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Material Type: Notes; Professor: Balogun; Class: Auditing; Subject: Accounting; University: Fayetteville State University; Term: Unknown 1989;
Typology: Study notes
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Auditing Study Guide
Chapter 1
1-21. These questions pertain to types of audits and other services performed by CPA firms.
Program Economy & Results Compliance Efficiency a. Yes Yes No ** b. Yes Yes Yes c. No Yes Yes d. Yes No Yes
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. 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.
Advancement Inspection Consultation a. Yes Yes Yes ** b. Yes Yes Yes c. No Yes Yes d. Yes No Yes
a. Supervision and review. b. Continuing professional education. c. Professional development. ** d. Quality control.
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.
** 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.
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.
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.
Management's Auditor's Responsibility Responsibility ** a. Explicitly Explicitly b. Implicitly Implicitly c. Implicitly Explicitly d. Explicitly Implicitly
** 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.
"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.
** 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.
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.
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.
** 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. 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.
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.
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.
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.
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.
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.
** 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.
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.
a. Completeness. b. Existence. c. Presentation. ** d. Valuation.
a. Existence or occurrence. b. Completeness. ** c. Presentation and disclosure. d. Valuation or allocation.
** 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.
a. Completeness and valuation. b. Valuation and rights and obligations. ** c. Rights and obligations and existence. d. Existence and completeness.
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.
a. Bank statement obtained from the client. b. Computations made by the auditor. ** c. Prenumbered client sales invoices. d. Vendor's invoice.
** 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. 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.
a. The audit program. ** b. The auditor's judgment. c. Generally accepted auditing standards. d. The auditor's working papers.
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. 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.
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.
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.
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.
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.
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.
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.
a. Internal control structure. b. Corroborating evidence. ** c. Materiality and relative risk. d. Reasonable assurance.
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.
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.
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.
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
** a. Audit risk. b. Control activities. c. Information and communication. d. Control environment.
a. Control activities. ** b. Control environment. c. Information and communication. d. Quality control system.
a. Prevent management override. b. Relate to the control environment. c. Reflect management's philosophy and operating style. ** d. Affect the financial statement assertions.
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.
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.
** 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.
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.
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.
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. Inspection ** b. Observation. c. Reperformance. d. Reconciliation.
a. Analysis. b. Confirmation. ** c. Reperformance. d. Comparison.
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.
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.
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
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.
a. Audit risk. b. Inherent risk. c. Control risk. ** d. Detection risk.