Audit and Assurance - Concepts and Applications Test Bank 1

C. The prospective client is unwilling to make financial records available to the CPA

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

a. The CPA lacks a thorough understanding of the prospective client's operations and industry.

b. The prospective client has fired its prior auditor.

c. The prospective client is unwilling to make financial records available to the CPA.

d. The CPA is unable to review the predecessor auditor's working papers.

B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts

B. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold

Which of the following is an example of fraudulent financial reporting?

a. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

b. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.

c. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses.

B. Make preliminary judgments about materiality levels for audit purposes

When planning an audit, an auditor should:

a. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them.

b. Make preliminary judgments about materiality levels for audit purposes.

c. Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.

d. Prepare a preliminary draft of the management representation letter.

B. Fraud

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to

a. Errors.

b. Fraud.

c. Business risk.

d. Illegal acts.

D. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

Which of the following is correct concerning requirements about auditor communications about fraud?

a. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report.

b. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

c. All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.

d. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

C. Substantive procedures

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on:

a. Internal control.

b. Tests of controls.

c. Substantive procedures.

d. Statistical analysis.

D. The nonrecording of transactions

The most difficult type of misstatement to detect is fraud based on

a. The over recording of transactions.

b. Related-party receivables.

c. Recorded transactions in subsidiaries.

d. The nonrecording of transactions.

A. Inventory items of small size, but high value

Which of the following conditions identified during the audit increases the risk of employee fraud?

a. Inventory items of small size, but high value.

b. Existence of a mandatory vacation policy for employees performing key functions.

c. Presence of reconciling items on a client prepared year-end proof of cash.

d. Large amounts of cash in the bank.

A. Planning

The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit refers to:

a. Planning

b. Directing

c. Audit procedures

d. Supervision

A. Analytical procedures

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. Analytical procedures.

b. Tests of transactions and balances.

c. Specialized audit programs.

d. An assessment of internal control.

B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements

Which of the following statements is not correct about materiality?

a. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

c. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

C. An engagement letter

Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in:

a. A memorandum to be placed in the permanent section of the auditing working papers.

b. A client representation letter.

c. An engagement letter.

d. A confirmation letter attached to the constructive services letter.

A. Detection risk

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

a. Detection risk.

b. Account risk.

c. Control risk.

d. Inherent risk.

C. Valuation and competence

Which of the following is not a financial statement assertion relating to account balances?

a. Completeness.

b. Existence.

c. Valuation and competence.

d. Rights and obligations.

C. Management's disregard for internal control

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?

a. Management's attempt to meet earnings per share growth rate goals.

b. Lack of understanding of the potential client's internal auditors' computer assisted audit techniques.

c. Management's disregard for internal control.

d. The existence of related party transactions.

B. Confirmation of all major accounts

Which of the following procedures is not performed as a part of planning an audit engagement?

a. Reviewing the working papers of the prior year.

b. Confirmation of all major accounts.

c. Designing an audit program.

d. Performing analytical procedures.

C. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

Which of the following is correct concerning requirements about auditor communications about fraud?

a. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.

b. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

c. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

B. The work is to be adequately planned and assistants, if any, are to be properly supervised.

The auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit program for every audit. Which audit standard is most closely related to this requirement?

a. Due professional care is to be exercised in the planning and performance of the audit and preparation of the report.

b. The work is to be adequately planned and assistants, if any, are to be properly supervised.

c. In all matters relating to the assignment, an independent mental attitude is to be maintained by the auditor(s).

d. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

A. Defalcations occurring due to invalid electronic approvals.

Which of the following is most likely to be an example of fraud?

a. Defalcations occurring due to invalid electronic approvals.

b. Unreasonable accounting estimates arising from oversight.

c. Mistakes in the application of accounting principles.

d. Mistakes in processing data.

B. Detection risk

The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

a. Inherent risk.

b. Detection risk.

c. Sampling risk.

d. Non-sampling risk.

B. Written communication with the client

The auditor should document the understanding established with a client through a

a. Completely detailed audit plan.

b. Written communication with the client.

c. Oral communication with the client.

d. Written or oral communication with the client.

D. Financial statement assertions

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the

a. Timing of audit procedures.

b. Cost-benefit of gathering evidence.

c. Selected audit techniques.

d. Financial statement assertions.

D. The auditors' preliminary assessment of internal control.

Which of the following topics is not normally included in an engagement letter?

a. The auditors' estimate of the fee for the engagement.

b. Limitations on the scope of the engagement.

c. A description of responsibility for the detection of fraud.

d. The auditors' preliminary assessment of internal control.

D. Analytical procedures used in planning an audit generally use data aggregated at a high-level

Which of the following statements is correct concerning analytical procedures?

a. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk.

b. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

c. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions developed by management.

d. Analytical procedures used in planning an audit generally use data aggregated at a high level.

D. Substantive tests should increase

As the acceptable level of detection risk decreases, the assurance directly provided from

a. Substantive tests should decrease.

b. Tests of controls should increase.

c. Tests of controls should decrease.

d. Substantive tests should increase. The correct answer is: Substantive tests should

D. Information, which existed at the report date and may affect the report, comes to the auditor's attention

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless

a. The control environment changes after issuance of the report.

b. Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements.

c. Information about an event that occurred after the date of the auditor's report comes to the auditor's attention.

d. Information, which existed at the report date and may affect the report, comes to the auditor's attention.

B. Exist independently of the financial statement audit

Inherent risk and control risk differ from detection risk in that they

a. May be assessed in either quantitative or nonquantitative terms.

b. Exist independently of the financial statement audit.

c. Arise from the misapplication of auditing procedures.

A. Limitations of the engagement.

Which of the following matters is generally included in an auditor's engagement letter?

a. Limitations of the engagement.

b. Factors to be considered in establishing preliminary judgments about materiality.

c. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.

d. Management's liability for illegal acts committed by its employees.

D. Tolerable rate (75%) was less than the achieved upper precision limit (8%).

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2½ % of the sales invoices lacked approval. A sample of 200 invoices was examined and seven of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the

a. Expected deviation rate (2 ½ %) was less than the tolerable rate (7%).

b. Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3 ½ %).

c. Expected deviation rate (7%) was more than the percentage of errors in the sample (3 ½ %).

d. Tolerable rate (75%) was less than the achieved upper precision limit (8%).

A. Obtain an understanding of the business purpose of the transaction

After determining that a related party transaction has, in fact, occurred, an auditor should

a. Obtain an understanding of the business purpose of the transaction.

b. Perform analytical procedure to verify whether similar transactions occurred, but were not recorded.

c. Substantive that the transaction was consummated on terms equivalent to an arm's-length transaction.

d. Add separate paragraph to the auditor's report to explain the transaction.

D. Provide an objective basis for quantitatively evaluating sample risk

An advantage of statistical over nonstatistical sampling methods in test of controls is that the statistical methods

a. Eliminate the need top used judgment in determining appropriate sample sizes.

b. Can more easily convert the sample into a dual-purpose test useful for substantive testing.

c. Afford greater assurance than a nonstatistical sample of equal size.

d. Provide an objective basis for quantitatively evaluating sample risk.

A. 4 ½ %

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2½ % of the sales invoices lacked approval. A sample of 200 invoices was examined and seven of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%.*. The allowance for sampling risk was

a. 4 ½ %.

b. 3 ½ %.

c. 1%.

d. 5 ½ %.

A. Item in the accounting population should have an opportunity to be selected

An underlying feature of random-based selection of items is that each

a. Item in the accounting population should have an opportunity to be selected.

b. Item in the accounting population is randomly ordered.

c. Selected using replacement

d. Stratum of the accounting population is given equal representation in the sample.

B. Has been properly voided

An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher.

a. Represents an immaterial peso amount.

b. Has been properly voided.

c. Cannot be located.

d. Constitutes a deviation.

B. Treat the missing purchase order has a deviation for the purpose of evaluating the sample

An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the client's internal control procedures. One of the purchase orders in the chosen sample cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase was properly approved. The auditor should

a. Choose another purchase order to replace the missing purchase order in the sample.

b. Treat the missing purchase order has a deviation for the purpose of evaluating the sample.

c. Select to a completely new set of 20 purchase orders.

d. Consider this test of control invalid and proceed with substantive test since internal control cannot be relied upon.

B. Additional substantive test of details is required

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

a. The communication with the audit committee should be revised.

b. Additional substantive test of details is required.

c. Irregularities exist among the relevant account balances.

d. Internal control activities are not operating effectively.

B. Considering unusual or unexpected account balances that were not previously identified

Analytical procedures used in the overall review stage of the audit generally include

a. Performing test of transactions to corroborate management's financial statement assertions.

b. Considering unusual or unexpected account balances that were not previously identified.

c. Gathering evidence concerning account balances that have not changed from the prior year.

d. Retesting controls that appeared to be ineffective during the assessment of control risk.

D. Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection

Audit sampling involves the

a. Application of audit procedures to all items that comprise a class of transactions or an account balance.

b. Selection of all items over a certain amount.

c. Application of audit procedures to all items over a certain amount and those that are unusual or have a history of error.

d. Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection.

B. Management fraud

Fraud involving one or more members of management or those charged with governance is referred to as

a. Misappropriation of assets.

b. Management fraud. c. Fraudulent financial reporting.

d. Employee fraud.

B. I, II and III

In designing audit procedures, the auditor required to determine appropriate means of selecting items for testing to gather audit evidence. Which of the following means is/are available to the auditor?

I. Selecting all items (100% examination)

II. Selecting specific items

III. Auditing sampling

a. I and III only

b. I, II and III

c. III only

d. And II only

D. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment

The likelihood of assessing control risk too high is the risk that the sample selected to test controls.

a. Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole.

b. Contains misstatement that could be material to the financial statement when aggregated with misstatement in other account balances of transactions classes.

c. Does not support the tolerable misstatement for some or all of management's assertions.

d. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

D. I, II and III

In which of the following circumstances would an auditor most likely meet with the client's legal counsel to discuss the likely outcome of the litigation and claims?

I. The auditor determines that the matter is a significant risk.

II. There is a disagreement between management and the entity's legal counsel.

III. The subject matter of the litigation is complex.

a. I and II only

b. II and III only

c. I and III only

d. I, II and III

A. Auditor's report

The date of the management representation letter should coincide with the date of the

a. Auditor's report

b. Latest related party transaction

c. Balance sheet

d. Latest interim financial information

B. Attribute sampling

The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of5%. In the review client invoices the auditor should use

a. Stratified sampling b. Attribute sampling

c. Variable sampling

d. Discovery sampling

A. Prepared by management and sent by the auditor

The letter of audit inquiry should be

a. Prepared by management and sent by the auditor.

b. Prepared by the auditor and sent by the management.

c. Prepared and sent by the auditor.

d. Prepared and sent by management.

C. When the class of transactions or account balance consist of large number of small value items

It will be appropriate to audit all of the items that make up class of transactions or account balance (100%examination), except

a. When the class of transactions or account balance consist of a small number of large value items.

b. When there is a significant risk of misstatement and other selection methods do not provide sufficient appropriate audit evidence.

c. When the class of transactions or account balance consist of large number of small value items.

d. When the repetitive nature of a calculation or other process performed automatically by the client's computer information system (CIS) makes a 100% examination cost effective.

D. Postpone expenditures for research and development projects

Nico Robin, CPA, believes there is substantial doubt about the ability of Enies Lobby Co. to continue as a going concern for a reasonable period of time. In evaluating Enies Lobby's plans for dealing with the adverse effects of future conditions and events, Nico Robin most likely would consider, as a mitigating factor, Enies Lobby's plans to

a. Discuss with lenders the terms of all debt and loan agreements.

b. Strengthen internal controls over cash disbursement.

c. Purchase production facilities currently being leased from related party.

d. Postpone expenditures for research and development projects.

B. Misappropriation of assets

The auditor is concerned with the fraud that causes a material misstatement in the financial statements. There are two types of intentional misstatement that are relevant to the auditor: misstatement resulting from fraudulent financial reporting and misstatements resulting from

a. Collusion within the entity or with third parties.

b. Misappropriation of assets.

c. Management fraud. d. Employee fraud.

C. Corroboration of the information furnished by management about litigation, claims, and assessments

The primary reason an auditor request that letters of inquiry be sent to a client's attorneys is to provide the auditor with

a. A description and evaluation of litigation, claims, and assessment that existed at the balance sheet date.

b. The attorneys' opinion of the client's historical experiences in recent similar litigation.

c. Corroboration of the information furnished by management about litigation, claims, and assessments.

d. The probable outcome of asserted claims and pending or threatened litigation.

B. May occur in a systematic pattern, thus destroying the sample randomness

When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population

a. May systematically occur more than once in the sample.

b. May occur in a systematic pattern, thus destroying the sample randomness.

c. Must be recorded in a systematic pattern before the sample can be drawn.

d. Must be systematically replaced in the population after sampling.

A. Effectiveness to the audit

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

a. Effectiveness to the audit

b. Preliminary estimates of materiality levels.

c. Efficiency of the audit

d. Tolerable misstatement.

C. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations if the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?

a. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate minus the allowance for sampling risk equals the expected population deviation rate.

b. Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.

c. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

d. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

C. A book value for each sample item is known

Use of the ratio estimation sampling technique to estimated peso amounts in appropriate when

a. The total book value is known and corresponds to the sum of all the individual book values.

b. The audited values are nearly proportional to the book values.

c. A book value for each sample item is known.

d. There are some observed differences between audited values and book values.

C. Precision

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible misstatement in either direction. This statistical concept is known as

a. Standard deviation. b. Reliability.

c. Precision.

d. Projected misstatement.

D. Stratify the cash disbursement population so that the unusually large disbursements are selected.

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursement if the auditor is aware of several unusually large cash disbursements?

a. Increase the sample size to reduce the effect of the unusually large disbursement.

b. Set the tolerable rate of deviation at a lower level than originally planned.

c. Continue to draw new samples until all the large disbursements appear in the sample.

d. Stratify the cash disbursement population so that the unusually large disbursements are selected.

A. Obtain certain written representations from management

When an audit is made in accordance with generally accepted auditing standards, the auditor should always

a. Obtain certain written representations from management.

b. Observe the taking of physical inventory on the balance sheet date.

c. Document the understanding of the client's internal control and the basis for all conclusions about the assessed level of control risk for financial statement assertions.

d. Employ analytical procedures as substantive test to obtain evidence about assertions related to account balances.

B. Not issue a review report.

Loony, CPA, has been engaged to review the financial statements of Filch Company, a non-issuer company. The management of Filch Company has refused to sign a representation letter for the engagement. What should be Loony's response?

a. Issue a review report modified for a scope restriction.

b. Not issue a review report.

c. Issue a standard review report providing all other review procedures were performed.

d. Issue a review report modified for a possible departure from generally accepted accounting principles.

A. Cash flows from operating activities are negative

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

a. Cash flows from operating activities are negative.

b. Research and development projects are postponed.

c. Significant related party transactions are pervasive.

d. Stock dividends replace annual cash dividends.

B. Making a loan without scheduled terms for payment of the funds.

Which of the following events most likely indicates the existence of related parties?

a. Selling real estate at a price that differs significantly from its book value.

b. Making a loan without scheduled terms for payment of the funds.

c. Borrowing a large sum of money at a variable rate of interest.

d. Discussing merger terms with a company that is a major competitor.

D. Both I and II

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

I. Expected Error

II. Tolerable Error

a. Neither I nor II

b. II only

c. I only

d. Both I and II

C. Sequential sampling

Which of the following statistical sampling plans does not use a fixed sample size for tests of controls?

a. PPS sampling

b. Variables sampling c. Sequential sampling d. Attributes sampling

D. There is an inverse relationship between the sample size and the tolerable rate

Which of the following statement is correct concerning statistical sampling in test of controls?

a. The qualitative aspects of deviations are not considered by the auditor.

b. Deviations from control procedure at given rate usually result in misstatements at a higher rate.

c. As the population size doubles, the sample size should also double.

d. There is an inverse relationship between the sample size and the tolerable rate.

D. The auditor's responsibility is to consider the appropriateness of management's use of the going concern assumption and consider whether there are material uncertainties about the entity's ability to continue as a going concern that need to be disclosed in the financial statements

Which of the following statements best describes the auditor's responsibility concerning the appropriateness of the going concern assumption in the preparation of the financial statements?

a. The auditor's responsibility is to give a guarantee in the audit report that the entity has the ability to continue as a going concern.

b. The auditor's responsibility is to make a specific assessment of the entity's ability to continue as a going concern.

c. The auditor's responsibility is to predict future events or conditions that may cause the entity to cease to continue as going concern.

d. The auditor's responsibility is to consider the appropriateness of management's use of the going concern assumption and consider whether there are material uncertainties about the entity's ability to continue as a going concern that need to be disclosed in the financial statements.

A. Block selection

Which of the following statistical selection techniques is least desirable for use by an auditor?

a. Block selection

b. Sequential selection c. Stratified selection d. Systematic selection

D. I believe that the action can be settled for less than the damages claimed

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessment most likely would cause the auditor to request clarification?

a. I believe that the company will be able to defend this action successfully.

b. I believe that the plaintiff's case against the company is without merit.

c. I believe that the possible liability to the company is nominal in amount.

d. I believe that the action can be settled for less than the damages claimed.

A. An incorrect accounting estimate arising from oversight or misinterpretation of facts

Error includes

a. An incorrect accounting estimate arising from oversight or misinterpretation of facts.

b. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements.

c. Engaging in complex transactions that are structured to misinterpret the financial position or financial performance of the entity.

d. Intentional misapplication of accounting policies relating to amounts, classification, manner or presentation, or disclosure.

C. Representations by management can be a substitute for other audit evidence that the auditor could reasonably expect to be available

Which of the following statements concerning management representations is incorrect?

a. If a representation by management is contradicted by other audit evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations by management.

b. If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter, which has, or may have, a material effect on the financial statements and such audit evidence is expected to be available; this will constitute a limitation in the scope of the audit, even if a representation from management has been received on the matter.

c. Representations by management can be a substitute for other audit evidence that the auditor could reasonably expect to be available.

d. The auditor's working papers would ordinarily include a summary of oral discussions with management or written representations from management.

B. The date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statement subject to audit

Which of the following statements best describes the "date of the financial statements?"

A. The date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statement.

B. The date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statement subject to audit.

C. The date on which those with the recognized authority assert that they have prepared the entity's complete set of financial statement, including the related notes, and that they have taken responsibility for them.

D. The date that the auditor's report and audited financial statements are made available to third parties.

C. An unmodified (unqualified) opinion

A note to the financial statements of the Gringotts Bank indicates that all of the records relating to the bank's business operations are stored on magnetic disks, and that there are no emergency back-up systems or duplicate disks stored since the Gringotts Bank and their auditors consider the occurrence of a catastrophe to be remote. Based upon this, one would expect the auditor's report to express

a. An "except for" opinion

b. An adverse opinion

c. An unmodified (unqualified) opinion

d. A qualified opinion

A. An emphasis-of-matter paragraph explaining the change.

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

a. An emphasis-of-matter paragraph explaining the change.

b. No reference to consistency.

c. A justification for making the change and the impact of the change on reported net income.

d. A reference to a prior period adjustment in the opinion paragraph.

D. not describe the reason for lack of independence but should state specifically that the CPA is not independent.

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should:

a. not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards.

b. clearly state the specific reasons for lack of independence.

c. include a middle paragraph clearly describing the CPA's association with the client and explaining why the CPA was unable to gather sufficient competent evidential matter to warrant the expression of an opinion.

d. not describe the reason for lack of independence but should state specifically that the CPA is not independent.

C. An uncertainty

A modification of the CPA's report on a review of the interim financial statements of a publicly-held company would be necessitated by which of the following?

a. Reference to another accountant

b. Inadequate disclosure

c. An uncertainty

d. Lack of consistency

B. Deciding the number of digits to use in the random number table and their association with the population numbering system

Correspondence is established between the random number table and the population by

a. Selecting a random starting point on the table

b. Deciding the number of digits to use in the random number table and their association with the population numbering system

c. Defining which digits the auditor uses in a column and the method of reading the table

d. Identifying each item in the population with a unique number

A. Both Years

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover

a. Both years.

b. Only the current year, but the prior year's report should be presented.

c. Only the current year, but the prior year's report should be referred to.

d. Only the current year.

D. Qualified and disclaimer

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?

a. Qualified and adverse.

b. Adverse and unmodified (unqualified) with an emphasis-of-matter paragraph added.

c. Disclaimer and unmodified (unqualified) with an emphasis-of-matter paragraph added.

d. Qualified and disclaimer.

B. Representative sample

A sample in which the characteristics of the sample are the same as those of the population is a/an

a. Random sample

b. Representative sample

c. Attributes sample

d. Variables sample

B. Attributes sampling

A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is

a. Estimation sampling b. Attributes sampling c. Variables sampling d. Population proportional to size sampling

D. read and consider the manner of presentation of the "other financial information"

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to:

a. indicate in the auditor's report that the "other financial information" is unaudited.

b. consider whether the "other financial information" is accurate by performing a limited review

c. obtain written representations from management as to the accuracy of "other financial information"

d. read and consider the manner of presentation of the "other financial information"

C. Either I or II

Unqualified financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and

I. The report on the prior period should be reissued to accompany the current period report

II. The report on the current period should include as a separate paragraph description of the responsibility

III. assumed for the prior period's financial statements

a. Both I and II

b. I only

c. Either I or II d. II only

A. Use the date of the original report.

When an auditor reissues in 20X7 the auditor's report on the 20X5 financial statements at the request of the client without revising the 20X5 wording, the auditor should

a. Use the date of the original report.

b. Dual date the report.

c. Use the date of the current period report. d. Use the date of the client's request.

D. Examine a sample of duplicate sales invoices for credit approval by the credit manager

Attribute sampling would be an appropriate method to use on which of the following procedures in an audit program?

a. Observe whether the duties of the accounts receivable clerk are separate from handling cash

b. Review the aged schedule of accounts receivable to determine if receivables from officers are included

c. Review sales transactions for large and unreasonable amounts

d. Examine a sample of duplicate sales invoices for credit approval by the credit manager

B. It is easy to use

The advantage of systematic sample selection is that

a. There is limited possibility of it being biased.

b. It is easy to use.

c. It is unnecessary to determine if the population is arranged randomly.

d. All of the choices are correct

C. Can conclude that the sample exception rate is 2%

If an auditor, without statistical sampling, selects a sample of one hundred items from a population and finds two exceptions, the auditor

a. Can calculate the highest exception rate expected in the population

b. Cannot make any conclusions about either the sample or the population

c. Can conclude that the sample exception rate is 2%

d. Can conclude that the population exception rate is 2%

D. Not performed

If the auditor decides to assess control risk at the maximum level, tests of controls are

a. Unchanged from prior planned settings b. Reduced in number c. Increased in number d. Not performed

C. Review sales transactions for large and unusual amounts

For which of the following audit procedures is audit sampling inappropriate?

a. Audit sampling is appropriate for each of the choices

b. Examine a sample of duplicate sales invoices for credit approval

c. Review sales transactions for large and unusual amounts

d. Compare the quantity on duplicate sales invoices with the quantity on related shipping documents

D. Based on the auditor's personal judgment in the circumstances

The appropriate assumption to make regarding the overall percent of error in those population items containing an error is

a. Determined using random number tables

b. Set after a quantitative analysis of client's internal control system

c. Based on statistical analysis using confidence limits

d. Based on the auditor's personal judgment in the circumstances

D. Tolerable deviation rate

The deviation rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the

a. Sample deviation rate

b. Acceptable sampling risk

c. Estimated population deviation rate

d. Tolerable deviation rate

B. The computed upper exception rate

The highest estimated exception rate in the population at a given acceptable risk of assessing control risk too low is

a. The tolerable exception rate

b. The computed upper exception rate c. The upper exception rate

d. Estimated population exception rate

A. Sampling risk

The possibility that the auditor's conclusion based on a sample may be different from the conclusion reached if the entire population were subjected to the same procedure is called

a. Sampling risk

b. Audit risk

c. Detection risk

d. Non-sampling risk

C. Haphazard selection

When the auditor goes through a population and selects items for the sample without regard to their size, source or other distinguishing characteristics, it is called

a. Statistical selection b. Systematic sample selection

c. Haphazard selection d. Block sample selection

A. Systematic selection

The process which requires the calculation of an interval and then selects the items based in the size of the interval is

a. Systematic selection b. Statistical sampling c. Random selection

d. Computerized selection

C. Acceptable risk of assessing control risk too low

The risk which the auditor is willing to take accepting a control as being effective when it is not is the

a. Estimated population exception rate

b. Finite correction factor

c. Acceptable risk of assessing control risk too low

d. Tolerable exception rate

C. The number of exceptions in the sample divided by the sample size

The sample exception rate equals

a. The number of exceptions in the population divided by the sample size

b. The number of items in the population multiplied by the number of exceptions in the sample

c. The number of exceptions in the sample divided by the sample size

d. The number of exceptions in the population divided by the population rate

D. Deviation occurrence rate the auditor expects to find in the population

To determine an optimum sample size when sampling methods are used in a substantive test, all of the following factors must be considered except

a. Risk levels the auditor is willing to accept

b. Variance in the population

c. Tolerable misstatement

d. Deviation occurrence rate the auditor expects to find in the population

B. Population size

Which of the following factors is generally not considered in determining sample size for a test of controls?

a. Expected population deviation rate

b. Population size

c. Risk of assessing control risk too low

d. Tolerable rate

A. Attributes sampling

Which of the following is not a type of statistical method that provides results in peso terms?

a. Attributes sampling b. Variables sampling c. Monetary-unit sampling

d. Sampling with probability proportional to size

A. Audit procedures in the sample item will not vary as a result of using either statistical or nonstatistical sampling

Which of the following statements best expresses the impact that the performance of audit procedures has on statistical and non-statistical sampling?

a. Audit procedures in the sample item will not vary as a result of using either statistical or nonstatistical sampling.

b. Audit procedures on the sample item will vary as a result of using either statistical or nonstatistical sampling.

c. Statistical sampling requires quantitative audit procedures, whereas nonstatistical sampling requires judgmental audit procedures.

d. The audit procedures will be the same for either statistical or nonstatistical sampling but they must be performed differently for each.

B. Board of Directors

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to

a. Corporate Controller

b. Board of Directors c. Vice-President for Finance

d. Corporate Stockholders

B. Responsibility for losses because of errors of judgment

Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the audit?

a. Critical review of the audit work performed at every level of supervision

b. Responsibility for losses because of errors of judgment

c. Observance of the standards of field work and reporting

d. Degree of skill commonly possessed by others in the profession