Audit Homework questions

When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client’s ending inventory balance. This audit procedure provides assurance about which management assertion?

Rights and obligations

During an audit of a company’s cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion?

Existence

Jones, CPA, is planning the audit of Rhonda’s Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda’s representation in this regard:

is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

Independent auditors of financial statements perform audits that reduce:

information risk faced by investors.

Which of the following would best be described as an attest engagement?

An engagement to assess the effectiveness of an internal control system.

The Sarbanes–Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?

All of the choices are correct.

When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?

Cutoff.

Substantial equivalency refers to:

permitting a CPA to practice in another state without having to obtain a license in that state.

The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about:

Valuation or allocation.

A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of:

operational auditing.

Which of the following best describes the relationship between auditing and attestation engagements?

Auditing is a subset of attestation engagements that focuses on the certification of financial statements.

When auditing the accounts receivable account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of:

existence.

When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management’s assertion regarding:

Existence.

In auditing the accrued liabilities account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of:

completeness.

In an attestation engagement, a CPA practitioner is engaged to:

prepare a written report containing a conclusion about the reliability of a management assertion.

In testing the goodwill at an audit client in the retail industry, an auditor may seek to determine whether the account balance had been impaired. Such impairment procedures would be designed to test which financial statement assertion?

Valuation or allocation.

An auditor’s purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management’s assertion about:

presentation and disclosure.

Which of the following best describes the scope of audit and compilation engagements compared to a review engagement?

	Audit	Compilation
a.	Lesser than review	Lesser than review
b.	Greater then review	Lesser than review
c.	Lesser than review	Greater than review
d.	Greater than review	Greater than review

Option B

 If a nonissuer prepares financial statements that omit substantially all footnote disclosures required by GAAP, the accountants' compilation report:

should indicate that the disclosures are omitted and that this omission might affect users’ conclusions.

During a review of a nonissuer’s financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by SSARS?

Internal control deficiencies.

Which of the following is not related to ethical requirements of auditors?

Professional judgment

Which of the following principles is most closely associated with the auditors’ conclusion as to the fair presentation of the entity’s financial statements?

Reporting principle

Auditors’ understanding of the internal control in an entity provides information for:

planning the nature, timing, and extent of substantive procedures on an audit.

Which of the following opinions would be issued if auditors believed that the entity’s financial statements were not presented in conformity with GAAP?

Adverse opinion

Which of the following statements is not true with respect to the performance principle?

Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.

Which of the following categories of principles is most closely related to gathering audit evidence?

Performance

The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as:

audit procedures.

Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board?

Develop Auditing Standards for the audits of issuers.

Which of the following procedures would provide the most reliable audit evidence?

Inspection of bank statements obtained directly from the client’s financial institution.

Which of the following topics is not addressed in the auditors’ report for an issuer?

Absolute assurance regarding the fairness of the entity’s financial statements in accordance with GAAP.

Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?

Relevant ethical requirements.

Which of the following is true with respect to PCAOB inspections of accounting firms?

PCAOB inspections review a sample of audits conducted by firms as well as the firm’s systems of quality control.

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would:

be considered as exercising proper due care.

Which of the following is most closely related to the relevance of audit evidence?

In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable.

The evidence considered most appropriate by auditors is best described as:

direct personal knowledge obtained through physical observation and mathematical recalculation.

Which of the following is most closely related to the responsibilities principle?

The auditors’ compliance with relevant ethical requirements of independence and due care.

Which of the following concepts is least related to the standard of due care?

Reasonable assurance

Which of the following best describes the general contents of the first paragraph of the "Basis for Opinion" section of the auditors’ report?

Statements identifying the responsibility of auditors and management in the financial reporting process.

The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit is:

to determine the nature, timing, and extent of substantive procedures to be performed.

One of an accounting firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following:

standards within a system of quality control.

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following?

Evidence of a conservative systematic bias

Which of the following procedures would a CPA most likely perform in planning a financial statement audit?

Compare financial information with nonfinancial operating data.

When auditing the existence assertion for an asset, auditors proceed from the:

general ledger back to the supporting original transaction documents.

Which of the following procedures would most likely be performed during planning?

Identifying related parties

When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company’s precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes’s work in the audit report?

The auditors’ report should mention the use of the audit specialist only when the audit specialist’s findings affect the auditors’ conclusions.

Which of the following is an advantage of computer-assisted audit techniques (CAATs)?

The software can be used for audits of clients that use differing computer equipment and file formats.

Which of the following would be considered an analytical procedure?

Comparing inventory balances to recent sales activities

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?

The auditors’ judgment about their independence with regard to the client

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

Scanning the minutes for significant transactions with members of the board of directors

Which of the following communications is most likely to be written before the balance-sheet date?

An engagement letter

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

There will be a client-imposed scope limitation.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They typically use financial and nonfinancial data aggregated at a high level.

When initiating communications with predecessor auditors, prospective auditors should expect:

All of the choices are correct.

An auditor's permanent file audit documentation most likely will contain:

excerpts of the corporate charter and bylaws.

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?

Being able to decide early what type of audit opinion to issue

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

Schedules and analyses to be prepared by the client’s employees.

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the:

current file audit documentation.

With respect to the concept of materiality, which of the following statements is correct?

Materiality is a matter of professional judgment.

Generally accepted auditing standards require that auditors always prepare and use:

a written audit plan.

Prior to accepting a new audit engagement, a public accounting firm should:

All of the choices are correct.

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions?

Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis

Auditors perform analytical procedures in the planning stage of an audit for the purpose of:

identifying unusual conditions that deserve more auditing effort.

The risk of material misstatement is composed of which audit risk components?

Inherent risk and control risk

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client’s internal control is referred to as:

risk of material misstatement.

An audit strategy memorandum contains

Specifications of procedures the auditors believe appropriate for the financial statements under audit.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to:

evaluate the effect of the noncompliance on the financial statements.

Under the Private Securities Litigation Reform Act (the act), independent auditors are required to first:

report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

The risk that the auditors’ own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is:

detection risk.

One of the typical characteristics of management fraud is:

victimization of investors through the use of materially misleading financial statements.

A primary objective of analytical procedures used in the final review stage of an audit is to:

assist the auditor in evaluating the overall financial statement presentation.

Auditing standards do not require auditors of financial statements to:

report all errors and frauds found to police authorities.

Analytical procedures are generally used to produce evidence from:

relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Auditors are not responsible for accounting estimates with respect to:

making the estimates.

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?

Evidence of a conservative systematic bias

Which of the following circumstances would most likely cause an audit team to perform extended procedures?

The client made several large adjustments at or near year-end.

Analytical procedures used when planning an audit should concentrate on:

accounts and relationships that can represent specific potential problems and risks in the financial statements.

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?

Accounts receivable

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from low to high and audit risk and inherent risk remain constant, the acceptable level of detection risk is most likely to:

change from high to moderate.

An audit committee is:

composed of members of a company’s board of directors who are not involved in the day-to-day operations of the company.

An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

an error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value.

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must:

obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

Effectiveness of audit procedures would be reduced by:

performing procedures during the interim period as opposed to at the fiscal year-end date.

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the:

authorization of transactions from the custody of related assets.

Which of the following is an example of a limitation of an internal control system?

All of these are limitations.

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for:

confirmation of balances.

The primary purpose for obtaining an understanding of internal control during the audit of a nonissuer is to:

determine the nature, timing, and extent of further audit tests to be performed.

Which of the following controls is not an example of a monitoring control that is used to fulfill the monitoring component of the COSO framework?

Three-Way match of purchase order, receiving report and vendor invoice

Both management and auditors have responsibilities related to the audit client’s internal control system. What is an example of management’s responsibility related to internal control system?

All of these are the responsibility of management.

According to the COSO Framework, internal control is a process that is designed to achieve objectives in three different categories. Which of the following responses is not one of the categories identified in the COSO Framework?

Relevant financial reports

If they decide to rely on internal controls, the audit team should assess control risk for relevant assertions by considering the evidence obtained from all sources, including:

All of the choices are correct.

When evaluating an internal control deficiency as part of a financial statement audit, the primary difference between a significant deficiency and a material weakness depends on:

the magnitude of the potential misstatement resulting from the deficiency or the deficiencies.

A material weakness is a situation in which:

it is reasonably possible that a material misstatement would not be prevented or detected and corrected on a timely basis.

Which of the following methods would be the most effective technique for an auditor to perform when testing the operating effectiveness of an internal control activity?

Reperformance of the control activity

Which of the following is a preventive control?

Separation of duties between the payroll and personnel departments

When considering auditor’s responsibilities for the client’s internal control system, much depends on whether the audit team believes it can rely on the client’s internal control system in order to modify substantive testing on the financial statement audit. If the audit team is able to rely on the internal control system, which impact on substantive testing would you expect to see:

the timing of the substantive testing might occur at the interim testing date.

A transaction-level internal control activity is best described as:

an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

When assessing control risk on a preliminary basis during a financial statement audit, a key objective of evaluating the design of an internal control system is to:

determine whether the company’s internal control activities mitigate the risk of material misstatement for the relevant assertions if they operate effectively.

Which of the following items is not one of the five components of an internal control system, according to the COSO framework?

Completeness and accuracy

A SOC 1 Type 2 report supporting the auditors' report on internal control over financial reporting for an issuer provides assurance with respect to:

	Controls placed in operation	Operating effectiveness of controls
a.	Yes	Yes
b.	Yes	No
c.	No	Yes
d.	No	No

Option A

Which of the following is not correct with respect to a user auditors' request for a SOC 1 report?

Type 1 reports would be most appropriate for auditors' reporting requirements for issuers.