Question 1

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries?

Accepted Answer

A)  Completeness. 
B)  Existence. 
C)  Rights. 
D)  Valuation. 
A)  Completeness. 
B)  Existence. 
C)  Rights. 
D)  Valuation.

Question 2

With respect to the auditor's planning of a year-end audit, which of the following statements is always true?

Accepted Answer

A)  An engagement should not be accepted after the fiscal year-end. 
B)  An inventory count must be observed at the balance sheet date. 
C)  The client's audit committee should not be told of any specific audit procedures which will be performed. 
D)  It is an acceptable practice to carry out parts of the examination at interim dates. 
A)  An engagement should not be accepted after the fiscal year-end. 
B)  An inventory count must be observed at the balance sheet date. 
C)  The client's audit committee should not be told of any specific audit procedures which will be performed. 
D)  It is an acceptable practice to carry out parts of the examination at interim dates.

Question 3

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

Accepted Answer

A)  There are significant related party transactions that management claims occurred in the ordinary course of business. 
B)  Internal control activities requiring the segregation of duties are subject to management override. 
C)  Management continues to employ an inefficient system of information technology to record financial transactions. 
D)  It is unlikely that sufficient evidence is available to support an opinion on the financial statements. 
A)  There are significant related party transactions that management claims occurred in the ordinary course of business. 
B)  Internal control activities requiring the segregation of duties are subject to management override. 
C)  Management continues to employ an inefficient system of information technology to record financial transactions. 
D)  It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Question 4

While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and:

Accepted Answer

A)  Assess the risk of misstatements due to illegal acts. 
B)  Consider the complexity of the transactions involved. 
C)  Consider the likelihood that the risks could result in material misstatements. 
D)  Determine materiality levels. 
A)  Assess the risk of misstatements due to illegal acts. 
B)  Consider the complexity of the transactions involved. 
C)  Consider the likelihood that the risks could result in material misstatements. 
D)  Determine materiality levels.

Question 5

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

Accepted Answer

A)  Several members of management have recently purchased additional shares of the entity's stock. 
B)  Several members of the board of directors have recently sold shares of the entity's stock. 
C)  The entity distributes financial forecasts to financial analysts that predict conservative operating results. 
D)  Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices. 
A)  Several members of management have recently purchased additional shares of the entity's stock. 
B)  Several members of the board of directors have recently sold shares of the entity's stock. 
C)  The entity distributes financial forecasts to financial analysts that predict conservative operating results. 
D)  Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Question 6

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered?

Accepted Answer

A)  Client manuals of accounts and charts of accounts. 
B)  AICPA Industry Audit Guides. 
C)  Prior-year working papers of the predecessor auditors. 
D)  Latest annual and interim financial statements issued by the client. 
A)  Client manuals of accounts and charts of accounts. 
B)  AICPA Industry Audit Guides. 
C)  Prior-year working papers of the predecessor auditors. 
D)  Latest annual and interim financial statements issued by the client.

Question 7

When planning an audit, an auditor should:

Accepted Answer

A)  Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. 
B)  Make preliminary judgments about materiality levels for audit purposes. 
C)  Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. 
D)  Prepare a preliminary draft of the management representation letter. 
A)  Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. 
B)  Make preliminary judgments about materiality levels for audit purposes. 
C)  Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. 
D)  Prepare a preliminary draft of the management representation letter.

Question 8

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

Accepted Answer

A)  Large amounts of cash in the bank. 
B)  Existence of a mandatory vacation policy for employees performing key functions. 
C)  Inventory items of small size, but high value. 
D)  Presence of reconciling items on a client prepared year-end proof of cash. 
A)  Large amounts of cash in the bank. 
B)  Existence of a mandatory vacation policy for employees performing key functions. 
C)  Inventory items of small size, but high value. 
D)  Presence of reconciling items on a client prepared year-end proof of cash.

Question 9

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?

Accepted Answer

A)  Decreases in accounts payable. 
B)  Decreases in accounts receivable. 
C)  Negative cash flows from investing. 
D)  Negative operating cash flows. 
A)  Decreases in accounts payable. 
B)  Decreases in accounts receivable. 
C)  Negative cash flows from investing. 
D)  Negative operating cash flows.

Question 10

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Accepted Answer

A)  Purchase returns and allowances. 
B)  Allowance for doubtful accounts. 
C)  Common stock. 
D)  Noncontrolling interest of a subsidiary purchased during the year. 
A)  Purchase returns and allowances. 
B)  Allowance for doubtful accounts. 
C)  Common stock. 
D)  Noncontrolling interest of a subsidiary purchased during the year.

Question 11

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Accepted Answer

A)  Large amounts of liquid assets that are easily convertible into cash. 
B)  Low growth and profitability as compared to other entity's in the same industry. 
C)  Financial management's participation in the initial selection of accounting principles. 
D)  An overly complex organizational structure involving unusual lines of authority. 
A)  Large amounts of liquid assets that are easily convertible into cash. 
B)  Low growth and profitability as compared to other entity's in the same industry. 
C)  Financial management's participation in the initial selection of accounting principles. 
D)  An overly complex organizational structure involving unusual lines of authority.

Question 12

Tests for unrecorded assets typically involve tracing from:

Accepted Answer

A)  Source documents to recorded journal entries. 
B)  Source documents to observations. 
C)  Recorded journal entries to documents. 
D)  Recorded journal entries to observations. 
A)  Source documents to recorded journal entries. 
B)  Source documents to observations. 
C)  Recorded journal entries to documents. 
D)  Recorded journal entries to observations.

Question 13

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

Accepted Answer

A)  Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. 
B)  An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. 
C)  An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. 
D)  An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. 
A)  Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. 
B)  An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. 
C)  An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. 
D)  An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Question 14

Which measure of materiality (or both) considers quantitative considerations? $$\begin{array} { | l | c | c | } 
\hline & \text { Planning } & \text { Evaluation } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$

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 15

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: $$\begin{array} { | c | c | c | } 
\hline & \text { Errors } & \text { Misappropriation of Assets } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$

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 16

Which of the following is least likely to be required on an audit?

Accepted Answer

A)  Evaluate the business rationale for significant, unusual transactions. 
B)  Make a legal determination of whether fraud has occurred. 
C)  Review accounting estimates for biases. 
D)  Test appropriateness of journal entries and adjustments. 
A)  Evaluate the business rationale for significant, unusual transactions. 
B)  Make a legal determination of whether fraud has occurred. 
C)  Review accounting estimates for biases. 
D)  Test appropriateness of journal entries and adjustments.

Question 17

Confirming a bank account establishes existence but not rights to the cash balance.

Accepted Answer

A) True 
 B)False

Question 18

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:

Accepted Answer

A)  A memorandum to be placed in the permanent section of the auditing working papers. 
B)  An engagement letter. 
C)  A client representation letter. 
D)  A confirmation letter attached to the constructive services letter. 
A)  A memorandum to be placed in the permanent section of the auditing working papers. 
B)  An engagement letter. 
C)  A client representation letter. 
D)  A confirmation letter attached to the constructive services letter.

Question 19

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

Accepted Answer

A)  Adequacy of the preplanned audit plan. 
B)  Ability to establish consistency in application of accounting principles between years. 
C)  Apparent scope limitation. 
D)  Integrity of management. 
A)  Adequacy of the preplanned audit plan. 
B)  Ability to establish consistency in application of accounting principles between years. 
C)  Apparent scope limitation. 
D)  Integrity of management.

Question 20

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 risk assessment phase of the audit by the use of:

Accepted Answer

A)  Tests of transactions and balances. 
B)  An assessment of internal control. 
C)  An audit time budget. 
D)  Analytical procedures. 
A)  Tests of transactions and balances. 
B)  An assessment of internal control. 
C)  An audit time budget. 
D)  Analytical procedures.

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries?

With respect to the auditor's planning of a year-end audit, which of the following statements is always true?

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and:

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

When planning an audit, an auditor should:

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

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Tests for unrecorded assets typically involve tracing from:

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

Which measure of materiality (or both) considers quantitative considerations? Planning Evaluation A. Yes Yes B. Yes No C. No Yes D. No No

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: Errors Misappropriation of Assets A. Yes Yes B. Yes No C. No Yes D. No No

Which of the following is least likely to be required on an audit?

Confirming a bank account establishes existence but not rights to the cash balance.

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:

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

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 risk assessment phase of the audit by the use of:

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Filters

Exam 6: Planning the Audit; Linking Audit Procedures to Risk

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries?

With respect to the auditor's planning of a year-end audit, which of the following statements is always true?

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks, and:

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

When planning an audit, an auditor should:

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

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Tests for unrecorded assets typically involve tracing from:

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

Which measure of materiality (or both) considers quantitative considerations? Planning Evaluation A. Yes Yes B. Yes No C. No Yes D. No No

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: Errors Misappropriation of Assets A. Yes Yes B. Yes No C. No Yes D. No No

Which of the following is least likely to be required on an audit?

Confirming a bank account establishes existence but not rights to the cash balance.

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:

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:

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 risk assessment phase of the audit by the use of:

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Filters