of supervision of the work done and the judgment exercised by those assisting in the audit.

Question #3 (AICPA.901142AUD-AU) ________________________________________

An auditor uses the knowledge provided by the understanding of the internal control structure and the final assessed level of control risk primarily to determine the nature, timing, and extent of the

  A.  Attribute tests.

  B.  Compliance tests.

  C.  Tests of controls.

Attribute tests, compliance tests, and tests of controls all refer to the same tests. Although the knowledge gained by the auditor is also used to identify controls which may be tested, that is not the primary purpose.

  D.  Substantive tests.

The knowledge gained by an auditor in obtaining a sufficient understanding of internal control and in assessing control risk is used to: 1) identify types of potential misstatements; 2) consider factors that affect the risk of material misstatements; and 3) design substantive tests.

Question #4 (AICPA.921109AUD-AU) ________________________________________

An auditor's primary consideration regarding an entity's internal control structure policies and procedures is whether the policies and procedures

  A.  Affect the financial statement assertions.

The auditor's primary interest in internal controls is whether the controls affect the financial statement assertions. The internal control system is evaluated in terms of its ability to prevent or detect material misstatements in the financial statements.

  B.  Prevent management override.

  C.  Relate to the control environment.

  D.  Reflect management's philosophy and operating style.

Question #5 (AICPA.941131AUD-AU) ________________________________________

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including

  A.  Inquiry.

Evidential matter about control risk is obtained by the auditor through inquiry, observation, and inspection of documentation, among other techniques.

  B.  Analytical procedures.

Analytical procedures are used for planning, as substantive auditing procedures, and for overall review. They would not be used to obtain evidential matter about control risk.

  C.  Calculation.

  D.  Confirmation.

Question #6 (AICPA.070631AUD) ________________________________________

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters does the auditor and management agree upon at this time?

  A.  The appropriateness of the entity's plans for dealing with adverse economic conditions.

  B.  The determination of the fraud risk factors that exist within the client's operations.

  C.  The control weaknesses to be included in the communication with the audit committee.

  D.  The coordination of the assistance of the client's personnel in data preparation.

During the planning stage, the auditor and management would agree on the assistance to be provided by the client's personnel, e.g., preparation of schedules, retrieval of supporting documentation, and the timing of such assistance.

Question #7 (AICPA.070633AUD) ________________________________________

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

  A.  The CPA does not understand the entity's operations and industry.

A CPA may accept a new audit engagement even if he/she does not understand the entity's operations and industry. However, before the engagement is completed such knowledge must be obtained.

  B.  Management acknowledges that the entity has had recurring operating losses.

  C.  The CPA is unable to review the predecessor auditor's working papers.

  D.  Management is unwilling to permit inquiry of its legal counsel.

The CPA is required by GAAS to make certain inquiries of the client's legal counsel. Management's refusal to permit such inquiries is an indication of a possible lack of management integrity, a problem of such importance that it could cause the CPA to decline the engagement.

Question #8 (AICPA.900502AUD-AU) ________________________________________

Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of analytical procedures?

  A.  Whether the data were processed in an EDP system or in a manual accounting system.

This is a poorly worded and difficult question. It asks for the factor which would LEAST influence data reliability.

The question of processing in an EDP system or in a manual system is least important as it is the internal controls in place over either system that would make a difference.

  B.  Whether sources within the entity were independent of those who are responsible for the amount being audited.

  C.  Whether the data were subjected to audit testing in the current or prior year.

  D.  Whether the data were obtained from independent sources outside the entity or from sources within the entity.

Question #9 (AICPA.910535AUD-AU) ________________________________________

A previously communicated significant deficiency ordinarily should be communicated again if

  A.  The deficiency has a material effect on the auditor's assessment of control risk.

Although the auditor would need to take into account in audit planning any deficiency that has a material effect on the auditor's assessment of control risk, a previously communicated significant deficiency must continue to be reported as long as it has not been corrected.

  B.  Those charged with governance accept that degree of risk because of cost-benefit considerations.

  C.  The weakness could adversely affect the entity's ability to achieve its operating objectives.

  D.  It has not been corrected.

A previously communicated significant deficiency must be reported as long as it has not been corrected.

Question #10 (AICPA.911142AUD-AU) ________________________________________

Which of the following statements concerning analytical procedures is correct?

  A.  Analytical procedures may be omitted entirely for some financial statement audits.

  B.  Analytical procedures used in planning the audit should not use nonfinancial information.

Although analytical procedures used in planning the audit frequently use only financial data, the auditor is free to use nonfinancial information as well.

  C.  Analytical procedures usually are effective and efficient for tests of controls.

  D.  Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Analytical procedures may be performed as substantive procedures, which may alone, or combined with tests of details, provide the appropriate level of assurance for some assertions.

Question #11 (AICPA.900549AUD-AU) ________________________________________

Which of the following is the authoritative body designated to promulgate attestation standards?

  A.  Auditing Standards Board.

Statements on Standards for Attestation Engagements are issued by the AICPA's Auditing Standards Board.

  B.  Governmental Accounting Standards Board.

  C.  Financial Accounting Standards Board.

  D.  U.S. Government Accountability Office.

Question #12 (AICPA.900501AUD-AU) ________________________________________

As the acceptable level of detection risk decreases, an auditor may change the

  A.  Timing of substantive tests by performing them at an interim date rather than at year end.

  B.  Nature of substantive tests from a less effective to a more effective procedure.

Reduction of detection risk results in the need for an increase in substantive testing, which can be achieved by changing the nature, timing, or extent of substantive testing to be performed. 

Changing to a more effective procedure provides the needed increase in substantive testing.

  C.  Timing of tests of controls by performing them at several dates rather than at one time.

  D.  Assessed level of inherent risk to a higher amount.

Question #13 (AICPA.900560AUD-AU) ________________________________________

A CPA in public practice must be independent in fact and appearance when providing which of the following services?

Preparation of a tax return  Compilation of a financial forecast  Compilation of personal financial statements 

  Yes No No  

A CPA is not required to be independent in preparing a tax return, compiling a financial forecast, or compiling personal financial statements. 

As a tax return preparer, the CPA is acting as the client's advocate and cannot be independent. A CPA who lacks independence can compile financial forecasts or personal financial statements as long as the lack of independence is disclosed.

  No Yes No  

  No No Yes  

  No No No  

A CPA is not required to be independent in preparing a tax return, compiling a financial forecast, or compiling personal financial statements. 

As a tax return preparer, the CPA is acting as the client's advocate and cannot be independent. A CPA who lacks independence can compile financial forecasts or personal financial statements as long as the lack of independence is disclosed.

Question #14 (AICPA.900532AUD-AU) ________________________________________

The primary objective of procedures performed to obtain an understanding of the internal control structure is to provide an auditor with

  A.  Evidential matter to use in reducing detection risk.

  B.  Knowledge necessary to plan the audit.

Recall that the second standard of field work requires the auditor to obtain a sufficient understanding of the entity and its environment, including internal control to enable planning of the audit and determination of the nature, timing, and extent of the tests to be performed. 

The primary objective, therefore, of procedures performed to obtain an understanding of internal control is to provide an auditor with knowledge necessary to plan the audit.

  C.  A basis from which to modify tests of controls.

  D.  Information necessary to prepare flowcharts.

Question #15 (AICPA.941145AUD-AU) ________________________________________

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies?

  A.  A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.

Significant deficiencies may not be corrected by management because of cost or other considerations. The failure to correct a significant deficiency does not necessarily cause a scope limitation. An audit utilizing primarily substantive procedures would not rely as heavily on internal controls so that internal control deficiencies may not represent a scope limitation.

  B.  An auditor should perform tests of controls on significant deficiencies before communicating them to the client.

  C.  An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

Distribution of reports on significant deficiencies should be restricted for the use of the audit committee, management, and others within the organization. If governmental reporting requirements exist, specific reference to regulatory authorities may be made.

  D.  An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.

Question #16 (AICPA.911103AUD-AU) ________________________________________

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

  A.  Reviewing investment transactions of the audit period to determine whether related parties were created.

  B.  Performing analytical procedures to identify areas that may represent specific risks.

Analytical procedures must be performed in planning a financial statement audit. They focus on enhancing the auditor's understanding of the business and identifying areas that may represent specific risks relevant to the audit.

  C.  Reading the minutes of stockholder and director meetings to discover whether any unusual transactions have occurred.

  D.  Obtaining a written representation letter from the client to emphasize management's responsibilities.

Question #17 (AICPA.920537AUD-AU) ________________________________________

When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the

  A.  Extent of tests of details.

An increase in the assessed level of control risk would be accompanied by a decrease in the level of detection risk and an increase in the extent of tests of details.

The relationship between the assessed level of control risk and the extent of tests of details is direct.

  B.  Level of inherent risk.

An increase in the assessed level of control risk would be accompanied by a decrease in the level of detection risk and an increase in the extent of tests of details. Inherent risk is assessed independently and would not be impacted by an increase in the assessed level of control risk.

  C.  Extent of tests of controls.

  D.  Level of detection risk.

Question #18 (AICPA.940507AUD-AU) ________________________________________

An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the

  A.  Auditor is precluded from obtaining sufficient competent evidence about the illegal act.

  B.  Illegal act has an effect on the financial statements that is both material and direct.

  C.  Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.

  D.  Client refuses to accept the auditor's report as modified for the illegal act.

If the auditor determines that an illegal act has been committed and is not properly accounted for or disclosed, a GAAP departure exists and the normal alternatives for a GAAP departure would be a qualified or adverse opinion. However, because of the additional concerns related to the fact that the GAAP departure has arisen because of the commission of an illegal act, the auditor would withdraw if the client refused to accept the auditor's report as modified to disclose the effects for the illegal act.

Question #19 (AICPA.931109AUD-AU) ________________________________________

In performing an attestation engagement, a CPA typically

  A.  Supplies litigation support services.

  B.  Assesses control risk at a low level.

  C.  Expresses a conclusion about an assertion.

In an attest engagement, the practitioner is engaged to express an opinion about subject matter or an assertion about subject matter that is the responsibility of another party.

  D.  Provides management consulting advice.

An attest engagement does not involve the provision of management consulting advice.

Question #20 (AICPA.070621AUD) ________________________________________

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

  A.  There is a lack of interest by management in maintaining an earnings trend.

  B.  Computer hardware is usually sold at a loss before being fully depreciated.

  C.  Management had frequent disputes with the auditor on accounting matters.

The existence of frequent disputes between management and the auditor on accounting matters is a factor that increases the risk of material misstatement arising from fraudulent financial reporting. It is an attitude/rationalization that may allow or justify fraudulent financial reporting.

  D.  Monthly bank reconciliations usually include several large checks outstanding.

 

Week 2

Question #1 (AICPA.901148AUD-AU) ________________________________________

The most likely result of ineffective internal control policies and procedures in the revenue cycle is that

  A.  Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped.

  B.  Omission of shipping documents could go undetected, causing an understatement of inventory.

  C.  Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.

Ineffective internal controls in the revenue cycle will result in weaknesses that allow employee defalcation to occur. Allowing personnel in the sales department to authorize credit memos demonstrates inadequate segregation of duties. 

Sales personnel could sell merchandise to themselves under a fictitious name or to friends and then write the receivables off with credit memos.

  D.  Fictitious transactions could be recorded, causing an understatement of revenues and overstatement of receivables.

The recording of fictitious transactions would result in an OVERstatement of revenues and an overstatement of receivables.

Question #2 (AICPA.921114AUD-AU) ________________________________________

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using

  A.  Employee fidelity bonds.

  B.  Independently prepared mailroom prelists.

  C.  Daily check summaries.

  D.  A bank lockbox system.

The risk of employee misappropriation of cash is best reduced through the use of a bank lockbox system because the cash is never handled by the entity's employees.

Question #3 (AICPA.920516AUD-AU) ________________________________________

Which of the following statements is generally correct about the reliability ofaudit evidence?

  A.  The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.

The reliability of the accounting data and financial statements is influenced by the effectiveness of an entity's internal control system. The more effective the system of internal control, the more assurance is provided about the reliability of the accounting data and financial statements.

  B.  The reliability of audit evidence is determined by the amount of corroborative evidence obtained.

  C.  Audit evidence obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection.

Information obtained directly by the auditor would, in general, be considered more persuasive than information from independent outside sources.

  D.  The reliability of audit evidence refers to the validity and relevance of the evidence obtained.

Question #4 (AICPA.940527AUD-AU) ________________________________________

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

  A.  Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.

  B.  Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

Completeness of sales transactions pertains to the proper inclusion of all sales transactions occurring during the period. Inspecting prenumbered shipping documents to ensure that all sales have been recorded addresses completeness and thus would be a proper test of controls for completeness.

  C.  Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.

Comparing invoice prices to the authorized price list addresses valuation (accuracy). It ensures that the prices used were properly authorized. It would not be a proper test of controls for completeness.

  D.  Inquire about the entity's credit granting policies and the consistent application of credit checks.

Question #5 (AICPA.911152AUD-AU) ________________________________________

The audit working paper that reflects the major components of an amount reported in the financial statements is the

  A.  Interbank transfer schedule.

  B.  Carryforward schedule.

  C.  Supporting schedule.

  D.  Lead schedule.

A lead schedule identifies the major components of an amount reported in the financial statements. For example, a lead schedule for cash would include all of the entity's cash accounts.

Question #6 (AICPA.921140AUD-AU) ________________________________________

Which of the following most likely would indicate the existence of related parties?

  A.  Writing down obsolete inventory just before year end.

  B.  Failing to correct previously identified internal control structure deficiencies.

  C.  Depending on a single product for the success of the entity.

Depending on a single product for the success of the entity, is not indicative of a related party transaction. This condition is, in fact, common to startup companies, which arise due to the success of a single product, and are not able to diversify into other areas immediately.

  D.  Borrowing money at an interest rate significantly below the market rate.

Funds borrowed at a rate significantly below market, are a good indication of the existence of related parties. The application of a below market rate indicates that one or more of the parties involved is benefiting from the transaction in ways not readily apparent from examination of the lending transaction alone.

Question #7 (AICPA.010412AUD-AU) ________________________________________

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?

  A.  Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.

  B.  Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.

  C.  Determine whether inadequate provisions for the safeguarding of assets have been corrected.

  D.  Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.

During the overall review stage, the auditor assesses the conclusions reached and the evaluation of the overall financial statement presentation. As part of that evaluation, he/she would consider whether the results of the audit procedures performed affect the risk of material misstatement due to fraud. The overall review would include considering the adequacy of the evidence gathered in response to unusual or unexpected balances and whether such balances reflected a misstatement due to fraud.

Question #8 (AICPA.941152AUD-AU) ________________________________________

In auditing accounts receivable the negative form of confirmation request most likely would be used when

  A.  Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.

  B.  The combined assessed level of inherent and control risk relative to accounts receivable is low.

Negative confirmations may be used when: 

1) the combined assessed level of inherent and control risk is low; 

2) a large number of small balances are involved; and 

3) the auditor has no reason to believe that the recipients of the requests are unlikely to respond.

  C.  A small number of accounts receivable are involved but a relatively large number of errors are expected.

Negative confirmations may be used when: 

1) the combined assessed level of inherent and control risk is low; 

2) a large number of small balances are involved; and 

3) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. If a small number of accounts receivable are involved along with a relatively large number of expected errors, it would be more effective to utilize positive confirmations or an alternative auditing procedure.

  D.  The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Question #9 (AICPA.941163AUD-AU) ________________________________________

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:

  A.  Control risk at below the maximum level.

  B.  Inherent risk at the maximum level.

Before applying substantive tests to the details of asset accounts at an interim date, an auditor would not assess inherent risk at the maximum level. Assessing inherent risk at maximum would lead to a need for more and stronger evidence. Testing would move to year end as a result.

  C.  The difficulty in controlling the incremental audit risk.

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess the difficulty in controlling the incremental audit risk. This is the risk that misstatements may exist at the balance sheet date that will not be detected by the auditor. The longer the period from the interim testing to year end, the greater the incremental risk.

  D.  Materiality for the accounts tested as insignificant.

Question #10 (AICPA.920513AUD-AU) ________________________________________

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a

  A.  Special report.

  B.  Management representation letter.

Although the specific content of the management representation letter varies depending on the engagement and the client, it typically includes reference to communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices.

  C.  Letter for an underwriter.

  D.  Report on internal controls.

Question #11 (AICPA.941164AUD-AU) ________________________________________

"We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a(n)

  A.  Client engagement letter.

  B.  Report on compliance with laws and regulations.

  C.  Management representations letter.

The management representation letter commonly includes a statement as to violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.

  D.  Attestation report on an internal control structure.

Question #12 (AICPA.901151AUD-AU) ________________________________________

Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?

  A.  The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports.

  B.  Vendors' invoices are compared with purchase orders by an employee who is independent of the receiving department.

  C.  Receiving reports require the signature of the individual who authorized the purchase.

  D.  Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

To ensure that recorded purchases are free of material errors, the purchase orders, receiving reports, and vendors' invoices should be independently matched in preparing the vouchers which are used to record the payables.

Question #13 (AICPA.920523AUD-AU) ________________________________________

An auditor should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide

  A.  The opinion of a specialist as to whether loss contingencies are possible, probable, or remote.

  B.  A description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcomes.

The primary purpose of the attorney's letter is to corroborate the information furnished by management concerning litigation, claims, and assessments. It is not to obtain a description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcomes.

  C.  An objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters.

  D.  The corroboration of the information furnished by management concerning litigation, claims, and assessments.

An attorney's letter is obtained by the auditor to corroborate the information provided by management concerning litigation, claims, and assessments.

Question #14 (AICPA.950566AUD-AU) ________________________________________

To which of the following matters would materiality limits not apply in obtaining written management representations?

  A.  The availability of minutes of stockholders' and directors' meetings.

Management's representations may be limited to matters considered material to the financial statements either individually or in the aggregate as long as management and the auditor agree on the limits of materiality for this purpose. This limitation specifically does not apply to representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for fair presentation of the financial statements, availability of all financial records, and completeness and availability of all minutes of stockholders' and directors' meetings.

  B.  Losses from purchase commitments at prices in excess of market value.

  C.  The disclosure of compensating balance arrangements involving related parties.

Management's representations may be limited to matters considered material to the financial statements either individually or in the aggregate as long as management and the auditor agree on the limits of materiality for this purpose. This limitation specifically does not apply to representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for fair presentation of the financial statements, availability of all financial records, and completeness and availability of all minutes of stockholders' and directors' meetings. The disclosure of compensating balance arrangements involving related parties is directly related to amounts included in the financial statements and would be subject to the limitation.

  D.  Reductions of obsolete inventory to net realizable value.

Question #15 (AICPA.070601AUD) ________________________________________

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

  A.  The client has a new sales incentive program in place.

In deciding to perform substantive tests before year end, the auditor must consider the incremental audit risk that results from the early performance of substantive tests. A new sales incentive program would increase the incremental audit risk for two reasons: 1) it could predispose management to misstate the financials and 2) it could make the related asset and liability accounts less predictable (and thus harder to audit). As a result, it would not be appropriate to perform substantive testing of accounts receivable before the balance sheet date.

  B.  Internal controls during the remaining period are effective.

When substantive tests are performed before year end, the auditor is relying on the internal control system to ensure that transactions occurring between the interim date and year end are recorded properly. Clearly, then, the internal control system would have to be effective during the remaining period.

  C.  There is a high turnover of senior management.

  D.  It is a first engagement of a new client.

Question #16 (AICPA.911140AUD-AU) ________________________________________

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

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

Segregating the hiring of personnel from the distribution of payroll checks separates the authorization of transactions from the custody of related assets.

  B.  Operational responsibility from the record keeping responsibility.

  C.  Human resources function from the controllership function.

Segregating the hiring of personnel from the distribution of payroll checks separates the authorization of transactions from the custody of related assets. Segregation of duties does not address the human resource and controllership functions directly; it addresses specific duties that may be performed by both areas.

  D.  Administrative controls from the internal accounting controls.

Question #17 (AICPA.910502AUD-AU) ________________________________________

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about

  A.  Classification and understandability.

An auditor would review credit ratings of customers with delinquent accounts receivable in order to ascertain whether the allowance for doubtful accounts was adequately stated. 

This procedure would provide evidence for the valuation or allocation assertion, which deals with the proper valuation of the accounts in accordance with GAAP. It would not address classification and understandability (one of the presentation and disclosure assertions), which relates to the proper classification of the accounts in accordance with GAAP and the understandability of the related disclosures.

  B.  Existence or occurrence.

  C.  Rights and obligations.

  D.  Valuation or allocation.

An auditor would review credit ratings of customers with delinquent accounts receivable in order to ascertain whether the allowance for doubtful accounts was adequately stated.

This procedure would provide evidence for the valuation or allocation assertion, which deals with the proper valuation of the accounts in accordance with GAAP.

Question #18 (AICPA.911147AUD-AU) ________________________________________

The objective of tests of details of transactions performed as substantive tests is to

  A.  Detect material misstatements in the financial statements.

Tests of details of transactions are substantive tests. The objective of substantive tests is to detect material misstatements in the financial statements.

  B.  Evaluate whether management's policies and procedures operated effectively.

  C.  Identify specific financial statement assertions that satisfy the audit objectives.

Tests of details of transactions are substantive tests. The objective of substantive tests is to detect material misstatements in the financial statements. Audit objectives are identified to verify specific financial statement assertions, not the reverse.

  D.  Verify that significant deficiencies in the accounting system are discovered.

Question #19 (AICPA.920528AUD-AU) ________________________________________

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

  A.  A client letter that acknowledges agreement with the auditor's audit strategy and risk assessment.

The auditor's audit strategy and risk assessment are audit judgments that are solely the responsibility of the auditor. The client would not be requested to provide a letter agreeing with such judgments.

  B.  The basis for the auditor's conclusions when the assessed level of control risk is below the maximum level.

  C.  A written audit program setting forth the procedures necessary to accomplish the audit's objectives.

  D.  An indication that the accounting records agree or reconcile with the financial statements.

The audit workpapers must be sufficient to indicate that the accounting records agree or reconcile with the financial statements.

Question #20 (AICPA.950516AUD-AU) ________________________________________

An auditor should design the written audit program so that

  A.  All material transactions will be selected for substantive testing.

  B.  Substantive tests prior to the balance sheet date will be minimized.

  C.  The audit procedures selected will achieve specific audit objectives.

An auditor is required to prepare a written audit program which details the audit procedures needed to carry out the objectives of the audit. Sufficient, appropriate evidence must be collected to support the opinion.

  D.  Each account balance will be tested under either tests of controls or tests of transactions.

 

Week 3

Question #1 (AICPA.940508AUD-AU) ________________________________________

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the

  A.  Timing of audit procedures.

  B.  Cost-benefit of gathering evidence.

The audit objectives incorporated into the written audit programs relate primarily to the financial statement assertions. The auditor will consider the timing of audit procedures, cost-benefit considerations, and specific audit techniques in selecting the audit procedures which will meet the audit objectives.

  C.  Selected audit techniques.

  D.  Financial statement assertions.

Specific audit objectives that relate primarily to the financial statement assertions should be established in designing written audit programs.

Question #2 (AICPA.901124AUD-AU) ________________________________________

Which of the following procedures is least likely to be performed before the balance sheet date?

  A.  Testing of internal control over cash.

  B.  Confirmation of receivables.

  C.  Search for unrecorded liabilities.

Be careful with negatively worded questions. The procedure LEAST likely to be performed before the balance sheet date is the search for unrecorded liabilities. Liabilities unrecorded before the balance sheet date might easily be paid before year end and more liabilities incurred up to year end. As a result, the auditor would have to perform the procedures again after the balance sheet date to provide the most assurance that unrecorded liabilities did not go undetected.

  D.  Observation of inventory.

Observation of inventory is a procedure which could be performed before year end to reduce substantive tests after year end. 

The auditor must consider whether the year-end balances selected for interim examination are reasonably predictable with respect to amount, relative significance, and composition. Inventories frequently meet these requirements. (AU 313)

Question #3 (AICPA.950557AUD-AU) ________________________________________

In determining whether transactions have been recorded, the direction of the audit testing should be from the

  A.  General ledger balances.

  B.  Adjusted trial balance.

  C.  Original source documents.

Testing from original source documents into the records is correct. You are testing for completeness, i.e. to see that transactions that occurred were recorded.

  D.  General journal entries.

Question #4 (AICPA.921127AUD-AU) ________________________________________

Which of the following combination of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?

  A.  Inspecting documents and physically examining assets.

In obtaining evidence about fixed asset additions, the auditor is primarily concerned about existence and valuation. The procedures performed would therefore involve inspecting documents (valuation) and physically examining the assets (existence).

  B.  Recomputing calculations and obtaining written management representations.

  C.  Observing operating activities and comparing balances to prior period balances.

In obtaining evidence about fixed asset additions, the auditor is primarily concerned about existence and valuation. While observing operating activities might provide evidence in support of valuation of fixed assets, such evidence would pertain more to the proper classification and valuation of obsolescent or unused fixed assets rather than verifying the valuation of new additions. 

Comparing balances to prior period balances helps the auditor ascertain that changes have occurred so that other procedures may then be employed to verify the changes. It does not provide strong evidence for existence.

  D.  Confirming ownership and corroborating transactions through inquiries of client personnel.

Question #5 (AICPA.951138AUD-AU) ________________________________________

An auditor may achieve audit objectives related to particular assertions by

  A.  Performing analytical procedures.

This doesn't seem to be worded very well. Audit objectives are RELATED to particular assertions. Nonetheless, audit objectives relating to particular assertions are achieved through the performance of substantive procedures. Substantive procedures include analytical procedures.

  B.  Adhering to a system of quality control.

  C.  Preparing auditor working papers.

  D.  Increasing the level of detection risk.

Question #6 (AICPA.900539AUD-AU) ________________________________________

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a(an)

  A.  Clock card or time ticket.

  B.  Employee Form W-2.

  C.  Employee personnel record.

  D.  Payroll register entry.

In performing a test of controls for existence, the direction of testing must be from the recording to the support. Thus, the auditor would begin with the payroll register entries (recorded payroll) and trace them to clock cards or time tickets to provide the existence of payroll expenditures.

Question #7 (AICPA.951119AUD-AU) ________________________________________

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

  A.  Allowable risk of tolerable misstatement.

  B.  Preliminary estimates of materiality levels.

  C.  Efficiency of the audit.

  D.  Effectiveness of the audit.

The risk of incorrect acceptance is the risk of concluding that a book balance is fairly stated when it really isn't. The likelihood of assessing control risk too low is risk that the assessed level of control risk based on the sample is lower than the true population level. Both relate to the effectiveness of the audit as they affect the auditor's ability to correctly conclude that the financial statements are fairly presented.

Question #8 (AICPA.920517AUD-AU) ________________________________________

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

  A.  Trace test counts noted during the entity's physical count to the entity's summarization of quantities.

  B.  Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Rights and obligations address whether the entity owns (has the legal rights to) the assets in question. Inspecting agreements to determine whether any inventory is pledged as collateral or subject to any liens addresses rights and obligations related to inventories.

  C.  Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.

  D.  Inspect the open purchase order file for significant commitments that should be considered for disclosure.

Question #9 (AICPA.901128AUD-AU) ________________________________________

When an auditor tests a computerized accounting system, which of the following is true of the test data approach?

  A.  Test data must consist of all possible valid and invalid conditions.

  B.  The program tested is different from the program used throughout the year by the client.

  C.  Several transactions of each type must be tested.

It is not possible to create test data that would include several transactions of EACH type.

  D.  Test data are processed by the client's computer programs under the auditor's control.

In the test data approach, the auditor attempts to test the client's computer programs by processing fictitious (or test) data including a variety of valid and invalid conditions.

Question #10 (AICPA.990420AUD-AU) ________________________________________

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the

Variability in the dollar amounts of inventory items    Risk of incorrect acceptance 

  Yes Yes  

Variables sampling plans, also known as classical variables sampling, uses normal distribution theory to evaluate population characteristics based on selected samples.

In such plans, variability (the estimated standard deviation), population size, the risk of incorrect acceptance and rejection, and tolerable and expected misstatement are used to determine sample size.

The correct answer is thus A - both variability in the dollar amounts of inventory items and the risk of incorrect acceptance are considered in determining sample size.

  Yes No  

Variables sampling plans, also known as classical variables sampling, uses normal distribution theory to evaluate population characteristics based on selected samples.

In such plans, variability (the estimated standard deviation), population size, the risk of incorrect acceptance and rejection, and tolerable and expected misstatement are used to determine sample size.

  No Yes  

  No No  

Question #11 (AICPA.921136AUD-AU) ________________________________________

Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of control policies and procedures.

One of the techniques involved in this approach makes use of

  A.  Controlled reprocessing.

  B.  An integrated test facility.

An integrated test facility is a technique which processes data through the use of simulated files. It involves the creation of a dummy company against which transactions are submitted for processing concurrently with "live" transactions.

  C.  Input validation.

Input validation is not a technique which processes data through the use of simulated files. It is a check of the data input to ensure the validity of such data. It is not a check of the operating effectiveness of controls.

  D.  Program code checking.

Question #12 (AICPA.911154AUD-AU) ________________________________________

An auditor should trace bank 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.

Bank transfers made during the latter part of the year and the first part of the subsequent year should be traced into the records to detect whether cash balances were overstated because of kiting. Kiting occurs when a transfer is recorded in different periods in the disbursing and the receiving accounts.

  D.  Any unusual payments to or receipts from related parties occurred.

Question #13 (AICPA.910532AUD-AU) ________________________________________

The primary responsibility of a bank acting as registrar of capital stock is to

  A.  Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.

  B.  Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger.

  C.  Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock.

  D.  Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

A registrar's primary responsibility is to verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

Question #14 (AICPA.930537AUD-AU) ________________________________________

An auditor most likely would perform substantive tests of details on payroll transactions and balances when

  A.  Cutoff tests indicate a substantial amount of accrued payroll expense.

  B.  The assessed level of control risk relative to payroll transactions is low.

  C.  Analytical procedures indicate unusual fluctuations in recurring payroll entries.

Analytical procedures aid the auditor in identifying unusual balances or amounts which might indicate the presence of a material misstatement. The auditor must then investigate further. If analytical procedures indicate unusual fluctuations in recurring payroll entries, the auditor would expand substantive testing of payroll transactions and balances.

  D.  Accrued payroll expense consists primarily of unpaid commissions.

Question #15 (AICPA.911145AUD-AU) ________________________________________

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of

  A.  Presentation.

  B.  Completeness.

The completeness assertion addresses the proper inclusion of all transactions in the records in the appropriate period. Cutoff tests designed to detect credit sales made before the end of the year but erroneously recorded in the subsequent year would enable such transactions to be properly included in the current year.

  C.  Rights.

  D.  Existence.

Question #16 (AICPA.910539AUD-AU) ________________________________________

In performing tests of controls over authorization of cash disbursements, which of the following sampling methods would be most appropriate?

  A.  Ratio.

  B.  Attributes.

Attribute sampling involves the measurement of the rate of occurrence of an attribute or characteristic. In a test of controls over authorization of cash disbursements, the auditor is concerned about the rate at which the controls over cash disbursements were not performed. Attribute sampling would be most appropriate for testing controls.

  C.  Variables.

Variables sampling or classical variables sampling includes methods designed to estimate an account balance within given confidence intervals. The classical methods include mean-per-unit, difference estimation, and ratio estimation. These methods are used for substantive testing and are not appropriate for tests of controls.

  D.  Stratified.

Question #17 (AICPA.930529AUD-AU) ________________________________________

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of

  A.  Existence or occurrence.

  B.  Valuation or allocation.

The auditor reviews the aging of receivables in conjunction with evaluating the adequacy of the allowance for doubtful accounts in order to support the valuation assertion. The valuation assertion addresses whether or not asset accounts have been included in the financial statements at appropriate amounts.

  C.  Completeness.

  D.  Rights and obligations.

Question #18 (AICPA.941155AUD-AU) ________________________________________

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

  A.  Set the tolerable rate of deviation at a lower level than originally planned.

  B.  Stratify the cash disbursements population so that the unusually large disbursements are selected.

If the auditor is aware of several unusually large cash disbursements, the auditor will probably decide to stratify the cash disbursements population to ensure that the large items are selected.

  C.  Increase the sample size to reduce the effect of the unusually large disbursements.

If the auditor is aware of several unusually large cash disbursements, the auditor will want to examine them as they are more likely to contain a material misstatement. Increasing the sample size to reduce the effect of the large items will not meet the auditor's objective of trying to detect material misstatements.

  D.  Continue to draw new samples until all the unusually large disbursements appear in the sample.

Question #19 (AICPA.070607AUD) ________________________________________

Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

  A.  The selection of negative balances requires no special design considerations.

A weakness of PPS sampling is that the selection of negative (or zero) balances requires special design consideration. Negative or zero balance accounts have to be segregated and tested separately.

  B.  The sampling process can begin before the complete population is available.

  C.  The auditor need not consider the preliminary judgments about materiality.

  D.  The sample will result in a smaller sample size if few errors are expected.

PPS sampling generally results in a smaller sample than classical variables sampling if few errors are expected. When a large number of differences is expected, classical variables sampling will result in a smaller sample than PPS sampling.

Question #20 (AICPA.920553AUD-AU) ________________________________________

Which of the following statements is correct concerning statistical sampling in tests of controls?

  A.  Deviations from control procedures at a given rate usually result in misstatements at a higher rate.

  B.  As the population size doubles, the sample size should also double.

Although, in general, sample size increases with population size, the rate of increase is not proportionate and a point is reached at which no further sample size increases will occur.

  C.  The qualitative aspects of deviations are not considered by the auditor.

  D.  There is an inverse relationship between the sample size and the tolerable rate.

Sample size decreases as the tolerable rate increases; an inverse relationship between the two exists. Audit sampling usually assumes a "large" population where no further sample size increases occur.

 

Week 4

Question #1 (AICPA.910554AUD-AU) ________________________________________

Comfort letters ordinarily are addressed to

  A.  Creditor financial institutions.

  B.  The client's audit committee.

  C.  The Securities and Exchange Commission.

  D.  Underwriters of securities.

Comfort letters are letters requested by underwriters in connection with registration statements filed with the Securities and Exchange Commission under the Securities Act of 1933.

They are issued by auditors to the underwriters and provide negative assurance regarding unaudited financial statements included in the registration statement. (AU 634)

Question #2 (AICPA.910519AUD-AU) ________________________________________

When compiling a nonpublic entity's financial statements, an accountant would be least likely to

  A.  Perform analytical procedures designed to identify relationships that appear to be unusual.

In performing a compilation, an accountant is required only to read the compiled financial statements and consider whether they appear to include adequate disclosure. No other procedures, such as analytical procedures, must be performed.

  B.  Read the compiled financial statements and consider whether they appear to include adequate disclosure.

  C.  Omit substantially all of the disclosures required by generally accepted accounting principles.

Compiled financial statements may omit substantially all of the disclosures required by generally accepted accounting principles provided that the intent is not to create misleading financial statements. This omission would be noted by the accountant in his/her compilation report.

  D.  Issue a compilation report on one or more, but not all, of the basic financial statements.

Question #3 (AICPA.921158AUD-AU) ________________________________________

Comfort letters ordinarily are signed by the entity's

  A.  Independent auditor.

Comfort letters are issued (and signed) by an entity's independent auditor for the purpose of providing a "due diligence" defense to underwriters and certain other requesting parties in connection with a securities offering.

  B.  Underwriter of securities.

  C.  Audit committee.

  D.  Senior management.

Question #4 (AICPA.930551AUD-AU) ________________________________________

Which of the following matters is covered in a typical comfort letter?

  A.  Negative assurance concerning whether the entity's internal control procedures operated as designed during the period being audited.

  B.  An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984.

  C.  Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles.

  D.  An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

A comfort letter typically provides an opinion (positive assurance) as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

Question #5 (AICPA.930550AUD-AU) ________________________________________

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances.

Green's auditor's report most likely contained a(an)

  A.  Unqualified opinion.

As long as the auditor is satisfied as to the reasonableness of the account balances, an UNQUALIFIED opinion may be issued. Although confirmation of accounts receivable is required, it may be replaced by other acceptable procedures when: 

1) accounts receivable are immaterial; 

2) the use of confirmations would be ineffective; and 

3) the combined assessed level of inherent and control risk is low so that other procedures are believed to be sufficient. In this case, confirmation of accounts receivable was considered to be ineffective because of the timing of the appointment.

  B.  Unqualified opinion with an explanatory paragraph.

As long as the auditor is satisfied as to the reasonableness of the account balances, an UNQUALIFIED opinion may be issued. Although confirmation of accounts receivable is required, it may be replaced by other acceptable procedures when:

1) accounts receivable are immaterial; 

2) the use of confirmations would be ineffective; and

3) the combined assessed level of inherent and control risk is low so that other procedures are believed to be sufficient. In this case, confirmation of accounts receivable was considered to be ineffective because of the timing of the appointment. An explanatory paragraph is not necessary.

  C.  Qualified opinion due to a scope limitation.

  D.  Qualified opinion due to a departure from generally accepted auditing standards.

Question #6 (AICPA.920510AUD-AU) ________________________________________

When engaged to audit a not-for-profit organization in accordance with Government Auditing Standards, an auditor is required to prepare a written report on compliance with laws and regulations that includes

  A.  All material and immaterial instances of noncompliance with laws and regulations.

  B.  All instances or indications of illegal acts that could result in criminal prosecution.

Government Auditing Standards require a report on compliance with laws and regulations that includes identification of all instances or indications of illegal acts that could result in criminal prosecution.

  C.  A description of all material weaknesses noted during the engagement.

  D.  An explanation of the inherent limitations of the internal control structure.

Government Auditing Standards require a report on compliance with laws and regulations that includes identification of all illegal acts noted. The required report on internal control would explain the inherent limitations of internal control.

Question #7 (AICPA.040179BEC-SIM) ________________________________________

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)

The effects of financial leverage result when a firm finances assets using:

  A.  Trade accounts.

  B.  Fixed-interest debt.

Financial leverage results when a firm uses fixed-interest debt (or other fixed-interest securities) to finance assets. 

Because of the fixed element of the cost of financing inherent in using fixed-interest securities, changes in earnings before interest and taxes (conventionally referred to as EBIT) result in greater than equal changes in total earnings and earnings per share (EPS). Management's intent in using financial leverage is that an increase in EBIT will result in an even greater benefit to common shareholders. The magnifying effects, however, work both ways.

A decrease in EBIT will have an even greater negative effect on earnings. The greater the extent of financial leverage used, the greater the fluctuations up or down in earnings resulting from increases and decreases in EBIT.

  C.  Common stock.

Financing of assets through the use of common stock does not result in a fixed cost element and, therefore, no magnifying effect of changes in EBIT on net income or earnings per share. 

When common stock is used to finance assets, any change in EBIT results in an equally proportionate change in net income.

  D.  Retained earnings.

Question #8 (AICPA.911159AUD-AU) ________________________________________

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity's financial statements?

  A.  The accountant does not contemplate obtaining an understanding of the internal control structure.

In both a compilation and a review, the accountant is not required to obtain an understanding of the internal control structure. That understanding is required for an audit.

  B.  The accountant must be independent in fact and appearance.

The accountant must be independent to review financial statements. Independence is not required for a compilation, however.

  C.  The accountant expresses no assurance on the financial statements.

  D.  The accountant should obtain a written management representation letter.

Question #9 (AICPA.931154AUD-AU) ________________________________________

Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonpublic entity's financial statements?

  A.  The accountant is independent with respect to the entity.

An accountant is presumed to be independent when issuing a compilation report unless the lack of independence is specifically disclosed in the compilation report.

  B.  The financial statements have not been audited.

  C.  A compilation consists principally of inquiries and analytical procedures.

  D.  The accountant does not express any assurance on the financial statements.

Question #10 (AICPA.070647AUD) ________________________________________

Which of the following statements is correct regarding a review engagement of a nonpublic company's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARs)?

  A.  An accountant must establish an understanding with the client in an engagement letter.

While the accountant is required to establish an understanding with the client regarding the services to be performed and it is strongly recommended that the understanding be in writing, a written engagement letter is not required.

  B.  An accountant must obtain an understanding of the client's internal control when performing a review.

  C.  A review provides an accountant with a basis for expressing limited assurance on the financial statements.

Because a review consists primarily of inquiries of company personnel and the performance of analytical procedures, it provides only limited assurance. That limited assurance appears in the review report as a statement that the accountant is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with GAAP (or other applicable framework of accounting).

  D.  A review report contains an accountant's opinion of the financial statements taken as a whole.

Question #11 (AICPA.930558AUD-AU) ________________________________________

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?

  A.  The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.

  B.  The financial statements fail to disclose information that is required by generally accepted accounting principles.

An "except for" qualified opinion or an adverse opinion may only be issued in the event of a GAAP departure. The only situation listed which involved a GAAP departure was the failure to disclose information required by GAAP.

  C.  The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.

An auditor is allowed to enter into an engagement to report on only one of the financial statements provided that the auditor has access to information underlying all of the financial statements. An "except for" qualified opinion or an adverse opinion may only be issued in the event of a GAAP departure. A GAAP departure is not present.

  D.  Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

Question #12 (AICPA.990507AUD-AU) ________________________________________

When engaged to compile the financial statements of a nonpublic entity, an accountant is required to possess a level of knowledge of the entity's accounting principles and practices.

This requirement most likely will include obtaining a general understanding of the

  A.  Stated qualifications of the entity's accounting personnel.

This answer might be obtained by the "process of elimination" by determining that this is the "least bad answer" on the menu. In a compilation engagement, the accountant has a responsibility to obtain an understanding of the financial reporting framework and significant accounting policies associated with the entity's financial statements. As a "precondition" for accepting the compilation engagement, the accountant is required to verify management's understanding of a variety of management responsibilities (and document that with an engagement letter). The interaction that the accountant has with management and other accounting personnel makes it reasonably likely that the accountant will gain an understanding of the qualifications of personnel associated with the financial reporting process.

  B.  Design of the entity's internal controls placed in operation.

  C.  Risk factors relating to misstatements arising from illegal acts.

  D.  Internal control awareness of the entity's senior management.

Question #13 (AICPA.900522AUD-AU) ________________________________________

When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph

  A.  Preceding the opinion paragraph and referred to only in the scope paragraph of the auditor's report.

  B.  Following the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

  C.  Following the opinion paragraph and referred to only in the scope paragraph of the auditor's report.

The explanatory paragraph for a scope limitation should PRECEDE the opinion paragraph and be referred to in BOTH the SCOPE and OPINION paragraphs of the report. (AU 508)

  D.  Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

The explanatory paragraph for a scope limitation should precede the opinion paragraph and be referred to in both the scope and opinion paragraphs of the report. (AU 508)

Question #14 (AICPA.921153AUD-AU) ________________________________________

The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity states that

  A.  A review includes assessing the accounting principles used and significant estimates made by management.

  B.  A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

A review report does NOT state that a review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. That wording appears in an audit report.

  C.  The accountant is not aware of any material modifications that should be made to the financial statements.

A review report states that the accountant is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with GAAP. (AR 100)

  D.  The accountant does not express an opinion or any other form of assurance on the financial statements.

Question #15 (AICPA.951171AUD-AU) ________________________________________

Which of the following phrases would an auditor most likely include in the auditor's report when expressing a qualified opinion because of inadequate disclosure?

  A.  Subject to the departure from generally accepted accounting principles, as described above.

  B.  With the foregoing explanation of these omitted disclosures.

The standards require the use of specific language in qualifying a report. Use of the phrase "with the foregoing explanation" is expressly prohibited as it is not considered to be clear or forceful enough. (AU 508)

  C.  Except for the omission of the information discussed in the preceding paragraph.

The standards require the use of specific language, "except for," in qualifying a report. The appropriate modification of the opinion paragraph is answer C, "Except for the omission of the information discussed in the preceding paragraph." (AU 508)

  D.  Does not present fairly in all material respects.

Question #16 (AICPA.120728AUD) ________________________________________

A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?

  A.  Qualified opinion.

  B.  Unmodified opinion.

  C.  Disclaimer opinion.

  D.  Adverse opinion.

When a misstatement is material and the effect on the financial statements is pervasive, the auditor should express an adverse opinion indicating that the financial statements are not fairly stated.

Question #17 (AICPA.941185AUD-AU) ________________________________________

Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program.

Wolf's report on compliance should express

  A.  No assurance on the compliance tests.

  B.  Reasonable assurance on the compliance tests.

  C.  A qualified or adverse opinion.

Discovery of noncompliance having a material effect on the program would result in a qualified or adverse opinion.

  D.  An adverse or disclaimer of opinion.

Question #18 (AICPA.111188AUD) ________________________________________

General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the

  A.  Distribution of the financial statements and Ford's report is restricted to internal use only.

  B.  Reason for omitting the disclosures is acknowledged in the notes to the financial statements.

  C.  Omitted disclosures would not influence any potential creditor's conclusions about General's financial position.

  D.  Omission is not undertaken with the intention of misleading the users of General's financial statements.

In general, the accountant who compiles such financial statements must believe that the omission of the disclosures is not undertaken for the purpose of misleading readers of those financial statements.

Question #19 (AICPA.950579AUD-AU) ________________________________________

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonpublic entity. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows.

Moore may issue the review report provided the

  A.  Balance sheet is presented in a prescribed form of an industry trade association.

An accountant may issue a review report on one financial statement and not on the others, provided that the scope of the inquiry and analytical procedures has not been limited. It is not necessary to present the balance sheet in a prescribed industry form.

  B.  Scope of the inquiry and analytical procedures has not been restricted.

An accountant may issue a review report on one financial statement and not on the others, provided that the scope of the inquiry and analytical procedures has not been limited.

  C.  Balance sheet is not to be used to obtain credit or distributed to creditors.

  D.  Specialized accounting principles and practices of Dover's industry are disclosed.

Question #20 (AICPA.070618AUD) ________________________________________

Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to

  A.  Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives.

  B.  Present the results of the auditor's tests of controls.

Governmental auditing standards require that the auditor report on the financial statements, internal control and compliance with laws and regulations. The auditor is specifically required to provide a description of the scope of the testing of internal controls and the results of those tests or an opinion if sufficient work was performed.

  C.  Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls.

  D.  Describe the scope of the auditor's principal substantive tests.

 

Week 5 quiz

Question #1 (AICPA.920509AUD-AU) ________________________________________

An accountant's compilation report on a financial forecast should include a statement that the

  A.  Compilation does not include evaluation of the support of the assumptions underlying the forecast.

The accountant's report on a compilation of a financial forecast should include: 

1) identification of the statements; 

2) adherence to AICPA standards for compilation; 

3) no expression of assurance; 

4) a caveat that the prospective results may not be achieved; and 

5) no responsibility for updating. It would also include a statement that a compilation is limited to presenting, in the form of a forecast, information that is the representation of management and does not include evaluation of the support of the assumptions underlying the forecast.

  B.  Hypothetical assumptions used in the forecast are reasonable.

The accountant's compilation report would not include a statement that the hypothetical assumptions used in the forecast are reasonable. In fact, the report would include a specific statement that a compilation does not include evaluation of the support of the assumptions underlying the forecast.

  C.  Range of assumptions selected is one in which one end of the range is less likely to occur than the other.

  D.  Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant's representation.

Question #2 (AICPA.020401AUD-AU) ________________________________________

When a CPA examines a client's projected financial statements, the CPA's report should

  A.  Explain the principal differences between historical and projected financial statements.

  B.  State that the CPA performed procedures to evaluate management's assumptions.

A CPA's report on projected financial statements should state that the CPA performed procedures to evaluate management's assumptions. The specific wording is as follows:

"Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection."

  C.  Refer to the CPA's auditor's report on the historical financial statements.

  D.  Include the CPA's opinion on the client's ability to continue as a going concern.

Question #3 (AICPA.060650REG) ________________________________________

At a confidential meeting, an audit client informed a CPA about the client's illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client.

After receiving immunity, the CPA should do which of the following?

  A.  Take the Fifth Amendment and not discuss the meeting.

  B.  Cite the privileged communications aspect of being a CPA.

  C.  Discuss the entire conversation including the illegal acts.

The federal courts recognize no privilege that would allow the client to prevent the CPA from discussing the entire conversation.

  D.  Discuss only the items that have a direct connection to those items the CPA worked on for the client in the past.

Question #4 (AICPA.080939REG-1B) ________________________________________

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)

XYZ Corporation is having financial difficulties. Its CFO has ordered subordinates to pump up revenues artificially and hide that fact from the external auditor. If an internal auditor of XYZ intentionally misleads XYZ's outsider auditor from the ABC Accounting firm, the internal auditor has:

  A.  Violated the Code of Professional Conduct.

  B.  Violated Sarbanes-Oxley.

  C.  Both A and B.

Because both A and B are correct, this is the best answer.

  D.  Neither A or B.

Question #5 (AICPA.080962REG-1B) ________________________________________

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)

Duncan, an accounting firm, is auditing Alchemy Inc. Regarding commissions and referral fees, which of the following arrangements would be permissible?

  A.  Duncan receives a commission from MacroSoft for recommending its software to Alchemy.

  B.  Duncan buys MacroSoft's software products and sells them to Alchemy at a 5% markup.

The Code of Professional Conduct allows such sales out of the accounting firm's inventory, even without disclosure of the profit made. A sensible client would realize that the accounting firm was probably making a profit on the transaction. This is the best answer.

  C.  Duncan receives a referral fee from John Jacob for referring his legal service to Alchemy.

  D.  Duncan receives a commission from MacroSoft for recommending its software products to Alchemy, but Duncan discloses this information to Alchemy.

Since Alchemy is Duncan's audit client, even with the disclosure, the commission is disallowed.

Question #6 (AICPA.191005REG) ________________________________________

A CPA who is not in public practice is obligated to follow which of the following rules of conduct?

  A.  Independence.

  B.  Integrity and objectivity.

This is the best answer, for every CPA, whether engaged in audit, tax, consulting, or other services must always act with integrity and objectivity.

  C.  Contingent fees.

  D.  Commissions.

Question #7 (AICPA.951105REG-BL) ________________________________________

Under the Statements on Standards for Consulting Services, which of the following statements best reflects a CPA's responsibility when undertaking a consulting services engagement?

The CPA must

  A.  Not seek to modify any agreement made with the client.

  B.  Not perform any attest services for the client.

A CPA may perform attest services for the client.

If the client is a public company, the type of consulting services that can be performed are limited by SOX.

If it is a private company, they are limited by the AICPA Independence rules.

  C.  Inform the client of significant reservations concerning the benefits of the engagement.

If a CPA has reservations that the engagement will not be beneficial, the client must be advised at the outset.

  D.  Obtain a written understanding with the client concerning the time for completion of the engagement.

Question #8 (AICPA.082098REG-I.A) ________________________________________

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

  A.  A CPA in public practice providing tax and management advisory services.

  B.  A CPA in public practice providing auditing and other attestation services.

CPAs in public practice providing audit and other attest services must act independently (as well as with integrity and objectivity).

  C.  A CPA not in public practice.

  D.  All CPAs.

CPAs not in public practice providing attest services need not act independently.

Question #9 (AICPA.901109REG-BL) ________________________________________

Locke, CPA, was engaged to perform an audit for Vorst Co. During the audit, Locke discovered that Vorst's inventory contained stolen goods. 

Vorst was indicted and Locke was validly subpoenaed to testify at the criminal trial. Vorst has claimed accountant-client privilege to prevent Locke from testifying.

Locke may be compelled to testify

  A.  Only with Vorst's consent.

  B.  In any federal court located in the 50 states.

There is no accountant-client privilege in federal courts, except for some tax matters under Sec. 7525. That limited privilege would not apply in this case.

  C.  In any state court.

  D.  Only about the nature of the work performed in the audit.

Question #10 (AICPA.080928REG-1B) ________________________________________

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)

Ron is a partner in the Houston office of KPMG. A partner in Ron's office is the lead partner on the team that audits Midstream Pipeline, which operates intrastate oil and gas pipelines, but Ron is not on the engagement team. Which of the following scenarios represents an independence violation of the AICPA Code of Conduct?

  A.  Ron invests in a nondiversified mutual fund, which invests in Midstream Pipeline. Midstream Pipeline makes up 10% of the mutual fund’s portfolio, and Ron's share of the mutual fund represents 15% of Ron's net worth.

This investment in a nondiversified mutual fund arguably represents a material indirect interest by a covered member (Ron, an OPIO), and, therefore, arguably impairs independence. One can make a reasonable argument that 1.5% of Ron's net worth being invested in the audit client is not material, but it doesn't look good for him to put 15% of his net worth in a nondiversified fund that has a large chunk of its portfolio in an audit client.

  B.  Ron invests a small amount in Superoil, Inc., which is a company audited by KPMG's New York office, run by a Partner in the New York office.

Clearly, Ron is not a covered member for purposes of this audit client. So long as his investment is less than 5% of the stock, there is no independence problem.

  C.  Ron owns a few shares of Gas Sales Company, a company that is a customer of Midstream Pipeline. Midstream Pipeline is an insignificant supplier of services to Gas Sales.

  D.  Jenny, Ron's distant Aunt, passes away and leaves him 30 shares of Midstream Pipeline, which Ron sells the following day after learning of his inheritance.

Question #11 (AICPA.080927REG-1B) ________________________________________

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)

The CPA firm, where Joanna is currently a tax partner, is auditing Bubbles Corp. in Austin. Her mother, Teresa, has been working as a receptionist for Bubbles for the last 30 years. Her best friend since grade school, Maggie, is currently serving as CFO at Bubbles. Joanna knows that her brother, Jonathan, sank most of his savings into a purchase of 6% of Bubbles outstanding stock, which he currently owns. Does Joanna have an independence issue?

  A.  Yes, because her mother has worked for Bubbles for a long period of time.

  B.  Yes, because a close friend holds a key position in the company being audited.

  C.  Yes, because her brother has a significant financial interest in the company.

Joanna's brother is a close relative of a covered member and, therefore, causes Joanna's independence problem, especially because his holding is known to Joanna, significant to him, and over 5%.

  D.  B and C

Because B does not create an independence problem, D cannot be The right answer.

Question #12 (AICPA.941123AUD-AU) ________________________________________

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that

  A.  Distribution of the report is restricted to the specified users.

An engagement to apply agreed-upon procedures to prospective financial statements requires that distribution of the report be restricted to the specified users, that the users agree upon and take responsibility for the sufficiency of the procedures performed, and that the prospective financial statements include a summary of significant assumptions.

  B.  The prospective financial statements are also examined.

  C.  Responsibility for the adequacy of the procedures performed is taken by the accountant.

  D.  Negative assurance is expressed on the prospective financial statements taken as a whole.

Question #13 (AICPA.082020REG-1.B) ________________________________________

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)

In order to preserve independence, the PCAOB requires:

  A.  Rotation of audit firms.

  B.  Rotation of lead audit partners and reviewing audit partners on a 5-years on/5-years off basis.

Accurate, but not the best answer. The PCAOB does, in fact, require this 5-on/5-off rotation.

  C.  Rotation of other audit partners on a 7-on/2-off/7-off basis.

  D.  B and C

Because both B and C are accurate, this is the best answer.

Question #14 (AICPA.951104REG-BL) ________________________________________

According to the standards of the profession, which of the following activities would most likely not impair a CPA's independence?

  A.  Providing extensive advisory services for an audit client that is a private company.

An accountant generally preserves independence if she does not become entangled with a client financially, act as a director or officer in a client firm, or allow a client to indemnify her for malpractice. Merely providing advice, even if done extensively, is likely acceptable for a private company audit client. Even with private company audit clients, there are limits to what an auditor can do, but this is the best of the four answers.

  B.  Contracting with a client to supervise the client's office personnel.

  C.  Signing a client's checks in emergency situations.

  D.  Accepting a luxurious gift from a client.

Question #15 (AICPA.950501REG-BL) ________________________________________

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?

  A.  Obtaining a collateralized automobile loan from a financial institution client.

  B.  Litigation with a client relating to billing for consulting services for which the amount is immaterial.

  C.  Employment of the CPA's spouse as a client's internal auditor.

Auditors cannot be officers of a client to be audited. Having a spouse in such a position is similarly prohibited.

  D.  Acting as an honorary trustee for a not-for-profit organization client.

Question #16 (AICPA.990502AUD-AU) ________________________________________

Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?

  A.  ElectroNet.

  B.  EDIFACT.

  C.  TechSafe.

  D.  WebTrust.

In a WebTrust assurance engagement, the practitioner expresses an opinion on management's assertions regarding business practices, transaction integrity, and information protection. The engagement is conducted in accordance with the attestation standards. A WebTrust Seal of Assurance can be displayed for a limited period of time on the websites of entities who receive unqualified opinions in WebTrust engagements.

Question #17 (AICPA.010501AUD-AU) ________________________________________

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when

  Testifying as an expert witness in accounting and auditing matters given stipulated facts    Compiling a client's financial projection that presents a hypothetical course of action  

  Yes Yes  

  Yes No  

  No Yes  

Statements on Standards for Attestation Engagements (SSAE) apply to attest and agreed-upon procedures engagements, compilations and examinations of financial forecasts and projections, and pro forma, compliance and internal control engagements. 

Thus, they apply to the compilation of a financial projection and they do not apply to expert witness testimony.

  No No  

Question #18 (AICPA.920552AUD-AU) ________________________________________

An accountant's report expressing an opinion on a nonissuer's internal control over financial reporting should state that

  A.  Only those controls on which the accountant intends to rely were reviewed, tested, and evaluated.

  B.  Management is responsible for maintaining effective internal control over financial reporting.

An attestation report on internal control would include a statement that management is responsible for maintaining effective internal control over financial reporting. It should also state:

1. the examination was conducted in accordance with standards established by the AICPA;

2. the work performed provides a reasonable basis for the opinion;

3. inherent limitations exist in any internal control system; and

4. the opinion expressed.

  C.  The study and evaluation of the internal controls was conducted in accordance with generally accepted auditing standards.

  D.  Distribution of the report is restricted for use only by management and those charged with governance.

Question #19 (AICPA.920501REG-BL) ________________________________________

In a state jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over work papers without a client's permission?

  A.  Purchaser of the CPA's practice.

  B.  State tax authorities.

  C.  State court.

Do not be confused by the statute. An accountant-client privilege, if it exists, is held by the CLIENT. It is the client who decides whether an accountant may or may not reveal information about the client. If the client does not give permission, the accountant cannot release information. The only exception is that an accountant may release working papers to a CPA society quality control panel.

  D.  State CPA society quality control panel.

Do not be confused by the statute. An accountant-client privilege, if it exists, is held by the CLIENT. It is the client who decides whether an accountant may or may not reveal information about the client. If the client does not give permission, the accountant cannot release information. The only exception is that an accountant may release working papers to a CPA society quality control panel.

Question #20 (AICPA.901103REG-BL) ________________________________________

Mell Corp. engaged Davis & Co., CPAs. to audit Mell's financial statements. Mell's management informed Davis it suspected that the accounts receivable were materially overstated. Although the financial statements did include a materially overstated accounts receivable balance, Davis issued an unqualified opinion.

Mell relied on the financial statements in deciding to obtain a loan from County Bank to expand its operations. 

County relied on the financial statements in making the loan to Mell. As a result of the overstated accounts receivable balance, Mell has defaulted on the loan and has incurred a substantial loss.

If County sues Davis for fraud, must Davis furnish County with the audit working papers?

  A.  Yes, if the working papers are lawfully subpoenaed into court.

Working papers normally may not be released without the client's consent. However, the client does not hold an absolute privilege like the type that exists for attorney-client communications. If a court orders the release of the papers, then Davis must hand them over.

  B.  Yes, provided that Mell does not object.

  C.  No, because of the privileged communication rule, which is recognized in a majority of jurisdictions.

  D.  No, because County was not in privity of contract with Davis.

 

 

• Question 1

1.33 out of 1.33 points

 

Which of the following statements is correct?

 

 

• Question 2

 

 

Which of the following can cause a CPA to receive an automatic suspension from the AICPA?
 


I. The CPA’s CPA certificate is revoked by the relevant state board of accountancy.

II. The CPA is convicted of a crime punishable by more than one year in jail.

III. The CPA intentionally did not file his personal tax return as required by federal law.

 

 

 

• Question 3

 

 

Which of the following is not considered a threat to independence in the Code of Professional Conduct's Independence Conceptual Framework?

 

 

• Question 4

 

 

When the dependent daughter of a partner in a CPA firm owns ten shares of stock in an audit client, which rule of the Code of Professional Conduct is most directly relevant?

 

 

• Question 5

 

 

An auditor’s independence is considered impaired if the auditor has

 

 

• Question 6

 

 

According to the profession’s ethical standards, a CPA who is a covered member would be considered independent in which of the following instances?

 

 

• Question 7

 

 

In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?

 

 

• Question 8

 

 

Bill Fling, CPA, has posted the general ledger and has maintained the financial records of Wing Corporation.  As a part of his responsibilities he has recorded journal entries and made closing entries.  Which of the following best summarizes the AICPA and SEC views as to the following question:  Is audit independence impaired? 

AICPA SEC

 

 

 

• Question 9

 

 

The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the selected auditor must be

 

 

• Question 10

 

 

Independence standards of the GAO for audits in accordance with generally accepted government auditing standards describe three types of impairments of independence. Which of the following is one of these types of impairments?

 

 

• Question 11

 

 

Which of the following bodies enforce the audit requirements of the Employee Retirement Security Act of 1974 (ERISA) with respect to employee benefit plans?

 

 

• Question 12

 

 

The Department of Labor (DOL) most frequently conducts financial and performance audits following

 

 

• Question 13

 

 

Which of the following is correct concerning General Accountability Office (GAO) audits?

 

 

• Question 14

 

 

Which of the following activities would most likely be considered an attestation engagement?

 

 

• Question 15

 

 

The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and statement of cash flows is applied within the framework of

 

 

• Question 16

 

 

The auditor faces a risk that the examination will not detect material misstatements which occur in the accounting process. In regard to minimizing this risk, the auditor primarily relies on

 

 

• Question 17

 

 

Under the Sarbanes‐Oxley Act of 2002, which of the following is not a stated responsibility of the Public Company Accounting Oversight Board?

 

 

• Question 18

 

 

At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers?

 

 

• Question 19

 

 

The risk that an auditor will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

 

 

• Question 20

 

 

Which of the following factors would least influence an auditor’s consideration of the reliability of data for purposes of analytical procedures?

 

 

• Question 21

 

 

Which of the following audit risk components may be assessed in nonquantitative terms? 

Inherent risk Control risk Detection risk

 

 

 

• Question 22

 

 

Which of the following is correct concerning a "fraud risk factor?"

 

 

• Question 23

 

 

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

 

 

• Question 24

 

 

When an auditor discovered that certain control activities were ineffective, the auditor most likely would increase the

 

 

• Question 25

 

 

An independent auditor has concluded that the client’s records, procedures, and representation can be relied upon based on tests made during the year when internal control was found to be effective. The auditor should test the records, procedures, and representations again at year‐end if

 

 

• Question 26

 

 

As a result of analytical procedures, 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

 

 

• Question 27

 

 

In assessing the competence of a client’s internal auditor, an independent auditor most likely would consider the

 

 

• Question 28

 

 

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization

 

 

• Question 29

 

 

Which of the following is a standard control for cash disbursements?

 

 

• Question 30

 

 

Effective internal control over the purchasing of raw materials should usually include all of the following procedures except

 

 

• Question 31

 

 

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and

 

 

• Question 32

 

 

Tracing bills of lading to sales invoices provides evidence that

 

 

• Question 33

 

 

In obtaining an understanding of a manufacturing entity's internal control over inventory balances, an auditor most likely would

 

 

• Question 34

 

 

Audit documentation of the audit of a nonpublic company should be retained

 

 

• Question 35

 

 

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are

 

 

• Question 36

 

 

Each of the following is a type of a known misstatement, except

 

 

• Question 37

 

 

A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson’s ability to continue as a going concern for a reasonable period of time?

 

 

• Question 38

 

 

“In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies.”  The forgoing passage most likely is from a(n)

 

 

• Question 39

 

 

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use

 

 

• Question 40

 

 

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

 

 

• Question 41

 

 

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all

 

 

• Question 42

 

 

The auditor tests the quantity of materials charged to work in process by tracing these quantities to

 

 

• Question 43

 

 

Prior to the start of an audit the auditor learns that the client was granted a 6‐month waiver of the repayment of principal on the installment loan with the bank without an extension of the maturity date. With respect to this loan, the audit plan used by the auditor would be least likely to include a verification of the

 

 

• Question 44

 

 

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?

 

 

• Question 45

 

 

An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher

 

 

• Question 46

 

 

In determining the number of documents to select for a test to obtain assurance that all sales have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the

I.  Likely rate of deviations.

II.  Allowable risk of assessing control risk too high.

 

 

 

• Question 47

 

 

Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability‐proportional‐to‐size(PPS) sampling?

 

 

• Question 48

 

 

Which of the following statements is correct concerning probability‐proportional‐to‐size (PPS) sampling, also known as dollar unit sampling?

 

 

• Question 49

 

 

According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed‐upon procedures engagements?

 

 

• Question 50

 

 

Which auditor actions are possible when that auditor incurs a scope limitation relating to a public company engagement on whether a previously reported material weakness continues to exist? 

Disclaimer of Opinion Qualified Opinion

 

 

 

• Question 51

 

 

Comfort letters are ordinarily signed by the

 

 

• Question 52

 

 

As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA

 

 

• Question 53

 

 

When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive

 

 

• Question 54

 

 

Comfort letters ordinarily are 

Addressed to the client’s Signed by the client’s

 

 

 

• Question 55

 

 

An auditor is reporting on cash basis financial statements.  These statements are best referred to in his opinion by which of the following descriptions?

 

 

• Question 56

 

 

The auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the client refuses to revise or eliminate the material inconsistency, the auditor should

 

 

• Question 57

 

 

With respect to consistency, which of the following should be done by an independent auditor, who has not examined a company’s financial statements for the preceding year but is doing so in the current year?

 

 

• Question 58

 

 

An auditor would express an unmodified opinion and add an emphasis‐of‐matter paragraph for 

An unjustified 
 accounting change A material weakness 
 in the internal control

 

 

 

• Question 59

 

 

When making a review of interim financial information the auditor’s work consists primarily of

 

 

• Question 60

 

 

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified (unqualified) opinion on the current year's

 

 

• Question 61

 

 

An auditor’s report includes the following statement:  “The financial statements do not present fairly the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles.” This auditor’s report was most likely issued in connection with financial statements that are

 

 

• Question 62

 

 

When the report of a group auditor makes reference to the examination made by another auditor, the other auditor may be named if express permission to do so is given and

 

 

• Question 63

 

 

Jones, CPA, is the group engagement partner who is auditing the consolidated financial statements of his client. Jones plans to refer to a component auditor's examination of the financial statements of a subsidiary company but does not wish to present the other CPA’s audit report. Both Jones and the other CPA’s audit reports have noted no exceptions to generally accepted accounting principles. Under these circumstances the opinion paragraph of Jones’ consolidated audit report should express

 

 

• Question 64

 

 

When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain sufficient appropriate audit evidence, the auditor should issue a(n)

 

 

• Question 65

 

 

After performing all necessary procedures a predecessor auditor reissues a prior‐period report on financial statements at the request of the client without revising the original wording. The predecessor auditor should

 

 

• Question 66

 

 

The individual with whom an auditor would be most likely to discuss specific access controls within a client’s relational database management system is the

 

 

• Question 67

 

 

Carmel Department Store has an ERP information system and is planning to issue credit cards to creditworthy customers. To strengthen internal control by making it difficult for one to create a valid customer account number, the company’s independent auditor has suggested the inclusion of a check digit which should be placed

 

 

• Question 68

 

 

Which of the following is an auditor’s client most likely to use to perform queries requested by the auditor of a relational database?

 

 

• Question 69

 

 

Which of the following is an advantage of using a value‐added network for EDI transactions?

 

 

• Question 70

 

 

Which of the following is not a major reason for maintaining an audit trail for a computer system?