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Finance
Q:
Tests of controls must be performed if control risk is set at a lower level.
Q:
Once a level of control risk has been established, it cannot be changed.
Q:
A substantive strategy is used when control risk has been set at high.
Q:
A reliance strategy is used when control risk has been set at high.
Q:
Internal control includes monitoring of controls.
Q:
Internal control consists of six components.
Q:
One of the risks associated with internal control from IT is potential loss of data.
Q:
The extent of an entity's use of IT can affect any of the components of internal control.
Q:
The auditor must understand internal control before assessing inherent risk.
Q:
The concept of internal control includes IT systems and manual systems.
Q:
The audit testing hierarchy is considered to be more effective and more efficient. Why?
Q:
Auditors obtain evidence about the inventory account through, among other procedures, observing the counting of inventory. What are some limitations "observation" has as an audit procedure?
Q:
Sarah is auditing the sales of a new client. In one procedure Sarah performs, she begins with the original sales documents and then searches the accounting records to find the corresponding entry. What test is Sarah performing and what management assertion is she testing?
Q:
Why is appropriateness important for audit evidence? What qualities must evidence have to be considered appropriate?
Q:
Name two management assertions pertaining to the inventory account balance and explain why they are considered in an audit.
Q:
Explain the occurrence and completeness assertions. How does failure to meet each assertion affect the financial statements?
Q:
Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
A. Quick assets divided by accounts payable.
B. Accounts receivable divided by inventory.
C. Interest payable divided by interest receivable.
D. Total debt divided by total assets.
Q:
Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?
A. Earnings per share.
B. Return on total assets before interest and taxes.
C. Accounts receivable turnover.
D. Operating cycle.
Q:
An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor?
A. The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
B. Twice as many accounts receivable were written off in the prior year than in the current year.
C. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.
D. The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
Q:
Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except:
A. Tracing transactions through the system to determine whether procedures are being applied as prescribed.
B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts) and similar data for the industry in which the entity operates.
C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience.
D. Study of the relationships of financial data with relevant nonfinancial data.
Q:
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.
Q:
The auditor notices significant fluctuations in key elements of the company's financial statements. 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 examination with the expectation of detecting management fraud.
D. Withdraw from the engagement.
Q:
The auditor generally gives most emphasis to ratio and trend analysis in the examination of the
A. Statement of Changes in Stockholders' Equity and Retained Earnings.
B. Income Statement.
C. Balance Sheet.
D. Statement of Cash Flows.
Q:
As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
A. Express an opinion that is qualified due to the inability of the company to continue as a going concern.
B. Evaluate management's performance in causing this decline.
C. Require footnote disclosure.
D. Consider the possibility of an error in the financial statements.
Q:
Analytical procedures are
A. Never required.
B. Required for planning, substantive testing, and overall review of the financial statements.
C. Required for planning and overall review of the financial statements.
D. Required during planning only.
Q:
Analytical procedures used in planning an audit should focus on identifying
A. Material weaknesses in internal control.
B. The predictability of financial data from individual transactions.
C. The various assertions that are embodied in the financial statements.
D. Areas that may represent specific risks relevant to the audit.
Q:
An example of an analytical procedure is the comparison of
A. Financial information with similar information regarding the industry in which the entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual population.
D. EDP generated data with similar data generated by a manual accounting system.
Q:
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of
A. Tests of transactions and balances.
B. A preliminary review of internal controls.
C. Specialized audit programs.
D. Analytical procedures.
Q:
Analytical procedures may be classified as being primarily which of the following?
A. Tests of controls.
B. Substantive procedures.
C. Tests of ratios.
D. Detailed tests of balances.
Q:
Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial information.
B. Comparison of the financial information with similar information regarding the industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.
Q:
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that
A. Fraud exists within the relevant accounts.
B. Internal control activities are not operating effectively.
C. Additional tests of details are required.
D. The communication with the audit committee should be revised.
Q:
A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2013. The number of subscribers increased steadily throughout the year and at December 31, 2013, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2013 and was increased to $12 for new members on April 1, 2013. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2013, would be approximately
A. $179,400.
B. $171,600.
C. $164,400.
D. $163,800.
Q:
Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
A. Turnover of personnel in the accounting department.
B. Objectivity of audit committee members.
C. Square footage of selling space.
D. Management's plans to repurchase stock.
Q:
A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be
A. $528,000.
B. $540,000.
C. $588,000.
D. $600,000.
Q:
An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by
A. Availability of data aggregated at a high level.
B. Relative effectiveness and efficiency of the tests.
C. Timing of tests performed after the balance sheet date.
D. Auditor's familiarity with industry trends.
Q:
Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements?
A. Tests of controls.
B. Analytical procedures.
C. Computer controls.
D. Post-audit review of audit documents.
Q:
The audit working papers belong to
A. The company under audit.
B. The government.
C. The audit firm.
D. They are public record documents.
Q:
All audit documentation should have a heading, which includes
A. Name of the company under audit.
B. Title of the working paper.
C. Company's year-end date.
D. All of these.
Q:
The current audit file usually includes
A. Working trial balance.
B. Organizational chart.
C. Accounting manual.
D. Copies of important contracts.
Q:
The permanent audit file usually includes
A. Working trial balance.
B. Organizational chart.
C. Audit plan.
D. Audit programs.
Q:
Which of the following statements concerning audit evidence is correct?
A. Appropriate evidence supporting management's assertions should be convincing rather than persuasive.
B. Effective internal controls contribute little to the reliability of the evidence created within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
D. A company's accounting data cannot be considered sufficient audit evidence to support the financial statements.
Q:
The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence?
A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined."
B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."
C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."
D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it."
Q:
You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases?
A. Vouching transactions in accounting records to vendor invoices.
B. Tracing vendor invoices to accounting records.
C. Recalculation of vendor invoice amounts.
D. Confirmation of customer accounts.
Q:
Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.
Q:
Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Observation.
Q:
Audit documentation
A. Must be in electronic form.
B. Must be in paper form only.
C. Is not required, but is strongly recommended.
D. May be in paper, electronic, or some other form.
Q:
In creating lead schedules for an audit engagement, what financial information is needed to begin?
A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balances.
B. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year.
C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.
D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries.
Q:
Audit documents that record the procedures used by the auditor to gather evidence should be
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the accounting records and the financial statements.
C. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement.
D. Retained until the audited entity ceases to be a client.
Q:
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that
A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposes.
B. Audit documents should be the primary support for the financial statements being examined.
C. Audit documents should be considered as a substitute for the company's accounting records.
D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
Q:
Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?
A. Accounting records belong to the auditee.
B. Documentation of an auditor's understanding of the entity's internal control system is not necessary.
C. Audit documents may be regarded as a substitute for the company's accounting records.
D. The independent auditor may discard audit documents after two years.
Q:
Which of the following types of audit evidence is the most persuasive?
A. Prenumbered internal purchase order forms.
B. Auditee worksheets supporting cost allocations.
C. Bank statements obtained from the auditee.
D. Auditee personnel responses to auditor inquiries.
Q:
Which of the following statements is generally correct about the appropriateness of audit evidence?
A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.
B. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained.
C. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection.
D. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity.
Q:
Which of the following is the least persuasive documentation in support of an auditor's opinion?
A. Schedules of details of physical inventory counts conducted by the entity.
B. Notation of auditor's inferences drawn from ratios and trends.
C. Notation of appraisers' conclusions documented in the auditor's working papers.
D. Lists of negative confirmation requests for which no response was received by the auditor.
Q:
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
A. A sales invoice issued by the entity and supported by a delivery receipt from an outside trucker.
B. Confirmation of an account payable balance mailed by and returned directly to the auditor.
C. A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditor.
D. A working paper prepared by the entity's controller and reviewed by the entity's treasurer.
Q:
Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable 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 internal control system provides more reliable audit evidence.
Q:
Of the following, the most reliable type of evidence typically is:
A. Confirmation.
B. Inspection of records and documents.
C. Reperformance.
D. Observation.
Q:
Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Low inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.
Q:
Which statement concerning audit evidence is not valid?
A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited.
B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated.
C. The auditor weighs the cost of obtaining evidence with its usefulness.
D. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected.
Q:
Procedures specifically outlined in an audit program are designed primarily to
A. Assess risk for planning purposes.
B. Detect all errors or fraudulent activities.
C. Test internal control systems.
D. Gather evidence about management's assertions.
Q:
Which of the following best describes the primary purpose of audit procedures?
A. To detect all errors or fraudulent activities.
B. To comply with generally accepted accounting principles.
C. To gather corroborative evidence about management's assertions.
D. To verify the accuracy of the balance sheet account balances.
Q:
The largest public accounting firms typically are structured as
B. Professional corporations.
Limited liability partnerships.
D. Limited liability corporations.
Q:
The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Auditor in charge of the fieldwork.
D. Securities and Exchange Commission.
Q:
The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of
A. The stock exchange officials.
B. The independent auditor.
C. The company's management.
D. The Securities and Exchange Commission.
Q:
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 cynicism.
B. Independent differentialism.
C. Professional skepticism.
D. Impartial conservatism.
Q:
The first PCAOB standard of reporting requires that, "the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles." This passage requires
A. A statement of fact by the auditor.
B. An opinion by the auditor.
C. An implied measure of fairness.
D. An objective measure of compliance.
Q:
The first PCAOB general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and
A. Independence with respect to the financial statements and supplementary disclosures.
B. Exercising professional care as judged by peer reviewers.
C. Proficiency as an auditor, which likely has been acquired from previous experience.
D. Objectivity as an auditor as verified by proper supervision.
Q:
Which of the following best describes the general character of the three PCAOB generally accepted auditing standards that are classified as standards of fieldwork?
A. The competence, independence, and professional care of persons performing the audit.
B. Criteria for the content of the auditor's report on financial statements and related footnote disclosures.
C. The criteria of audit planning and evidence-gathering.
D. The need to maintain independence in mental attitude in all matters relating to the audit.
Q:
Which of the following describes the PCAOB generally accepted auditing standard requiring a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision?
A. Proficiency.
B. Audit risk.
C. Inspection.
D. Due care.
Q:
The auditor must be independent of the auditee unless
A. The lack of independence does not influence his or her professional judgment.
B. Both parties agree that the independence issue is not a problem.
C. The lack of independence is insignificant.
D. None of the abovethe auditor cannot lack independence.
Q:
The authoritative body designed to promulgate standards concerning a CPA's association with audited financial statements of an entity that is required to file financial statements with the SEC is the
A. Financial Accounting Standards Board.
B. General Accounting Office.
C. Public Company Accounting Oversight Board.
D. Auditing Standards Board.
Q:
The Public Company Accounting Oversight Board's role is to
A. Conduct the final review of auditors' work before the auditor's opinion is issued.
B. Oversee the auditors of public companies in order to protect the interests of investors.
C. Conduct audits of governmental entities.
D. Sanction auditors who fail to follow GAAS.
Q:
What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?
A. AICPA.
B. FASB.
C. GASB.
D. PCAOB.
Q:
The Audit Committee consists of
A. Members of management.
B. A subcommittee of the AICPA who establish the SAS.
C. Members of the Board of Directors.
D. Appointed government overseers.
Q:
PCAOB auditing standards must be followed on all audits of public companies' financial statements.
Q:
Generally, the financial statements of U.S. companies must be prepared based on GAAP.
Q:
A financial statement audit must be conducted based on GAAP.
Q:
PCAOB auditing standards must be followed on all financial statement audits performed in the U.S.
Q:
The IAASB and the ASB collaborated on a replacement for the 10 GAAS standards which include principles underlying an audit conducted in accordance with generally accepted auditing standards.
Q:
One of the five basic business processes is the warehousing cycle.
Q:
A financial statement audit is generally organized based on the five basic business processes or cycles.