Download Auditing - Study Guide for Exam | ACCT 422 and more Study notes Auditing in PDF only on Docsity!
Auditing Study Guide
Chapter 1
1-21. These questions pertain to types of audits and other services performed by CPA firms.
- A governmental audit may extend beyond an audit leading to the expression of an opinion on the fairness of financial presentation to include
Program Economy & Results Compliance Efficiency a. Yes Yes No ** b. Yes Yes Yes c. No Yes Yes d. Yes No Yes
- Operational audits generally have been conducted by internal auditors and governmental audit agencies, but may be performed by certified public accountants. A primary purpose of an operational audit is to provide
a. A means of assurance that internal controls are functioning as planned. b. Aid to the independent auditor, who is conducting the audit of the financial statements. c. The results of internal examinations of financial and accounting matters to a company's top-level management. ** d. A measure of management performance in meeting organizational goals.
- A attestation engagement is one in which a CPA is engaged to
** a. Issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party. b. Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. c. Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts. d. Assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.
1-22. These questions relate to quality control standards.
- Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?
Advancement Inspection Consultation a. Yes Yes Yes ** b. Yes Yes Yes c. No Yes Yes d. Yes No Yes
- A CPA firm studies its personnel advancement experience to ascertain whether individuals meeting stated criteria area assigned increased degrees of responsibility. This is evidence of the firm's adherence to prescribed standards of
a. Supervision and review. b. Continuing professional education. c. Professional development. ** d. Quality control.
- A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by
a. Adhering to generally accepted auditing standards. ** b. Having an appropriate system of quality control. c. Joining professional societies that enforce ethical conduct. d. Maintaining an attitude of independence in its engagements.
Chapter 2
2-21. These questions pertain to basic considerations in financial statement audits.
- One of the following is not a proper condition that supports the need for an independent audit of financial statements.
** a. Conflict of interest between management and the CPA. b. Complexity of the financial statements. c. Remoteness of users from the accounting records. d. Consequence of the financial statements in the user's decision process.
- An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy management's financial representations. ** b. Lends credibility to the financial statements. c. Guarantees that financial data are fairly presented. d. Assures the readers of financial statements that any fraudulent activity has been corrected.
- To emphasize auditor independence from management, many corporations follow the practice of
a. Appointing a partner of the CPA firm conducting the examination to the corporation's audit committee. b. Establishing a policy of discouraging social contact between employees of the corporation and the staff of the independent auditor. c. Requesting that a representative of the independent auditor be on hand at the annual stockholder's meeting. ** d. Having the independent auditor report to an audit committee of outside members of the board of directors.
- How are management's responsibility and the auditor's responsibility represented in the standard auditor's report?
Management's Auditor's Responsibility Responsibility ** a. Explicitly Explicitly b. Implicitly Implicitly c. Implicitly Explicitly d. Explicitly Implicitly
- The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor
** a. Obtains reasonable assurance about whether the financial statements are free of material misstatement. b. Assesses the accounting principles used and also evaluates the overall financial statement presentation. c. Realizes some matters, either individually or in the aggregate, are important while other matters are not important. d. Is responsible for expressing an opinion on the financial statements, which are the responsibility of the management.
- The following explanatory paragraph was included in an auditor's report to indicate a lack of consistency:
"As discussed in not T to the financial statements, the company changed its method of computing depreciation in 1990."
How should the auditor report on this matter if the auditor concurred with the change?
Type Location of Opinion of Explanatory Paragraph a. Unqualified Before opinion paragraph ** b. Unqualified After opinion paragraph c. Qualified Before opinion paragraph d. Qualified After opinion paragraph
2-24. These questions involve the auditor's responsibilities for errors, irregularities, and illegal acts.
- Which of the following statements concerning illegal acts by clients is correct?
** a. An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and irregularities. b. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements. c. An auditor considers illegal acts form the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. d. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.
- Under Statements on Auditing Standards, which of the following would be classified as an error?
a. Misappropriation of assets for the benefit of management. ** b. Misinterpretation by management of facts that existed when the financial statements were prepared. 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.
- With respect to errors and irregularities, the auditor should plan to
a. Detect errors that would have a material effect and irregularities that would have either a material or immaterial effect on the financial statements. b. Discover irregularities that would have a material effect and errors that would have either a material or immaterial effect on the financial statements. ** c. Detect errors or irregularities that would have a material effect on the financial statements. d. Discover errors or irregularities that have either a material or immaterial effect on the financial statements.
3-22. These questions pertain to the CPA's independence.
- According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?
** a. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. b. The auditor is also an attorney who advises the client as its general counsel. c. An employee of the auditor donates service as treasure of a charitable organization that is a client. d. The client owes the auditor fees for two consecutive annual audits.
- A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities were not material to the CPA but were material to the child’s personal net worth. Would the independence of the CPA be considered impaired with respect to the client?
** a. Yes, because the stock would be considered a direct financial interest and, consequentially, materiality is not a factor. b. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child. c. No, because the CPA would not be considered to have a direct financial interest in the client. d. No, because the CPA would not be considered to have a material indirect financial interest in the client.
- Which of the following legal situations would be considered to impair the auditor’s independence?
a. An expressed intention by the present management to commence litigation against the auditor alleging deficiencies in audit work for the client, although the auditor considers that there is only a remote possibility that such a claim will be filed. b. Actual litigation by the auditor against the client for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for management advisory services. ** c. Actual litigation by the auditor against the present management alleging management fraud or deceit. d. Actual litigation by the client against the auditor for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for tax services.
3-23. These questions involve other rules in the Code of Professional Conduct.
- Without the consent of the client, a CPA should not disclose confidential client information contained in working papers to a
a. Voluntary quality control review board. ** b. CPA firm that has purchased the CPA's accounting practice. c. Federal court that has issued a valid subpoena. d. Disciplinary body created under state statute.
- The profession’s ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
a. CPA would not be independent. b. Fee was a competitive bid. ** c. Actual fee would be substantially higher. d. Actual fee would be substantially lower than the fees charged by other CPA's for comparable services.
- On completing an audit, Larkin, CPA, was asked by the client to provide technical assistance in the implementation of a new EDP system. The set of pronouncements designed to guide Larkin in this engagement is the Statements on
a. Auditing Standards. ** b. Standards for Management Advisory Services. c. Quality Control Standards. d. Standards for Accountants' EDP Services.
Chapter 4
4-21. These questions pertain to the auditor's liability under common law.
- If a stockbroker sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following is the CPA's best defense?
a. The CPA did not financially benefit from the alleged fraud. b. There was contributory negligence of the client. c. The stockholder lacks privity to sue. ** d. The false statements were immaterial.
- In a common law action against an accountant, the lack of privity is a viable defense if the plaintiff
** a. Is a creditor of the client who sues the accountant for negligence. b. Can prove the presence of gross negligence, which amounts to a reckless disregard for the truth. c. Is the accountant's client. d. Bases his action on fraud.
- Starr Corp., approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain irregularities, which have subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law, Starr at a minimum must prove that Cox
a. Acted recklessly or with lack of reasonable grounds for belief. b. Know of the irregularities. ** c. Failed to exercise due care. d. Was grossly negligent.
Chapter 5
5-21. These questions pertain to financial statement assertions.
- Inquiries of warehouse personnel concerning possible obsolete or slow- moving inventory items provide assurance about management's assertion of
a. Completeness. b. Existence. c. Presentation. ** d. Valuation.
- An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of
a. Existence or occurrence. b. Completeness. ** c. Presentation and disclosure. d. Valuation or allocation.
- Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
** a. Compare a sample of shipping documents to related sales invoices. b. Observe the client's distribution of payroll checks. c. Confirm a sample of recorded receivables by direct communication with the debtors. d. Review standard bank confirmations for indications of kiting.
5-22. These questions relate to evidential matter.
- Two assertions for which confirmation of accounts receivable balances provide primary evidence are
a. Completeness and valuation. b. Valuation and rights and obligations. ** c. Rights and obligations and existence. d. Existence and completeness.
- Which of the following statements relating to the competence of evidential matter is always true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable. b. Accounting data developed under satisfactory internal control are more relevant than data developed under unsatisfactory internal control conditions. c. Oral representations made by management are not valid evidence. ** d. Evidence gathered by auditors must be both valid and relevant to be considered competent.
- Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
a. Bank statement obtained from the client. b. Computations made by the auditor. ** c. Prenumbered client sales invoices. d. Vendor's invoice.
- Which of the following statements is generally correct about the competence 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. To be competent, evidential matter must be either valid or relevant, but need not be both. c. Accounting data alone may be considered sufficient competent evidential matter to issue an unqualified opinion on financial statements. d. Competence of evidential matter refers to the amount of corroborative evidence to be obtained.
5-23. These questions pertain to audit procedures.
- A basic premise underlying analytical review procedures is that
a. These procedures cannot replace tests of balances and transactions. b. Statistical tests of financial information may lead to the discovery of material errors in the financial statements. c. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. ** d. Relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
- Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?
a. The audit program. ** b. The auditor's judgment. c. Generally accepted auditing standards. d. The auditor's working papers.
- In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions. b. Are designed to discover significant subsequent events. ** c. May be either tests of transactions, tests of balances, or analytical tests. d. Will increase proportionately with the auditor's detection risk.
- A CPA is most likely to refer to one or more of the three general auditing standards in determining
a. Awareness of the consistency in the application of GAAP between periods. b. Evaluation of all matters of continuing accounting significance. c. Opinion of any subsequent events occurring since the predecessor's audit report was issued. ** d. Whether the CPA should undertake an audit engagement.
- Engagement letters are widely used in practice for professional engagements of all types. The primary purpose of the engagement letter is to
a. The nature of the CPA's report qualification. b. The scope of the CPA's auditing procedures. c. Requirements for the review of the internal control structure. ** d. Provide a written record of the agreement with the client as to the services to be provided.
- The exercise of due professional care requires that an auditor
a. Examine all available corroborating evidence. ** b. Critically review the judgment exercised at every level of supervision. c. Reduce control risk below the maximum. d. Attain the proper balance of professional experience and formal education.
6-22. These questions relate to planning the engagement.
- The element of the audit planning process most likely to be agreed on with the client before implementation of the audit strategy is the determination of the
a. Methods of statistical sampling to be used I 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. Schedules and analyses to be prepared by the client's staff.
- An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of
a. A review of prior years' working papers. b. An evaluation of the entity's internal control structure. c. Specialized audit programs. ** d. Analytical procedures.
- Analytical procedures used in planning an audit should focus on identifying
a. Material weakness in the internal control structure. b. The predictability of financial data from individual transactions. c. The various assertions that are embodied in the financial statements. ** d. Areas that may represent specific risks relevant to the audit.
- For all audits of financial statements made in accordance with GAAS, the use of analytical procedures is required to some extent
In the As a In the Planning Substantive Review Stage Test Stage
** a. Yes No Yes b. No Yes No c. No Yes Yes d. Yes No No
Chapter 7
7-21. The following questions pertain to materiality.
- Which of the following underlies the application of GAAS, particularly the standards of field work and reporting?
a. Internal control structure. b. Corroborating evidence. ** c. Materiality and relative risk. d. Reasonable assurance.
- Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the AICPA. b. Materiality depends only on the dollar amount of an item relative to other items in the financial statements. c. Materiality depends on the nature of an item rather than the dollar amount. ** d. Materiality is a matter of professional judgment.
- The concept of materiality would be least important to an auditor in determining the
a. Transactions that should be reviewed. b. Need for disclosure of a particular fact or transaction. c. Scope of the CPA's audit program relating to various accounts. ** d. Effects of direct financial interest in the client upon the CPA's independence.
- In developing a preliminary audit strategy, the auditor specifies each of the following components except
a. The extent of understanding of the internal control structure to be obtained. ** b. The tests of details of transactions and balances to be performed. c. The planned assessed level of control risk. d. The extent of tests of controls to be performed.
- Use of the lower assessed level of control risk approach is least likely when
a. The auditor expects that controls related to an assertion are well designed and highly effective. b. An assertion is affected by high volume of routine transactions that are subject to processing controls. ** c. The account to which an assertion pertains is affected primarily by infrequent transactions or adjusting entries. d. The cost of performing more extensive procedures to obtain the understanding of the internal control structure and test controls will be more than offset by cost savings from performing less extensive substantive tests.
Chapter 8
- Which of the following is not a component of an entity's internal control structure?
** a. Audit risk. b. Control activities. c. Information and communication. d. Control environment.
- Which of the following components of an entity's internal control structure includes the development of employee promotion and training policies?
a. Control activities. ** b. Control environment. c. Information and communication. d. Quality control system.
- An auditor's primary consideration regarding an entity's internal control structure policies and procedures is whether they
a. Prevent management override. b. Relate to the control environment. c. Reflect management's philosophy and operating style. ** d. Affect the financial statement assertions.
- Which of the following is not a reason on auditor should obtain an understanding of the components of an entity's internal control structure in planning an audit?
a. To identify the types of potential misstatements that can occur. b. To design substantive tests. ** c. To consider the operating effectiveness of the internal control structure. d. To consider factors that affect the risk of material misstatements.
8-22. These questions pertain to obtaining an understanding of the internal control structure.
- The primary objective of procedures performed to obtain an understanding of the internal control structure is to provide an auditor with
a. Evidential matter to use in reducing detection risk. ** b. Knowledge necessary to plan the audit. c. A basis from which to modify tests of controls. d. Information necessary to prepare flowcharts.
- During consideration of the internal control structure in a financial statement audit, an auditor is not obligated to
** a. Search for significant deficiencies in the operation of the internal control structure. b. Understand the internal control environment and the accounting system. c. Determine whether the control procedures relevant to audit planning have been placed in operation. d. Perform procedures to understand the design of the internal control structure policies.
- When obtaining an understanding on an entity's internal control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because
a. The auditor may believe that the policies and procedures are inappropriate for that particular entity. b. The board of directors may not be aware of management's attitude toward the control environment. c. Management may establish appropriate policies and procedures but not act on them. d. The policies and procedures may be so weak that no reliance is contemplated by the auditor.
- Which of the following is not a step in an auditor's decision to assess control risk at below the maximum?
a. Evaluate the effectiveness of the internal control procedures with tests of controls. b. Obtain an understanding of the entity's accounting system and control environment. ** c. Perform tests of details of transactions to detect material misstatements in the financial statements. d. Consider whether control procedures can have a pervasive effect on financial statement assertions.
- The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that
a. Specified controls requiring segregation of duties may be circumvented by collusion. b. Entity policies may be overridden by senior management. c. Tests of controls may fail to identify procedures relevant to assertions. ** d. Material misstatements may exist in the financial statements.
9-22. These questions relate to tests of control.
- A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is
a. Inspection ** b. Observation. c. Reperformance. d. Reconciliation.
- To obtain evidential matter about control risk, an auditor ordinarily selects tests from a variety of techniques, including
a. Analysis. b. Confirmation. ** c. Reperformance. d. Comparison.
- The objective of tests of details of transactions performed as tests of controls is to
a. Detect material misstatements in the account balances of the financial statements. ** b. Evaluate whether an internal control structure policy or procedure operated effectively. c. Determine the nature, timing, and extent of substantive tests for financial statement assertion. d. Reduce control risk, inherent risk, and detection risk to an acceptably low level.
- An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
a. Confirmation and observation. ** b. Observation and inquiry. c. Analytical procedures and confirmation. d. Inquiry and analytical procedures.
9-23. These following questions relate to documenting control risk assessments.
- When control risk is assessed at the maximum level for all financial statement assertions, an auditor should document the auditor's
Understanding Conclusion Basis for of the entity's that control concluding internal control risk is at the that control structure maximum risk is at the components level maximum level a. Yes No No ** b. Yes Yes No c. No Yes Yes d. Yes Yes Yes
- When an auditor assesses control risk below the maximum level, the auditor is required to document the auditor's
Concluding of the entity's
Basis for Understanding
that control internal control risk is at the structure maximum level components
a. No No ** b. Yes Yes c. Yes No d. No Yes
Chapter 10
10-21. These questions relate to detection.
- The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as
a. Audit risk. b. Inherent risk. c. Control risk. ** d. Detection risk.
