Test Bank for Auditing & Assurance Services 9th Edition By Timothy Louwers, Penelope Bagley, Allen B

TEST BANK FOR Auditing & Assurance Services 9th Edition By Timothy Louwers, Penelope Bagley, Allen Blay, Jerry Strawser, Jay Thibodeau Answers are at the End of Each Chapter Chapter 1 Student name:__________ 1) The audit objective that all transactions and accounts that should be presented in the financial

statements are in fact included is related to which of the PCAOB assertions?

A) Existence B) Rights and obligations C) Completeness D) Valuation

2) Cutoff tests designed to detect purchases made before the end of the year that have been

recorded in the subsequent year provide assurance about management's assertion of A) presentation and disclosure.

B) completeness.

C) rights and obligations.

D) existence.

3) During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of A) existence or occurrence.

B) completeness.

C) valuation or allocation.

D) presentation and disclosure.

4) The confirmation of an account payable balance selected from the general ledger provides

primary evidence regarding which management assertion?

A) Completeness B) Valuation C) Allocation D) Existence

5) What type of evidence would provide the highest level of assurance in an attestation

engagement?

A) Evidence secured solely from within the entity.

B) Evidence obtained from independent sources.

C) Evidence obtained indirectly.

D) Evidence obtained from multiple internal inquiries.

6) Which of the following management assertions is an auditor most likely testing if the audit

objective states that all inventory on hand is reflected in the ending inventory balance?

A) The entity has rights to the inventory.

B) Inventory is properly valued.

C) Inventory is properly presented in the financial statements.

D) Inventory is complete.

7) An auditor traces the serial numbers on equipment to a nonissuer's subledger. Which of the

following management assertions is supported by this test?

A) Valuation and allocation B) Completeness C) Rights and obligations D) Presentation and disclosure

8) An auditor has substantial doubt about the entity's ability to continue as a going concern for a

reasonable period of time because of negative cash flows and working capital deficiencies.

Under these circumstances, the auditor would be most concerned about the A) control environment factors that affect the organizational structure.

B) correlation of detection risk and inherent risk.

C) effectiveness of the entity's internal control activities.

D) possible effects on the entity's financial statements.

9) Which of the following types of audit evidence provides theleast assurance of reliability?

A) Receivable confirmations received from the client's customers.

B) Prenumbered receiving reports completed by the client's employees.

C) Prior months' bank statements obtained from the client.

D) Municipal property tax bills prepared in the client's name.

10) Which of the following is a management assertion regarding account balances at the period

end?

A) Transactions and events that have been recorded have occurred and pertain to the

entity.

B) Transactions and events have been recorded in the proper accounts.

C) The entity holds or controls the rights to assets, and liabilities are obligations of the entity.

D) Amounts and other data related to the transactions and events have been recorded appropriately.

11) A practitioner is engaged to express an opinion on management's assertion that the square

footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

A) Statement of Auditing Standards.

B) Statements on Standards for Attestation Engagements.

C) Statements on Standards for Accounting and Review Services.

D) Statements on Standards for Consulting Services.

12) In auditing the long-term debt account, an auditor's procedures most likely would focus

primarily on management's assertion of A) existence.

B) completeness.

C) allocation.

D) rights and obligations.

13) An auditor selected items for test counts from the client's warehouse during the physical

inventory observation. The auditor then traced these test counts into the detailed inventory listing that ultimately agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of A) completeness.

B) valuation.

C) presentation and disclosure.

D) existence.

E) rights and obligations.

14) An auditor selected items from the client's detailed inventory listing (that agreed to the

financial statements). During the physical inventory observation, the auditor then found each item selected and counted the number of units on hand. Assuming that the amount on hand was the same as the amount in the client's detailed inventory listing, this procedure most likely would provide evidence concerning management's assertion of A) completeness.

B) valuation.

C) presentation and disclosure.

D) existence.

E) rights and obligations.

15) According to PCAOB Auditing Standard No. 2201 ( AS 2201), the auditor should identify

significant accounts and disclosures and their relevant assertions. Which of the following financial statement assertions is not explicitly identified in AS 2201?

A) Completeness B) Valuation or allocation C) Accuracy D) Existence or occurrence E) All of these are assertions identified in AS 2201.

16) When testing the completeness assertion for a liability account, 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 evidence.

D) trial balance to the subsidiary ledger.

17) If an auditor is performing procedures related to the information that is contained in the

client's pension footnote, he/she is most likely to obtain evidence concerning management's assertion about A) rights and obligations.

B) existence.

C) valuation.

D) presentation and disclosure.

18) Which of the following questions would beinappropriate for an auditor to ask a client when

exhibiting an appropriate level of professional skepticism while completing an audit procedure related to the internal control system?

A) What can go wrong in this process?

B) Which of your employees is a fraudster?

C) What else is important to know about this process?

D) What happens when a key employee goes on vacation?

19) To be proficient as an auditor, a person must first be able to accomplish which of these tasks

in a decision-making process?

A) Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes.

B) Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes.

C) Recognize the financial assertions made in management's financial statements and footnotes.

D) Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality.

20) Which of the following is an underlying condition that in part creates the demand by users

for reliable information?

A) Economic transactions that are numerous and complex.

B) Decisions that are time-sensitive.

C) Users separated from accounting records by distance and time.

D) Financial decisions that are important to investors and users.

E) All of these choices are correct.

21) Which of the following is not included in the American Accounting Association (AAA)

definition of auditing?

A) Potential conflict of interest B) Systematic process C) Assertions about economic actions D) Established criteria

22) What is the term used to identify the risk that the client's financial statements may be

materially false and misleading?

A) Business risk B) Information risk C) Client risk D) Risk assessment

23) Which of the following is not a recommendation usually made following the completion of

an operational audit?

A) Economic and efficient use of resources.

B) Effective achievement of business objectives.

C) Attesting to the fairness of the financial statements.

D) Compliance with company policies.

24) In order to be considered as external auditors with respect to government agencies, GAO

auditors must be A) organizationally independent.

B) empowered as the accounting and auditing agency by the U.S. Congress.

C) funded by the federal government.

D) guided by standards similar to GAAS.

25) Which of the following is the essential purpose of the audit function?

A) Detection of fraud.

B) Examination of individual transactions to certify as to their validity.

C) Determination of whether the client's financial statement assertions are fairly stated.

D) Assurance of the consistent application of correct accounting procedures.

26) The audit objective that all the transactions and accounts presented in the financial statements

represent real assets, liabilities, revenues, and expenses is related most closely to which of the PCAOB assertions?

A) Existence or occurrence B) Rights and obligations C) Completeness D) Presentation and disclosure

27) The audit objective that all transactions are recorded in the proper period is related most

closely to which of the Audit Standards Board (ASB) assertions about classes of transactions and events and related disclosures?

A) Occurrence B) Completeness C) Cutoff D) Accuracy

28) The audit objective that all transactions are recorded in the proper account is related most

closely to which one of the ASB assertions about classes of transactions and events and related disclosures?

A) Occurrence B) Completeness C) Accuracy D) Classification

29) The audit objective that all balances include items owned by the client is related most closely

to which one of the ASB assertions about account balances and related disclosures?

A) Existence B) Rights and obligations C) Completeness D) Valuation

30) The audit objective that all balances include all items that should be recorded in that account

is related most closely to which one of the ASB assertions about account balances and related disclosures?

A) Existence B) Rights and obligations C) Completeness D) Valuation

31) The audit objective that footnotes in the financial statements should be clear and expressed

such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB assertions about account balances and related disclosures ?

A) Occurrence B) Rights and obligations C) Comprehensibility D) Presentation

32) The engineering department at Omni Company built a piece of equipment in the company's

own shop for use in the company's operations. The auditor reviewed all work orders that were capitalized as part of the equipment costs. Which of the following is the ASB assertion about classes of transactions and events and related disclosures most closely related to the auditor's testing?

A) Occurrence B) Completeness C) Accuracy D) Classification

33) The engineering department at Omni Company built a piece of equipment in the company's

own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB assertion about account balances and related disclosures most closely related to the auditor's testing?

A) Existence B) Completeness C) Rights and obligations D) Valuation

34) Which of the following best describes the primary role and responsibility of independent

external auditor?

A) Produce a company's annual financial statements and notes.

B) Express an opinion on the fairness of a company's annual financial statements and footnotes.

C) Provide business consulting advice to audit clients.

D) Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.

35) Which of the following best describes the main reason independent auditors report on

management's financial statements?

A) Management fraud may exist and it is likely to be detected by independent auditors.

B) The management that prepares the statements and the persons who use the statements may have conflicting interests.

C) Misstated account balances may be corrected as the result of the independent audit work.

D) The management that prepares the statements may have a poorly designed system of internal control.

36) The auditor's judgment concerning the overall fairness of the presentation of financial

position, results of operations, and cash flows is applied within the framework of A) quality control.

B) generally accepted auditing standards, which include the concept of materiality.

C) the auditor's evaluation of the audited company's internal control.

D) the applicable financial reporting framework (i.e., GAAP in the United States).

37) Assurance services involve all of the following, except A) relevance as well as the reliability of information.

B) nonfinancial information as well as traditional financial statements.

C) providing absolute rather than reasonable assurance.

D) electronic databases as well as printed reports.

38) Because of the risk of material misstatement, an audit of financial statements in accordance

with generally accepted auditing standards should be planned and performed with an attitude of A) objective judgment.

B) independent integrity.

C) professional skepticism.

D) impartial conservatism.

39) Which of the following best describes assurance services?

A) Independent professional services that report on the client's financial statements.

B) Independent professional services that improve the quality of information for decision

makers.

C) Independent professional services that report on specific written management assertions.

D) Independent professional services that improve the operations of the client.

40) Which of the following is not a PCAOB assertion about inventory related to presentation and

disclosure?

A) Inventory is properly classified as a current asset on the balance sheet.

B) Inventory is properly stated at its cost on the balance sheet.

C) Major inventory categories and their valuation bases are adequately disclosed in notes.

D) All of these are PCAOB presentation and disclosure assertions about inventory.

41) Which of the following is not an ASB assertion about inventory ?

A) Inventory is properly classified as a current asset on the balance sheet.

B) Inventory is properly stated at cost on the balance sheet.

C) Major inventory categories and their valuation bases are adequately disclosed in

notes.

D) All of these are ASB assertions about inventory.

42) In performing an attestation engagement, a CPA typically A) supplies litigation support services.

B) assesses control risk at a low level.

C) expresses a conclusion on an assertion about some type of subject matter.

D) provides management consulting advice.

43) An attestation engagement is one in which a CPA is engaged to A) issue, or does issue, a report on subject matter or an assertion about the subject matter

that is the responsibility of another party.

B) provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.

C) testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts.

D) assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.

44) The underlying conditions that create demand by users for reliable information include all of

the following, except A) transactions are numerous and complex.

B) users lack professional skepticism.

C) users are separated from accounting records by distance and time.

D) financial decisions are important to investors and users.

E) decisions are time-sensitive.

45) Cutoff tests designed to detect credit sales made before the end of the year that have been

recorded in the subsequent year provide assurance about the PCAOB assertion of A) presentation.

B) completeness.

C) rights.

D) existence.

46) Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory

items provide assurance about the PCAOB assertion of A) completeness.

B) existence.

C) presentation.

D) valuation.

E) rights and obligations.

47) Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory

items provide assurance about the ASB assertions about account balances and related disclosures of A) completeness.

B) existence.

C) presentation.

D) valuation.

E) rights and obligations.

48) The probability that the information circulated by a company will be false or misleading is

referred to as A) business risk.

B) information risk.

C) assurance risk.

D) audit risk.

49) The Sarbanes–Oxley Act of 2002 requires that the key company officials certify the financial

statements. Certification means that the company CEO and CFO must sign a statement indicating A) they have read the financial statements.

B) they are not aware of any false or misleading statements (or any key omitted disclosures).

C) they believe that the financial statements present an accurate picture of the company's financial condition.

D) All of these choices are correct.

50) The process of a CPA obtaining a certificate and license in a state other than the state in

which the CPA's certificate was originally obtained is referred to as A) substantial equivalency.

B) quid pro quo.

C) relicensing.

D) reexamination.

51) The risk an entity will fail to meet its objectives is referred to as A) business risk.

B) information risk.

C) assurance risk.

D) audit risk.

52) The four basic requirements for becoming a CPA in most states are A) education, the CPA Examination, experience, and substantial equivalency.

B) the CPA Examination, experience, continuing professional education, and a state

certificate.

C) continuing professional education, the CPA Examination, experience, and an AICPA certificate.

D) education, the CPA Examination, experience, and a state certificate.

53) The study of business operations for the purpose of making recommendations about the

efficient use of resources, effective achievement of business objectives, and compliance with company policies is referred to as A) environmental auditing.

B) financial auditing.

C) compliance auditing.

D) operational auditing.

54) The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S.

Comptroller General, is known as A) the Federal Bureau of Investigation (FBI).

B) the U.S. General Accountability Office (GAO).

C) the Internal Revenue Service (IRS).

D) the United States Legislative Auditors (USLA).

55) What are the differences between the American Accounting Association and AICPA

definitions and objectives of auditing?

56) What is operational auditing and by whom is it performed?

57) What is information risk? What is business risk?

58) What are the four basic requirements for becoming a CPA?

59) Define assurance, attestation, and auditing in the context of "lending credibility."

60) Which of the PCAOB assertions (A–E) are best verified by the following audit procedures

(1–4)?

A. Existence or occurrence B. Rights and obligations C. Valuation or allocation D. Completeness E. Presentation and disclosure ___ 1. Confirming inventory held on consignment by the client with independent third party. ___ 2. Consulting the Wall Street Journal for year-end prices of securities held by the client. ___ 3. Physically examine all major property and equipment additions. ___ 4. Review the aged trial balance for significant past due accounts.

61) ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the

revenue of ABC Company. The auditors performed the audit procedures listed 1–3. For each audit procedure select the ASB assertion about classes of transactions and events and related disclosures that is most likely being tested.

A. Occurrence B. Completeness C. Cutoff D. Accuracy E. Classification ___ 1. The auditor reviewed the shipping documents to check the date that product was shipped to XYZ Company. ___ 2. The auditor reviewed the shipping documents to ensure that all product included in the sales revenue to XYZ had been shipped. ___ 3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been properly billed.

62) Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the

audit procedures listed 1–5. For each audit procedure select the ASB assertions about account balances and related disclosures that is most likely being tested.

A. Existence B. Rights and obligations C. Completeness D. Accuracy E. Valuation ___ 1. The auditors walked through the warehouse looking for obsolete inventory. ___ 2. The auditors compared invoices received from suppliers with the cost of inventory listed in the inventory accounts. ___ 3. The auditors reviewed purchase orders to determine if any inventory was on consignment. ___ 4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs, or other costs had been included in inventory costs. ___ 5. The auditors selected items from the inventory and reviewed inventory records to ensure these items were included in those records.

Answer Key Test name: chapter 1 1) C 2) B 3) D 4) D 5) B 6) D 7) B 8) D 9) B 10) C 11) B 12) B 13) A 14) D 15) C 16) B 17) D 18) B 19) C 20) E 21) A 22) B 23) C 24) A 25) C 26) A 27) C 28) D 29) B 30) C 31) D 32) D 33) D 34) B 35) B 36) D 37) C

38) C 39) B 40) B 41) D 42) C 43) A 44) B 45) B 46) D 47) D 48) B 49) D 50) A 51) A 52) D 53) D 54) B 55) Essay 56) Essay 57) Essay 58) Essay 59) Essay 60) Essay 61) Essay 62) Essay

Student name:__________ 63) Control risk is A) the probability that a material misstatement could not be prevented or detected by the

entity's internal control policies and procedures.

B) the probability that a material misstatement could occur and not be detected by auditors' procedures.

C) the risk that auditors will not be able to complete the audit on a timely basis.

D) the risk that auditors will not properly control the staff on the audit engagement.

64) The responsibilities principle under generally accepted auditing standards does not include

which of the following?

A) Competence and capabilities.

B) Independent attitude.

C) Due care.

D) Planning and supervision.

65) Which of the following types of auditors' reports does not require additional information to

support the opinion?

A) Unmodified opinion.

B) Adverse opinion.

C) Qualified opinion.

D) Disclaimer of opinion.

66) Which of the following is an element of a system of quality control that should be considered

by a public accounting firm in establishing its quality control policies and procedures?

A) Lending credibility to a client's financial statements.

B) Using statistical sampling techniques.

C) Acceptance and continuance of client relationships and specific engagements.

D) Membership in the Center for Public Company Audit Firms.

67) Which of the following presumptions does not relate to the reliability of audit evidence?

A) The more effective the client's internal control, the more assurance it provides about

the accounting data and financial statements.

B) The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

C) Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.

D) The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.

68) An important role of the Public Company Accounting Oversight Board is to oversee the A) issuance of statements by the Financial Accounting Standards Board.

B) preparation and grading of the Uniform CPA Examination.

C) peer review of member firms of the Private Companies Practice Section.

D) regulation of firms that audit issuers.

69) Audit evidence is usually considered sufficient when A) it is reliable.

B) there is enough quantity to afford a reasonable basis for an opinion on financial

statements.

C) it has the qualities of being relevant, objective, and free from unknown bias.

D) it has been obtained through random selection methods.

70) Which of the following is not considered a type of audit evidence?

A) The entity's trial balance.

B) Auditors' calculations.

C) Physical observation.

D) Verbal statements made by client personnel.

71) An audit of the financial statements of Camden Corporation is being conducted by external

auditors. The external auditors are expected to: A) certify the correctness of Camden's financial statements.

B) make a complete examination of Camden's records and verify all of Camden's transactions.

C) give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).

D) give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

72) Auditors try to achieve independence in appearance in order to: A) maintain public confidence in the profession.

B) become independent in fact.

C) comply with the responsibilities principle.

D) maintain an unbiased mental attitude.

73) The preparation of an audit plan prior to the beginning of field work is appropriately

considered documentation of A) planning.

B) supervision.

C) information evaluation.

D) quality assurance.

74) Which of the following procedures would provide the most reliable audit evidence?

A) Inquiries of the client's accounting staff held in private.

B) Inspection of pre-numbered client shipping documents.

C) Inspection of bank statements obtained directly from the client's financial institution.

D) Analytical procedures performed by auditors on the client's trial balance.

75) Which of the following would most likely be a violation of the independence requirement

found in the responsibilities principle under generally accepted auditing standards?

A) An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.

B) The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm.

C) An auditor on the engagement owns a financial interest in the stock of the client.

D) The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

76) A vendor's invoice received and held by the client would be considered what type of

evidence?

A) External.

B) Internal.

C) External–internal.

D) Written representation.

77) Which of the following statements is generally correct about the appropriateness of audit

evidence?

A) Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.

B) To be reliable, audit evidence must be either valid or relevant, but need not be both.

C) Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements.

D) Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

78) The standard auditors' report refers to standards of the PCAOB and GAAP in which

section(s)?

A) Standards of the PCAOB: Basis for Opinion; GAAP: Opinion on the Financial Statements.

B) Standards of the PCAOB: Opinion on the Financial Statements; GAAP: Opinion on the Financial Statements and Basis for Opinion.

C) Standards of the PCAOB: Opinion on the Financial Statements and Basis for Opinion; GAAP: Opinion on the Financial Statements.

D) Standards of the PCAOB: Opinion on the Financial Statements; GAAP: Opinion on the Financial Statements.

79) Which of the following is not included in the auditors' standard report representing an

unmodified opinion?

A) A brief indication of the responsibility of auditors and management for the financial statements.

B) An indication that all appropriate disclosures have been made and included in the financial statements.

C) An indication that the audit was conducted in accordance with standards established by the PCAOB. D) The auditors' opinion on the fairness of the financial statements.

80) Internal evidence A) is obtained directly from third parties independent of the client.

B) originates outside of the client's system but has been received and processed by the

client.

C) consists of documents that are produced, used, and stored within the client's information system.

D) consists of representations made by the client's officers, directors, owners, and employees.

81) Which of the following presumptions is correct about the reliability of audit evidence?

A) Information obtained indirectly from outside sources is the most reliable form of audit

evidence.

B) To be reliable, audit evidence should be convincing rather than persuasive.

C) Reliability of audit evidence refers to the amount of corroborative evidence obtained.

D) An effective system of internal control provides more assurance about the reliability of audit evidence.

82) The auditors' responsibility to express an opinion on the financial statements is A) implicitly represented in the auditors' standard report.

B) explicitly represented in the Opinion on the Financial Statements section of the

auditors' standard report.

C) explicitly represented in the Basis for Opinion section of the auditors' standard report.

D) explicitly represented in the Critical Audit Matters section of the auditors' standard report.

83) Which of the following is not a concept from the performance principle under generally

accepted auditing standards?

A) The auditor must plan the work and properly supervise any assistants.

B) The auditor must express an opinion in accordance with the auditor's findings.

C) The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.

D) The auditor must determine and apply an appropriate materiality level throughout the audit.

84) Under generally accepted auditing standards, which of the following relates to the

responsibilities principle?

A) The initial planning of the audit engagement.

B) The confirmation of accounts receivable.

C) The completion of an internal control questionnaire.

D) Maintaining professional skepticism and exercising professional judgment.

85) Which of the following represent audit quality guides that remain stable over time and are

applicable for all audits?

A) Auditing procedures.

B) Auditing standards.

C) Due care.

D) System of quality control.

86) Which of the following situations would most likely be in conflict with the responsibilities

principle?

A) Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors.

B) Auditors obtain expertise in their client's industry as they are conducting the audit examination.

C) Auditors are directly involved with a client manager in a strategic decision-making capacity.

D) Auditors fail to document their assessment of control risk following their study of internal control.

87) Which of the following statements is not true with respect to the evidence that would be

gathered when assessments of control risk are high?

A) Auditors would be required to rely on external (rather than internal) forms of evidence.

B) Auditors would be required to perform procedures at interim periods, rather than at year end.

C) Auditors would be required to confirm a larger number of customer accounts receivable balances.

D) Auditors would be required to obtain more evidence through direct personal observation.

88) As it relates to audit evidence, appropriateness refers to the A) originality of evidence gathered.

B) quality of evidence gathered.

C) quantity of evidence gathered.

D) timeliness of evidence gathered.

89) Which of the following information would not be included in the auditors' standard report?

A) The names of the financial statements audited.

B) A description of the nature of an audit.

C) An indication that all necessary disclosures have been presented.

D) An opinion on the entity's financial statements.

90) The primary purpose of the auditors' study of internal control for a nonissuer is: A) to provide constructive suggestions to the client for improving its internal control.

B) to report on internal control as required by Auditing Standard No. 5.

C) to identify and detect fraud and irregularities perpetrated by client personnel.

D) to determine the nature, timing, and extent of further audit procedures.

91) Which reporting options do auditors have if the client's financial statements are not presented

according to the applicable financial framework (e.g., GAAP, IFRS)?

A) Unmodified opinion or disclaimer of opinion.

B) Qualified opinion or disclaimer of opinion.

C) Unmodified opinion or adverse opinion.

D) Qualified opinion or adverse opinion.

92) Which of the following statements is true with respect to the quality of audit evidence?

A) Quality is related to the relevance of evidence, but not the reliability of evidence.

B) Evidence is considered of higher quality when gathered prior to year-end than

following year-end.

C) Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control.

D) In evaluating quality, sufficiency of evidence is of greater importance than appropriateness of evidence.

93) Which of the following concepts is least related to the risk of material misstatement?

A) Control risk.

B) Detection risk.

C) Inherent risk.

D) Materiality.

94) Which of the following statements describes an appropriate relationship with respect to the

reliability of audit evidence?

A) Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities.

B) Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers.

C) A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.

D) Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.

95) A periodic review of an audit firm's system of quality control by the PCAOB is referred to as

a(n): A) B) C) D)

inspection. peer review. principles review. quality review.

96) The performance principle would include all of the following except: A) the auditors' determination of materiality levels.

B) the auditors' evaluation of independence with respect to their clients.

C) the auditors' evaluation of the risk of material misstatement.

D) the auditors' determination of the nature, timing, and extent of further audit

procedures.

97) Which of the following is most closely associated with the responsibilities principle?

A) Due care.

B) Planning.

C) Qualified audit opinion.

D) Risk of material misstatement.

98) Which of the following statements is not true with respect to the responsibility for

establishing auditing standards?

A) The PCAOB issues auditing standards for the audit of issuers, subject to SEC approval.

B) Standards issued by the Auditing Standards Board after 2003 apply to the audits of both issuers and nonissuers.

C) The Auditing Standards Board currently issues auditing standards for the audit of nonissuers.

D) Prior to the Sarbanes–Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both issuers and nonissuers.

99) Which of the following would normally be considered earliest in the audit examination?

A) Determination of materiality levels for use during the audit.

B) Consideration of the ability of the entity's internal control to prevent or detect errors.

C) Preparation of a written audit plan.

D) Evaluation of the type of audit opinion to be issued, based on the auditor's findings.

100)

The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as: A) due care.

B) independence in appearance.

C) professional judgment.

D) professional skepticism.

101)

Which of the following is least related to the concept of independence in appearance?

A) The auditors' objectivity and ability to act impartially toward the client.

B) The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements.

C) The ownership of a financial interest in a client by the auditor.

D) The employment of the auditor's family member in an important position with the client.

102)

The concept of__________ recognizes that a GAAS audit may fail to detect all material misstatements.

A) absolute assurance B) due care C) reasonable assurance D) risk of material misstatement

103)

Generally accepted auditing standards are A) specific actions performed by auditors during an examination.

B) standards that guide the conduct of an audit examination.

C) legal requirements auditors must observe during the audits of issuers.

D) standards used by entities in deciding whether to engage or retain the services of auditors.

104)

Which of the following could serve as a source of professional guidance in the audit of an issuer?

Auditing Standards Issued by the PCAOB Yes Yes No No

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

Statements on Auditing Issued by the ASB No Yes Yes No

105)

Which of the following is not true with respect to the responsibilities for establishing auditing standards?

A) Auditing standards for both issuers and non-issuers must be formally approved by the Securities and Exchange Commission.

B) Interpretive publications are issued by the AICPA to provide guidance on the application of auditing standards in specific circumstances.

C) The PCAOB is the body with formal authority for the creation of auditing standards for the audits of issuers.

D) If specific guidance is not provided by PCAOB Auditing Standards, auditors may refer to Statements on Auditing Standards that have not been amended or superseded.

106)

107)

Which of the following is not related to the responsibilities principle?

A) Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession.

B) Firm-wide policies to evaluate the financial and professional relationships of its professionals.

C) Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting.

D) The auditors' use of professional judgment throughout the examination.

A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as A) due care.

B) independence.

C) professional judgment.

D) professional skepticism.

108)

During which stages of an audit examination are auditors required to exhibit the appropriate use of professional judgment?

Gathering Evidence

Drawing Conclusions

Yes Yes No No

No Yes Yes No

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

109)

Which of the following is not true with respect to the concept of reasonable assurance?

A) Reasonable assurance allows for mistakes and misinterpretations by the audit team throughout the examination.

B) The nature of many audit procedures is such that they cannot always be relied upon to detect misstatements.

C) Audit teams should evaluate all transactions and components of an account balance or class of transactions.

D) Auditors should control the overall risk in an audit to an acceptably low level.

110)

Which of the following factors influences the risk of material misstatement?

A. B. C. D. A) B) C) D)

Susceptibility of the Account Balance to Misstatement Yes Yes No No

Option A Option B Option C Option D

Nature, Timing, and Extent of Further Audit Procedures No Yes Yes No

111)

Which of the following is not true with respect to the auditors' report for an issuer?

A) The report title should contain the word "independent."

B) The report provides a detailed listing of major auditing procedures performed during the examination.

C) The opinion assesses the financial statements against an applicable financial reporting framework.

D) The report specifically identifies the financial statements and years examined by the auditor.

112)

Which of the following section(s) references the requirement of auditors to be independent?

A) Opinion on the Financial Statements section.

B) Basis for Opinion section.

C) Critical Audit Matters section.

D) Opinion on the Financial Statements section and Basis for Opinion section.

113)

Which of the following is true with respect to the PCAOB inspection process?

A) All firms performing audits of issuers are inspected every year.

B) PCAOB inspections are conducted by partners of other CPA firms.

C) PCAOB inspection teams review a sample of audit engagements conducted by the firm as well as the firm's system of quality control.

D) Deficiencies from sample audit engagements reviewed by the inspection team and deficiencies in the firm's system of quality control are publicly disclosed on the PCAOB's website.

114)

Which of the following would be evaluated during the PCAOB inspection process?

Firm's system of quality control Yes Yes No No

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

Financial viability of the firm No Yes Yes No

115)

The Public Company Accounting Oversight Board was established by which of the following?

A) The Financial Accounting Standards Board.

B) The American Institute of Certified Public Accountants.

C) The Sarbanes–Oxley Act of 2002.

D) The International Accounting Standards Board.

116)

Which of the following types of audit evidence provides the least assurance of reliability?

A) Receivable confirmations received from the client’s customers.

B) Prenumbered receiving reports completed by the client's employees.

C) Prior months' bank statements obtained from the client.

D) Municipal property tax bills prepared in the client's name.

117)

A CPA firm would provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by A) establishing an understanding with each client concerning individual responsibilities in a signed engagement letter.

B) assessing the risk that errors and fraud may cause the financial statements to contain material misstatements.

C) developing specific audit objectives to support management's assertions that are embodied in the financial statements.

D) maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

118)

Which of the following courses of action is most appropriate if an auditor concludes that there is a high risk of material misstatement?

A) Use smaller, rather than larger, sample sizes.

B) Perform substantive tests as of an interim date.

C) Select more effective substantive tests.

D) Increase tests of controls.

119)

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards?

A) Establish procedures that comply with the standards of the Sarbanes–Oxley Act. B) Use attributes sampling techniques in testing internal controls.

C) Consider inherent risk and control risk before determining detection risk.

D) Establish policies to ensure that the audit work meets applicable professional standards.

120)

Which of the following is a definition of control risk?

A) The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls B) The risk that the auditor will not detect a material misstatement C) The risk that the auditor's assessment of internal controls will be at less than the maximum level D) The susceptibility of material misstatement assuming there are no related internal control policies or procedures

121)

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?

A) Presumptive B) Judgmental C) Criticizing D) Questioning

122)

An independent auditor must have which of the following?

A) A preexisting and well-informed point of view with respect to the audit B) Technical training that is adequate to meet the requirements of a professional C) A background in many different disciplines D) Experience in taxation that is sufficient to comply with generally accepted auditing standards

123)

What type of evidence would provide the highest level of assurance in an attestation engagement?

A) Evidence secured solely from within the entity.

B) Evidence obtained from independent sources.

C) Evidence obtained indirectly.

D) Evidence obtained from multiple internal inquiries.

124)

Which of the following is an important consideration during the planning of the audit?

A) Considering the independence of members of the audit team B) Performing some of the audit procedures prior to the end of the year under audit C) Considering the ability and expertise of the audit team with respect to accounting and auditing issues in the client's industry D) Considering the impact of tests of controls on the overall assessment of control risk

125)

The initial development of auditing standards was in response to A) a scandal involving embezzlement that was not detected during an audit engagement.

B) auditors' concerns that all components of the financial statements were not being verified.

C) independent inquiries of the public accounting profession made by the SEC. D) requests by companies for greater assurance with respect to the auditors' ability to detect financial statement misstatements.

126)

All of the following statements are true regarding auditing standards except: A) departures from auditing standards that impose presumptively mandatory requirements on auditors are not permitted under any circumstances.

B) Auditing Standards issued by the PCAOB serve as an appropriate source of standards for the audits of issuers.

C) separate auditing standards have been developed for the audits of U.S. governmental entities and foreign entities.

D) Interpretive Publications, which are officially considered less authoritative and less binding than auditing standards, are included as part of auditing standards.

127)

The particular and specialized actions that auditors undertake to obtain evidence in a specific audit engagement are known as A) Auditing Standards.

B) audit procedures.

C) Interpretive Publications.

D) Statements on Auditing Standards.

128)

The role of the Public Company Accounting Oversight Board in the standard-setting process is to develop A) Statements on Auditing Standards for the audits of nonissuers.

B) Auditing Standards for the audits of issuers.

C) Governmental Auditing Standards for the audits of governmental entities.

D) International Standards on Auditing for the audits of foreign entities.

129)

Pronouncements issued by the Public Company Accounting Oversight Board are subject to formal approval by the A) American Institute of Certified Public Accountants.

B) Auditing Standards Board.

C) International Auditing and Assurance Standards Board.

D) Securities and Exchange Commission.

130)

131)

The three fundamental principles underlying GAAS include all of the following, except: A) general principle.

B) performance principle.

C) reporting principle.

D) responsibilities principle.

The fundamental principles developed by the Auditing Standards Board are best described as: A) ten basic standards underlying an audit.

B) standards that apply only to audits of issuers.

C) industry-specific guidance on how audit procedures should be conducted.

D) guidelines for the general conduct of audit engagements.

132)

The relevant ethical requirements relating to due care, professional skepticism, and professional judgment are responsibilities of the auditor at which stage(s) of the audit?

Risk Assessment

Audit Evidence

Yes Yes No No

No Yes Yes No

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

133)

Which of the following does not directly relate to an auditor's responsibility for having appropriate competence and capabilities to perform the audit?

A) Participating in continuing professional education B) Gaining experience through hands-on practice C) Obtaining reliable documentary evidence D) Attending on-the-job training

134)

Which of the following situations would result in the issuance of a disclaimer of opinion?

A) The audit reveals weaknesses in the client's internal control over financial reporting.

B) The auditor is discovered to own a financial interest in the entity.

C) The audit is performed, with limited exception, in accordance with generally accepted auditing standards.

D) The entity's financial statements are not presented in conformity with the applicable financial reporting framework.

135)

In a system of quality control, leadership responsibilities for quality within the firm are best characterized by: A) basing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients.

B) management's evaluation of the integrity and business reputation of the client.

C) management's clear and consistent demonstration of its own commitment to quality control and high-quality work.

D) assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.

136)

The audit failures of both Enron and WorldCom were examples in which the leadership responsibilities for quality work within the accounting firm were overshadowed by fears that losing a key client would A) result in shareholder losses from reduced company profitability.

B) require additional audit procedures and increase the fees paid by the companies to the accounting firm.

C) negatively influence the results of the firm's inspection.

D) negatively impact individual auditors' performance evaluations.

137)

Which of the following is an example of the appropriate implementation of a system of quality control?

A) The firm requires all documents obtained during the audit to be destroyed immediately following the engagement to ensure the client's information remains confidential.

B) The firm's quality control policies have evolved through the performance of audit procedures but are not formally developed or communicated to staff members.

C) All firm employees must verbally confirm their compliance with the appropriate independence requirements before being assigned to an engagement.

D) The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.

138)

An internal evaluation of the significant judgments made by the audit team and the conclusions reached in formulating its report for engagements meeting specified criteria is known as a(n): A) engagement quality control review.

B) inspection.

C) peer review.

D) performance control evaluation.

139)

Which element of a system of quality control strives to provide the firm with reasonable assurance that its policies and procedures are operating effectively?

A) Human resources B) Leadership responsibilities for quality within the firm C) Monitoring D) Relevant ethical requirements

140)

When a firm decides to withdraw from an engagement, it should document all of the following except: A) significant issues influencing the decision to withdraw from the engagement.

B) the basis for any conclusions related to this decision to withdraw from the engagement.

C) significant consultations related to the decision to withdraw from the engagement.

D) significant effects the decision to withdraw from the engagement could have on the firm.

141)

Firm A performs audits of 60 issuers, while firm B performs audits of 120 issuers. How often must each firm undergo a PCAOB inspection?

A) Both firm A and firm B will be inspected every other year.

B) Firm A will be inspected annually and firm B will be inspected every three years.

C) Firm A will be inspected every three years and firm B will be inspected annually.

D) Both firm A and firm B will be inspected annually.

142)

143)

PCAOB inspections are conducted by A) individuals selected by the PCAOB who are not current employees of public accounting firms.

B) another public accounting firm selected by the firm being inspected.

C) current employees of another public accounting firm selected by the PCAOB. D) the AICPA's Public Oversight Board.

All of the following are examples of procedures a firm can use to monitor its system of quality control except: A) discussions with firm personnel.

B) conducting reviews of engagement documentation.

C) devoting sufficient resources to developing a system of quality control.

D) assessing compliance with independence policies and procedures.

144)

Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan.

Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working.

After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything – it will only make us go over the budget."

When Alan came to the client near the end of field work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager.

Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with the performance principle?

Explain.

145)

For each of the items below, indicate through the appropriate letter the fundamental principle to which the item is most closely related.

A. Responsibilities principle B. Performance principle C. Reporting principle ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

1. Maintaining professional skepticism.

2. An auditors’ overall conclusion of the fairness of the client’s financial statements.

3. The use of an audit plan to identify audit procedures to be performed during the engagement.

4. Auditors’ assessment of the risk of material misstatement.

5. Accounting firm policies with respect to the level of expected continuing professional education.

6. Expressing an opinion in accordance with the auditor’s findings.

7. Proper supervision of assistants on the audit.

8. Auditors’ requests to obtain bank statements directly from financial institutions with whom the client does business.

9. An indication that an opinion cannot be expressed.

10. Determining and applying an appropriate materiality level.

146)

For each of the statements below, indicate through the appropriate letter whether it relates to the PCAOB, Auditing Standards Board, both the PCAOB and Auditing Standards Board, or neither the PCAOB nor Auditing Standards Board.

A. PCAOB B. Auditing Standards Board C. Both PCAOB and Auditing Standards Board D. Neither PCAOB nor Auditing Standards Board ___ 1. Conducts inspections of firms that audit issuers. ___ 2. Pronouncements may be used in the audit of non-issuers. ___ 3. Pronouncements may be used in the audit of issuers. ___ 4. Was created by the Sarbanes Oxley Act of 2002. ___ 5. Involved with the certification and licensure of public accountants. ___ 6. Issues Statements on Auditing Standards. ___ 7. Conducts peer reviews of firms that audit non-issuers. ___ 8. Sanctions individual auditors for violations of generally accepted auditing standards.

147)

For each of the items below, indicate through the appropriate letter the element of a system of quality control to which it is most closely related.

A. Leadership responsibilities B. Relevant ethical requirements C. Acceptance and continuance of clients D. Human resources E. Engagement performance F. Monitoring ___ ___ ___ ___ ___

___ ___ ___ ___ ___

1. Reviewing selected administrative and personnel records.

2. Obtaining written confirmations regarding compliance with appropriate independence requirements.

3. Ensuring that financial considerations do not override the quality of work performed.

4. Establishing policies and procedures for resolving differences of opinion within the engagement team.

5. Devoting sufficient resources for developing, communicating, and supporting the firm’s quality control policies and procedures.

6. Evaluating the integrity and business reputation of the client.

7. Identifying circumstances and relationships that create threats to auditor independence.

8. Ensuring the firm’s ability to perform the engagement with an appropriate level of professional competence.

9. Maintaining engagement documentation for an appropriate period of time.

10. Assessing the appropriateness of the firm’s guidance materials and professional aids.

Answer Key Test name: chapter 2 63) A 64) D 65) A 66) C 67) B 68) D 69) B 70) A 71) C 72) A 73) A 74) C 75) C 76) C 77) A 78) C 79) B 80) C 81) D 82) C 83) B 84) D 85) B 86) C 87) B 88) B 89) C 90) D 91) D 92) C 93) B 94) C 95) A 96) B 97) A 98) B 99) A

100) 101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139)

D A C B B A C A B C A B B C A C B D C D A D B B B A A B B D A D B C B C D D A C

140) 141) 142) 143) 144) 145) 146) 147)

D C A C Essay Essay Essay Essay

Student name:__________ 148)

Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?

A) The entity has no formal written code of conduct.

B) The integrity of entity's management is suspect.

C) Procedures requiring separation of duties are subject to management override.

D) Management fails to modify prescribed controls for changes in conditions.

149)

150)

Before accepting an engagement to audit a new client, an auditor is required to: A) make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

B) obtain the prospective client's signature to the engagement letter.

C) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.

D) discuss the management representation letter with the prospective client's audit committee.

Which of the following statements is most accurate regarding sufficient and appropriate documentation?

A) Accounting estimates are not considered sufficient and appropriate documentation.

B) Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

C) If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.

D) Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

151)

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

A) Considering unaudited account balances and ratios to calculate what adjusted balances should be.

B) Comparing current-year account balances to balances of one or more comparable periods.

C) Considering the pattern of several unusual changes without trying to explain what caused them.

D) Comparing client data with client-determined expected results to reduce detailed tests of account balances.

152)

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?

A) The audit is being performed soon after the balance sheet date.

B) Audit staff are experienced in performing the planned procedures.

C) Analytical procedures have revealed no unusual or unexpected results.

D) There were many transactions posted to the account during the period.

153)

Which of the following steps should an auditor perform first to determine the existence of related parties?

A) Examine invoices, contracts, and purchasing orders.

B) Request a list of related parties from management.

C) Review the company's business structure.

D) Review proxy and other materials filed with the SEC.

154)

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

A) Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

B) The firm must address all independence impairment issues on the date of the audit opinion.

C) Communications related to independence may occur in any form prior to issuance of the financial statements.

D) Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

155)

Before accepting an engagement to audit a new client, a CPA is required to obtain: A) an assessment of fraud risk factors likely to cause material misstatements.

B) an understanding of the prospective client's industry and business.

C) the prospective client's signature to a written engagement letter.

D) the prospective client's consent to make inquiries of the predecessor, if any.

156)

During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing.

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

Tests of Controls

Substantive Tests

Yes Yes No No

Yes No Yes No

157)

When assessing internal auditors' objectivity, an independent auditor should: A) consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

B) review the internal auditors' reports to determine that their conclusions are consistent with the work performed.

C) verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment.

D) evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations.

158)

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

A) Make inquiries of the client's lawyer concerning pending litigation.

B) Perform cutoff tests of cash receipts and disbursements.

C) Compare financial information with nonfinancial operating data.

D) Recalculate the prior year's accruals and deferrals.

159)

160)

Which of the following matters does an auditor usually include in the engagement letter?

A) Arrangements regarding fees and billing.

B) Analytical procedures that the auditor plans to perform.

C) Indications of negative cash flows from operating activities.

D) Identification of working capital deficiencies.

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence?

A) The reporting status of the internal auditor within the organization.

B) The educational level and professional experiences of the internal auditor.

C) Whether policies prohibit the internal auditor from auditing areas where relatives are employed.

D) Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.

161)

Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

A) An inadequate understanding of the entity's internal controls.

B) The close proximity to the end of the entity's fiscal year.

C) Concluding that the entity's management probably lacks integrity.

D) The inability to perform preliminary analytical procedures before assessing control risk.

162)

The auditor is not required to ask the predecessor auditor about: A) facts that might bear on the integrity of management.

B) disagreements the predecessor may have had with management about accounting principles and audit procedures.

C) the fees charged for the previous audit.

D) the predecessor's understanding about the reasons for the change of auditors.

163)

Audit documentation does not normally include the: A) specific assertions under audit.

B) industry accounting guides.

C) record of the procedures performed.

D) decisions made in the course of the audit.

164)

D. Street, CPA, has been retained to audit the financial statements of Tuesday Company.

Tuesday's predecessor auditor was K. Post, CPA, whom Tuesday has notified by that its services have been terminated. Under these circumstances, which party should initiate the communications between Street and Post?

A) Street, the auditor.

B) Post, the predecessor auditor.

C) Tuesday's controller or CFO. D) The chair of Tuesday's board of directors.

165)

Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit?

A) Performing tests of details of transactions and balances.

B) Reviewing prior year audit documentation and the permanent file for the client.

C) Reading specialized industry journals.

D) Reevaluating the client's internal control environment.

166)

The preengagement activities of an audit engagement for a public accounting firm do not include: A) evaluating the public accounting firm's independence with regard to the audit engagement.

B) obtaining predecessor audit documentation.

C) obtaining an engagement letter.

D) ensuring that there are sufficient firm resources to complete the engagement on a timely basis.

167)

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

A) Inquiring of the client's legal counsel concerning pending litigation.

B) Comparing the financial statements to anticipated results.

C) Examining computer-generated exception reports to verify the effectiveness of internal controls.

D) Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

168)

This year, Wooten Enterprises engaged a new auditor who must: A) attempt to communicate with the predecessor auditor before accepting the engagement.

B) review the predecessor's audit documentation if the audit is to be in accordance with GAAS. C) seek the SEC's permission to accept the engagement if Wooten is publicly owned.

D) reject the engagement if the change in auditors resulted from a dispute with the predecessor.

169)

An engagement letter is used primarily to: A) ensure a clear contractual understanding of the services to be provided by the CPA. B) express an opinion on the financial statements.

C) provide management representations to be included in the audit evidence.

D) disclaim liability.

170)

The firm of Bagley, Nance, and Cummings, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard?

A) Independence.

B) Adequate technical competence and capabilities.

C) Adequate planning and supervision.

D) Gathering sufficient competent evidence.

171)

172)

During the initial planning phase of an audit, a CPA most likely would: A) test specific internal control activities that are likely to prevent fraud.

B) evaluate the reasonableness of the client's accounting estimates of inventory obsolescence.

C) discuss the timing of the audit procedures with the client's management.

D) inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should: A) reduce audit risk by lowering the preliminary levels of materiality.

B) design special substantive tests to compensate for the lack of industry expertise.

C) engage financial experts familiar with the nature of the industry.

D) obtain knowledge of matters that relate to the nature of the entity's business.

173)

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

A) Assessment of inherent risk, yes; assessment of control risk, yes.

B) Assessment of inherent risk, yes; assessment of control risk, no.

C) Assessment of inherent risk, no; assessment of control risk, yes.

D) Assessment of inherent risk, no; assessment of control risk, no.

174)

Which of the following is not considered an accounting estimate?

A) Allowance for loan losses.

B) Credit sales.

C) Net realizable value of inventory.

D) Percentage-of-completion revenue to be recorded.

175)

Which of the following would be a step in an internal control program?

A) Obtain an aged trial balance of the accounts receivable.

B) Prepare and send confirmations on a sample of customers' accounts receivable.

C) Assess the control risk for sales and collections.

D) Read sales contracts for evidence of customers' rights of return or price allowance terms.

176)

The idea of the cycle approach is to group accounts together by: A) specific function.

B) financial statement assertion.

C) audit objective.

D) transactions that affect all accounts in that particular group.

177)

Which of the following is not one of the four major cycles?

A) Revenue and cash collection.

B) Acquisition and expenditure.

C) Cash receipts and disbursements.

D) Financing and investing.

178)

Looking at vendors' invoices for particular information is an example of: A) physical observation.

B) confirmation.

C) inspection of documents.

D) scanning.

179)

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on: A) absolute size.

B) relative size.

C) nature of the item.

D) cumulative effects.

180)

Which of the following is not a way in which auditors use the concept of overall materiality?

A) As a guide to planning the audit plan.

B) As a guide to the evaluation of evidence.

C) As a guide for making decisions about the audit report.

D) As a guide for assessing control risk.

181)

The auditor looked at a bank statement received and held by the client. What kind of audit procedure would this be considered?

A) Recalculation.

B) Physical observation.

C) Confirmation.

D) Examination of documents.

182)

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 statement.

C) accounting records to the supporting evidence.

D) supporting evidence to the accounting records.

183)

In determining whether transactions have been recorded, the direction of the audit testing should start from the: A) general ledger balances.

B) adjusted trial balance.

C) original source documents.

D) general journal entries.

184)

Auditors should design the written audit plan so that: A) all material transactions will be selected for substantive testing.

B) substantive tests prior to the balance sheet date will be minimized.

C) the audit procedures selected will achieve specific audit objectives.

D) each account balance will be tested under either tests of controls or tests of transactions.

185)

In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the: A) timing of audit procedures.

B) cost-benefit of gathering techniques.

C) selected audit techniques.

D) financial statement assertions.

186)

In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating: A) $10,000.

B) $15,000.

C) $20,000.

D) $30,000.

187)

The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of: A) planning.

B) supervision.

C) information evaluation.

D) quality assurance.

188)

To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to: A) inspect the stock certificates evidencing the investment.

B) examine the audited financial statements of the investee company.

C) review the broker's advice or canceled check for the investment's acquisition.

D) obtain market quotations from The Wall Street Journal or another independent source.

189)

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of: A) presentation and disclosure.

B) completeness.

C) rights and obligations.

D) existence.

190)

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A) Trace test counts noted during the physical count of inventory to the summarization of quantities.

B) Inspect agreements for evidence of inventory held on consignment.

C) Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.

D) Inspect the open purchase order file for significant commitments to consider for disclosure.

191)

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion: A) existence or occurrence.

B) completeness.

C) valuation or allocation.

D) presentation and disclosure.

192)

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?

A) Tracing amounts in the subsidiary ledger to details on shipping documents.

B) Comparing receivable turnover rates to industry statistics for reasonableness.

C) Inquiring about receivables pledged under loan agreements.

D) Assessing the allowance for uncollectible accounts for reasonableness.

193)

An auditor most likely would inspect additions to the audit client's Property, Plant, and Equipment account to obtain evidence concerning management's assertions about: A) existence or occurrence.

B) rights and obligations.

C) presentation and disclosure.

D) valuation or allocation.

194)

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

A) Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.

B) Receiving the client's unopened mail for a reasonable period of time after year-end to search for unrecorded vendor's invoices.

C) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

D) Confirming accounts payable balances with known vendors and suppliers who have zero balances at year-end.

195)

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of: A) rights and obligations.

B) completeness.

C) presentation and disclosure.

D) existence or occurrence.

196)

In auditing accrued liabilities, an auditor's procedures most likely would focus primarily on management's assertion of: A) existence or occurrence.

B) completeness.

C) presentation and disclosure.

D) valuation or allocation.

197)

An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them. This procedure most likely obtained evidence concerning management's assertion of: A) rights and obligations.

B) completeness.

C) existence or occurrence.

D) valuation.

198)

An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of: A) valuation or allocation.

B) presentation and disclosure.

C) existence or occurrence.

D) rights and obligations.

199)

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?

A) Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.

B) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

C) Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.

D) Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.

200)

The confirmation of a cash balance provides primary evidence regarding which management assertion?

A) Existence.

B) Valuation.

C) Allocation.

D) Completeness.

201)

The confirmation of an accounts receivable balance provides primary evidence regarding which management assertion?

A) Completeness.

B) Valuation.

C) Allocation.

D) Existence.

202)

In testing the completeness assertion for a liability account, 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 evidence.

D) trial balance to the subsidiary ledger.

203)

An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about: A) rights and obligations.

B) existence.

C) presentation and disclosure.

D) valuation.

204)

Explain the bottom-up approach and the top-down approach to quantifying overall materiality.

205)

Do the following regarding auditors' concepts of overall "materiality" considered at the planning stage (i.e., "planning materiality"). a. Define or describe independent auditors' concept of "planning materiality." b. Name (but do not describe or explain) three common relationships or considerations used by auditors when assessing the dollar amount considered to be material.

206)

D. Jackson, CPA, audited Washington Company's financial statements for the year ended December 31, 2023. On November 1, 2024, Washington notified Jackson that it was changing auditors and that Jackson's services were being terminated. On November 5, 2024, Washington invited Lincoln, CPA, to make a proposal for an engagement to audit its financial statements for the year ended December 31, 2024.

Required: What procedures concerning Jackson should Lincoln perform before accepting the engagement?

207) For each of the descriptions 1–6, match the correct word or phrase from A–H. A. Inspections of tangible assets B. Confirmation C. Tracing D. Vouching E. Inquiry F. External–internal evidence G. Audit plan H. Substantive procedures ___ 1. Documentation prepared by independent parties and sent to the client. ___ 2. Proceeding forward through the accounting and control system from the evidence to the financial statements. ___ 3. Audit of details of transactions and balances. ___ 4. Audit procedure that provides compelling evidence of existence. ___ 5. Direct correspondence with independent parties. ___ 6. A list of audit procedures.

Answer Key Test name: chapter 3 148) 149) 150) 151) 152) 153) 154) 155) 156) 157) 158) 159) 160) 161) 162) 163) 164) 165) 166) 167) 168) 169) 170) 171) 172) 173) 174) 175) 176) 177) 178) 179) 180) 181) 182) 183) 184)

B A B B C B D D A A C A B C C B A B B B A A C C D D B C D C C B D D C C C

185) 186) 187) 188) 189) 190) 191) 192) 193) 194) 195) 196) 197) 198) 199) 200) 201) 202) 203) 204) 205) 206) 207)

D A A D B B D D A C B B C C D A D B C Essay Essay Essay Essay

Student name:__________ 208)

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU-C 240) is on: A) employee misappropriation of assets.

B) management fraud.

C) client fraud on customers.

D) employee embezzlement.

209)

Management fraud generally refers to: A) unintentional mistakes.

B) noncompliance.

C) intentional distortions of financial statements.

D) violations of GAAS.

210)

External auditors are responsible: A) for authenticating documents.

B) for reporting immaterial frauds to a level of management at least one level above the people involved.

C) for finding all intentional misstatements concealed by collusion.

D) for reporting all frauds to outside agencies or parties.

211)

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts?

A) The exchange of property for similar property in a nonmonetary transaction.

B) The discovery of unexplained payments made to government employees.

C) The presence of several difficult-to-audit transactions affecting expense accounts.

D) The failure to develop adequate procedures that detect unauthorized purchases.

212)

Analytical procedures are most appropriate when testing which of the following types of transactions?

A) Payroll and benefit liabilities.

B) Acquisitions and disposals of fixed assets.

C) Operating expense transactions.

D) Long-term debt transactions.

213)

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: A) an error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

B) the investee's decision to reduce cash dividends declared per share of its common stock.

C) an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities.

D) a substantial fluctuation in the price of the investee's common stock on a national stock exchange.

214)

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?

A) Presumptive.

B) Judgmental.

C) Criticizing.

D) Questioning.

215)

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

A) Comparing current-year to prior-year sales volumes.

B) Reading the financial statements and notes and considering the adequacy of evidence.

C) Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior-year's ratio.

D) Reading the letter from the client's attorney and considering the threat of litigation.

216)

In auditing related party transactions, an auditor ordinarily places primary emphasis on: A) the probability that related party transactions will recur.

B) confirming the existence of the related parties.

C) verifying the valuation of the related party transactions.

D) the adequacy of the disclosure of the related party transactions.

217)

Which of the following would not be considered an analytical procedure?

A) Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages.

B) Developing the current year's expected net sales based on the sales trend of similar entities within the same industry.

C) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

D) Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.

218)

While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue?

A) There is a broad indication of misappropriation of assets.

B) There is an indication of theft of the entity's assets.

C) There is an indication of embezzling receipts.

D) There is a broad indication of financial reporting fraud.

219)

Inherent risk and control risk differ from detection risk in which of the following ways?

A) Inherent risk and control risk are calculated by the client.

B) Inherent risk and control risk exist independently of the audit.

C) Inherent risk and control risk are controlled by the auditor.

D) Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

220)

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

A) Move detailed analytical procedures from year end to interim.

B) Increase the dollar threshold of vouching customer invoices.

C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations.

D) Use more experienced audit team members to perform year-end testing.

221)

If not already performed during the overall review stage of the audit, it is most important that auditors perform analytical procedures relating to which of the following transaction cycles?

A) Payroll.

B) Revenue.

C) Purchasing.

D) Inventory.

222)

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include: A) designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention.

B) performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements.

C) considering the qualitative materiality of known and suspected noncompliance.

D) obtaining written management representations concerning the absence of violations of laws and regulations.

223)

Certain conditions and circumstances are often present when management fraud occurs.

Which of the following is not such a condition or circumstance?

A) Unfavorable industry conditions.

B) Lack of working capital.

C) High liquidity.

D) Slow customer collections.

224)

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of: A) the maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit.

B) a maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit.

C) a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit.

D) controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.

225)

An auditor assesses the risk of material misstatement because it: A) is relevant to the auditor's understanding of the control environment.

B) provides assurance that the auditor's overall materiality levels are appropriate.

C) indicates to the auditor where inherent risk may be the greatest.

D) affects the level of detection risk that the auditor may accept.

226)

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely: A) perform extended audit procedures.

B) consult with fraud examiners.

C) report directly to the Securities and Exchange Commission within one day.

D) withdraw from the engagement.

227)

228)

Which of the following statements concerning noncompliance by clients is correct?

A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds.

B) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements.

C) An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions.

D) An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

Which of the following statements best describes auditors' responsibility to detect errors and frauds?

A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.

B) Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure.

C) Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.

D) Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.

229)

The probability that an audit team will give an inappropriate opinion on financial statements best describes: A) audit risk.

B) inherent risk.

C) control risk.

D) detection risk.

230)

Inherent risk is the: A) probability that the auditor expresses an unmodified opinion when the financial statements are materially misstated.

B) probability that the client's internal control policies and procedures will fail to detect material misstatements.

C) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.

D) probability that the auditor may not detect material misstatements in the financial statements.

231)

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?

A) Detection risk will decrease.

B) Inherent risk will increase.

C) Audit risk will decrease.

D) Detection risk will increase.

232)

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A) income would be overstated.

B) income would be understated.

C) income would not be misstated.

D) accounts receivable would be understated.

233)

An audit team uses the assessed risk of material misstatement to: A) evaluate the effectiveness of the entity's internal control policies and activities.

B) identify transactions and account balances where inherent risk is at the maximum.

C) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.

D) determine the acceptable level of detection risk for financial statement assertions.

234)

The risk of material misstatement differs from detection risk in that it: A) arises from the misapplication of audit procedures.

B) may be assessed in either quantitative or nonquantitative terms.

C) exists independently of the financial statement audit.

D) can be changed at the auditor's discretion.

235)

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is: A) audit risk.

B) inherent risk.

C) control risk.

D) detection risk.

236)

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) decrease substantive testing.

B) decrease detection risk.

C) increase inherent risk.

D) increase materiality levels.

237)

The acceptable level of detection risk is inversely related to the: A) assurance provided by substantive tests.

B) risk of misapplying audit procedures.

C) preliminary judgment about materiality levels.

D) risk of failing to discover material misstatements.

238)

The existence of audit risk is recognized by the statement in the auditor's standard report that the: A) auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

B) financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework.

C) audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

D) auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

239)

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the: A) liquidity of the account.

B) degree of management estimation involved in determining the proper account balance.

C) related internal control policies and procedures.

D) complexity of calculations involved.

240)

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: A) the noncompliance is a violation of generally accepted accounting principles.

B) the client does not take the remedial action that the auditor considers necessary.

C) the illegal act was committed during a prior year that was not audited.

D) the auditor has already assessed control risk at the maximum level.

241)

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to: A) evaluate the effect on the financial statements.

B) determine the reliability of management's representations.

C) consider whether other similar acts may have occurred.

D) recommend remedial actions to the audit committee.

242)

Jones, CPA, is auditing the financial statements of XYZ Retailing Incorporated. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected?

A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None.

B) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable.

C) Direct effect noncompliance: Limited; Indirect effect noncompliance: None.

D) Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable.

243)

Generally accepted auditing standards states that analytical procedures: A) should be applied in the planning and final review stages of the audit and as a substantive test during the audit.

B) should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.

C) should be applied in the planning stage and can be applied as a substantive test and in the final review stage.

D) should be applied in the final review stage and can be applied as a substantive test and in the planning stage.

244)

In the planning stage, analytical procedures are used to: A) identify potential problem areas.

B) provide direct evidence about the balances in accounts.

C) determine the mathematical correctness of the financial statements.

D) perform all of these.

245)

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should: A) consider the matter a scope limitation.

B) perform additional audit procedures to investigate the matter further.

C) intensify the audit with the expectation of detecting management fraud.

D) withdraw from the engagement.

246)

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent.

A) As a substantive test: Yes; In the final review stage: Yes. B) As a substantive test: Yes; In the final review stage: No. C) As a substantive test: No; In the final review stage: Yes. D) As a substantive test: No; In the final review stage: No.

247)

Which of the following would not likely be found in the minutes of the board of directors?

A) Amount of dividends declared.

B) Approval to pledge assets as security for debts.

C) Authorization of officers' salaries.

D) Approval of a new desktop computer for the controller.

248)

If an auditor encounters significant risks at the client, the auditor should do all of the following except: A) inform the SEC. B) perform extended procedures.

C) include more experienced auditors on the engagement.

D) perform tests closer to year end.

249)

Horizontal analysis refers to: A) the trend of income from year to year of persons suspected of fraud.

B) changes of financial statement numbers and ratios across several years.

C) financial statement amounts expressed each year as a proportion of a base amount.

D) the change in a suspect's net worth from the beginning to the end of a period.

250)

Analytical procedures used in planning an audit should focus on: A) reducing the scope of tests of controls and substantive tests.

B) providing assurance that potential material misstatements will be identified.

C) enhancing the auditor's understanding of the client's business.

D) assessing the adequacy of the available evidential matter.

251)

Sources of financial and nonfinancial data do not include: A) financial account information for comparable prior periods.

B) nonfinancial information such as physical production statistics.

C) company budgets and forecasts.

D) Bureau of Labor statistics.

252)

The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as: A) horizontal analysis.

B) vertical analysis.

C) net worth analysis.

D) expenditure analysis.

253)

Which of the following accounts tends to be most predictable for purposes of analytical procedures?

A) Accounts receivable.

B) Travel and entertainment expense.

C) Interest expense.

D) Income taxes payable.

254)

Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to: A) identify the appropriate schedules to be prepared by the client.

B) identify the types of errors or frauds that can occur in transactions.

C) identify unusual conditions that deserve additional audit effort.

D) determine the existence of unrecorded liabilities or overstated assets.

255)

Which of the following is not required by AU-C 240, "Consideration of Fraud in a Financial Statement Audit"?

A) Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit.

B) Conduct a discussion by the audit team of the risks of material misstatement due to fraud.

C) Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor.

D) Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

256)

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the: A) extent of substantive tests of details.

B) level of inherent risk.

C) extent of tests of controls.

D) level of detection risk.

257)

What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected?

A) Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited.

B) Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable.

C) Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited.

D) Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable.

258)

Experience has shown that the many large fraudulent transactions can be found in: A) systematic processing of large volumes of day-to-day ordinary transactions.

B) payroll fraudsters' mistakes in using unissued Social Security numbers.

C) petty cash embezzlements.

D) nonroutine, nonsystematic journal entries.

259)

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are: A) elements of audit risk whereas detection risk is not.

B) changed at the auditor's discretion whereas detection risk is not.

C) considered at the individual account-balance level whereas detection risk is not.

D) functions of the client and its environment whereas detection risk is not.

260)

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the: A) nature of substantive tests to more effective procedures.

B) timing of substantive tests, such as performing them at year-end rather than at an interim date.

C) extent of substantive tests, such as using larger sample sizes.

D) assurances provided by substantive tests to a lower level.

261)

Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit?

A) Exercise professional skepticism when performing sales testing.

B) Increase the assessment of control risk for sales.

C) Increase the assessment of detection risk for sales.

D) Perform additional substantive sales procedures on a surprise basis.

262)

If tests of controls induce the auditor to change the assessed level of control risk for Property, Plant, and Equipment from moderate to high, and audit risk and inherent risk remain constant, the acceptable level of detection risk: A) would most likely change from low to moderate.

B) would most likely change from moderate to high.

C) would most likely change from moderate to low.

D) would be unchanged, because the auditor has control over detection risk.

E) cannot be determined because inherent risk is not given.

263)

Managing business risk is the responsibility of: A) the auditors.

B) management.

C) the SEC. D) the PCAOB.

264)

Auditors would use the enterprise risk model: A) to reduce the client's business risk.

B) to determine detection risk.

C) to evaluate management's risk assessment.

D) to monitor client risk.

265)

Auditors use brainstorming: A) to heighten the audit team's awareness of fraud potential.

B) to heighten management's awareness of fraud potential.

C) to determine detection risk.

D) to set materiality.

266)

The purpose of an audit strategy is: A) to provide a defense against litigation.

B) to gain an understanding of the client.

C) to comply with securities law.

D) to set the scope, timing, and direction for auditing each relevant assertion.

267)

What are the independent auditor's responsibilities to detect and report errors and frauds?

268)

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

269)

Post, CPA, accepted an engagement to audit the financial statements of General Company, a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud.

Required: 1. (a) Describe Post's responsibilities on the circumstances described above.

2. (b) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for frauds.

3. (c) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by frauds.

270)

Items 1 through 6 represent an auditor's observed changes in certain financial statement ratios or amounts from the prior year's ratios or amounts. For each observed change, select the most likely explanation or explanations from the list of explanations provided. Answers on the list may be selected once, more than once, or not at all.

Auditor's observed changes (considered independent of each other).

1. Inventory turnover increased substantially from the prior year. (Select 3 explanations) 2. Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations) 3. Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year.

(Select 3 explanations) 4. Long-term debt increased from the prior year, but interest expense increased a larger than proportionate amount than long-term debt. (Select 1 explanation) 5. Operating income increased from the prior year although the entity was less profitable than in the prior year. (Select 2 explanations) 6. Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. (Select 1 explanation) B. Items shipped on consignment during the last month of the year were recorded as sales.

C. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

D. Year-end purchases of inventory were overstated by incorrectly including items received in the first month of the subsequent year.

E. Year-end purchases of inventory were understated by incorrectly excluding items received before the year-end.

F. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

G. A smaller percentage of sales occurred during the last month of the year, as compared to the prior year.

H. The same percentage of sales occurred during the last month of the year, as compared to the prior year.

I. Sales increased at the same percentage as cost of goods sold, as compared to the prior year.

J. Sales increased at a greater percentage than cost of goods sold increased, as compared to the prior year.

K. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year.

L. Interest expense decreased, as compared to the prior year.

M. The effective income tax rate increased, as compared to the prior year.

N. The effective income tax rate decreased, as compared to the prior year.

O. Short-term borrowing was refinanced on a long-term basis at the same interest rate.

P. Short-term borrowing was refinanced on a long-term basis at lower interest rates.

Q. Short-term borrowing was refinanced on a long-term basis at higher interest rates.

271)

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by auditors.

Required: a. Describe the broad purposes of analytical procedures. b. Identify the sources of information from which an auditor develops expectations.

272)

Analytical procedures are one type of evidence gathering procedure. According to auditing standards, there are five general forms of analytical procedures. Auditing standards also provide examples of five sources of information for analytical procedures.

Required:Describe three of the five general forms of analytical procedures. For each form, describe a typical source of the information for the form. For each source, include any questions or concerns an auditor would have about the reliability or relevancy of the source.

273)

This question tests your ability to perceive the place(s) where various potential problems may exist and the type of problem (overstatement or understatement) that may exist. It asks that you supply the words or descriptions that complete the analysis begun by applying analytical procedures.

Required:For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason (i.e., potential overstatement or understatement of __________). a. If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same. b. If the current year inventory is larger than last year and the current year gross margin (profit) is larger. c. If current year long-term liabilities are larger than last year and the interest expense is the same. d. If current year fixed assets are larger and current depreciation expense is the same as last year.

274)

Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. Understanding and evaluating such relationships are essential to the audit process.

The following financial statements were prepared by CFW Manufacturing Company for the year ended December 31, 2023. Also presented are various financial statement ratios for Holiday as calculated from the prior year's financial statements. Sales represent net credit sales. The total assets and the receivables and inventory balances at December 31, 2023, were the same as at December 31, 2022.

ABC Manufacturing Company.

Balance Sheet December 31, 2023 Assets Liabilities and Capital Cash $ 240,000 Accounts $ 160,000 payables Receivables 400,000 Notes payable 100,000 Inventory 600,000 Other current 140,000 liabilities Total current $ Total current $ 400,000 assets 1,240,000 liabilities Plant and 760,000 Long-term debt 350,000 equipment–net Common stock 750,000 Retained earnings Total assets

Sales Cost of goods sold Material Labor

$ 2,000,000

500,000

Total $ liabilities and 2,000,000 capital

ABC Manufacturing Company.

Income Statement Year Ended December 31, 2023 $ 3,000,0000

$

800,000 700,000

Overhead

300,000

Gross margin Selling expenses

1,800,000 $ 1,200,000

$

General and administrative expenses Operating income

240,000 300,000

540,000

$

Less interest expense Income before taxes Less federal income taxes

660,000 40,000

$

620,000 220,000

Net income

$

400,000

Required: Items 1 through 9 below represent financial ratios that the auditor calculated during the prior year's audit. For each ratio, calculate the current year's ratio from the financial statements presented above.

Calculations

12/31/2023

12/31/2022

1.

Current ratio

2.5

2.

Quick ratio

1.3

3.

Accounts receivable turnover

5.5

4.

Inventory turnover

2.5

5.

Total asset turnover

1.2

6.

Gross margin percentage

35 %

7.

Net operating margin %

25 %

8.

Times interest earned

10.3

9.

275)

Total debt to equity

50 %

Why is it important for auditors to understand their clients' business risks?

276)

The audit risk model includes the four risks listed below. Match the type of risk with the related definition.

A. Detection risk B. Control risk C. Inherent risk D. Audit risk ___ 1. The probability that material misstatements have occurred in transactions entering the accounting system. ___ 2. The probability that an auditor will give an inappropriate opinion on financial statements. ___ 3. The probability that the client's internal control policies and procedures will fail to detect material misstatements if they have entered the accounting system. ___ 4. The probability that audit procedures will fail to produce evidence of material misstatements.

277) For each of the following statements, match the term it best describes or typifies.

A. Management fraud B. Embezzlement or defalcation C. White-collar crime D. Larceny E. Errors ___ 1. An employee in a supermarket takes home bags of fresh fruit each day without paying for them. ___ 2. A type of fraud involving employees or nonemployees wrongfully taking money or property entrusted to their care. ___ 3. Misdeeds done by people who steal with a pencil or computer. ___ 4. The controller changed the journal entry for estimating bad debt expense to a smaller number to hide the poor results from extending credit to high-risk customers. This made income materially higher than it otherwise would have been. ___ 5. A bookkeeper inadvertently recorded depreciation by transposing numbers in a journal entry.

278)

For each of the descriptions in Column A, match the correct word or words from Column

B. A. Analytical procedures B. Year-end audit work C. Audit trail D. Horizontal analysis E. Vertical analysis F. Interim audit work ___ 1. Refers to changes across two or more years. ___ 2. A wide range of evidence-gathering activity that occurs before year-end. ___ 3. Chain of evidence found at an audit client. ___ 4. Procedures performed that rely on relationships among account balances and/or relevant non-financial data.

5. Financial statement amounts expressed as proportions of a base.

Answer Key Test name: chapter 4 208) 209) 210) 211) 212) 213) 214) 215) 216) 217) 218) 219) 220) 221) 222) 223) 224) 225) 226) 227) 228) 229) 230) 231) 232) 233) 234) 235) 236) 237) 238) 239) 240) 241) 242) 243) 244)

B C B B C A D A D C D B D B A C C D D A A A C A C D C D B A D C B A A B A

245) 246) 247) 248) 249) 250) 251) 252) 253) 254) 255) 256) 257) 258) 259) 260) 261) 262) 263) 264) 265) 266) 267) 268) 269) 270) 271) 272) 273) 274) 275) 276) 277) 278)

B C D A B C D B C C D A D D D D C C B C A D Essay Essay Essay Essay Essay Essay Essay Essay Essay Essay Essay Essay

Student name:__________ 279)

An audit team’s responsibility would not include A) designing client’s internal controls.

B) documentation of understanding of a client’s internal controls.

C) communicating internal control deficiencies.

D) assessing the effectiveness of a client’s internal controls.

280)

The appropriate separation of duties does not include A) authorization to execute transactions.

B) recording of transactions.

C) custody of assets involved in transactions.

D) data preparation.

281)

A set of characteristics that helps to define a seriousness about employees’ attitudes about the control activities in a company is referred to as A) management assertions.

B) the control environment.

C) control risk assessment.

D) functional responsibilities.

282)

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?

A) Test the operating effectiveness of such controls in the current audit.

B) Document that reliance and proceed with the original audit strategy.

C) Inquire of management as to the effectiveness of the controls.

D) Report the reliance in the report on internal controls.

283)

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor’s concern?

A) Matching purchase orders to accounts payable.

B) Verifying that approved spending limits arenot exceeded.

C) Tracing sales orders to the revenue account.

D) Reviewing minutes of board meeting.

284)

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

A) Distributing paychecks directly to department store employees.

B) Setting the pay rate for departmental employees.

C) Hiring employees and authorizing them to be added to payroll.

D) Approving a summary of hours each employee worked during the pay period.

285)

Which of the following outcomes is a likely benefit of information technology used for internal control?

A) processing of unusual or nonrecurring transactions B) enhanced timeliness of information C) potential loss of data D) recording of unauthorized transactions

286)

287)

Which of the following procedures is considered a test of controls?

A) An auditor reviews the entity’s check register for unrecorded liabilities.

B) An auditor evaluates whether a general journal entry was recorded at the proper amount.

C) An auditor interviews and observes appropriate personnel to determine segregation of duties.

D) An auditor reviews the audit workpapers to ensure proper sign-off.

Which of the following factors is most likely to affect the extent of the documentation of the auditor’s understanding of a client’s system of internal controls?

A) the industry and the business and regulatory environments in which the client operates B) the degree to which information technology is used in the accounting function C) the relationship between management, the board of directors, and external stakeholders D) the degree to which the auditor intends to use internal audit personnel to perform substantive tests

288)

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

A) Require all employees to record arrival and departure by using the time clock.

B) Have a payroll clerk recalculate all time cards.

C) Require all employees to sign their time cards.

D) Require employees to have their direct supervisors approve their time cards.

289)

Each of the following types of controls is considered to be an entity-level control, except those A) relating to the control environment.

B) pertaining to the company’s risk assessment process.

C) regarding the company’s annual stockholder meeting.

D) addressing policies over significant risk management practices.

290)

Which of the following is not a component of internal controls?

A) control environment B) control activities C) inherent risk D) monitoring

291)

Which of the following is a definition of control risk?

A) The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.

B) The risk that the auditor will not detect a material misstatement.

C) The risk that the auditor’s assessment of internal controls will be at less than the maximum level.

D) The susceptibility of material misstatement assuming there are no related internal controls, policies, or procedures.

292)

Which of the following should an auditor do when control risk is assessed at the maximum level?

A) Perform fewer substantive tests of details.

B) Perform more tests of controls.

C) Document the assessment.

D) Document the control structure more extensively.

293)

Which of the following statements is correct regarding internal control?

A) A well-designed internal control environment ensures the achievement of an entity’s control objectives.

B) An inherent limitation to internal control is the fact that controls can be circumvented by management override.

C) A well-designed and operated internal control environment should detect collusion perpetrated by two people.

D) Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

294)

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

A) Disclosing lack of segregation of duties to the external auditors during the annual review.

B) Replacing personnel every three or four years.

C) Requiring accountants to pass a yearly background check.

D) Allowing for greater management oversight of incompatible activities.

295)

Obtaining an understanding of internal control involves evaluating the design of the control and determining whether the control has been A) authorized.

B) implemented.

C) tested.

D) monitored.

296)

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

A) The relevant internal control components arenot well documented.

B) The internal auditor already has tested the relevant controls and found them effective.

C) Testing the operating effectiveness of the relevant controls wouldnot be efficient.

D) The cost of substantive procedures will exceed the cost of testing the relevant controls.

297)

An auditor is evaluating a client’s internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect?

A) The accounting staff neglects the control due to increased transactions to be processed.

B) The technology department writes a program that doesnot properly implement the control due to a lack of understanding.

C) Two employees, who work in different departments, are circumventing an internal control.

D) Someone erroneously disables edit checks in a software program designed to identify control exceptions.

298)

299)

Which of the following is a factor in the control environment?

A) segregation of duties B) information processing C) performance reviews D) management’s philosophy and operating style

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of A) occurrence.

B) accuracy.

C) valuation or allocation.

D) cutoff.

300)

Sound internal control can be described as separating all of the following duties and responsibilities except for A) transaction authorization.

B) recordkeeping.

C) custody of, or direct access to, assets.

D) hiring of employees.

301)

After obtaining an understanding of the entity’s internal control and assessing control risk, an auditor of a nonissuer decided not to perform additional tests of controls. The auditor most likely concluded that the A) additional evidence to support a further reduction in control risk was not cost beneficial.

B) assessed level of inherent risk exceeded the assessed level of control risk.

C) internal control structure was properly designed and justifiably may be relied on.

D) evidence obtainable through tests of controls would not support an increased level of control risk.

302)

Regardless of the assessed level of control risk, an auditor of a nonissuer would perform some A) tests of controls to determine the effectiveness of internal control policies.

B) analytical procedures to verify the design of internal control activities.

C) substantive tests to restrict detection risk for significant transaction classes.

D) dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

The “obtaining an understanding” work phase (Phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client’s A) control environment.

B) information and communication system.

C) control activity effectiveness.

D) monitoring activities.

303)

304)

The internal control in small business is highly dependent on the A) separation of functional responsibilities.

B) complexity of the client’s internal controls.

C) owner-manager’s competence, as well as his/her ethics and integrity.

D) bonding of employees.

305)

Which of the following is the least important audit reason for the auditor’s obtaining an understanding of a company’s internal control?

A) to serve as a basis for constructive suggestions B) to plan subsequent substantive tests C) to identify types of possible misstatements that may occur D) to consider factors that may affect the risk of material misstatement

306)

Tracing bills of lading to sales invoices provides evidence that A) shipments to customers were invoiced.

B) shipments to customers were recorded as sales.

C) recorded sales were shipped.

D) invoiced sales were recorded as sales.

307)

Which of the following client internal control activities is not usually performed in the treasurer’s department?

A) Verifying the accuracy of checks and vouchers.

B) Controlling the mailing of checks to vendors.

C) Approving vendors’ invoices for payment.

D) Canceling payment vouchers when paid.

308)

Which of the following audit procedures most likely would provide an auditor with the most assurance about the effectiveness of the operation of an entity’s internal control?

A) confirmation with outside parties B) inquiry of client personnel C) successful re-performance of the control activity D) observation of client personnel

309)

When obtaining an understanding of an entity’s internal control in a financial statement audit at a nonissuer, an auditor is not obligated to A) determine whether the control activities have been placed in operation.

B) perform procedures to understand the design of the internal control system.

C) document the understanding of the company’s internal control system.

D) search for significant deficiencies in the operation of the internal control system.

310)

After obtaining an understanding of a client’s financial reporting control activities, the auditor would next A) test the client’s control activities.

B) assess the final control risk.

C) document the understanding obtained.

D) plan the remainder of the audit work.

311)

If auditors assess control risk at the maximum level, they will tend to A) perform a great deal of additional tests of controls.

B) perform a great deal of substantive testing during the audit.

C) perform substantive tests at an interim date.

D) perform more audit procedures using internal evidence.

312)

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the A) factors that raise doubts about the auditability of the financial statements.

B) operating effectiveness of internal control policies and procedures.

C) risk that material misstatements exist in the financial statements.

D) possibility that the nature and extent of substantive tests may be reduced.

313)

When the audit team increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the audit team would most likely increase the A) extent of substantive tests of details.

B) level of inherent risk.

C) extent of tests of controls.

D) level of detection risk.

314)

When auditing financial statements of a nonissuer, the minimum work an auditor must perform in connection with a company’s internal control is best described by which of the following statements?

A) Perform exhaustive tests of accounting controls and evaluate the company’s control system effectiveness.

B) Determine whether the company’s control policies are designed well enough to prevent material misstatements.

C) Prepare auditing working papers that document the auditor’s understanding of the company’s internal control.

D) Design procedures to search for significant deficiencies in the actual operation of the company’s internal control.

315)

316)

Each member of a company’s audit committee must be A) financially literate.

B) a financial expert.

C) involved in the entity’s day-to-day management.

D) independent of the entity’s board of directors.

Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the descriptions below best expresses the minimum amount of work permitted by GAAS for nonissuers?

A) Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances.

B) Obtain an understanding of client environment, accounting, and control activities.

Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances.

C) Obtain an understanding of client environment, accounting, and control activities, and perform detailed tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment.

D) Obtain an understanding of client environment, accounting, and control activities, and perform detailed tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances, since zero control risk means that no errors or fraud can reach the accounts.

317)

Proper separation of duties reduces the opportunities to allow persons to be in positions to both A) journalize entries and prepare financial statements.

B) record cash receipts and cash disbursements.

C) establish internal controls and authorize transactions.

D) perpetrate fraud and then conceal it in the books.

318)

In an audit of financial statements, an auditor’s primary consideration regarding an internal control policy or activity is whether the policy or activity A) reflects management’s philosophy and operating style.

B) affects management’s financial statement assertions.

C) provides adequate safeguards over access to assets.

D) enhances management’s decision-making processes.

319)

Which of the following is a step in an auditor’s decision to assess control risk below the maximum?

A) Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.

B) Perform tests of details of transactions and account balances to identify potential errors and fraud.

C) Identify specific internal control policies and activities that are likely to detect or prevent material misstatements.

D) Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

320)

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity’s internal controls?

A) incompatible duties B) management override C) mistakes in judgment D) collusion among employees

321)

As part of understanding the internal control, an auditor is not required to A) consider factors that affect the risk of material misstatement.

B) ascertain whether internal control policies and activities have been placed in operation.

C) identify the types of potential misstatements that can occur.

D) obtain knowledge about the operating effectiveness of the client’s internal control activities.

322)

The primary objective of procedures performed to obtain an understanding of the entity’s internal control is to provide an auditor with A) knowledge necessary for audit planning.

B) evidential matter to use in assessing inherent risk.

C) a basis for modifying tests of controls.

D) an evaluation of the consistency of application of management’s policies.

323)

The overall attitude and awareness of an entity’s board of directors concerning the importance of the client’s internal control usually is reflected in its A) computer-based control activities.

B) system of separation of duties.

C) control environment.

D) safeguards over access to assets.

324)

After obtaining an understanding of internal controls and assessing control risk on the audit of a nonissuer, an auditor decided to perform tests of controls. The auditor most likely decided that A) it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

B) additional evidence to support a further reduction in control risk is not available.

C) an increase in the assessed level of control risk is justified for certain financial statement assertions.

D) there were many internal control weaknesses that could allow errors to enter the accounting system.

325)

In an audit of financial statements of a nonissuer in accordance with generally accepted auditing standards, an auditor is required to A) document the auditor’s understanding of the entity’s internal control.

B) search for significant deficiencies in the operation of the internal controls.

C) perform tests of controls to evaluate the effectiveness of the entity’s accounting system.

D) determine whether control activities are operating effectively to prevent or detect material misstatements.

326)

In testing control activities, an auditor ordinarily selects from a variety of techniques, including A) inquiry and analytical procedures.

B) reperformance and observation.

C) comparison and confirmation.

D) inspection and verification.

327)

328)

Assessing control risk at below the maximum level most likely would involve A) performing more extensive substantive tests with larger sample sizes than originally planned.

B) reducing inherent risk for most of the assertions relevant to significant account balances.

C) changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end.

D) identifying specific internal control activities that are relevant to specific financial statement assertions.

Which of the following areas can external auditors rely on internal auditors’ work in auditing internal controls?

A) evaluation of the auditing environment B) testing of low-risk internal control activities C) all testing of the operating effectiveness of internal control activities D) as providing the key evidential matter supporting the external auditors’ opinion

329)

Which of the following most likely would be considered an inherent limitation of the potential effectiveness of an entity’s internal controls?

A) human error B) deliberate circumvention C) human error and deliberate circumvention D) neither human error not deliberate circumvention

330)

Which of the following organizations do not have COSO representatives?

A) American Institute of Certified Public Accountants B) Institute of Internal Auditors C) Financial Accounting Standards Board D) American Accounting Association

331)

Which of the following organizations have COSO representatives?

A) Institute of Management Accountants B) American Institute of Certified Public Auditors C) Institute of Internal Accountants D) International Accounting Standards Board

332)

The COSO framework is utilized as a benchmark to assess the internal control effectiveness by whom?

A) Management and Analysts B) Analysts and Creditors C) Auditors and Analysts D) Management and Auditors

333)

The COSO framework is utilized as a benchmark to assess the internal control effectiveness by whom?

A) Creditors B) Analysts C) Creditors and Analysts D) Neither Creditors nor Analysts

334)

According to the COSO Framework, internal control is a process that is designed to achieve objectives in three different categories. Which of the following responses is not one of the objectives identified in the COSO Framework?

A) compliance with laws and regulations B) faithful representation C) relevant financial reports D) effective and efficient operations

335)

When two or more employees work together to circumvent the segregation of duties and commit fraud, the employees are committing__________.

A) collusion B) human Error C) management Override D) segregation of duties

336)

According to the COSO Framework, internal control is a process that is designed to achieve objectives in three different categories. Which of the following responses is one of the objectives identified in the COSO Framework?

A) effective and efficient operations B) financial statements free from bias C) comparability of financial information D) financial statements free from error

337)

The concept that recognizes that the costs of controls should not exceed the benefits that are expected from the controls is defined as __________.

A) absolute assurance B) limitation of internal control C) control risk D) reasonable assurance

338)

Which of the following characteristics describe internal control?

A) process B) dynamic C) process and dynamic D) neither process nor dynamic

339)

Which of the following characteristics does not describe internal control?

A) dynamic B) absolute C) process D) All characteristics describe internal control.

340)

Management’s responsibility would include A) communicating internal control deficiencies.

B) ensuring proper monitoring of internal control activities.

C) documentation of understanding of a client’s internal controls.

D) assessing the effectiveness of a client’s internal controls.

341)

Management’s responsibility would not include A) designing internal controls.

B) maintaining documentation of operating and design effectiveness of internal controls.

C) communicating internal control deficiencies.

D) ensuring proper monitoring of internal control activities.

342)

According to the COSO framework, a well-functioning internal control environment is characterized by which of the following philosophies?

A) organizational structure B) authority and responsibility C) integrity and ethical values D) All characterize a well-functioning control environment.

343)

According to the COSO framework, a well-functioning internal control environment is not characterized by which of the following philosophies?

A) board of directors B) human resources C) auditor assessments D) financial reporting competencies

344)

According to the COSO framework, which component of internal controls has a pervasive effect on the effect on the reliability of financial reporting because it affects all other components of an organization’s internal control system?

A) control Activities B) control environment C) monitoring D) information and communication

345)

Audit Committees are comprised of A) a subset of the audit engagement team who consult on the client’s business.

B) a subset of the board of directors that is generally composed of three to six independent members.

C) the full board of directors.

D) the full audit engagement team.

346)

The audit committee must be comprised of how many financial experts?

A) none B) one C) majority D) all

347)

Which of the following is a duty of the audit committee?

A) Appointment, compensation, and oversight of the public accounting firm conducting the entity’s audit.

B) Oversight of the anonymous fraud hotline that is designed to provide employees with a confidential and effective manner in which to report possible financial reporting issues.

C) Authority to engage legal counsel in the event of management fraud.

D) These are all duties of the audit committee.

348)

Which of the following is not a duty of the audit committee?

A) Oversight of the entity’s internal audit function.

B) Approval of non-audit services provided by the public accounting firm performing the audit engagement.

C) Determining the nature, timing, and extent of further audit procedures.

D) These are all duties of the audit committee

349)

Which of the following types of risks addresses the factors, events, and conditions that can prevent organizations from achieving their business objective?

A) control risk B) business risk C) inherent risk D) risk of material misstatement

350)

The process applied in a strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite to provide reasonable assurance regarding the achievement of entity objectives is defined as A) Business strategy.

B) Business risk.

C) Enterprise risk management.

D) Entity-level controls.

351)

A robust ERM framework, at a minimum, will include some type of process where management takes the steps necessary to A) identify risks.

B) estimate their significance and likelihood.

C) consider how to manage the risks.

D) All of these answer choices are correct.

352)

Which of the following categories is not relevant as the audit team inquires with management regarding their internal control system?

A) information technology B) vacation policy C) development of control activities D) policies and procedures

353)

Which of the following are procedures that prevent misstatements before they occur?

A) preventive controls B) detective controls C) corrective controls D) entity-level controls

354)

Which of the following is not an example of preventive controls?

A) hiring competent people B) unrestricted access to the company’s accounting software C) requiring approval for purchases and expenditures D) segregation of duties

355)

Combinations of responsibilities that place a person alone in a position to create and conceal misstatements due to errors or frauds in her or his normal job are called?

A) collusion B) human error C) incompatible responsibilities D) segregation of duties

356)

The communication aspect of the Information and Communication category of the COSO framework includes A) report production and distribution.

B) report production and manipulation.

C) report manipulation and distribution.

D) report manipulation and destruction.

357)

In order to obtain an understanding of the client’s information system, the auditor must seek to understand A) the nature of the underlying accounting records.

B) supporting information and the accounts that are used to fully execute a transaction.

C) the nature of the underlying accounting records and supporting information and the accounts that are used to fully execute a transaction.

D) neither the nature of the underlying accounting records nor supporting information nor the accounts that are used to fully execute a transaction.

358)

According to professional standards, an auditor is required to perform audit procedures that are designed to A) test the controls that have been designed to ensure that the information is complete and accurate.

B) test the completeness and accuracy of the information using substantive testing procedures.

C) test the controls that have been designed to ensure that the information is complete and accurate and those that have been designed to ensure that the information is complete and accurate.

D) test the controls that have been designed to ensure that the information is complete and accurate or that have been designed to ensure that the information is complete and accurate.

359)

According to COSO, a well-functioning monitoring system is characterized by philosophies such as A) human resources.

B) reporting deficiencies.

C) information technology.

D) organizational structure.

360)

Which of the following is a common monitoring control?

A) audit committee inquiries of internal and external auditors B) segregation of duties C) client generates reports with information used by management D) management establishes a “tone at the top” environment

361)

Which of the following is not a common monitoring control?

A) audit committee inquiries of internal and external auditors B) quality assurance reviews of the internal audit department C) management establishes a “tone at the top” environment D) analysis of and appropriate follow-up of operating reports or metrics that might identify anomalies indicative of a control failure

362)

Which of the following types of controls is considered to be an entity-level control?

A) period-end financial reporting process B) controls related to management override C) period-end financial reporting process and controls related to management override.

D) neither period-end financial reporting process nor controls related to management override.

363)

Which of the following types of controls are pervasive to the internal control system and the reliability of the financial statements taken as a whole?

A) walkthrough controls B) entity-level controls C) transaction-level controls D) industry-level controls

364)

Transaction-level controls pertain to A) broad classes of transactions, account balances, and disclosures.

B) broad disclosures and implications.

C) unique merger and acquisition transactions.

D) specific classes of transactions, account balances, and disclosures.

365)

Which of the following is not a process or form of a client’s internal control understanding?

A) narrative description B) internal control questionnaire C) process flowchart D) Venn diagram

366)

The accounting process flowchart should communicate in visual form all relevant information and evidence about A) separation of duties.

B) authorization.

C) accounting and control activities in an understandable.

D) All of these answer choices are correct.

367)

A narrative description of each significant process within the internal control system is designed to describe A) all environmental elements.

B) the process flow of transactions through the accounting system.

C) All of the control activities that have been implemented.

D) All of these answer choices are correct.

368)

Tests of controls, when performed, should be applied to samples of transactions and control activities executed A) throughout the period under audit.

B) at the beginning of the period under audit.

C) at the end of the period under audit.

D) at different times depending on the type of test.

369)

370)

How does an auditor determine which test of internal controls approach to use?

A) The approach depends on the nature of the control that is being tested along with the availability of data.

B) The auditor should always test all items in the population.

C) The auditor should always test from a sample of the population.

D) Management decides which test of internal controls approach the auditor should use.

Which of the following is the key difference between document examination and reperformance?

A) Audit teams inspect documents for evidence that the auditors performed for document examination, while auditor reperformance provides indirect evidence on that the control activity was(was not) performed correctly by management.

B) Audit teams inspect documents for evidence that employees performed for document examination, while auditor reperformance provides direct evidence on that the control activity was(was not) performed correctly by management.

C) Audit teams inspect documents for evidence that the auditors performed for document examination, while auditor reperformance provides direct evidence on that the control activity was(was not) performed correctly by management.

D) Audit teams inspect documents for evidence that employees performed for document examination, while auditor reperformance provides indirect evidence on that the control activity was(was not) performed correctly by management.

371)

Which of the following is a limitation of the observation test of control?

A) Observation can produce evidence of access controls such as the use of passwordsecured access to the computerized information system, locked doors, and security guards.

B) Observation covers only one point in time, and what is observed at that point in time may not be representative of prior time periods.

C) Observation is typically used when certain control activities, leave no documentary evidence for subsequent examination.

D) Observation occurs when auditors have eyewitness accounts of employees at their jobs performing control activities.

372)

Which of the following is an example of the inspection test of control?

A) Asking a client about the presence of fraud within the company.

B) Observing a client count their inventory annually.

C) Examining voided checks for an authorized signature.

D) Recalculating a complex reserve balance.

373)

A dual-purpose test can produce A) control testing evidence.

B) substantive testing evidence.

C) control testing evidence and Substantive testing evidence.

D) neither control testing evidence nor substantive testing evidence.

374)

List several elements of a company’s control environment.

375)

List and explain briefly the phases of an internal control evaluation.

376)

What are some of the problems in establishing an internal control system in small business?

377)

What are two reasons to not test internal controls?

378)

What are two approaches to testing internal controls?

379) A. B. C. D. E. F. G. H. I.

Below are several of the ASB management assertions.

Occurrence Completeness Rights and obligations Allocation or valuation Classification Existence Cutoff Accuracy Understandability For each of the following control activities, identify the management assertion that best applies by placing the correct letter in the blank space below. ___ 1. Match shipping documents with sales invoices before a sale is recorded. ___ 2. Balance total of individual customers’ receivables with the Trade A/R control account. ___ 3. Sales manager approves taking discounts. ___ 4. Computer check for billing the quantity shipped, list price, and total. ___ 5. Account for numerical sequence of prenumbered shipping documents.

Answer Key Test name: chapter 5 279) 280) 281) 282) 283) 284) 285) 286) 287) 288) 289) 290) 291) 292) 293) 294) 295) 296) 297) 298) 299) 300) 301) 302) 303) 304) 305) 306) 307) 308) 309) 310) 311) 312) 313) 314) 315)

A D B A B D B C B D C C A C B D B C C D D D A C C C A A C C D C B C A C A

316) 317) 318) 319) 320) 321) 322) 323) 324) 325) 326) 327) 328) 329) 330) 331) 332) 333) 334) 335) 336) 337) 338) 339) 340) 341) 342) 343) 344) 345) 346) 347) 348) 349) 350) 351) 352) 353) 354) 355)

B D B C A D A C A A B D B C C A D D B A A D C B B C D C B B B D C B C D B A B C

356) 357) 358) 359) 360) 361) 362) 363) 364) 365) 366) 367) 368) 369) 370) 371) 372) 373) 374) 375) 376) 377) 378) 379)

A C D B A C C B D D D D A A B B C C Essay Essay Essay Essay Essay Essay

Student name:__________ 380)

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should A) investigate fully to determine the total amount of the misappropriation.

B) determine which accounts are affected and the amount by which they are overstated or understated.

C) determine the methods by which the misappropriation was carried out.

D) identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work.

E) All of these choices are correct.

381)

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be A) psychotic.

B) egocentric.

C) ideological.

D) economic.

382)

Which of the following management policies would increase the probability of fraud in a company?

A) Diversifying authority throughout divisions and subsidiaries in the organization.

B) Measuring performance and awarding bonuses based on short-term operating results.

C) Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work.

D) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts.

383)

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

A) Observation and inspection of records.

B) Confirmation and reperformance.

C) Inquiry and inspection of records.

D) Analytical procedures and reperformance.

384)

Each of the following is a type of known misstatement, except A) an inaccuracy in processing data.

B) the misapplication of accounting principles.

C) differences between management and the auditor's judgment regarding estimates.

D) a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

385)

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets?

A) A large number of bearer bonds on hand.

B) A large number of inventory items with low sales prices.

C) A large number of transactions processed in a short period of time.

D) A large number of fixed assets with easily identifiable serial numbers.

386)

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Clerk 1 Clerk 2 Clerk 3 Treasurer

Reviews Review vendor invoices for proper signature approval.

Enters vendor invoice into the accounting system and verifies payment terms.

Posts entered vendor invoices to accounts payable ledger for payment and mails checks.

Review the vendor invoices and signs each check.

Which of the following would indicate a weakness in the company's internal controls?

A) Clerk 1 opens all of the incoming mail.

B) Clerk 2 reconciles the accounts payable ledger with the general ledger monthly.

C) Clerk 3 mails the checks and remittances after they have been signed.

D) The treasurer uses a stamp for signing checks.

387)

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if A) the results of alternative procedures that were performed compensate for the omission.

B) the auditor's assessed level of detection risk is low.

C) the omission is documented in a communication with the audit committee.

D) no individual investment is material to the financial statements taken as a whole.

388)

Which of the following is not considered one of the three factors increasing the probability of fraud?

A) motive B) lack of training C) opportunity D) rationalization

389)

Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements?

A) Send positive confirmations on recorded customer accounts receivable balances.

B) Perform physical observation and test count during the client's inventory taking.

C) Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.

D) Conduct interviews with the client's sales billing personnel to learn about sales recording control activities.

390)

If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by A) comparing the amount written on the check face to the amount written in the cash disbursements journal.

B) comparing the magnetic imprint of the amount paid to the amount written on the check face.

C) examining the endorsement on the back of the check.

D) comparing the check number on the face of the check to the check number in the cash disbursements journal.

391)

Which of the following would be consistent with an employee taking cash receipts from customers on account?

A) The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account.

B) The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable control account.

C) Total cash receipts from customers for the month are less than credit sales for the month.

D) Total cash receipts from customers for the month are greater than credit sales for the month.

392)

An audit plan of substantive procedures for cash would not include A) request a cutoff bank statement be mailed to the client.

B) request client to prepare bank reconciliations.

C) prepare a schedule of interbank transfers for a period of ten business days before and after year-end date.

D) obtain a written client representation concerning compensating balance agreements.

393)

In the audit of cash the auditor obtains a bank cutoff statement primarily to A) identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash.

B) obtain sufficient information to reconcile the client's bank account as of year-end.

C) obtain direct confirmation of the client's bank balances as of year-end.

D) test the propriety of items appearing on the client's year-end bank reconciliation.

394)

Auditors ordinarily send an electronic confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to A) provide the data necessary to prepare a proof of cash.

B) request that a cutoff bank statement and related checks be sent to the auditor.

C) detect questionable bank activities that may otherwise not be discovered.

D) seek information about contingent liabilities and security agreements.

395)

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the A) cutoff bank statement.

B) general ledger.

C) bank confirmation.

D) year-end bank statement.

396)

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using A) employee fidelity bonds.

B) independently prepared mailroom prelists.

C) daily check summaries.

D) a bank lockbox system.

397)

Which of the following sets of information does an auditor usually confirm on one form?

A) Accounts payable and purchase commitments.

B) Cash in bank and collateral for loans.

C) Inventory on consignment and contingent liabilities.

D) Accounts receivable and accrued interest receivable.

398)

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the A) check register for the last month is reviewed.

B) cutoff bank statement is reconciled.

C) bank confirmation is reviewed.

D) search for unrecorded liabilities is performed.

399)

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by A) confirmation and observation.

B) observation and inquiry.

C) analytical procedures and confirmation.

D) inquiry and analytical procedures.

400)

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A) supported by a vendor's invoice.

B) stamped "paid" by the check signer.

C) prenumbered and accounted for.

D) approved for authorized purchases.

401)

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud?

A) Intentional deception.

B) Taking unfair or dishonest advantage of other people.

C) Perpetration for the benefit or detriment of the organization.

D) Negligence on the part of executive management.

402)

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if A) the illegal act is a violation of generally accepted accounting principles.

B) the client does not take the remedial action that the auditor considers necessary.

C) the illegal act was committed during a prior year that was not audited.

D) the auditor has already assessed control risk at the maximum level.

403)

An auditor would least likely initiate a discussion with a client's audit committee concerning A) the methods used to account for significant unusual transactions.

B) the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

C) indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor.

D) disagreements with management as to accounting principles that were resolved during the current year's audit.

404)

Which of the following statements is correct with respect to the elements of the "fraud triangle"?

A) Motive is a cause that pressures people into action.

B) Opportunity refers to a situation that allows someone with motive to carry out fraud.

C) A lack of integrity describes a person who does not stick to the social or organizational ethical code.

D) Fraud is most common when these three factors exist together.

E) All of these statements are correct.

405)

Narbona, CPA, is reviewing controls over cash received through a bank night depository.

Which controls would she find most important?

A) Responsibilities are rotated for processing night depository receipts among employees of the various departments.

B) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.

C) Vacations are required for all employees engaged in night depository activities.

D) All deposit tickets related to night deposits are numbered.

406)

Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is A) examination of the company's escrow account.

B) interview with the company's treasurer and cash manager.

C) preparation and review of standard electronic bank confirmation.

D) analytical computations comparing current cash in the bank with previous accounting periods.

407)

A proof of cash A) is required by GAAS. B) can be used to test the transactions process.

C) is most helpful when control risk for cash is low.

D) always detects lapping.

408)

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent A) theft.

B) irregular endorsement.

C) replacement or substitution of stolen assets.

D) deposits in transit.

409)

As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process?

A) Adequate internal control.

B) Inadequate internal control because mailroom employees should not have access to cash.

C) Inadequate internal control because treasury employees should prepare the deposit slip.

D) Inadequate internal control because of a lack of separation of duties.

410)

Which of the following should be performed by the persons opening the mail and recording payments?

A) Restrictive endorsement on all checks.

B) Entering of payment information into customer accounts.

C) The preparation of the deposit slip and the delivery of the checks to the bank.

D) The segregation of all payments made on accounts listed as past due.

411)

At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called A) PayChex.

B) Pay-As-You-Go. C) Positive Pay. D) Pay Master.

412)

The mail which includes payments should be opened by two people. This control is called A) separation of duties.

B) joint custody.

C) anti-collusion.

D) lapping.

413)

Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle?

A) motive B) opportunity C) capability D) liquidity

414)

When you examine canceled checks returned in the bank statement by a client's bank, how could you tell whether the amount on the check had been skillfully raised (increased, say, from $75.00 to $7,500 in the amount box, and altered in the written line from "Seventyfive dollars" to "Seventy-five hundred dollars") after the check was cleared by the bank? (An employee might do this to "support" a $7,500 cash disbursement journal entry.)

415)

After checks are signed for vendor invoices, why should vouchers be marked "paid" or otherwise mutilated?

416)

417)

List, and briefly describe, the three factors that increase the probability of fraud.

What kind of error or fraud could happen if the inventory warehouse manager also had responsibility for making the physical inventory count and reconciling discrepancies to the perpetual inventory records?

418)

Describe how a lockbox works and indicate the advantages of such a system.

419)

Ed's wife Diane owns a printing business in town. Ed works in the accounts payable department of Jiffy Abs Vitamin Company. Diane prints invoices for work supposedly done for Jiffy Abs (no actual work was performed) and Ed places in the invoice in the approved for payment invoice pile. Jiffy Abs pays these invoices and sends Diane a check.

1. Name two internal controls that might prevent or detect these fraudulent payments.

2. Name two audit procedures that might detect this fraud.

420)

Micro Chip Corporation (MCC) has a special PO Box for customer payments. Jane is responsible for: going to the post office every day, emptying the post office box, opening the mail, making a prelist, sending the remittance advices to accounts receivable, and sending the checks to the cashier's office.

1. Name two controls that would prevent or detect this fraud.

2. Name two audit procedures that might detect this fraud.

421)

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1–5 below) select the control objective being tested by placing the correct letter in the blank.

A. Existence B. Completeness C. Authorization D. Accuracy E. Classification F. Accounting and posting G. Proper period __________ __________ __________ __________ __________

1. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date.

2. The auditors traced a sample of daily cash reports to the cash receipts journal.

3. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement.

4. The auditors recalculated the cash listed on the daily deposit for a sample of recorded cash receipts.

5. The auditors traced a sample of recorded cash receipts to postings in the correct customers’ accounts.

Answer Key Test name: chapter 6 380) 381) 382) 383) 384) 385) 386) 387) 388) 389) 390) 391) 392) 393) 394) 395) 396) 397) 398) 399) 400) 401) 402) 403) 404) 405) 406) 407) 408) 409) 410) 411) 412) 413) 414) 415) 416)

E C B C C A C A B C B A A D D B D B B B B D B B E B C B C D A C B C Essay Essay Essay

417) 418) 419) 420) 421)

Essay Essay Essay Essay Essay

Student name:__________ 422)

To be recognized, revenues must also be realized or realizable and A) foreseeable.

B) collected.

C) earned.

D) shipped.

423)

The SEC requires all of the following for revenue to be recognized except A) cash is collected.

B) persuasive evidence of an arrangement exists.

C) delivery has occurred or services have been rendered.

D) the seller's price to the buyer is fixed or determinable.

424)

"Bill and hold" refers to an arrangement where A) sales are recorded but are not shipped.

B) sales are shipped but are not recorded.

C) sales are billed but not collected.

D) inventory is held but not billed.

425)

Custody of inventory is transferred to the shipping area upon authorization of A) the customer order.

B) the shipping order.

C) the invoice.

D) the purchase order.

426)

The document that generates recording of a sale is the A) customer order.

B) shipping order.

C) invoice.

D) purchase order.

427)

The sum of customers' unpaid balances that is compared to the general ledger balance comes from A) a total of sales invoices.

B) a total of shipping orders.

C) the sales journal.

D) the accounts receivable trial balance.

428)

The file that contains sales transactions that were initiated in the system but are not yet completed is the A) credit check file.

B) sales detail.

C) inventory master.

D) pending order master.

429)

The assertion that auditors will probably emphasize in the revenue and collection cycle is A) occurrence.

B) completeness.

C) accuracy.

D) classification.

430)

A small business owner can best offset the lack of separation of duties by A) creating an internal audit department.

B) installing the latest computer equipment and software.

C) being actively involved in the accounting process.

D) relying on the external auditor to detect errors.

431)

Accountants should be under orders to record sales and accounts receivable when A) the customer's order is received.

B) all supporting documentation of shipping is in order.

C) the item has been paid for.

D) the terms are agreed upon.

432)

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

A) Recorded sales in the sales journal are supported by invoices.

B) Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked.

C) Sales are recorded in the proper account.

D) Invoice quantities are compared to shipment and customer order quantities.

433)

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

A) completeness B) accuracy C) occurrence D) classification

434)

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of A) occurrence.

B) completeness.

C) classification.

D) accuracy.

435)

Alpha Brewery Corporation recorded sales through January 4, 2024, dating them December 31, 2023. This situation is an example of a violation of which of the following assertions?

A) existence or occurrence B) completeness C) classification D) accuracy

436)

Confirmations of accounts receivable provide the most evidence for which of the following assertions?

A) existence B) valuation or allocation C) rights and obligations D) completeness

437)

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except: A) preparing the confirmation letters.

B) mailing the confirmation letters.

C) receiving the confirmation letters.

D) None of these choices are correct.

438)

If the auditor obtains sufficient appropriate evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to A) disclose the fact that alternative procedures were used due to client-imposed scope limitation.

B) disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.

C) avoid mentioning the alternative procedures.

D) include an explanatory paragraph that discloses the performance of alternative procedures.

439)

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

A) The balance is immaterial.

B) Confirmations would be ineffective.

C) The client requests alternative procedures be performed instead.

D) Other procedures provide sufficient competent evidence.

440)

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's A) credit manager.

B) treasurer.

C) accountant.

D) internal auditor.

441)

Which of the following audit procedures is the most effective in testing sales for understatement?

A) Analyze the aged trial balance of recorded accounts receivable.

B) Confirm recorded accounts receivable.

C) Trace a sample of shipping documents to sales invoices recorded in the sales journal.

D) Vouch a sample of recorded sales from the sales journal to shipping documents.

442)

To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

A) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.

B) Analyze transactions occurring within a few days before and after year-end.

C) Confirm year-end transactions with regular customers.

D) Examine cash receipts in the subsequent period.

443)

The most effective audit procedure for determining the collectability of an account receivable is the A) review of the subsequent cash collections.

B) examination of the related sales invoice(s).

C) confirmation of the account.

D) review of authorization of credit sales to the customer and the previous history of collections.

444)

In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from A) an aging schedule of past due accounts that the auditor has tested.

B) correspondence with the client's collection agency.

C) financial statements of individual customers.

D) no reply to negative confirmations.

445)

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

A) One of the cashiers has been covering a personal embezzlement by lapping.

B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends.

C) One of the IT control clerks has been removing all sales invoices applicable to his account from the data file.

D) The credit manager has misappropriated remittances from customers whose accounts have been written off.

446)

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when A) no reply to a positive confirmation request is received.

B) no reply to a negative confirmation request is received.

C) collectability of the receivables is in doubt.

D) pledging of the receivables is probable.

447)

A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive." This confirmation A) provides evidence of existence.

B) does not provide evidence of existence because the customer may refuse to pay the $250 charge.

C) provides evidence that the account was understated.

D) provides evidence that the account should be written off.

448)

The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the A) type of confirmation to be used.

B) client's internal control over transactions affecting receivables.

C) availability of staff auditors.

D) number of customer accounts.

449)

In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?

A) existence B) completeness C) rights and obligations D) valuation or allocation

450)

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions?

A) occurrence B) completeness C) accuracy D) cutoff

451)

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

B) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

C) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

D) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

452)

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

A) The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.

B) The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.

C) The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.

D) The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

453)

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

A) Daily sales summaries are compared to daily postings to the accounts receivable ledger.

B) Each sales invoice is supported by a prenumbered shipping document.

C) The accounts receivable ledger is reconciled daily to the control account in the general ledger.

D) Each shipment on credit is supported by a prenumbered sales invoice.

454)

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of A) existence.

B) valuation or allocation.

C) completeness.

D) rights and obligations.

455)

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

A) Review the cash receipts journal for the month prior to the year-end.

B) Intensify the study of the internal control structure concerning the revenue cycle.

C) Increase the assessed level of detection risk for the existence assertion.

D) Inspect the shipping records documenting the merchandise sold to the debtors.

456)

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?

A) Shipments lacking sales invoices and shipping documents.

B) Excessive write-offs of accounts receivable.

C) Unrecorded sales at year-end.

D) Lapping of year-end accounts receivable.

457)

Tracing shipping documents to prenumbered sales invoices provides evidence that A) no duplicate shipments or billings occurred.

B) shipments to customers were properly invoiced.

C) all goods ordered by customers were accounted for.

D) all prenumbered sales invoices were accounted for.

458)

Which of the following statements is correct concerning the use of negative confirmation requests?

A) Unreturned negative confirmation requests rarely provide significant explicit evidence.

B) Negative confirmation requests are effective when detection risk is low.

C) Unreturned negative confirmation requests indicate that alternative procedures are necessary.

D) Negative confirmation requests are effective when understatements of account balances are suspected.

459)

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because A) many customers merely sign and return the confirmation without verifying its details.

B) recipients usually respond only if they disagree with the information on the request.

C) customers may not be inclined to report understatement errors in their accounts.

D) auditors typically select many accounts with low recorded balances to be confirmed.

460)

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A) a majority of recipients usually lacks the willingness to respond objectively.

B) some recipients may report incorrect balances that require extensive follow up.

C) the auditor cannot infer that all nonrespondents have verified their account information.

D) negative confirmations do not produce evidential matter that is statistically quantifiable.

461)

Elm Tree Incorporated has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include: A) confirmations of year-end accounts that were examined on October 15.

B) tests the client's internal control procedures from October 15 through the year end.

C) tests of compliance with internal control for a random sample of transactions throughout the audit period.

D) a comparison of the responses to the auditor's internal control questionnaire with a detailed flowchart of control procedures at year end.

462)

Revenues are normally considered to have been earned when A) all possibility of return has expired.

B) the company has substantially accomplished what it must to be entitled to the benefits.

C) the cash is collected.

D) goods have been shipped.

463)

Sales are normally recorded on the date of the A) customer purchase order.

B) bill of lading.

C) sales invoice.

D) payment check.

464)

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the A) sales journal.

B) accounts receivable listing.

C) general ledger.

D) cash receipts listing.

465)

466)

Which of the following accounts is not normally part of the revenue and collection cycle?

A) sales B) accounts receivable C) cash D) purchases returns and allowances

The control activity "credit sales approved by credit department" is directed toward which transaction assertion?

A) occurrence B) completeness C) accuracy D) cutoff

467)

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.

B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

C) Have customers send payments directly to the company's depository bank.

D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.

468)

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

A) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

B) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.

C) Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.

D) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

469)

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

A) Unrecorded purchases.

B) Unrecorded sales.

C) Merchandise purchases being charged to selling and general expense.

D) Fictitious sales.

470)

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices.

The purpose of this audit procedure is to establish that A) sales invoices represent bona fide sales.

B) all sales have been recorded.

C) all sales invoices have been properly posted to customer accounts.

D) entries in the accounts receivable subsidiary ledger were properly invoiced.

471)

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor is most likely concerned about A) unrecorded costs.

B) improper credit approvals.

C) improper sales cut-off.

D) fictitious sales.

472)

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor best test the sales manager's representation?

A) Perform additional inquiries with sales personnel.

B) Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

C) Send confirmations asking customers about unit prices paid for product.

D) Vouch vender invoices to payments made after year-end.

473)

To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?

A) miscellaneous income B) petty cash C) miscellaneous expense D) sales returns

474)

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

A) "This amount was paid on December 30th."

B) "We received this shipment on January 2nd."

C) "These goods were returned for credit on November 15th."

D) "The balance does not reflect our sales discount for paying by January 5th."

475)

A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

A) Prepare a schedule of purchases and payments for these customers.

B) Send out negative confirmations on a large sample of these customers.

C) Inquire of the sales manager regarding the accounts receivable terms.

D) Send out positive confirmations on a large sample of these customers.

476)

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to A) evaluate internal control over credit sales.

B) test the accuracy of recorded charge sales.

C) estimate credit losses.

D) verify the existence of the recorded receivables.

477)

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

A) Lapping year-end accounts receivable.

B) Inflating sales for the year.

C) Kiting bank balances.

D) Misappropriating merchandise.

478)

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the A) collectability of the balances confirmed.

B) ownership of the balances confirmed.

C) existence of the balances confirmed.

D) internal control over balances confirmed.

479)

Which of the following is the best reason for prenumbering in sequence such documents as sales orders, shipping documents, and sales invoices?

A) Enables company personnel to determine the accuracy of each document.

B) Enables personnel to determine the proper period for recording of sales revenue and receivables.

C) Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.

D) Enables personnel to determine the validity of recorded transactions.

480)

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to A) sales invoices with shipping documents.

B) records of accounts receivable write-offs.

C) cash remittance lists and bank deposit slips.

D) credit files and reports.

481)

482)

In the audit of accounts receivable, the most important emphasis should be on the A) completeness assertion.

B) existence assertion.

C) rights and obligations assertion.

D) presentation and disclosure assertion.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with A) obtaining a summary of receivables transactions from the interim date to the year-end date.

B) obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence and explanations for large variations.

C) sending negative confirmations to all the customers as of the year-end date.

D) considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially.

483)

The negative request form of accounts receivable confirmation is useful particularly when the: Assessed Level of Risk of Material Misstatement Relating to Receivables Is A. Low B. Low C. High D. High A) B) C) D)

Number of Proper Consideration by Small Balances the Recipient Is Is Many Likely Few Unlikely Few Likely Many Likely

Option A Option B Option C Option D

484)

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that A) shipments to customers were invoiced.

B) shipments to customers were recorded as sales.

C) recorded sales were shipped.

D) invoiced sales were shipped.

485)

486)

Write-offs of doubtful accounts should be approved by A) the salesperson.

B) the credit manager.

C) the treasurer.

D) the cashier.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: A) send a second request.

B) do nothing for immaterial balances.

C) examine shipping documents.

D) examine client correspondence files.

487)

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

A) Understating the sales journal.

B) Overstating the accounts receivable control account.

C) Overstating the accounts receivable subsidiary ledger.

D) Understating the cash receipts journal.

488)

Which of the following internal control activities most likely would deter lapping of collections from customers?

A) Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

B) Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.

C) Separation of duties between receiving cash and posting the accounts receivable ledger.

D) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.

489)

The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

A) Control risk was particularly low for accounts receivable.

B) Inherent risk was particularly high for accounts receivable.

C) Mr. Dennis's account was not yet due.

D) Mr. Dennis's account was not with a related party.

490)

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by A) delivering goods, billing customer, granting credit, and performing collection activities.

B) customer ordering, delivering goods, granting credit, and billing customers.

C) processing customer orders, granting credit, delivering goods, and billing customers.

D) granting credit, billing customers, delivering goods, and processing cash receipts.

491)

Which of the following controls is designed to meet the completeness assertion?

A) Prenumbering invoices, shipping documents, and sales orders.

B) Sales orders are approved by the credit department prior to shipping goods.

C) The sale is to a customer on the approved customer list.

D) Sales are dated by the computer to ensure it is included in the proper period.

492)

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

A) Is customer credit approved before orders are shipped?

B) Are sales orders prenumbered?

C) Are shipping documents required before a customer invoice is sent?

D) Are payments received from the customer deposited in the bank in a timely manner?

493)

Party Chip Company distributes snacks in the Seattle, Washington area. Which of the following would be the test to determine that shipments made were actual sales?

A) Trace bills of lading to the sales journal.

B) Vouch entries made in the sales journal to the bills of lading.

C) Trace entries in the sales journal to accounts receivable subsidiary ledger.

D) Vouch bills of lading to the customer order documents.

494)

Davis Manufacturing Company's accounts receivable clerk has a friend who is also Davis's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned (these returns did not exist). The most effective control for preventing this activity is to A) prenumber and account for all credit memorandums.

B) require receiving reports to support all credit memorandums before they are approved.

C) have the sales department independent of the accounts-receivable department.

D) mail monthly statements to the customer.

495)

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

A) Move detailed analytical procedures from year end to interim.

B) Increase the dollar threshold of vouching customer invoices.

C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations.

D) Use more experienced audit team members to perform year-end testing.

496)

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose A) customers with credit balances.

B) small account balances.

C) individual overdue balances.

D) individual invoices.

497)

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations A) copies of the client's shipping documents that support the account balances.

B) lists of the customers' recent payments that the client has already recorded.

C) client-prepared statements of account that show the details of the account balances.

D) copies of the customers' purchase orders that support the account balances.

498)

__________ of accounts receivable records implies the power to alter them directly or enter transactions to alter them.

499)

The pending sales orders can be reviewed for evidence of the__________ of recorded__________ and__________.

500)

Internal control assessment is important because it governs the__________,__________ and__________ of substantive procedures.

501)

Information about the internal control system can be gathered by completing an__________.

502)

Another way to obtain information about the internal control system is to take a single example of a transaction and__________ the process from its initiation to its recording in the accounting records.

503)

The audit procedures which can be used in tests of controls are__________,__________,__________,__________ and__________.

504)

Dual direction testing involves samples of transactions selected to obtain evidence about control over__________ in one direction and control over__________ in the other direction.

505)

A procedure to gather evidence on both account balances and controls is called a__________ procedure.

506)

Assertions related to account balances are__________,__________,____________________,__________ and__________.

507)

Confirmations provide evidence of__________ and, to a limited extent,__________ of accounts and notes receivable.

508)

__________ may be used to access computerized receivable files to select and print confirmations.

509)

Two widely used confirmation forms to test accounts receivable are__________ and__________ confirmations.

510)

The__________ confirmation form is used when individual balances are__________ or accounts are in__________.

511)

Auditing the details of customer payments listed in bank deposits in comparison to details of customer payment postings can detect__________.

512)

What is dual direction testing?

513)

Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.

514)

In tests of controls auditing, auditors need to define "deviations" in advance. Give seven examples of control compliance deviations related to a client's processing of credit sales transactions and the related assertion that was violated.

515)

You are the auditor for Wilson Wholesale Products Inc. As part of the audit of accounts receivable, Wilson has provided you an electronic file representing its accounts receivable as of its fiscal year-end. The file includes the customer name, customer address, customer number, sales invoice number, sales invoice date, and amount.

Required:Describe three or more substantive audit procedures you might perform using computer-assisted audit tools and techniques (CAATs) with this computer file.

516)

What procedures should an auditor perform for a positive confirmation that is not returned by the client's customer?

517)

For each of the tests of controls for sales and receivables, indicate the assertion that is supported by placing the correct number in the blank.

1. Accuracy 2. Completeness 3. Occurrence 4. Completeness 5. Accuracy __________ __________ __________ __________ __________

A. Scan sales invoices for missing numbers in sequence.

B. Perform arithmetic recalculation of a sample of recorded sales invoices.

C. For a sample of recorded sales, determine whether credit was approved.

D. Trace a sample of credit memos to postings in customers’ accounts.

E. Select a sample of customer accounts and vouch debits to sales invoices.

518)

The following questions appeared on an internal control questionnaire for sales. Next to each of the questions indicate the related assertion.

A. Are sales invoice blanks prenumbered?

B. Are all credit sales approved by the credit department prior to shipment?

A __________ B __________

C. Are invoice quantities compared to shipped quantities?

D. Are summary journal entries approved before posting?

E. Are sales prices and terms based on approved standards?

F. Is access to sales invoice blanks restricted?

G. Does the accounting manual contain instructions to date sales invoices on the shipment date?

C __________

H. Are returned sales credits supported by documentation?

I. •Are prenumbered bills of lading prepared in the shipping department?

H __________

J. •Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?

J __________

D __________ E __________ F __________ G __________

I __________

Answer Key Test name: chapter 7 422) 423) 424) 425) 426) 427) 428) 429) 430) 431) 432) 433) 434) 435) 436) 437) 438) 439) 440) 441) 442) 443) 444) 445) 446) 447) 448) 449) 450) 451) 452) 453) 454) 455) 456) 457) 458)

C A A B C D D A C B D A A A A A C C B C B A D A A A B B A D D A B D C B A

459) 460) 461) 462) 463) 464) 465) 466) 467) 468) 469) 470) 471) 472) 473) 474) 475) 476) 477) 478) 479) 480) 481) 482) 483) 484) 485) 486) 487) 488) 489) 490) 491) 492) 493) 494) 495) 496) 497) 498)

C C B B C B D C C A B D D D D C D C B C C A B C A A C B A C B C A A D B D D C Custody

499) 500) 501) 502) 503) 504) 505) 506) 507) 508) 509) 510) 511) 512) 513) 514) 515) 516) 517) 518)

[completeness, sales, accounts receivable] [nature, timing, extent] internal control questionnaire walkthrough [inquiry, observation, inspection of documents, reperformance] [completeness, occurrence] dual-purpose [existence, completeness, rights, obligations, obligations, allocation] [existence, valuation] CAATs [positive, negative] [positive, large, dispute] lapping Essay Essay Essay Essay Essay Essay Essay

Student name:__________ 519)

520)

When confirming accounts payable, emphasis should be put on what kind of accounts?

A) Accounts with small or zero balances from known suppliers.

B) All accounts should be equally emphasized.

C) Accounts with large balances.

D) Accounts listed in the accounts payable subsidiary.

"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion?

A) classification B) occurrence C) completeness D) cutoff

521)

"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion?

A) occurrence B) completeness C) cutoff D) classification

522)

Cash disbursements are authorized by A) purchase orders.

B) invoices.

C) receiving reports.

D) a complete voucher package.

523)

For the copy of the purchase order that goes to the receiving department, it is best to A) leave off the description of the goods ordered.

B) leave off the quantity of the goods ordered.

C) leave off the name of the vendor.

D) have the receiving department forward all copies of the purchase order to accounts payable.

524)

Vouchers should be stamped PAID to A) prevent duplicate payment.

B) generate a new purchase order.

C) indicate posting in the voucher register.

D) facilitate preparation of the bank reconciliation.

525)

A voucher package is used to A) document receipt of inventory.

B) document completion of services.

C) document a purchase contract.

D) provide a source document for recording the purchase of a good or service.

526)

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to A) identify usually large purchases that should be investigated further.

B) verify that cash disbursements were for goods actually received.

C) determine that purchases were properly recorded.

D) test whether payments were for goods actually ordered.

527)

The usual source for journal entries posted to the general ledger to record the purchase of inventory is A) sales invoices updated with cost data from the inventory records department.

B) purchase invoices updated with cost data from the inventory records department.

C) receiving reports updated with cost data from the accounts payable department.

D) vouchers payable journal from the accounts payable department.

528)

Which of the following would detect the understatement of a purchase discount?

A) Verify the arithmetic accuracy of the purchases journal B) Compare purchase disbursement records and checks with invoice terms C) Compare approved purchase orders to receiving reports D) Verify the receipt of items ordered and invoiced

529)

Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure?

A) Purchase orders are not prepared for services acquired directly under authorization of department heads.

B) The same person authorizes voucher packages and signs checks.

C) Unacceptable goods are not scheduled on receiving reports.

D) The same person signs checks and stamps vouchers PAID.

530)

Which of the following client control activities is not usually performed in the vouchers payable (accounts payable) department?

A) Determining the mathematical accuracy of the vendors' invoices B) Writing checks for the treasurer's signature to take advantage of purchase discounts C) Controlling the mailing of the check and remittance advice D) Checking the prices on the vendor's invoice

531)

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that A) all goods purchased before year-end are received before the physical inventory count.

B) no goods held on consignment for customers are included in the inventory balance.

C) no goods observed during the physical count are pledged or sold.

D) all goods owned at year-end are included in the inventory balance.

532)

Auditors may conclude that depreciation charges are too small by noting A) insured values much larger than book values.

B) large numbers of fully depreciated assets.

C) frequent trade-ins of relatively new assets.

D) large and frequent losses on assets retired.

533)

The auditor decided to test accounts payable by sending open-ended (blank) confirmations to selected vendors. The auditor's best approach in selecting the vendor accounts to confirm is to A) select vendor accounts with large balances.

B) select vendor accounts at random in order to apply a statistical sampling procedure.

C) select vendor accounts based on the number of purchases from vendors during the year.

D) select vendor accounts that are past due.

534)

What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices?

A) Purchase requisitions and accounts payable entries B) Receiving reports and purchase orders C) Purchase requisitions and purchases orders D) Purchase orders and bid quotes

535)

Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company A) has paid for the merchandise.

B) has physical possession of the merchandise.

C) holds legal title to the merchandise.

D) holds the shipping documents for the merchandise issued in the company's name.

536)

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

A) depreciation expense B) gain on disposal of equipment C) accounts payable D) repairs and maintenance expense

537)

Which of the following would not be included in the supporting documents for a voucher?

A) purchase order B) vendor invoice C) receiving report D) blank check

538)

539)

A voucher would typically contain A) a purchase requisition, purchase order, vendor invoice, receiving report, and check copy.

B) a purchase requisition, purchase order, sales invoice, receiving report, and check copy.

C) a purchase requisition, sales order, sales invoice, receiving report, and check copy.

D) a purchase requisition, sales order, vendor invoice, receiving report, and check copy.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be A) vendors with whom the entity has previously done business.

B) amounts recorded in the accounts payable subsidiary ledger.

C) payees of checks drawn in the month after the year-end.

D) invoices filed in the entity's open invoice file.

540)

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

A) Reconcile receiving reports with related cash payments made just prior to year-end.

B) Contrast the ratio of accounts payable to purchases with the prior year's ratio.

C) Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.

D) Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

541)

An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all A) purchase orders.

B) canceled checks.

C) receiving reports.

D) approved vouchers.

542)

An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A) confirmation and observation.

B) observation and inquiry.

C) analytical procedures and confirmation.

D) inquiry and analytical procedures.

543)

Which of the following audit procedures is best for identifying unrecorded accounts payable?

A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

B) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.

C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments.

D) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.

544)

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A) supported by a vendor's invoice.

B) stamped "paid" by the check signer.

C) prenumbered and accounted for.

D) approved for authorized purchases.

545)

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of A) valuation or allocation.

B) existence or occurrence.

C) completeness.

D) rights and obligations.

546)

547)

When auditing PP&E, the auditor's approach is generally to A) examine evidence supporting the amounts in the ending balance.

B) examine evidence supporting additions during the year.

C) follow a reliance strategy, testing internal controls and analytical procedures.

D) concentrate on finding unrecorded assets.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

A) Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.

B) Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.

C) Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

D) Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.

548)

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would A) inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

B) tour the client's facilities, and then inspect the property ledger, and the insurance and tax records.

C) analyze the repair and maintenance account, and then tour the client's facilities.

D) tour the client's facilities, and then analyze the repair and maintenance account.

549)

A weakness in internal control over recording retirements of equipment may cause an auditor to A) inspect certain items of equipment in the plant and trace those items to the accounting records.

B) review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

C) trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.

D) select certain items of equipment from the accounting records and locate them in the plant.

550)

Failure to record a liability generally results in A) an understatement of profit.

B) an understatement of current ratio.

C) an overstatement of profit.

D) an overstatement of assets.

551)

Improperly capitalizing an expense item results in A) understatement of profit in the current year and overstatement in future years.

B) understatement of profit in the current year and in future years.

C) overstatement of profit in the current year and understatement in future years.

D) overstatement of profit in the current year and in future years.

552)

A liability for a long-term purchase contract should generally be recognized when A) the contract is signed.

B) the goods are shipped.

C) the goods are received.

D) the goods are sold to match the cost.

553)

Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?

A) legal expense B) miscellaneous expense C) repairs and maintenance D) payroll expense

554)

Which of the following would be an indicator of potential fraud?

A) Photocopies of invoices in the voucher file B) Vendor invoices in numerical order C) Vendors with only post office box addresses D) All of these indicate potential fraud.

555)

Which of the following fraud detection steps could not be performed by CAATs? A) Look for photocopies in invoice files.

B) Look for vendor invoices in numerical order.

C) Look for vendor invoices slightly below the approval threshold.

D) Look for duplicate vendor numbers.

556)

Tracing a sample of time clock cards to payroll registers (journals) is a procedure designed to obtain evidence about the transaction assertion(s) of A) occurrence only.

B) occurrence and accuracy only.

C) completeness only.

D) accuracy only.

557)

The permanent reference files (master files) in a personnel and payroll database ordinarily do not include which of the following?

A) deduction table B) payroll master C) compensation table D) employee earning record

558)

Which of the following situations represents an internal control weakness in the payroll department?

A) Payroll department personnel are rotated in their duties.

B) Paychecks are distributed by the employees' immediate supervisor.

C) Payroll records are reconciled with quarterly tax reports.

D) The timekeeping function is independent of the payroll department.

559)

Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?

A) Distributing paychecks B) Authorizing overtime hours C) Authorizing the addition or deletion of employees from the payroll.

D) Collecting and retaining unclaimed paychecks

560)

To test the transaction assertion of occurrence in the area of payroll, the auditor most likely would A) select a sample of personnel files and trace the pay rate to union contracts or other rate rights and obligations.

B) select a sample of personnel files and trace the pay rate to payroll department files used in payroll preparation.

C) select a sample of payroll register entries and recalculate gross pay, deductions, and net pay.

D) select a sample of payroll register entries and vouch hours worked to clock time cards.

561)

Mini Corporation uses a Wages Clearing Account for its payroll disbursements. At the end of February, a reasonably large debit balance remained in this account. The most likely reason for this is that A) more labor cost had been assigned to the expense accounts than had been paid.

B) some labor cost had not been properly classified in the expense accounts.

C) some employees had not yet cashed their checks.

D) not enough cash had been transferred to the bank account.

562)

Which of the following is not a major control risk in the payroll cycle?

A) Paying fictitious "employees" B) Overpaying for time or production C) Losing employees to competitors.

D) Incorrect accounting for costs or expenses

563)

The sampling unit in a test of controls pertaining to the existence or occurrence of payroll transactions ordinarily is a(an) A) clock card or time ticket.

B) employee Form W-2.

C) employee personnel record.

D) payroll register (journal) entry.

564)

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the A) human resources function from the controllership function.

B) administrative controls from the internal accounting controls.

C) authorization of transactions from the custody of related assets.

D) operational responsibility from the recordkeeping responsibility.

565)

An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for A) examining authorization forms for new employees.

B) comparing payroll registers with original batch transmittal data.

C) distribute payroll checks to all employees.

D) hiring all subordinate payroll department employees.

566)

An auditor most likely would extend substantive tests of payroll when A) payroll is extensively audited by the state government.

B) payroll expense is substantially higher than in the prior year.

C) overpayments are discovered in performing tests of controls.

D) employees complain to management about too much overtime.

567)

An auditor most likely would perform substantive procedures on payroll transactions and balances when A) cutoff tests indicate a substantial amount of accrued payroll expense.

B) the assessed level of control risk relative to payroll transactions is low.

C) analytical procedures indicate unusual fluctuations in recurring payroll entries.

D) accrued payroll expense consists primarily of unpaid commissions.

568)

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that A) payments to employees are computed at authorized rates.

B) employees work the number of hours for which they are paid.

C) separation of duties exists between the preparation and distribution of the payroll.

D) internal controls relating to unclaimed payroll checks are operating effectively.

569)

Substantive tests of account balances in the payroll cycle are likely to include the following procedures except A) analytical review procedures.

B) recalculation of accruals.

C) comparison of accruals to subsequent payments.

D) detail vouching of payroll expense entries.

570)

Which of the following accounts does not appear in the acquisition and expenditure cycle?

A) cash B) purchases returns C) sales returns D) prepaid insurance

571)

For which of the following accounts would the matching concept be the most appropriate?

A) cost of goods sold B) research and development C) depreciation expense D) sales

572)

Which of the following would not overstate current-period net income?

A) Capitalizing an expenditure that should be expensed.

B) Failing to record a liability for an expenditure.

C) Failing to record a check paying an item in vouchers payable.

D) All of these would overstate net income.

573)

A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?

A) Accounts payable are not materially understated.

B) Authority to incur liabilities is restricted to one designated person.

C) Acquisition of materials is not made from one vendor or one group of vendors.

D) Commitments for all purchases are made only after established competitive bidding procedures are followed.

574)

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

A) Vouchers should be prepared by individuals who are responsible for signing disbursement checks.

B) Disbursement vouchers should be approved by at least two responsible management officials.

C) The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

D) The official who signs the check should compare the check with the voucher and should stamp PAID on the voucher documents.

575)

C. Spot, the purchasing agent of River Hardware Wholesalers, has a relative who owns a retail hardware store. Spot arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (COD) basis, thereby enabling his relative to buy at River's wholesale prices. Spot was probably able to accomplish this because of River's poor internal control over A) purchase requisitions.

B) cash receipts.

C) perpetual inventory records.

D) purchase orders.

576)

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

A) Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable.

B) Examine a sample of cash disbursements in the period subsequent to year-end.

C) Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded.

D) Examine unusual relationships between monthly accounts payable and recorded purchases.

577)

Which of the following procedures is least likely to be performed before the balancesheet date?

A) Observation of inventory B) Review of internal control over cash disbursements C) Search for unrecorded liabilities.

D) Confirmation of receivables

578)

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all A) vendors' invoices.

B) purchase orders.

C) receiving reports.

D) canceled checks.

579)

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase A) approvals.

B) requisitions.

C) invoices.

D) orders.

580)

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables.

The invoice was eventually received but was for the 84 tables ordered. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?

A) The copy of the purchase order sent to the furniture company's receiving department should not have shown an expected quantity.

B) Personnel in the furniture company's accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher.

C) Personnel in the furniture company's cash disbursements department should compare the check that is prepared to all of the backup documentation.

D) Personnel in the furniture company's purchasing department should compare the purchase requisition to the purchase order.

581)

Smithson, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by A) comparison of the company name to the approved vendor list by the check signer.

B) recognition of the excess maintenance costs by Smithson's supervisor.

C) refusal by the purchasing department to approve the vendor.

D) All of these choices are correct.

582)

An audit team would most likely examine the detail support for which of the following charges?

A) Payroll expense B) Cost of goods sold C) Supplies expense D) Legal expense

583)

Which of the following accounts would most likely be audited in connection with a related balance sheet account?

A) property tax expense B) payroll expense C) research and development D) legal expense

584)

When auditing liabilities account balances, auditors are most concerned with management' assertion about A) existence.

B) rights and obligations.

C) completeness.

D) valuation and allocation.

585)

In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for A) occurrence.

B) completeness.

C) classification.

D) cutoff.

586)

An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for A) examining authorization forms for new employees.

B) comparing payroll registers with original batch transmittal data.

C) authorizing payroll rate changes for all employees.

D) hiring all subordinate payroll department employees.

587)

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

A) Personnel B) Treasurer C) Controller D) Payroll

588)

William Corporation has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change, A) a generalized computer audit plan must be used.

B) part of the audit trail is altered.

C) the potential for payroll-related fraud is diminished.

D) transactions must be processed in batches.

589)

Effective control over the cash payroll function would mandate which of the following?

A) The payroll clerk should fill the envelopes with cash and include a computation of the net wages.

B) The paymaster should be retain unclaimed payroll envelopes.

C) Each employee should be asked to sign a receipt for wages received.

D) A separate checking account for payroll should be maintained.

590)

A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to A) ensure that employees who were absent on a payroll distribution day are not paid for that day.

B) prevent the paymaster from cashing checks that are unclaimed for several weeks.

C) prevent a bona fide employee's check from being claimed by another employee.

D) detect any fictitious employee who may have been placed on the payroll.

591)

Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of A) clock cards.

B) the voucher system.

C) cash in bank.

D) accrued payroll.

592)

In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and A) observe the separation of duties concerning personnel responsibilities and payroll disbursement.

B) inspect evidence of accounting for prenumbered payroll checks.

C) recompute the payroll deductions for employee fringe benefits.

D) verify the preparation of the monthly payroll account bank reconciliation.

593)

An auditor is planning the testing of the accounts payable balance. The auditor's main concerns should be A) existence and accuracy.

B) completeness and cutoff.

C) occurrence and cutoff.

D) valuation and accuracy.

594)

When goods are received, the receiving clerk should match the goods with the A) purchase order and the requisition form.

B) vendor's invoice and the receiving report.

C) vendor's shipping document and the purchase order.

D) receiving report and the vendor's shipping document.

595)

The auditor traces items from the receiving reports to the accounts payable journal in order to satisfy the A) existence assertion.

B) rights and obligations assertion.

C) completeness assertion.

D) valuation assertion.

596)

A CPA learns that his client has paid a vendor twice for the same shipment; once based upon the original invoice and once based upon the monthly statement sent from the vendor.

A control procedure that should have prevented this duplicate payment is A) prenumbering of disbursement vouchers.

B) attachment of the receiving report to the disbursement report.

C) use of a limit or reasonableness test.

D) prenumbering of receiving reports.

597)

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

A) The check signer accounts for the numerical sequence of receiving reports used in support of each payment.

B) An individual independent of cash operations prepares a bank reconciliation.

C) The check signer reviews and cancels the voucher packets.

D) Two check signers are required for all checks over a specified amount.

598)

Computer controls that might be found in an advanced online acquisition and expenditure system would not include A) all vendor invoices are prenumbered and the numbers accounted for.

B) each terminal performs only designated functions.

C) an identification number and password are required to enter the nonautomatic purchase orders.

D) the check signature is printed using a signature plate that is installed on the computer printer only when checks are printed.

599)

Specific balance assertions typical of accounts payable would not include A) recorded liabilities are obligations of the entity.

B) estimated liabilities are properly valued.

C) accounts payable are not pledged as collateral.

D) payables are recorded in the proper period.

600)

The inherent risk that accounts payable may be omitted or otherwise understated typically

is A) B) C) D)

low. high. moderate. indeterminate.

601)

An audit plan for accounts payable would not include which of the following procedures?

A) Obtaining a trial balance of recorded accounts payable B) Sending confirmation to accounts with zero balances C) Reviewing cash receipts for the period after year-end.

D) Obtaining written client representations about related-party payables and pledges of assets as collateral for liabilities

602)

Which of the following would not typically be a specific relevant assertion about fixed asset accounts?

A) Fixed assets in the accounts exist and are in productive use.

B) Net carrying book values in the accounts are reflected at current market values.

C) Depreciation has been calculated properly using accepted methods and reasonable estimates of useful life and other factors.

D) Fixed assets are properly classified in the balance sheet under appropriate descriptive captions.

603)

The typical functions of the personnel and payroll cycle would not include A) labor relations.

B) report of attendance and work performed.

C) allocation to cost of goods sold.

D) payroll accounting.

604)

An internal control questionnaire for payroll processing occurrence assertion would not include which of the following questions?

A) Are names of terminated employees reported in writing to the payroll department?

B) Is the payroll compared to personnel files periodically?

C) Are checks distributed by the employee's immediate supervisor?

D) Are all wage rates determined by contract or approved by a personnel officer?.

605)

Which of the following functional responsibilities would not typically relate to salaried employees?

A) Collecting timekeeping data B) Supervision C) Personnel or labor relations D) Payroll distribution

606)

The__________ inspects the goods received for__________ and__________ and then puts them in the hands of other responsible persons.

607)

When the __________, __________ and __________ are in hand, the accountants can record the accounts payable.

608)

Auditors can compare the__________ file to the__________ to determine whether the company has material unrecorded liabilities on the financial statement date.

609)

__________ and__________ can cause "unmatched" invoices and related "unmatched" receiving reports to be unnoticed.

610)

A__________ is a cover sheet containing all supporting documentation for an acquisition.

611)

A list of all purchases might exist only in a__________ file rather than a__________.

612)

Assessment of__________ of__________ is important because it governs the nature, timing, and extent of substantive procedures that will be applied in the audit of account balances in the acquisition cycle.

613)

Vendor invoices should be compared to__________ and__________ to determine that the vendor is charging the approved price and for quantity received.

614)

__________ consist of (1) identification of data population for audit and (2) an expression of the action to be taken to produce relevant audit evidence.

615)

When considering assertions and obtaining evidence about accounts payable, auditors must put emphasis on the__________ assertion.

616)

The__________ is a set of procedures designed to yield audit evidence of liabilities that were not recorded in the reporting period.

617)

The five functional responsibilities of a payroll cycle are__________,__________,__________, and__________.

618)

The__________ has transaction initiation authority to add new employees and delete terminated employees.

619)

A personnel file should establish the reality of a person's__________ and__________.

620)

The__________ is the primary original record for payroll accounting.

621)

Explain why auditors must put more emphasis on the completeness and obligation assertion when auditing payables and contrast this with the audit of asset accounts.

622)

F. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last year's work papers in selecting accounts payable to be confirmed. Confirmations were mailed to 50 of Jill's 200 suppliers. The sample was designed to select accounts with the largest balances.

Jack and Jill spent a lot of time reconciling minor differences between the confirmation amounts and the accounts payable trial balance.

Required:Do you believe Jack should use the same sample design for accounts payable confirmations this year? If not, what suggestions can you give to improve the design?

623)

After checks are signed for vendor invoices, why should vouchers be marked PAID or otherwise mutilated?

624)

This question requires knowledge of specific account balance assertions, general audit procedures, and trade accounts payable.

You are assigned to audit the accounts payable of Green Corporation whose business is wholesale and retail trade. The company purchases products from 1,002,000 manufacturers ("vendors") and sells the products to its retail and wholesale customers. The general ledger shows the Accounts Payable control balance as of the balance-sheet date in the amount of $42 million (which is 70 percent of current liabilities, 50 percent of total liabilities, and 35 percent of total liabilities and owners' equity). Green's management accountants post the summary entries from the purchases journal and from the cash disbursements journal each month to the Accounts Payable control account. The accounts payable manager gave you a detailed trial balance that lists all recorded unpaid invoices (recording date, vendor name, vendor invoice number, invoice date, and amount) subtotaled by vendor.

Other members of the audit team have already decided to assess control risk at the maximum for the accounts payable work. The engagement manager gave you last year's audit working papers but said the audit plan was missing (!). Thus, the first part of your assignment is to write the audit plan for audit of the Green Corporation trade accounts payable.

Required:For each of the balance assertions (existence, completeness, and valuation or and allocation), write two or more specific audit procedures designed to produce evidence related to the accounts payable balance of $42 million.

(Hints: 1. For each of the three balance assertions, think about a specific assertion before you write a procedure to gather evidence.

2. Write specific procedures as adaptations of the general audit procedures: recalculation, observation, confirmation, document examination, inquiry, scanning, analytical procedures.

3. Most procedures are two-part statements: "Select a sample of... [identify the population]...and "do something"... [specify an action].)

625)

When performing procedures in a search of unrecorded liabilities, auditors can utilize various sources of evidence/information (e.g., documents, files, management and clerical personnel).

Required:List at least five, but not more than seven, sources of evidence/information for the search for unrecorded liabilities.

(Do not write procedures. Do not take time to write about particular evidence that can be obtained or reasons for using the sources.)

626)

Julie works in accounts payable. Her job is to prepare the voucher package and submit the completed voucher to the treasurer’s office for payment. When the voucher is paid by the Treasurer’s department it is returned to Julie (without the check) for filing.

The company receives invoices from Mona’s Office Supply. When Julie receives the voucher package back from the Treasurer, Julie scans the invoice from Mona’s Office Supply and changes the address so that a duplicate payment is sent to a Mail Boxes Etc. store where Julie rents a mail box under the name Mini’s Official Supplies. With the slightly altered invoice (no other changes are made), Julie submits the voucher package a second time. Julie also has a bank account with the name Mini’s Official Supplies. When Julie receives the check for Mona’s Office Supply, Julie deposits it in her Mini’s Official Supplies bank account and then used an ATM card to withdraw the cash.

1. A) Define the internal control weakness that allowed the situation to exist—if any; 2. B) One (and only one) specific internal controls that should be in place to prevent or detect the problem; and 3. C) One (and only one) test of control audit procedure.

4. D) One (and only one) substantive audit procedure that may detect the situation described.

No credit will be given for generic controls (e.g., policies and procedures; separation of duties without specifics; discuss with management). Be specific

627)

The internal control questionnaire for purchases and accounts payable includes the following questions. Next to each of the questions, indicate the letter of the related transaction assertion.

A. Occurrence B. Completeness C. Accuracy D. Classification E. Cutoff __________ __________ __________ __________

__________ __________ __________ __________

1. Are vendor’s monthly statements reconciled with individual accounts payable accounts?

2. Are all purchases made only on the basis of approved purchase requisitions?

3. Are vendors’ invoices listed immediately upon receipt?

4. Are vendors’ invoices matched against purchase orders and receiving reports before a liability is recorded?

5. Is the accounts payable customer ledger balanced periodically with the general ledger control account?

6. Does the accounting manual give instructions to date purchase entries on the date of receipt of goods?

7. Are shipping documents authorized and prepared for goods returned to vendors?

8. Is the accounts payable department notified of goods returned to vendors?

628)

The test of controls for purchases, cash disbursements, and accounts payable include the following audit procedures. Next to each of the procedures, indicate the related transaction assertion.

Test of Controls 1. Select a sample of receiving reports and trace to inventory record posting of additions.

2. Vouch a sample of receiving reports to related purchase orders.

3. Trace a sample of voucher debits to general and subsidiary ledger accounts.

4. Scan a sample of vouchers for missing numbers.

5. Select a sample of open accounts payable and vouch to supporting documents of purchase.

6. Trace debits arising from accounts payable transactions for proper account.

7. Test a sample of cash disbursement voucher documents for accurate mathematics.

Transaction Assertion 1. __________

2. __________ 3. __________ 4. __________ 5. __________ 6. __________ 7. __________

629)

The test of controls for payroll includes the following audit procedures. Next to each of the procedures, indicate the related management assertion about transactions.

Test of Controls 1. •Trace payroll information to management reports and to general ledger account postings.

Transaction Assertion 1. __________

2. Obtain control of a periodic payroll and conduct a surprise distribution of paychecks.

2. __________

3. Select a sample of personnel files and trace pay rate and deduction information to payroll department files.

3. __________

4. Trace cost accounting labor cost distributions to management reports and postings in general ledger accounts.

4. __________

5. Select a sample of payroll register entries and recalculate gross pay, deductions, and net pay.

5. __________

6. Select a sample of cost accounting analyses and vouch to time records.

6. __________

7. Select a sample of clock time cards and trace to payroll register.

7. __________

8. Select a sample of personnel files and trace pay rate to union contracts.

8. __________

Answer Key Test name: chapter 8 519) 520) 521) 522) 523) 524) 525) 526) 527) 528) 529) 530) 531) 532) 533) 534) 535) 536) 537) 538) 539) 540) 541) 542) 543) 544) 545) 546) 547) 548) 549) 550) 551) 552) 553) 554) 555)

A B A D B A D C D B B C D D C B C D D A A D B B A B C B C A D C C C D D A

556) 557) 558) 559) 560) 561) 562) 563) 564) 565) 566) 567) 568) 569) 570) 571) 572) 573) 574) 575) 576) 577) 578) 579) 580) 581) 582) 583) 584) 585) 586) 587) 588) 589) 590) 591) 592) 593) 594) 595)

C D B C D B C D C C C C B D C A C A D D B C C C D C D A C B C A B C D A A B C C

596) 597) 598) 599) 600) 601) 602) 603) 604) 605) 606) 607) 608) 609) 610) 611) 612) 613) 614) 615) 616) 617) 618) 619) 620) 621) 622) 623) 624) 625) 626) 627) 628) 629)

B C A C B C B A D A [receiving department, quantity, quality] [purchase order, vendor's invoice, receiving report] [unmatched receiving reports, payables listing] [System failures, human coding errors] voucher [computer transaction, purchase journal] [risk, material misstatement] [purchase orders, receiving reports] Test of controls completeness search for unrecorded liabilities [personnel, supervision, timekeeping, record keeping, payroll distribution] personnel department [existence, employment] payroll register Essay Essay Essay Essay Essay Essay Essay Essay Essay

Student name:__________ 630)

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record A) sales.

B) sales discounts.

C) purchases.

D) purchase discounts.

631)

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to A) test and observe the client's physical count of inventory.

B) verify independently the physical counts obtained by the client.

C) assist the client in taking test counts of year-end inventory.

D) determine whether inventory contains obsolete goods.

632)

Ashley Blakely, CPA, noted that ABC Company received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?

A) Debit purchases/credit cost of goods sold.

B) Debit cost of goods sold/credit accounts payable.

C) Debit inventory/credit accounts payable.

D) None.

633)

S. Jimenez, CPA, was auditing a client, Wonderful Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which PCAOB assertion?

A) rights and obligations B) completeness C) existence or occurrence D) valuation or allocation

634)

An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and A) trace additions to the general ledger.

B) vouch additions to receiving reports.

C) vouch additions to sales invoices.

D) trace receipts to receiving reports.

635)

An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of A) existence.

B) valuation.

C) completeness.

D) rights and obligations.

636)

An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing?

A) occurrence B) completeness C) rights and obligations D) valuation

637)

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

A) existence B) completeness C) rights and obligations D) valuation

638)

An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

A) existence B) completeness C) rights and obligations D) valuation

639)

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

A) Complete recounts by independent teams are performed.

B) Perpetual inventory records are maintained.

C) Unit cost records are integrated with production accounting records.

D) Inventory balances are rarely at low levels.

640)

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record A) purchase discounts.

B) purchase returns.

C) sales.

D) sales returns.

641)

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace A) inventory tags noted during the auditor's observation to items in the inventory listing schedule.

B) inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.

C) items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

D) items in receiving reports and vendors' invoices to the inventory listing schedule.

642)

Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of A) occurrence.

B) valuation.

C) completeness.

D) presentation and disclosure.

643)

Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe?

A) Observe all counts at all locations by using the required number of auditors.

B) Insist the inventory be counted on separate days so the auditor can be present at all locations.

C) Work with the client to determine which locations to observe.

D) Observe a sample of locations on a surprise basis.

644)

645)

Generally accepted accounting principles (GAAP) require that inventory be recorded at A) the lower of cost or fair market value.

B) the higher of cost or fair market value.

C) the higher of cost or net realizable value less a normal profit (floor).

D) None of the choices are correct.

If overhead is miscalculated so that it is underabsorbed, the result if the error is not corrected will be that A) inventory will be understated and net income will be overstated.

B) inventory and net income will be overstated.

C) inventory will be overstated and net income will be understated.

D) inventory and net income will be understated.

646)

Which of the following steps would not normally be included in a program for a physical inventory observation?

A) Vouch unit prices to vendors' invoices or other cost records.

B) Obtain the client's inventory counting instructions and review them for completeness.

C) Inspect the tags used and unused and record the tag numbers used.

D) Obtain the numbers of the last five receiving reports and last five shipping documents.

647)

Counting different parts of inventory at different times of the year is called A) LIFO inventory.

B) inventory cutoff.

C) cycle counting.

D) just-in-time inventory.

648)

A company's cost accountant periodically reconciles job cost sheets to the work-inprocess inventory accounts. This reconciliation is most likely performed to provide assurance that A) recorded production transactions are valid and documented.

B) valid production transactions are recorded and none omitted.

C) production accounting and posting is complete.

D) production transactions are recorded in the proper period.

649)

To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would A) select a sample of open and closed production cost reports and recalculate all costs entered.

B) select a sample of issue slips from the raw materials stores file and trace materialsused reports to production cost reports.

C) select a sample of open and closed production cost reports and vouch overhead charges to overhead analysis schedules.

D) select a sample of production orders and determine whether the production orders were authorized.

650)

An auditor's tests of controls over the issuance of raw materials to production would most likely include A) reconciling raw materials and work-in-process perpetual inventory records to general ledger balances.

B) inquiring of the custodian about the procedures followed when defective materials are received from vendors.

C) observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.

D) examining material requisitions and reperforming client controls designed to process and record issuances.

651)

Which of the following is not an acceptable method of determining inventory cost under GAAP? A) FIFO. B) LIFO. C) Average cost.

D) All of the choices are acceptable.

652)

653)

Inventory count tags are controlled A) to prevent counting errors.

B) to test cutoff.

C) to prevent subsequent addition of goods to the inventory.

D) for reasons specified in all of the choices.

Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB) assertion?

A) Existence or occurrence.

B) Completeness.

C) Rights and obligations.

D) Valuation or allocation.

654)

Auditors record the last bill of lading used at the time of the inventory count to A) search for unrecorded sales.

B) test cutoff.

C) verify ownership.

D) All of these choices are correct.

655)

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of A) valuation or allocation.

B) rights and obligations.

C) existence or occurrence.

D) presentation and disclosure.

656)

Which of the following methods for determining inventory cost is not allowed by GAAP? A) Average cost.

B) FIFO. C) LIFO. D) Standard cost.

657)

Which cycle is not directly linked to the production cycle?

A) Acquisition and expenditure cycle.

B) Payroll cycle.

C) Revenue and collection cycle.

D) Finance and investment cycle.

658)

To determine the client's planned amount and timing of production of a product, the auditor will review the A) sales forecast.

B) inventory reports.

C) production plan.

D) purchases journal.

659)

An auditor reviews job cost sheets to test which transaction assertion?

A) occurrence B) completeness C) accuracy D) classification

660)

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

A) Supplies of relatively little value are expensed when purchased.

B) The cycle basis is used for physical counts.

C) The warehouse manager is responsible for maintenance of perpetual inventory records.

D) Perpetual inventory records are maintained only for items of significant value.

661)

To make a year-to-year comparison of inventory turnover most meaningful, the auditor will perform the analysis A) for the company as a whole.

B) by division.

C) by product.

D) All of the choices are correct.

662)

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

A) Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.

B) Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.

C) Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.

D) Require a manager's signature for the removal of any inventory item with a value above $50.

663)

An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are A) owned by the client.

B) not obsolete.

C) physically present at the time of the preparation of the final inventory schedule.

D) included in the final inventory schedule.

664)

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

A) Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets.

B) Credit memos for several items returned by customers had not been recorded.

C) No journal entry had been made on the retailer's books for several items returned to its suppliers.

D) An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

665)

From the auditors' point of view, inventory counts are more acceptable prior to the year end when A) internal control is weak.

B) accurate perpetual inventory records are maintained.

C) inventory is slow moving.

D) significant amounts of inventory are held on a consignment basis.

666)

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

A) The work-in-process account is periodically reconciled with subsidiary inventory records.

B) Employees responsible for custody of finished goods do not perform the receiving function.

C) Receiving reports are prenumbered and the numbering sequence is checked periodically.

D) There is a separation of duties between the payroll department and inventory accounting personnel.

667)

When auditing inventories, an auditor would least likely verify that A) all inventory owned by the client is on hand at the time of the count.

B) the client has used proper inventory pricing.

C) the financial statement presentation of inventories is appropriate.

D) damaged goods and obsolete items have been properly accounted for.

668)

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably A) apply gross profit tests to ascertain the reasonableness of the physical counts.

B) increase the extent of tests of controls relevant to the inventory cycle.

C) request the client to schedule the physical inventory count at the end of the year.

D) insist that the client perform physical counts of inventory items several times during the year.

669)

An auditor selected items for test counts while observing a client's physical inventory.

The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of A) rights and obligations.

B) completeness.

C) existence.

D) accuracy and valuation.

670)

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A) Trace test counts noted during the entity's physical count to the entity's summarization of quantities.

B) Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

C) Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.

D) Inspect the open purchase order file for significant commitments that should be considered for disclosure.

671)

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about A) existence.

B) rights and obligations.

C) completeness.

D) accuracy and valuation.

672)

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about A) existence.

B) rights and obligations.

C) completeness.

D) valuation.

673)

674)

When evaluating inventory controls, an auditor would be least likely to A) inspect documents.

B) make inquiries.

C) observe procedures.

D) consider policy and procedure manuals.

When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that A) quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.

B) physical inventories agree substantially with book inventories.

C) the system is in accordance with generally accepted accounting principles and is functioning as planned.

D) costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

675)

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to A) cost ledgers.

B) perpetual inventory records.

C) receiving reports.

D) material requisitions.

676)

Your client counts inventory three months before the end of the fiscal year. Internal controls over inventory are excellent. Which procedure is not necessary for the inventory roll-forward?

A) Check that shipping documents for the last three months agree with perpetual records.

B) Tracing receiving reports for the last three months to perpetual records.

C) Compare gross margin percentages for the last three months.

D) Request the client to recount inventory at the end of the year.

677)

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls?

A) Significant weaknesses were found in the company's internal control.

B) The auditor hopes to reduce the amount of work to be done in assessing inherent risk.

C) The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.

D) Tests of controls are always performed when the auditor begins to assess control risk.

678)

The typical functions of the production and conversion includes A) cash payments for raw materials purchased.

B) inventory planning and control.

C) purchase requisitioning and purchase ordering for inventory.

D) receiving of inventory shipments from vendors.

679)

When a production plan is complete the production planner needs to determine A) what raw materials need to be ordered.

B) labor rates for the jobs are needed to produce the orders.

C) which vendors need to supply raw materials.

D) what equipment needs to be purchased to meet production quotas.

680)

The production planner determines what inventory is need for future production using A) finished goods inventory status report for the product being produced.

B) bill of materials for the product being produced.

C) standard costs for the product being produced.

D) manpower availability report from human resources.

681)

At the beginning of the observation of the inventory count, the auditor records the last bill of lading used by the company to A) test inventory cut-off.

B) search for unrecorded sales.

C) verify inventory ownership.

D) record the inventory valuation of items received.

682)

Which of the following would be considered an analytical procedure?

A) Testing purchasing, shipping, and receiving cutoff activities.

B) Comparing inventory balances to recent sales activities.

C) Projecting the deviation rate of a statistical sample to the population.

D) Reconciling physical counts to perpetual records and general ledger balances.

683)

An auditor's observation procedures for inventory may be performed during or after the end of the period under audit under which of the following conditions?

A) When the client maintains periodic inventory records.

B) When the auditor finds minimal variations in client records and test counts in prior periods.

C) When total inventory has not varied more than 5% in the last five years.

D) When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

684)

Vouching a sample of items from the perpetual inventory records to the receiving reports achieves the specific ASB balance assertion of A) completeness.

B) occurrence.

C) presentation.

D) valuation.

685)

Which of the following is the assertion with the highest inherent risk in auditing inventory?

A) Completeness.

B) Rights.

C) Existence.

D) Properly classification on the balance sheet.

686)

Apple Company has an increase in purchases from specific vendors and an increase in raw materials inventory for the items purchased from these vendors. Sales for the company have not increased and are not forecast to increase. From this information an auditor might suspect A) an increase in obsolete raw material inventory.

B) theft of raw material inventory.

C) kickbacks from vendors.

D) poor security over raw material inventory.

687)

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

A) Scanning perpetual inventory, production, and purchasing records.

B) Examining paid vendor invoices.

C) Tracing inventory items from the tag listing back to the physical inventory quantities.

D) Performing cutoff procedures for shipping and receiving.

688)

The overall production starts with production planning, which usually is based on a__________.

689)

Production planning interacts with the preparation of __________.

690)

A production order usually includes a__________.

691)

__________ are used by the purchasing department to place orders for materials.

692)

The function of__________ refers to comparing the physical count of inventory to the perpetual inventory records.

693)

__________ can be used in connection with knowledge of the shape of management's plans for the year under audit.

694)

Production reports of finished units should be signed by the__________ and finished goods inventory custodian and forwarded to__________ .

695)

Materials requisitions should be compared in the__________ department with the__________ on the production order.

696)

Tracing production cost accumulation forward into the production cost reports in the cost accounting department is a test for __________ .

697)

With a sample of open and closed production cost reports, vouching labor cost to__________ is a test for__________ .

698)

A material error or fraud in inventory typically has a__________ on financial statements.

699)

Auditors__________ the inventory taking and make__________ , but they seldom__________ the entire inventory.

700)

Selecting inventory from locations on the warehouse floor, obtaining a test count, and tracing the count to the final inventory compilation produces evidence for the__________ ASB balance assertion.

701)

The physical observation procedures for inventory are principally designed to audit for the balance assertions of__________ ,__________ , and__________ .

702)

An inventory trial balance can be used to scan for __________ and as a population for sample selection for the __________.

703)

A sample from the source documents meets the__________ requirement to determine whether transactions were actually recorded in the inventory records.

704)

A sample from the perpetual inventory records meets the__________ requirement to determine whether all recorded transactions are supported by reports and documents.

705)

Inventory observation may need to be scheduled on the year-end date, making a large number of test counts if the test of controls__________ .

706)

Explain briefly the two directions of inventory test counts.

707)

The cost accounting department at Blue Manufacturing Company receives various types of information at the end of each week. The production floor reports time and production work data directly to the cost accounting department. Also, the payroll department sends labor cost data to the cost accounting department. What is the cost accounting department likely to do with this information? Why?

708)

Prepare an audit plan for the observation of an inventory count.

709)

Prepare an audit plan for inventory pricing and compilation.

710) A. B. C. D. E.

The tests of controls for inventory records would include the following procedures.

Existence.

Rights.

Completeness.

Valuation.

Presentation and disclosure.

For each of the procedures, choose the letter of the correct PCAOB assertion(s). Only one letter per procedure should be used. __________ __________ __________ __________ __________

1. Trace a sample of sales invoices to perpetual inventory record entry of issue.

2. Select a sample of inventory item from perpetual records and vouch additions to receiving reports.

3. Select a sample of shipping documents and review the accounting summary of the quantities and prices.

4. Trace posting of sample of sales invoices to amounts in general ledger.

5. Review the appropriateness of standard costs to price inventory issues and cost of goods sold.

711) A. B. C. D. E.

The tests of controls for inventory records would include the following procedures.

Existence.

Rights and obligations.

Completeness.

Accuracy and valuations.

Presentation and disclosure.

For each of the procedures, choose the letter of the correct ASB balance assertion(s). Only one letter per procedure should be used. __________ __________ __________ __________ __________

1. Test counted inventory and traced the count to the perpetual inventory record.

2. Selected a sample of inventory items from the perpetual records and vouch additions to receiving reports.

3. Reviewed a sample of vendor invoices for prices paid for inventory.

4. Review inventory footnote for the financial statements.

5. Reviewed vendor invoices and purchase orders for terms of the contract.

712)

The auditors of Mikel’s Shops obtained the following information when performing cutoff testing procedures during their observation of Mikel’s physical inventory count at December 31, 2020: Bill of Lading Number Date Sales price Cost of goods

1235 12/31/23 $ 12,000 $ 9,000

1236 12/31/23 $ 4,500 $ 3,000

1237 1/2/24 $ 18,000 $ 12,000

1238 1/2/24 $ 16,000 $ 12,000

When comparing the cutoff information to the sales records, the auditors found that all these shipments were recorded as 2023 sales. The goods shipped on bills of lading 1235 and 1236 were not counted in the inventory, but the goods on bill of lading 1237 and 1238 were included.

Required:Prepare the appropriate journal entry to correct the cutoff error.

Note: If no entry is required for a transaction/event, select "No journal entry required"

713)

Audit planning requires that the auditor consider possible inventory errors or frauds that might occur that could affect the financial statements. For each of the types of inventory errors listed in the following table, indicate what would be the possible effect in the inventory and cost of sales accounts: overstated, understated, or no effect.

Inventory Error

Effect on Account Inventory Cost of Sale 1. __________ 1. __________ 2. __________ 2. __________

1. Unrecorded Receipt of Inventory 2. December sales recorded in January 3. December purchase recorded in 3. __________ January 4. Inventory omitted during 4. __________ physical count 5. Consigned out inventory omitted 5. __________ during physical count 6. Unrecorded shipment of inventory 6. __________

3. __________ 4. __________ 5. __________ 6. __________

Answer Key Test name: chapter 9 630) 631) 632) 633) 634) 635) 636) 637) 638) 639) 640) 641) 642) 643) 644) 645) 646) 647) 648) 649) 650) 651) 652) 653) 654) 655) 656) 657) 658) 659) 660) 661) 662) 663) 664) 665) 666)

C A C C B C A B A B D C B D D D A C C B D D C B B A D D C C C C C D B B C

667) 668) 669) 670) 671) 672) 673) 674) 675) 676) 677) 678) 679) 680) 681) 682) 683) 684) 685) 686) 687) 688) 689) 690) 691) 692) 693) 694) 695) 696) 697) 698) 699) 700) 701) 702) 703) 704) 705) 706)

A C B B D D D D D D C B A B A B D B C C D sales forecast production orders bill of materials Material requisitions periodic reconciliation Forecasts [production supervisor, cost accounting] [cost accounting, list (bill) of materials] completeness [labor reports, occurrence] pervasive effect [observe, test counts, count] completeness [existence, completeness, valuation] [unusual conditions, physical inventory observation] completeness occurrence reveals weaknesses (assessed high) Essay

707) 708) 709) 710) 711) 712) 713)

Essay Essay Essay Essay Essay Essay Essay

Student name:__________ 714)

The typical business activity of the finance and investment cycle would not include A) proposals for cash forecasts, capital budgets, and business expansion.

B) analysis of excess cash funds.

C) reconciliation of cash.

D) sale of stocks, bonds, or notes.

715)

Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for A) accounting.

B) valuation or allocation.

C) completeness.

D) existence or occurrence.

716)

The typical assertions related to investments and related accounts would not include the PCAOB assertion that A) capitalized intangible costs relate to intangibles acquired in exchange transactions.

B) amortization is properly calculated.

C) research and development costs are properly classified.

D) goodwill is valued at market value.

717)

The decision of a company to have a transfer agent handle exchanges of shares is related primarily to which of the functional responsibilities?

A) rights and obligations B) custody C) record keeping D) periodic reconciliation

718)

ABC Company has issued a bond that pays 5% interest semiannually to bond holders on record June 30 and December 30. Payments are made on July 15 and January 15. ABC Company has a December 31 fiscal year-end. The auditor vouches the January 15, 2024 payment to the liabilities recorded on the December 31, 2023 balance sheet. Which of the following ASB balance assertions is the auditor testing?

A) existence B) rights and obligations C) completeness D) valuation

719)

Auditors count investment securities held by the client primarily to test the ASB balance assertion of A) existence.

B) rights and obligations.

C) completeness.

D) valuation.

720)

Which of the following is not a substantive audit procedure for estimates of management?

A) Recalculating the mathematical estimate B) Observing whether estimates are prepared by qualified personnel C) Developing an independent estimate based on alternative assumptions D) Comparing the estimates of management to subsequently discovered facts before the end of fieldwork

721)

Which of the following would not be a place in which owners' equity transactions would be documented?

A) Capital budget B) Minutes of the meetings of the board of directors C) Proxy statements D) Securities offering registration statements

722)

If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from A) management.

B) the board of directors.

C) stockholders.

D) an independent registrar.

723)

In Case 10.4 (No Treasure in This Treasure Planet), Disney overvalued net assets by capitalizing unrecoverable production costs. The lesson for the auditors in this case was to A) always recalculate the client's figures regardless of how simple they appear.

B) maintain professional skepticism when evaluating clients' estimates.

C) always look into the background of the client before accepting an engagement.

D) None of these choices are correct.

724)

Which ASB balance assertion is of the most importance to auditors for long-term liabilities?

A) Existence B) Completeness C) Rights and obligations D) Valuation

725)

"Are interest payments and accruals monitored for due dates and financial statement dates?" is an internal control questionnaire item that is related to the ASB transaction assertion of A) occurrence.

B) completeness.

C) cutoff.

D) accuracy.

726)

Which of the following would not be a typical feature of management's control over the production of estimates?

A) Accumulation of relevant, sufficient, and reliable data B) Preparation of estimates by qualified personnel C) Review by the independent auditor D) Consideration by management of whether particular accounting estimates are consistent with the company's operational plans

727)

Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness?

A) All material long-term liabilities are recorded.

B) New long-term liabilities and debt extinguishments are properly authorized.

C) Terms, conditions, and restrictions relating to noncurrent debt are adequately disclosed.

D) Disclosures of maturities for the next five years are accurate and adequate.

728)

The preferred method of determining fair value of transactions is A) market-based values.

B) basing them on reasonable management assumptions.

C) external auditor estimates.

D) detailed computations by outside experts.

729)

Derivative instruments include A) stocks.

B) preferred stocks.

C) stock options.

D) All of these choices are correct.

730)

A transfer agent A) keeps the stockholder list and, from time to time, determines the shareholders eligible to receive dividends.

B) handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates.

C) records notes and bonds payable.

D) makes investment decisions for an entity.

731)

In the audit of notes payable, an auditor testing the ASB balance assertion of accuracy and valuation most likely would A) read directors' and finance committee's minutes for authorization of financing transactions.

B) select a sample of paid notes and trace interest expense to the general ledger account.

C) select a sample of paid notes and recalculate interest expense for the period under audit.

D) select a sample of notes payable and vouch cash receipt to the bank statement.

732)

To determine whether facts support management's intent to hold securities to maturity, an auditor might A) study the entity's cash flow forecasts.

B) obtain published market quotations.

C) compare fair value of the securities to cost.

D) confirm that the securities are held by a broker.

733)

Which of the following controls would be most effective in ensuring that the proper custody of assets in the investing cycle is maintained?

A) Direct access to securities in the safety deposit box is limited to only one corporate officer.

B) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.

C) The purchase and sale of investments are executed on the specific authorization of the board of directors.

D) Independent personnel periodically compare the recorded balances in the investment subsidiary ledger with the contents of the safety deposit box.

734)

In auditing long-term bonds payable, an auditor most likely would A) perform analytical procedures on the bond premium and discount accounts.

B) examine documentation of assets purchased with bond proceeds for liens.

C) compare interest expense with the bond payable amount for reasonableness.

D) confirm the existence of individual bondholders at year-end.

735)

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify the ASB presentation and disclosure assertion of A) occurrence.

B) completeness.

C) rights and obligations.

D) understandability.

736)

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of A) valuation.

B) existence.

C) completeness.

D) rights and obligations.

737)

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of ASB balance assertion of existence and A) valuation.

B) rights and obligations.

C) completeness.

D) accuracy.

738)

The focus of controls in the finance and investment cycle is on A) proper authorizations and competent personnel.

B) computer controls over transactions.

C) physical security of assets.

D) prenumbered documents.

739)

One primary focus of substantive tests in the finance and investment cycle is on A) reconciliation of detailed listings with general ledger amounts.

B) proper cut-off.

C) search for unrecorded items.

D) gaining an understanding and verifying amounts and calculations.

740)

Compensating controls in the finance and investment cycle A) feature separation of duties by upper management.

B) feature involvement of two or more persons handling all important responsibilities.

C) include involvement by the external auditor.

D) All of these choices are correct.

741)

Which of the following is not a relevant aspect of internal controls over estimates?

A) External auditor involvement in developing assumptions B) Adequate review by appropriate levels of authority C) Comparison of prior estimates with subsequent results D) All the above are relevant aspects of internal controls over estimates.

742)

Loan covenants A) describe the collateral of the loan.

B) require the borrower to maintain certain financial characteristics.

C) describe the lender's responsibilities.

D) All of these choices are correct.

743)

Related party transactions A) must be valued as if they were arm's length.

B) must be assumed to be valued differently than if they were arm's length.

C) must be disclosed in the financial statements.

D) must be disclosed in the financial statements and the auditor's report.

744)

Taking a "big bath" in the financial statements refers to A) overstating income.

B) overstating revenues.

C) understating income.

D) an economic downturn.

745)

Keeping track of securities owners for payment of interest or dividends is usually done by the company's A) treasurer.

B) broker.

C) transfer agent.

D) registrar.

746)

Records of stock and bond certificates are usually maintained by the company's A) treasurer.

B) chief financial officer.

C) transfer agent.

D) registrar.

747)

Tests of controls in the finance and investment cycle A) normally focus on tests of transactions.

B) primarily involve observing physical security of assets.

C) typically amount to inquiries and observations related to management involvement.

D) can significantly reduce the extent of substantive tests.

748)

Documentation of a count of equity securities should include all of the following except A) interest rate.

B) serial numbers.

C) number of shares.

D) market value.

749)

Which of the following is not an estimate required in the finance and investment cycle?

A) Actuarial assumptions for pension accruals B) Residual values for leases C) Stated market value of publicly traded stocks D) All the above are estimates.

750)

Appropriate audit inquiries regarding estimates include all of the following except A) Who prepares the estimates?

B) Why are they prepared?

C) What data are used?

D) When are they prepared?

751)

Which of the following is not an off-balance-sheet item?

A) Purchase commitment B) Capitalized lease C) Loan commitment D) Synthetic lease

752)

Which of the following approaches is most suitable for auditing the finance and investment cycle?

A) Perform extensive tests of controls and limit substantive procedures to analytical procedures.

B) Ignore internal controls and perform extensive substantive procedures.

C) Gain an understanding of internal controls and perform extensive substantive procedures.

D) Ignore internal controls and limit substantive procedures to analytical procedures.

753)

Loan covenants are used for which of the following reasons?

A) To protect the lender from the borrower substantially weakening the borrower's financial position.

B) To protect the borrower from the lender calling the loan early.

C) To protect the auditors from false information by the borrower.

D) To protect shareholders from management taking on too much debt.

754)

A related party is a person or entity that A) has a family tie to a management member.

B) does business with the company.

C) can exert significant influence over or be influenced by the company.

D) is a member of the company's management.

755)

Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

A) Tracing recorded dividend income to cash receipts records and validated deposit slips B) Performing analytical procedures and statistical sampling C) Comparing recorded dividends with amounts appearing on federal information Form 1099 D) Comparing recorded dividends with a standard financial reporting service's record of dividends

756)

When the client holds a large amount of negotiable securities, auditors need to plan to guard against A) unauthorized negotiation of the securities before they are counted.

B) unrecorded sales of securities after they are counted.

C) substitution of securities already counted for other securities that should be on hand but are not.

D) substitution of authentic securities with counterfeit securities.

757)

In connection with the audit of an issue of long-term bonds payable, the audit team should A) determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond.

B) calculate the effective interest rate to see if it is substantially the same as the rates for similar issues.

C) decide whether the bond issue was made without violating state or local law.

D) ascertain that the client has obtained the opinion of counsel on the legality of the issue.

758)

Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

A) Changes in the capital stock account are verified by an independent stock transfer agent.

B) Stock dividends and stock splits during the year under audit were approved by the stockholders.

C) Stock dividends are capitalized at par or stated value on the dividend declaration date.

D) Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.

759)

If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that A) the approximate market value of the investments be shown in parentheses on the face of the balance sheet.

B) the investments be classified as long term for balance-sheet purposes with full disclosure in the footnotes.

C) the loss in value be recognized in the financial statements.

D) the equity section of the balance sheet separately show a charge equal to the amount of the loss.

760)

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to A) evaluate internal control over securities.

B) determine the validity of prepaid interest expense.

C) ascertain the reasonableness of imputed interest.

D) detect unrecorded liabilities.

761)

The auditors should insist that a representative of the client be present during the inspection and count of securities to A) lend authority to the auditors' directives.

B) detect forged securities.

C) coordinate the return of all securities to proper locations.

D) acknowledge the receipt of securities returned.

762)

When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should A) be defaced to prevent reissuance and attached to their corresponding stubs.

B) not be defaced but be segregated from other stock certificates and retained in a canceled certificates file.

C) be destroyed to prevent fraudulent reissuance.

D) be defaced and sent to the secretary of state.

763)

When a client company does not maintain its own capital stock records, the auditors 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) guarantees of preferred stock liquidation value.

D) the number of shares subject to agreements to repurchase.

764)

765)

All corporate capital stock transactions should ultimately be traced to the A) minutes of the meetings of the board of directors.

B) cash receipts journal.

C) cash disbursements journal.

D) numbered stock certificates.

An audit plan for the examination of the retained earnings account should include a step that requires verification of the A) market value used to charge retained earnings to account for a 2-for-1 stock split.

B) approval of the adjustment to the beginning balance as a result of a write-down of account receivables.

C) authorization for both cash and stock dividends.

D) dividends received from investments.

766)

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the A) trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

B) securities are registered in the name of the trust company rather than the entity itself.

C) interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.

D) the trust company places the securities in a bank safe deposit vault under the custodian's exclusive control.

767)

An audit team 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) recomputing the interest earned on the basis of face amount, interest rate, and period held.

D) testing internal controls relevant to cash receipts.

768)

A client has a large and active investment portfolio that is kept in a bank safe deposit box.

If the auditors are unable to count securities at the balance-sheet date, they most likely will A) request the bank to confirm to the auditors the contents of the safe deposit box at the balance-sheet date.

B) examine supporting evidence for transactions occurring during the year.

C) count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance-sheet date.

D) request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.

769)

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the A) existence of unrealized gains or losses.

B) completeness of recorded investment income.

C) classification as available-for-sale or trading securities.

D) valuation of trading securities.

770)

In auditing for unrecorded long-term bonds payable, an audit team most likely will A) perform analytical procedures on the bond premium and discount accounts.

B) examine documentation of assets purchased with bond proceeds for liens.

C) compare interest expense with the bond payable amount for reasonableness.

D) confirm the existence of individual bondholders at year-end.

771)

An audit plan to examine long-term debt most likely would include steps that require A) comparing the carrying amount of held-to-maturity securities with their year-end market values.

B) correlating interest expense recorded for the period with outstanding debt.

C) verifying the existence of the holders of the debt by direct confirmation.

D) inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.

772)

Which of the following questions would auditors most likely include on an internal 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 signatures required on checks that repay notes payable?

C) Are the proceeds from notes payable used for the purchase of noncurrent assets?

D) Are direct borrowings on notes payable authorized by the board of directors?

773)

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about A) existence.

B) valuation.

C) completeness.

D) classification.

774)

Which of the following audit procedures would not likely be performed for audits of investments?

A) Read board of directors' minutes for authorization of investment strategies.

B) Confirm investments with registrar.

C) Confirm investments with broker or trustee.

D) Compare valuation to published market prices.

775)

Which of the following audit procedures would not likely be performed for audits of shareholders' equity?

A) Read board of directors' minutes for authorization of equity transactions.

B) Confirm outstanding common and preferred stock with stock registrar.

C) Compare valuation of stock to published market prices.

D) Obtain management representation about number of shares issued and outstanding.

776)

XYZ Company has 100 shares of AMZN stock that is held as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of AMZN stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery?

A) The certificates in the safe deposit box were forgeries.

B) There was unauthorized buying and selling of investment securities.

C) The securities may be misclassified on the balance sheet.

D) The securities were no longer owned by ABC Company.

777)

The typical business activity in the financing and investment cycle that requires an accounting entry is A) short- and long-term forecast.

B) meeting with investment bankers.

C) proposal to board of directors for investing excess monies.

D) investment of excess funds in temporary or long-term securities.

778)

If a company keeps investments in a bank safe deposit box, which of the following two people ideally should have access to the safe deposit box?

A) A director and the president B) The president and vice president for finance C) A director and vice president for finance D) A director and general ledger accountant

779)

Selecting a sample of notes payable transactions and vouching payments to canceled checks is a test of the ASB balance assertion of A) accuracy.

B) completeness.

C) existence.

D) presentation.

780)

The typical assertion relating to investments and related accounts in a manufacturing company would not include the assertion that A) all investments are valued at cost.

B) investment securities are on hand or held in safekeeping by a trustee.

C) investment income has been properly recorded.

D) investments are adequately classified and described in the balance sheet, including disclosures.

781)

In an audit test of recorded interest expense and accrued interest, the auditor was able to detect that the recorded interest expense was higher than the calculations showed. This may indicate A) a failure to accrue interest occurred.

B) interest payments are in default.

C) interest payments were charged to another account.

D) interest was paid on an unknown debt or unrecorded liability.

782)

783)

When auditing the market value of an investment, an auditor would be least likely to A) examine quoted market prices.

B) evaluate management's procedure for determining market prices.

C) make his or her own determination of market prices.

D) confirm market prices with a broker.

When a company keeps its own stock records, which of the following procedures is not required?

A) Confirm outstanding common stock with stock registrar agent.

B) Inspect the stock record stubs for certificate numbers and number of shares.

C) Inspect the unissued certificates.

D) Obtain written representation about the number of shares issued and outstanding.

784)

Which of the following is not a typical assertion relating to owners' equity?

A) The number of shares shown as issued is in fact issued.

B) The accounting is proper for options, warrants, and other stock issue plans, and related disclosure is adequate.

C) All owners' equity transactions have been authorized by the board of directors.

D) The valuation of shares issued for noncash consideration is reflected at book value.

785)

When auditing the valuation assertion of an equity method investment, which of the following is the auditor most likely to do?

A) Inspect stock certificates.

B) Obtain audited financial statements of the investee company.

C) Obtain the market price of the stock as of year-end.

D) Review management's calculations.

786)

An agent of a bond issuer who handles the administrative aspects of a loan and ensures that the borrower complies with the terms of the bond indenture is called a A) registrar.

B) transfer agent.

C) trustee.

D) none of the above.

787)

Which of the following would provide the auditor the best evidence of the Rights assertion for bitcoin recorded as an asset by a client?

A) Inspection of purchase records maintained by the client.

B) Confirmation of the bitcoin from a third party.

C) Execution of a small bitcoin transaction from a digital wallet to demonstrate control of the private key.

D) Verification of the price of the bitcoin in the Wall Street Journal as of the balance sheet date.

788)

Which of the following is not an approach an auditor may choose when performing substantive procedures to test accounting estimates?

A) Test the company’s process used to develop the accounting estimate.

B) Confirm the accounting estimate with a reliable third party expert.

C) Develop an independent expectation for comparison to the company’s estimate.

D) Evaluate audit evidence from events or transactions occurring after the measurement date.

789)

Which of the following would be considered a Level 3 fair value estimate?

A) The valuation of goodwill obtained from a purchase transaction.

B) The valuation of a building held for over 20 years.

C) The valuation of an equity investment traded on the NYSE. D) The valuation of a bond investment with a 10 year maturity and an A+ S&P bond rating.

790)

A__________ approved by the board of directors constitutes the authorization for capital asset acquisitions and investments.

791)

__________ transactions are obligations and commitments that are not required to be recorded.

792)

A __________ is a financial institution appointed to record the issuance and ownership of company securities.

793)

A__________ handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates to buyers.

794)

Records of interest rates and bonds payable are maintained by the __________ and the __________.

795)

Capital stock may be subject to__________ when independent registrars and transfer agents are employed.

796)

The responsibility for financing and investment transactions is basically in the hands of__________ .

797)

A__________ is a control feature relied upon when a standard internal control procedure is not in place.

798)

An __________ is an approximation of a financial statement element, item, or account

799)

__________ is responsible for making estimates and should have a __________ and __________ designed to reduce the likelihood of material misstatements in them.

800)

When circumstances call for extended procedures, information on outstanding stock may be __________ .

801)

The ASB balance assertion of __________ is paramount in the verification of long-term liabilities and determination that all liabilities are recorded.

802)

The confirmation of notes payable to banks may use the__________ confirmation.

803)

Investment accounting may be on the__________ method,__________ method, or__________ method.

804)

__________ of securities can prevent the use of company securities as__________ for personal loans.

805)

The primary audit concern with the verification of long-term liabilities is that all __________ are recorded and that the __________ is properly paid or __________ .

806)

What are "off-balance-sheet" financing transactions? Explain and provide two or more examples.

807)

What is a compensating control? Describe what type of compensating controls might be implemented in the finance and investment cycle.

808)

Interest expense related to interest-bearing liabilities could be audited using analytical procedures. Describe how this might be done and how the results would be used.

809)

According to auditing standards, specific relevant aspects of an internal control system for making estimates include: Management communication of the need for proper accounting estimates.

Accumulation of relevant, sufficient, and reliable data for estimates.

Preparation of estimates by qualified personnel.

Adequate review and approval by appropriate levels of authority.

Comparison of prior estimates with subsequent results to assess the reliability of the estimation outcomes.

Consideration by management of whether particular accounting estimates are consistent with the company's operational plans. a. How would the auditor test these control activities over the production of estimates? b. What substantive audit procedures would the auditor use to test the accounting estimates?

810)

Red Corporation had a temporary cash squeeze near its balance-sheet date. It needed cash badly for a seasonal dip in sales. However, a loan covenant requiring a certain debt/equity ratio would be violated if any additional money were borrowed. To remedy this, the top two officers of the Corporation set up another corporation, Pink Incorporated, Red made a large sale of inventory to Pink at cost. Pink used the inventory as collateral for a three-month loan from a local bank. The money from the loan was used to pay Red for the accounts receivable resulting from the "sale." The officers intended to have Red buy back the inventory from Pink at the end of the three-month period at a price that would allow Pink to pay off the loan plus interest.

Required: a. How would this transaction designed by the two officers enable Red to maintain its required debt/equity ratio while obtaining the cash it needed? b. What tests of controls and substantive tests would enable an auditor to detect this scheme?

811)

Mike is the controller at Huskie Supply Company. Huskie Supply has an investment account with DT National Brokerage. Mike is authorized to call the broker and initiate trades on behalf of the company. Mike's son goes to MEU (Most Expensive University) and Mike has a CD with the money for this year's tuition. MEU changed the tuition due date such that the tuition came due 30 days before Mike's CD matured. Mike would lose a large amount of interest if he cashed in the CD early, and a loan from the bank was not possible (Mike is already over extended), and interest on a credit card advance would be 28%.

Mike authorized DT National Brokerage to sell one of the company's investments and send the check to his attention at the company. Mike paid the tuition and 30 days later, when the CD came due Mike repurchased the investment with the broker. In fact, the stock had dropped $3 and mike made a profit of $900.

A. Define the internal control weakness that allowed the situation to exist - if any; B. One (and only one) specific internal controls that should be in place to prevent or detect the problem; and.

C. One (and only one) test of control audit procedure.

D. One (and only one) substantive audit procedure that may detect the situation described.

Consider each item separately - no credit will be given for generic controls (e.g. policies and procedures; separation of duties (without specifics); discuss with management.)

812)

For each of the internal control questions for notes payable, indicate by letter the related ASB transaction assertion. Answers may be used more than once.

A. Valuation or allocation B. Occurrence C. Completeness D. Rights __________ __________ __________ __________

1. Are paid notes canceled, stamped PAID, and filed?

2. Are bank due notices compared with records of unpaid liabilities?

3. Are notes payable kept by someone who cannot sign notes or checks?

4. Is all borrowing authorization by the directors checked to determine whether all notes payable are recorded?

813)

XYZ Company has investment securities held by a broker. An auditor is reviewing the last broker’s statement for the year. For each of the tests 1–5, select the ASB balance assertion listed in A–D that the auditor is testing.

A. Rights and obligations B. Completeness C. Valuation or Accuracy D. Existence __________ __________ __________ __________ __________

1. Verified the name on the account was the company’s name.

2. Vouched items listed on the statement to the investment account.

3. Vouched purchases listed on the statement by authorization by senior management or the board of directors.

4. The auditor has received a letter of confirmation directly from the broker for investments listed on the statement.

5. The auditor compared the price of the securities listed on the broker’s statement with the price listed on that day in The Wall Street Journal to the price used to record the investment on the balance sheet.

Answer Key Test name: chapter 10 714) 715) 716) 717) 718) 719) 720) 721) 722) 723) 724) 725) 726) 727) 728) 729) 730) 731) 732) 733) 734) 735) 736) 737) 738) 739) 740) 741) 742) 743) 744) 745) 746) 747) 748) 749) 750)

C C D B C A B A D C B C C A A C B C A D C C A B A A B A B C C C D C D C B

751) 752) 753) 754) 755) 756) 757) 758) 759) 760) 761) 762) 763) 764) 765) 766) 767) 768) 769) 770) 771) 772) 773) 774) 775) 776) 777) 778) 779) 780) 781) 782) 783) 784) 785) 786) 787) 788) 789) 790)

B C A C D C D D C D D A B A C A C D B C B D D B C B D B C A D C A D B C C B A capital budget

791) 792) 793) 794) 795) 796) 797) 798) 799) 800) 801) 802) 803) 804) 805) 806) 807) 808) 809) 810) 811) 812) 813)

Off-balance-sheet financing registrar transfer agent [accounting department, CFO (or controller)] confirmation senior management officials compensating control accounting estimate [Client's management, process, controls] confirmed directly with the stockholders completeness standard bank [cost, equity, consolidation] [Proper custodial control, collateral] [liabilities, interest expense, accrued] Essay Essay Essay Essay Essay Essay Essay Essay

Student name:__________ 814)

Which of the following events or activities may occur following the audit report release date?

A) Interim testing B) Roll-forward work C) Subsequent events D) Subsequently discovered facts

815)

Interim testing normally occurs between the__________ and the__________.

A) beginning of the year under audit; audit report release date B) date of the financial statements; audit report release date C) beginning of the year under audit; date of the financial statements D) end of the year under audit; date of the auditors' report

816)

Roll-forward work normally occurs between the__________ and the__________.

A) beginning of the year under audit; audit report release date B) date of the financial statements; audit report release date C) beginning of the year under audit; date of the financial statements D) date of interim work; date of the auditors' report

817)

For which of the following objectives would auditors be least likely to use analytical procedures near the end of the audit?

A) Obtaining evidence about assertions related to account balances or classes of transactions B) Evaluating the adequacy of evidence gathered in response to unexpected account balances C) Identifying unusual or unexpected account balances or relationships among account balances that were not previously identified during the audit D) Evaluating the adequacy of evidence gathered in response to unexpected relationships among account balances

818)

Which of the following best describes the auditors' responsibility with respect to management's estimates?

A) Verifying the mathematical accuracy of management estimates.

B) Assessing the likelihood that actual results will be consistent with management's estimates.

C) Evaluating the reasonableness of management's estimates.

D) Identifying how the failure of the entity to achieve management's estimates will influence users' decisions.

819)

Which of the following would not ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts?

A) Current-year recorded (unaudited) balances.

B) Expected balances using a statistical analysis or relationships among accounts.

C) Internal budgets and reports.

D) Prior-year balances.

820)

Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses?

A) These accounts are likely to relate to going-concern matters.

B) These accounts are often more difficult to audit using normal substantive procedures.

C) These accounts may represent attempts of earnings management.

D) These accounts are likely to require the assistance of a specialist.

821)

Which of the following is the most effective method of identifying potential earnings management attempts?

A) Analytical procedures.

B) Detailed substantive procedures.

C) Inquiry of client management and key financial personnel.

D) Scanning accounts for unusual items.

822)

An important method used by auditors to learn of material contingencies is A) examining documents in the client's possession concerning contingencies.

B) inquiring and discussing them with management.

C) obtaining responses to an attorney letter.

D) confirming accounts receivable with the client's customers.

823)

Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments?

A) Obtaining a description and evaluation of litigation, claims, and assessments from management.

B) Examining documentary evidence regarding litigation, claims, and assessments.

C) Reading minutes of meetings of stockholders, directors, and appropriate committees.

D) Performing analytical procedures.

824)

Which of the following is typically not included in the inquiry letter sent to the client's attorneys?

A) A disclaimer regarding the likelihood of settlement of pending litigation.

B) A listing of pending or threatened litigation, claims, or assessments.

C) An evaluation of the likelihood of an unfavorable outcome.

D) An estimate of the range of potential loss.

825)

Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?

A) Attorney B) Auditors C) Client D) Securities and Exchange Commission or other regulatory body

826)

To whom should written representations be addressed?

A) Auditors B) Board of directors C) Client D) Stockholders

827)

Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity?

A) Statements related to management's responsibility for the entity's financial statements.

B) Statements related to management's responsibility for designing internal control to prevent and detect fraud.

C) An indication that all subsequent events have been disclosed to the auditors.

D) Management's opinion as to the effectiveness of its internal control over financial reporting.

828)

What is the primary purpose of obtaining written representations?

A) To provide auditors with substantive evidence of important assertions.

B) To impress upon management its primary responsibility for the financial statements.

C) To allow auditors to communicate important internal control deficiencies to management.

D) To allow auditors to communicate important suggestions for improvement to management.

829)

If auditors are appointed on January 3, 2023, the date of the financial statements is December 31, 2023, the date of the auditors' report is February 7, 2024, and the audit report release date is March 3, 2024, what is the appropriate date of the written representations?

A) January 3, 2023 B) December 31, 2023 C) February 7, 2024 D) March 3, 2024

830)

Which of the following reporting options is available if the client refuses to provide auditors with written representations?

A) Unmodified or qualified opinion B) Qualified or adverse opinion C) Qualified opinion or disclaimer of opinion D) Disclaimer of opinion or adverse opinion

831)

832)

Why is it the client's decision to record adjustments to the financial statements?

A) Having auditors adjust the financial statements would impair independence with respect to the client.

B) The financial statements are the responsibility of the client's management.

C) Auditors often do not have sufficient client-specific expertise to record adjustments to the financial statements.

D) The client will ultimately suffer any losses related to misstated financial statements.

Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork?

A) To ensure that all appropriate steps in the audit plan were performed.

B) To ensure that referencing among audit documentation is clear.

C) To ensure that the explanations included in the audit documentation are understandable.

D) To ensure that the overall scope of the audit was appropriate.

833)

Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the A) client's management.

B) audit manager.

C) engagement partner.

D) engagement quality review partner.

834)

Subsequent events occur between the__________ and the__________.

A) date of the financial statements; date of the auditors' report B) date of the auditors' report; audit report release date C) date of the financial statements; audit report release date D) audit report release date; beginning of subsequent year's audit

835)

Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events?

A) Reviewing the latest interim financial statements.

B) Performing cut-off testing near year end.

C) Inquiring of officers and other client executives.

D) Obtaining written representations.

836)

Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern?

A) Violation of debt covenants.

B) Failure to meet forecasted earnings per share.

C) Legal proceedings that may have a significant negative impact on the entity.

D) Negative cash flow from operations for each of the last three years.

837)

Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements?

A) Settlement of long outstanding litigation.

B) Collection of a past due accounts receivable.

C) Loss of inventory as a result of a flood.

D) An additional tax assessment on prior income.

838)

The Orange Corporation was audited for the year ended December 31. The audit was completed on January 25; prior to the release of the report, auditors learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the auditors' reports?

A) December 31 and January 25 B) January 25 and February 1 C) January 25 and February 15 D) February 1 and February 15

839)

Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the A) date of the financial statements.

B) date of the auditors' report.

C) audit report release date.

D) subsequent year's date of the financial statements.

840)

841)

Management letters are not a means of A) reporting recommendations to the client.

B) assisting the client in improving its operations.

C) satisfying professional requirements to communicate matters related to the client's internal control.

D) developing rapport with the client.

An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the A) "to-do lists" are reviewed and cleared.

B) audit plan procedures are "signed off."

C) tick-mark notations are cleared.

D) audit work meets the quality standards of the firm.

842)

Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the A) date of the auditors' report.

B) final review of the audit documentation.

C) audit report release date.

D) delivery of the auditors' reports to the client.

843)

Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously expressed opinion. Auditors need not try to perform the omitted procedure if A) the risk of adverse publicity or litigation is low.

B) some financial statement users are currently relying on the auditors' reports.

C) the auditors' opinion was qualified because of a departure from generally accepted accounting principles.

D) the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.

844)

845)

The primary objective of analytical procedures used near the end of an audit is to A) obtain evidence from details tested to corroborate management assertions.

B) obtain evidence on the validity of the assessment of control risk.

C) assist auditors in evaluating the overall financial statement presentation.

D) identify areas that represent specific risks relevant to the audit.

In an audit of contingent liabilities, which of the following procedures would be least effective?

A) Examining customer confirmation replies.

B) Reviewing a bank confirmation letter.

C) Examining invoices for professional services.

D) Reading the minutes of the board of directors meetings.

846)

Near the end of an audit, the application of analytical procedures is A) recommended by auditing standards.

B) not mentioned by auditing standards.

C) not useful, since detailed substantive procedures have already been performed.

D) required by auditing standards.

847)

The primary source of information auditors use to obtain information about litigation, claims, and assessments is the A) client's attorney.

B) court records.

C) client's management.

D) independent auditors.

848)

Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2023. On January 11, 2024, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2024.

As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to A) record the loss on uncollectible accounts as a routine transaction in the year 2024.

B) treat the loss as a subsequent event and provide a footnote about the loss in the 2023 financial statements.

C) treat the loss as a subsequent event and adjust the 2023 financial statements to record the loss on uncollectible accounts.

D) file a lawsuit against the customer in hopes of collecting some of the money owed to the client.

849)

Small and Tall, CPAs, completed the December 31, 2023, audit of Big Company on February 10, 2024. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2023, financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should A) determine whether persons are currently relying on the auditors' reports.

B) advise the client to make appropriate changes in the financial statements and reissue them.

C) notify each member of the board of directors of Big Company.

D) take no action since the event took place after the audit report release date.

850)

A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on A) the fair presentation of the financial statements in conformity with GAAP. B) irregularities involving the client's management and its employees.

C) the materiality of the adjusting entries proposed by the audit staff.

D) the communication of internal control deficiencies to the client's audit committee (or those charged with governance).

851)

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts.

Auditors most likely could have detected this irregularity by A) tracing a sample of journal entries to the general ledger.

B) evaluating the effectiveness of the internal control policies and procedures.

C) investigating the reconciliations between controlling accounts and subsidiary records.

D) performing analytical procedures designed to disclose differences from expectations.

852)

Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts.

What is the most appropriate initial course of action that auditors should take?

A) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

B) Request that management disclose the newly discovered information by issuing revised financial statements.

C) Issue revised pro forma financial statements taking into consideration the newly discovered information.

D) Give public notice that auditors are no longer associated with financial statements.

853)

854)

Analytical procedures performed near the end of an audit generally include A) considering unusual or unexpected account balances that were not previously identified.

B) performing tests of transactions to corroborate management's financial statement assertions.

C) gathering evidence concerning account balances that have not changed from the prior year.

D) retesting control activities that appeared to be ineffective during the assessment of control risk.

Auditors try to identify predictable relationships when using analytical procedures.

Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

A) Accounts receivable B) Interest expense C) Accounts payable D) Travel and entertainment expense

855)

On March 15, 2024, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2023. On May 4, 2024, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first A) advise management to disclose to the stockholders that Kent's unqualified opinion should not be relied on.

B) undertake to apply alternative procedures that would provide a satisfactory basis for the opinion.

C) reissue the auditors' reports and add an explanatory paragraph describing the departure from generally accepted auditing standards.

D) compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.

856)

Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?

A) Determine that changes in employee pay rates after year end were properly authorized.

B) Recompute depreciation charges for plant assets sold after year end.

C) Inquire about payroll checks that were recorded before year end but cashed after year end.

D) Investigate changes in long-term debt occurring after year end.

857)

Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity?

A) Auditors are required to specifically gather evidence with respect to going-concern status and separately report on the entity's ability to continue as a going concern.

B) Auditors are required to specifically gather evidence with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

C) Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and separately report on the entity's ability to continue as a going concern.

D) Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

858)

Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments?

A) Request the client's attorney to evaluate whether the client's pending litigation claims, and assessments indicate a going-concern problem.

B) Examine the legal documents in the client's attorney's possession concerning litigation, claims, and assessments to which the attorney has devoted substantive attention.

C) Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.

D) Confirm directly with the client's attorney that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.

859)

Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?

A) Confirming a sample of material accounts receivable established after year-end.

B) Comparing the financial statements being reported on with those of the prior period.

C) Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements.

D) Inquiring as to whether any unusual adjustments were made just before year-end.

860)

Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously issued financial statements?

A) An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.

B) A contingency is resolved that had been disclosed in the audited financial statements.

C) New information is discovered concerning undisclosed lease transactions during the period under audit.

D) A subsidiary is sold that accounts for 25% of the entity's consolidated net income.

861)

What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist?

A) Modify their report on the financial statements to describe management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist.

B) Prepare a separate report that describes management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist.

C) Require financial statement disclosure of management's plan to mitigate goingconcern uncertainties with no modification to the auditors' report on the financial statements or no separate report on going concern.

D) Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' report.

862)

If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(an) A) omitted procedure.

B) prior period adjustment.

C) subsequent event.

D) subsequently discovered fact.

863)

Assume that Rory is auditing the financial statements of Augusta, Incorporated Rory completes his fieldwork on February 25 and his report (along with Augusta's financial statements) is issued on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Rory's responsibility with respect to the effects of this hurricane on Augusta's financial statements?

A) Because the inventory was included in the financial statements audited by Rory, he is required to perform additional procedures and reissue his report on the revised financial statements.

B) Because the hurricane occurred after the date of Rory's report, he has no responsibility to perform additional procedures or reissue his report.

C) Because the hurricane occurred prior to the next fiscal quarter, Rory is required to perform additional procedures and reissue his report on the revised financial statements.

D) Because the hurricane occurred after the release of the financial statements and Rory's report, he has no responsibility to perform additional procedures or reissue his report.

864)

If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event?

A) A significant acquisition that was announced on February 1 and will be finalized on October 1.

B) A court settlement on March 3 related to a case that was pending on December 31.

C) Losses from the devaluation of a foreign currency that became finalized on February 21.

D) The entity's announcement of a major restructuring plan on December 30 that will be implemented during the upcoming year.

865)

Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

A) Inspecting title documents to verify whether any assets are pledged as collateral.

B) Confirming with third parties the details of arrangements to maintain financial support.

C) Reconciling the client's cash balance with the cut-off bank statement and the bank confirmation.

D) Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

866)

Select the appropriate term to which it is most likely related. Each term is associated with only one statement.

Audit documentation and financial statements, including footnotes, are reviewed by a partner who did not participate on the audit.

A) Written representations.

B) Engagement quality review.

C) Management letter.

D) Interim audit work.

E) Communication with individuals charged with governance.

F) Attorney letters.

867)

Select the appropriate term to which it is most likely related. Each term is associated with only one statement.

Based on the facts, known to us, after a full investigation, it is our opinion that no liability will be established against this entity.

A) Written representations.

B) Engagement quality review.

C) Management letter.

D) Interim audit work.

E) Communication with individuals charged with governance.

F) Attorney letters.

868)

Select the appropriate term to which it is most likely related. Each term is associated with only one statement.

Audit procedures performed several weeks or months before the date of the financial statements.

A) Written representations.

B) Engagement quality review.

C) Management letter.

D) Interim audit work.

E) Communication with individuals charged with governance.

F) Attorney letters.

869)

Select the appropriate term to which it is most likely related. Each term is associated with only one statement.

There have been no irregularities involving management or employees who have significant roles in the client's internal control.

A) Written representations.

B) Engagement quality review.

C) Management letter.

D) Interim audit work.

E) Communication with individuals charged with governance.

F) Attorney letters.

870)

Select the appropriate term to which it is most likely related. Each term is associated with only one statement.

We discussed the following recommendation for streamlining the receiving department document flow with Ms. Phyllis Cook, receiving department supervisor.

A) Written representations.

B) Engagement quality review.

C) Management letter.

D) Interim audit work.

E) Communication with individuals charged with governance.

F) Attorney letters.

871)

Select the appropriate term to which it is most likely related. Each term is associated with only one statement.

Includes statements regarding auditors' judgment of the quality of the client's accounting principles.

A) Written representations.

B) Engagement quality review.

C) Management letter.

D) Interim audit work.

E) Communication with individuals charged with governance.

F) Attorney letters.

872)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Engagement letter A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

873)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Acceptance letter (signed copy of engagement letter) A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

874)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Attorney letter response A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

875)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Written representations A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

876)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Internal control deficiencies A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

877)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Communications with individuals charged with governance A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

878)

For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written.

Management letter A) Prior to or at the date of the auditors' report; Written B) Following the date of the auditors' report; Either oral or written C) Prior to the engagement; Written D) Either following the date of the auditors' report or as significant matters are identified; Written

879)

Explain briefly (a) written representations, (b) internal control communications, and (c) management letters. In your answer, include the general content of the communication, the parties involved with the communication, the required form of the communication, and whether the communication is required under generally accepted auditing standards.

880)

Explain briefly auditors’ responsibility for subsequently discovered facts existing at the date of the auditors’ reports.

Define what is meant by the term “subsequent event”. In addition, identify the two types of subsequent events and indicate how auditors should modify the engagement for the discovery of subsequent events.

881)

882)

You are auditing Green Corporation for the calendar year 2023. Among other items related to the audit, Green Corporation was being sued for personal injury resulting from the malfunction of one of their products. The lawsuit was initiated by Sue Ewe in September, 2023. Management and the company's outside legal counsel estimated the loss from the suit to be approximately $250,000. This amount is accrued and properly disclosed in the footnotes of the financial statements. You have no reason to believe that the estimate is inaccurate. You completed your audit and dated your report March 2, 2024. The financial statements were issued on March 14, 2024. On March 20, 2024, you read in a national business periodical that the jury in the trial awarded Sue Ewe $1.5 million.

Required:Discuss the nature of these events and what responsibility, if any, you have regarding the news of March 20, 2024.

883)

Below is a list of events that occur throughout an audit examination. Indicate, using the correct letter, the time period during which these events are most likely to occur. An event may occur in more than one time period.

A. Prior to the date of the financial statements.

B. Between the date of the financial statements and the date of the auditors’ report.

C. Between the date of the auditors’ report and the audit report release date.

D. After the audit report release date. ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

1. Subsequently discovered facts.

2. Roll-forward work.

3. Attorney letters.

4. Interim testing relating to substantive procedures.

5. Preparation of proposed adjusting journal entries.

6. Dual dating for subsequently discovered facts.

7. Communications with the individuals charged with governance.

8. Written representations.

9. Identification of subsequent events.

10. Interim testing related to tests of controls.

884)

Indicate, using the letters C (client), A (auditors), and AT (attorney) which party is responsible for each of the following duties relating to letters of inquiry of attorneys. Each statement is associated with only one party. ___ 1. Respond directly to auditors’ initial inquiries regarding litigation, claims, and assessments. ___ 2. Initiate request for attorney letter. ___ 3. Respond to attorney letter. ___ 4. Provide initial description and evaluation of litigation, claims, and assessments. ___ 5. Request attorney letter. ___ 6. Perform various procedures relating to litigation, claims, and assessments. ___ 7. Identify whether client’s views expressed in the attorney letter are appropriate. ___ 8. Party the attorney informs if an unasserted claim must be disclosed.

885)

Indicate the type of communication(s) that correspond to each of the following statements. Use the letters A (attorney letter), M (management letter), and WR (written representations). Each statement may be related to more than one type of communication. ___ 1. Discusses management’s responsibility for the fairness of the financial statements. ___ 2. Is obtained on the date of the auditors’ report. ___ 3. Provides auditors with significant evidence regarding litigation, claims, and assessments. ___ 4. Discusses the absence of fraud activity by the client and its personnel. ___ 5. Is not required by generally accepted auditing standards. ___ 6. Is intended to be returned to auditors as a form of evidence. ___ 7. Is typically prepared following the audit report release date. ___ 8. Is signed by an executive of the client.

Answer Key Test name: chapter 11 814) 815) 816) 817) 818) 819) 820) 821) 822) 823) 824) 825) 826) 827) 828) 829) 830) 831) 832) 833) 834) 835) 836) 837) 838) 839) 840) 841) 842) 843) 844) 845) 846) 847) 848) 849) 850)

D C D A C A C D C D A C A D B C C B D A A B B C B C C D C D C A D C B D A

851) 852) 853) 854) 855) 856) 857) 858) 859) 860) 861) 862) 863) 864) 865) 866) 867) 868) 869) 870) 871) 872) 873) 874) 875) 876) 877) 878) 879) 880) 881) 882) 883) 884) 885)

D A A B B D D C C C D D D A B B F D A C E C C A A D B B Essay Essay Essay Essay Essay Essay Essay

Student name:__________ 886)

Which of the following statements is not included in the Auditor's Responsibilities for the Audit of the Financial Statements Section of the standard (unmodified) report?

A) "In accordance with accounting principles generally accepted in the United States of America."

B) "Our objectives are to obtain reasonable assurance…and to issue an auditor’s report that includes our opinion" C) "…it is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement…"

D) "Reasonable assurance is a high level of assurance but is not absolute assurance…"

887)

Which of the following situations would not result in auditors adding an emphasis-ofmatter paragraph or section to their report without modifying the remainder of the report?

A) Reference to a change in the method of accounting mandated by the issuance of a new accounting standard.

B) Reference to a going-concern uncertainty facing the entity.

C) Reference to a departure from GAAP that is material, but not pervasive, to the financial statements.

D) Reference to an acquisition made by the entity during the most recent fiscal year.

888)

Which of the following statements is not included in the Basis for Opinion Section of the standard (unmodified) report on the entity's financial statements?

A) "We are required to communicate with those charged with governance…"

B) "We are required to be independent of [the client]…"

C) "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion."

D) "We conducted our audit in accordance with…(GAAS)"

889)

Auditors are required to reference consistency in their report when there are changes in A) accounting estimates.

B) the format of the Statement of Cash Flows.

C) the classification of financial statement amounts.

D) accounting principles.

890)

If financial statements contain a material but nonpervasive departure from generally accepted accounting principles, the auditors should render a(n) A) qualified opinion with reference to departure.

B) adverse opinion with scope limitation reference.

C) adverse opinion with reference to departure.

D) disclaimer of opinion.

891)

Which of the following scope limitations would ordinarily be of most concern to the auditors?

A) The inability to observe inventories because auditors were appointed following the date of the financial statements.

B) Management's refusal to provide auditors with written representations.

C) The inability to obtain confirmation of year-end balances from customers because of different billing dates.

D) The use of the work of component auditors in the audit of group financial statements.

892)

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not A) identify management's responsibility for the financial statements.

B) refer to any scope limitation in the Basis for Opinion Section.

C) modify the Auditor’s Responsibilities for the Audit of the Financial Statements Section to identify the basis for the disclaimer.

D) indicate that the auditors were engaged to audit the financial statements.

893)

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n) A) qualification.

B) division of responsibility.

C) expansion of scope.

D) scope limitations.

894)

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 20x1…" is an illustration of a A) consistency change requiring a qualified opinion.

B) scope limitation.

C) departure from generally accepted accounting principles.

D) report with a consistency modification.

895)

The auditors' report on the entity's financial statements included language disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The Opinion Section of the auditors' report should express a(n) A) unmodified opinion.

B) qualified opinion citing a departure from generally accepted accounting principles.

C) qualified opinion citing a scope limitation and lack of specific evidence.

D) disclaimer of opinion.

896)

Auditors will issue an adverse opinion when A) a severe scope limitation has been imposed by the entity.

B) a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

C) a qualified opinion cannot be rendered because the auditors lack independence.

D) the entity's ability to continue as a going concern is subject to substantial doubt.

897)

The issuance of a disclaimer of opinion generally indicates A) the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

B) the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole.

C) the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion.

D) the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

898)

When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n) A) disclaimer of opinion.

B) qualified opinion referencing a departure from generally accepted accounting principles.

C) unmodified opinion with an emphasis-of-matter paragraph.

D) adverse opinion.

899)

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements?

A) The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.

B) The auditors wish to emphasize a matter regarding the financial statements.

C) The auditors reference component auditors who examined a subsidiary of group financial statements.

D) The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

900)

The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may A) issue a qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles.

B) consider the matter closed since the other information is not included in the audited financial statements.

C) issue an adverse opinion on the entity's financial statements due to inadequate disclosure.

D) revise the report on the entity's financial statements to include an additional section describing the material inconsistency.

901)

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?

A) The auditors should disclaim an opinion and should state specifically that they are not independent.

B) The auditors should disclaim an opinion but not mention that they are not independent.

C) The auditors should issue an unmodified opinion with an other-matter paragraph stating that they are not independent.

D) The auditors should issue a qualified opinion with an other-matter paragraph stating that they are not independent.

902)

In which of the following circumstances would a qualified opinion not be appropriate?

A) A scope limitation prevents the auditors from completing an important auditing procedure.

B) The entity has failed to properly disclose going-concern uncertainties.

C) An accounting principle at variance with generally accepted accounting principles is used.

D) The auditors lack independence with respect to the audited entity.

903)

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in A) the Adverse Opinion Section.

B) the Basis for Adverse Opinion Section.

C) the Auditor’s Responsibilities for the Audit of the Financial Statements Section.

D) the footnotes to the financial statements.

904)

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission and modify A) the Qualified Opinion Section only.

B) the Basis for Qualified Opinion Section only.

C) the Auditor’s Responsibilities for the Audit of the Financial Statements Section only.

D) the Qualified Opinion Section and the Basis for Qualified Opinion Section.

905)

Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35 percent of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express A) a qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles.

B) a disclaimer of opinion on the entity's financial statements.

C) an unmodified opinion on the entity's financial statements with an other-matter paragraph.

D) an unmodified opinion on the entity's financial statements with a modification of the Auditor’s Responsibilities for the Audit of the Financial Statements Section.

906)

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should A) modify the Opinion Section and Basis for Opinion Section of the report for lack of conformity with generally accepted accounting principles.

B) disclaim an opinion on the entity's financial statements because of uncertainty.

C) disclose the matter in an emphasis-of-matter paragraph but not modify the Opinion Section of the report.

D) not modify the report because both principles are generally accepted accounting principles.

907)

Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor auditors should A) indicate in their report the substantive reasons for the qualification issued by the predecessor auditors.

B) request the entity to reissue the predecessor's report on the prior years' statements.

C) issue an updated comparative report on the entity's financial statements, indicating the involvement of component auditors.

D) express an opinion only on the current year's financial statements and make no reference to the prior years' financial statements or opinion.

908)

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should A) express a qualified or adverse opinion.

B) not modify the Opinion Section of the report as long as the departure is adequately disclosed in a footnote.

C) disclaim an opinion on the financial statements.

D) express a qualified opinion or disclaimer of opinion.

909)

Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements?

A) A change in the estimate of useful lives used to depreciate property, plant, and equipment.

B) A change in the entity's form of reporting entity.

C) Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification.

D) A change from an accounting principle that conforms with GAAP to one that does not.

910)

Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally A) disclaim an opinion.

B) express an adverse opinion.

C) qualify the opinion.

D) express an unmodified opinion with an additional section describing the goingconcern uncertainty.

911)

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of A) inadequate disclosure of material information.

B) the omission of the Statement of Cash Flows.

C) a material departure from generally accepted accounting principles.

D) management's refusal to furnish written representations.

912)

When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation and modify the A) Opinion Section.

B) Opinion Section and Auditor’s Responsibilities for the Audit of the Financial Statements Section.

C) Opinion Section, Basis for Opinion Section, and Auditor’s Responsibilities for the Audit of the Financial Statements Section.

D) Basis for Opinion Section and Auditor’s Responsibilities for the Audit of the Financial Statements Section.

913)

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?

A) The financial statements fail to contain adequate disclosure of related-party transactions.

B) The entity refuses to permit its attorney to furnish information requested in an attorney letter.

C) The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances.

D) The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.

914)

When audited financial statements are presented in a document containing other information, the auditors should A) perform inquiry and analytical procedures to ascertain whether the other information is reasonable.

B) add an emphasis-of-matter paragraph describing the other information to the auditors' report without modifying the opinion on the financial statements.

C) perform the appropriate substantive procedures to corroborate the other information.

D) read the other information to determine that it is consistent with the audited financial statements.

915)

Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of A) involvement of component auditors in the audit of the group financial statements.

B) the portion of the group statements audited by the component auditors not being considered material.

C) group auditors' recognition of the component auditors' competence, reputation, and professional certification.

D) different opinions the auditors are expressing on the components of the financial statements that each audited.

916)

The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A) is considered a qualification of the opinion.

B) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

C) necessitates a revision of the Opinion Section to include the phrase "with the foregoing explanation."

D) is appropriate and would not otherwise affect the unmodified opinion.

917)

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should A) refer to the change in an emphasis-of-matter paragraph.

B) explicitly concur that the change is preferred.

C) not refer to consistency in the report.

D) refer to the change in the Basis for Opinion Section.

918)

When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is A) unmodified.

B) qualified.

C) adverse.

D) qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

919)

In which of the following circumstances would auditors be most likely to express an adverse opinion?

A) The chief executive officer refuses to provide the auditors access to minutes of board of directors' meetings.

B) Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon.

C) The financial statements are not in accordance with generally accepted accounting principles regarding the presentation and disclosure of leases.

D) Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.

920)

In which of the following circumstances would auditors most likely add an emphasis-ofmatter paragraph or additional section to the standard (unmodified) report without modifying the opinion on the entity's financial statements?

A) The auditors are asked to report on the balance sheet, but not on the other basic financial statements.

B) There is substantial doubt about the entity's ability to continue as a going concern.

C) Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable.

D) Certain transactions cannot be tested because of management's records retention policy.

921)

Green, CPA, was engaged to audit the financial statements of Essex company. after its fiscal year had ended. The timing of Green's appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n) A) unmodified opinion.

B) unmodified opinion with an emphasis-of-matter paragraph.

C) qualified opinion due to a scope limitation.

D) qualified opinion due to a departure from generally accepted auditing standards.

922)

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?

A) The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures.

B) The financial statements fail to disclose information that is required by generally accepted accounting principles.

C) The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements.

D) Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

923)

The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n) A) adverse opinion or a disclaimer of opinion.

B) qualified opinion or an adverse opinion.

C) disclaimer of opinion or an unmodified opinion with a separate emphasis-of-matter paragraph.

D) unmodified opinion with a separate emphasis-of-matter paragraph or a qualified opinion.

924)

Auditors would not normally issue a qualified opinion on the entity's financial statements when A) an accounting principle at variance with generally accepted accounting principles is used.

B) the auditors lack independence with respect to the audited entity.

C) a scope limitation prevents the auditors from completing an important auditing procedure.

D) the entity has undertaken a change in accounting principle with which the auditor does not agree.

925)

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?

A) "Subject to the departure from generally accepted accounting principles, as described below."

B) "With the foregoing explanation of these omitted disclosures."

C) "Except for the effects of the matter described in the Basis for Qualified Opinion Section of our report" D) "Does not present fairly in all material respects."

926)

If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unmodified and would A) disclose the fact that alternative procedures were used due to client-imposed scope limitation.

B) disclose in the Basis for Opinion Section that confirmation of accounts receivable was impracticable.

C) not mention the alternative procedures.

D) include an other-matter paragraph that discloses the performance of alternative procedures.

927)

When reporting on comparative financial statements, auditors ordinarily should modify their previously expressed opinion on the prior years' financial statements if the A) prior years' financial statements are restated to conform with generally accepted accounting principles.

B) auditors were predecessor auditors who have been requested by a former client to reissue the previous report.

C) prior years' opinions were unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency.

D) prior years' financial statements are restated following an acquisition in the current year.

928)

Which of the following paragraphs or sections of the group auditors' report is modified to identify the extent of component auditor involvement in the audit of group financial statements?

A) The Opinion Section..

B) The Basis for Opinion Section.

C) The Auditor’s Responsibilities for the Audit of the Financial Statements Section.

D) The other-matter paragraph.

929)

When component auditors are involved in the audit of group financial statements, the group auditors are required to A) consider the independence and professional reputation of the component auditors in deciding how to utilize their work.

B) identify the extent of component auditors' involvement if they choose not to rely on the component auditors' work.

C) identify the component auditors by name in their report to appropriate limit their liability for the component auditors' work.

D) disclaim an opinion on the portion of the financial statements examined by the component auditors.

930)

Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the group auditors' report?

A) Issue a standard (unmodified) report that does not reference any involvement by the component auditors.

B) Identify the component auditors by name and present their report along with the group auditors' report.

C) Refer to the component auditors' work and disclose the extent of their work in the group auditors' report.

D) Disclaim an opinion on the portion of the financial statements examined by the component auditors.

931)

Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format?

A) The auditors' report must only refer to the current year's financial statements.

B) The auditors' report must only refer to the prior years' financial statements if they were audited by the current auditor.

C) The auditors' report must only refer to the prior years' financial statements if they were audited by either the current auditors or predecessor auditors.

D) The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.

932)

Which of the following situations would require auditors to add an other-matter paragraph to their report on comparative financial statements?

A) An unmodified opinion is issued in the current year while a qualified opinion was issued in prior years.

B) A qualified opinion is issued in the current year because of a scope limitation; because this limitation was not encountered in prior years, the opinion issued in those years was unmodified.

C) The updated opinion issued on prior years' financial statements differs from the opinion originally issued on those financial statements.

D) The auditors' unmodified opinion issued on prior years' financial statements is still considered to be appropriate.

933)

Situations in which auditors provide additional copies of a previously issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as A) additional use reports.

B) reissued reports.

C) subsequent use reports.

D) updated reports.

934)

When a predecessor auditor has examined the prior years' financial statements presented in comparative format, the current auditors' report should A) make no reference to the predecessor auditors' report.

B) reference the predecessor auditors' report in the Opinion Section, Basis for Opinion Section, and Auditor’s Responsibilities for the Audit of the Financial Statements Section.

C) reference the predecessor auditors' report in an other-matter paragraph.

D) disclaim an opinion on the prior years' financial statements.

935)

936)

What is the major difference between a reissued report and an updated report?

A) An updated report considers information that has come to the auditors’ attention since the date of the original report, while a reissued report does not consider this information.

B) An updated report can be presented along with the entity's financial statements, but a reissued report cannot be presented along with the entity's financial statements.

C) An updated report will express a different opinion on the prior years' financial statements that were originally expressed by the auditors, while a reissued report will express the same opinion.

D) An updated report will not express an opinion other than an unmodified opinion, while a reissued report can express an unmodified opinion, qualified opinion, adverse opinion, or disclaimer of opinion.

On which of the following matters would it not be appropriate for the auditors to report using an other-matter paragraph?

A) An indication that a predecessor auditor examined prior year’s financial statements presented in comparative form.

B) Procedures performed related to supplementary mineral reserve information required by the Financial Accounting Standards Board.

C) The consistency of summary financial statements with the audited financial statements from which they were derived.

D) An updated opinion on comparative financial statements that differs from the opinion originally issued by the auditors.

937)

What is the auditors' responsibility for reporting on other information accompanying financial statements?

A) Because this information is not a fundamental part of the financial statements, the auditors have no reporting responsibility with respect to this information.

B) Auditors are required to report on the consistency of other information with the audited financial statements.

C) Auditors are required to provide reasonable assurance with respect to whether the other information is presented in accordance with generally accepted accounting principles.

D) Auditors are required to express an opinion on whether the other information is presented in accordance with generally accepted accounting principles.

938)

Which of the following best reflects the auditors' reporting responsibility under generally accepted auditing standards?

Other Information Accompanying the Financial Statements Exception Exception Required Required

A. B. C. D. A) B) C) D)

939)

Required Supplementary Information Required Exception Required Exception

Option A Option B Option C Option D

Which of the following is true with respect to the auditors' report on summary financial statements?

A) Auditors can only issue a report on summary financial statements if they have expressed an unmodified opinion on the full financial statements.

B) The report will indicate whether the summary financial statements are fairly stated in relation to the full financial statements.

C) The report will express limited assurance on whether the summary financial statements are prepared in accordance with AICPA presentation guidelines.

D) The report will express an opinion on whether the summary financial statements present the financial condition, results of operations, and cash flows in accordance with generally accepted accounting principles.

940)

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's A) income statement only.

B) statement of cash flows only.

C) balance sheet only.

D) statement of changes in shareholders' equity only.

941)

Zag Company issues financial statements that present financial position and results of operations, but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements would not be limited. Under the circumstances, Brown most likely would A) add an other-matter paragraph to the standard (unmodified) report that justifies the omission.

B) refuse to accept the engagement as proposed because of the client-imposed scope limitation.

C) explain to Zag that the omission requires a qualification of the auditors' opinion.

D) prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.

942)

A client has lease agreements that they do not wish to properly in the financial statements. Which of the following reporting options does an auditor have if the misstatements have a material and pervasive effect on the financial statements?

A) Qualified opinion.

B) Unmodified opinion.

C) Disclaimer of opinion.

D) Adverse opinion.

943)

Hart, CPA, is auditing the year 2 financial statements of Kell Company. Previously, Hart audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include an other-matter paragraph in the year 2 report because comparative financial statements are being presented for year 2 and year 1. This paragraph should indicate the A) substantive reasons for the prior year's qualification.

B) reason that Hart continued to provide audit services, despite the previous scope limitation.

C) consistency of application of accounting principles between year 2 and year 1.

D) restriction on the distribution of the report.

944)

The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would A) document in the engagement letter that the group auditors assume no responsibility for the component auditors' work.

B) obtain written permission from the component auditors to omit the reference in the group auditors' report.

C) contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary.

D) add an other-matter paragraph to the group auditors' report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

945)

In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?

A) The Auditor’s Responsibilities for the Audit of the Financial Statements Section.

B) The Opinion Section.

C) An emphasis-of-matter paragraph following the Basis for Opinion Section.

D) An emphasis-of-matter paragraph preceding the Basis for Opinion Section.

946)

An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should A) issue an updated comparative report indicating the involvement of component auditors.

B) explain to the client that comparative financial statements may not be presented under these circumstances.

C) express an opinion only on the current year's financial statements and make no reference to the prior years' statements.

D) indicate the substantive reasons for the qualification in the predecessor auditors' opinion.

947)

How do auditors make the following representations when issuing the standard (unmodified) auditors' report?

Consistent Application of Accounting Principles Implicitly Explicitly Implicitly Explicitly

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

Independence Requirement Explicitly Implicitly Explicitly Explicitly

948)

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s).

"Except for the Effects of Such Adjustments" A. B. C. D.

Yes Yes No No A) B) C) D)

949)

"Possible Discontinuance of the Entity's Operations" Yes No Yes No

Option A Option B Option C Option D

After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time.

The auditor's responsibility includes A) disclaiming an opinion on the financial statements due to the indications of possible financial difficulties.

B) indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented.

C) considering the adequacy of disclosure about the client's possible inability to continue as a going concern.

D) issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

950)

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the Auditor’s Responsibilities for the Audit of the Financial Statements Section Yes Yes No No

A. B. C. D. A) B) C) D)

Notes to the Financial Statements Yes No Yes No

Option A Option B Option C Option D

951)

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor A) expresses an unmodified opinion on the audited financial statements from which the summary financial statements are derived.

B) indicates whether the information is fairly stated in all material respects in relation to the complete financial statements.

C) determines that the summary financial statements include all the disclosures necessary for the complete set of financial statements.

D) presents the summary financial statements in comparative form with the prior years' summary financial statements.

952)

Issuers’ financial statements should be accompanied by all of the following reports except

the A) B) C) D)

auditors' report on internal control over financial reporting. management's report on internal control over financial reporting. auditors' report on financial statements and related disclosures. management's report on financial statements and related disclosures.

953)

When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report?

A) "Do not present fairly."

B) "Except for the effects of the matter described in the Basis for Qualified Opinion Section of our report…"

C) "We were engaged to audit the accompanying financial statements."

D) "As a result of the departures discussed in the Opinion Section of our report…"

954)

Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?

A) Whether the financial statements are presented in accordance with GAAP, or another applicable financial reporting framework.

B) Unusual aspects of the audit examination, such as the involvement of component auditors in the audit of group financial statements.

C) Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements.

D) Other matters affecting the client, such as substantial doubt about the entity's ability to continue as a going concern.

955)

Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued?

A) Standard (unmodified) report.

B) Unmodified opinion with an emphasis-of-matter paragraph.

C) Qualified opinion based on a circumstance-imposed scope limitation.

D) Qualified or adverse opinion based on a departure from GAAP.

956)

The auditors have determined that there is substantial doubt about an entity's ability to continue as a going concern. When considering the appropriateness of management's disclosures and severity of the uncertainty, all of the following reports could be issued, except A) qualified opinion based on a material and pervasive uncertainty.

B) unmodified opinion with an additional section describing the uncertainty.

C) adverse opinion based on inadequate disclosure of the uncertainty.

D) disclaimer of opinion based on a material and pervasive uncertainty.

957)

During the year under audit, Forrest Corporation experienced significant losses due to a pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue?

A) Qualified or adverse opinion.

B) Disclaimer or adverse opinion.

C) Disclaimer of opinion or qualified opinion.

D) Unmodified opinion with an other-matter paragraph.

958)

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will A) modify the Opinion Section and Basis for Opinion Section.

B) modify the Opinion Section and Auditor’s Responsibilities for the Audit of the Financial Statements Section.

C) modify the Opinion Section, Basis for Opinion Section, and Auditor’s Responsibilities for the Audit of the Financial Statements Section.

D) modify the Opinion Section and Basis for Opinion Section and omit the Auditor’s Responsibilities for the Audit of the Financial Statements Section.

959)

Which of the following guidelines should be followed when a disclaimer of opinion is issued?

A) The report should identify the financial statements accompanying the disclaimer of opinion.

B) The report should be addressed to the client and specific users who originally retained the auditors.

C) If the disclaimer is due to a lack of independence, the report should indicate the specific reasons for the auditors not being independent.

D) The report should describe any auditing procedures performed prior to issuing the disclaimer.

960)

Holmes & Smith, LLP, were engaged to audit the financial statements of Sodolak Reality for the year ended December 31. During the engagement, Sodolak filed a lawsuit against Holmes & Smith, LLP. What effect, if any, will this lawsuit have on the auditors' report?

A) The report should be modified to include an emphasis-of-matter paragraph describing the pending litigation.

B) A disclaimer of opinion should be issued because the auditors' independence is impaired.

C) The litigation will not have any impact on the report or auditors' independence unless Holmes & Smith are found guilty.

D) A qualified or adverse opinion should be issued depending on the severity of the lawsuit.

961)

Holmes, CPA, assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed?

A) Unmodified opinion with an other-matter paragraph limiting the level of assurance provided by Holmes.

B) Qualified opinion with indicating a circumstance-imposed scope limitation.

C) Disclaimer of opinion because Holmes did not audit the financial statements.

D) Homes is not required to issue a report or opinion in this situation.

962)

Carson, LLP, audited Best Corporation's financial statements for the year ended December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report?

A) December 31, Year 1.

B) March 1, Year 2.

C) December 31, Year 2.

D) February 15, Year 3.

963)

Harris & Thompson were engaged to audit Smart Corp's comparative financial statements for the years ended December 31, Year 1 and Year 2. The Year 1 financial statements were presented in accordance with generally accepted accounting principles, but the Year 2 financial statements were determined to be materially misstated. As a result, Harris & Thompson should A) issue a qualified opinion on the comparative financial statements as a whole.

B) issue an unmodified opinion on the Year 1 financial statements and disclaim an opinion on the Year 2 financial statements.

C) issue an unmodified opinion on the Year 1 financial statements and a qualified opinion on the Year 2 financial statements.

D) reissue the previous opinion on the Year 1 financial statements and withdraw from the engagement.

964)

When updating the report on prior years' financial statements presented in comparative form, the auditors' responsibility for the prior years' financial statements is A) limited to the previously issued report date.

B) extended to the date of the updated audit report.

C) limited to 30 days after the date of the prior years' financial statements.

D) extended to the updated report date only if information comes to the auditors' attention requiring modification of the previously expressed opinion.

965)

When a previously expressed opinion is updated from qualified to unmodified, the auditors' report on comparative financial statements should A) not modify the previously expressed opinion or refer to factors affecting the opinion on the prior years' financial statements.

B) update the opinion expressed on the prior years' financial statements but provide no explanation for the updated opinion.

C) not modify the previously expressed opinion but include a reference to the footnote describing the factors affecting the opinion on the prior years' financial statements.

D) update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change.

966)

When reporting on financial statements that include only summarized totals of account balances, the auditors' conclusion should state whether the information in the summary financial statements A) is complete with respect to disclosures required by the SEC. B) is fairly stated, in all material respects, in accordance with generally accepted accounting principles.

C) is consistent, in all material respects, with the prior years' summary financial statements.

D) is fairly stated, in all material respects, in relation to the complete financial statements.

967)

When other information is presented in a document with audited financial statements, the auditors' report should A) state that the auditor read the other information for inconsistencies and misstatements with the financial statements.

B) provide limited assurance as to whether the other information is presented in accordance with generally accepted accounting principles.

C) reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.

D) be expanded to express an opinion that the other information is consistent with the financial statements and not materially misstated.

968)

Harris is auditing the financial statements of Cole Corporation., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?

A) Unmodified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve information.

B) Adverse opinion on the financial statements and mineral reserve information due to the misstatement.

C) Unmodified opinion on the financial statements with an other-matter paragraph expressing an adverse opinion on the mineral reserve information.

D) Qualified opinion on the financial statements and mineral reserve information due to the misstatement.

969)

970)

The standard (unmodified) report issued in the audit of a non-issuer includes a(n) A) Responsibilities of Management for the Financial Statements Section providing a general description of an audit conducted in accordance with the applicable auditing standards.

B) Opinion Section identifying the responsibility of management and auditors in the financial reporting process.

C) Internal Control Section indicating the effectiveness of the entity's internal control over financial reporting.

D) Opinion Section providing the auditors' conclusion as to the fair presentation of the financial statements.

An auditors’ report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that: A) justifies the reasons for departing from generally accepted principles.

B) states whether the financial statements are fairly presented in conformity with a special purpose framework.

C) refers to the note to the financial statements that describes the special purpose framework.

D) explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

971)

Delta Life Insurance Company prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. Wall, CPA, is Delta's auditor. If Wall discovers that the statements are not suitably titled, Wall should: A) disclose any reservations in an explanatory paragraph and qualify the opinion.

B) apply to the state insurance commission for an advisory opinion.

C) issue a special statutory basis report that clearly disclaims any opinion.

D) explain in the notes to the financial statements the terminology used.

972)

Special purpose frameworks include all of the following except: A) statements that conform to a regulatory agency.

B) statements prepared on a tax basis.

C) statements that conform to accounting principles that are generally accepted.

D) statements prepared on a cash basis.

973)

Which of the following account titles would not be appropriate for a company that prepared its financial statements using the tax basis of accounting?

A) Balance Sheet.

B) Statement of Assets, Liabilities, and Owner's Equity.

C) Statement of Revenue and Expenses.

D) Statement of Change in Partners' Capital Accounts.

974)

Which of the following would not be an appropriate reporting option for financial statements prepared using a special purpose framework?

A) A qualified opinion because of a departure from the accounting principles of the special purpose framework.

B) A disclaimer of opinion because of the failure of the entity to use generally accepted accounting principles.

C) An adverse opinion because of a departure from the accounting principles of the special purpose framework.

D) A qualified opinion because of a circumstance-imposed scope limitation.

975)

Which of the following statements would normally be included in a report on financial statements prepared using a special purpose framework?

A) An indication that the auditors examined the balance sheet, statement of operations, and statement of cash flows.

B) An opinion on the appropriateness of the special purpose framework.

C) A brief summary of differences between the financial results using the special purpose framework and generally accepted auditing standards.

D) An indication that the audit was conducted in accordance with generally accepted auditing standards.

976)

Which of the following is impacted when a nonissuer prepares financial statements using a special purpose framework?

Basis of accounting Yes Yes No No

A. B. C. D. A) B) C) D)

Auditing standards Yes No Yes No

Option A Option B Option C Option D

977)

Which type of entit(ies) may prepare financial statements using a special purpose framework.

Issuers A. B. C. D.

Yes Yes No No A) B) C) D)

Option A Option B Option C Option D

Nonissuers Yes No Yes No

978)

In an engagement to audit financial statements prepared using a special purpose framework, the audit team would conduct all of the following procedures except: A) Obtaining an engagement letter.

B) Evaluating internal control and assessing control risk.

C) Performing substantive tests.

D) The audit team would perform all of the above procedures.

979)

Which of the following would not be included in the auditors’ report on financial statements prepared using a special purpose framework?

A) An identification of the financial statements examined by the auditors.

B) An indication that management is responsible for the appropriateness of the special purpose framework.

C) A reference to disclosures provided by management relating to the use of the special purpose framework.

D) An opinion on the appropriateness of the use of the special purpose framework.

980)

Which of the following is not true if auditors are requested to express an opinion on the fairness of a nonissuers’ balance sheet?

A) The auditors must refuse to accept the engagement if originally engaged to issue an opinion on the complete financial statements and would have expressed an adverse opinion on those financial statements.

B) The auditors must conduct the engagement in accordance with generally accepted auditing standards.

C) The auditors’ opinion will be limited to the balance sheet and will not reference the remaining financial statements.

D) The auditors’ procedures will be limited only to those related to the balance sheet.

981)

In which of the following engagements would auditors not be subject to complying with generally accepted auditing standards?

A) An examination of a financial forecast.

B) An audit of financial statements prepared using the cash basis of accounting.

C) An audit of a nonissuer’s statement of cash flows.

D) An examination of compliance with contractual agreements conducted in conjunction with an audit of the financial statements.

982)

Engagements to express an opinion on an account, element, or item of a financial statements: A) Are not permitted under generally accepted auditing standards.

B) Would limit the opinion expressed to the specific account, element, or item that serves as the focus of the engagement.

C) May be conducted for either issuers or nonissuers.

D) Require auditors to perform some level of procedures related to the complete financial statements.

983)

When auditors report on compliance with contractual agreements in conjunction with an audit of the financial statements conducted under generally accepted auditing standards, which of the following is a reporting option with respect to compliance?

Combined report Yes Yes No No

A. B. C. D. A) B) C) D)

984)

Separate report Yes No Yes No

Option A Option B Option C Option D

In a report on compliance with contractual agreements conducted in conjunction with an audit of the financial statements, the auditors’ report would include all of the following except: A) A limitation on the use of the report to identified parties.

B) A reference to the audit of the financial statements.

C) An indication that the audit was not directed toward identifying instances of noncompliance with contractual agreements.

D) An opinion on the entity’s compliance with contractual agreements.

985) Below are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements

of Happy, incorporation. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.

B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000.

Johnson's management has included information in the footnotes about the lawsuit.

However, they have not recorded any loss or liability in the income statement or balance sheet.

Required: For each of the independent situations presented above, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state what modifications, if any, would be required to the standard report.

986)

Define a scope limitation and distinguish between client-imposed and circumstanceimposed scope limitations. What reporting options are available to auditors when scope limitations are encountered during the engagement?

987)

Murray & Company., CPAs completed the audit of Classic, Incorporated, a non-issuer, on March 1, 2024 for a January 31, 2024 fiscal year end. The audit team encountered no significant issues and found no material misstatements. Murray & Company. has audited Classic, Incorporate. for several years and past audits did not reveal any significant issues or material misstatements. The audit team partner determined that a standard (unmodified) report on Classic, Incorporated's financial statements was appropriate. The auditors’ report, drafted by I.M. Nu, a staff assistant, is provided below.

Independent Auditor’s Report To the Board of Directors and Shareholders Classic, incorporation.

Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Classic Incorporate., which comprise the balance sheet as of January 31, 2024 and the related statements of changes in shareholders' equity and cash flows for the year then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements present fairly, the financial position of Classic, Incorporated as of January 31, 2024 and the results of its operations and its cash flows for the year then ended.

Basis for Opinion We conducted our audit in accordance with generally accepted auditing standards. We are required to be independent of Classic Incorporate. and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Classic Incorporate.’s ability to continue as a going concern for one year following the issuance of the financial statements.

Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements.

In performing an audit in accordance with GAAS, we: [detail omitted; assume all elements of the GAAS audit are appropriately worded] Murray & Company, CPAs January 31, 2024 Required: Identify the deficiencies and errors in the draft report. Do not rewrite the report, but be specific as to what is incorrect or omitted. Organize your answer by paragraph or section.

988)

Which of the following statements is not included in the Basis for Opinion section of the standard report?

A) "These financial statements are the responsibility of [the company’s] management."

B) "Those standards require that we plan and perform the audit to obtain reasonable assurance…"

C) "…it is not a guarantee that an audit conducted in accordance with PCAOB standards will always detect a material misstatement…"

D) "We believe that our audit provides a reasonable basis for our opinion"

989)

Which of the following situations would not result in auditors adding an explanatory paragraph without modifying the remainder of the report?

A) Reference to a change in the method of accounting mandated by the issuance of a new accounting standard.

B) Reference to a going-concern uncertainty facing the entity.

C) Reference to a departure from GAAP that is material, but not pervasive, to the financial statements.

D) Reference to an acquisition made by the entity during the most recent fiscal year.

990)

Which of the following statements is not included in the Basis for Opinion section of the standard report on the entity's financial statements?

A) "The critical audit matter communicated is a matter arising from the current period audit…"

B) "We are a public accounting firm registered with the Public Company Accounting Oversight Board…"

C) "Our audit included evaluating the accounting principles used and significant estimates made by management..."

D) "We conducted our audit in accordance with the standards of the PCAOB."

991)

Auditors are required to reference consistency in their report when there are changes in A) accounting estimates.

B) the format of the Statement of Cash Flows.

C) the classification of financial statement amounts.

D) accounting principles.

992)

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n) A) Qualified opinion with reference to departure.

B) adverse opinion with scope limitation reference.

C) adverse opinion with reference to departure.

D) disclaimer of opinion.

993)

Which of the following scope limitations would ordinarily be of most concern to the auditors?

A) The inability to observe inventories because auditors were appointed following the date of the financial statements.

B) Management's refusal to provide auditors with written representations.

C) The inability to obtain confirmation of year-end balances from customers because of different billing dates.

D) The use of the work of other auditors in the audit of group financial statements.

994)

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not A) identify management's responsibility for the financial statements.

B) refer to any scope limitation in the Basis for Opinion Section.

C) identify the scope limitation as a critical audit matter.

D) indicate that the auditors were engaged to audit the financial statements in the Disclaimer of Opinion on the Financial Statements section.

995)

A report that acknowledges reliance on the reports of other auditors is a type of report modification known as a(n) A) qualification.

B) division of responsibility.

C) expansion of scope.

D) scope limitations.

996)

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 20x1…" is an illustration of a A) consistency change requiring a qualified opinion.

B) scope limitation.

C) departure from generally accepted accounting principles.

D) report with a consistency modification.

997)

The auditors' report on the entity's financial statements included language disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The Opinion on the Financial Statements section of the auditors' report should express a(n) A) unqualified opinion.

B) qualified opinion citing a departure from generally accepted accounting principles.

C) qualified opinion citing a scope limitation and lack of specific evidence.

D) disclaimer of opinion.

998)

Auditors will issue an adverse opinion when A) a severe scope limitation has been imposed by the entity.

B) a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

C) a qualified opinion cannot be rendered because the auditors lack independence.

D) the entity's ability to continue as a going concern is subject to substantial doubt.

999)

The issuance of a disclaimer of opinion generally indicates A) the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

B) the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole.

C) the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion.

D) the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

1000) When an entity will not permit inquiry of outside legal counsel, the auditors' report on the

entity's financial statements will ordinarily contain a(n) A) disclaimer of opinion.

B) qualified opinion referencing a departure from generally accepted accounting principles.

C) unqualified opinion with an explanatory paragraph.

D) adverse opinion.

1001) In which of the following circumstances may auditors issue the standard report on the

entity's financial statements?

A) The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.

B) The auditors wish to emphasize a matter regarding the financial statements.

C) The auditors reference other auditors who examined a subsidiary of group financial statements.

D) The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

1002) The auditors conclude that there is a material inconsistency in the "other information" in

an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may A) issue a qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles.

B) consider the matter closed since the other information is not included in the audited financial statements.

C) issue an adverse opinion on the entity's financial statements due to inadequate disclosure.

D) revise the report on the entity's financial statements to include an additional section describing the material inconsistency.

1003) When auditors lack independence, which of the following is true about the report on the

entity's financial statements that should be issued?

A) The auditors should disclaim an opinion and should state specifically that they are not independent.

B) The auditors should disclaim an opinion but not mention that they are not independent.

C) The auditors should issue an unqualified opinion with an explanatory paragraph stating that they are not independent.

D) The auditors should issue a qualified opinion with an explanatory paragraph stating that they are not independent.

1004) In which of the following circumstances would a qualified opinion not be appropriate?

A) A scope limitation prevents the auditors from completing an important auditing

procedure.

B) The entity has failed to properly disclose going-concern uncertainties.

C) An accounting principle at variance with generally accepted accounting principles is used.

D) The auditors lack independence with respect to the audited entity.

1005) Auditors should disclose the substantive reasons for expressing an adverse opinion on the

entity's financial statements in A) the Opinion on the Financial Statements section.

B) the Basis for Opinion section.

C) the Critical Audit Matters section.

D) the footnotes to the financial statements.

1006) When auditors qualify their opinion on the entity's financial statements because of

inadequate disclosure, the auditors should describe the nature of the omission and modify A) the Opinion on the Financial Statements section only.

B) the Basis for Opinion section only.

C) the Critical Audit Matters section only.

D) the Opinion on the Financial Statements section and the Basis for Opinion section.

1007) Restrictions imposed by an entity prohibited the observation of physical inventories,

which accounted for 35 percent of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express A) a qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles.

B) a disclaimer of opinion on the entity's financial statements.

C) an unqualified opinion on the entity's financial statements with an explanatory paragraph.

D) an unqualified opinion on the entity's financial statements with a modification of the Basis for Opinion section.

1008) If management fails to provide adequate justification for a change from one generally

accepted accounting principle to another, the auditors should A) Modify the Opinion on the Financial Statements section of the report for lack of conformity with generally accepted accounting principles.

B) Modify the Opinion on the Financial Statements section and Basis for Opinion section of the report for lack of conformity with generally accepted accounting principles.

C) disclose the matter in an explanatory paragraph but not modify the Opinion on the Financial Statements section of the report.

D) Not modify the report because both principles are generally accepted accounting principles.

1009) Charlie Company's comparative financial statements include the financial statements of

the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor auditors should A) indicate in their report the substantive reasons for the qualification issued by the predecessor auditors.

B) request the entity to reissue the predecessor's report on the prior years' statements.

C) issue an updated comparative report on the entity's financial statements, indicating the involvement of other auditors.

D) express an opinion only on the current year's financial statements and make no reference to the prior years' financial statements or opinion.

1010) Auditors who are reporting on financial statements that contain a material departure from

generally accepted accounting principles should A) express a qualified or adverse opinion.

B) not modify the Opinion on the Financial Statements section of the report as long as the departure is adequately disclosed in a footnote.

C) disclaim an opinion on the financial statements.

D) express a qualified opinion or disclaimer of opinion.

1011) Which of the following is an example of a material accounting change that requires

recognition in an unqualified opinion on the entity's financial statements?

A) A change in the estimate of useful lives used to depreciate property, plant, and equipment.

B) A change in the entity's form of reporting entity.

C) Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification.

D) A change from an accounting principle that conforms with GAAP to one that does not.

1012) Independent auditors must consider whether the entity has the ability to continue as a

going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally A) disclaim an opinion.

B) express an adverse opinion.

C) qualify the opinion.

D) express an unqualified opinion with an explanatory paragraph describing the goingconcern uncertainty.

1013) Auditors most likely would issue a disclaimer of opinion on the entity's financial

statements because of A) inadequate disclosure of material information.

B) the omission of the Statement of Cash Flows.

C) a material departure from generally accepted accounting principles.

D) management's refusal to furnish written representations.

1014) When disclaiming an opinion due to a client-imposed scope limitation, auditors should

describe the nature of the scope limitation and modify the A) Disclaimer of Opinion on the Financial Statements section.

B) Basis for Disclaimer of Opinion section.

C) Disclaimer of Opinion on the Financial Statements section and Basis for Disclaimer of Opinion section.

D) Disclaimer of Opinion on the Financial Statements section, Basis for Disclaimer of Opinion section, and explanatory paragraph.

1015) Under which of the following circumstances would a disclaimer of opinion on the entity's

financial statements not be appropriate?

A) The financial statements fail to contain adequate disclosure of related-party transactions.

B) The entity refuses to permit its attorney to furnish information requested in an attorney letter.

C) The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances.

D) The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.

1016) When audited financial statements are presented in a document containing other

information, the auditors should A) perform inquiry and analytical procedures to ascertain whether the other information is reasonable.

B) add an explanatory paragraph describing the other information to the auditors' report without modifying the opinion on the financial statements.

C) perform the appropriate substantive procedures to corroborate the other information.

D) read the other information to determine that it is consistent with the audited financial statements.

1017) Reference in a principal auditors' report to the fact that part of the audit of group financial

statements was performed by component auditors most likely would be an indication of A) involvement of component auditors in the audit of the group financial statements.

B) the portion of the group statements audited by the component auditors not being considered material.

C) principal auditors' recognition of the component auditors' competence, reputation, and professional certification.

D) different opinions the auditors are expressing on the components of the financial statements that each audited.

1018) The auditors include an explanatory paragraph in an otherwise unqualified report on the

entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A) is considered a qualification of the opinion.

B) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

C) necessitates a revision of the Opinion Section to include the phrase "with the foregoing explanation."

D) is appropriate and would not otherwise affect the unqualified opinion.

1019) When there has been a change in accounting principles, but the effect of the change on

the comparability of the financial statements is not material, the auditors should A) refer to the change in an explanatory paragraph.

B) explicitly concur that the change is preferred.

C) not refer to consistency in the report.

D) refer to the change in the Basis for Opinion Section.

1020) When financial statements contain a departure from GAAP, the auditors should explain

the unusual circumstances in a separate paragraph and express an opinion that is A) unqualified.

B) qualified.

C) adverse.

D) qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

1021) In which of the following circumstances would auditors be most likely to express an

adverse opinion?

A) The chief executive officer refuses to provide the auditors access to minutes of board of directors' meetings.

B) Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon.

C) The financial statements are not in accordance with generally accepted accounting principles regarding the presentation and disclosure of leases.

D) Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.

1022) In which of the following circumstances would auditors most likely add an explanatory

paragraph to the standard report without modifying the opinion on the entity's financial statements?

A) The auditors are asked to report on the balance sheet, but not on the other basic financial statements.

B) There is substantial doubt about the entity's ability to continue as a going concern.

C) Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable.

D) Certain transactions cannot be tested because of management's records retention policy.

1023) Green, CPA, was engaged to audit the financial statements of Essex Company after its

fiscal year had ended. The timing of Green's appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n) A) unqualified opinion.

B) unqualified opinion with an explanatory paragraph.

C) qualified opinion due to a scope limitation.

D) qualified opinion due to a departure from generally accepted auditing standards.

1024) In which of the following situations would auditors ordinarily choose between expressing

a qualified opinion or an adverse opinion on the entity's financial statements?

A) The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures.

B) The financial statements fail to disclose information that is required by generally accepted accounting principles.

C) The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements.

D) Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

1025) The auditors conclude that an entity's illegal act, which has a material effect on the

financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n) A) adverse opinion or a disclaimer of opinion.

B) qualified opinion or an adverse opinion.

C) disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.

D) unqualified opinion with a separate explanatory paragraph or a qualified opinion.

1026) Auditors would not normally issue a qualified opinion on the entity's financial statements

when A) an accounting principle at variance with generally accepted accounting principles is

used.

B) the auditors lack independence with respect to the audited entity.

C) a scope limitation prevents the auditors from completing an important auditing procedure.

D) the entity has undertaken a change in accounting principle with which the auditor does not agree.

1027) Which of the following phrases would auditors most likely include in their report when

expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?

A) "Subject to the departure from generally accepted accounting principles, as described below."

B) "Except for the effects of [XXX] as discussed in the Basis for Opinion section…”

C) "Except for the effects of [XXX] as discussed in the following paragraph…”

D) "Does not present fairly in all material respects."

1028) If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable

balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unqualified and would A) disclose the fact that alternative procedures were used due to client-imposed scope limitation.

B) disclose in the Basis for Opinion section that confirmation of accounts receivable was impracticable.

C) not mention the alternative procedures.

D) include an explanatory paragraph that discloses the performance of alternative procedures.

1029) When reporting on comparative financial statements, auditors ordinarily should modify

their previously expressed opinion on the prior years' financial statements if the A) prior years' financial statements are restated to conform with generally accepted accounting principles.

B) auditors were predecessor auditors who have been requested by a former client to reissue the previous report.

C) prior years' opinions were unqualified and the opinion on the current year's financial statements is modified due to a lack of consistency.

D) prior years' financial statements are restated following an acquisition in the current year.

1030) Which of the following paragraphs or sections of the principal auditors' report is modified

to identify the extent of component auditor involvement in the audit of group financial statements?

A) The Opinion on the Financial Statements section.

B) The Basis for Opinion section.

C) The Opinion on the Financial Statements section and Basis for Opinion section.

D) The explanatory paragraph.

1031) When component auditors are involved in the audit of group financial statements, the

principal auditors are required to A) consider the independence and professional reputation of the component auditors in deciding how to utilize their work.

B) identify the extent of component auditors' involvement if they choose not to rely on the component auditors' work.

C) identify the component auditors by name in their report to appropriate limit their liability for the component auditors' work.

D) disclaim an opinion on the portion of the financial statements examined by the component auditors.

1032) Which of the following is not an appropriate reporting option when component auditors

are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the principal auditors' report?

A) Issue a standard report that does not reference any involvement by the component auditors.

B) Identify the component auditors by name and present their report along with the principal auditors' report.

C) Refer to the component auditors' work and disclose the extent of their work in the principal auditors' report.

D) Disclaim an opinion on the portion of the financial statements examined by the other auditors.

1033) Which of the following best describes the auditors' responsibility when financial

statements are presented in comparative format?

A) The auditors' report must only refer to the current year's financial statements.

B) The auditors' report must only refer to the prior years' financial statements if they were audited by the current auditor.

C) The auditors' report must only refer to the prior years' financial statements if they were audited by either the current auditors or predecessor auditors.

D) The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.

1034) Which of the following situations would require auditors to add an explanatory paragraph

to their report on comparative financial statements?

A) An unqualified opinion is issued in the current year while a qualified opinion was issued in prior years.

B) A qualified opinion is issued in the current year because of a scope limitation; because this limitation was not encountered in prior years, the opinion issued in those years was unqualified.

C) The updated opinion issued on prior years' financial statements differs from the opinion originally issued on those financial statements.

D) The auditors' unqualified opinion issued on prior years' financial statements is still considered to be appropriate.

1035) Situations in which auditors provide additional copies of a previously issued report or

grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as A) additional use reports.

B) reissued reports.

C) subsequent use reports.

D) updated reports.

1036) When a predecessor auditor has examined the prior years' financial statements presented

in comparative format, the current auditors' report should A) make no reference to the predecessor auditors' report.

B) reference the predecessor auditors' report in the Opinion on the Financial Statements section and Basis for Opinion section.

C) reference the predecessor auditors' report in an explanatory paragraph.

D) disclaim an opinion on the prior years' financial statements.

1037) What is the major difference between a reissued report and an updated report?

A) An updated report considers information that has come to the auditors’ attention since

the date of the original report, while a reissued report does not consider this information.

B) An updated report can be presented along with the entity's financial statements, but a reissued report cannot be presented along with the entity's financial statements.

C) An updated report will express a different opinion on the prior years' financial statements that were originally expressed by the auditors, while a reissued report will express the same opinion.

D) An updated report will not express an opinion other than an unqualified opinion, while a reissued report can express an unqualified opinion, qualified opinion, adverse opinion, or disclaimer of opinion.

1038) On which of the following matters would it not be appropriate for the auditors to report

using an explanatory paragraph?

A) An indication that a predecessor auditor examined prior year’s financial statements presented in comparative form.

B) Procedures performed related to supplementary mineral reserve information required by the Financial Accounting Standards Board.

C) A departure from GAAP that has a material, but not pervasive, effect on the financial statements.

D) An updated opinion on comparative financial statements that differs from the opinion originally issued by the auditors.

1039) What is the auditors' responsibility for reporting on other information accompanying

financial statements?

A) Because this information is not a fundamental part of the financial statements, the auditors have no reporting responsibility with respect to this information.

B) Auditors are only required to report on other information if it is inconsistent with information in the audited financial statements.

C) Auditors are required to provide reasonable assurance with respect to whether the other information is presented in accordance with generally accepted accounting principles.

D) Auditors are required to express an opinion on whether the other information is presented in accordance with generally accepted accounting principles.

1040) Which of the following best reflects the auditors' reporting responsibility under generally

accepted auditing standards?

Other Information Accompanying the Financial Statements Exception Exception Required Required

A. B. C. D. A) B) C) D)

Required Supplementary Information Required Exception Required Exception

Option A Option B Option C Option D

1041) Which of the following is true with respect to the auditors' report on condensed financial

statements?

A) Auditors can only issue a report on condensed financial statements if they have expressed an unqualified opinion on the full financial statements.

B) The report will indicate whether the condensed financial statements are fairly stated in relation to the full financial statements.

C) The report will express limited assurance on whether the condensed financial statements are prepared in accordance with AICPA presentation guidelines.

D) The report will express an opinion on whether the condensed financial statements present the financial condition, results of operations, and cash flows in accordance with generally accepted accounting principles.

1042) An auditor who is unable to form an opinion on a new client's opening inventory balances

may issue an unqualified opinion on the current year's A) income statement only.

B) statement of cash flows only.

C) balance sheet only.

D) statement of shareholders' equity only.

1043) Zag Company issues financial statements that present financial position and results of

operations, but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements would not be limited. Under the circumstances, Brown most likely would A) add an explanatory paragraph to the standard report that justifies the omission.

B) refuse to accept the engagement as proposed because of the client-imposed scope limitation.

C) explain to Zag that the omission requires a qualification of the auditors' opinion.

D) prepare the statement of cash flows as an accommodation to Zag and express an unqualified opinion.

1044) A client has lease agreements that they do not wish to disclose in the financial statements.

Which of the following reporting options does an auditor have if the misstatements have a material and pervasive effect on the financial statements?

A) Qualified opinion.

B) Unqualified opinion.

C) Disclaimer of opinion.

D) Adverse opinion.

1045) Hart, CPA, is auditing the year 2 financial statements of Kell Company Previously, Hart

audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include an explanatory paragraph in the year 2 report because comparative financial statements are being presented for year 2 and year 1. This paragraph should indicate the A) substantive reasons for the prior year's qualification.

B) reason that Hart continued to provide audit services, despite the previous scope limitation.

C) consistency of application of accounting principles between year 2 and year 1.

D) restriction on the distribution of the report.

1046) The principal auditors decide not to refer to the audit of other auditors who audited a

subsidiary of the group financial statements. After making inquiries about the other auditors' professional reputation and independence, the principal auditor most likely would A) document in the engagement letter that the principal auditors assume no responsibility for the other auditors' work.

B) obtain written permission from the other auditors to omit the reference in the principal auditors' report.

C) contact the other auditors' and review the audit programs and working papers pertaining to the subsidiary.

D) add an explanatory paragraph to the principal auditors' report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

1047) In which of the following should an auditors' report refer to the lack of consistency when

there is a change in accounting principle that is significant?

A) The Opinion on the Financial Statements section.

B) The Basis for Opinion section.

C) Both the Opinion on the Financial Statements section and the Basis for Opinion section.

D) An explanatory paragraph.

1048) An entity's comparative financial statements include the financial statements of the prior

year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should A) issue an updated comparative report indicating the involvement of other auditors.

B) explain to the client that comparative financial statements may not be presented under these circumstances.

C) express an opinion only on the current year's financial statements and make no reference to the prior years' statements.

D) indicate the substantive reasons for the qualification in the predecessor auditors' opinion.

1049) How do auditors make the following representations when issuing the standard auditors'

report?

Consistent Application of Accounting Principles Implicitly Explicitly Implicitly Explicitly

A. B. C. D. A) B) C) D)

Independence Requirement Explicitly Implicitly Explicitly Explicitly

Option A Option B Option C Option D

1050) An auditor concludes that there is substantial doubt about an entity's ability to continue as

a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s).

"Except for the Effects of Such Adjustments" Yes Yes No No

A. B. C. D. A) B) C) D)

Option A Option B Option C Option D

"Possible Discontinuance of the Entity's Operations" Yes No Yes No

1051) After considering management's plans, an auditor concludes that there is substantial

doubt about a client's ability to continue as a going concern for a reasonable period of time.

The auditor's responsibility includes A) disclaiming an opinion on the financial statements due to the indications of possible financial difficulties.

B) indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented.

C) considering the adequacy of disclosure about the client's possible inability to continue as a going concern.

D) issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

1052) When qualifying an opinion because of an insufficiency of audit evidence, an auditor

should refer to the situation in the Basis for Opinion Section Yes Yes No No

A. B. C. D. A) B) C) D)

Notes to the Financial Statements Yes No Yes No

Option A Option B Option C Option D

1053) An auditor may report on condensed financial statements that are derived from a

complete set of audited financial statements only if the auditor A) expresses an unqualified opinion on the audited financial statements from which the condensed financial statements are derived.

B) indicates whether the information is fairly stated in all material respects in relation to the complete financial statements.

C) determines that the condensed financial statements include all the disclosures necessary for the complete set of financial statements.

D) presents the condensed financial statements in comparative form with the prior years' condensed financial statements.

1054) Issuers’ financial statements should be accompanied by all of the following reports except

the A) B) C) D)

auditors' report on internal control over financial reporting. management's report on internal control over financial reporting. auditors' report on financial statements and related disclosures. management's report on financial statements and related disclosures.

1055) When auditors conclude that a material and pervasive departure from GAAP exists in an

entity's financial statements, which of the following phrases would most likely be included in their report?

A) "Do not present fairly."

B) "Except for the effects of the matter described in the Basis for Opinion section of our report…"

C) "We were engaged to audit the accompanying financial statements."

D) "As a result of the departures discussed in the Opinion on the Financial Statements section of our report…"

1056) Which of the following would not be communicated to users in the auditors' report on an

entity's financial statements and related disclosures?

A) Whether the financial statements are presented in accordance with GAAP, or another applicable financial reporting framework.

B) Unusual aspects of the audit examination, such as the involvement of other auditors in the audit of group financial statements.

C) Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements.

D) Other matters affecting the client, such as substantial doubt about the entity's ability to continue as a going concern.

1057) Management determined it was probable that a pending litigation claim would result in a

material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued?

A) Standard report.

B) Unqualified opinion with an explanatory paragraph.

C) Qualified opinion based on a circumstance-imposed scope limitation.

D) Qualified or adverse opinion based on a departure from GAAP.

1058) The auditors have determined that there is substantial doubt about an entity's ability to

continue as a going concern. When considering the appropriateness of management's disclosures and severity of the uncertainty, all of the following reports could be issued, except A) qualified opinion based on a material and pervasive uncertainty.

B) unqualified opinion with an additional verbiage describing the uncertainty.

C) adverse opinion based on inadequate disclosure of the uncertainty.

D) disclaimer of opinion based on a material and pervasive uncertainty.

1059) During the year under audit, Forrest Corporation experienced significant losses due to a

pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue?

A) Qualified or adverse opinion.

B) Disclaimer or adverse opinion.

C) Disclaimer of opinion or qualified opinion.

D) Unqualified opinion with an explanatory paragraph.

1060) When a circumstance-imposed scope limitation has a material but not pervasive effect on

the sufficiency of the auditors' evidence, the auditors' report will A) modify the Opinion on the Financial Statements section and Basis for Opinion section.

B) modify the Opinion on the Financial Statements section only.

C) modify the Basis for Opinion section only.

D) modify the Opinion on the Financial Statements section and notes to the financial statements.

1061) Which of the following guidelines should be followed when a disclaimer of opinion is

issued?

A) Because an opinion is not issued, the auditors should not issue a report.

B) The report should identify the financial statements accompanying the disclaimer of

opinion.

C) If the disclaimer is due to a lack of independence, the report should indicate the specific reasons for the auditors not being independent.

D) The report should describe any auditing procedures performed prior to issuing the disclaimer.

1062) Holmes & Smith, LLP, were engaged to audit the financial statements of Sodolak Reality

for the year ended December 31. During the engagement, Sodolak filed a lawsuit against Holmes & Smith, LLP. What effect, if any, will this lawsuit have on the auditors' report?

A) The report should be modified to include an explanatory paragraph describing the pending litigation.

B) A disclaimer of opinion should be issued because the auditors' independence is impaired.

C) The litigation will not have any impact on the report or auditors' independence unless Holmes & Smith are found guilty.

D) A qualified or adverse opinion should be issued depending on the severity of the lawsuit.

1063) Holmes, CPA, assisted Williams Corporation in preparing its financial statements and

gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed?

A) Unqualified opinion with an explanatory paragraph limiting the level of assurance provided by Holmes.

B) Qualified opinion with indicating a circumstance-imposed scope limitation.

C) Disclaimer of opinion because Holmes did not audit the financial statements.

D) Homes is not required to issue a report or opinion in this situation.

1064) Carson, LLP, audited Best Corporation's financial statements for the year ended

December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report?

A) December 31, Year 1.

B) March 1, Year 2.

C) December 31, Year 2.

D) February 15, Year 3.

1065) Harris & Thompson were engaged to audit Smart Corp's comparative financial statements

for the years ended December 31, Year 1 and Year 2. The Year 1 financial statements were presented in accordance with generally accepted accounting principles, but the Year 2 financial statements were determined to be materially misstated. As a result, Harris & Thompson should A) issue a qualified opinion on the comparative financial statements as a whole.

B) issue an unqualified opinion on the Year 1 financial statements and disclaim an opinion on the Year 2 financial statements.

C) issue an unqualified opinion on the Year 1 financial statements and a qualified opinion on the Year 2 financial statements.

D) reissue the previous opinion on the Year 1 financial statements and withdraw from the engagement.

1066) When updating the report on prior years' financial statements presented in comparative

form, the auditors' responsibility for the prior years' financial statements is A) limited to the previously issued report date.

B) extended to the date of the updated audit report.

C) limited to 30 days after the date of the prior years' financial statements.

D) extended to the updated report date only if information comes to the auditors' attention requiring modification of the previously expressed opinion.

1067) When a previously expressed opinion is updated from qualified to unqualified, the

auditors' report on comparative financial statements should A) not modify the previously expressed opinion or refer to factors affecting the opinion on the prior years' financial statements.

B) update the opinion expressed on the prior years' financial statements but provide no explanation for the updated opinion.

C) not modify the previously expressed opinion but include a reference to the footnote describing the factors affecting the opinion on the prior years' financial statements.

D) update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change.

1068) When reporting on financial statements that include only summarized totals of account

balances, the auditors' conclusion should state whether the information in the condensed financial statements is A) complete with respect to disclosures required by the SEC. B) fairly stated, in all material respects, in accordance with generally accepted accounting principles.

C) consistent, in all material respects, with the prior years' condensed financial statements.

D) fairly stated, in all material respects, in relation to the complete financial statements.

1069) When other information is presented in a document with audited financial statements, the

auditors' report should A) state that the auditor read the other information for inconsistencies and misstatements with the financial statements.

B) provide limited assurance as to whether the other information is presented in accordance with generally accepted accounting principles.

C) reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.

D) be expanded to express an opinion that the other information is consistent with the financial statements and not materially misstated.

1070) Harris is auditing the financial statements of Cole Corporation, an energy company. The

FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?

A) Unqualified opinion on the financial statements with an explanatory paragraph disclaiming an opinion on the mineral reserve information, but noting the misstatement.

B) Adverse opinion on the financial statements and mineral reserve information due to the misstatement.

C) Unqualified opinion on the financial statements with an explanatory paragraph expressing a qualified or adverse opinion on the mineral reserve information.

D) Qualified opinion on the financial statements and mineral reserve information due to the misstatement.

1071) The standard report issued in the audit of an issuer includes a(n) A) Responsibilities of Management for the Financial Statements Section providing a

general description of an audit conducted in accordance with the applicable auditing standards.

B) Opinion on the Financial Statements section identifying the responsibility of management and auditors in the financial reporting process.

C) Critical Audit Matters section indicating that an audit was conducted in accordance with PCAOB standards.

D) Opinion on the Financial Statements section providing the auditors' conclusion as to the fair presentation of the financial statements.

1072) Below are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements

of Happy, Incorporated. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.

B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000.

Johnson's management has included information in the footnotes about the lawsuit.

However, they have not recorded any loss or liability in the income statement or balance sheet.

Required:For each of the independent situations presented above, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale.

Finally, state what modifications, if any, would be required to the standard report.

1073) Define a scope limitation and distinguish between client-imposed and circumstance-

imposed scope limitations. What reporting options are available to auditors when scope limitations are encountered during the engagement?

1074) Murray & Company, CPAs completed the audit of Classic, Incorporated, an issuer, on

March 1, 2024 for a January 31, 2024 fiscal year end. The audit team encountered no significant issues and found no material misstatements. The audit team partner determined that a standard report on Classic, Incorporated's financial statements was appropriate. The auditors' report, drafted by I.M. Nu, a staff assistant, is provided below. (Nu has decided to present separate reports on the financial statements and on internal control over financial reporting).

Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Classic, Incorporated Opinion on the Financial Statements We have audited the accompanying balance sheet of Classic Incorporated (the Company) as of December 31, 2023 and the related statements of comprehensive income, stockholders' equity, and cash flows for the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the period ended December 31, 2023.

Basis for Opinion Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters The critical audit matter communicated is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee. Because we are expressing an unqualified opinion, PCAOB standards do not require communication of critical audit matters in our report.

Murray & Company, CPAs January 31, 2024 Required:Identify the deficiencies and errors in the draft report. Do not rewrite the report, but be specific as to what is incorrect or omitted. Organize your answer by paragraph or section.

1075) In each of the circumstances listed below, indicate, by appropriate letter, which of the

following types of opinions should be rendered on the entity’s financial statements.

A. Unmodified B. Qualified C. Adverse D. Disclaimer ___ 1. Departure from generally accepted accounting principles that is material but not pervasive. ___ 2. Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements. ___ 3. Emphasis of a matter, no generally accepted accounting principles (GAAP) departure. ___ 4. Material, but not pervasive, scope limitation. ___ 5. Material and pervasive departure from generally accepted accounting principles (GAAP).

1076) For each of the sentences or phrases below, indicate, by letter, in which section of the

standard (unmodified) report on the entity’s financial statements the sentence or phrase would appear.

A. Opinion Section B. Basis for Opinion Section C. Responsibilities of Management for the Financial Statements Section D. Auditor’s Responsibilities for the Audit of the Financial Statements Section ___ 1. We conducted our audit in accordance with auditing standards generally accepted in the United States of America generally accepted accounting standards (GAAS). ___ 2. We have audited the financial statements of Draper Company… ___ 3. In preparing the financial statements, management is required to evaluate whether there are conditions or events… ___ 4. Reasonable assurance is a high level of assurance but is not absolute assurance… ___ 5. We believe that the audit evidence we have obtained is sufficient and appropriate…

1077) For each of the situations below, indicate, by letter, the type of report most likely to be

issued.

A. Unmodified opinion, no modification.

B. Unmodified opinion, emphasis-of-matter paragraph for consistency.

C. Unmodified opinion, additional section for a going-concern uncertainty.

D. Qualified opinion.

E. Disclaimer of opinion. ___ 1. The entity has a lawsuit pending against them. There is significant uncertainty about the outcome of the lawsuit, which could have a highly material impact on the viability of the entity. Management has provided adequate disclosure of the lawsuit in the footnotes accompanying the financial statements. ___ 2. The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has accrued the best estimate of the loss and provided adequate disclosure. It is not expected that this lawsuit will have a significant effect on the entity’s ability to continue as a going concern. ___ 3. The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has not accrued the best estimate of the loss, but has provided information in the footnotes. It is not expected that this lawsuit will have a significant effect on the entity’s ability to continue as a going concern. ___ 4. Based on recent analysis of usage, the entity has changed the useful life of its office equipment from five to four years. This change is reflected in the depreciation amounts computed for the current year. ___ 5. The entity’s management has not provided written representations requested by the auditors. The failure to provide these representations is considered to be a significant limitation on the scope of the auditors’ work…

1078) Listed below are words and phrases from the auditors' standard (unmodified) report on a

non-issuer’s financial statements. For each of the words and phrases indicate by letter in which section of the standard (unmodified) report they should appear.

A. Opinion Section B. Basis for Opinion Section C. Responsibilities of Management for the Financial Statements Section D. Auditor’s Responsibilities for the Audit of the Financial Statements Section ___ 1. Audit provides a basis for an opinion. ___ 2. The financial statements present fairly, in all material respects. ___ 3. The risk of not detecting a material misstatement resulting from fraud is higher. ___ 4. Our objectives are to obtain reasonable assurance. ___ 5. Financial statements are in accordance with accounting principles generally accepted in the United States of America. ___ 6. Management responsible to evaluate whether substantial doubt exists about ability to continue as a going concern. ___ 7. Auditor communication of scope and timing of audit with those charged with governance. ___ 8. Conducted our audits in accordance with the auditing standards generally accepted in the United States of America. ___ 9. Management is responsible for the design, implementation, and maintenance of internal control. ___ 10. We have audited the financial statements.

1079) Shown below are a number of situations that may be encountered during the audit

examination. For each, indicate how the auditors’ standard (unmodified) report would be modified (each reporting situation may result in more than one modification to the auditors’ standard (unmodified) report).

A. Modification to Opinion Section.

B. Modification to Basis for Opinion Section.

C. Modification to Responsibilities of Management for the Financial Statements Section.

D. Modification to Auditor’s Responsibilities for the Audit of the Financial Statements Section.

E. Emphasis-of-matter paragraph, other-matter paragraph, or additional section added to report.

F. No modifications to the standard (unmodified) report are necessary. ___ 1. Departure from generally accepted accounting principles (GAAP) that does not materially affect the financial statements. ___ 2. Inability of auditors to confirm accounts receivable with customers; while the scope limitation is material, the auditors still believe an opinion may be expressed on the entity’s financial statements. ___ 3. Group auditors decide to refer to the work of component auditors in their report. ___ 4. Entity has changed from First-In, First-Out (FIFO) to LastIn, First-Out (LIFO) accounting for inventories. ___ 5. Auditors wish to highlight an event that occurred following the date of the financial statements. ___ 6. Departure from generally accepted accounting principles (GAAP) that has a material, but not pervasive, effect on the financial statements. ___ 7. Group auditors decide to assume full responsibility for the work of component auditors and not refer to component auditors’ work in their report. ___ 8. Scope limitation that precludes auditors from expressing an opinion. ___ 9. Auditors would like to disclose potential going-concern uncertainties in their report (these uncertainties have been appropriately disclosed in the entity’s financial statements and related disclosures). ___ 10. Departure from GAAP that has a material and pervasive effect on the financial statements.

1080) Which of the following is not true with respect to the auditors’ report on internal control

over financial reporting?

A) This report is required in the audit of issuers, but not non-issuers.

B) This report may be presented as a combined report with the report on the audit of the financial statements or as a separate report.

C) This report should be dated as of the date of the financial statements.

D) This report expresses an opinion on the design and operating effectiveness of internal control over financial reporting.

1081) The auditors’ report on an issuer’s financial statements includes all of the following

except: A) An identification of the financial statements examined by the audit team.

B) A disclaimer on the operating effectiveness of the internal control over financial

reporting.

C) An indication that the audit was conducted in accordance with standards of the PCAOB. D) An opinion on the fairness of the issuer’s financial statements.

1082) Which of the following best describes how the auditors’ report on an issuer’s financial

statements references the report on internal control over financial reporting (assume separate reports are prepared): A) The report on the financial statements does not refer to the report on internal control over financial reporting.

B) The report on the financial statements refers to the report on internal control over financial reporting, but does not indicate the nature of the auditor’s opinion on internal control over financial reporting.

C) The report on the financial statements refers to the report on internal control over financial reporting and indicates the opinion expressed on internal control over financial reporting.

D) The report on the financial statements refers to the report on internal control over financial reporting and indicates the opinion expressed on internal control over financial reporting when the opinion is other than unqualified.

1083) Which of the following best describes the audit team’s responsibility for communicating

critical audit matters in the audit of an issuer’s financial statements?

A) Communication of critical audit matters is strictly prohibited without the client’s consent.

B) Communication of critical audit matters is optional and based on the issuer’s needs.

C) Communication of critical audit matters is required in circumstances when the auditor’s opinion on the financial statements is modified because of a departure from GAAP. D) Communication of critical audit matters is required in all audits.

1084) Issues that are communicated to an issuer’s audit committee that involve challenging,

subjective, or complex audit team judgments related to material accounts and disclosures are known as: A) Accounting estimates.

B) Critical audit matters.

C) Material audit judgments.

D) Significant deficiencies.

1085) Critical audit matters: A) Are only communicated in the auditors’ report with the client’s consent.

B) Are communicated immediately preceding the Opinion on the Financial Statements

Section of the auditor’s report.

C) Are communicated immediately following the Opinion on the Financial Statements Section of the auditor’s report.

D) Are communicated immediately following the Basis for Opinion Section of the auditor’s report.

1086) For which of the following types of clients are audit teams required to express an opinion

on internal control over financial reporting? a. b. c. d.

A) B) C) D)

Issuer

Non-issuer

Yes Yes No No

Yes No Yes No

Option a Option b Option c Option d

1087) The auditors’ report on an issuer’s internal control over financial reporting provides: A) No opinion or assurance with respect to internal control over financial reporting.

B) A summary of findings related to internal control over financial reporting.

C) Limited assurance with respect to the effectiveness of internal control over financial

reporting.

D) An opinion with respect to internal control over financial reporting.

1088) Which of the following is not included in an auditors’ report on an issuer’s internal

control over financial reporting (assume a separate report is prepared)?

A) A reference to the auditors’ report and opinion on the financial statements.

B) An indication that the audit team is responsible for maintaining effective internal control over financial reporting.

C) A definition of internal control over financial reporting.

D) A description of inherent limitations of internal control over financial reporting.

1089) If the audit team identifies a material weakness in internal control over financial reporting

in the audit of an issuer’s financial statements, their report on internal control over financial reporting would express a(n): A) Unqualified opinion with an explanatory paragraph describing the material weakness.

B) Qualified or adverse opinion (depending on the severity of the material weakness) with an explanatory paragraph describing the material weakness.

C) Adverse opinion with an explanatory paragraph describing the material weakness.

D) Disclaimer of opinion with an explanatory paragraph describing the material weakness.

1090) Which of the following would not be included in the auditors’ report on an issuer’s

internal control over financial reporting if an adverse opinion is expressed?

A) The definition of a material weakness.

B) A listing of specific material weakness(es) identified during the audit.

C) An indication that the primary purpose of the audit was not to express an opinion on internal control over financial reporting.

D) An indication that the issuer has not maintained effective internal control over financial reporting.

1091) If the audit team identifies one or more significant deficiencies in an issuer’s internal

control over financial reporting and the scope of the engagement is not restricted, the auditors’ report would: A) Express an unqualified opinion on internal control over financial reporting without reference to the significant deficiency.

B) Express an unqualified opinion on internal control over financial reporting, with a separate section of the report identifying the significant deficiency.

C) Express a qualified opinion on internal control over financial reporting, without reference to the significant deficiency.

D) Express a qualified opinion on internal control over financial reporting, with a separate section of the report identifying the significant deficiency.

1092) If the audit team is restricted from performing procedures to evaluate the effectiveness of

an issuer’s internal control over financial reporting, their report would express: A) An unqualified opinion, with explanatory language describing the scope limitation.

B) Either a qualified opinion or disclaimer of opinion, depending on the pervasiveness of the scope limitation.

C) A disclaimer of opinion.

D) An adverse opinion.

1093) In each of the circumstances listed below, indicate, by appropriate letter, which of the

following types of opinions should be rendered on the entity's financial statements.

A. Unqualified B. Qualified C. Adverse D. Disclaimer __________ 1. Departure from generally accepted accounting principles that is material but not pervasive. __________ 2. Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements. __________ 3. Emphasis of a matter, no GAAP departure. __________ 4. Material, but not pervasive, scope limitation. __________ 5. Material and pervasive departure from GAAP.

1094) For each of the sentences or phrases below, indicate, by letter, in which section of the

standard report on the entity's financial statements the sentence or phrase would appear.

A. Opinion on the Financial Statements section B. Basis for Opinion section C. Critical Audit Matters section __________ 1. We conducted our audit in accordance with the standards of the PCAOB. __________ 2. We have audited the accompanying balance sheet of Draper Company… __________ 3. These financial statements are the responsibility of Draper Company’s management. __________ 4. In our opinion, the financial statements present fairly… __________ 5. We believe that our audit provides a reasonable basis for our opinion __________ 6. The communication of critical audit matters does not alter in any way our opinion on the financial statements…

1095) For each of the situations below, indicate, by letter, the type of report most likely to be

issued.

A. Unqualified opinion, no modification.

B. Unqualified opinion, explanatory paragraph for consistency.

C. Unqualified opinion, explanatory paragraph for a going-concern uncertainty.

D. Qualified opinion.

E. Disclaimer of opinion __________ 1. The entity has a lawsuit pending against them. There is significant uncertainty about the outcome of the lawsuit, which could have a significant impact on the viability of the entity. Management has provided adequate disclosure of the lawsuit in the footnotes accompanying the financial statements. __________ 2. The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has accrued the best estimate of the loss and provided adequate disclosure. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern. __________ 3. The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has not accrued the best estimate of the loss, but has provided information in the footnotes. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern. __________ 4. Based on recent analysis of usage, the entity has changed the useful life of its office equipment from five to four years. This change is reflected in the depreciation amounts computed for the current year. __________ 5. The entity's management has not provided written representations requested by the auditors. The failure to provide these representations is considered to be a significant limitation on the scope of the auditors' work.

1096) Listed below are words and phrases from the auditors' standard report on a non-issuer's

financial statements. For each of the words and phrases indicate by letter in which section of the standard report they should appear.

A. Opinion on the Financial Statements section B. Basis for Opinion section C. Critical Audit Matters section D. None of the these choices are correct. __________ 1. Audit provides a basis for an opinion. __________ 2. The financial statements present fairly, in all material respects. __________ 3. Financial statements are free of material misstatement, whether due to error or fraud. __________ 4. We plan and perform the audit to obtain reasonable assurance. __________ 5. Financial statements are in accordance with accounting principles generally accepted in the United States of America. __________ 6. Management responsible to evaluate whether substantial doubt exists about ability to continue as a going concern. __________ 7. Auditor communication of matters to audit committee that involve challenging, subjective, or complex judgments. __________ 8. Conducted our audits in accordance with standards of the PCAOB. __________ 9. Auditors are required to be independent with respect to client. __________ 10. Have audited financial statements and internal control over financial reporting.

1097) Shown below are a number of situations that may be encountered during the audit

examination. For each, indicate how the auditors' standard report would be modified (each reporting situation may result in more than one modification to the auditors' standard report).

A. Modification to Opinion on the Financial Statements section.

B. Modification to Basis for Opinion section.

C. Modification to (or removal of) Critical Audit Matters section.

D. Explanatory paragraph added to report.

E. No modifications to the standard report are necessary. __________ 1. Departure from GAAP that does not materially affect the financial statements. __________ 2. Inability of auditors to confirm accounts receivable with customers; while the scope limitation is material, the auditors still believe an opinion may be expressed on the entity's financial statements. __________ 3. Principal auditors decide to refer to the work of other auditors in their report. __________ 4. Entity has changed from FIFO to LIFO accounting for inventories. __________ 5. Auditors wish to highlight an event that occurred following the date of the financial statements. __________ 6. Departure from GAAP that has a material, but not pervasive, effect on the financial statements. __________ 7. Principal auditors decide to assume full responsibility for the work of other auditors and not refer to other auditors' work in their report. __________ 8. Scope limitation that precludes auditors from expressing an opinion. __________ 9. Auditors would like to disclose potential goingconcern uncertainties in their report (these uncertainties have been appropriately disclosed in the entity's financial statements and related disclosures). __________ 10. Departure from GAAP that has a material and pervasive effect on the financial statements.

Answer Key Test name: chapter 12 886) 887) 888) 889) 890) 891) 892) 893) 894) 895) 896) 897) 898) 899) 900) 901) 902) 903) 904) 905) 906) 907) 908) 909) 910) 911) 912) 913) 914) 915) 916) 917) 918) 919) 920) 921) 922)

A C A D A B C B D B B A A A D A D B D B A A A B D D C A D A D C D C B A B

923) 924) 925) 926) 927) 928) 929) 930) 931) 932) 933) 934) 935) 936) 937) 938) 939) 940) 941) 942) 943) 944) 945) 946) 947) 948) 949) 950) 951) 952) 953) 954) 955) 956) 957) 958) 959) 960) 961) 962)

B B C C A A A D D C B C A C B C B C C D A C C D A D C D B D A C D A C A A B C B

963) 964) 965) 966) 967) 968) 969) 970) 971) 972) 973) 974) 975) 976) 977) 978) 979) 980) 981) 982) 983) 984) 985) 986) 987) 988) 989) 990) 991) 992) 993) 994) 995) 996) 997) 998) 999) 1000) 1001) 1002)

C B D D A A D C A C A A A A C D D D A B A A Essay Essay Essay C C A D A B C B D B B A A A D

1003) 1004) 1005) 1006) 1007) 1008) 1009) 1010) 1011) 1012) 1013) 1014) 1015) 1016) 1017) 1018) 1019) 1020) 1021) 1022) 1023) 1024) 1025) 1026) 1027) 1028) 1029) 1030) 1031) 1032) 1033) 1034) 1035) 1036) 1037) 1038) 1039) 1040) 1041) 1042)

A D A A B A A A B D D C A D A D C D C B A B B B C C A C A D D C B C A C B B B C

1043) 1044) 1045) 1046) 1047) 1048) 1049) 1050) 1051) 1052) 1053) 1054) 1055) 1056) 1057) 1058) 1059) 1060) 1061) 1062) 1063) 1064) 1065) 1066) 1067) 1068) 1069) 1070) 1071) 1072) 1073) 1074) 1075) 1076) 1077) 1078) 1079) 1080) 1081) 1082)

C D A C D D A D C B B D A C D A C A B B C B C B D D C A D Essay Essay Essay Essay Essay Essay Essay Essay C B C

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D B D B D B C C A C Essay Essay Essay Essay Essay