Why do auditors generally use a sampling approach to evidence gathering?
Auditors must balance the cost of the audit with the need for precision.
Which of the following statements best describes a relationship between sample size and other elements of auditing?
If materiality decreases, sample size will need to increase.
Which of the following statements about the study of auditing is NOT true?
The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.
The basic purpose of a financial statement audit is to
Provide assurance regarding whether the auditee's financial statements are fairly stated.
Assurance services may improve all of the following except
Periodicity.
Evidence is reliable if it
Signals the true state of a management assertion.
Which of the following best describes the concept of audit risk?
The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.
An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should
Obtain a knowledge of matters that relate to the nature of the entity's business.
For publicly-held companies, which of the following is integrated into the audit of financial statements?
The audit of internal controls.
During the first phase of an audit, a CPA most likely would
Evaluate the integrity of management.
In the context of agency theory, information asymmetry refers to the idea that
Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?
Different interests may exist between the company preparing the statements and the parties using the statements.
Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?
To enhance auditor independence from the management of the corporation.
Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"?
There should be a well-planned approach for obtaining and evaluating evidence.
Which of the following would best be described as an assurance service?
Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies.
Which of the following statements is not true with respect to assurance, attest, and audit services?
These services are applied only to financial statements and financial statement accounts.
Auditors are most likely to use the most rigorous audit procedures to examine
Management assertions that are deemed to be of high risk.
When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to
Identify areas of relatively high risk of misstatement and plan the audit accordingly.
Which one of the following statements best describes the concept of materiality?
Materiality is largely a matter of professional judgment.
Before accepting an engagement to audit a new entity, an auditor is required to
Make inquiries of the predecessor auditor.
An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that
Any disputes over significant accounting issues have been settled to the auditor's satisfaction.
Preliminary engagement activities include
Performing background checks on top management.
The auditor's report is generally addressed to the
Stockholders of the company.
An auditor would issue an adverse opinion if
The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
Which of the following is true with respect to the auditor's report?
The report indicates that the company's financial statements were audited in accordance with applicable auditing standards.
The Audit Committee consists of
Members of the Board of Directors.
What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?
PCAOB.
The Public Company Accounting Oversight Board's role is to
Oversee the auditors of public companies in order to protect the interests of investors.
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
Public Company Accounting Oversight Board.
The auditor must be independent of the auditee unless
None of the above—the auditor cannot lack independence.
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?
Due care.
Which of the following best describes the general character of the three PCAOB generally accepted auditing standards that are classified as standards of fieldwork?
The criteria of audit planning and evidence-gathering.
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
Proficiency as an auditor which likely has been acquired from previous experience.
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
An opinion by the auditor.
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
Professional skepticism.
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
The company's management.
The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the
Management of the company.
The largest public accounting firms typically are structured as
Limited liability partnerships.
Typically, an external auditor first gets supervisory experience at what level of authority?
Senior.
An "in-charge" auditor typically holds the rank of
Senior.
Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance?
Whether management has systems in place to evaluate and effectively manage the entity's business risks.
Forensic audits include all of the following except
Manufacturers' assertions about product quality.
A typical objective of an operational audit is for the auditor to
Make recommendations for improving performance.
Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and
Compliance.
External auditors are referred to as "external" because
They are not employees of the entity being audited.
Which is not an attribute of an external auditor?
Auditee advocacy.
What is the general character of the work conducted in performing a forensic audit for a company?
Detecting or deterring fraudulent activity.
Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.
A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in determining
Whether the CPA should undertake an audit engagement.
Who bears ultimate responsibility for the financial statements?
Management of the organization.
The three PCAOB general standards are concerned with
Independence, adequate training and due professional care.
The first PCAOB general standard recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper
Education and experience in auditing.
The main difference between SAS and AU is
They are the same except that SAS are organized chronologically and the AU are organized by topical area.
The AICPA's Statements on Auditing Standards can be described as
Defining the minimum standards of performance for an auditor.
Due professional care requires auditors to
Exercise professional skepticism during the audit.
The objective of the second PCAOB Standard of Reporting is to provide assurance that
The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed.
An internal auditor is likely to be more concerned with _________________ than the external auditor.
The efficiency of operations.
Which of the following is not included in the broad category of assurance services?
Accounting or review services.
Which of the following is not explicitly a part of the IIA's definition of internal auditing?
Internal auditors should help external auditors complete the annual financial statement audit.
Which of the following statements regarding the PCAOB is incorrect?
It has delegated all of its standard-setting authority to the AICPA.
Due professional care requires
Auditors to plan and perform their duties with the skill and care that is commonly expected of accounting professionals.
Which of the following best describes the role of corporate governance?
Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.
The four PCAOB standards of reporting are concerned with all of the following except
The presentation of the financial statements based on GAAS.
Which of the following best describes what is meant by generally accepted auditing standards?
Standards of quality for the auditor's performance.
The fourth PCAOB standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements. The overall purpose of the fourth standard of reporting is to require that reports
Indicate the character of the auditor's examination and the degree of responsibility assumed by the auditor.
The three PCAOB standards of fieldwork are concerned with
Planning and supervision and understanding the auditee's internal control system.
The fourth PCAOB reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent
Misinterpretations regarding the degree of responsibility the auditor is assuming.
Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the
Integrity of management.
In assessing whether to accept a client for an audit engagement, a CPA should consider
The current financial health of the prospective client. The integrity of management. The CPA's overall engagement risk. All of these should be considered.
Evaluating a prospective client requires which of the following steps?
Communicate with the predecessor auditor.
An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the
Audit committee of the board of directors.
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
Whether the engagement should be accepted.
Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
Facts that might bear on management integrity.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
The prospective client's unwillingness to permit inquiry of its legal counsel.
An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if
Management fails to take the appropriate remedial action.
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's
Audit working papers.
Evaluating a prospective client requires which of the following steps?
Determine if the firm is independent of the client.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
Management's disregard of its responsibility to maintain an adequate control environment.
Before accepting an engagement to audit a new client, a CPA is required to obtain
The prospective client's consent to make inquiries of the predecessor auditor.
Which of the following situations would most likely require special audit planning?
Inventory is comprised of precious stones.
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of the audit procedures with the client's management.
An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes
The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.
A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n)
Engagement letter.
Engagement letters include all of the following except:
A list of adjusting journal entries.
Which of the following matters generally is included in an auditor's engagement letter?
Management's responsibility for the entity's compliance with laws and regulations.
To provide for the greatest degree of independence in performing internal audit activities, the internal audit function most likely should report to the
Audit committee of the board of directors.
All of the following refer to the competence of the internal audit function except:
The party in the entity to which the internal audit function reports.
An independent auditor might consider the procedures performed by the internal audit function because
They are employees whose work might be relied upon.
As generally conceived, the audit committee of a publicly held company should be made up of
Members of the board of directors who are not officers or employees.
To emphasize auditor independence from management, publicly traded corporations are required to
Have the independent auditor report to an audit committee of independent members of the board of directors.
An auditor obtains knowledge about a new client's business and its industry in order to
Understand the events and transactions that may have an effect on the client's financial statements.
Which of the following is an example of a related party transaction?
A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.
An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of
Related party transactions.
Which of the following would not necessarily be a related party transaction?
Sales to another corporation with a similar name.
The existence of a related party transaction may be indicated when another entity
Absorbs expenses of the corporation under audit.
In the context of an audit of financial statements, substantive procedures are audit procedures that
May be either tests of details of transactions, tests of details of account balances, or analytical procedures.
Which of the following is not an audit procedure that is commonly used in performing tests of controls?
Confirming.
Tolerable misstatement is
Materiality allocated to a specific account.
Which of the following would an auditor most likely use in determining the auditor's overall materiality?
The entity's annualized interim (i.e. quarterly) financial statements
Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
Firm policy sets materiality at 4% of pretax income.
Which of the following is not a concern as to whether a misstatement is qualitatively material?
The misstatement is less than 5% of pretax income.
In assessing the competence of the internal audit function, an independent CPA most likely would obtain information about the
Quality of the work of the internal audit function.
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
Determining the extent of involvement of the client's internal audit function.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
How the results of various auditing procedures performed by the assistants should be evaluated.
Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit?
Confirming purchases and sales transactions with the vendors and/or customers involved.
A dual-purpose test
Is both a substantive test of transactions and a test of controls.
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
Timing of the audit.
The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning
The integrity of management.
Which of the following procedures would an auditor most likely include in the initial planning of an examination of financial statements?
Assess the need for the use of specialists in the audit.
An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by
Scanning the general journal for unusual entries.
Under the Sarbanes-Oxley Act, the audit committee of a public company has the following requirement(s):
Each member of the committee must be a board member and shall be independent. The audit committee must preapprove all audit and nonaudit services. The audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing. All of these.
Which of the following is a general audit test?
Tests of controls.
Which of the following arranges the general types of audit tests in the order they are normally performed in an audit?
Risk assessment procedures, tests of controls, and substantive procedures.
Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements?
An illegal payment to a foreign official that was not recorded.
Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?
The misstatement will cause the client to fail to meet an earnings forecast.
Which element(s) is/are pervasive to the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
The elements of materiality and audit risk.
Which of the following statements is not correct about materiality?
An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.
Engagement risk is
The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
Client risk as defined in the text is
The overall risk of material misstatement.
Under Statements on Auditing Standards, which of the following would be classified as an error?
Misinterpretation by management of facts that existed when the financial statements were prepared.
When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are
Susceptible to bias.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
Management places substantial emphasis on meeting earnings projections.
Which of the following is a factual misstatement?
A fixed asset being recorded at the incorrect cost.
Engagement risk can be eliminated by
Engagement risk cannot be eliminated.
The achieved (actual) level of audit risk
Can never be known with certainty.
An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except:
Audit risk should increase.
The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as
Detection risk.
The risk of material misstatement differs from detection risk in that it
Exists independently of the actions of the auditor.
All of the following are inherent risk factors that are pervasive to the financial statements except:
Supplies inventory is difficult to count.
When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the
Extent of substantive tests.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement 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
Decrease detection risk.
The risk of material misstatement includes which of the following?
Inherent risk.
An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except:
Detection risk increases.
Which of the following audit risk components may be assessed in qualitative terms?
Both risk of material misstatement and detection risk.
When an entity moves into a significant new line of business, all of the following increase except:
Acceptable audit risk.
Which of the following procedures would not be used to obtain an understanding of the entity and its environment?
Verify proper valuation of inventory subject to technological obsolescence.
Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?
Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability.
Which of the following is a source of detection risk?
A nonrepresentative sample.
In general, material frauds perpetrated by which of the following are most difficult to detect?
Controller.
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than expected.
The primary responsibility for preventing fraud in an organization lies with
The organization's management.
Which of the following is not a misstatement of the financial statements?
The entity uses different inventory accounting methods for internal and external reporting.
All of the following represent an increased opportunity for management to commit fraud except:
The auditor's relationship with management is strained.
The auditor can respond to an increased risk of fraud by doing all of the following except:
Increasing detection risk.
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably
Disclose the fraud to the appropriate level of the client's management.
The acceptable level of detection risk is inversely related to the
Extent of the substantive procedures.
As the acceptable level of detection risk decreases, an auditor may change the
Nature of substantive procedures from less effective to more effective procedures.
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive procedures should increase.
Increased fraud risk could result in all of the following except:
Lower control risk.
The objectives of the engagement partner's communication with the audit team include
Emphasizing the importance of professional skepticism.
The auditor is most likely to presume that a high risk of a fraud exists if
Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
Inability to generate cash flows from operations while reporting substantial earnings growth.
A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion.
Which of the following is correct concerning required auditor communications about fraud?
Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved
The first phase of audit planning is risk assessment.
FALSE
When the prospective client has previously been audited, auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.
TRUE
The Code of Professional Conduct does not allow an auditor to disclose confidential client information without the client's consent.
TRUE
If the prospective client refuses to allow the predecessor auditor to communicate with the successor auditor, the successor auditor should have reservations about accepting the client.
TRUE
In order to properly preplan the audit, the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm.
TRUE
If the internal audit function is competent and objective, the auditor may generally rely on the work of an internal audit function in certain areas to reduce the amount of external audit work in these areas.
TRUE
The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.
TRUE
The engagement partner is typically responsible for doing the detailed audit testing.
FALSE
In assessing whether to accept a client for an audit engagement, a CPA should consider A. The current financial health of the prospective client. B. The integrity of management. C. The CPA's overall engagement risk. D. All of these should be considered.
D. All of these should be considered.
Evaluating a prospective client requires which of the following steps? A. Communicate with the predecessor auditor. B. Preplan the audit. C. Establish the terms of the engagement. D. None of these.
A. Communicate with the predecessor auditor.
An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the A. Securities and Exchange Commission. B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Audit committee of the board of directors.
D. Audit committee of the board of directors.
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. A. Whether the predecessor's work should be utilized. B. Whether, in the predecessor's opinion, the financial statements are materially correct. C. Whether, in the predecessor's opinion, the company's internal controls have been satisfactory. D. Whether the engagement should be accepted.
D. Whether the engagement should be accepted.
Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? A. Analysis of balance sheet accounts. B. Analysis of income statement accounts. C. All matters of continuing accounting significance. D. Facts that might bear on management integrity.
D. Facts that might bear on management integrity.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A. The prospective client's unwillingness to permit inquiry of its legal counsel. `B. The inability to review the predecessor auditor's documentation. C. The CPA's lack of understanding of the prospective client's operations and industry. D. Indications that management has not investigated employees in key positions before hiring them.
A. The prospective client's unwillingness to permit inquiry of its legal counsel.
An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if A. The payments violated the client's policies regarding the prevention of illegal acts. B. The client receives financial assistance from a federal government agency. C. Documentation that is necessary to prove that the bribes were paid does not exist. D. Management fails to take the appropriate remedial action.
D. Management fails to take the appropriate remedial action.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. The details of most recorded transactions are not available after a specified period of time. B. Internal control activities requiring segregation of duties are subject to management override. C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. B. Management's disregard of its responsibility to maintain an adequate control environment. C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. D. Management's refusal to permit the CPA to perform substantive procedures before the year-end.
B. Management's disregard of its responsibility to maintain an adequate control environment.
Before accepting an engagement to audit a new client, a CPA is required to obtain A. An understanding of the prospective client's industry and business. B. The prospective client's signature on the engagement letter. C. A preliminary understanding of the prospective client's control environment. D. The prospective client's consent to make inquiries of the predecessor auditor.
D. The prospective client's consent to make inquiries of the predecessor auditor.
An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes A. Management's responsibility to guarantee that there are no material misstatements due to fraud. B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud. C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. D. The auditor's responsibility for the fairness of the financial statements.
B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.
A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n) A. Client representation letter. B. Letter of audit inquiry. C. Management letter. D. Engagement letter.
D. Engagement letter.
Engagement letters include all of the following except: A. A list of additional services that will be provided. B. A list of adjusting journal entries. C. Information about the audit fee. D. Arrangements involving the use of specialists.
B. A list of adjusting journal entries.
Which of the following matters generally is included in an auditor's engagement letter? A. Management's responsibility for the entity's compliance with laws and regulations. B. The factors to be considered in setting preliminary judgments about materiality. C. Management's liability for illegal acts committed by its employees. D. The auditor's responsibility to guarantee accuracy of the financial statements.
A. Management's responsibility for the entity's compliance with laws and regulations.
To provide for the greatest degree of independence in performing internal audit activities, the internal audit function most likely should report to the A. Vice-President - Finance B. Corporate controller. C. Audit committee of the board of directors. D. Corporate stockholders.
C. Audit committee of the board of directors.
As generally conceived, the audit committee of a publicly held company should be made up of A. Representatives of the major equity interests (preferred stock, common stock). B. The audit partner, the chief financial officer, the legal counsel, and at least one outsider. C. Representatives from the client's management, investors, suppliers, and customers. D. Members of the board of directors who are not officers or employees.
D. Members of the board of directors who are not officers or employees.
To emphasize auditor independence from management, publicly traded corporations are required to A. Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee. B. Establish a policy of discouraging social contact between employees of the corporation and the independent auditors. C. Request that a representative of the independent auditor be on hand at the annual stockholders' meeting. D. Have the independent auditor report to an audit committee of independent members of the board of directors.
D. Have the independent auditor report to an audit committee of independent members of the board of directors.
The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning A. Adequate financial statement disclosures. B. Compliance with the statutory laws and regulations. C. Scope limitations resulting from their inaction. D. The integrity of management.
D. The integrity of management.
Under the Sarbanes-Oxley Act, the audit committee of a public company has the following requirement(s): - Each member of the committee must be a board member and shall be independent. - The audit committee must preapprove all audit and nonaudit services. - The audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing. - All of these.
All of these.
All companies must have an audit committee.
FALSE
The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any accounting firm employed by a public company.
TRUE
All of the following refer to the competence of the internal audit function except: - The party in the entity to which the internal audit function reports. - The quality of internal audit documents and reports. - Professional certification. - Supervision and review of internal audit activities.
The party in the entity to which the internal audit function reports.
An independent auditor might consider the procedures performed by the internal audit function because - They are employees whose work must be reviewed during substantive testing. - They are employees whose work might be relied upon. - Their work impacts the cost/benefit tradeoff in evaluating inherent limitations. - Their degree of independence may be inferred by the nature of their work.
They are employees whose work might be relied upon.
In assessing the competence of the internal audit function, an independent CPA most likely would obtain information about the - Quality of the work of the internal audit function. - Organization's commitment to integrity and ethical values. - Influence of management on the scope of the internal audit function duties. - Organizational levels to which the internal audit function reports.
Quality of the work of the internal audit function.
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? - Perform detailed testing of the individual balance sheet accounts. - Examining documents to detect illegal acts having a material effect on the financial statements. - Considering whether the client's accounting estimates are reasonable in the circumstances. - Determining the extent of involvement of the client's internal audit function.
Determining the extent of involvement of the client's internal audit function.
Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the - Adequacy of the preplanned audit program. - Ability to establish consistency in application of accounting principles between years. - Apparent scope limitation. - Integrity of management.
Integrity of management.
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's - Engagement letter. - Audit working papers. - Engagement letter and audit working papers. - It would not be typical to allow a review of either the engagement letter or the audit working papers.
Audit working papers.
There are five general types of audit tests.
FALSE
Materiality significantly impacts the auditor's decisions about how much and what kind of evidence to gather.
TRUE
Materiality is based only on a quantitative analysis of the financial statements.
FALSE
Evaluating a prospective client requires which of the following steps? - Communicate with the SEC. - Preplan the audit. - Determine if the firm is independent of the client. - Communicate with the AICPA.
Determine if the firm is independent of the client.
Which of the following situations would most likely require special audit planning? - Some items of factory and office equipment do not bear identification numbers. - Depreciation methods used on the client's tax return differ from those used on the books. - Assets costing less than $500 are expensed even though the expected life exceeds one year. - Inventory is comprised of precious stones.
Inventory is comprised of precious stones.
During the initial planning phase of an audit, a CPA most likely would - Identify specific internal control activities that are likely to prevent fraud. - Evaluate the reasonableness of the client's accounting estimates. - Discuss the timing of the audit procedures with the client's management. - Inquire of the client's attorney as to any unrecorded claims.
Discuss the timing of the audit procedures with the client's management.
An auditor obtains knowledge about a new client's business and its industry in order to - Make constructive suggestions concerning improvements to the client's internal control. - Develop an attitude of professional skepticism concerning management's financial statement assertions. - Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. - Understand the events and transactions that may have an effect on the client's financial statements.
Understand the events and transactions that may have an effect on the client's financial statements.
Which of the following is an example of a related party transaction? - An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A. - A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor. - A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A. - A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.
A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.
An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of - Management fraud. - Related party transactions. - Window dressing. - Weak internal control.
Related party transactions.
Which of the following would not necessarily be a related party transaction? - Sales to another corporation with a similar name. - Purchases from another corporation that is controlled by the corporation's chief stockholder. - Loan from the corporation to a major stockholder. - Sale of land to the corporation by the spouse of a director.
Sales to another corporation with a similar name.
The existence of a related party transaction may be indicated when another entity A. Sells real estate to the corporation at a price that is comparable to its appraised value. B. Absorbs expenses of the corporation under audit. C. Borrows from the corporation at a rate of interest which equals the current market rate. D. Lends to the corporation at a rate of interest which equals the current market rate.
B. Absorbs expenses of the corporation under audit.
In the context of an audit of financial statements, substantive procedures are audit procedures that A. May be eliminated under certain conditions. B. Are primarily designed to discover significant subsequent events. C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures. D. Will increase proportionately with an increase in the auditor's reliance on internal control.
C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures.
Which of the following is not an audit procedure that is commonly used in performing tests of controls? A. Inquiring. B. Observing. C. Confirming. D. Inspecting.
C. Confirming.
Tolerable misstatement is A. Materiality allocated to an assertion. B. Materiality for the balance sheet as a whole. C. Materiality for the income statement as a whole. D. Materiality allocated to a specific account.
D. Materiality allocated to a specific account.
Which of the following would an auditor most likely use in determining the auditor's overall materiality? A. The anticipated sample size for planned substantive procedures. B. The entity's annualized interim (i.e. quarterly) financial statements. C. The results of the internal control questionnaire. D. The contents of the management representation letter.
B. The entity's annualized interim (i.e. quarterly) financial statements.
Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality? A. Potential for fraud. B. The company is close to violating loan covenants. C. Firm policy sets materiality at 4% of pretax income. D. A small misstatement would interrupt an earnings trend.
C. Firm policy sets materiality at 4% of pretax income.
Which of the following is not a concern as to whether a misstatement is qualitatively material? A. The misstatement hides a failure to meet analysts' expectations. B. The misstatement is less than 5% of pretax income. C. The misstatement increases management's compensation. D. The misstatement changes a small amount of profit to a small reported loss.
B. The misstatement is less than 5% of pretax income.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants A. That immaterial fraud is not to be reported to the client's audit committee. B. How the results of various auditing procedures performed by the assistants should be evaluated. C. How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk. D. How overall materiality was selected.
B. How the results of various auditing procedures performed by the assistants should be evaluated.
Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit? A. Reading "conflict-of-interest" statements obtained by the client from its management. B. Scanning accounting records for large transactions at or just prior to the end of the period under audit. C. Reading minutes of the Board of Directors meetings for authorization or discussion of material transactions. D. Confirming purchases and sales transactions with the vendors and/or customers involved.
D. Confirming purchases and sales transactions with the vendors and/or customers involved.
A dual-purpose test A. Simultaneously tests debits and credits. B. Is a procedure completed by both the internal and external auditors. C. Is useful to both the entity and the auditor. D. Is both a substantive test of transactions and a test of controls.
D. Is both a substantive test of transactions and a test of controls.
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the A. Methods of statistical sampling to be used in confirming accounts receivable. B. Pending legal matters to be included in the inquiry of the client's attorney. C. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. D. Timing of the audit.
D. Timing of the audit.
The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning A. Adequate financial statement disclosures. B. Compliance with the statutory laws and regulations. C. Scope limitations resulting from their inaction. D. The integrity of management.
D. The integrity of management.
Which of the following procedures would an auditor most likely include in the initial planning of an examination of financial statements? A. Assess the need for the use of specialists in the audit. B. Inquiring of the client's attorney as to any claims that are likely to be asserted. C. Perform detailed testing of the individual financial statement accounts. D. Determining whether necessary internal controls procedures are being applied as prescribed.
A. Assess the need for the use of specialists in the audit.
An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by A. Scanning the general journal for unusual entries. B. Performing a revenue cutoff test at year-end. C. Tracing a sample of journal entries to the general ledger. D. Examining documentary evidence of sales returns and allowances recorded after year-end.
A. Scanning the general journal for unusual entries.
Which of the following is a general audit test? A. Fee assessment procedures. B. Tests of controls. C. Preparation of corporate tax returns. D. Active testing procedures.
B. Tests of controls.
Which of the following arranges the general types of audit tests in the order they are normally performed in an audit A. Substantive procedures, tests of controls, and risk assessment procedures. B. Substantive procedures, risk assessment procedures, and tests of controls. C. Risk assessment procedures, tests of controls, and substantive procedures. D. Risk assessment procedures, substantive procedures, and tests of controls.
C. Risk assessment procedures, tests of controls, and substantive procedures.
Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements? A. An illegal payment to a foreign official that was not recorded. B. A piece of obsolete office equipment that was not retired. C. A petty cash fund disbursement that was not properly authorized. D. An uncollectible account receivable that was not written-off.
A. An illegal payment to a foreign official that was not recorded.
Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments? A. A misstatement exceeded five percent of net income. B. The auditor also provides consulting services to the audit client. C. The misstatement will cause the client to fail to meet an earnings forecast. D. The audit committee is not well-educated about the accounting principle in question.
C. The misstatement will cause the client to fail to meet an earnings forecast.
Which element(s) is/are pervasive to the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? A. The elements of materiality and audit risk. B. The element of internal control. C. The element of corroborating evidence. D. The element of reasonable assurance.
A. The elements of materiality and audit risk.
Which of the following statements is not correct about materiality? A. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. B. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually. C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. D. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.
B. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.
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