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Flashcards in Becker Deck (114):
1

The fourth standard of reporting requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.  The objective of the fourth standard is to prevent

a. An auditor from expressing different opinions on each of the basic financial statements.

b. Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain evidence.

c. Misinterpretations regarding the degree of responsibility the auditor is assuming.

d. An auditor from reporting on one basic financial statement and not the others.

c. Misinterpretations regarding the degree of responsibility the auditor is assuming.

2

When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must included a(n)

a. Compilation report.

b. Disclaimer of opinion.

c. Unaudited association report.

d. Qualified report.

b. Disclaimer of opinion.

3

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

a. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures.

b. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

c. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.

d. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

b. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

4

In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior ear, as well as the amounts of assets or liabilities at the beginning of the current year.  This was due to client's record retention policies.  If the amount in question could materially affect current operating results, the auditor would

a. Be unable to express an opinion on the current year's results of operations and cash flows.

b. Express a qualified opinion on the financial statements because of a client-imposed scope limitation.

c. Withdraw from the engagement and refuse to be associated with the financial statements.

d. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

a. Be unable to express an opinion on the current year's results of operations and cash flows.

5

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time.  If the entity's financial statements adequately disclose it's financial difficulties, the auditor's report is required to include an explanatory paragraph that specificall uses the phrase(s)

a. "Reasonable period of time, not to exceed one year" and "Going concern."

b. "Reasonable period of time, not to exceed one year." 

c. "Going concern."

d. Neither.

c. "Going concern."

6

The introductory paragraph of an auditor's report contains the following sentences:

We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals.  Those statements were audited by other auditors whose report has has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc. is based sole on the report of the other auditors.

These sentences

a. Indicate a division of responsibility.

b. Assume responsibility for the other auditor.

c. Require a departure from an unqualified opinion.

d. Are an improper form of reporting.

a. Indicate a division of responsibility.

7

Which of the following phrases whould an auditor most likely include in the auditor's report when expressing a qualified opinion because of inadequate disclosure?

a. Subject to the departure from generally accepted accounting principles, as described above.

b. With the foregoing explanation of these omitted disclosures.

c. Except for the omission of the information discussed in the preceding paragraph.

d. Does not present fairly in all material respects.

c. Except for the omission of the information discussed in the preceding paragraph.

8

Under which of the following circumstances would a disclamer of opinion not be appropriate?

a. The auditor is unable to determine the amounts associated with an employee fraud scheme.

b. Management does not provide reasonable justification for a change in accounting principles.

c. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.

d. The chief executive officer is unwilling to sign the management representation letter.

b. Management does not provide reasonable justification for a change in accounting principles.

9

When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(n)

a. Regulation S-X exemption.

b. Report on pro-forma financial statement.

c. Unaudited association report.

d. Disclaimer of opinion.

d. Disclaimer of opinion.

10

An auditor decides to issue a qualified opinion on an entity's financial statements because a majore inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures.  The opinion paragraph of the auditor's report should state that the qualification pertains to

a. A client-imposed scope limitation.

b. A departure from generally accepted auditing standars.

c. The possible effects on the financial statements.

d. Inadequate disclosure of necessary information.

c. The possible effects on the financial statements.

11

When disclaiming an opinion due to a client imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards.  The auditor should also omit the

a. Opinion paragraph.

b. Scope paragraph and Opinion paragraph.

c. Neither.

d. Scope paragraph.

d. Scope paragraph.

12

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?

a. The auditor did not observe the entity's physical inventory and is unable to vecome satisfied as to its balance by other auditing procedures.

b. The financial statements fail to disclose information that is required by generally accepted accounting principles.

c. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.

d. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

b. The financial statements fail to disclose information that is required by generally accepted accounting principles.

13

Under which of the following circumstances would a disclaimer of opinion not be appropriate?

a. The financial statements fail to contain adequate disclosure of related party transactions.

b. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.

c. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.

d. The auditor is unable to determine the amounts associated with illegal acts commited by the client's management.

d. The auditor is unable to determine the amounts associated with illegal acts commited by the client's management.

14

When an auditor expresses an adverse opinion the opinion paragraph should include

a. The principal effects of the departure from generally accepted accounting principles.

b. A direct reference to a separate paragraph disclosing the basis or the opinion.

c. The substantive reasons for the financial statmenets being misleading.

d. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

b. A direct reference to a separate paragraph disclosing the basis or the opinion.

15

An Auditor was unable to obtain sufficient competent evidential matter concerning certain transactions due to an inadequacy in the entity's accounting records.  The auditor would choose between issuing a(n)

a. Qualified opinion and an unqualified opinion with an explanatory paragraph.

b. Unqualified opinion with an explanatory paragraph and an adverse opinion.

c. Adverse opinion and a disclaimer of opinion.

d. Disclamer of opinion and a qualified opinion.

c. Adverse opinion and a disclaimer of opinion.

16

The following explanatory paragraph was included in an auditor's report to indicate a lack of consistency:

"A discussed in note 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?

a. Unqualified - Before opinion paragraph

b. Unqualified - After opinion paragraph

c. Qualified - Before opinion paragraph

d. Qualified - After the opinion paragraph

b. Unqualified - After opinion paragraph

17

An auditor may reasonably issue an "except for" qualified opinion for a(n)

a. Scope limitation.

b. Unjustified accounting change.

c. Scope limitation and Unjustified accounting change.

d. Neither.

c. Scope limitation and Unjustified accounting change.

18

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should

a. Refer to the change in an explanatory paragraph.

b. Concur explicitly with the change and Refer to the change in an explanatory paragraph.

c. Concur explicitly with the change and Issue and "except for" qualified opinion.

d. Issue an "except for" qualified opinion.

a. Refer to the change in an explanatory paragraph.

19

If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor shoud issue a(n)

a. Adverse opinion.

b. Qualified opinion with an expanatory paragraph.

c. Unqualified opinion.

d. Unqualified opinion with an additional explanatory paragraph.

d. Unqualified opinion with an additional explanatory paragraph.

20

When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph

a. Preceding the opinion paragraph and referred to only in the scope paragraph of the auditor's report.

b. Following the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

c. Following the opinion paragraph and referred to only in the scope paragraph of the auditor's report.

d. Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

d. Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

21

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concertn for a reasonable period of time.  If the entity's disclosures concerning this matter are adequate, the audit report may include a(n)

a. Disclaimer of opinion or "Except for" qualified opinion.

b. Neither.

c. "Except for" qualified opinion.

d. Disclaimer of opinion.

d. Disclaimer of opinion.

22

Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets.  Alternative audit procedures cannot be applied, although te auditor was able to examine satisfacotry evidence for all other itmes in the financial statements.  The auditor should issue a(n)

a. "Except for" qualified opinion.

b. Disclaimer of oinion.

c. Unqualified opinion with a searate exlanatory paragraph.

d. Unqualified opinion with an explanation in the scope paragraph.

b. Disclaimer of oinion.

23

If information accomanying the basic financial statements in an auditor-submitted document has been subjected to auditing procedures, the auditor may include in the auditor's report on the financial statements an opinion that the accompanyin information is fairly stated in

a. Accorcance with generally accepted auditing standards.

b. Conformity with generally accepted accounting principles.

c. All material resects in relation to the basic financial statements taken as a whole.

d. Accordance with attestation standards exressing a conclusion about management's assertions.

c. All material resects in relation to the basic financial statements taken as a whole.

24

An auditor concludes that theire is a material inconsistency in the aother information in an annual report to shareholders containing audited financial statements.  If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may

a. Reviese the auditor's report to include a separate explanatory paragraph describing the material inconsistency.

b. Issue an "except for" qualified opinion after discussing the matter with the client's board of directors.

c. Consider the matter closed since the other information is not in the audited financial statements.

d. Disclaime an opinion on the financial statements after explaining the material, inconsistency in a separate explanatory paragraph

a. Reviese the auditor's report to include a separate explanatory paragraph describing the material inconsistency.

25

When audited financial statements are presented in a client's document containing other information the auditor should

a. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.

b. Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements.

c. Perform the appropriate substantive auditing procedures to corroborate the other information.

d. Read the other information to determine that it is consistend with the audited financial statements.

d. Read the other information to determine that it is consistend with the audited financial statements.

26

An auditor may express an opinion on an entity's accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the

a. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial statements.

b. Distribution of the report on the accounts receivable is restricted to internal use only.

c. Auditor also reports on the current asset portion of the entity's balance sheet.

d. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

d. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

27

Field is an employee of Gold Enterprises.  Hardy, CPA, is asked to express an opinion on Field's profit particiapation in Gold's net income.  Hardy may accept ths engagement only if

a. Hardy also audits Gold's complete financial statements.

b. Gold's financial statements are prepared in conformity with GAAP.

c. Hardy's report is available for distribution to Gold's other employees.

d. Field owns controlling interest in Godl.

a. Hardy also audits Gold's complete financial statements.

28

In reviewing the financial statements of a nonpublic entity, an accountant is required to modify the standard review report for which of the following matters?

a. Inability to assess the risk of material misstatement due to fraud and Discovery of significant deficiencies in the design of the entity's internal control.

b. Inability to assess the risk of material misstatement due to fraud

c. Discovery of significant deficiencies in the design of the entity's internal control.

d. Neither

d. Neither

29

An auditor's report would be designated a special report when it is issued in connection with

a. Interim financial information of a publicly held company that is subject to a limited review.

b. Compliance with aspects of regulatory requirements related to audited financial statements.

c. Application of accounting principles to specified transactions.

d. Limited use prospective financial statements such as a financial projection.

b. Compliance with aspects of regulatory requirements related to audited financial statements.

30

An accountant complies unaudited financial statements that are not expected to be used by a third party.  The accountant may decline to issue a compilation report provided:

I. Each page of the financial statements is clearly marked to restrict its use.

II. A written engagement letter is used to document the understanding with the client.

III. A written representation letter is obtained from the client's management.

a. I and III

b. I and II

c. III

d. II

b. I and II

31

An accountant has comiled the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting an Review Services (SSARS).  The financial statements are expected to be used by a third party.  Does SSARS require that the compilation report be printed on the accountant'sletterhead and that the report be manually signed by the accountant?

a. Printed on the accountant's letterhead and Manually signed by the accountant.

b. Printed on the accountant's letterhead

c. Manually signed by the accountant.

d. Neither

d. Neither

32

During an engagement to review the financial statements of a nonpublic entity, an accountant becomes aware that several leases that should be capitalized are not capitalized.  The accountant considers these leases to be material to the financial statements.  The accountant decides to modify the standard review report because management will not capitalize the leases.  Under these circumstances, the accountant should

a.Issue an adverse opinion because of the departure from GAAP. 

b. Express no assurance of any kind on the entity's financial statements.

c. Emphasize that the financial statements are for limited use only.

d. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

d. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

33

Each page of a nonpublic entity's financial statements reviewed by an accountant should include the following reference:

a. See Accompanying Accountant's Footnotes.

b. Reviewed, No material Modifications Required.

c. See Accountant's Review Report.

d. Reviewed, No Accountant's Assurance Expressed.

c. See Accountant's Review Report.

34

During an engagement to review the financial statements of a nonpublic entity, an accountant becomes aware of a material departure from GAAP.  If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should

a. Express negative assurance on the accounting principles that do not conform with GAAP.

b. Disclose the departure from GAAP in a separate paragraph of the report.

c. Issue an adverse or an "except for" qualified opinion, depending on materiality.

d. Express positive assurance on the accounting principles that conform with GAAP.

b. Disclose the departure from GAAP in a separate paragraph of the report.

35

Which of the following procedures is more likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement?

a. Gaining an understanding of the entity's business transactions.

b. Making a preliminary assessment of control risk.

c. Obtaining a representation letter from the chief executive officer.

d. Assisting the entity in adjusting the accounting records.

c. Obtaining a representation letter from the chief executive officer.

36

An accountant who reviews the financial statements of a nonpublic entity should issue a report stating that a review

a. Is substantially less in scope than an audit.

b. Provides negative assurance that the internal control structure is functioning as designed.

c. Provides only limited assurance that the financial statements are fairly presented.

d. Is substantially more in scope than a compilation.

a. Is substantially less in scope than an audit.

37

Which of the following matters is covered in a typical comfort letter?

a. Negative assurance concerning whether the entity's internal controls operated as designed during the period being audited.

b. An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984.

c. Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles.

d. An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

d. An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

38

When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that

a. Describes the limitations on the usefulness of the presentation.

b. Provides an explantion of the differences between an examination and an audit.

c. States that the accountant is responsible for events and circumstances up to one year after the report's date.

d. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.

a. Describes the limitations on the usefulness of the presentation.

39

A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain

a. A statement of limitations on the use of the report.

b. An opinion about whether management's assertion is fairly stated.

c. Negative assurance that control risk has not been assessed.

d. An acknowledgment of responsibility for the sufficiency of the procedures.

a. A statement of limitations on the use of the report.

40

An accountant may accept an engagement to apply agreed-upon procedures to propective financial statements provide that

a. Use of the report is restricted to the specified parties.

b. The prospective financial statements are also examined.

c. Reasonability for the adequacy of the procedures performed is taken by the accountant.

d. Negative assurance is expressed on the prospective financial statements taken as a whole.

a. Use of the report is restricted to the specified parties.

41

Which of the following statements concerning prospective financial statements is correct?

a. Only a financial forecast would normally be appropriate for limited use.

b. Only a financial projection would normally be appropriate for general use.

c. Any type of prospective financial statements would normally be appropriate for limited use.

d. Any type of prospective financial statements would normally be appropriate for general use.

c. Any type of prospective financial statements would normally be appropriate for limited use.

42

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a(n)

a. "Except for" qualified opinion.

b. "Subject to" qualified opinion.

c. Unqualified opinion with a separate explanatory paragraph.

d. Adverse opinion.

d. Adverse opinion.

43

Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a 

a. Partial presentation.

b. Projected balance sheet.

c. Financial forecast.

d. Financial projection.

a. Partial presentation.

44

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?

a. Complying with laws and regulations.

b. Using statistical sampling techniques.

c. Assigning personnel to engagements.

d. Considering audit risk and materiality.

c. Assigning personnel to engagements.

45

Which one of the following is not ture regarding audit documentation for a specific audit?

a. Audit documentation should be sufficient to enable members of the audit team with supervisory responsibilities to understand the nature, timing, extent and results of auditing procedures performed.

b. Audit documentation should indicate which member(s) of the audit team performed and reviewed the audit work.

c. Audit documentation should demonstrate compliance with quality control standards.

d. Audit documentation should demonstrate compliance with the standards of fieldwork.

c. Audit documentation should demonstrate compliance with quality control standards.

46

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?

a. The entity's industry is experiencing declining customer demand.

b. Employees who handle cash receipts are not bonded.

c. Bank reconciliations usually include in-transit deposits.

d. Equipment is often sold at a loss before being fully depreciated.

a. The entity's industry is experiencing declining customer demand.

47

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's

a. Engagement letter and Working papers.

b. Engagement letter.

c. Working papers.

d. Neither

c. Working papers.

48

In assessing the competence and objectivity of an entity's internal auditor, and independent auditor least likely would consider information obtained from

a. Discussions with management personnel.

b. External quality reviews of the internal auditor's activities.

c. Previous experience with the internal auditor.

d. The results of analytical procedures.

d. The results of analytical procedures.

49

Which of the following documentation is not required for an audit in accordance with gennerally accepted auditing standards?

a. A written audit program setting forth the procedures necessary to accomplish the audit's objectives.

b. An indication that the accounting records agree or reconcile with the financial statements.

c. A client engagement letter that summarizes the timing and degails of the auditor's planned fieldwork.

d. The basis for the auditor's conclusions when the assessed level of control risk is below the maximum level.

c. A client engagement letter that summarizes the timing and degails of the auditor's planned fieldwork.

50

During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit.  Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements.

Jones should reconsider the intended degree of reliance to be placed on the

a. Letter of audit inquiry to the client's attorney.

b. Prior years' audit programs.

c. Management representation letter.

d. Preliminarty judgment about materiality levels.

c. Management representation letter.

51

In planning an audit of a new client, an auditor is most likely would consider the methods used to process accounting information because such methods

a. Influence the design of internal control.

b. Affect the auditor's preliminary judgment about materiality levels.

c. Assist in evaluating the planned audit objectives.

d. Determine the auditor's acceptable level of audit risk.

a. Influence the design of internal control.

52

An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed.  The auditor should withdraw from the engagement if the

a. Auditor is precluded from obtaining sufficient competent evidence about the illegal act.

b. Illegal act has an effect on the financial statments that is both material and direct.

c. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.

d. Client refuses to accept the auditor's report as modified for the illegal act.

d. Client refuses to accept the auditor's report as modified for the illegal act.

53

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

a. Materiality of misstatements.

b. Evaluation of accounting estimates.

c. Neither.

d. Materiality of misstatements and Evaluation of accounting estimates.

c. Neither.

54

Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

a. Coordinating the assistance of entity personnel in data preparation.

b. Descussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.

c. Selecting a sample of vendors invoices for comparison to receiving reports.

d. Reading the current year's interim financial statements.

c. Selecting a sample of vendors invoices for comparison to receiving reports.

55

Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?

a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's internal control.

b. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.

c. An indication in the working papers that the accounting records agree or reconcile with the financial statements.

d. The basis for the auditor's conclusions when the assessed level of control risk is at the maximum level for all financial statement assertions.

c. An indication in the working papers that the accounting records agree or reconcile with the financial statements.

56

Several sources of accounting principles for federal governmental entities are in conflict as to the application of an accounting principle.  Which of the following should the auditor consider the most authoritative?

a. Technical Releases of the Accounting and Auditing Policy Committee of the Federal Accounting Standards Advisory Board.

b. Federal Accounting Standards Advisory Board Interpretations.

c. Implementation guides published by the Federal Accounting Standards Advisory Board staff.

d. AICPA Industry Audit and Accounting Guides specifically made applicable to federal governmental agencies by the AICPA and cleared by the Federal Accounting Standards Advisory Board.

b. Federal Accounting Standards Advisory Board Interpretations.

57

An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of the auditor's report

a. A statement of the audit objectives and a discription of the audit scope.

b. Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.

c. The pertinent views of the entity's responsible officials concerning the auditor's findings.

d. A concurrent opinion on the financial statements taken as a whole.

d. A concurrent opinion on the financial statements taken as a whole.

58

Gearty & Duffy, certified public accountants have been engaged to perform an audit of Sleepy Knoll Township in accordance with OMB Circular A-133.  In connection with that engagement which statement is true regarding the determination of major grants.

a. Auditors may use a risk-based approach as long as audit coverage always exceeds 50 percent.

b. Auditors must select all federally assisted programs in excess of $100,000.

c. The required percentage of coverage decreases if the audited organization is classified as low risk.

d. Enough grants must be tested to achieve a single specific coverage percentage.

c. The required percentage of coverage decreases if the audited organization is classified as low risk.

59

An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond generally accepted auditing standars.  The auditor's expanded responsibilities include:

a. Performance of additional procedures to test and report on compliance with laws, rules, regulations, and provisions of contracts or grant agreements that have any effect on federal award programs.

b. Performance of additional procedures to test for noncompliance with laws, rules, and the regulations targeted for review by the Ofice of the Inspector General.

c. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.

d. Performance of additional procedures to test and report on achievement of program objectives.

c. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.

60

Gearty & Duffy, certified public accountants, has been engaged by the Hoot 'n' Holler School District to perform a program audit of the school district's school lunch program, a federal financial assistance program provided through the United States Department of Education.  In performing these audits, Gearty & Duffy would expect:

a. To report on both the financial statements of the school district as well as the financial performance and compliance related to the school district's grants.

b. To audit the fair presentation of federal financial assistance programs in relation to the financial statements of the school district.

c. To conduct an audit of the federal financial assistance program in accordance with specific audit guides.

d. To only audit the accomplishment of program objectives in the context of a single audit.

c. To conduct an audit of the federal financial assistance program in accordance with specific audit guides.

61

Although the scope of audits of recipients of federal financial assistance in accordance with federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?

a.The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

b. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

c. The auditor should obtain written management representations that the recipint's internal auditors will report their findings objectively without fear of political repercussions.

d. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipicnt's financial statements are disclosed to the inspector general.

a.The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

62

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report

a. A statment of assurance that all controls over fraud and illegal acts wer tested.

b. Material instances of fraud and illegal acts that wer discovered.

c. The materiality criteria used by the auditor in considering whether instances of noncompliance were significant.

d. An opinion on whether compliance with laws and regulations affect the entity's goals and objective.s

b. Material instances of fraud and illegal acts that wer discovered.

63

In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations.  This reports should

a. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement.

b. Describe the laws and regulations that the entity must comply with.

c. Provide an opinion on overall compliance with laws and regulations.

d. Indicated that the auditor does not possess legal skills and cannot make legal judgments.

a. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement.

64

Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards require

a. Written report describing the entity's internal controls specifically designed to prevent fraud, abuse, and illegal acts.

b. Written report describing each reportable condition observed including identification of those considered material weaknesses.

c. Statment of negative assurance that internal controls not tested have an immaterial effect on the entity's financial statements.

d. Statment of positive assurance that internal controls designed to detect material errors and fraud were tested.

b. Written report describing each reportable condition observed including identification of those considered material weaknesses.

65

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements?

a.Reperforming the activities for a sample of transactions.

b. Performing analytical procedures using data aggregated at a high level.

c. Vouching a sample of transactions directly related to the actvities.

d. Observing the entity's personnel applying the activities.

d. Observing the entity's personnel applying the activities.

66

Which of the following statements is correct concerning an auditor's assessment of control risk?

a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.

b. Evidence about the operation of controls in prior audits may not be considered during the current year's assessment of control risk.

c. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum.

d. The lower the assessed level of control risk, the less assurnace the evidence must provide that the controls are operating effectively.

a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.

67

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

a. Inquiry and analytical procedures.

b. Reperformance and observation.

c. Comparison and confirmation.

d. Inspection and verification.

b. Reperformance and observation.

68

In obtaining an understanding of an entity's internal controls that are relevant to audit planning, an auditor is required to obtain knowledge about the

a. Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

b. Effectiveness of the internal controls that have been placed in operation.

c. Consistency with which of the internal controls are currently being applied.

d. Controls related to each principal transaction class and account balance.

a. Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

69

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?

a. Gross margin information regarding the client's industry.

b. Confirmations of receivables verifying account balances.

c. Client records documenting the use of EDP programs.

d. Anticipated results documented in budgets or forecasts.

c. Client records documenting the use of EDP programs.

70

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to

a. Document the audtor's understanding of the entity's internal control.

b. Search for significant deficiencies in the operation of internal control.

c. Perform tests of controls to evaluate the effectiveness of the entity's information system relevant to financial reporting.

d. Determine whether controls are suitably designed to prevent or detect material misstatement.

a. Document the audtor's understanding of the entity's internal control.

71

When an auditor assesses control risk at the maximum level, the auditor is required to document the auditor's

a. Neither.

b. Basis for concluding that control risk is at the maximum level.

c. Understanding of the entity's information system.

d. Understanding of the entity's information system and Basis for concluding that control risk is at the maximum level.

c. Understanding of the entity's information system.

72

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including

a. Inquiry

b. Analytical procedures.

c. Calculation.

d. Confirmation.

a. Inquiry

73

Which of the following are considered control environment factors?

a.Detection risk and Human Resources policies and practices.

b. Detection risk

c. Human Resources policies and practices.

d. Neither.

c. Human Resources policies and practices.

74

An auditor wishes to perform tests of controls on a client's cash disbursements procedures.  If the controls 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.

b. Observation and inquiry.

75

In obtaining an understanding of a manufacturing entity's internal control concerning inventorybalances, an auditor most likely would

a. Analyze the liquidity and turnover ratios of the inventory.

b. Perform analytical procedures designed to identify cost variances.

c. Review the entity's descriptions of controls over inventory.

d. Perform test counts of inventory during the entity's physical count.

c. Review the entity's descriptions of controls over inventory.

76

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?

a. Analyze the liquidity and turnover ratios of the inventory.

b. Perform analytical procedures designed to identify cost variances.

c. Review the entity's descriptions of controls over inventory.

d. Perform test counts of inventory during the entity's physical count.

c. Review the entity's descriptions of controls over inventory.

77

Which of the following matters would an auditor most likely consider to be a reportable condition to be communicated to the audit committee?

a. Management's failure to renegotiate unfavorable long-term purchase commitments.

b. Recurring operating losses that may indicated going concern problems.

c. Evidence of a lack of objectivity by those responsible for accounting decisions.

d. Management's current plans to reduce its ownership equity in the entity.

c. Evidence of a lack of objectivity by those responsible for accounting decisions.

78

When management's assertion about the effectiveness of an entity's internal control is presented in a representation letter that will not accompany the CPA's report

a. Use of the report is restricted to management and the board of directors.

 b. The report should contain a statement of management's assertion.

c. The CPA should not accept the engagement.

d. The report should include a negative assurance with respect to the effectiveness of the entity's internal control.

 b. The report should contain a statement of management's assertion.

79

A report on an entity's internal control should include a statement limiting the use of the report when

a. Management's assertion is presented in a separate report that will accompany the CPA's report.

b. Management's assertion is presented as a representation letter to the CPA.

c. Management's assertion is presented based upon criteria that are available to specific parties.

d. Management's assertion is not presented.

c. Management's assertion is presented based upon criteria that are available to specific parties.

80

Which of the following statements is correct concerning an auditor's requred communication of reportable conditions?

a. A reportable condition previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.

b. An auditor should perform tests of controls on reportable conditions before communicating them to the client.

c. An auditor's report on reportable conditions should include a restriction on the distribution of the report.

d. An auditor should communicate reportable conditions after tests of controls, but before commencing substantive tests.

c. An auditor's report on reportable conditions should include a restriction on the distribution of the report.

81

A letter issued on reportable conditions relating to an entity's internal control observed during an audit of financial statements should include a

a. Restriction on the distribution of the report.

b. Description of tests performed to search for material weaknesses.

c. Statment of compliancewith applicable laws and regulations.

d. Paragraph describing management's evaluation of the effectiveness of internal control.

 

a. Restriction on the distribution of the report.

82

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain evidential matter in support of an assessed level of control risk below the maximum level?

a. Observing an entity's employee prepare the schedule of past due accounts receivable.

b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable.

c. Inspecting an entity's analysis of accounts receivable for unusual balances.

d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

a. Observing an entity's employee prepare the schedule of past due accounts receivable.

83

Which of the following procedures would an auditor most likely perform in searching for unrecorded liablities?

a. Vouch a sample of accounts payable entries recorded just before year end to the unmatched receiving report file.

b. Compare a sample of purchase orders issued just after year end with the year-end accounts payable trial balance.

c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices.

d. Scan  the cash disbursements entries recorded just before year end for indications of unusual transactions.

c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices.

84

Which of the following sets of information does an auditor usually confirm on one form?

a. Accounts payable and purchase commitments.

b. Cash in bank and collateral for loans.

c. Inventory on consignment and contingent liabilities.

d. Accounts receivable and accrued interest receivable.

b. Cash in bank and collateral for loans.

85

Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should

a. Add the checks to the daily cash summary.

b. Verifiy that each check is supported by a prenumbered sales invoice.

c. Prepare a duplicate listing of checks received.

d. Record the checks in the cash receipts journal.

c. Prepare a duplicate listing of checks received.

86

An auditor tests an entity's control of obtaining credit approval before shipping goods to custmers in support of management's financial statement assertion of

a. Valuation or allocation.

b. Completeness.

c. Existence or occurrence.

d. Rights and obligations.

a. Valuation or allocation.

87

Which of the following procedures would an entity most likely include in its disaster recovery plan?

a. Convert all data from EDI format to an internal company format.

b. Maintain a trojan horse program to prevent illicit activity.

c. Develop an auxiliary power supply to provide uninterrupted electricity.

d. Store duplicate copies of files in a location away from the computer center.

a. Convert all data from EDI format to an internal company format.

88

Which of the following services performed by another entity would not be considered to be part of the client's information system?

a. Processing of the client's accounting transactions by an electronic data processing service center.

b. Preparation of the client's financial statements by an outside accounting organization.

c. Initiation of the client's weekly payroll transactions by a payroll processing organization.

d. Sale (specifically authorized by the client) of investment securities by an external broker.

d. Sale (specifically authorized by the client) of investment securities by an external broker.

89

Which of the following activities most likely would detect whether payroll data were altered during processing?

a. Monitor authorized distribution of data control sheets.

b . Use test data to verify the performance of edit routines.

c. Examine source documents for opproval by supervisors.

d. Segregate duties between approval of hardware and software specifications.

b . Use test data to verify the performance of edit routines.

90

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal cotnrols placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should

a. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls.

b. State whether PDC's controls were suitably designed to achieve the retailer's objectives.

c. Identify PDC's controls relevant to specific financial statement assertions.

d. Disclose Cook's assessed level of control risk for PDC.

a. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls.

91

Which of the following characteristics distinguishes electronic data interchange (EDI) from other forms of electronic commerce?

a. The cost of sending EDI transactions using a value-added network (VAN) is less than the cost of using the Internet.

b. Software maintenance contracts are unnecessary because thranslation software for EDI transactions need not be updated.

c. EDI commerce is ordinarily conducted without establishing legally binding contracts between trading partners.

d. EDI transactions are formatted using strict stnadards that have been agreed to worldwide.

d. EDI transactions are formatted using strict stnadards that have been agreed to worldwide.

92

Which of the following would an auditor ordinarily consider the greatest risk regarding an entity's use of electronic data interchange (EDI)?

a. Authorization of EDI transactions.

b. Duplication of EDI transmissions.

c. Improper distribution of EDI transactions.

d. Elimination of paper documents.

c. Improper distribution of EDI transactions.

93

Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction of transmission?

a. Hash total.

b. Parity check.

c. Encryption.

d. Check digit.

d. Check digit.

94

Which of the following computer-assisted auditing techniques allows fictiious and real transactions to be processed together without client operating personnel being aware of the testing process?

a. Integrated test facility.

b. Input controls matrix.

c. Parallel simulation.

d. Data entry monitor.

a. Integrated test facility.

95

Mill Co. uses a batch processing method to process its sales transactions. Data on Mill's sales transaction tape are electronically sorted by customer number and are subjected to customer number and are subjected to programmed edit checs in preparing its invoices, sale journals, and updated customer account balances. One of the direct outputs of the creation of this tape most likely would be a 

a. Report showing exceptions and control totals.

b. Printout of the updated inventory records.

c. Report showing overdue accounts receivable.

d. Printout of the sales price master file.

a. Report showing exceptions and control totals.

96

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

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

b. Eliminate the need to use judment in determining appropriate sample sizes.

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

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

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

97

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

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

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

c. Increase the sample size to reduce the effect of the unusually large distribursements.

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

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

98

Which of the following statements is correct concerning statistical sampling in tests of controls?

a. As the population size increases, the sample size should increase proportionately.

b. Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

c. There is an inverse relationship between the expected population deviation rate and the sample size.

d. In determining tolerable rate, an auditor considers detection risk and the sample size.

b. Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

99

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of

a. Assessing control risk too high.

b. Assessing control risk too low.

c. Incorrect rejection.

d. Incorrect acceptance.

c. Incorrect rejection.

100

For which of the following audit tests would and auditor most likely use attribute sampling?

a. Making an independent estimate of the amount of a LIFO inventory.

b. Examining invoices in support of the valuation of fixed asset additions.

c. Selecting accounts receivable for confirmation of account balances.

d. Inspecting employee time cards for proper approval by supervisors.

d. Inspecting employee time cards for proper approval by supervisors.

101

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that

a. The deviation rates of both the auditor's sampe and the population exceed the tolerable rate.

b. The deviation rates of both the auditor's sample and the population is less than the tolerable rate.

c. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

d. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

c. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

102

Which of the following most likely would be an advantage in using classical variable sampling rather than probability-proportional-to-size (PPS) sampling?

a. An estimate of the standard deviation of the population's recorded amounts is not required.

b. The auditor rarely needs the assistance of a computer program to design an efficient sample.

c. Inclusion of zero and negative balances generally does not require special design considerations.

d. Any amount that is individually significant is automatically identified and selected.

c. Inclusion of zero and negative balances generally does not require special design considerations.

103

Which of the following is a true statement regarding documentation requirements for analytical procedures?

a. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to doument the reasons analytical procedures were performed instead of tests of details.

b. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document his or her expectation and management's concurrence with that expectation.

c. When an analytical proedure is used during the overall review stage of the audit, the auditor is required to document the auditor's expectation and any additional procedures performed to investigate significant unexplained differences.

d. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor's expectation and the factors considered in developing that expectation.

d. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor's expectation and the factors considered in developing that expectation.

104

The objective of tests of details of transactions performed as substantive tests is to

a. Comply with generally accepted auditing standards.

b. Attain assurance about the reliability of the information system relevant to financial reporting.

c. Detect material misstatements in the financial statements.

d. Develops its data from sources solely within the entity.

c. Detect material misstatements in the financial statements.

105

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence or occurence and

a. Valuation or allocation.

b. Rights and obligations.

c. Existence or occurence.

d. Presentation and disclosure.

b. Rights and obligations.

106

In auditing accounts receivable, the nagative form of confirmation request most likely would be used when

a. The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole.

b. Response rates in prior years to properly designed positive confirmation requests were inadequate.

c. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.

d. The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

d. The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

107

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurance assertion concerning sales transactions and the auditor has already gathered evidence supporting

a. Opening and closing inventory blances.

b. Cash receipts and accounts receivable.

c. Shipping and receiving activities.

d. Cutoffs of sales and purchases.

b. Cash receipts and accounts receivable.

108

When control risk is assessed as low fr assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

a. Observing the distribution of paychecks.

b. Footing and crossfooting the payroll register.

c. Inspecting payroll tax returns.

d. Recalculating payroll accruals.

d. Recalculating payroll accruals.

109

In auditing long-term bonds payable, an auditor most likely would

a. Perform analytical procedures on the bond premium and discount accounts.

b. Examine documentation of assets purchased with bond proceeds for liens.

c. Compare interest expense with the bond payable amount for reasonableness.

d. Confirm the existence of individual bondholders at year end.

c. Compare interest expense with the bond payable amount for reasonableness.

110

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

a. Vendors with whom the entity has previously done business.

b. Amounts recorded in the accounts payable subsidiary ledger.

c. Payees of checks drawn in the month after the year end.

d. Invoices filed in the entity's open invoice file.

a. Vendors with whom the entity has previously done business.

111

Which of the following auditin procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

a. Testing the entity's computation of standard overhead rates.

b. Obtaining confirmation of inventories pledged under loan agreements.

c. Reviewing shipping and receiving cutoff procedures for inventories.

d. Tracing test counts to the entity's inventory listing.

a. Testing the entity's computation of standard overhead rates.

112

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the

a. Trust company has no direct contract with th entity employees responsible for maintaining investment accounting records.

b. Securities are registered in the name of the trust company, rather than the entity itself.

c. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.

d. Trust company places the securities in a ban safe-deposit vault under the custodian's exclusive control.

a. Trust company has no direct contract with th entity employees responsible for maintaining investment accounting records.

113

In identifying matters for communication with an entity's audit committee, an auditor most likely would aske management whether

a. The turnover in the accounting department was unusually high.

b. It consulted with another CPA firm about accounting matters.

c. There were any subsequent events of which the auditor was unaware.

d. It agreed with the auditor's assessed level of control risk.

b. It consulted with another CPA firm about accounting matters.

114

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?

a. Current ratio - No effect/Quick ratio - No effect

b. Current ratio - Increase/Quick ratio - Increase

c. Current ratio - No effect/Quick ratio - Increase

d. Current ratio - Increase/Quick ratio - No effect

a. Current ratio - No effect/Quick ratio - No effect