ACCT 4200 Additional Practice exam Questions Exam 1
Terms in this set (75)
Independent auditing can best be described as
A) A branch of accounting.
B) A discipline that provides assurance regarding the results of accounting and other functional operations and data.
C) A professional activity that measures and communicates financial and business data.
D) A regulatory function that prevents the issuance of improper financial information.
A) Refers to an imbalance of information among stockholders in a company.
B) Refers to an imbalance of information between the auditor and the management of the company.
C) Refers to an imbalance of information between stockholders and the management of the company.
D) Refers to an imbalance of information between the auditor and the stockholders of the company.
Which of the following best describes the primary reason an independent auditor reports on financial statements?
A) To give stockholders some assurance that any fraudulent activities will be detected.
B) To identify a poorly designed internal control structure that may produce unreliable financial statements.
C) To provide expertise to management, which may not be totally knowledgeable of prevailing GAAP.
D) To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.
Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that
A) The buyer [or user] pays directly for this assurance in both situations.
B) There are often information asymmetry and conflicts of interest.
C) The cost of obtaining information is not relevant.
D) Independence is not relevant in either situation.
Assurance services differ from auditing services in that
A) Assurance services are more narrow in scope than audit services.
B) Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.
C) Assurance services are limited to economic events or actions, and audit services are not similarly limited.
D) Audit services do not improve the quality of information as do assurance services.
Which of the following best describes the relationship between attestation services and audit services?
A) Attestation is a subset of auditing that improves the quality of information for decision makers.
B) Auditing is a subset of attestation and focuses on providing companies with advisory services and decision support.
C) Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.
D) Attestation is a subset of auditing that provides more assurance than does an audit engagement.
The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor's decision when reporting on the financial statements as a whole relates most closely to which major audit concept?
B) Audit risk.
C) Management assertions.
D) Reasonable assurance.
A) May only be gathered from parties external to the auditee to be reliable.
B) May only be gathered from the auditee to be reliable since they are the most knowledgeable source of information.
C) May only be gathered from computerized sources to avoid human error.
D) Can be gathered from many sources and is not limited to the underlying accounting data.
A) Can be completely eliminated through appropriate sampling of transactions.
B) Is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated.
C) Is what creates the demand for an audit.
D) Is the risk that a company may hire an incompetent auditor.
The examination of all of an entity's transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample?
A) A decrease in the materiality level.
B) A decrease in the desired level of assurance.
C) An assessment that the account being audited is high risk.
D) An increase in the desired level of assurance.
Which of the following audit phases would generally be conducted before all of the others listed below?
A) Auditing business processes and related accounts.
B) Evaluation of audit evidence.
C) Gaining an understanding of the auditee's industry.
D) Consideration of internal control systems.
An auditor's evaluation of the reasonableness of a company's loan loss reserve would normally be made during which phase of the audit?
A) Gaining an understanding of the auditee's industry.
B) Client acceptance.
C) Consideration of internal control systems.
D) Auditing business processes and related accounts.
Gaining an understanding of the auditee and its environment includes all of the following areas except
A) Regulatory issues unique to the industry.
B) The entity's application of accounting policies.
C) The audit fee and timeline for completion of the work.
D) The entity's business risks.
The most favorable type of audit opinion for an entity to receive is
C) Full assurance.
The study and practice of auditing is unlike other areas in accounting because it
A) Requires the memorization of formulas and patterns.
B) Requires the knowledge of GAAP.
C) Requires common sense and some creativity.
D) Is required by law for all companies in the United States.
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 audit function's audit plan.
B) Management's disregard of its responsibility to maintain an adequate internal 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 tests before the year-end.
Which of the following statements is correct with regard to the predecessor-successor communications?
A) The successor auditor has no responsibility to contact the predecessor auditor.
B) The successor auditor should obtain permission from the entity before contacting the predecessor auditor.
C) The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.
D) The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.
Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees?
A) They provide documentation of management's responsibility for the financial statements.
B) They document the audit fees and deadlines that have been agreed upon.
C) They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.
D) They help to limit auditor liability in the event of misunderstandings.
Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors?
A) The competence and objectivity of the internal audit function.
B) The materiality or significance of the accounts examined by the internal audit function.
C) The audit risk associated with the accounts examined by the internal auditors.
D) The nature of the audit software documentation used by the internal auditors.
The audit committee of a company which is responsible for the appointment of the independent audit firm should consist of
A) Members of the board of directors who are not officers or employees.
B) Representatives of major equity interests (i.e., common and preferred shareholders).
C) Representatives from management, suppliers, and shareholders.
D) Members of the board of directors who have a financial interest in the company.
Which of the following would most likely indicate the existence of related parties?
A) Failing to write down inventory to market value just before year-end.
B) Depending on one or a few products for nearly all of a firm's operating revenues.
C) Borrowing money at an interest rate substantially below the prevailing market rate of interest.
D) Selling goods to a major customer of your main competitor.
Tests of controls include all of the following except:
A) Inspection of documents, files, etc.
B) Analytical procedures.
Which of the following would NOT be a typical supervisory activity for an audit?
A) Perform detailed testing of the accounts payable account.
B) Inform engagement team of the nature, timing, and extent of audit procedures.
C) Review the work of other engagement team members.
D) Evaluate the results of the work and whether it supports the conclusions reached.
The concept of materiality as it applies to a financial statement audit
A) Relates primarily to the audit fees involved.
B) Generally involves less professional judgment for public companies.
C) Is determined, in part, based on how financial statement users may be influenced in making decisions.
D) Relates primarily to the quantity of audit procedures performed.
According to the text, the first step in applying materiality to an audit is
A) To determine tolerable misstatement for each account balance.
B) To determine a materiality level for the overall financial statements.
C) To aggregate the misstatements found in each account and determine their overall affect on the financial statements.
D) To ask management what constitutes a material amount in their business.
For which laws and regulations does the auditor have the same responsibility as that for errors and fraud?
A) Laws and regulations that have an indirect effect on the determination of financial statement amounts.
B) Laws and regulations that have a material but indirect effect on the determination of financial statement amounts.
C) Laws and regulations that have a direct and material effect on the financial statements.
D) Laws and regulations that have a direct and material effect on the financial statements as well as laws and regulations that have material but indirect effect on the determination of financial statement amounts.
When establishing an understanding with the entity regarding the terms of the engagement, all of the following should be discussed, except:
A) The engagement letter.
B) The internal audit function.
C) The audit committee.
D) The agreed upon limits on auditor liability for an improper audit.
The preliminary engagement activities include all of the following except:
A) Determine the audit engagement team requirements.
B) Ensure that the audit team is independent.
C) Ensure that there is an independent audit committee.
D) Ensure that the audit firm is independent.
A dual-purpose test is
A) A procedure that provides evidence about two different account balances at the same time.
B) A procedure that serves as both a test of control and a substantive test of transactions.
C) A procedure that provides evidence about two different accounting periods at the same time.
D) A procedure that serves as both a substantive test of transactions and a substantive test of balances.
When likely misstatements are greater than overall materiality, the auditor should
A) Request that the auditee adjust the financial statements.
B) Issue an unqualified opinion.
C) Modify the opinion if the auditee will not adjust the financial statements.
D) Both a and c.
The existence of audit risk is recognized by the statement in the auditor's standard report that the:
A) Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.
B) Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
C) Financial statements are presented fairly, in all material respects, in conformity with GAAP.
D) Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
Which of the following factors would an auditor least likely consider when assessing the inherent risk associated with sales transactions?
A) Billings are made using the percentage-of-completion method of revenue recognition.
B) The nature of the credit authorization process.
C) Some invoices are normally billed prior to shipments [which occur at a later date].
D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.
The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does exist, is known as:
A) Audit risk.
B) Detection risk.
C) Inherent risk.
D) Business risk.
One of your clients recently upgraded its accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system. This installation took place over the last nine months of the entity's fiscal year and is nearly 100% complete by the balance sheet date. Which of the following best describes the main affect of this event on the audit risk model for the current year?
A) It will likely increase the risk of material misstatement.
B) It will likely decrease the risk of material misstatement.
C) It will likely decrease the audit risk.
D) It will likely increase the detection risk.
Which of the following would be classified as an error?
A) Misinterpretation by management of facts that existed when the financial statements were prepared.
B) Misappropriation of assets for the benefit of management.
C) Preparation of records by employees to cover a fraudulent scheme.
D) Intentional omission of the recording of a transaction to benefit a third party.
Which of the following factors is least likely to represent an opportunity to commit fraud?
A) The audit committee is ineffective.
B) Poor internal controls over cash transactions.
C) The existence of highly complex transactions.
D) Operating losses make a hostile takeover imminent.
The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except:
A) Inquiries of management and others.
B) Compute the level of detection risk.
C) Analytical procedures.
D) Observation and inspections.
Which of the following statements is false as it relates to the auditor's responsibility to document the risk assessment?
A) The documentation may include the use of questionnaires.
B) Management's response to high-risk areas identified by the auditor should be included in the documentation.
C) The level of risk must be set quantitatively (i.e., inherent risk is 60%).
D) All of the above are false.
The disclosure of fraud to parties other than the entity's senior management and its audit committee ordinarily would be precluded by the auditor's ethical or legal obligations of confidentiality. However, the auditor has a duty to disclose the information to parties outside the entity in all of the following circumstances except:
A) A court subpoena in conjunction with a fraud investigation.
B) A successor auditor makes inquiries in determining whether to accept the engagement.
C) A Wall Street analyst inquiry regarding future profit projections.
D) To comply with legal or regulatory requirements.
Which of the following is not one of the three conditions that are generally present when fraud occurs?
A) Incentive or pressure.
C) Rationalization or attitude.
Audit risk is typically considered and assessed:
A) At the assertion level.
B) At the account balance level.
C) For the financial statements as a whole.
D) All of the above.
If risk of material misstatement is higher than originally anticipated, the auditor may respond by:
A) Increasing supervision.
B) Reducing control risk.
C) Reducing inherent risk.
D) None of the above.
If the auditor determines that a material misstatement may be due to fraud, the auditor should do all of the following except:
A) Attempt to obtain evidence to determine whether the misstatement was, in fact, due to fraud.
B) Discuss the findings with an appropriate level of management.
C) Alert the authorities.
D) Suggest that management consult with legal counsel.
Which of the following represents a factual misstatement?
A) A misstatement that management knows about, but the auditor does not.
B) A misstatement found by the auditor that is due to incorrect pricing on a sales invoice.
C) A misstatement arising from the differences between the auditor's estimate and management's estimate of the allowance for doubtful accounts.
D) A misstatement based on an auditor's projection of an error found in a sample.
If acceptable audit risk is set at low and the assessed risk of material misstatement is high, then detection risk must be:
D) Cannot determine detection risk from the information given.
Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue?
A) Existence and occurrence.
C) Rights and obligations.
Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory?
D) Rights and obligations.
Which of the following statements is correct with regard to the quality or appropriateness of evidential matter?
A) The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
B) Evidential matter must be either valid or relevant but need not be both.
C) Internal accounting data alone may be considered sufficient appropriate evidential matter to issue an unqualified opinion on financial statements.
D) Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained.
Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing?
A) Send confirmations to selected vendors to verify amounts.
B) Examine a random sample of inventory documents.
C) Manually foot, or sum, several randomly-selected pages.
D) Use generalized audit software to foot, or sum, the entire listing.
Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following?
B) Deferred Taxes.
C) Machinery and Equipment.
D) Accounts Receivable.
One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify:
A) Transactions that have not been properly authorized.
B) Illegal acts undetected as a result of poor internal controls.
C) Inefficient operations.
D) Unusual changes that may signal possible account misstatements.
Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
A) Vendor confirmations of accounts payable balances.
B) Copies of bank statements obtained from the entity under audit.
C) Pre-numbered sales invoices.
D) The opinion of an outside specialist regarding inventory valuation.
Which of the following presumptions is correct regarding the reliability of audit evidence?
A) To be reliable, evidence should be convincing rather than simply persuasive.
B) Information obtained directly from outside sources is considered to be the most reliable type of evidence.
C) An effective internal control system provides increased assurance with regard to the reliability of audit evidence.
D) Reliability generally refers to the amount and relevance of corroborative audit evidence obtained.
Which of the following is true relating to audit work paper documentation?
A) It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered.
B) It should not include copies of any client-generated documents.
C) It is generally examined and utilized by the client after the audit is completed.
D) It must be destroyed once the audit is complete and the opinion is rendered.
Which of the following items is generally not included as part of audit documentation?
C) Client review notation.
According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is:
D) Analytical procedures.
According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is:
Audit documentation provides the principal support for which of the following?
A) Demonstrate how the audit complied with auditing and related professional practice standards.
B) Support the basis for the auditor's conclusions concerning every material financial statement assertion.
C) Demonstrate that the underlying accounting records agreed or reconciled with the financial statements.
D) All of the above.
According to the text, each of the following is a main purpose for performing audit procedures except:
A) To obtain an understanding of the entity and its environment.
B) To test the operating effectiveness of controls.
C) To develop recommendations for the control system.
D) To detect material misstatements in the financial statements.
Which of the following is true regarding audit evidence?
A) Auditors typically gather audit evidence about one whole financial statement at a time rather than one account at a time.
B) Auditors rarely gather audit evidence about one business process at a time.
C) Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported.
D) When audit evidence supports management's assertions, a qualified audit report can be issued.
The Public Company Accounting Oversight Board [PCAOB] derives its authority to set and enforce auditing standards for public company audits from
A) The American Institute of Certified Public Accountants [AICPA].
B) The Securities and Exchange Commission [SEC].
C) An Act of Congress.
D) A Presidential executive order.
Which of the following is generally not considered one of the five business processes or cycles?
A) Information technology.
B) Revenue [or sales].
D) Inventory management.
Which of the following is NOT a typical responsibility for an associate/staff level auditor?
A) Assisting in the development of the audit plan.
B) Performing the audit procedures assigned to them.
C) Preparing adequate and appropriate documentation of completed work.
D) Informing the senior about any auditing or accounting problems encountered.
Prior to the Sarbanes-Oxley Act of 2002, the _________was responsible for creating all new auditing standards in the United States. Today, for publicly held companies, that responsibility rests with the _____________.
A) Financial Accounting Standards Board [FASB]; Public Company Accounting Oversight Board [PCAOB].
B) AICPA Auditing Standards Board [ASB]; Securities and Exchange Commission [SEC].
C) AICPA Auditing Standards Board [ASB]; Public Company Accounting Oversight Board [PCAOB].
D) Financial Accounting Standards Board [FASB]; Securities and Exchange Commission [SEC].
To exercise due professional care, an auditor should
A) Attain the proper balance of professional experience and formal education. B) Critically review the work performed and judgment exercised by those assisting in the audit.
B) Examine all available corroborating evidence supporting management's assertions.
C) Design the audit to detect all instances of illegal acts.
What is the essential meaning of the generally accepted auditing standard that requires the auditor to be independent?
A) The auditor must be without bias with respect to the auditee.
B) The auditor must adopt a critical attitude during the audit.
C) The auditor's sole obligation is to third parties.
D) The auditor may have a direct ownership interest in his auditee's business if it is not material.
The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except
A) The auditor should maintain professional skepticism and exercise professional judgment throughout the planning and performance of the audit.
B) The auditor should obtain sufficient appropriate audit evidence about whether material misstatements exist in the financial statements.
C) The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.
D) The auditor should have appropriate competence and capability to perform the audit.
The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the
A) Senior management.
B) External auditors.
C) Internal audit department.
Which of the following is considered an example of a compliance audit?
A) The examination a company's claims that its product is superior to that of a competitor on specific dimensions.
B) The examination of a school district networked computer system.
C) The examination of a company's adherence to government-mandated safety provisions.
D) The examination of a company's financial statements.
Which of the following best describes the relationship between management and the board of directors?
A) Management reports to the board of directors.
B) The board of directors reports to management.
C) Neither group is accountable to the other.
D) Both groups report directly to the shareholders.
Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards?
A) Auditing standards issued by the AICPA and the PCAOB are considered minimum standards of performance for auditors.
B) The AICPA sets auditing standards for use in audits of nonpublic entities.
C) The PCAOB sets auditing standards for use in audits of publicly held companies.
D) All of the above.
A) Audit about 80% of publicly traded companies in the United States.
B) Are national in their practices and have international affiliates.
C) Are generally regional in their practices (such as the west coast).
D) Are generally local in their practices (such as large metropolitan areas).
Which of the following organizations affect the environment that CPAs work in?
A) The American Institute of Certified Public Accountants [AICPA].
B) The Securities and Exchange Commission [SEC].
C) The Public Company Accounting Oversight Board [PCAOB].
D) All of the above.
Which of the following primarily shapes the context in which auditing takes place? The American Institute of Certified Public Accountants [AICPA].
A) The Securities and Exchange Commission [SEC].
B) The entity's business environment.
C) Legislation passed by Congress.
An "integrated audit" includes
A) A special audit related to management fraud.
B) A financial statement audit and an audit of internal control over financial reporting.
C) A financial statement audit and a special audit related to management fraud.
D) A special audit related to management fraud and an audit of internal control over financial reporting.