CPA review questions test
Content
The existence of audit risk is recognized by the statement in the auditor's standard report that the: Auditor is responsible for expressing an opinion on the A) financial statements, which are the responsibility of management B) Financial statements are presented fairly, in all material respects, in conformity with GAAP
auditor would most likely: Attempt to sign0on to the system using invalid user identifications and passwords( 1rite a computer program that simulates the logic of the client's access control software(
A) B)
Audit includes examining, on a test basis, evidence C) supporting the amounts and disclosures in the financial statements Auditor obtains reasonable assurance about whether ) the financial statements are free of material misstatement Correct Answer: D Explanation: A! "#$ states that the existence of audit ris% is recogni&ed by the statement in the auditor's standard report that the audit or obtained reasonable assurance about whether the financial statements are free of material misstatement( Audit ris% is the ris% that the auditor may un%nowingly fail to appropriately modify the opinion on financial statements that are materially misstated( )he sentence in the opinion in the financial statement is a division of responsibilities between management and auditor( )hat portion of the report is supporting the opinion rendered( )he statement explains that due to timing and cost constraints the auditor has to audit less than all evidence available through the use of statistical sampling( hich of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of se!eral unusually large cash disbursements" *et the tolerable rate of deviation at a lower level than A) originally planned( B) C) ) *tratify the cash disbursements population so that the unusually large disbursements are selected( +ncrease the sample si&e to reduce the effect of the unusually large disbursements( Continue to draw new samples until all the unusually large disbursements appear in the sample(
2xtract a random sample of processed transactions C) and ensure that the transactions were appropriately authori&ed( 2xamine statements signed by employees stating that ) they have not divulged their user identifications and passwords to any other person( Correct Answer: A Explanation: )he correct choice is to attempt to sign0on to the system using invalid user identifications and passwords( )his will provide the auditor with the most competent evidence that the user identification and password controls are functioning as designed( )he other answers do not relate directly to actual system access3 they refer to programming, authori&ation and written statements Tests of controls are performed in order to determine whether or not: A) Controls are functioning as designed( B) 4ecessary controls are absent( C) +ncompatible functions exist( ) 5aterial dollar errors exist( Correct Answer: A Explanation: )ests of controls are designed to determine whether the control procedures prescribed by the client are actually functioning( An example of a test of controls would be to examine purchase orders for proper authori&ation The independent auditor should ac%uire an understanding of a client's internal audit function to determine whether the work of internal auditors will be a factor in determining the nature$ timing$ and extent of the independent auditor's procedures& The work performed by internal auditors might be such a factor when the internal auditor's work includes: A) 6erification of the mathematical accuracy of invoices B) .eview of administrative practices to improve efficiency and achieve management ob7ectives
Correct Answer: # Explanation: An auditor would normally select #,,- of unusually large cash disbursements and a lower percentage of smaller cash disbursements because the larger disbursements are more material to the financial statements( *tratified sampling divides the population into strata, or groups of transactions that possess the same characteristics( )he auditor would select #,,- of the items in the category that includes the unusually large disbursements and a smaller percentage of the other categories( .ate of deviation relates to tests of controls and not substantive tests( )he auditor selects the sample so that #,, - of the larger disbursements are selected( /ou can't increase more than #,,-( /ou don't continue to draw new samples since you already have #,,-( To obtain e!idence that user identification and password controls are functioning as designed$ an
C) *tudy and evaluation of internal accounting control ) Preparation of internal financial reports for management purposes
Correct Answer: C Explanation: )he wor% of internal auditors is a part of, but not a substitute for, the independent auditor's evaluation of internal control( 86erification of the mathematical accuracy of invoices 8 is wor% not necessarily performed by internal auditors( )he remaining answer choices do not directly affect internal accounting control(
An auditor uses the knowledge pro!ided by the understanding of internal control and the final assessed le!el of control risk primarily to determine the nature$ timing$ and extent of the: A) Attribute tests B) Compliance tests C) )ests of controls ) *ubstantive tests
include the word 8all(8 Auditors are not expected to examine all the evidence and detect all illegal acts (n a properly designed internal control system$ the same employee most likely would match !endors' in!oices with recei!ing reports and also: A) Post the detailed accounts payable records B) .ecompute the calculations on vendors' invoices C) .econcile the accounts payable ledger ) Cancel vendors' invoices after payment
Correct Answer: D Explanation: *ubstantive tests are audit tests performed to substantiate the fairness of presentation of each account on the financial statements( )he nature, timing, and extent of substantive tests are determined by the creditor's assessment of control ris%( )he remaining answer choices are synonymous terms, and these tests are used to determine whether internal control procedures are actually in place in the client's operation( hen a C'A is approached to perform an audit for the first time$ the C'A should make in%uiries of the predecessor auditor& This is a necessary procedure because the predecessor may be able to pro!ide the successor with information that will assist the successor in determining: A) 1hether the predecessor's wor% should be utili&ed B) C) 1hether the company follows the policy of rotating its auditors 1hether in the predecessor's opinion internal control of the company has been satisfactory Correct Answer: # Explanation: )he accounts payable, or vouchers payable, department has the responsibility to prepare vouchers for payment( As part of that process, an employee in that department should chec% vendors' invoices for mathematical accuracy by recomputing calculations and extensions, and should match the vendors' invoices with receiving report sand purchase orders for 9uantities, prices, and terms( hich of the following internal control acti!ities most likely would pre!ent direct labor hours from being charged to manufacturing o!erhead" Periodic independent counts of wor% in process for comparison to recorded amounts Comparison of daily 7ournal entries with approved production orders !se of time tic%ets to record actual labor wor%ed on production orders .econciliation of wor%0in0process inventory with periodic cost budgets
A) B) C) )
) 1hether the engagement should be accepted Correct Answer: D Explanation: )his is a ma7or consideration for the successor CPA to determine whether to accept the engagement( 8)he successor auditor should ma%e specific and reasonable in9uiries of the predecessor regarding matters that the successor believes will assist him in determining whether to accept the engagement(8 To exercise due professional care an auditor should: Attain the proper balance of professional experience and formal education
Correct Answer: C Explanation: )ime tic%ets should be designed to %eep trac% of hours wor%ed, by whom, and on what production orders( After approval by a production supervisor, time tic%ets provide the information on number of hours wor%ed directly on specific production orders( +f time tic%ets are properly used to record actual hours wor%ed on orders, approval and;or review of these cards should prevent direct labor hours from being incorrectly charged to manufacturing overhead( )he remaining answer choices are incorrect for the following reasons: < Counts of wor% in process will not provide brea%downs between direct and indirect costs and therefore would not prevent direct labor hours from being incorrectly charged to overhead( < 2rrors may be made on the production orders( +n order to prevent and;or detect errors regarding direct labor hours, the production orders would have to be compared to time tic%ets( < 1or%0in0process inventory is a total which combines direct labor and manufacturing overhead( 2ven if this total is correct, direct labor could have been incorrectly charged to manufacturing overhead( )organ$ C'A$ is the principal auditor for a multinational corporation& Another C'A has examined
A)
B) esign the audit to detect all instances of illegal acts C) ) Critically review the 7udgment exercised by those assisting in the audit 2xamine all available corroborating evidence supporting management's assertions
Correct Answer: C Explanation: )he third general standard is: ue professional care is to be exercised in the performance of the audit and the preparation of the report( 2xercise of due care re9uires critical review at every level of supervision of the wor% done and the 7udgment exercised by those assisting in the audit( )he correct answer choice relates to the first general standard( )he incorrect answer choices
and reported on the financial statements of a significant subsidiary of the corporation& )organ is satisfied with the independence and professional reputation of the other auditor$ as well as the %uality of the other auditor's examination& ith respect to )organ's report on the financial statements$ taken as a whole$ )organ: A) 5ust not refer to the examination of the auditor B) 5ust refer to the examination of the other auditor C) 5ay refer to the examination of the other auditor 5ay refer to the examination of the other auditor, in which case 5organ must include in the auditor's report ) on the consolidated financial statements, a 9ualified opinion with respect to the examination of the other auditor( Correct Answer: C Explanation: )he principal auditor may or may not refer to the other auditor's examination( +f he does, he is sharing the responsibility for his opinion( +f he accepts full responsibility, no reference is made to the other auditor( *oeb$ C'A$ has completed preparation of the #loto Company's unaudited financial statements and has prepared the following report to accompany them: The accompanying balance sheet of the #loto Company as of August +,$ -.,,$ and the related statements of income$ retained earnings$ and cash flows for the year then ended were not audited by us and accordingly we do not express an opinion on them& The financial statements fail to disclose that the debentures issued on /uly ,0$ -..1$ limit the payment of cash di!idends to the amount of earnings after August +,$ -..2& The company's statements of income for the years -.,. and -.,,$ both of which are unaudited$ show this amount to be 3,4$2..& 5enerally accepted accounting principles re%uire disclosure of matters of this nature& hich of the following comments best describes the appropriateness of this report" A) )he report is satisfactory( B) C) )he report is deficient because =oeb does not describe the scope of the review( )he report is deficient because the second paragraph gives the impression that some audit wor% was done(
generally accepted accounting principles$ the auditor will issue a7n8: A) >ualified opinion B) *pecial report C) isclaimer of opinion ) Adverse opinion Correct Answer: D Explanation: )he 9uestion states the auditor concludes the statements are not in conformity with GAAP( +n order to ma%e this statement in his report, the auditor must issue anadverse opinion( A 9ualification, rather than an adverse opinion, still states the financial statements present fairly, except for((( An adverse opinion states the 8financial statements do not present fairly(((8 A company issues audited financial statements under circumstances which re%uire the presentation of a statement of cash flows& (f the company refuses to present a statement of cash flows$ the independent auditor should: A) isclaim an opinion(
Prepare a statement of cash flows and note in a middle B) paragraph of the report that this statement is auditor0 prepared( C) Prepare a statement of cash flows and disclose in a footnote that this statement is auditor0prepared(
>ualify his opinion with an 8except for8 9ualification and ) a description of the omission in a middle paragraph of the report( Correct Answer: D Explanation: )he statement of cash flows is re9uired by GAAP and its omission results in a 9ualified except for opinion( )he statement of cash flows, for reporting purposes, is considered the omission of a disclosure( *imitation on the scope of the auditor's examination may re%uire the auditor to issue a %ualified opinion or to disclaim an opinion& hich of the following would generally be a limitation on the scope of the auditor's examination" )he unavailability of sufficient competent evidential matter )he engagement of the auditor to report on only one basic financial statement
A) B)
)he report is deficient because the explanatory ) comment in the second paragraph should precede the opinion paragraph( Correct Answer: A Explanation: )he report is satisfactory because when the CPA is preparing unaudited statements, he has the responsibility to ensure that the statements are in accordance with GAAP( +f they are not, the CPA must propose ad7ustments, and if the client refuses to boo% said ad7ustments, to so disclose in his report( hen$ in the auditor's 6udgment$ the financial statements are not presented fairly in conformity with
)he examination of a subsidiary's financial statements C) by an auditor other than the one who examines and reports on the consolidated financial statements ) )he engagement of the auditor after year end
Correct Answer: A Explanation: =imitations on the scope of the audit can come about by client restrictions, inability to obtain sufficient competent evidential matter or inade9uacy of client accounting records(
)he remaining answer choices are incorrect for the following reasons: < )he auditor can report on only one basic financial statement( < )he use of another auditor is not a scope limitation( < 8)he engagement of the auditor after year end(8 is incorrect because this would not necessarily result in a scope limitation( hich of the following audit procedures is best for identifying unrecorded trade accounts payable" .eviewing cash disbursements recorded subse9uent to A) the balance sheet date to determine whether the related payables apply to the prior period( +nvestigating payables recorded 7ust prior to and 7ust B) subse9uent to the balance sheet date to determine whether they are supported by receiving reports( 2xamining unusual relationships between monthly C) accounts payable balances and recorded cash payments( .econciling vendors' statements to the file of receiving ) reports to identify items received 7ust prior to the balance sheet date( Correct Answer: A Explanation: )he auditor reviews cash disbursements recorded in the period subse9uent to the balance sheet date to determine if they represent payments for goods and;or services received during the period ending on the balance sheet date( +f so, the auditor would then determine whether or not they have been properly recorded in the period prior to the balance sheet date( )his review of subse9uent payments is designed to identify unrecorded trade accounts payable and other unrecorded liabilities( )he remaining answer choices are incorrect for the following reasons: < 8+nvestigating payables recorded 7ust prior to and 7ust subse9uent to the balance sheet date to determine whether they are supported by receiving reports(8 would not detect unrecorded liabilities because it is testing recorded payables, not potentially unrecorded payables( < Cash payments are made for many items, not 7ust for accounts payable( )herefore, the relationship between cash payments and accounts payable balances may fluctuate based on other activity( < .econciling vendor statements to receiving reports would not disclose unrecorded liabilities unless comparisons were also made with recorded payables and cash payments( (n e!aluating an entity's accounting estimates$ one of an auditor's ob6ecti!es is to determine whether the estimates are: A) 4ot sub7ect to bias B) Consistent with industry guidelines C) Based on ob7ective assumptions ) .easonable in the circumstances Correct Answer: D
Explanation: )he auditor's ob7ective when evaluating accounting estimates is to obtain sufficient competent evidential matter to provide reasonable assurance that all accounting estimates that could be material to the financial statements have been developed3 those accounting estimates are reasonable in the circumstances3 and the accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed( )he remaining answer choices are incorrect for the following reasons: < 2stimates are based on sub7ective as well as ob7ective factors and may involve biased 7udgments made by management( < 8Consistent with industry guidelines8 presents a procedure the auditor would perform to determine whether the estimates are reasonable( +n addition to consistency with industry data, the auditor would evaluate consistency with other supporting and relevant historical data( An auditor selected items for test counts while obser!ing a client's physical in!entory& The auditor then traced the test counts to the client's in!entory listing& This procedure most likely obtained e!idence concerning management's assertion of: A) .ights and obligations B) Completeness C) 2xistence or occurrence ) 6aluation Correct Answer: # Explanation: Assertions about completeness deal with whether all accounts and transactions that should be presented in the financial statements are so included( +f an auditor test counts selected items while observing a client's physical inventory and then traces those counts to the client's inventory listing, the auditor is obtaining evidence that all inventory items that should be included in the listing, which becomes the basis for the financial statement amounts, are so included( )he assertions presented in the incorrect answer choices are not tested by this procedure( +f an inventory item is test counted and on the listing, the client may not have the rights to that item( +n order to test existence, the auditor would compare the listing to the actual items on hand instead of comparing the test counts to the listing( 6aluation of inventory includes tests of lower of cost and mar%et, not 7ust 9uantities obtained during test counts( Auditors try to identify predictable relationships when using analytical procedures& 9elationships in!ol!ing transactions from which of the following accounts most likely would yield the highest le!el of e!idence" A) Accounts receivable B) +nterest expense C) Accounts payable ) )ravel and entertainment expense
Correct Answer: # Explanation: 1hen using analytical procedures to identify
predictable relationships, higher levels of evidence will be obtained when those relationships are most predictable( .elationships involving income statement accounts, such as interest expense, tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time rather than a point in time( Also, interest expense, which can be related to debt, is more predictable than the travel and entertainment expense, which is more sub7ect to management discretion( hich of the following procedures would an auditor most likely perform to !erify management's assertion of completeness" Compare a sample of shipping documents to related sales invoices(
litigation Correct Answer: A Explanation: +nternal evidence, consisting of documents such as purchase orders that are produced within the client's system, is generally considered low in competence and therefore the least persuasive( < 8Ban% statements obtained from the client8 is an example of external0internal evidence, is considered more competent( < 8)est counts of inventory performed by the auditor8 is evidence obtained directly from an external source, is better than evidence that goes through the client before reaching the auditor( < 8Correspondence from the client's attorney about litigation(8 is an example of the most persuasive evidence because it is obtained directly by the auditor through physical observation( An auditor concluded that no excessi!e costs for idle plant were charged to in!entory& This conclusion most likely related to the auditor's ob6ecti!e to obtain e!idence about the financial statement assertions regarding in!entory$ including presentation and disclosure and: A) 6aluation and allocation B) Completeness C) 2xistence or occurrence ) .ights and obligations Correct Answer: A Explanation: Assertions about valuation or allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts( +f the auditor is concluding that no excessive costs were charged to inventory, he or she has gathered evidence regarding valuation of amounts in the inventory account( Proper costing of inventory does not relate to the assertions presented in the other answers( )he remaining answer choices are incorrect for the following reasons: < )he completeness assertion deals with whether all accounts and transactions, such as those related to inventory, that should be presented in the financial statements are so included( < )he existence or occurrence assertion deals with whether assets of the entity, such as inventory, exist at a given date and whether recorded transactions, such as those related to inventory, has occurred during a given period( < )he rights and obligations assertion deals with whether assets, such as inventory, are the rights of the entity( (f the ob6ecti!e of a test of details is to detect o!erstatements of sales$ the auditor should trace transactions from the: A) Cash receipts 7ournal to the sales 7ournal B) *ales 7ournal to the cash receipts 7ournal C) *ource documents to the accounting records
A)
B) ?bserve the client's distribution of payroll chec%s( C) ) Confirm a sample of recorded receivables by direct communication with the debtors( .eview standard ban% confirmations for indications of %iting(
Correct Answer: A Explanation: Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are so included( )o test management's assertion that all sales are included on the income statement, the auditor would compare shipping documents, which typically provide evidence that a sale has occurred and should be recorded, to related sales invoices, which provide the basis for recording the sales transactions( )he concern of the auditor is with fictitious or overstated amounts, not omitted or incomplete amounts( An auditor most likely would inspect loan agreements under which an entity's in!entories are pledged to support management's financial statement assertion of: A) 2xistence or occurrence B) Completeness C) Presentation and disclosure ) 6aluation or allocation Correct Answer: C Explanation: Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed( An auditor would inspect loan agreements regarding pledged inventories to determine that management has ade9uately disclosed the security arrangements( hich of the following types of audit e!idence is the least persuasi!e" A) Prenumbered purchase order forms B) Ban% statements obtained from the client C) )est counts of inventory performed by the auditor ) Correspondence from the client's attorney about
) Accounting records to the source documents Correct Answer: D Explanation: )he ob7ective is to test whether recorded sales are valid @not overstated)( )he auditor is answering the 9uestion, 8+s this recorded sale a valid transactionA8 +n order to answer that 9uestion, the auditor would start with the recorded sales and loo% for documentation corroborating its validity( 4egative confirmation re9uests as% the respondent to reply only if the stated receivable information is incorrect( )he presumption is that a non0 reply to a confirmation re9uest is evidence that the account balance is correct( )hus, negative confirmation procedures would not be used when there is a li%elihood that accounts are in dispute( )hey would be used where a small number of accounts are in dispute( The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit in%uiry limits the response to: 5atters to which the attorney has given substantive attention in the form of legal representation An evaluation of the li%elihood of an unfavorable outcome of the matters disclosed by the entity )he attorney's opinion of the entity's historical experience in recent similar litigation )he probable outcome of asserted claims and pending or threatened litigation
:oon after #oyd's audit report was issued$ #oyd learned of certain related party transactions that occurred during the year under audit& These transactions were not disclosed in the notes to the financial statements& #oyd should: Plan to audit the transactions during the next engagement(
A)
B) .ecall all copies of the audited financial statements( C) ) etermine whether the lac% of disclosure would affect the auditor's report( As% the client to disclose the transactions in subse9uent interim statements(
Correct Answer: C Explanation: +f the auditor becomes aware of facts that existed at the report date, he should determine whether the facts would have affected the audit report( +f they would have affected his report and people are currently relying on the report, the auditor should advise the client to ma%e appropriate disclosures of the facts and their impact( < 8Plan to audit the transactions during the next engagement(8 does not address what the auditor should do regarding the current year's audit( < 8.ecall all copies of the audited financial statements(8 and 8As% the client to disclose the transactions in subse9uent interim statements(8 would be considered only after the auditor determined that the lac% of footnote disclosure affected his report( A written client representation letter most likely would be an auditor's best source of corroborati!e information of a client's plans to: A) )erminate an employee pension plan( B) 5a%e a public offering of its common stoc%( C) *ettle an outstanding lawsuit for an amount less than the accrued loss contingency(
A) B) C) )
Correct Answer: A Explanation: uring the audit of financial statements, the auditor is re9uired to send a letter of audit in9uiry to the client's legal counsel concerning claims, litigation and assessments( +t is reasonable to assume that an attorney would be responsible to respond concerning only those items that he has given substantive attention( Be would not be able to respond to items he has not given substantive attention @the attorney has no %nowledge)( )herefore, such a limited response on the part of an attorney would not be considered a scope limitation( An auditor's purpose in re!iewing credit ratings of customers with delin%uent accounts recei!able most likely is to obtain e!idence concerning management's assertions about: A) Presentation and disclosure B) 2xistence or occurrence C) .ights and obligations ) 6aluation or allocation Correct Answer: D Explanation: )he auditor's review of credit ratings of customers with delin9uent accounts is normally accomplished during an audit in order to test the ade9uacy of the allowance for doubtful accounts( )he auditor is trying to validate the proper dollar balance in the account( )he valuation assertion is concerned with proper dollar valuation(
) iscontinue a line of business( Correct Answer: D Explanation: +n some cases, the corroborating information that can be obtained by the application of auditing procedures other than in9uiry is limited( 1hen a client plans to discontinue a line of business, for example, the auditor may not be able to obtain information through other auditing procedures to corroborate the plan or intent( Accordingly, the auditor should obtain a written representation to provide confirmation of management's intent( )he client's plans included in the other answers, in comparison to the plans to discontinue a line of business, could be more readily corroborated by other evidence( A written client representation letter most likely would be an auditor's best source of corroborati!e information of a client's plans to: A) )erminate an employee pension plan( B) 5a%e a public offering of its common stoc%( C) *ettle an outstanding lawsuit for an amount less than
the accrued loss contingency( ) iscontinue a line of business( Correct Answer: D Explanation: +n some cases, the corroborating information that can be obtained by the application of auditing procedures other than in9uiry is limited( 1hen a client plans to discontinue a line of business, for example, the auditor may not be able to obtain information through other auditing procedures to corroborate the plan or intent( Accordingly, the auditor should obtain a written representation to provide confirmation of management's intent( )he client's plans included in the other answers, in comparison to the plans to discontinue a line of business, could be more readily corroborated by other evidence( Cooper$ C'A$ is auditing the financial statements of a small rural municipality& The recei!able balances represent residents' delin%uent real estate taxes& The internal control structure at the municipality is weak& To determine the existence of the accounts recei!able balances at the balance sheet date$ Cooper would most likely: A) *end positive confirmation re9uests( B) *end negative confirmation re9uests( C) 2xamine evidence of subse9uent cash receipts( ) +nspect the internal records such as copies of the tax invoices that were mailed to the residents(
following reasons: < 8?btain evidence from details tested to corroborate particular assertions(8 refers to substantive tests of details, not analytical procedures( < 8+dentify areas that represent specific ris%s relevant to the audit(8 is an ob7ective of analytical procedures used in planning the audit( < 8*atisfy doubts when 9uestions arise about a client's ability to continue in existence(8 involves the auditor obtaining information about management's plans and assessing the li%elihood that such plans can be implemented3 these are not analytical procedures( hich of the following procedures is least likely to be performed before the balance sheet date" A) )esting of internal control over cash B) Confirmation of receivables C) *earch for unrecorded liabilities ) ?bservation of inventory Correct Answer: C Explanation: )he auditor is concerned with unrecorded liabilities as of the balance sheet date @completeness assertion), thus audit procedures performed to identify unrecorded liabilities before the balance sheet date would be meaningless( Accounts receivable may be confirmed prior to the balance sheet date if the auditor concludes internal controls surrounding accounts receivable are effective( +nventory counts may be observed prior to year if the client maintains perpetual inventory records and the controls surrounding those records are effective( hich of the following presumptions does not relate to the competence of audit e!idence" )he more effective the internal control structure, the A) more assurance it provides about the accounting data and financial statements( An auditor's opinion, to be economically useful, is B) formed within reasonable time and based on evidence obtained at a reasonable cost( 2vidence obtained from independent sources outside C) the entity is more reliable than evidence secured solely within the entity( )he independent auditor's direct personal %nowledge, ) obtained through observation and inspection, is more persuasive than information obtained indirectly(
Correct Answer: A Explanation: Confirmation of receivables is a generally accepted auditing procedure( )he use of positive confirmation re9uests is preferable when individual account balances are relatively large or when there is reason to believe that there may be a substantial number of accounts in dispute or with inaccuracies or irregularities( )he negative form is useful when internal control surrounding accounts receivable is considered to be effective( +n this case, although the individual accounts may not be relatively large, the internal control structure is wea% and the balances, since they are delin9uent, may be in dispute The primary ob6ecti!e of analytical procedures used in the final re!iew stage of an audit is to: ?btain evidence from details tested to corroborate particular assertions( +dentify areas that represent specific ris%s relevant to the audit(
A) B)
Correct Answer: # Explanation: )here should be a rational relationship between the cost of obtaining evidence and the usefulness of the information obtained( Bowever, when considering competency of evidence, time and cost are not relevant( < )he more effective the internal control structure, the more assurance it provides about the reliability of accounting data and financial statements( < 1hen evidential matter can be obtained from independent sources outside the entity, it is more competent than evidential matter secured solely within the entity( < )he independent auditor's direct personal %nowledge,
Assist the auditor in assessing the validity of the C) conclusions reached( ) *atisfy doubts when 9uestions arise about a client's ability to continue in existence(
Correct Answer: C Explanation: )he ob7ective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation( )he remaining answer choices are incorrect for the
obtained through examination, observation, computation, and inspection, is more persuasive than information obtained indirectly( The third standard of field work states that sufficient competent e!idential matter is to be obtained through inspection$ obser!ation$ in%uiries$ and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit& The substanti!e e!idential matter re%uired by this standard may be obtained$ in part$ through: A) Flowcharting the internal control structure B) Proper planning of the audit engagement C) Analytical procedures ) Auditor wor%ing papers Correct Answer: C Explanation: *ubstantive audit procedures include test of balances and analytical procedures( )he ob7ectives of analytical procedures is to gather evidence concerning the completeness of the items included in the financial statements, and to indicate unusual fluctuations in account balances that may re9uire more detailed substantive audit procedures( ;f the following which is the least persuasi!e type of audit e!idence" A) ocuments mailed by outsiders to the auditor
inspection and reconciliation8 is incorrect because segregation of duties related to inventory is a control that is not evidenced by documents that the auditor can inspect( The o!erall attitude and awareness of an entity's board of directors concerning the importance of the internal control structure usually is reflected in its: A) Computer0based controls B) *ystem of segregation of duties C) Control environment ) *afeguards over access to assets Correct Answer: C Explanation: An entity's internal control structure consists of three elements: the control environment, the accounting system, and control procedures( )he control environment reflects the overall attitude, awareness, and actions of the board of directors, management, owners, and others concerning the importance of control and its emphasis in the entity( )he incorrect answer choices are examples of control procedures( hich of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed" *can the sales 7ournal for se9uential and unusual entries( 2xamine shipping documents for matching sales invoices( Compare the accounts receivable ledger to daily sales summaries( +nspect unused sales invoices for consecutive prenumbering(
B) Correspondence between auditor and vendors C) Copies of sales invoices inspected by the auditor ) Computations made by the auditor
A) B) C)
Correct Answer: C Explanation: )he competency @reliability) of evidence depends upon the degree of control exercised over the evidence by the client( )he client does have control over sales invoices and, thus, it is the least competent( An auditor generally tests the segregation of duties related to in!entory by: A) Personal in9uiry and observation B) )est counts and cutoff procedures C) Analytical procedures and invoice recomputation ) ocument inspection and reconciliation )
Correct Answer: # Explanation: )he auditor is loo%ing for evidence to prove that goods shipped are properly billed( )o accomplish the completeness of the billing process for all goods shipped, it is necessary to sample from a population that includes all goods shipped by examining a sample of shipping documents and tracing them to matching sales invoices( hen obtaining an understanding of an entity's internal control procedures$ an auditor should concentrate on the substance of the procedures rather than their form because: )he procedures may be operating effectively but may not be documented( 5anagement may establish appropriate procedures but not enforce compliance with them( )he procedures may be so inappropriate that no reliance is contemplated by the auditor(
Correct Answer: A Explanation: *ome internal control procedures, such as the segregation of duties, may not generate an audit trail of documents that the auditor can inspect( )he auditor can test this type of control procedure by ma%ing in9uiries of client personnel and observing who performs what duties( 8)est counts and cutoff procedures8 and 8Analytical procedures and invoice recomputation8 are procedures that relate more to substantive tests of financial statement amounts, rather than to tests of controls( 8 ocument
A) B) C)
) 5anagement may implement procedures whose costs
exceed their benefits(
B)
Perform tests of details of transactions and account balances to identify potential errors and irregularities(
Correct Answer: # Explanation: )he auditor should concentrate on the substance of management's policies, procedures, and related actions rather than their form because management may establish appropriate policies and procedures but not act on them( )he remaining answer choices are incorrect for the following reasons: < )he lac% of documentation is a form issue whereas operating effectiveness relates to substance, which is what interests the auditor( < +f the auditor does not plan to rely, the difference between form and substance is irrelevant( < 85anagement may implement procedures whose costs exceed their benefits(8 is not related to the 9uestion in that it deals with management's cost;benefit evaluation of implementing controls, not substance v( form( hich of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process" Comparing control totals for shipping documents with corresponding totals for sales invoices !sing computer programmed controls on the pricing and mathematical accuracy of sales invoices 5atching shipping documents with approved sales orders before invoice preparation .econciling the control totals for sales invoices with the accounts receivable subsidiary ledger
+dentify specific internal control policies and C) procedures that are li%ely to detect or prevent material misstatements( ocument that the additional audit effort to perform ) tests of controls exceeds the potential reduction in substantive testing(
Correct Answer: C Explanation: A! "#C states that the auditor may ma%e a preliminary assessment of control ris% at less than a high level only when the auditor: < +s able to identify policies and procedures of the accounting and internal control systems relevant to specific assertions which are li%ely to prevent or detect material misstatements in the financial statement( < Plans to perform tests of control to support the assessment( Analytical procedures or tests of reasonableness test amounts of financial data( )ests of details are performed as a substantive test to determine material mista%es in the financial statements( +f the audit effort of performing tests of controls exceeds the potential reduction in substantive testing, tests of controls will not be performed because doing so would reduce audit efficiency( hich of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements" 5anagement places little emphasis on meeting earnings pro7ections( )he board of directors ma%es all ma7or financing decisions( .eportable conditions previously communicated to management are not corrected( )ransactions selected for testing are not supported by proper documentation(
A) B) C) )
Correct Answer: D Explanation: )he reconciliation provides evidence that sales which have been invoiced are recorded in the accounts receivable subsidiary ledger but does not reduce the ris% of errors in billing( < 8Comparing control totals for shipping documents with corresponding totals for sales invoices8 is incorrect because it reduces the ris% of errors in the billing process by providing evidence that all items shipped were included in the sales invoices( < 8!sing computer programmed controls on the pricing and mathematical accuracy of sales invoices8 is incorrect because it reduces the ris% of errors in the billing process by controlling the mathematical accuracy of the computations on the sales invoices( < 85atching shipping documents with approved sales orders before invoice preparation8 is incorrect because matching shipping documents with sales orders reduces the ris% of errors in the billing process by providing evidence that approved sales orders were shipped before being invoiced( hich of the following is a step in an auditor's decision to assess control risk at below the maximum" Apply analytical procedures to both financial data and A) nonfinancial information to detect conditions that may indicate wea% controls(
A) B) C) )
Correct Answer: D Explanation: A! "#D states that if a condition or circumstance differs adversely from the auditor's expectation, the auditor needs to consider the reason for such a difference( For example: < Analytical procedures disclose significant differences from expectations( < *ignificant unreconciled differences between reconciliations of a control account and subsidiary records( < Confirmation re9uests disclose significant differences or yield fewer responses than expected( < transactions selected for testing are not supported by proper documentation( < *upporting records or files that should be readily available are not promptly produced when re9uested( < audit tests detect errors that apparently were %nown to client personnel, but were not voluntarily disclosed(
1hen such conditions exist, the planned scope of audit procedures should be reconsidered( As the differences from expectations increase, the auditor should consider whether the assessment of the ris% of material misstatement of the financial statements made in the planning stage of the engagement is still appropriate( 85anagement places little emphasis on meeting earnings pro7ections(8 and 8)he board of directors ma%es all ma7or financing decisions(8 are encouraging factors that management is not willing to circumvent the rules 7ust to meet earnings pro7ections and that the board of directors ma%es all financial decisions( !ncorrected conditions do not necessarily mean that material misstatements exist( (n planning an audit of a new client$ an auditor most likely would consider the methods used to process accounting information because such methods: A) +nfluence the design of internal control( B) Affect the auditor's preliminary 7udgment about materiality levels(
C) Assist in evaluating the planned audit ob7ectives( ) etermine the auditor's acceptable level of audit ris%( Correct Answer: A Explanation: A! "## states that the auditor should consider the methods the entity uses to process accounting information because such methods influence the design of the internal control structure( )he extent to which computer processing is used in accounting applications, as well as the complexity of that processing, may also influence the nature, timing, and extent of audit procedures( 5ateriality, audit ob7ectives, and acceptable level of audit ris% are not based on the methods used to process accounting information( <ill$ C'A$ has been retained to audit the financial statements of )onday Co& )onday's predecessor auditor was 'ost$ C'A$ who has been notified by )onday that 'ost's ser!ices ha!e been terminated& =nder these circumstances$ which party should initiate the communications between <ill and 'ost" A) Bill, the successor auditor B) Post, the predecessor auditor C) 5onday's controller or CF? ) )he chairman of 5onday's board of directors
Correct Answer: A Explanation: A! "#E states that the initiative in communicating rests with the successor auditor( )he communication may be either written or oral( Both the predecessor and successor auditors should hold in confidence information obtained from each other( )his obligation applies whether or not the successor accepts the engagement( Before contacting the predecessor, the successor auditor must have the permission from the client to do so(
auditor would most likely: Attempt to sign0on to the system using invalid user identifications and passwords( 1rite a computer program that simulates the logic of the client's access control software(
A) B)
Audit includes examining, on a test basis, evidence C) supporting the amounts and disclosures in the financial statements Auditor obtains reasonable assurance about whether ) the financial statements are free of material misstatement Correct Answer: D Explanation: A! "#$ states that the existence of audit ris% is recogni&ed by the statement in the auditor's standard report that the audit or obtained reasonable assurance about whether the financial statements are free of material misstatement( Audit ris% is the ris% that the auditor may un%nowingly fail to appropriately modify the opinion on financial statements that are materially misstated( )he sentence in the opinion in the financial statement is a division of responsibilities between management and auditor( )hat portion of the report is supporting the opinion rendered( )he statement explains that due to timing and cost constraints the auditor has to audit less than all evidence available through the use of statistical sampling( hich of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of se!eral unusually large cash disbursements" *et the tolerable rate of deviation at a lower level than A) originally planned( B) C) ) *tratify the cash disbursements population so that the unusually large disbursements are selected( +ncrease the sample si&e to reduce the effect of the unusually large disbursements( Continue to draw new samples until all the unusually large disbursements appear in the sample(
2xtract a random sample of processed transactions C) and ensure that the transactions were appropriately authori&ed( 2xamine statements signed by employees stating that ) they have not divulged their user identifications and passwords to any other person( Correct Answer: A Explanation: )he correct choice is to attempt to sign0on to the system using invalid user identifications and passwords( )his will provide the auditor with the most competent evidence that the user identification and password controls are functioning as designed( )he other answers do not relate directly to actual system access3 they refer to programming, authori&ation and written statements Tests of controls are performed in order to determine whether or not: A) Controls are functioning as designed( B) 4ecessary controls are absent( C) +ncompatible functions exist( ) 5aterial dollar errors exist( Correct Answer: A Explanation: )ests of controls are designed to determine whether the control procedures prescribed by the client are actually functioning( An example of a test of controls would be to examine purchase orders for proper authori&ation The independent auditor should ac%uire an understanding of a client's internal audit function to determine whether the work of internal auditors will be a factor in determining the nature$ timing$ and extent of the independent auditor's procedures& The work performed by internal auditors might be such a factor when the internal auditor's work includes: A) 6erification of the mathematical accuracy of invoices B) .eview of administrative practices to improve efficiency and achieve management ob7ectives
Correct Answer: # Explanation: An auditor would normally select #,,- of unusually large cash disbursements and a lower percentage of smaller cash disbursements because the larger disbursements are more material to the financial statements( *tratified sampling divides the population into strata, or groups of transactions that possess the same characteristics( )he auditor would select #,,- of the items in the category that includes the unusually large disbursements and a smaller percentage of the other categories( .ate of deviation relates to tests of controls and not substantive tests( )he auditor selects the sample so that #,, - of the larger disbursements are selected( /ou can't increase more than #,,-( /ou don't continue to draw new samples since you already have #,,-( To obtain e!idence that user identification and password controls are functioning as designed$ an
C) *tudy and evaluation of internal accounting control ) Preparation of internal financial reports for management purposes
Correct Answer: C Explanation: )he wor% of internal auditors is a part of, but not a substitute for, the independent auditor's evaluation of internal control( 86erification of the mathematical accuracy of invoices 8 is wor% not necessarily performed by internal auditors( )he remaining answer choices do not directly affect internal accounting control(
An auditor uses the knowledge pro!ided by the understanding of internal control and the final assessed le!el of control risk primarily to determine the nature$ timing$ and extent of the: A) Attribute tests B) Compliance tests C) )ests of controls ) *ubstantive tests
include the word 8all(8 Auditors are not expected to examine all the evidence and detect all illegal acts (n a properly designed internal control system$ the same employee most likely would match !endors' in!oices with recei!ing reports and also: A) Post the detailed accounts payable records B) .ecompute the calculations on vendors' invoices C) .econcile the accounts payable ledger ) Cancel vendors' invoices after payment
Correct Answer: D Explanation: *ubstantive tests are audit tests performed to substantiate the fairness of presentation of each account on the financial statements( )he nature, timing, and extent of substantive tests are determined by the creditor's assessment of control ris%( )he remaining answer choices are synonymous terms, and these tests are used to determine whether internal control procedures are actually in place in the client's operation( hen a C'A is approached to perform an audit for the first time$ the C'A should make in%uiries of the predecessor auditor& This is a necessary procedure because the predecessor may be able to pro!ide the successor with information that will assist the successor in determining: A) 1hether the predecessor's wor% should be utili&ed B) C) 1hether the company follows the policy of rotating its auditors 1hether in the predecessor's opinion internal control of the company has been satisfactory Correct Answer: # Explanation: )he accounts payable, or vouchers payable, department has the responsibility to prepare vouchers for payment( As part of that process, an employee in that department should chec% vendors' invoices for mathematical accuracy by recomputing calculations and extensions, and should match the vendors' invoices with receiving report sand purchase orders for 9uantities, prices, and terms( hich of the following internal control acti!ities most likely would pre!ent direct labor hours from being charged to manufacturing o!erhead" Periodic independent counts of wor% in process for comparison to recorded amounts Comparison of daily 7ournal entries with approved production orders !se of time tic%ets to record actual labor wor%ed on production orders .econciliation of wor%0in0process inventory with periodic cost budgets
A) B) C) )
) 1hether the engagement should be accepted Correct Answer: D Explanation: )his is a ma7or consideration for the successor CPA to determine whether to accept the engagement( 8)he successor auditor should ma%e specific and reasonable in9uiries of the predecessor regarding matters that the successor believes will assist him in determining whether to accept the engagement(8 To exercise due professional care an auditor should: Attain the proper balance of professional experience and formal education
Correct Answer: C Explanation: )ime tic%ets should be designed to %eep trac% of hours wor%ed, by whom, and on what production orders( After approval by a production supervisor, time tic%ets provide the information on number of hours wor%ed directly on specific production orders( +f time tic%ets are properly used to record actual hours wor%ed on orders, approval and;or review of these cards should prevent direct labor hours from being incorrectly charged to manufacturing overhead( )he remaining answer choices are incorrect for the following reasons: < Counts of wor% in process will not provide brea%downs between direct and indirect costs and therefore would not prevent direct labor hours from being incorrectly charged to overhead( < 2rrors may be made on the production orders( +n order to prevent and;or detect errors regarding direct labor hours, the production orders would have to be compared to time tic%ets( < 1or%0in0process inventory is a total which combines direct labor and manufacturing overhead( 2ven if this total is correct, direct labor could have been incorrectly charged to manufacturing overhead( )organ$ C'A$ is the principal auditor for a multinational corporation& Another C'A has examined
A)
B) esign the audit to detect all instances of illegal acts C) ) Critically review the 7udgment exercised by those assisting in the audit 2xamine all available corroborating evidence supporting management's assertions
Correct Answer: C Explanation: )he third general standard is: ue professional care is to be exercised in the performance of the audit and the preparation of the report( 2xercise of due care re9uires critical review at every level of supervision of the wor% done and the 7udgment exercised by those assisting in the audit( )he correct answer choice relates to the first general standard( )he incorrect answer choices
and reported on the financial statements of a significant subsidiary of the corporation& )organ is satisfied with the independence and professional reputation of the other auditor$ as well as the %uality of the other auditor's examination& ith respect to )organ's report on the financial statements$ taken as a whole$ )organ: A) 5ust not refer to the examination of the auditor B) 5ust refer to the examination of the other auditor C) 5ay refer to the examination of the other auditor 5ay refer to the examination of the other auditor, in which case 5organ must include in the auditor's report ) on the consolidated financial statements, a 9ualified opinion with respect to the examination of the other auditor( Correct Answer: C Explanation: )he principal auditor may or may not refer to the other auditor's examination( +f he does, he is sharing the responsibility for his opinion( +f he accepts full responsibility, no reference is made to the other auditor( *oeb$ C'A$ has completed preparation of the #loto Company's unaudited financial statements and has prepared the following report to accompany them: The accompanying balance sheet of the #loto Company as of August +,$ -.,,$ and the related statements of income$ retained earnings$ and cash flows for the year then ended were not audited by us and accordingly we do not express an opinion on them& The financial statements fail to disclose that the debentures issued on /uly ,0$ -..1$ limit the payment of cash di!idends to the amount of earnings after August +,$ -..2& The company's statements of income for the years -.,. and -.,,$ both of which are unaudited$ show this amount to be 3,4$2..& 5enerally accepted accounting principles re%uire disclosure of matters of this nature& hich of the following comments best describes the appropriateness of this report" A) )he report is satisfactory( B) C) )he report is deficient because =oeb does not describe the scope of the review( )he report is deficient because the second paragraph gives the impression that some audit wor% was done(
generally accepted accounting principles$ the auditor will issue a7n8: A) >ualified opinion B) *pecial report C) isclaimer of opinion ) Adverse opinion Correct Answer: D Explanation: )he 9uestion states the auditor concludes the statements are not in conformity with GAAP( +n order to ma%e this statement in his report, the auditor must issue anadverse opinion( A 9ualification, rather than an adverse opinion, still states the financial statements present fairly, except for((( An adverse opinion states the 8financial statements do not present fairly(((8 A company issues audited financial statements under circumstances which re%uire the presentation of a statement of cash flows& (f the company refuses to present a statement of cash flows$ the independent auditor should: A) isclaim an opinion(
Prepare a statement of cash flows and note in a middle B) paragraph of the report that this statement is auditor0 prepared( C) Prepare a statement of cash flows and disclose in a footnote that this statement is auditor0prepared(
>ualify his opinion with an 8except for8 9ualification and ) a description of the omission in a middle paragraph of the report( Correct Answer: D Explanation: )he statement of cash flows is re9uired by GAAP and its omission results in a 9ualified except for opinion( )he statement of cash flows, for reporting purposes, is considered the omission of a disclosure( *imitation on the scope of the auditor's examination may re%uire the auditor to issue a %ualified opinion or to disclaim an opinion& hich of the following would generally be a limitation on the scope of the auditor's examination" )he unavailability of sufficient competent evidential matter )he engagement of the auditor to report on only one basic financial statement
A) B)
)he report is deficient because the explanatory ) comment in the second paragraph should precede the opinion paragraph( Correct Answer: A Explanation: )he report is satisfactory because when the CPA is preparing unaudited statements, he has the responsibility to ensure that the statements are in accordance with GAAP( +f they are not, the CPA must propose ad7ustments, and if the client refuses to boo% said ad7ustments, to so disclose in his report( hen$ in the auditor's 6udgment$ the financial statements are not presented fairly in conformity with
)he examination of a subsidiary's financial statements C) by an auditor other than the one who examines and reports on the consolidated financial statements ) )he engagement of the auditor after year end
Correct Answer: A Explanation: =imitations on the scope of the audit can come about by client restrictions, inability to obtain sufficient competent evidential matter or inade9uacy of client accounting records(
)he remaining answer choices are incorrect for the following reasons: < )he auditor can report on only one basic financial statement( < )he use of another auditor is not a scope limitation( < 8)he engagement of the auditor after year end(8 is incorrect because this would not necessarily result in a scope limitation( hich of the following audit procedures is best for identifying unrecorded trade accounts payable" .eviewing cash disbursements recorded subse9uent to A) the balance sheet date to determine whether the related payables apply to the prior period( +nvestigating payables recorded 7ust prior to and 7ust B) subse9uent to the balance sheet date to determine whether they are supported by receiving reports( 2xamining unusual relationships between monthly C) accounts payable balances and recorded cash payments( .econciling vendors' statements to the file of receiving ) reports to identify items received 7ust prior to the balance sheet date( Correct Answer: A Explanation: )he auditor reviews cash disbursements recorded in the period subse9uent to the balance sheet date to determine if they represent payments for goods and;or services received during the period ending on the balance sheet date( +f so, the auditor would then determine whether or not they have been properly recorded in the period prior to the balance sheet date( )his review of subse9uent payments is designed to identify unrecorded trade accounts payable and other unrecorded liabilities( )he remaining answer choices are incorrect for the following reasons: < 8+nvestigating payables recorded 7ust prior to and 7ust subse9uent to the balance sheet date to determine whether they are supported by receiving reports(8 would not detect unrecorded liabilities because it is testing recorded payables, not potentially unrecorded payables( < Cash payments are made for many items, not 7ust for accounts payable( )herefore, the relationship between cash payments and accounts payable balances may fluctuate based on other activity( < .econciling vendor statements to receiving reports would not disclose unrecorded liabilities unless comparisons were also made with recorded payables and cash payments( (n e!aluating an entity's accounting estimates$ one of an auditor's ob6ecti!es is to determine whether the estimates are: A) 4ot sub7ect to bias B) Consistent with industry guidelines C) Based on ob7ective assumptions ) .easonable in the circumstances Correct Answer: D
Explanation: )he auditor's ob7ective when evaluating accounting estimates is to obtain sufficient competent evidential matter to provide reasonable assurance that all accounting estimates that could be material to the financial statements have been developed3 those accounting estimates are reasonable in the circumstances3 and the accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed( )he remaining answer choices are incorrect for the following reasons: < 2stimates are based on sub7ective as well as ob7ective factors and may involve biased 7udgments made by management( < 8Consistent with industry guidelines8 presents a procedure the auditor would perform to determine whether the estimates are reasonable( +n addition to consistency with industry data, the auditor would evaluate consistency with other supporting and relevant historical data( An auditor selected items for test counts while obser!ing a client's physical in!entory& The auditor then traced the test counts to the client's in!entory listing& This procedure most likely obtained e!idence concerning management's assertion of: A) .ights and obligations B) Completeness C) 2xistence or occurrence ) 6aluation Correct Answer: # Explanation: Assertions about completeness deal with whether all accounts and transactions that should be presented in the financial statements are so included( +f an auditor test counts selected items while observing a client's physical inventory and then traces those counts to the client's inventory listing, the auditor is obtaining evidence that all inventory items that should be included in the listing, which becomes the basis for the financial statement amounts, are so included( )he assertions presented in the incorrect answer choices are not tested by this procedure( +f an inventory item is test counted and on the listing, the client may not have the rights to that item( +n order to test existence, the auditor would compare the listing to the actual items on hand instead of comparing the test counts to the listing( 6aluation of inventory includes tests of lower of cost and mar%et, not 7ust 9uantities obtained during test counts( Auditors try to identify predictable relationships when using analytical procedures& 9elationships in!ol!ing transactions from which of the following accounts most likely would yield the highest le!el of e!idence" A) Accounts receivable B) +nterest expense C) Accounts payable ) )ravel and entertainment expense
Correct Answer: # Explanation: 1hen using analytical procedures to identify
predictable relationships, higher levels of evidence will be obtained when those relationships are most predictable( .elationships involving income statement accounts, such as interest expense, tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time rather than a point in time( Also, interest expense, which can be related to debt, is more predictable than the travel and entertainment expense, which is more sub7ect to management discretion( hich of the following procedures would an auditor most likely perform to !erify management's assertion of completeness" Compare a sample of shipping documents to related sales invoices(
litigation Correct Answer: A Explanation: +nternal evidence, consisting of documents such as purchase orders that are produced within the client's system, is generally considered low in competence and therefore the least persuasive( < 8Ban% statements obtained from the client8 is an example of external0internal evidence, is considered more competent( < 8)est counts of inventory performed by the auditor8 is evidence obtained directly from an external source, is better than evidence that goes through the client before reaching the auditor( < 8Correspondence from the client's attorney about litigation(8 is an example of the most persuasive evidence because it is obtained directly by the auditor through physical observation( An auditor concluded that no excessi!e costs for idle plant were charged to in!entory& This conclusion most likely related to the auditor's ob6ecti!e to obtain e!idence about the financial statement assertions regarding in!entory$ including presentation and disclosure and: A) 6aluation and allocation B) Completeness C) 2xistence or occurrence ) .ights and obligations Correct Answer: A Explanation: Assertions about valuation or allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts( +f the auditor is concluding that no excessive costs were charged to inventory, he or she has gathered evidence regarding valuation of amounts in the inventory account( Proper costing of inventory does not relate to the assertions presented in the other answers( )he remaining answer choices are incorrect for the following reasons: < )he completeness assertion deals with whether all accounts and transactions, such as those related to inventory, that should be presented in the financial statements are so included( < )he existence or occurrence assertion deals with whether assets of the entity, such as inventory, exist at a given date and whether recorded transactions, such as those related to inventory, has occurred during a given period( < )he rights and obligations assertion deals with whether assets, such as inventory, are the rights of the entity( (f the ob6ecti!e of a test of details is to detect o!erstatements of sales$ the auditor should trace transactions from the: A) Cash receipts 7ournal to the sales 7ournal B) *ales 7ournal to the cash receipts 7ournal C) *ource documents to the accounting records
A)
B) ?bserve the client's distribution of payroll chec%s( C) ) Confirm a sample of recorded receivables by direct communication with the debtors( .eview standard ban% confirmations for indications of %iting(
Correct Answer: A Explanation: Assertions about completeness deal with whether all transactions and accounts that should be presented in the financial statements are so included( )o test management's assertion that all sales are included on the income statement, the auditor would compare shipping documents, which typically provide evidence that a sale has occurred and should be recorded, to related sales invoices, which provide the basis for recording the sales transactions( )he concern of the auditor is with fictitious or overstated amounts, not omitted or incomplete amounts( An auditor most likely would inspect loan agreements under which an entity's in!entories are pledged to support management's financial statement assertion of: A) 2xistence or occurrence B) Completeness C) Presentation and disclosure ) 6aluation or allocation Correct Answer: C Explanation: Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed( An auditor would inspect loan agreements regarding pledged inventories to determine that management has ade9uately disclosed the security arrangements( hich of the following types of audit e!idence is the least persuasi!e" A) Prenumbered purchase order forms B) Ban% statements obtained from the client C) )est counts of inventory performed by the auditor ) Correspondence from the client's attorney about
) Accounting records to the source documents Correct Answer: D Explanation: )he ob7ective is to test whether recorded sales are valid @not overstated)( )he auditor is answering the 9uestion, 8+s this recorded sale a valid transactionA8 +n order to answer that 9uestion, the auditor would start with the recorded sales and loo% for documentation corroborating its validity( 4egative confirmation re9uests as% the respondent to reply only if the stated receivable information is incorrect( )he presumption is that a non0 reply to a confirmation re9uest is evidence that the account balance is correct( )hus, negative confirmation procedures would not be used when there is a li%elihood that accounts are in dispute( )hey would be used where a small number of accounts are in dispute( The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit in%uiry limits the response to: 5atters to which the attorney has given substantive attention in the form of legal representation An evaluation of the li%elihood of an unfavorable outcome of the matters disclosed by the entity )he attorney's opinion of the entity's historical experience in recent similar litigation )he probable outcome of asserted claims and pending or threatened litigation
:oon after #oyd's audit report was issued$ #oyd learned of certain related party transactions that occurred during the year under audit& These transactions were not disclosed in the notes to the financial statements& #oyd should: Plan to audit the transactions during the next engagement(
A)
B) .ecall all copies of the audited financial statements( C) ) etermine whether the lac% of disclosure would affect the auditor's report( As% the client to disclose the transactions in subse9uent interim statements(
Correct Answer: C Explanation: +f the auditor becomes aware of facts that existed at the report date, he should determine whether the facts would have affected the audit report( +f they would have affected his report and people are currently relying on the report, the auditor should advise the client to ma%e appropriate disclosures of the facts and their impact( < 8Plan to audit the transactions during the next engagement(8 does not address what the auditor should do regarding the current year's audit( < 8.ecall all copies of the audited financial statements(8 and 8As% the client to disclose the transactions in subse9uent interim statements(8 would be considered only after the auditor determined that the lac% of footnote disclosure affected his report( A written client representation letter most likely would be an auditor's best source of corroborati!e information of a client's plans to: A) )erminate an employee pension plan( B) 5a%e a public offering of its common stoc%( C) *ettle an outstanding lawsuit for an amount less than the accrued loss contingency(
A) B) C) )
Correct Answer: A Explanation: uring the audit of financial statements, the auditor is re9uired to send a letter of audit in9uiry to the client's legal counsel concerning claims, litigation and assessments( +t is reasonable to assume that an attorney would be responsible to respond concerning only those items that he has given substantive attention( Be would not be able to respond to items he has not given substantive attention @the attorney has no %nowledge)( )herefore, such a limited response on the part of an attorney would not be considered a scope limitation( An auditor's purpose in re!iewing credit ratings of customers with delin%uent accounts recei!able most likely is to obtain e!idence concerning management's assertions about: A) Presentation and disclosure B) 2xistence or occurrence C) .ights and obligations ) 6aluation or allocation Correct Answer: D Explanation: )he auditor's review of credit ratings of customers with delin9uent accounts is normally accomplished during an audit in order to test the ade9uacy of the allowance for doubtful accounts( )he auditor is trying to validate the proper dollar balance in the account( )he valuation assertion is concerned with proper dollar valuation(
) iscontinue a line of business( Correct Answer: D Explanation: +n some cases, the corroborating information that can be obtained by the application of auditing procedures other than in9uiry is limited( 1hen a client plans to discontinue a line of business, for example, the auditor may not be able to obtain information through other auditing procedures to corroborate the plan or intent( Accordingly, the auditor should obtain a written representation to provide confirmation of management's intent( )he client's plans included in the other answers, in comparison to the plans to discontinue a line of business, could be more readily corroborated by other evidence( A written client representation letter most likely would be an auditor's best source of corroborati!e information of a client's plans to: A) )erminate an employee pension plan( B) 5a%e a public offering of its common stoc%( C) *ettle an outstanding lawsuit for an amount less than
the accrued loss contingency( ) iscontinue a line of business( Correct Answer: D Explanation: +n some cases, the corroborating information that can be obtained by the application of auditing procedures other than in9uiry is limited( 1hen a client plans to discontinue a line of business, for example, the auditor may not be able to obtain information through other auditing procedures to corroborate the plan or intent( Accordingly, the auditor should obtain a written representation to provide confirmation of management's intent( )he client's plans included in the other answers, in comparison to the plans to discontinue a line of business, could be more readily corroborated by other evidence( Cooper$ C'A$ is auditing the financial statements of a small rural municipality& The recei!able balances represent residents' delin%uent real estate taxes& The internal control structure at the municipality is weak& To determine the existence of the accounts recei!able balances at the balance sheet date$ Cooper would most likely: A) *end positive confirmation re9uests( B) *end negative confirmation re9uests( C) 2xamine evidence of subse9uent cash receipts( ) +nspect the internal records such as copies of the tax invoices that were mailed to the residents(
following reasons: < 8?btain evidence from details tested to corroborate particular assertions(8 refers to substantive tests of details, not analytical procedures( < 8+dentify areas that represent specific ris%s relevant to the audit(8 is an ob7ective of analytical procedures used in planning the audit( < 8*atisfy doubts when 9uestions arise about a client's ability to continue in existence(8 involves the auditor obtaining information about management's plans and assessing the li%elihood that such plans can be implemented3 these are not analytical procedures( hich of the following procedures is least likely to be performed before the balance sheet date" A) )esting of internal control over cash B) Confirmation of receivables C) *earch for unrecorded liabilities ) ?bservation of inventory Correct Answer: C Explanation: )he auditor is concerned with unrecorded liabilities as of the balance sheet date @completeness assertion), thus audit procedures performed to identify unrecorded liabilities before the balance sheet date would be meaningless( Accounts receivable may be confirmed prior to the balance sheet date if the auditor concludes internal controls surrounding accounts receivable are effective( +nventory counts may be observed prior to year if the client maintains perpetual inventory records and the controls surrounding those records are effective( hich of the following presumptions does not relate to the competence of audit e!idence" )he more effective the internal control structure, the A) more assurance it provides about the accounting data and financial statements( An auditor's opinion, to be economically useful, is B) formed within reasonable time and based on evidence obtained at a reasonable cost( 2vidence obtained from independent sources outside C) the entity is more reliable than evidence secured solely within the entity( )he independent auditor's direct personal %nowledge, ) obtained through observation and inspection, is more persuasive than information obtained indirectly(
Correct Answer: A Explanation: Confirmation of receivables is a generally accepted auditing procedure( )he use of positive confirmation re9uests is preferable when individual account balances are relatively large or when there is reason to believe that there may be a substantial number of accounts in dispute or with inaccuracies or irregularities( )he negative form is useful when internal control surrounding accounts receivable is considered to be effective( +n this case, although the individual accounts may not be relatively large, the internal control structure is wea% and the balances, since they are delin9uent, may be in dispute The primary ob6ecti!e of analytical procedures used in the final re!iew stage of an audit is to: ?btain evidence from details tested to corroborate particular assertions( +dentify areas that represent specific ris%s relevant to the audit(
A) B)
Correct Answer: # Explanation: )here should be a rational relationship between the cost of obtaining evidence and the usefulness of the information obtained( Bowever, when considering competency of evidence, time and cost are not relevant( < )he more effective the internal control structure, the more assurance it provides about the reliability of accounting data and financial statements( < 1hen evidential matter can be obtained from independent sources outside the entity, it is more competent than evidential matter secured solely within the entity( < )he independent auditor's direct personal %nowledge,
Assist the auditor in assessing the validity of the C) conclusions reached( ) *atisfy doubts when 9uestions arise about a client's ability to continue in existence(
Correct Answer: C Explanation: )he ob7ective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation( )he remaining answer choices are incorrect for the
obtained through examination, observation, computation, and inspection, is more persuasive than information obtained indirectly( The third standard of field work states that sufficient competent e!idential matter is to be obtained through inspection$ obser!ation$ in%uiries$ and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit& The substanti!e e!idential matter re%uired by this standard may be obtained$ in part$ through: A) Flowcharting the internal control structure B) Proper planning of the audit engagement C) Analytical procedures ) Auditor wor%ing papers Correct Answer: C Explanation: *ubstantive audit procedures include test of balances and analytical procedures( )he ob7ectives of analytical procedures is to gather evidence concerning the completeness of the items included in the financial statements, and to indicate unusual fluctuations in account balances that may re9uire more detailed substantive audit procedures( ;f the following which is the least persuasi!e type of audit e!idence" A) ocuments mailed by outsiders to the auditor
inspection and reconciliation8 is incorrect because segregation of duties related to inventory is a control that is not evidenced by documents that the auditor can inspect( The o!erall attitude and awareness of an entity's board of directors concerning the importance of the internal control structure usually is reflected in its: A) Computer0based controls B) *ystem of segregation of duties C) Control environment ) *afeguards over access to assets Correct Answer: C Explanation: An entity's internal control structure consists of three elements: the control environment, the accounting system, and control procedures( )he control environment reflects the overall attitude, awareness, and actions of the board of directors, management, owners, and others concerning the importance of control and its emphasis in the entity( )he incorrect answer choices are examples of control procedures( hich of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed" *can the sales 7ournal for se9uential and unusual entries( 2xamine shipping documents for matching sales invoices( Compare the accounts receivable ledger to daily sales summaries( +nspect unused sales invoices for consecutive prenumbering(
B) Correspondence between auditor and vendors C) Copies of sales invoices inspected by the auditor ) Computations made by the auditor
A) B) C)
Correct Answer: C Explanation: )he competency @reliability) of evidence depends upon the degree of control exercised over the evidence by the client( )he client does have control over sales invoices and, thus, it is the least competent( An auditor generally tests the segregation of duties related to in!entory by: A) Personal in9uiry and observation B) )est counts and cutoff procedures C) Analytical procedures and invoice recomputation ) ocument inspection and reconciliation )
Correct Answer: # Explanation: )he auditor is loo%ing for evidence to prove that goods shipped are properly billed( )o accomplish the completeness of the billing process for all goods shipped, it is necessary to sample from a population that includes all goods shipped by examining a sample of shipping documents and tracing them to matching sales invoices( hen obtaining an understanding of an entity's internal control procedures$ an auditor should concentrate on the substance of the procedures rather than their form because: )he procedures may be operating effectively but may not be documented( 5anagement may establish appropriate procedures but not enforce compliance with them( )he procedures may be so inappropriate that no reliance is contemplated by the auditor(
Correct Answer: A Explanation: *ome internal control procedures, such as the segregation of duties, may not generate an audit trail of documents that the auditor can inspect( )he auditor can test this type of control procedure by ma%ing in9uiries of client personnel and observing who performs what duties( 8)est counts and cutoff procedures8 and 8Analytical procedures and invoice recomputation8 are procedures that relate more to substantive tests of financial statement amounts, rather than to tests of controls( 8 ocument
A) B) C)
) 5anagement may implement procedures whose costs
exceed their benefits(
B)
Perform tests of details of transactions and account balances to identify potential errors and irregularities(
Correct Answer: # Explanation: )he auditor should concentrate on the substance of management's policies, procedures, and related actions rather than their form because management may establish appropriate policies and procedures but not act on them( )he remaining answer choices are incorrect for the following reasons: < )he lac% of documentation is a form issue whereas operating effectiveness relates to substance, which is what interests the auditor( < +f the auditor does not plan to rely, the difference between form and substance is irrelevant( < 85anagement may implement procedures whose costs exceed their benefits(8 is not related to the 9uestion in that it deals with management's cost;benefit evaluation of implementing controls, not substance v( form( hich of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process" Comparing control totals for shipping documents with corresponding totals for sales invoices !sing computer programmed controls on the pricing and mathematical accuracy of sales invoices 5atching shipping documents with approved sales orders before invoice preparation .econciling the control totals for sales invoices with the accounts receivable subsidiary ledger
+dentify specific internal control policies and C) procedures that are li%ely to detect or prevent material misstatements( ocument that the additional audit effort to perform ) tests of controls exceeds the potential reduction in substantive testing(
Correct Answer: C Explanation: A! "#C states that the auditor may ma%e a preliminary assessment of control ris% at less than a high level only when the auditor: < +s able to identify policies and procedures of the accounting and internal control systems relevant to specific assertions which are li%ely to prevent or detect material misstatements in the financial statement( < Plans to perform tests of control to support the assessment( Analytical procedures or tests of reasonableness test amounts of financial data( )ests of details are performed as a substantive test to determine material mista%es in the financial statements( +f the audit effort of performing tests of controls exceeds the potential reduction in substantive testing, tests of controls will not be performed because doing so would reduce audit efficiency( hich of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements" 5anagement places little emphasis on meeting earnings pro7ections( )he board of directors ma%es all ma7or financing decisions( .eportable conditions previously communicated to management are not corrected( )ransactions selected for testing are not supported by proper documentation(
A) B) C) )
Correct Answer: D Explanation: )he reconciliation provides evidence that sales which have been invoiced are recorded in the accounts receivable subsidiary ledger but does not reduce the ris% of errors in billing( < 8Comparing control totals for shipping documents with corresponding totals for sales invoices8 is incorrect because it reduces the ris% of errors in the billing process by providing evidence that all items shipped were included in the sales invoices( < 8!sing computer programmed controls on the pricing and mathematical accuracy of sales invoices8 is incorrect because it reduces the ris% of errors in the billing process by controlling the mathematical accuracy of the computations on the sales invoices( < 85atching shipping documents with approved sales orders before invoice preparation8 is incorrect because matching shipping documents with sales orders reduces the ris% of errors in the billing process by providing evidence that approved sales orders were shipped before being invoiced( hich of the following is a step in an auditor's decision to assess control risk at below the maximum" Apply analytical procedures to both financial data and A) nonfinancial information to detect conditions that may indicate wea% controls(
A) B) C) )
Correct Answer: D Explanation: A! "#D states that if a condition or circumstance differs adversely from the auditor's expectation, the auditor needs to consider the reason for such a difference( For example: < Analytical procedures disclose significant differences from expectations( < *ignificant unreconciled differences between reconciliations of a control account and subsidiary records( < Confirmation re9uests disclose significant differences or yield fewer responses than expected( < transactions selected for testing are not supported by proper documentation( < *upporting records or files that should be readily available are not promptly produced when re9uested( < audit tests detect errors that apparently were %nown to client personnel, but were not voluntarily disclosed(
1hen such conditions exist, the planned scope of audit procedures should be reconsidered( As the differences from expectations increase, the auditor should consider whether the assessment of the ris% of material misstatement of the financial statements made in the planning stage of the engagement is still appropriate( 85anagement places little emphasis on meeting earnings pro7ections(8 and 8)he board of directors ma%es all ma7or financing decisions(8 are encouraging factors that management is not willing to circumvent the rules 7ust to meet earnings pro7ections and that the board of directors ma%es all financial decisions( !ncorrected conditions do not necessarily mean that material misstatements exist( (n planning an audit of a new client$ an auditor most likely would consider the methods used to process accounting information because such methods: A) +nfluence the design of internal control( B) Affect the auditor's preliminary 7udgment about materiality levels(
C) Assist in evaluating the planned audit ob7ectives( ) etermine the auditor's acceptable level of audit ris%( Correct Answer: A Explanation: A! "## states that the auditor should consider the methods the entity uses to process accounting information because such methods influence the design of the internal control structure( )he extent to which computer processing is used in accounting applications, as well as the complexity of that processing, may also influence the nature, timing, and extent of audit procedures( 5ateriality, audit ob7ectives, and acceptable level of audit ris% are not based on the methods used to process accounting information( <ill$ C'A$ has been retained to audit the financial statements of )onday Co& )onday's predecessor auditor was 'ost$ C'A$ who has been notified by )onday that 'ost's ser!ices ha!e been terminated& =nder these circumstances$ which party should initiate the communications between <ill and 'ost" A) Bill, the successor auditor B) Post, the predecessor auditor C) 5onday's controller or CF? ) )he chairman of 5onday's board of directors
Correct Answer: A Explanation: A! "#E states that the initiative in communicating rests with the successor auditor( )he communication may be either written or oral( Both the predecessor and successor auditors should hold in confidence information obtained from each other( )his obligation applies whether or not the successor accepts the engagement( Before contacting the predecessor, the successor auditor must have the permission from the client to do so(
