To strengthen control over the custody of heavy mobile equipment, the entity would most likely institute a policy requiring a periodic a. Increase in insurance coverage. b. Inspection of equipment and reconciliation with accounting records. c. Verification of liens, pledges, and collateralizations. d. Accounting for work orders.
> In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client’s financial statements? a. Departure from generally accepted accounting principles. b. Inadequate disclosur
> Tech Company has appropriately disclosed an uncertainty due to pending litigation. However, the auditor was unable to satisfy herself that all pending litigation had been identified. The auditor’s decision to issue a qualified opinion on Tech’s financial
> Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle’s inventory account. Assuming the inventory account is at least materia
> How does the fair value evidence the auditor is likely to gather differ between Level 1 and Level 3 assets?
> Why does the auditor generally follow a substantive strategy when auditing long-term debt and capital accounts? Under what conditions might the auditor follow a reliance strategy?
> An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph a. Is approp
> A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substan
> Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor’s report would be most likely to cause the auditor to make further inquiries about the financial statements? a. A technological devel
> Which of the following matters should an auditor communicate to those charged with governance? Significant Audit Adjustments Management's Consultations with Other Accountants a. Yes Yes b. Yes No Yes С. No d. No No
> Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting? a. A conversation with those charged with governance to discuss matters pertaining to financial reporting. b. A c
> Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern? a. Review compliance with the terms of debt agr
> Final analytical procedures are generally intended to a. Provide the auditor with a final, overall evaluation of the relationships among financial statement balances. b. Test transactions to corroborate management’s financial statement assertions. c. Gat
> Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor’s
> An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor’s responsibility fo
> An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide a. The opinion of a specialist as to whe
> What two presentation classification issues are important for the audit of debt investments?
> An auditor would be most likely to identify a contingent liability by obtaining a(n) a. Accounts payable confirmation. b. Bank confirmation of the entity’s cash balance. c. Letter from the entity’s general legal counsel. d. List of subsequent cash receip
> The audit firm’s valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present: a. The entity is a new audit client. b. Significant uncertainty exists in key inputs to the ent
> An auditor would most likely verify the interest earned on bond investments by a. Vouching the receipt and deposit of interest checks. b. Confirming the bond interest rate with the issuer of the bonds. c. Re computing the interest earned on the basis of
> Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities? a. Trace deposits of dividend checks to the cash receipts book. b. Reconcile recorded earnings w
> To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or a. Relies on the entity’s internal controls if the auditor has reasonable assurance that
> An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the a. Existence of unrealized gains or losses in the portfolio. b. Completeness of recorded investment income. c. Classifi
> Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained? a. Direct access to securities in the safe-deposit box is limited to one corporate officer. b. Personnel who post inve
> Which of the following cash transfers results in a misstatement of cash at December 31? Bank Transfer Schedule Disbursing Bank Account Receiving Bank Account Recorded in Client's Books Paid by Bank Recorded in Client's Books Recelved by Bank Transfe
> On receiving the cutoff bank statement, the auditor should vouch a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. b. Checks dated before year-end listed as outstanding on the year-end bank reconciliatio
> The primary evidence regarding year-end bank balances is documented in the a. Standard bank confirmations. b. Outstanding check listing. c. Interbank transfer schedule. d. Bank deposit lead schedule.
> How does an entity’s controls over cash receipts and disbursements affect the nature and extent of the auditor’s substantive tests of cash balances?
> An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to a. Provide the data necessary to prepare
> Over the past 10 years it has become quite common for an accounting firm to withdraw its opinion on a set of previously issued financial statements. Search the Internet to find a recent example of a company that has had to restate its financials and whos
> The tick mark ⧫ most likely indicates that the amount was traced to the a. December cash disbursements journal. b. Outstanding check list of the applicable bank reconciliation. c. January cash disbursements journal. d. Year-end bank confirmations.
> Visit the SEC’s website (www.sec.gov), and identify a company that has been recently cited for problems related to property, plant, and equipment or lease accounting (e.g., in years past, many retail companies had to restate earnings to comply with the S
> An auditor compares the current-year revenues and expenses with those of the prior year and investigates all changes exceeding 5 percent. By this procedure, the auditor would be most likely to learn that a. Fourth-quarter payroll taxes in the current yea
> Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include a. Schedules that support the current year’s adjusting entries. b. Prior years’ accounts receivable confirmat
> To obtain evidence on the authorization assertion, an auditor should trace corporate stock issuances and treasury stock transactions to the a. Numbered stock certificates. b. Articles of incorporation. c. Transfer agent’s records. d. Minutes of the board
> The primary responsibility of a bank acting as a registrar of capital stock is to a. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. b. Account for stock certificates by comparing the total sh
> When an entity does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning a. Restrictions on the payment of dividends. b. The number of shares issued and outstanding. c. Guaran
> An entity has established a bond sinking fund to repurchase a portion of the outstanding bonds each year. The auditor can best verify the entity’s bond sinking fund transactions and year-end bond balance by a. Confirmation of retired bonds with individua
> List three substantive analytical procedures that the auditor might use in auditing the income statement.
> An audit program for long-term debt would most likely include steps that require a. Comparing the carrying amount of the debt to its year-end market value. b. Correlating the interest expense recorded for the period with the debt outstanding for the peri
> An auditor’s primary purpose in examining a letter received from the bank shortly after the balance sheet date that renews and extends an entity’s note payable is most likely to obtain evidence concerning management’s assertions about a. Existence. b. Pr
> Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed-asset additions? a. Inspecting documents and physically examining assets. b. Re computing calculations and obtaining written manag
> An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all a. Non capitalizable expenditures for repairs and maintenance have been properly charged to expense. b. Expenditures for property and e
> When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs a. Substantive analytical procedures for property and equipment balances at the end of the year. b.
> Which of the following control activities would most likely allow for a reduction in the scope of the auditor’s tests of depreciation expense? a. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively parti
> Which of the following situations would not support the auditor’s decision to reduce control risk below maximum for the audit of intangible assets? a. The entity employs a qualified specialist who reviews the value of the intangible assets on an annual b
> Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for a. Investigation of variances within a formal budgeting system. b. Review and approval of the monthly deprec
> Which of the following procedures is most likely to prevent the improper disposition of equipment? a. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders. b. The use of serial numbers
> Due to a weakness observed in an entity’s control over recording retirement of equipment, the auditor may decide to a. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used. b. Select certain
> Describe common audit procedures used to audit dividends and retained earnings.
> Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions? a. Periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by th
> When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a(n) a. Insurance premium du
> Which of the following questions would an auditor most likely include on a control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity’s continued existence? b. Are two or more authorized signa
> In which of the following situations would an auditor ordinarily issue an unqualified/ unmodified financial statement audit opinion with no explanatory (or emphasis-of matter/other-matter) paragraph? a. The auditor wishes to emphasize that the entity had
> Why does the auditor obtain a representation letter from management?
> Why does an auditor obtain a cutoff bank statement when auditing a bank account? What information is examined on the canceled or substitute checks returned with the cutoff bank statement?
> What is one approach used by auditors to test for kiting?
> Explain why the standard bank confirmation form does not identify all information about an entity’s bank accounts or loans.
> Confirmation is a useful audit procedure for verifying information related to prepaid insurance. What type of information would be requested from an entity’s insurance broker in such a confirmation?
> List two common disclosures for stockholders’ equity and why such disclosures are necessary.
> Confirmations of long-term debt provide evidence about which assertions?
> What are the most important assertions for long-term debt? What documents would normally contain the authorization to issue long-term debt?
> Prepaid expenses are generally assessed to have a low inherent risk. Why would intangible assets present serious inherent risk consideration?
> Describe what is meant when it is said that an auditor is “associated with” a set of financial statements.
> What actions can result in an auditor being held criminally liable under statutes and regulations?
> Define corporate governance. Why do you think an effective internal audit function is referred to as one of the cornerstones of corporate governance?
> What type of knowledge must an accountant possess about the entity in order to perform a compilation engagement? A review engagement?
> What are the two types of prospective financial statements? How do they differ from each other?
> Why might a non-public company choose to engage an independent auditor to provide an audit of internal control over financial reporting?
> How can the practitioner satisfy the requirement that specified users take responsibility for the adequacy of procedures performed on an agreed-upon procedures engagement?
> What is the major segregation of duties that should be maintained when the entity does not use a registrar or transfer agent and sufficient personnel are available to perform the stock transactions?
> What types of engagements can be provided under the attestation standards? Give examples of two different types of attestation engagements.
> Define an attest engagement. Discuss how attestation engagements are different from assurance services.
> Why might a company that does a lot of business online choose to obtain a SOC 2 report? Why might such a company choose to obtain a SOC 3 report?
> What elements does a Trust Services engagement focus on and why might an e- commerce company consider purchasing such a service?
> List 3 important risks associated with electronic commerce. What are the Trust Services Criteria and how do they relate to the risks you identified?
> The AICPA Special Committee on Assurance Services developed six potential assurance services that could be offered by CPA firms. What are these six services?
> Explain how internal auditors can play a vital role in helping management comply with the requirements of the Sarbanes-Oxley Act.
> Define assurance services. Discuss why the definition focuses on decision making and information.
> In what ways does the Sarbanes-Oxley Act change criminal liability for auditors of public companies?
> What were the most significant components of the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998? Did the ruling in Tellabs v. Makor make it easier or harder to hold auditors liable for fraud?
> Describe how substantive analytical procedures may be used to provide evidence on the reasonableness of interest expense.
> What elements must a plaintiff prove in order to win action under Rule 10b-5 of the Securities Exchange Act of 1934? What was the significance of the outcome of the Ernst & Ernst v. Hochfelder case for auditors’ liability?
> Distinguish between the Securities Act of 1933 and the Securities Exchange Act of 1934. Why is it easier for a plaintiff to sue an auditor under the Securities Act of 1933?
> Distinguish among the four standards that have evolved for defining auditors’ liability for ordinary negligence to third parties under common law. Why is this area of auditors’ liability so complex?
> What elements must a client prove to maintain an action against an auditor for negligence?
> What is meant by proportionate liability? Contrast this legal doctrine with the doctrine of joint and several liability.
> What types of activities should the auditor be alert to that may violate the Foreign Corrupt Practices Act?
> How does the Dodd-Frank Act affect the auditing profession?
> What types of sanctions can the SEC and the PCAOB impose on auditors?
> Briefly describe the four stages of the auditor dispute process.
> Generally, a CPA is not allowed to disclose confidential entity information without the consent of the entity. Identify four circumstances in which confidential entity information can be disclosed under the Rules of Conduct without the entity’s permissio
> Why might the auditor do an account analysis and vouch selected transactions in income statement accounts such as legal expense, travel and entertainment, and other income/expenses?
> Summarize the major differences between the AICPA’s Code of Professional Conduct independence rules and the SEC’s independence rules for auditors of public companies. Briefly describe why the SEC’s requirements diverged from those of the AICPA in the ear
> What types of personal loans from a financial institution are allowed by the Rules of Conduct? What is meant by normal lending procedures, terms, and requirements within this context?
> What are the eleven major sections of the Rules of Conduct in Part 1 of the Code of Professional Conduct?
> Describe the six Principles of Professional Conduct, and indicate which CPAs are responsible for observing these six professional ideals.
> Including the preface, what are the four major “Parts” of the AICPA Code of Professional Conduct? To what group of CPAs is each Part of the Code applicable?
> What entities are involved in establishing standards and rules for the professional conduct of public accountants? Who establishes such standards for auditors of public versus private companies?
> Why are companies like Kmart able to continue in business after experiencing federal indictments, convictions of top executives, and bankruptcy, while accounting firms, like the once highly respected, financially strong Arthur Andersen, can be destroyed
> How are the roles of the PCAOB inspection program and the AICPA peer review program similar, and how are they different?
