Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness? a. Reviewing standard bank confirmations for indications of cash manipulations. b. Comparing a sample of shipping documents to related sales invoices. c. Observing the entity’s distribution of payroll checks. d. Confirming a sample of recorded receivables by direct communication with the debtors.
> For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. Employee overtime wages. b. Credit granted to customers. c. Write-offs of customer accounts. d. Cash disbursements.
> Koss Corporation is a publicly traded company that designs and sells stereo headphones. The Koss family controls a majority of the Company’s stock. On November 17, 2010, Sujata “Sue” Sachdeva, the former Vice-President of Finance was sentenced to 11 year
> Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling? a. An estimate of the standard deviation of the population’s recorded amounts is not required. b. The auditor rarely needs
> In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation? a. The qualitative aspects of misstatements. b. The total dollar amount of t
> Which of the following statements concerning the auditor’s use of statistical sampling is correct? a. An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling. b. An assumptio
> An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following sta
> How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in Tolerable Misstatement Increase in Assessed Level of Control Risk Decrease sample size Decrease sam
> Which of the following statements concerning monetary-unit sampling is correct? a. The sampling distribution should approximate the normal distribution. b. Overstated units have a lower probability of sample selection than units that are understated. c.
> The risk of incorrect acceptance relates to the a. Effectiveness of the audit. b. Efficiency of the audit. c. Planning materiality. d. Allowable risk of tolerable misstatement.
> Considering each independently, a change in which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Misstatement Tolerable Misstatement a. No No b. Yes Yes C.
> A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Greater reliance on internal controls. b. Greater reliance
> Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value? a. Random sampling. b. Numeric sampling. c. Attribute sampling. d. Variable sampling.
> On September 2, 2010, the Securities & Exchange Commission brought an action against Sujata Sachdeva, vice president of finance, and Koss senior accountant and subordinate, Julie Mulvaney, who allegedly helped her cover up the fraudulent scheme. The SEC
> As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that a. The deviation rates of both the auditor’s sample and the popul
> Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations. What should the auditor conclude if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, and the allo
> Which of the following statements is correct concerning statistical sampling in tests of controls? a. Deviations from controls at a given rate usually result in misstatements at a higher rate. b. As the population size doubles, the sample size should als
> The following table depicts the possible outcomes for the auditor’s estimated computed upper deviation rate based on a sample relative to the auditor’s tolerable deviation rate (i.e., the computed upper deviation rate
> Based on the information above, the planned allowance for sampling risk was a. 5½ percent. b. 4½ percent. c. 3½ percent. d. 1 percent.
> In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a. Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent). b. Expected populat
> Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a sta
> When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why a. A record
> Samples to test internal controls are intended to provide a basis for an auditor to conclude whether a. The controls are operating effectively. b. The financial statements are materially misstated. c. The risk of incorrect acceptance is too high. d. Mate
> An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s a. Program for tests of controls. b. Understanding of the system. c. Understanding of the types of fraud that are probable, given the pres
> Mincin, CPA, is the auditor of the Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current year’s engagement. The prior year’s working papers show that confirmation requests were mailed to 10
> An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? a. Data capture controls. b. Application controls. c. Output controls. d.
> Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit committee because they represent a. Disclosures of information that significantly contradict the auditor’s going concern assumption.
> SOC 1, Type 2 reports issued by the service organization’s auditor typically a. Provide reasonable assurance that their financial statements are free of material misstatements. b. Ensure that the entity will not have any misstatements in areas related to
> The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by a. Inspection of documents prepared by a third party but which contain the initials of those applying entity controls. b. Observation b
> Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control? a. Inquiry of entity personnel. b. Re performance of the control by the auditor. c. Observation o
> Assessing control risk below high involves all of the following except a. Identifying specific controls to rely on. b. Concluding that controls are ineffective. c. Performing tests of controls. d. Analyzing the achieved level of control risk after perfor
> Regardless of the assessed level of control risk, an auditor would perform some a. Tests of controls to determine the effectiveness of internal controls. b. Analytical procedures to verify the design of internal controls. c. Substantive procedures to res
> After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at high for some assertions because the auditor a. Believes the internal controls are unlikely to be effective. b. Determines that the pertinent inte
> Monitoring is a major component of the COSO Internal Control— Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? a. Monitoring can be an ongoing process. b. Monitoring can be conducted a
> Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? a. Effectiveness and efficiency of operations. b. Reliability of financial reporting. c. Compliance with applicable laws and regulations.
> Friendly Furniture, Inc., a manufacturer of fine hardwood furniture, is a publicly held SEC-registered company with a December 31 year-end. During May, Friendly had a flood due to heavy rains at its major manufacturing facility that damaged about $525,00
> Which of the following statements about internal control is correct? a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. b. The establishment and maintenance of internal control is an important
> The substantive analytical procedure known as trend analysis is best described by a. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. b. Development of a mod
> The primary objective of final analytical procedures is to a. Obtain evidence from details tested to corroborate particular assertions. b. Identify areas that represent specific risks relevant to the audit. c. Assist the auditor in assessing the validity
> An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a. Lead schedule. b. Supporting schedule. c. Audit control account. d. Working trial balance.
> The permanent file section of the working papers that is kept for each audit client most likely contains a. Review notes pertaining to questions and comments regarding the audit work performed. b. A schedule of time spent on the engagement by each indivi
> The current file of the auditor’s working papers should generally include a. A flowchart of the accounting system. b. Organization charts. c. A copy of the financial statements. d. Copies of bond and note indentures.
> The assurance bucket is filled with all of the following types of evidence except a. Test of controls. b. The audit report. c. Substantive analytical procedures. d. Tests of details.
> An auditor would be least likely to use confirmations in connection with the examination of a. Inventory held in a third-party warehouse. b. Refundable income taxes. c. Long-term debt. d. Stockholders’ equity.
> Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a. Bank statements obtained from the entity. b. Computations made by the auditor. c. Pre numbered entity sal
> Search the Internet (e.g., an entity’s website or sec.gov), and find an audit report for an entity’s audit of internal control over financial reporting that expresses an adverse opinion with respect to the effectiveness of internal control.
> Forestcrest Woolen Mills is a closely held North Carolina company that has existed since 1920. The company manufactures high-quality woolen cloth for men’s and women’s outerwear. Your firm has audited Forestcrest for 15 years. Five years ago, Forestcrest
> Search the Internet (e.g., an entity’s website or sec.gov), and find an audit report for an entity’s audit of internal control over financial reporting. Determine whether the entity used the combined or separate format. Specify whether the report identif
> Which of the following statements concerning audit evidence is correct? a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. b. The measure of the reliability of audit evidence lies in the auditor’s judgment.
> In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items. b. Potentially unrecorded items to the financial statements. c. Accounting records to the supporting docume
> Which of the following would an auditor most likely use in determining overall materiality when planning the audit? a. The anticipated sample size of the planned substantive tests. b. The entity’s income before taxes for the period-to-date (e.g., 6 month
> Tolerable misstatement is a. The amount of misstatement that management is willing to tolerate in the financial statements. b. Materiality for the balance sheet as a whole. c. Materiality for the income statement as a whole. d. Materiality used to establ
> The engagement partner and manager review the work of engagement team members to evaluate which of the following? a. The work was performed and documented. b. The objectives of the procedures were achieved. c. The results of the work support the conclusi
> Which of these statements concerning illegal acts by clients is correct? a. An auditor’s responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud. b. An audit in acc
> When planning an audit, an auditor should a. Consider whether the extent of substantive procedures may be reduced based on the results of tests of controls. b. Determine overall materiality for audit purposes. c. Conclude whether changes in compliance wi
> As generally conceived, the audit committee of a publicly held company should be made up of a. Representatives of the major equity interests (preferred stock, common stock). b. The audit partner, the chief financial officer, the legal counsel, and at lea
> Baker, CPA, was engaged to audit Mill Company’s financial statements for the year ended September 30. After studying Mill’s internal control, Baker decided to obtain evidence about the effectiveness of both the design and the operation of the controls th
> During the initial planning phase of an audit, a CPA most likely would a. Identify specific internal control activities that are likely to prevent fraud. b. Evaluate the reasonableness of the entity’s accounting estimates. c. Discuss the timing of the au
> If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors’ a. Competence and objectivity. b.
> Visit the SEC’s website (www.sec.gov) and identify a company that has been recently cited for revenue recognition problems. Prepare a memo summarizing the revenue recognition issues for the company.
> Visit the SEC’s website (www.sec.gov), and identify a company that has been recently cited for financial reporting problems related to the recognition of expenses. Prepare a memo summarizing the expense issues for the company.
> Visit the website of a catalog retailer similar to Earth Wear Clothiers, and determine how it processes purchase transactions and recognizes expenses. Note that you may have to examine the entity’s annual report and 10-K.
> Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States? ASB PCAOB a. Nonpublic company audits b. Public company audits Nonpublic company au
> The Public Company Accounting Oversight Board a. Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies. b. Is a quasi-governmental organization that has legal authority to set accounting st
> Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? a. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through
> Visit the GAO’s home page (www.gao.gov) and search for a recently completed audit. Prepare a summary of the GAO audit, including background on the issue and the GAO’s primary findings and recommendations.
> Which of the following best places the events of the last decade in proper sequence? a. Sarbanes-Oxley Act, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. b.
> The revenue recognition accounting standard (ASC 606) specifies for a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met: The reason for the bill-and-hold arrangement must be substanti
> Which of the following would be considered a non attest assurance service engagement? I. Expressing an opinion about the reliability of an entity’s financial statements. II. Reporting that a company’s sustainability metrics are complete and accurate. a.
> Operational auditing is oriented primarily toward a. Efficiency and future improvements to accomplish the goals of management. b. The accuracy of data reflected in management’s financial records. c. Verification that an entity’s financial statements are
> Which of the following is not a part of the role of internal auditors? a. Assisting the external auditors. b. Providing reports on the reliability of financial statements to investors and creditors. c. Consulting activities. d. Operational audits.
> A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to
> The auditing standards that are used to guide the conduct of the audit are a. Implicitly referred to in the critical audit matters section of the auditor’s standard report. b. Explicitly referred to in the critical audit matters section of the auditor’s
> Which of the following statements best describes what is meant by an unqualified audit opinion? a. Issuance of an unqualified auditor’s report indicates that in the auditor’s opinion the client’s financial statements are not fairly enough presented in ac
> Preliminary engagement activities include a. Understanding the client and the client’s industry. b. Determining audit engagement team requirements. c. Ensuring the independence of the audit team and audit firm. d. All of the above.
> Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting? a. Understanding a client’s system of internal control can help the auditor assess risk
> Which of the following statements best describes the role of materiality in a financial statement audit? a. Materiality refers to the “material” from which audit evidence is developed. b. The higher the level at which the auditor assesses materiality, th
> For what primary purpose does the auditor obtain an understanding of the entity and its environment? a. To determine the audit fee. b. To decide which facts about the entity to include in the audit report. c. To plan the audit and determine the nature, t
> Doug Stevens, CPA, is interested in testing the fairness of the ending inventory balance during the audit of Morris Co. Doug has relatively little experience using statistical sampling methods and, quite frankly, doesn’t like to turn anything over to ran
> What is meant by the statement “The agency relationship between absentee owners and managers produces a natural conflict of interest”?
> Which of the following statements relating to attest and assurance services is not correct? a. Independence is an important attribute of assurance service providers. b. Assurance services can be performed to improve the quality or context of information
> Which of the following best describes relationships among auditing, attest, and assurance services? a. Attest is a type of auditing service. b. Auditing and attest services represent two distinctly different types of services— there is no overlap. c. Aud
> Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? a. Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. b. Dif
> An independent audit adds value to the communication of financial information because the audit a. Confirms the exact accuracy of management’s financial representations. b. Lends credibility to the financial statements. c. Guarantees that financial data
> An auditor’s primary consideration regarding an entity’s internal controls is whether they a. Prevent management override. b. Relate to the control environment. c. Reflect management’s philosophy and operating style. d. Affect the financial statement ass
> An advantage of statistical sampling over non statistical sampling is that statistical sampling helps an auditor to a. Eliminate the risk of non sampling errors. b. Reduce audit risk and materiality to a relatively low level. c. Measure the sufficiency o
> Identify the three sections of the auditor’s standard unqualified report for a public company client.
> What kind of organization is the PCAOB, why was it formed, and what does it do?
> What are the major phases of an audit?
> The Committee on Basic Auditing Concepts has provided a widely cited definition of auditing. What does the phrase “systematic process” mean in this definition?
> You recently attended your five-year college reunion. At the main reception, you encountered an old friend, Dashawn Beagle, who recently graduated from law school and is now practicing with a large law firm in town. When you told him that you are a CPA a
> In understanding the entity and its environment, the auditor gathers knowledge about which categories of information?
> How is the sampling unit defined when monetary-unit sampling is used for statistical sampling? How is the sampling unit defined when classical variables sampling is used?
> In addition to policies and processes around payroll transactions, what other policies and processes are involved in the human resource management process?
> What control activities can an entity use to prevent unauthorized inventory production?
> List three substantive analytical procedures that can test the fairness of inventory and related accounts.
> List the three major steps in setting control risk in the inventory management process.
> List the inherent risk factors that affect the inventory management process.
> List the key segregation of duties in the inventory management process. What errors or fraud can occur if such segregation of duties is not present?
> What duties are performed within the inventory management, raw material stores, and cost-accounting functions?
> Briefly describe each of the following documents or records: production schedule, materials requisition, inventory master file, production data information, and cost accumulation and variance report.
