Auditing

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241 terms · ACCT 2520 Auditing Final Prep Chapter 1 - 8

Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n):

Attestation service

Ch 1

The Sarbanes-Oxley Act applies to which of the following companies?

Public Companies

Ch 1

The use of the Certified Public Accountant title is regulate by:

state law through a licensing department or agency of each state

Ch 1

An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n):

Compliance audit

Ch 1

Which of the following services provides the lowest level of assurance on a financial statement?

A compilation (No assurance at all)

Ch 1

In "auditing" financial accounting data, the primary concern is with:

Determining whether recorded information properly reflects the economic events that occurred during the accounting period

Ch 1

Financial statement users often receive unreliable financial information from companies. Which of the following is NOT a common reason for this?

Each of these choices is a common reason for unreliable financial information

Ch 1

Which one of the following is more difficult to evaluate objectively?

Efficiency and effectiveness of operations

Ch 1

The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company?

Most consulting services

Ch 1

The trait that distinguishes auditors from accountants is the:

auditor's accumulation and interpretation of evidence related to a company's financial statements

Ch 1

Which one of the following is not one of the three General Standards?

Proper planning and supervision

Ch 2

Which one of the following is not a Field Work Standard?

Due professional care

Ch 2

Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for establishing auditing standards?

Auditing Standards Board

Ch 2

An auditor need not abide by a particular auditing standard if the auditor believes that:

the issue in question is immaterial in amount

Ch 2

The Public Company Accounting Oversight Board does not:

establish auditing standards that must be followed by CPA's on all audits

Ch 2

The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the:

Form 8-K

Ch 2

The third general standard states that due care is to be exercised in the performance of an audit. This standard is generally interpreted to require:

critical review of work done at every level of supervision

Ch 2

Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

They are interpretations that are intended to clarify the meaning of "generally accepted auditing standards."

Ch 2

The auditor's judgment concerning the overall fairness of presentation of financial position, results of operations, and changes in cash flow is applied within the framework of:

generally accepted accounting principles

Ch 2

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with:

knowledge required to fulfill assigned responsibilities

Ch 2

Williams & Co., a member of the Private Companies Practice Section, is to have a "peer review." The peer review can be performed by:

either a or b.

Ch 2

Which of the following is true regarding the AICPA approved practice monitoring programs?

Public accounting firms must be enrolled in an AICPA approved practice monitoring program for members in the firm to be eligible for membership in the AICPA

Ch 2

If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter, the auditor should generally seek guidance from which of the following sources?

Statements on Auditing Standards

Ch 2

The AICPA has authority to establish standards and rules in all but which of the following areas?

Auditing standards applicable to financial statements of private and public companies

Ch 2

Auditing standards require that the audit report must be titled and that the title must:

include the word "independent"

Ch 3

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be:

Company Controller NO
Shareholders YES
Board of Directors YES

Ch 3

When determining whether an exception is "highly material," the extend to which the exception affects different elements of the financial statements must be considered. This concept is called:

pervasiveness

Ch 3

An auditor determines the financial statements include a material departure from GAAP. Which type of opinion may be issued?

Disclaimer NO
Qualified YES
Adverse YES

Ch 3

If an auditor performs an audit of a private company, the scope paragraph should make references to which standards?

U.S. generally accepted auditing standards

Ch 3

A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is:

included in a separate paragraph in the report

Ch 3

An auditor who issues a qualified opinion because sufficient appropriate evidence was not obtained should describe the limitations in an explanatory paragraph. The auditor should also refer to the limitation in the:

Scope paragraph YES
Opinion paragraph YES
Notes to the financial statements NO

Ch 3

The audit report indicates that (1) management is responsible for the content of the financial statements and (2) the auditor is responsible for evaluating the appropriateness of the accounting principles chosen by management. Which paragraph contains those statements?

None of the above are true

Ch 3

If the balance sheet of a company is dated December 31, 2009, the audit report is dated February 8, 2010, and both are released on February 15, 2010, this indicates that the auditor has searched for subsequent events that occurred up to:

February 8, 2010

Ch 3

When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue:

a disclaimer of opinion

Ch 3

Whenever there is a scope restriction, the appropriate response is to issue a(n):

unqualified report, a qualification of scope and opinion, or a disclaimer, depending on materiality

Ch 3

When a client has not applied GAAP consistently from the prior year to the current year, the auditor does not concur with the appropriateness of the change, and the change in GAAP has a material effect on the financial statements, the auditor should issue a(n):

qualified opinion

Ch 3

Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue:

a qualified opinion

Ch 3

When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed:

one year from the date of the financial statements

Ch 3

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report would be:

either an unqualified opinion with an explanatory paragraph or a disclaimer or opinion

Ch 3

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include:

an explanatory paragraph explaining the change

Ch 3

Indicate which changes would require an explanatory paragraph in the audit report.

A departure from GAAP YES
The CPA makes reference NO

Ch 3

A CPA would express a qualified opinion with at least four paragraphs for:

An unjustified accounting change YES
A justified accounting change NO

Ch 3

William Gregory, CPA

may refer to the examination of the other auditor

Ch 3

Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes:

all of the above

Ch 3

"Independence" in auditing means:

taking an unbiased and objective viewpoint

Ch 4

When CPA's are able to maintain their actual independence, it is referred to as independence in:

fact

Ch 4

Which of the following statements is true? The CPA firm will lose its independence if:

a staff auditor providing audit services to the client acquires stock in that client

Ch 4

Interpretations of Rule 101 prohibit covered members from owning any stock or other direct investment in audit clients. Covered members include all but which of the following?

All partners in an office that has no responsibility for the engagement

Ch 4

Interpretations of the rules regarding independence allow an auditor to serve as:

an honorary director for a not-for-profit charitable or religious organizations

ch 4

The Sarbanes-Oxley Act requires which of the following employees of an accounting firm to rotate off the engagement every five years?

In-Charge Auditor NO
Partner responsible for concurring review YES

Ch 4

Of the four parts of the AICPA's Code of Professional Conduct, which part is enforceable?

Rules of Conduct

Ch 4

An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's:

non-dependent grandfather

Ch 4

Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same client if three criteria are met. Which of the following is NOT one of those criteria?

The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission

Ch 4

A CPA is allowed to accept a referral fee for recommending a client to another CPA if:

The client pre-approves the trans. NO
Payment of the referral fee is disclosed YES

Ch 4

In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information about a client?

A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information

Ch 4

Generally, loans between CPA firm or its members and an audit client are prohibited because it is a financial relationship. Which of the following, made under normal lending procedures, is NOT a exception to this rule?

Material loans

Ch 4

The standard of due care to which the auditor is expected to adhere is referred to as the:

prudent person concept

Ch 5

"Absence of reasonable care that can be expected to a person in a set of circumstances" defines:

Ordinary negligence

Ch 5

Which of the following most accurately describes constructive fraud?

Extreme or unusual negligence without the intent to deceive

Ch 5

A third-party beneficiary is one which:

does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract

Ch 5

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. This is known as the concept of:

foreseeable users

Ch 5

Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to:

the date the registration statement becomes effective

Ch 5

Under the Securities Act of 1934, which type of organization is required to submit audited financial statements to the SEC?

Every company with securities traded on national and over-the-counter exchanges

Ch 5

Under the common law, an individual or company that (1) does not have a contract with an auditor, (2) is known by the auditor in advance of the audit, and (3) will use the auditor's report to make decisions about the client company has:

the same rights against an auditor as a client

Ch 5

The preferred defense in third-party suits is:

non-negligent performance

Ch 5

The Securities and Exchange Commission has authority to:

determine accounting principles for the purpose of financial reporting by companies offering securities to the public.

Ch 5

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?

The auditor must extend auditing procedures to actively search for evidence of fraud where the examination indicates that fraud may exist

Ch 6

When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that:

both a and b are correct

Ch 6

Which of the following journals would be included most often in the various audit cycles?

General journal

Ch 6

If the auditor believes that the financial statements are not fairly stated or is unable to reach an conclusion because of insufficient evidence, the auditor:

has the responsibility of notifying financial statement users through the auditor's report.

Ch 6

Auditors accumulate evidence to:

enable them to reach conclusions about the fairness of the financial statements

Ch 6

Which of the following is NOT one of the reasons that auditors provide only reasonable assurance on the financial statements?

Auditors believe that reasonable assurance is sufficient in the vast majority of cases

Ch 6

If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor:

can significantly reduce other substantive tests

Ch 6

The occurrence assertion applies to___:

classes of transactions and events during the period

Ch 6

When the auditor has reason to believe an illegal act has occurred, the auditor should:

consider accumulating additional evidence to determine if there is actually an illegal act

Ch 6

If an auditor uncovers an illegal act at a public company, the auditor must notify:

the Securities and Exchange Commission

Ch 6

Which of the following form of evidence is most reliable?

Confirmation of accounts receivable balance received from a customer

Ch 7

Which of the following is NOT a characteristic of the reliability of evidence?

Degree of subjectivity

Ch 7

Calculating the gross margin as a percent of sales and comparing it with previous periods is what type of evidence?

Analytical procedure

Ch 7

Audit evidence obtained directly by the auditor will not be reliable if:

the auditor lacks the qualifications to evaluate the evidence

Ch 7

Appropriateness of evidence is a measure of the:

quality of evidence

Ch 7

Which of the following statements regarding the relevance of evidence is correct?

To be relevant, evidence must pertain to the audit objective of the evidence

Ch 7

Two determinants of the persuasiveness of evidence are:

appropriateness and sufficiency

Ch 7

Three common types of confirmations used by auditors are (1) negative confirmations, (2) blank form positive confirmations, and (3) positive confirmations with information included. Place the confirmations in order of reliability from highest to lowest.

2, 3, 1

Ch 7

When auditors use documents to support recorded transactions, the process is often called:

vouching

Ch 7

Sarbanes-Oxley requires auditors of public companies to maintain audit documentation for what period of time?

Not less than 7 years

Ch 7

The Auditing Standards Board has concluded that analytical procedures are so important that they are required during:

planning and completion phases

Ch 7

Which of the following statements is NOT correct concerning audit documentation?

Audit documentation is acquired to defend against claims that the auditor performed a deficient audit

Ch 7

Which of the following is the most objective type of evidence?

The physical count of securities and cash

Ch 7

Traditionally, confirmations are used to verify:

bank balances and accounts receivable

Ch 7

Which items affect the sufficiency of evidence when choosing a sample?

Selecting items with a high likelihood YES
The randomness of the items selected NO

Ch 7

Most auditors assess inherent risk as high for related parties and related-party transactions because:

of the lack of independence between parties

Ch 8

A successor auditor may perform which of the following for a new audit client?

Speak to local attorneys, banks YES
Speak to predecessor auditors YES

Ch 8

The purpose of an engagement letter is to:

document the terms of the engagement in writing to minimize misunderstandings

Ch 8

Which of the following normally signs the engagement letter for an audit of a private company?

Management

Ch 8

The purpose of the requirements in SAS No. 84 of having communication between the predecessor and successor auditor is to:

help the successor auditor to evaluate whether to accept the engagement

Ch 8

Whenever an auditor compares client data to client-prepared budgets, there are two special concerns. Indicate if the two items below are concerns.

Assessing whether the budgets were realistic plans - A CONCERN
Client data may have been altered to conform to the budget - A CONCERN

Ch 8

When may the auditor refer to a specialist in the audit report?

Only if the specialist's report results in a modification of the audit opinion YES
Only if the specialist assisted in the audit of an account material to the financial statements NO

Ch 8

Which of the following would NOT likely be classified as a related-party transaction?

An advance of one week's salary to an employee

Ch 8

Which of the following statements is NOT correct?

Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor's attention to areas that may contain possible misstatements

Ch 8

Which of the following is correct with respect to a company's corporate charter?

The corporate charter includes the exact name of the corporation, the date of incorporation, and the types of business the corporation is authorized to conduct

Ch 8

Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

The elements of materiality and relative risk

Chapter 9

Which of the following is NOT a primary consideration when assessing inherent risk?

Frequency and intensity of management's review of accounting transactions and records

Chapter 9

When a different extent of evidence is planned for the various cycles, the difference is caused by:

An auditor's expectations of errors and assessment of internal control

Chapter 9

When allocating materiality, most practitioners choose to allocate to:

the balance sheet accounts because there are fewer

Chapter 9

When the auditor is attempting to determine the extent to which external users rely on a client's financial statements, they may consider several factors except for:

assessment of detection risk

Chapter 9

To what extent do auditors typically rely on internal controls of their public company clients?

Extensively

Chapter 9

___ misstatements are those where the auditor can determine the amount of the misstatement in the account.

Known

Chapter 9

Which of the following statements is NOT correct?

Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Chapter 9

Auditors begin their assessment of inherent risk during audit planning. Which of the following would NOT help in assessing inherent risk during the planning phase?

Obtaining client's agreement on the engagement letter

Chapter 9

Why do auditors establish a preliminary judgment about materiality?

To plan the appropriate audit evidence to accumulate and develop an overall audit strategy

Chapter 9

Internal control reports issued by public companies must identify the framework used to evaluate the effectiveness of internal control. Which of the following is the most common framework in the U.S.?

Internal Control - Integrated Framework - COSO

Chapter 10

The auditor's tests to understand the client's internal controls might include which of the following types of procedures?

Observation of employees YES
Inquiries of personnel YES

Chapter 10

In the audit of a private company, the auditor will test controls when control risk is initially assessed at:

Low YES
Moderate YES
High NO

Chapter 10

To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their:

Likelihood YES
Significance YES

Chapter 10

Internal controls normally include procedures designed to provide reasonable assurance that:

transactions are executed in accordance with management's authorization

Chapter 10

Which of the following is NOT a likely procedure to support the operating effectiveness of internal controls?

Completing an internal control questionnaire

Chapter 10

Of the following statements about internal controls, which one is NOT valid?

Control procedures reasonably ensure that collusion among employees cannot occur

Chapter 10

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:

the design and utilization of the controls

Chapter 10

Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:

place limited reliance on the work performed by the internal audit staff

Chapter 10

Proper segregation of functional responsibilities calls for separation of:

authorization, recording, and custody

Chapter 10

Which of the following most accurately defines professional skepticism as it is used in auditing standards?

It neither assumes that management is dishonest nor assumes unquestioned honesty

Chapter 11

After fraud risks are identified and documented, the auditor should evaluate factors that ____ fraud risk before developing an appropriate response to the risk of fraud.

reduce

Chapter 11

Which of the following issues is normally part of the "brainstorming" session required by SAS No. 99?

How assets could be misappropriated YES
Where the entity's financial statements are susceptible to material misstatements due to fraud YES

Chapter 11

Which of the following statements describes circumstances that underlie employee incentives to misappropriate assets?

Dissatisfied employees may steal from a sense of entitlement

Chapter 11

The most common technique used by management to misstate financial information is:

improper revenue recognition

Chapter 11

Who is least likely to perpetrate fraudulent financial reporting?

Production employees

Chapter 11

Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?

Excessive pressure for management to meet debt repayment requirements

Chapter 11

Which of the following best defines fraud in a financial statement auditing context?

Fraud is an intentional misstatement of the financial statements

Chapter 11

Which of the following is a factor that relates to incentives to misappropriate assets?

Significant personal financial obligations

Chapter 11

Which of the following is not a benefit of using IT-based controls?

Over-reliance on computer-generated reports

Chapter 12

Which of the following is a category of general controls?

Physical and online security

Chapter 12

To determine that user ID and password controls are functioning, an auditor would most likely:

attempt to sign on to the system using invalid user identification and passwords

Chapter 12

___ controls prevent and detect errors while transaction data are processed

Processing

Chapter 12

A database management system:

physically stores each element of data only once

Chapter 12

Which of the following is NOT associated with converting from a manual to an IT system?

It may take the record keeping function and the document preparation function away from those who have custody of assets and put those functions into the IT center

Chapter 12

An important characteristic of IT is uniformity of processing. Therefore, a risk exists that:

erroneous processing can result in the accumulation of a great number of misstatements in a short period of time

Chapter 12

Controls which apply to a specific element of the system are called:

applications controls

Chapter 12

Controls which are built in by the manufacturer to detect equipment failure are called:

hardware controls

Chapter 12

Auditors usually evaluate the effectiveness of:

general controls before applications controls

Chapter 12

Output controls are NOT designed to assure that data generated by the computer are:

used appropriately by employees in making decisions

Chapter 12

Auditors usually obtain information about general and application control through:

all of these methods

Chapter 12

The audit approach in which the auditor runs his or her own program on a controlled basis to verify the client's data recorded in a machine language is:

the generalized audit software approach

Chapter 12

Errors in data processed in a batch computer system may not be detected immediately because:

there are time delays in processing transactions in a batch system

Chapter 12

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?

Integrated test facility

Chapter 12

Which of the following is NOT an application control?

Separation of duties between computer programmer and operators

Chapter 12

Application controls vary across the IT system. To gain an understanding of internal control for a private company, the auditor must evaluate the application controls for every:

every audit area where the auditor plans to reduce assessed control risk

Chapter 12

The most important output control is:

review of data for reasonableness by someone who knows what the output should look like

Chapter 12

Old and new systems operating simultaneously in all locations is a test approach known as:

parallel testing

Chapter 12

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