Question 1

In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:

Accepted Answer

A)  Reconcile the open invoice file. 
B)  Inspect goods upon receipt. 
C)  Authorize requisitions of goods. 
D)  Negotiate terms with vendors. 
A)  Reconcile the open invoice file. 
B)  Inspect goods upon receipt. 
C)  Authorize requisitions of goods. 
D)  Negotiate terms with vendors.

Question 2

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of:

Accepted Answer

A)  Valuation and allocation. 
B)  Existence. 
C)  Completeness. 
D)  Rights and obligations. 
A)  Valuation and allocation. 
B)  Existence. 
C)  Completeness. 
D)  Rights and obligations.

Question 3

What is an auditor's responsibility for supplementary information which is outside the basic financial statements, but required by the FASB?

Accepted Answer

A)  The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. 
B)  The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted. 
C)  The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information. 
D)  The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information. 
A)  The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. 
B)  The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted. 
C)  The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information. 
D)  The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.

Question 4

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Accepted Answer

A)  Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? 
B)  Are purchase requisitions prenumbered and independently matched with vendor invoices? 
C)  Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? 
D)  Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for? 
A)  Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? 
B)  Are purchase requisitions prenumbered and independently matched with vendor invoices? 
C)  Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? 
D)  Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Question 5

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:

Accepted Answer

A)  Supported by a vendor's invoice. 
B)  Stamped "paid" by the check signer. 
C)  Prenumbered and accounted for. 
D)  Approved for authorized purchases. 
A)  Supported by a vendor's invoice. 
B)  Stamped "paid" by the check signer. 
C)  Prenumbered and accounted for. 
D)  Approved for authorized purchases.

Question 6

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?

Accepted Answer

A)  Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures. 
B)  Clark may report on the comparative financial statements provided the 20X1 statements do not contain any obvious material misstatements. 
C)  Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark's report on the comparative financial statements. 
D)  Clark may report on the comparative financial statements provided Clark updates the report on the 20X1 statements that do not include the GAAP disclosures. 
A)  Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures. 
B)  Clark may report on the comparative financial statements provided the 20X1 statements do not contain any obvious material misstatements. 
C)  Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark's report on the comparative financial statements. 
D)  Clark may report on the comparative financial statements provided Clark updates the report on the 20X1 statements that do not include the GAAP disclosures.

Question 7

Which of the following would not be considered an analytical procedure?

Accepted Answer

A)  Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. 
B)  Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. 
C)  Computing accounts receivable turnover by dividing credit sales by the average net receivables. 
D)  Developing the expected current-year sales based on the sales trend of the prior five years. 
A)  Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. 
B)  Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. 
C)  Computing accounts receivable turnover by dividing credit sales by the average net receivables. 
D)  Developing the expected current-year sales based on the sales trend of the prior five years.

Question 8

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Accepted Answer

A)  Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. 
B)  Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. 
C)  The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. 
D)  Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. 
A)  Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. 
B)  Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. 
C)  The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. 
D)  Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

Question 9

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?

Accepted Answer

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. 
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.

Question 10

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

Accepted Answer

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. 
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.

Question 11

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of:

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 12

Which of the following statements is correct concerning the use of negative confirmation requests?

Accepted Answer

A)  Unreturned negative confirmation requests rarely provide significant explicit evidence. 
B)  Negative confirmation requests are effective when detection risk is low. 
C)  Unreturned negative confirmation requests indicate that alternative procedures are necessary. 
D)  Negative confirmation requests are effective when understatements of account balances are suspected. 
A)  Unreturned negative confirmation requests rarely provide significant explicit evidence. 
B)  Negative confirmation requests are effective when detection risk is low. 
C)  Unreturned negative confirmation requests indicate that alternative procedures are necessary. 
D)  Negative confirmation requests are effective when understatements of account balances are suspected.

Question 13

Which of the following procedures would be most effective in reducing attestation risk?

Accepted Answer

A)  Discussion with responsible individuals. 
B)  Examination of evidence. 
C)  Inquiries of senior management. 
D)  Analytical procedures. 
A)  Discussion with responsible individuals. 
B)  Examination of evidence. 
C)  Inquiries of senior management. 
D)  Analytical procedures.

Question 14

Which of the following characteristics most likely would be indicative of check kiting?

Accepted Answer

A)  High turnover of employees who have access to cash. 
B)  Many large checks that are recorded on Mondays. 
C)  Low average balance compared to high level of deposits. 
D)  Frequent ATM checking account withdrawals. 
A)  High turnover of employees who have access to cash. 
B)  Many large checks that are recorded on Mondays. 
C)  Low average balance compared to high level of deposits. 
D)  Frequent ATM checking account withdrawals.

Question 15

Which of the following provides the most authoritative guidance for an auditor?

Accepted Answer

A)  An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry. 
B)  A Journal of Accountancy article discussing implementation of a new standard. 
C)  General guidance provided by a Statement on Auditing Standards. 
D)  Specific guidance provided by an interpretation of a Statement on Auditing Standards. 
A)  An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry. 
B)  A Journal of Accountancy article discussing implementation of a new standard. 
C)  General guidance provided by a Statement on Auditing Standards. 
D)  Specific guidance provided by an interpretation of a Statement on Auditing Standards.

Question 16

In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:

Accepted Answer

A)  Becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern. 
B)  Desires to disclose the specialist's findings, which imply that a more thorough audit was performed. 
C)  Is able to corroborate another specialist's earlier findings that were consistent with management's representations. 
D)  Discovers significant deficiencies in the design of the entity's internal control that management does not correct. 
A)  Becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern. 
B)  Desires to disclose the specialist's findings, which imply that a more thorough audit was performed. 
C)  Is able to corroborate another specialist's earlier findings that were consistent with management's representations. 
D)  Discovers significant deficiencies in the design of the entity's internal control that management does not correct.

Question 17

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

Accepted Answer

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. 
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.

Question 18

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.   Which of the following checks might indicate kiting?

Accepted Answer

A)  #101 and #303. 
B)  #202 and #404. 
C)  #101 and #404. 
D)  #202 and #303. 
A)  #101 and #303. 
B)  #202 and #404. 
C)  #101 and #404. 
D)  #202 and #303.

Question 19

In a computerized payroll system environment, an auditor would be least likely to use test data to test controls related to:

Accepted Answer

A)  Missing employee numbers. 
B)  Proper approval of overtime by supervisors. 
C)  Time tickets with invalid job numbers. 
D)  Agreement of hours per clock cards with hours on time tickets. 
A)  Missing employee numbers. 
B)  Proper approval of overtime by supervisors. 
C)  Time tickets with invalid job numbers. 
D)  Agreement of hours per clock cards with hours on time tickets.

Question 20

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?

Accepted Answer