AUDITING

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When an auditor increases the risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the

Answer

 

Extent of tests of details.

 

Levels of inherent risk.

 

Extent of tests of controls.

 

Level of detection risk.

In the consideration of internal control, the auditor is basically concerned that internal control provides reasonable assurance that

Answer

 

Controls have not been circumvented by collusion.

 

Misstatements have been prevented or detected.

 

Operational efficiency has been achieved in accordance with management plans.

 

Management cannot override controls.

Which of the following statements concerning audit evidence is true?

Answer

 

A client’s accounting data can be sufficient audit evidence to support the financial statements.

 

To be competent, audit evidence should be either persuasive or relevant, but it need not be both

 

The measure of the validity of audit evidence lies in the auditor’s judgment.

 

The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test

Which of the following is not an objective of a well-designed system of internal control?

Answer

 

Accurate reliable financial statements

 

  Safeguarding  of assets.

 

Adherence with applicable laws and regulations.

 

Maintaining proper segregation of duties

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that

Answer

 

Entity policies may be inappropriately overridden by senior management.

 

Specified controls requiring segregation of duties may be circumvented by collusion.

 

Tests of controls may fail to identify procedures relevant to assertions.

 

Material misstatements may exist in the financial statements

Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include

Answer

 

Schedules that support the current year’s adjusting entries.

 

Prior years’ accounts receivable confirmations that were classified as exceptions.

 

Documentation indicating that the audit work was adequately planned and supervised.

 

Analyses of capital stock and other owners’ equity accounts.

Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include

Answer

 

Schedules that support the current year’s adjusting entries.

 

Prior years’ accounts receivable confirmations that were classified as exceptions.

 

Documentation indicating that the audit work was adequately planned and supervised.

 

Analyses of capital stock and other owners’ equity accounts.

Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include

Answer

 

Schedules that support the current year’s adjusting entries.

 

Prior years’ accounts receivable confirmations that were classified as exceptions.

 

Documentation indicating that the audit work was adequately planned and supervised.

 

Analyses of capital stock and other owners’ equity accounts.

Which of the following procedures is least likely to be performed as a part of obtaining an understanding during an audit engagement of a new audit client previously audited by another CPA?

Answer

 

Communication with the predecessor auditor.

 

Performing analytical procedures.

 

Obtaining confirmation of cash balances.

 

Considering internal control.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to

Answer

 

Verify that cash disbursements were for goods actually received.

 

Test whether payments were for goods actually ordered.

 

Determine that purchases were properly recorded.

 

Identify unusually large purchases that should be investigated further

Which audit assertion ensures that all recorded sales are valid?

Answer

 

Documentation.

 

Vouching.

 

Existence or occurrence.

 

Valuation or allocation

Which of the following did not have substantive changes under the new clarification standards?

Answer

 

evidence

 

internal control

 

reporting

 

related parties

During the process of confirming receivables as of December 31, 2007, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, 2008.”  The auditor would most likely

Answer

 

Determine whether there were any changes in the account between January 1 and January 9, 2008

 

Determine whether a customary trade discount was taken by the customer.

 

Reconfirm the zero balance as of January 10, 2008.

 

Verify that the amount was received.

Which of the following has the lowest authoritative status but may be useful in assisting the auditor in applying the SASs?

Answer

 

Statements on Auditing Standards

 

Auditing Statements of Position.

 

Journal of Accountancy articles.

 

Auditing Interpretations

When auditing related party transactions, an auditor places primary emphasis on

Answer

 

Ascertaining the rights and obligations of the related parties.

 

Evaluating the disclosure of the related party transactions.

 

Verifying the valuation of the related party transactions.

 

Confirming the existence of the related parties

Which of the following is true?

Answer

 

the auditor must document the reasons for assessing control risk at the maximum

 

detection risk is equal to audit risk divided by the product of inherent risk and control risk

 

the auditor has no control over detection risk, control risk or inherent risk

 

the auditor should not accept an engagement when inherent risk is set at maximum

Which of the following controls would an auditor be least likely to review

Answer

 

Segregation of the asset-handling and recordkeeping functions.

 

Company policy regarding credit and collection efforts.

 

Cost records classified by date of product introduction

 

Authorization of additions to plant and equipment

When tests of controls reveal that controls are not operating as anticipated, it is most likely that the assessed level of the risk of material misstatement will

Answer

 

Be less than the planned level.

 

Equal the planned level.

 

Be greater than the planned level.

 

Be less than the actual level.

Which of the following gives, as Dr.

 described, a “warm and fuzzy feeling” when an auditor determines that the client has

Answer

 

a requirement that two signatures are required on checks

 

a budget and variance analysis system

 

an annual quality control review

 

an internal audit staff

Of the following, which is the least persuasive type of audit evidence?

Answer

 

Documents mailed by outsiders to the auditor.

 

Correspondence between auditor and vendors.

 

Copies of sales invoices inspected by the auditor.

 

Computations made by the auditor

A weakness in internal control over recording retirements of equipment may cause an auditor to

Answer

 

Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

 

Select certain items of equipment from the accounting records and locate them in the plant.

 

Inspect certain items of equipment in the plant and trace those items to the accounting records.

 

Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used

If internal control is properly designed, the same employee should not be permitted to

Answer

 

Sign checks and cancel supporting documents.

 

Receive merchandise and prepare a receiving report.

 

Prepare disbursement vouchers and sign checks.

 

Initiate a request to order merchandise and approve merchandise received.

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor.  This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining

Answer

 

Whether the predecessor’s work should be utilized.

 

Whether the company follows the policy of rotating its auditors.

 

Whether in the predecessor’s opinion internal control of the company has been satisfactory.

 

Whether the engagement should be accepted.

Which of the following is least likely to be a procedure used for planning/acceptance of an engagement?

Answer

 

Contacting the predecessor auditor

 

communicating with the client’s attorney and other third parties

 

review financial statements

 

determine internal control risk

Which of the following is not an interrelated component of internal control?

Answer

 

Control activities

 

Risk assessment

 

Monitoring

 

Management integrity

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 the

Answer

 

Availability of data aggregated at a high level.

 

Relative effectiveness and efficiency of the tests.

 

Timing of tests performed after the balance sheet date.

 

Auditor’s familiarity with industry trends

Factors or components of the control environment include all except

Answer

 

Organizational structure

 

Human resources

 

Integrity and ethical values

 

All of the above are factors

Which of the following is not a typical analytical procedure?

Answer

 

Study of relationships of the financial information with relevant nonfinancial information.

 

Comparison of the financial information with similar information regarding the industry in which the entity operates.

 

Comparison of recorded amounts of major disbursements with appropriate invoices.

 

Comparison of current year’s financial statement with last years

Failure to detect material dollar misstatements in the financial statements is a risk which the auditor primarily mitigates by

Answer

 

Performing substantive procedures.

 

Performing tests of controls.

 

Assessing internal control.

 

Obtaining a client representation letter.

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