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Auditing
[1]
A CPA who is associated with the unaudited financial statements of a public entity suggests revisions to the notes to provide adequate disclosure. If the client does not make the necessary changes, the CPA should disclaim an opinion and
A. Refer to the nature of the departure but need not provide further details even if practicable.
B. Include the necessary information if limited assurance can be expressed. C. Not refer to the departure. D. If practicable, include the necessary information.
[2]
Herman is the new independent external auditor for Bettina Company. Herman’s predecessor was Travis. In these circumstances, Herman must
A. Attempt to communicate with Travis. B. Reject the engagement if the change in auditors resulted from a dispute
between Bettina and Travis. C. Seek the permission of the SEC to accept the engagement if Bettina is
publicly owned. D. Review Travis’s audit documentation if the audit is to be in accordance
with GAAS.
[3]
Disclosure in financial statements of a reporting entity that has participated in related-party transactions that are material, individually or in the aggregate, should include all of the following except
A. A description of the transactions for the period reported upon including amounts, if any, and such other information necessary to an understanding of the effects on the financial statements.
B. The dollar volume of the transactions, amounts due from or to related parties and, if not otherwise apparent, the terms and manner of settlement.
C. The nature of the relationship. D. A statement that the transactions would have taken place regardless of
whether the parties were related.
[4]
Which of the following is a transaction that may indicate the existence of related parties?
A. An interest-free loan.
B. A large loan with specified terms as to when and how the funds are to be repaid.
C. The purchase of real estate at a price comparable to its appraised value. D. The sale of equipment to another corporation with a similar name.
[5]
When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the
A. Yes Yes B. No No C. No Yes D. Yes No
[6]
Most of the independent auditor’s work in formulating an opinion on financial statements consists of
A. Obtaining and examining evidential matter.B. Considering internal control.C. Comparing recorded accountability with assets.D. Examining cash transactions.
[7]
A weakness in internal control relevant to available-for-sale securities is that A. The internal auditors test the controls. B. A trust company having no direct contact with the auditee’s employees
has custody. C. The president approves temporary stock purchases subject to the board’s
periodic review. D. Certificated securities are held in bearer form.
[8]
The attestation standards are an extension of GAAS, but their composition differs from that of GAAS. Which of the following general attestation standards does not explicitly correspond to one of the three general standards included in GAAS?
A. Adequate knowledge in the subject matter of the assertion. B. Adequate technical training and proficiency in the attest function. C. Due professional care. D. Independence.
[9]
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph
A. Is considered a qualification of the opinion. B. Violates auditing standards if this information is already disclosed in notes
to the financial statements. C. Necessitates a revision of the opinion paragraph to include the phrase
“with the foregoing explanation.” D. Is appropriate and would not negate the unqualified opinion.
[10]
During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past 7 years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the
A. Management representation letter.B. Preliminary judgment about materiality levels.C. Letter of audit inquiry to the client’s attorney.D. Prior years’ audit plans.
[11]
The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of
A. Generally accepted accounting principles. B. Auditing standards, which include the concept of materiality. C. Quality control. D. The auditor’s assessment of control risk.
[12]
Which of the following statements is false regarding disclosure in a client’s financial statements?
A. Information essential for a fair presentation should be set forth in the financial statements.
B. Inadequate disclosure normally results in the auditor including the required information in the report.
C. Omission of a statement of cash flows is considered inadequate disclosure. D. The auditor should never disclose information in the report that the client
has not shown in the financial statements.
[13]
Which of the following is the authoritative body designated to promulgate attestation standards?
A. Auditing Standards Board. B. Financial Accounting Standards Board. C. Government Accountability Office. D. Governmental Accounting Standards Board.
[14]
An “issuer” subject to the Securities Exchange Act of 1934 is required to include in its annual report an auditor’s opinion on whether internal control over financial reporting was
A. Adequate to eliminate fraud.B. Sufficient to meet the needs of the shareholders.C. Properly designed and operated effectively.D. Complete and fair.
[15]
An auditor completed field work for a client on February 15. The related financial statements were issued on March 10. On April 8, the client suffered the loss of a significant portion of its plant facilities by fire. The client requested additional copies of the previously issued report on May 5. Assuming no additional audit work has been or will be performed, the auditor should
A. Have the client disclose the event in a separate note to the statements identified as “Event (Unaudited) Subsequent to the Date of the Report of the Independent Auditor.”
B. Disregard the casualty and reissue the original report with no change in date.
C. Use dual dating. D. Either have the client disclose the event in a separate note to the
statements identified as “Event (Unaudited) Subsequent to the Date of the Report of the Independent Auditor” OR use dual dating.
[16]
The auditor’s consideration of the client’s internal control is documented to substantiate
A. The fairness of the financial statement presentation.B. Compliance with auditing standards.C. Adherence to procedures for economic, effective, and efficient
management decision making.D. Conformity of the accounting records with generally accepted accounting
principles.
[17]
A CPA is testing sales transactions. What procedure may (s)he use to test for posting of fictitious accounts receivable?
A. Tracing a sample of sales invoices to the accounts receivable subsidiary ledger.
B. Vouching debits in the accounts receivable ledger to sales invoices and shipping documents.
C. Tracing a sample of shipping documents and sales invoices to the sales journal.
D. Sending out negative confirmations.
[18]
When the principal auditor refers to another auditor, the division of responsibility should be clearly indicated. The magnitude of the portion audited by the other auditor may be disclosed in terms of
A. No Yes Yes B. Yes Yes Yes C. Yes Yes No D. Yes No No
[Fact Pattern #1]
An audit was performed by Leo Scott, CPA, of the financial statements of Lectronic Leasing Company for the year ended December 31.
A cash advance to Computer Credit Corporation is material to the presentation of Lectronic’s financial position. Computer Credit’s unaudited financial statements show negative working capital, negative equity, and losses in each of the 5 preceding years. Mr. Scott has suggested an allowance for the uncollectibility of the advance to Computer Credit.
All of the capital stock of both Lectronic and Computer Credit is owned by Paul McRae and his family. Mr. McRae adamantly refuses to consider an allowance for uncollectibility. He insists that Computer Credit eventually will be profitable and be able to repay the advance.
Mr. McRae proposes the following note to Lectronic’s statements:
Note 1 to Financial Statements
At December 31, the Company had advanced $500,000 to Computer Credit Corporation. We obtained written confirmation of this debt from Computer Credit Corporation and reviewed unaudited financial statements of Computer Credit Corporation. Computer Credit Corporation is not in a position to repay this advance at this time, but the Company has informed us that it is optimistic as to the future of Computer Credit Corporation. Computer Credit Corporation’s capital stock is wholly owned by Lectronic Leasing Company’s common shareholders.
[19]
(Refers to Fact Pattern #1)A deficiency in the given note is that it
A. Does not identify the auditor. B. Does not state the auditor’s conclusion or opinion. C. Is worded as a representation of the auditor. D. Includes the client’s representation as to collectibility.
[20]
Which of the following is a true statement about an auditor’s responsibility regarding consideration of fraud in a financial statement audit?
A. The auditor should consider the types of misstatements that could occur, determine whether the necessary controls are prescribed and are being followed, but need not specifically assess the risk of fraud.
B. The auditor should assess the risk that errors may cause the financial statements to contain material misstatements, and determine whether the necessary controls are prescribed and are being followed satisfactorily.
C. The auditor should consider the client’s internal control, and plan and perform the audit to provide absolute assurance of detecting all material misstatements.
D. The auditor should specifically assess the risk of material misstatement due to fraud.
[21]
Internal control can provide only reasonable assurance of achieving entity control objectives. One factor limiting the likelihood of achieving those objectives is that
A. Management monitors internal control.B. The board of directors is active and independent.C. The auditor’s primary responsibility is the detection of fraud.D. The cost of internal control should not exceed its benefits.
[22]
Which of the following types of evidence is an auditor most likely to consider in determining whether internal controls are operating as designed?
A. A letter of representations corroborating inventory pricing. B. Attorneys’ responses to the auditor’s inquiries. C. Questionnaires completed by employees in the receiving department
concerning their duties and responsibilities. D. Confirmations of receivables verifying account balances.
[23]
Auditors must obtain and evaluate sufficient appropriate evidence to support significant accounting estimates. Differences between the estimates best supported by the evidence and the estimates in the financial statements
A. Should arouse concern only when estimates are based on hypothetical assumptions or subjective factors.
B. Are per se unreasonable and should be treated as misstatements if collectively material.
C. May be individually reasonable but collectively indicate possible bias. D. May be individually unreasonable, but if they collectively indicate no bias,
aggregation of the differences with other likely misstatements is not required.
[24]
An auditor may express an unqualified opinion with an explanatory paragraph in all the following circumstances except a(n)
A. Substantial doubt about an entity’s ability to continue as a going-concern. B. Emphasis of a matter. C. A scope limitation resulting from inadequate client records. D. Nonconformity with GAAP that is necessary for fair presentation in
unusual circumstances.
[25]
Which of the following entities should provide a statement of cash flows when reporting financial position and the results of operations?
I. A privately held business enterpriseII. A publicly held business enterprise
III. A not-for-profit organization
A. I and II only. B. II and III only. C. I, II, and III. D. I only.
[26]
When a corporate client maintains its own stock records, the auditor primarily will rely upon
A. Confirmation with the company secretary of shares outstanding at year-end.
B. Inspection of the stock book at year-end and accounting for all certificate numbers.
C. Confirmation of the number of shares outstanding at year-end with the appropriate state official.
D. Review of the corporate minutes for data as to shares outstanding.
[27]
A CPA is most likely to disclaim an opinion when (s)he A. Conducts an audit and discovers a significant uncertainty. B. Discovers that some of an audit client’s inventory records are inadequate
for management’s use. C. Lacks independence with respect to the client. D. Has an immaterial indirect financial interest in an audit client.
[28]
Mayer, CPA, is auditing equity. Tests typically include all the following except A. Tracing individual dividend payments to the capital stock records. B. Determining that dividend declarations comply with debt agreements. C. Reviewing the bank reconciliation for the imprest dividend account. D. Verifying the authorization of dividends by inspecting the directors’
minutes.
[29]
Alfonsina is a public accountant who is not independent with respect to Gaston Co. If she is associated with its unaudited financial statements, Alfonsina
A. Must disclaim an opinion but may issue a compilation report if Gaston is a private entity.
B. Need not disclaim an opinion and may issue a review or compilation report if Gaston is a private entity.
C. May issue a review report if Gaston is a public entity but must disclaim an opinion.
D. May not issue a review or compilation report and must disclaim an opinion whether or not Gaston is a public entity.
[30]
When criteria to select among alternative accounting principles have not been established to relate accounting methods to circumstances, the auditor
A. May concur with management’s selection of an accounting principle that appears appropriate when applied in a manner similar to the application of an established principle to a similar event.
B. Must treat all alternative principles as acceptable. C. Is required by current authoritative literature to obtain a ruling from the
AICPA. D. Is required by the SEC to seek advice from the FASB about the proper
accounting method.
[31]
If a company changes from deferring and amortizing a cost to recording it as an expense when incurred because future benefits of the cost have become doubtful, the auditor should
A. Not modify the report as to consistency because the change is a change in accounting principle.
B. Modify the report as to consistency because the change is a correction of an error in principle.
C. Not modify the report as to consistency because the change is a change in estimate.
D. Modify the report as to consistency because the change is a change in principle inseparable from a change in estimate.
[32]
To be independent, the auditor need not be A. Intellectually honest. B. Objective. C. Appointed by the board of directors of the client. D. Unbiased.
[33]
Financial statement audit plans are modified to suit the circumstances of particular engagements. An audit plan usually should be developed
A. After obtaining an understanding of the information and communication and control activities components of internal control.
B. Prior to beginning the actual audit work. C. When the engagement letter is prepared. D. After the auditor has obtained an under- standing of the client, its
environment, and internal control and assessed risks.
[34]
If control risk for equipment retirements is high, what procedure might an auditor perform to test for unrecorded retirements?
A. Perform a complete physical count of all equipment at an interim date and again at year-end.
B. Compare depreciation expense with equipment listed. C. Account for all serially numbered retirement work orders. D. Inspect items of equipment selected from the accounting records.
[35]
Who may practice public accounting in the United States? A. Those persons designated by the American Institute of Certified Public
Accountants as expert accountants.
B. Any person who has passed the CPA exam. C. Those persons who are licensed as certified public accountants by their
respective states. D. Those persons designated by the Internal Revenue Service.
[36]
If the auditor is reporting on several periods and a change in accounting principle from “completed contract” to “percentage of completion” method occurred in the earliest period reported upon, the auditor should
A. Not refer to the change.B. Qualify the opinion for the first year reported on but express an
unqualified opinion for the subsequent years.C. Refer to the change in the report even though there is no inconsistency
subsequent to the change.D. Refer to the change in a footnote to the audit report.
[37]
In evaluating the reasonableness of an accounting estimate, an auditor is most likely to concentrate on key factors and assumptions that are
A. Consistent with prior periods. B. Deviations from historical patterns. C. Similar to industry guidelines. D. Objective and not susceptible to bias.
[38]
Assume that an auditor includes the following in his/her report: “Because of the unavailability of evidence regarding the uncertainty involving the collectibility of the advance, we are unable to express an opinion.” This language constitutes
A. An improper type of reporting. B. An adverse opinion. C. Negative assurance. D. A disclaimer of opinion.
[39]
Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit?
A. Determine whether inadequate provisions for the safeguarding of assets have been corrected.
B. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
C. Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the financial statements.
D. Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement.
[40]
An auditor is most likely to verify the interest earned on bond investments byA. Testing controls relevant to cash receipts.B. Verifying the receipt and deposit of interest checks.C. Recomputing the interest earned on the basis of face amount, interest rate,
and period held.D. Confirming the bond interest rate with the issuer of the bonds.
[41]
The application of statistical sampling techniques is least related to which of the following generally accepted auditing standards?
A. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor.
B. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
C. The auditor must adequately plan the work and must properly supervise any assistants.
D. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the nature, timing, and extent of further audit procedures.
[42]
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that
A. The communication with the audit committee should be revised. B. Additional tests of details are required. C. Internal control activities are not operating effectively. D. Misstatements exist in the relevant account balances.
[43]
Equipment acquisitions that are misclassified as maintenance expense most likely will be detected by a control that provides for
A. Segregation of duties of employees in the accounts payable department. B. Authorization by the board of directors of significant equipment
acquisitions.
C. Independent verification of invoices for disbursements recorded as equipment acquisitions.
D. Investigation of variances within a formal budgeting system.
[44]
One of the primary roles of an audit plan (program) is to A. Document an auditor’s understanding of internal control. B. Assess the audit risk accepted by the auditor. C. Provide for a standardized approach to the audit engagement. D. Serve as a tool for planning, directing, and controlling audit work.
[45]
Generally accepted auditing standards for private companies are established by which of the following?
I. The Auditing Standards Board II. The SEC
III. The Institute of Internal Auditors
A. II only. B. I, II, and III. C. I only. D. I and II.
[46]
To which of the following treatments of treasury stock should an auditor object? A. Dividends are paid on treasury stock. B. Treasury stock is recorded at cost. C. Treasury stock is classified as a deduction from equity. D. Retained earnings are restricted with regard to treasury stock.
[47]
Blue, CPA, has been asked to report on the application of accounting principles to a specific transaction by an entity that is audited by another CPA. Blue may accept this engagement but should
A. Consult with the continuing CPA to obtain information relevant to the transaction.
B. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles.
C. Notify the entity that the report is for general use. D. Report the engagement’s findings to the entity’s audit committee, the
continuing CPA, and management.
[48]
An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls was most likely performed to support management’s financial statement assertion(s) of
A. Yes
Yes
B. Yes
No
C. No
No
D. No
Yes
[49]
Which of the following auditing procedures is ordinarily performed last? A. Obtaining a management representation letter. B. Reading of the minutes of the directors’ meetings. C. Testing of the purchasing function. D. Confirming accounts payable.
[50]
Which of the following cash transfers results in a misstatement of cash at December 31, 20X0?
A. 12/31/X0 1/4/X1 12/31/X0 12/31/X0 B. 1/4/X1 1/5/X1 12/31/X0 1/4/X1 C. 12/31/X0 1/5/X1 12/31/X0 1/4/X1 D. 1/4/X1 1/11/X1 1/4/X1 1/41/X1
[51]
An independent auditor may accept a client’s sampling method for the performance of physical inventory only if
A. Controls are not relied on.B. The sampling plan has statistical validity.
C. The client is willing to accept a qualification of the auditor’s opinion because of a scope limitation.
D. Over half of the dollar value of the inventory is counted.
[52]
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(n)
A. Qualified opinion because of a departure from auditing standards. B. Unqualified opinion. C. Unqualified opinion with an explanatory paragraph. D. Qualified opinion because of a scope limitation.
[53]
In the audit of property, plant, and equipment, the auditor tries to do all of the following except to
A. Judge the reasonableness of the depreciation. B. Determine the extent of property abandoned during the year. C. Obtain an understanding of internal control. D. Assess the adequacy of replacement funds.
[54]
A CPA may be a director of a not-for-profit organization, which is also an audit client, if certain conditions are met. Which of the following is not a condition that must be met for the auditor to be independent?
A. Participation is restricted to the use of his/her name. B. The auditor’s name is not included on the organization’s letterhead. C. The auditor does not vote or participate in management functions. D. The position is purely honorary.
[55]
Burrow & Co., CPAs, have provided annual audit and tax compliance services to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin field work for the current year’s audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the field work on Mare’s audit?
A. Mare commits to pay the past due fee in full before the audit report is issued.
B. Mare engages another firm to perform the field work, and Burrow is limited to reviewing the working papers and issuing the audit report.
C. Mare gives Burrow an 18-month note payable for the full amount of the past due fees before Burrow begins the audit.
D. Mare sets up a two-year payment plan with Burrow to settle the unpaid fee balance.
[56]
In a statement of cash flows, A. Financing activities include the acquisition of fixed assets. B. Investing activities include receiving donor-restricted resources that must
be used for long-term purposes. C. Noncash investing activities should not be reported in the statement. D. Interest received that is donor-restricted for long-term purposes is treated
as an operating cash inflow.
[57]
In a well-designed internal control system, two tasks that should be performed by different persons are
A. Posting of amounts from both the cash receipts journal and cash payments journal to the general ledger.
B. Approval of bad debt write-offs and reconciliation of the accounts payable subsidiary ledger and controlling account.
C. Recording of cash receipts and preparation of bank reconciliations. D. Distribution of payroll checks and approval of sales returns for credit.
[58]
Which of the following costs should not be capitalized? A. Fencing the plant parking lot. B. Machine operator’s wages during a period of testing and adjusting new
machinery. C. Major reconditioning of a delivery truck. D. Maintenance of an unused stand-by plant.
[59]
An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual circumstances are involved. Credit memoranda are prenumbered and must correlate with receiving
reports. Which of the following areas could be viewed as an internal control weakness of the above organization?
A. Credit approvals. B. Write-offs of delinquent accounts. C. Handling of credit memos. D. Monthly aging of receivables.
[60]
You are a CPA retained by the manager of a cooperative retirement village to do write-up work. You are expected to prepare unaudited financial statements with each page marked “unaudited” and accompanied by a disclaimer of opinion stating no audit was made. In performing the work, you discover that there are no invoices to support $25,000 of the manager’s claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?
A. Obtain from the manager a written statement that you informed him/her of the missing invoices and that (s)he gave his/her assurance that the disbursements were proper.
B. Include the unsupported disbursements in the statements because you are not expected to make an audit.
C. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.
D. Submit the expected statements but omit the $25,000 of unsupported disbursements.
[61]
An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting
A. Opening and closing inventory balances. B. Shipping and receiving activities. C. Cash receipts and accounts receivable. D. Cutoffs of sales and purchases.
[62]
Positive confirmations of accounts receivable are least likely to be used A. If the auditor does not want a response when the debtor agrees with the
balance. B. When the relevant internal controls are effective. C. When large balances are involved. D. In combination with negative confirmations.
[Fact Pattern #2]Management discovers that a supervisor at one of its restaurant locations removes excess
cash and resets sales totals throughout the day on the point of sale (POS) system. At closing, the supervisor deposits cash equal to the recorded sales on the POS system and keeps the rest.
The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differences between sales and deposits are recorded in an over/short account and, if necessary, followed up with the location supervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for one week at the location and then destroyed.
[63]
(Refers to Fact Pattern #2)Which of the following audit procedures would have detected the fraud?
A. Comparing a sample of the close-of-day POS reports to copies of the bank deposit slips.
B. For selected days, reconciling the total of customer food checks to daily bank deposits.
C. Flowcharting the controls over the verification of bank deposits. D. On a test basis, verifying that the serial-numbered customer food checks
are accounted for.
[64]
An appropriate audit procedure for testing the year-end cutoff for unrecorded liabilities is
A. Tracing recorded liabilities to supporting documents. B. Preparing an aging schedule for accounts payable. C. Reviewing the general journal for unusual entries recorded immediately
prior to year-end. D. Examining shipment date and terms of shipment on vendor invoices
received prior and subsequent to year-end.
[65]
In May 20X2, an auditor reissues the auditor’s report on the 20X0 financial statements at a continuing client’s request. The 20X0 financial statements are not restated and the auditor does not revise the wording of the report. The auditor should
A. Use the original report date on the reissued report. B. Use the release date of the reissued report. C. Use the current-period auditor’s report date on the reissued report.
D. Dual date the reissued report.
[66]
Dickins & Co., CPAs, offers to maintain on its computer certain routine accounting records for its audit client, Lake. If Lake accepts the offer and Dickins & Co. continues to function as independent auditor, Dickins & Co. is most likely to violate the rules relating to auditor’s independence of which organization(s)?
A. No Yes B. Yes No C. No No D. Yes Yes
[67]
Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?
A. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
B. A distinguishing mark of a profession is its acceptance of responsibility to the public.
C. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.
D. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
[68]
An auditor is obligated to communicate a proposed audit adjustment to an entity’s audit committee if the adjustment
A. Related to an uncorrected misstatement, was determined to be immaterial by management, and pertained to the earliest period presented.
B. Has a significant effect on the entity’s financial reporting process. C. Has not been recorded before the end of the auditor’s field work. D. Is a recurring matter that was proposed to management the prior year.
[69]
Which rule is not included in the Code of Professional Conduct? A. Acts Discreditable. B. Advertising and Other Forms of Solicitation. C. Commissions. D. Incompatible Occupations.
[70]
Which of the following procedures would provide the most reliable audit evidence?
A. Analytical procedures performed by the auditor on the entity’s trial balance.
B. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
C. Inspection of bank statements obtained directly from the client’s financial institution.
D. Inquiries of the client’s internal audit staff held in private.
[71]
Which of the following components of an entity’s internal control includes development and use of training policies that communicate prospective roles and responsibilities to employees?
A. Monitoring. B. Risk assessment. C. Information and communication. D. Control environment.
[72]
In manufacturing environments, employees are often required to use time cards and job time tickets. Which is the false statement related to the use of these documents?
A. Payroll should be prepared from job time tickets. B. Time reported on job time tickets should be reconciled to time cards. C. Only one time card should exist for each employee. D. Job time tickets are completed by employees for each job worked on, and
an employee may have one or many job time tickets in a day.
[73]
A CPA should not express an opinion on the financial statements of a client unless (s)he is independent of the client. Independence is not considered impaired if the auditor
A. Has an unsecured loan acquired from a major shareholder of the client. B. Was a trustee with investment decision-making authority of a trust that
was committed to acquire a direct financial interest in the client. C. Has a material, closely held business investment with a vice president of
the client. D. Has an immaterial indirect interest in the client.
[74]
Although the potential benefits of risk assessment services reach many users, the AICPA has identified the principal users as
A. Yes Yes No B. No No Yes C. No Yes Yes D. Yes Yes Yes
[75]
Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud?
A. The factors considered in assessing control risk indicated an increased risk of material misstatement due to fraud, but only a low risk of errors in the financial statements.
B. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
C. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud.
D. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.
[76]
The information and communication component of internal control includes the methods and records established to initiate, record, process, and report transactions and to maintain accountability. For which of the following transactions would the auditor ordinarily have the greatest difficulty in obtaining assurance that internal control objectives are met?
A. Collection of contributions from the public by a nonprofit organization. B. Collection of interest and dividends by a retailer. C. Acquisition of production equipment by a manufacturer. D. Collection of credit sales by a retailer.
[77]
The normal sequence of documents and operations on a well-prepared systems flowchart is
A. Bottom to top and right to left. B. Top to bottom and left to right. C. Top to bottom and right to left. D. Bottom to top and left to right.
[78]
When confirmation for accounts payable is undertaken, which form of confirmation should be used?
A. Either positive or negative confirmation, depending on the significance or the amount of the account.
B. Positive confirmation. C. Negative confirmation. D. Neither positive nor negative confirmation; accounts payable cannot be
confirmed.
[79]
The authoritative body designated by the AICPA to promulgate standards concerning an accountant’s association with unaudited financial statements of a nonpublic entity is the
A. Auditing Standards Board. B. Financial Accounting Standards Board. C. Accounting and Review Services Committee. D. General Accounting Office.
[80]
Under AICPA rules, independence most likely will be impaired if a member of the attest engagement team
A. Brings suit for an immaterial amount allegedly owed by the client for tax services.
B. Belongs to a credit union that (s)he audits. C. Provides accounting services to a nonpublic audit client. D. Owns a vacation home jointly with an officer of an audit client.
[81]
An auditor should obtain sufficient knowledge of an entity’s information system relevant to financial reporting to understand the
A. Process used to prepare significant accounting estimates.B. Procedures used to assure the proper supervision of staff.C. Safeguards used to limit access to computer facilities.D. Programs and controls intended to address the risks of fraud.
[82]
Under which of the following circumstances might an auditor disclaim an opinion?
A. The financial statements contain a departure from generally accepted accounting principles, which has a material effect.
B. The auditor is unable to obtain sufficient evidence to support management’s assertions concerning an uncertainty.
C. There has been a material change between periods in the method of application of accounting principles.
D. The principal auditor decides to refer to the report of another auditor who audited a subsidiary.
[83]
In obtaining an understanding of an entity’s internal control in a financial statement audit, an auditor is not obligated to
A. Perform procedures to understand the design of controls.B. Determine whether the controls have been implemented.C. Search for significant deficiencies in the operation of internal control.D. Document the understanding of the entity’s internal control components.
[84]
The risk that the assessed level of control risk based on a sample is less than the true operating effectiveness of the control being tested is the risk of
A. Incorrect acceptance. B. Assessing control risk too high. C. Incorrect rejection. D. Assessing control risk too low.
[85]
Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
A. Intensify the study of internal control concerning the revenue cycle. B. Increase the assessed level of detection risk for the existence assertion. C. Inspect the shipping records documenting the merchandise sold to the
debtors. D. Review the cash receipts journal for the month prior to year-end.
[86]
Which one of the following is least likely to be considered an internal control relevant to a financial statement audit?
A. Procedures to determine whether expenditures should be made for certain R&D activities.
B. Periodic reconciliation of perpetual inventory records to the general ledger control account.
C. Comparison of physical inventory counts with perpetual inventory records.
D. Approval of customers’ requests for credit terms.
[87]
An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)
A. Unqualified opinion. B. Qualified opinion. C. Consistency modification. D. Explanatory paragraph.
[88]
In assessing control risk for the purchasing cycle, the auditor will be least influenced by
A. The effectiveness of controls in other cycles, e.g., the sales-receivables-cash receipts cycle.
B. The existence within the purchasing cycle of internal control strengths that offset weaknesses.
C. The availability of a company manual describing policies and procedures for the purchasing cycle.
D. The audit work performed in the purchasing cycle by the company’s internal auditor.
[89]
Documentary evidence is one of the principal types of corroborating information used by an auditor to substantiate an opinion. Which one of the following examples of documentary evidence would be the most reliable?
A. Material requisition slips. B. Bank statements. C. Copies of sales invoices. D. Purchase requests.
[90]
Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except
A. Study of the relationships of financial data with relevant nonfinancial data. B. Study of the relationships of elements of financial data that would be
expected to conform to a predictable pattern based upon the entity’s experience.
C. Tracing transactions through the system to determine whether procedures are being applied as prescribed.
D. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts), and similar data for the industry in which the entity operates.
[91]
A questionnaire consists of a series of questions relating to controls normally required to prevent or detect errors and fraud that may occur for each type of transaction. Which of the following is not an advantage of a questionnaire?
A. A questionnaire can be easily completed. B. A questionnaire is flexible in design and application. C. The completed questionnaire provides documentation that the auditor
understands internal control for planning purposes. D. A questionnaire provides a framework that minimizes the possibility of
overlooking aspects of internal control.
[92]
How are management’s responsibility and the auditor’s responsibility represented in the standard auditor’s report?
A. Implicitly Explicitly B. Explicitly Explicitly C. Explicitly Implicitly D. Implicitly Implicitly
[93]
Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, sampling risk, is introduced. An example of sampling risk is
A. Drawing an erroneous conclusion from sample data. B. Improperly applying a proper audit procedure to sample data. C. Properly applying an improper audit procedure to sample data. D. Projecting the results of sampling beyond the population tested.
[94]
The 10 standards consist of general standards, standards of field work, and standards of reporting. The standards of field work include which one of the following?
A. In all matters relating to the assignment, an independence in mental attitude is essential.
B. Due professional care is to be exercised in the planning and performance of the audit and preparation of the audit report.
C. The auditor must adequately plan the work and must properly supervise any assistants.
D. The audit must be performed by a person or persons having adequate technical training and proficiency.
[95]
In addition to the balance sheet and income statement, the introductory paragraph of the standard auditor’s report may identify which financial information?
A. Cash flows and notes. B. Cash flows, notes, and retained earnings. C. Cash flows, retained earnings, and changes in equity. D. Statements of changes in financial position and changes in equity.
[96]
Under the AICPA’s auditing standards, which of the following statements concerning an auditor’s required communication of significant control deficiencies is true?
A. A significant control deficiency previously communicated during the prior year’s audit that remains uncorrected causes a scope limitation.
B. An auditor’s report on significant control deficiencies should include a restriction on the distribution of the report.
C. An auditor should perform tests of controls on significant control deficiencies before communicating them to the client.
D. An auditor should communicate significant control deficiencies after tests of controls but before commencing substantive tests.
[97]
A basic premise underlying analytical procedures is that A. The study of financial ratios is an acceptable alternative to the
investigation of unusual fluctuations. B. Statistical tests of financial information may lead to the discovery of
material misstatements in the financial statements. C. These procedures cannot replace tests of balances and transactions. D. Plausible relationships among data may reasonably be expected to exist
and continue in the absence of known conditions to the contrary.
[98]
An individual just beginning an auditing career must obtain professional experience primarily to achieve
A. Seasoned judgment. B. A positive employment evaluation. C. A favorable peer review. D. A specialty designation by the AICPA.
[99]
An auditor may reasonably express a “subject to” qualified opinion for A. Yes No B. Yes Yes C. No Yes D. No No
[100]
The AICPA Code of Professional Conduct permits a CPA firm to A. Receive a commission whenever the arrangement is disclosed. B. Receive a disclosed commission for recommending products to an audit
client. C. Receive a commission from a review client. D. Pay a referral fee to obtain a client whenever the arrangement is disclosed.
