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.
. Include the necessary information if limited assurance can be e!pressed.
C. "ot refer to the departure.
#. If practicable, include the necessary information.
[2]
$erman is the new independent e!ternal auditor for ettina Company. $erman%s
predecessor was &ravis. In these circumstances, $erman must
A. Attempt to communicate with &ravis.
. Re'ect the engagement if the change in auditors resulted from a dispute
between ettina and &ravis.
C. (eek the permission of the ()C to accept the engagement if ettina is
publicly owned.
#. Review &ravis%s audit documentation if the audit is to be in accordance
with *AA(.
[3]
#isclosure 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 e!cept
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.
. &he dollar volume of the transactions, amounts due from or to related
parties and, if not otherwise apparent, the terms and manner of settlement.
C. &he nature of the relationship.
#. A statement that the transactions would have taken place regardless of
whether the parties were related.
[4]
,hich of the following is a transaction that may indicate the e!istence of related
parties-
A. An interest+free loan.
. A large loan with specified terms as to when and how the funds are to be
repaid.
C. &he purchase of real estate at a price comparable to its appraised value.
#. &he sale of equipment to another corporation with a similar name.
[5]
,hen qualifying an opinion because of an insufficiency of audit evidence, an
auditor should refer to the situation in the
A. .es .es
. "o "o
C. "o .es
#. .es "o
[6]
/ost of the independent auditor%s work in formulating an opinion on financial
statements consists of
A. 0btaining and e!amining evidential matter.
. Considering internal control.
C. Comparing recorded accountability with assets.
#. )!amining cash transactions.
[7]
A weakness in internal control relevant to available+for+sale securities is that
A. &he internal auditors test the controls.
. A trust company having no direct contact with the auditee%s employees
has custody.
C. &he president approves temporary stock purchases sub'ect to the board%s
periodic review.
#. Certificated securities are held in bearer form.
[8]
&he attestation standards are an e!tension of *AA(, but their composition differs
from that of *AA(. ,hich of the following general attestation standards does not
e!plicitly correspond to one of the three general standards included in *AA(-
A. Adequate knowledge in the sub'ect matter of the assertion.
. Adequate technical training and proficiency in the attest function.
C. #ue professional care.
#. Independence.
[9]
An auditor includes a separate paragraph in an otherwise unmodified report to
emphasi1e that the entity being reported on had significant transactions with
related parties. &he inclusion of this separate paragraph
A. Is considered a qualification of the opinion.
. 2iolates auditing standards if this information is already disclosed in notes
to the financial statements.
C. "ecessitates a revision of the opinion paragraph to include the phrase
3with the foregoing e!planation.4
#. Is appropriate and would not negate the unqualified opinion.
[10]
#uring the annual audit of A'a! Corp., a publicly held company, 5ones, CPA, a
continuing auditor, determined that illegal political contributions had been made
during each of the past 6 years, including the year under audit. 5ones 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.
5ones should reconsider the intended degree of reliance to be placed on the
A. /anagement representation letter.
. Preliminary 'udgment about materiality levels.
C. 7etter of audit inquiry to the client%s attorney.
#. Prior years% audit plans.
[11]
&he auditor%s 'udgment concerning the overall fairness of the presentation of
financial position, results of operations, and cash flows is applied within the
framework of
A. *enerally accepted accounting principles.
. Auditing standards, which include the concept of materiality.
C. 8uality control.
#. &he auditor%s assessment of control risk.
[12]
,hich 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.
. Inadequate disclosure normally results in the auditor including the
required information in the report.
C. 0mission of a statement of cash flows is considered inadequate disclosure.
#. &he auditor should never disclose information in the report that the client
has not shown in the financial statements.
[13]
,hich of the following is the authoritative body designated to promulgate
attestation standards-
A. Auditing (tandards oard.
. 9inancial Accounting (tandards oard.
C. *overnment Accountability 0ffice.
#. *overnmental Accounting (tandards oard.
[14]
An 3issuer4 sub'ect to the (ecurities )!change Act of :;<= 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.
. (ufficient to meet the needs of the shareholders.
C. Properly designed and operated effectively.
#. Complete and fair.
[15]
An auditor completed field work for a client on 9ebruary :>. &he related financial
statements were issued on /arch :?. 0n April @, the client suffered the loss of a
significant portion of its plant facilities by fire. &he client requested additional
copies of the previously issued report on /ay >. Assuming no additional audit
work has been or will be performed, the auditor should
A. $ave the client disclose the event in a separate note to the statements
identified as 3)vent ABnauditedC (ubsequent to the #ate of the Report of
the Independent Auditor.4
. #isregard the casualty and reissue the original report with no change in
date.
C. Bse dual dating.
#. )ither have the client disclose the event in a separate note to the
statements identified as 3)vent ABnauditedC (ubsequent to the #ate of the
Report of the Independent Auditor4 0R use dual dating.
[16]
&he auditor%s consideration of the client%s internal control is documented to
substantiate
A. &he fairness of the financial statement presentation.
. Compliance with auditing standards.
C. Adherence to procedures for economic, effective, and efficient
management decision making.
#. Conformity of the accounting records with generally accepted accounting
principles.
[17]
A CPA is testing sales transactions. ,hat procedure may AsChe use to test for
posting of fictitious accounts receivable-
A. &racing a sample of sales invoices to the accounts receivable subsidiary
ledger.
. 2ouching debits in the accounts receivable ledger to sales invoices and
shipping documents.
C. &racing a sample of shipping documents and sales invoices to the sales
'ournal.
#. (ending out negative confirmations.
[18]
,hen the principal auditor refers to another auditor, the division of responsibility
should be clearly indicated. &he magnitude of the portion audited by the other
auditor may be disclosed in terms of
A. "o .es .es
. .es .es .es
C. .es .es "o
#. .es "o "o
[Fact Pattern #1]
An audit was performed by 7eo (cott,
CPA, of the financial statements of
7ectronic 7easing Company for the year
ended #ecember <:.
A cash advance to Computer Credit
Corporation is material to the presentation
of 7ectronic%s financial position. Computer
Credit%s unaudited financial statements
show negative working capital, negative
equity, and losses in each of the >
preceding years. /r. (cott has suggested
an allowance for the uncollectibility of the
advance to Computer Credit.
All of the capital stock of both 7ectronic
and Computer Credit is owned by Paul
/cRae and his family. /r. /cRae
adamantly refuses to consider an allowance
for uncollectibility. $e insists that
Computer Credit eventually will be
profitable and be able to repay the advance.
/r. /cRae proposes the following note to
7ectronic%s statementsD
"ote : to 9inancial (tatements
At #ecember <:, the Company had
advanced E>??,??? to Computer Credit
Corporation. ,e 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 7ectronic 7easing Company%s
common shareholders.
[19]
ARefers to 9act Pattern F:C
A deficiency in the given note is that it
A. #oes not identify the auditor.
. #oes not state the auditor%s conclusion or opinion.
C. Is worded as a representation of the auditor.
#. Includes the client%s representation as to collectibility.
[20]
,hich of the following is a true statement about an auditor%s responsibility
regarding consideration of fraud in a financial statement audit-
A. &he 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.
. &he 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. &he auditor should consider the client%s internal control, and plan and
perform the audit to provide absolute assurance of detecting all material
misstatements.
#. &he auditor should specifically assess the risk of material misstatement
due to fraud.
[21]
Internal control can provide only reasonable assurance of achieving entity control
ob'ectives. 0ne factor limiting the likelihood of achieving those ob'ectives is that
A. /anagement monitors internal control.
. &he board of directors is active and independent.
C. &he auditor%s primary responsibility is the detection of fraud.
#. &he cost of internal control should not e!ceed its benefits.
[22]
,hich 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.
. Attorneys% responses to the auditor%s inquiries.
C. 8uestionnaires completed by employees in the receiving department
concerning their duties and responsibilities.
#. Confirmations of receivables verifying account balances.
[23]
Auditors must obtain and evaluate sufficient appropriate evidence to support
significant accounting estimates. #ifferences between the estimates best
supported by the evidence and the estimates in the financial statements
A. (hould arouse concern only when estimates are based on hypothetical
assumptions or sub'ective factors.
. Are per se unreasonable and should be treated as misstatements if
collectively material.
C. /ay be individually reasonable but collectively indicate possible bias.
#. /ay 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 e!press an unqualified opinion with an e!planatory paragraph in
all the following circumstances e!cept aAnC
A. (ubstantial doubt about an entity%s ability to continue as a going+concern.
. )mphasis of a matter.
C. A scope limitation resulting from inadequate client records.
#. "onconformity with *AAP that is necessary for fair presentation in
unusual circumstances.
[25]
,hich 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 enterprise
II. A publicly held business enterprise
III. A not+for+profit organi1ation
A. I and II only.
. II and III only.
C. I, II, and III.
#. I only.
[26]
,hen 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.
. 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.
#. Review of the corporate minutes for data as to shares outstanding.
[27]
A CPA is most likely to disclaim an opinion when AsChe
A. Conducts an audit and discovers a significant uncertainty.
. #iscovers that some of an audit client%s inventory records are inadequate
for management%s use.
C. 7acks independence with respect to the client.
#. $as an immaterial indirect financial interest in an audit client.
[28]
/ayer, CPA, is auditing equity. &ests typically include all the following e!cept
A. &racing individual dividend payments to the capital stock records.
. #etermining that dividend declarations comply with debt agreements.
C. Reviewing the bank reconciliation for the imprest dividend account.
#. 2erifying the authori1ation of dividends by inspecting the directors%
minutes.
[29]
Alfonsina is a public accountant who is not independent with respect to *aston
Co. If she is associated with its unaudited financial statements, Alfonsina
A. /ust disclaim an opinion but may issue a compilation report if *aston is a
private entity.
. "eed not disclaim an opinion and may issue a review or compilation
report if *aston is a private entity.
C. /ay issue a review report if *aston is a public entity but must disclaim an
opinion.
#. /ay not issue a review or compilation report and must disclaim an
opinion whether or not *aston is a public entity.
[30]
,hen criteria to select among alternative accounting principles have not been
established to relate accounting methods to circumstances, the auditor
A. /ay 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.
. /ust treat all alternative principles as acceptable.
C. Is required by current authoritative literature to obtain a ruling from the
AICPA.
#. Is required by the ()C to seek advice from the 9A( about the proper
accounting method.
[31]
If a company changes from deferring and amorti1ing a cost to recording it as an
e!pense when incurred because future benefits of the cost have become doubtful,
the auditor should
A. "ot modify the report as to consistency because the change is a change in
accounting principle.
. /odify the report as to consistency because the change is a correction of
an error in principle.
C. "ot modify the report as to consistency because the change is a change in
estimate.
#. /odify the report as to consistency because the change is a change in
principle inseparable from a change in estimate.
[32]
&o be independent, the auditor need not be
A. Intellectually honest.
. 0b'ective.
C. Appointed by the board of directors of the client.
#. Bnbiased.
[33]
9inancial 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.
. Prior to beginning the actual audit work.
C. ,hen the engagement letter is prepared.
#. 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.
. Compare depreciation e!pense with equipment listed.
C. Account for all serially numbered retirement work orders.
#. Inspect items of equipment selected from the accounting records.
[35]
,ho may practice public accounting in the Bnited (tates-
A. &hose persons designated by the American Institute of Certified Public
Accountants as e!pert accountants.
. Any person who has passed the CPA e!am.
C. &hose persons who are licensed as certified public accountants by their
respective states.
#. &hose persons designated by the Internal Revenue (ervice.
[36]
If the auditor is reporting on several periods and a change in accounting principle
from 3completed contract4 to 3percentage of completion4 method occurred in the
earliest period reported upon, the auditor should
A. "ot refer to the change.
. 8ualify the opinion for the first year reported on but e!press 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.
#. 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.
. #eviations from historical patterns.
C. (imilar to industry guidelines.
#. 0b'ective and not susceptible to bias.
[38]
Assume that an auditor includes the following in hisGher reportD 3ecause of the
unavailability of evidence regarding the uncertainty involving the collectibility of
the advance, we are unable to e!press an opinion.4 &his language constitutes
A. An improper type of reporting.
. An adverse opinion.
C. "egative assurance.
#. A disclaimer of opinion.
[39]
,hich of the following procedures will an auditor most likely perform when
evaluating audit evidence at the completion of the audit-
A. #etermine whether inadequate provisions for the safeguarding of assets
have been corrected.
. Consider whether the results of audit procedures affect the assessment of
the identified risks of material misstatement due to fraud.
C. 0btain assurance from the entity%s attorney that all material litigation has
been disclosed in the financial statements.
#. 2erify 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 by
A. &esting controls relevant to cash receipts.
. 2erifying the receipt and deposit of interest checks.
C. Recomputing the interest earned on the basis of face amount, interest rate,
and period held.
#. Confirming the bond interest rate with the issuer of the bonds.
[41]
&he 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.
. &he 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. &he auditor must adequately plan the work and must properly supervise
any assistants.
#. &he 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 e!tent of further audit procedures.
[42]
Analytical procedures performed in the overall review stage of an audit suggest
that several accounts have une!pected relationships. &he results of these
procedures most likely indicate that
A. &he communication with the audit committee should be revised.
. Additional tests of details are required.
C. Internal control activities are not operating effectively.
#. /isstatements e!ist in the relevant account balances.
[43]
)quipment acquisitions that are misclassified as maintenance e!pense most likely
will be detected by a control that provides for
A. (egregation of duties of employees in the accounts payable department.
. Authori1ation by the board of directors of significant equipment
acquisitions.
C. Independent verification of invoices for disbursements recorded as
equipment acquisitions.
#. Investigation of variances within a formal budgeting system.
[44]
0ne of the primary roles of an audit plan AprogramC is to
A. #ocument an auditor%s understanding of internal control.
. Assess the audit risk accepted by the auditor.
C. Provide for a standardi1ed approach to the audit engagement.
#. (erve as a tool for planning, directing, and controlling audit work.
[45]
*enerally accepted auditing standards for private companies are established by
which of the following-
I. &he Auditing (tandards oard
II. &he ()C
III. &he Institute of Internal Auditors
A. II only.
. I, II, and III.
C. I only.
#. I and II.
[46]
&o which of the following treatments of treasury stock should an auditor ob'ect-
A. #ividends are paid on treasury stock.
. &reasury stock is recorded at cost.
C. &reasury stock is classified as a deduction from equity.
#. Retained earnings are restricted with regard to treasury stock.
[47]
lue, 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. lue may
accept this engagement but should
A. Consult with the continuing CPA to obtain information relevant to the
transaction.
. #isclaim any opinion that the hypothetical application of accounting
principles conforms with generally accepted accounting principles.
C. "otify the entity that the report is for general use.
#. 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.
(ubsequently, the auditor reviewed evidence of follow+up on the errors reported
by the customers. &his test of controls was most likely performed to support
management%s financial statement assertionAsC of
A. .es
.es
. .es
"o
C. "o
"o
#. "o
.es
[49]
,hich of the following auditing procedures is ordinarily performed last-
A. 0btaining a management representation letter.
. Reading of the minutes of the directors% meetings.
C. &esting of the purchasing function.
#. Confirming accounts payable.
[50]
,hich of the following cash transfers results in a misstatement of cash at
#ecember <:, H?I?-
A. :HG<:GI? :G=GI: :HG<:GI? :HG<:GI?
. :G=GI: :G>GI: :HG<:GI? :G=GI:
C. :HG<:GI? :G>GI: :HG<:GI? :G=GI:
#. :G=GI: :G::GI: :G=GI: :G=:GI:
[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.
. &he sampling plan has statistical validity.
C. &he client is willing to accept a qualification of the auditor%s opinion
because of a scope limitation.
#. 0ver half of the dollar value of the inventory is counted.
[52]
*reen, CPA, was engaged to audit the financial statements of )sse! Co. after its
fiscal year had ended. &he timing of *reen%s appointment as auditor and the start
of field work made confirmation of accounts receivable by direct communication
with the debtors ineffective. $owever, *reen applied other procedures and was
satisfied as to the reasonableness of the account balances. *reen%s auditor%s report
most likely contained aAnC
A. 8ualified opinion because of a departure from auditing standards.
. Bnqualified opinion.
C. Bnqualified opinion with an e!planatory paragraph.
#. 8ualified opinion because of a scope limitation.
[53]
In the audit of property, plant, and equipment, the auditor tries to do all of the
following e!cept to
A. 5udge the reasonableness of the depreciation.
. #etermine the e!tent of property abandoned during the year.
C. 0btain an understanding of internal control.
#. Assess the adequacy of replacement funds.
[54]
A CPA may be a director of a not+for+profit organi1ation, which is also an audit
client, if certain conditions are met. ,hich 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 hisGher name.
. &he auditor%s name is not included on the organi1ation%s letterhead.
C. &he auditor does not vote or participate in management functions.
#. &he position is purely honorary.
[55]
urrow J Co., CPAs, have provided annual audit and ta! compliance services to
/are Corp. for several years. /are has been unable to pay urrow in full for
services urrow rendered :; months ago. urrow is ready to begin field work for
the current year%s audit. Bnder the ethical standards of the profession, which of
the following arrangements will permit urrow to begin the field work on /are%s
audit-
A. /are commits to pay the past due fee in full before the audit report is
issued.
. /are engages another firm to perform the field work, and urrow is
limited to reviewing the working papers and issuing the audit report.
C. /are gives urrow an :@+month note payable for the full amount of the
past due fees before urrow begins the audit.
#. /are sets up a two+year payment plan with urrow to settle the unpaid fee
balance.
[56]
In a statement of cash flows,
A. 9inancing activities include the acquisition of fi!ed assets.
. Investing activities include receiving donor+restricted resources that must
be used for long+term purposes.
C. "oncash investing activities should not be reported in the statement.
#. 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 'ournal and cash payments
'ournal to the general ledger.
. 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.
#. #istribution of payroll checks and approval of sales returns for credit.
[58]
,hich of the following costs should not be capitali1ed-
A. 9encing the plant parking lot.
. /achine operator%s wages during a period of testing and ad'usting new
machinery.
C. /a'or reconditioning of a delivery truck.
#. /aintenance 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. (imilarly, accounts are
aged monthly. &he accounts receivable manager writes off delinquent accounts
after : year, or sooner if a bankruptcy or other unusual circumstances are
involved. Credit memoranda are prenumbered and must correlate with receiving
reports. ,hich of the following areas could be viewed as an internal control
weakness of the above organi1ation-
A. Credit approvals.
. ,rite+offs of delinquent accounts.
C. $andling of credit memos.
#. /onthly aging of receivables.
[60]
.ou are a CPA retained by the manager of a cooperative retirement village to do
write+up work. .ou are e!pected to prepare unaudited financial statements with
each page marked 3unaudited4 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 EH>,??? of the manager%s claimed disbursements. &he
manager informs you that all the disbursements are proper. ,hat should you do-
A. 0btain from the manager a written statement that you informed himGher of
the missing invoices and that AsChe gave hisGher assurance that the
disbursements were proper.
. Include the unsupported disbursements in the statements because you are
not e!pected to make an audit.
C. "otify the owners that some of the claimed disbursements are unsupported
and withdraw if the situation is not satisfactorily resolved.
#. (ubmit the e!pected statements but omit the EH>,??? 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. 0pening and closing inventory balances.
. (hipping and receiving activities.
C. Cash receipts and accounts receivable.
#. 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.
. ,hen the relevant internal controls are effective.
C. ,hen large balances are involved.
#. In combination with negative confirmations.
[Fact Pattern #2]
/anagement discovers that a supervisor at one of its restaurant locations removes e!cess
cash and resets sales totals throughout the day on the point of sale AP0(C system. At
closing, the supervisor deposits cash equal to the recorded sales on the P0( system and
keeps the rest.
&he supervisor forwards the close+of+day P0( reports from the P0( system along with a
copy of the bank deposit slip to the company%s revenue accounting department. &he
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 overGshort account and, if necessary,
followed up with the location supervisor. &he 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 'ournal tapes from the P0( system
are kept by the supervisor for one week at the location and then destroyed.
[63]
ARefers to 9act Pattern FHC
,hich of the following audit procedures would have detected the fraud-
A. Comparing a sample of the close+of+day P0( reports to copies of the bank
deposit slips.
. 9or selected days, reconciling the total of customer food checks to daily
bank deposits.
C. 9lowcharting the controls over the verification of bank deposits.
#. 0n 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. &racing recorded liabilities to supporting documents.
. Preparing an aging schedule for accounts payable.
C. Reviewing the general 'ournal for unusual entries recorded immediately
prior to year+end.
#. )!amining shipment date and terms of shipment on vendor invoices
received prior and subsequent to year+end.
[65]
In /ay H?IH, an auditor reissues the auditor%s report on the H?I? financial
statements at a continuing client%s request. &he H?I? financial statements are not
restated and the auditor does not revise the wording of the report. &he auditor
should
A. Bse the original report date on the reissued report.
. Bse the release date of the reissued report.
C. Bse the current+period auditor%s report date on the reissued report.
#. #ual date the reissued report.
[66]
#ickins J Co., CPAs, offers to maintain on its computer certain routine
accounting records for its audit client, 7ake. If 7ake accepts the offer and #ickins
J Co. continues to function as independent auditor, #ickins J Co. is most likely
to violate the rules relating to auditor%s independence of which organi1ationAsC-
A. "o .es
. .es "o
C. "o "o
#. .es .es
[67]
,hich of the following statements best e!plains why the CPA profession has
found it essential to promulgate ethical standards and to establish means for
ensuring their observance-
A. 2igorous enforcement of an established code of ethics is the best way to
prevent unscrupulous acts.
. 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.
#. )thical standards that emphasi1e e!cellence in performance over material
rewards establish a reputation for competence and character.
[68]
An auditor is obligated to communicate a proposed audit ad'ustment to an entity%s
audit committee if the ad'ustment
A. Related to an uncorrected misstatement, was determined to be immaterial
by management, and pertained to the earliest period presented.
. $as a significant effect on the entity%s financial reporting process.
C. $as not been recorded before the end of the auditor%s field work.
#. Is a recurring matter that was proposed to management the prior year.
[69]
,hich rule is not included in the Code of Professional Conduct-
A. Acts #iscreditable.
. Advertising and 0ther 9orms of (olicitation.
C. Commissions.
#. Incompatible 0ccupations.
[70]
,hich of the following procedures would provide the most reliable audit
evidence-
A. Analytical procedures performed by the auditor on the entity%s trial
balance.
. 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.
#. Inquiries of the client%s internal audit staff held in private.
[71]
,hich 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. /onitoring.
. Risk assessment.
C. Information and communication.
#. Control environment.
[72]
In manufacturing environments, employees are often required to use time cards
and 'ob time tickets. ,hich is the false statement related to the use of these
documents-
A. Payroll should be prepared from 'ob time tickets.
. &ime reported on 'ob time tickets should be reconciled to time cards.
C. 0nly one time card should e!ist for each employee.
#. 5ob time tickets are completed by employees for each 'ob worked on, and
an employee may have one or many 'ob time tickets in a day.
[73]
A CPA should not e!press an opinion on the financial statements of a client
unless AsChe is independent of the client. Independence is not considered impaired
if the auditor
A. $as an unsecured loan acquired from a ma'or shareholder of the client.
. ,as a trustee with investment decision+making authority of a trust that
was committed to acquire a direct financial interest in the client.
C. $as a material, closely held business investment with a vice president of
the client.
#. $as 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. .es .es "o
. "o "o .es
C. "o .es .es
#. .es .es .es
[75]
,hich of the following statements describes why a properly planned and
performed audit may not detect a material misstatement due to fraud-
A. &he 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.
. &he 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.
#. Audit procedures that are effective for detecting an error may be
ineffective for detecting fraud that is concealed through collusion.
[76]
&he information and communication component of internal control includes the
methods and records established to initiate, record, process, and report
transactions and to maintain accountability. 9or which of the following
transactions would the auditor ordinarily have the greatest difficulty in obtaining
assurance that internal control ob'ectives are met-
A. Collection of contributions from the public by a nonprofit organi1ation.
. Collection of interest and dividends by a retailer.
C. Acquisition of production equipment by a manufacturer.
#. Collection of credit sales by a retailer.
[77]
&he normal sequence of documents and operations on a well+prepared systems
flowchart is
A. ottom to top and right to left.
. &op to bottom and left to right.
C. &op to bottom and right to left.
#. ottom to top and left to right.
[78]
,hen confirmation for accounts payable is undertaken, which form of
confirmation should be used-
A. )ither positive or negative confirmation, depending on the significance or
the amount of the account.
. Positive confirmation.
C. "egative confirmation.
#. "either positive nor negative confirmationK accounts payable cannot be
confirmed.
[79]
&he 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 (tandards oard.
. 9inancial Accounting (tandards oard.
C. Accounting and Review (ervices Committee.
#. *eneral Accounting 0ffice.
[80]
Bnder AICPA rules, independence most likely will be impaired if a member of
the attest engagement team
A. rings suit for an immaterial amount allegedly owed by the client for ta!
services.
. elongs to a credit union that AsChe audits.
C. Provides accounting services to a nonpublic audit client.
#. 0wns a vacation home 'ointly 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.
. Procedures used to assure the proper supervision of staff.
C. (afeguards used to limit access to computer facilities.
#. Programs and controls intended to address the risks of fraud.
[82]
Bnder which of the following circumstances might an auditor disclaim an
opinion-
A. &he financial statements contain a departure from generally accepted
accounting principles, which has a material effect.
. &he auditor is unable to obtain sufficient evidence to support
management%s assertions concerning an uncertainty.
C. &here has been a material change between periods in the method of
application of accounting principles.
#. &he 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.
. #etermine whether the controls have been implemented.
C. (earch for significant deficiencies in the operation of internal control.
#. #ocument the understanding of the entity%s internal control components.
[84]
&he 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.
. Assessing control risk too high.
C. Incorrect re'ection.
#. Assessing control risk too low.
[85]
,hich 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.
. Increase the assessed level of detection risk for the e!istence assertion.
C. Inspect the shipping records documenting the merchandise sold to the
debtors.
#. Review the cash receipts 'ournal for the month prior to year+end.
[86]
,hich one of the following is least likely to be considered an internal control
relevant to a financial statement audit-
A. Procedures to determine whether e!penditures should be made for certain
RJ# activities.
. Periodic reconciliation of perpetual inventory records to the general ledger
control account.
C. Comparison of physical inventory counts with perpetual inventory
records.
#. 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. &his 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 aAnC
A. Bnqualified opinion.
. 8ualified opinion.
C. Consistency modification.
#. )!planatory paragraph.
[88]
In assessing control risk for the purchasing cycle, the auditor will be least
influenced by
A. &he effectiveness of controls in other cycles, e.g., the sales+receivables+
cash receipts cycle.
. &he e!istence within the purchasing cycle of internal control strengths that
offset weaknesses.
C. &he availability of a company manual describing policies and procedures
for the purchasing cycle.
#. &he audit work performed in the purchasing cycle by the company%s
internal auditor.
[89]
#ocumentary evidence is one of the principal types of corroborating information
used by an auditor to substantiate an opinion. ,hich one of the following
e!amples of documentary evidence would be the most reliable-
A. /aterial requisition slips.
. ank statements.
C. Copies of sales invoices.
#. 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 e!cept
A. (tudy of the relationships of financial data with relevant nonfinancial data.
. (tudy of the relationships of elements of financial data that would be
e!pected to conform to a predictable pattern based upon the entity%s
e!perience.
C. &racing transactions through the system to determine whether procedures
are being applied as prescribed.
#. Comparison of financial data with data for comparable prior periods,
anticipated results Ae.g., budgets and forecastsC, 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. ,hich of the following is not an advantage of a questionnaire-
A. A questionnaire can be easily completed.
. A questionnaire is fle!ible in design and application.
C. &he completed questionnaire provides documentation that the auditor
understands internal control for planning purposes.
#. A questionnaire provides a framework that minimi1es the possibility of
overlooking aspects of internal control.
[92]
$ow are management%s responsibility and the auditor%s responsibility represented
in the standard auditor%s report-
A. Implicitly )!plicitly
. )!plicitly )!plicitly
C. )!plicitly Implicitly
#. Implicitly Implicitly
[93]
)ach time an auditor draws a conclusion based on evidence from a sample, an
additional risk, sampling risk, is introduced. An e!ample of sampling risk is
A. #rawing an erroneous conclusion from sample data.
. Improperly applying a proper audit procedure to sample data.
C. Properly applying an improper audit procedure to sample data.
#. Pro'ecting the results of sampling beyond the population tested.
[94]
&he :? standards consist of general standards, standards of field work, and
standards of reporting. &he 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.
. #ue professional care is to be e!ercised in the planning and performance
of the audit and preparation of the audit report.
C. &he auditor must adequately plan the work and must properly supervise
any assistants.
#. &he 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.
. Cash flows, notes, and retained earnings.
C. Cash flows, retained earnings, and changes in equity.
#. (tatements of changes in financial position and changes in equity.
[96]
Bnder 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.
. 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.
#. 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. &he study of financial ratios is an acceptable alternative to the
investigation of unusual fluctuations.
. (tatistical tests of financial information may lead to the discovery of
material misstatements in the financial statements.
C. &hese procedures cannot replace tests of balances and transactions.
#. Plausible relationships among data may reasonably be e!pected to e!ist
and continue in the absence of known conditions to the contrary.
[98]
An individual 'ust beginning an auditing career must obtain professional
e!perience primarily to achieve
A. (easoned 'udgment.
. A positive employment evaluation.
C. A favorable peer review.
#. A specialty designation by the AICPA.
[99]
An auditor may reasonably e!press a 3sub'ect to4 qualified opinion for
A. .es "o
. .es .es
C. "o .es
#. "o "o
[100]
&he AICPA Code of Professional Conduct permits a CPA firm to
A. Receive a commission whenever the arrangement is disclosed.
. Receive a disclosed commission for recommending products to an audit
client.
C. Receive a commission from a review client.
#. Pay a referral fee to obtain a client whenever the arrangement is disclosed.