Question 1

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of:

Accepted Answer

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

Question 2

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

Accepted Answer

A)  Lake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence. 
B)  Lake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests. 
C)  Lake may refer to Cope only if Lake's report indicates the division of responsibility. 
D)  Lake may not refer to Cope under the circumstances above.

Question 3

An auditor's communication with those charged with governance is required to include the:

Accepted Answer

A)  Basis for the auditor's preliminary judgment about materiality. 
B)  Justification for the auditor's selection of sampling methods. 
C)  Discussion of disagreements with management about matters that significantly impact the entity's financial statements. 
D)  Assessment of the quality of the entity's earnings as compared to the previous year.

Question 4

Which of the following would an auditor least likely consider with respect to fair values?

Accepted Answer

A)  Segregation of duties between those committing the entity to certain transactions and those responsible for undertaking the valuations related to those transactions. 
B)  The effect on fair value measurement and disclosures of information available subsequent to the audit. 
C)  The role of information technology in determining fair value measurements and disclosures. 
D)  Whether the valuation methods used are appropriate in relation to the industry in which the entity operates.

Question 5

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that:

Accepted Answer

A)  Justifies the reasons for departing from generally accepted accounting principles. 
B)  States whether the financial statements are fairly presented in conformity with another comprehensive basis of accounting. 
C)  Refers to the note to the financial statements that describes the basis of accounting. 
D)  Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

Question 6

The audit documentation that makes up the current file most likely would include a copy of the:

Accepted Answer

A)  Bank reconciliation. 
B)  Pension plan contract. 
C)  Articles of incorporation. 
D)  Flowchart of the internal control.

Question 7

Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the U.S. should:

Accepted Answer

A)  Understand the accounting principles generally accepted in the other country. 
B)  Be certified by the appropriate auditing or accountancy board of the other country. 
C)  Notify management that the auditor is required to disclaim an opinion on the financial statements. 
D)  Receive a waiver from the auditor's state board of accountancy to perform the engagement.

Question 8

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are:

Accepted Answer

A)  Susceptible to bias. 
B)  Consistent with prior periods. 
C)  Insensitive to variations. 
D)  Similar to industry guidelines.

Question 9

An auditor may achieve audit objectives related to particular assertions by:

Accepted Answer

A)  Performing analytical procedures. 
B)  Adhering to a system of quality control. 
C)  Preparing audit documentation. 
D)  Increasing the level of detection risk.

Question 10

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

Accepted Answer

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.

Question 11

The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to:

Accepted Answer

A)  Matters to which the attorney has given substantive attention in the form of legal representation. 
B)  An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. 
C)  The attorney's opinion of the entity's historical experience in recent similar litigation. 
D)  The probable outcome of asserted claims and pending or threatened litigation.

Question 12

The following data pertain to Cowl, Inc., for the year ended December 31, 20X4:  What was Cowl's rate of return on assets for 20X4?

Accepted Answer

A)  5% 
B)  6% 
C)  20% 
D)  24%

Question 13

Which of the following statements is a basic element of the auditor's standard report?

Accepted Answer

A)  The disclosures provide reasonable assurance that the financial statements are free of material misstatement. 
B)  The auditor evaluated the overall internal control. 
C)  An audit includes assessing significant estimates made by management. 
D)  The financial statements are consistent with those of the prior period.

Question 14

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

Accepted Answer

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.

Question 15

To exercise due professional care an auditor should:

Accepted Answer

A)  Critically review the judgment exercised by those assisting in the audit. 
B)  Examine all available corroborating evidence supporting management's assertions. 
C)  Design the audit to detect all instances of illegal acts. 
D)  Attain the proper balance of professional experience and formal education.

Question 16

Which of the following factors are included in an entity's control environment?

Accepted Answer

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

Question 17

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about:

Accepted Answer

A)  Occurrence. 
B)  Understandability and classification. 
C)  Completeness. 
D)  Valuation and accuracy.

Question 18

An auditor of a manufacturer would most likely question whether that client has committed illegal acts if the client has:

Accepted Answer

A)  Been forced to discontinue operations in a foreign country. 
B)  Been an annual donor to a local political candidate. 
C)  Failed to correct material weaknesses in internal accounting control that were reported after the prior year's audit. 
D)  Disclosed several subsequent events involving foreign operations in the notes to the financial statements.

Question 19

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

Accepted Answer

A)  Accelerate research and development projects related to future products. 
B)  Accumulate treasury stock at prices favorable to Hill's historic price range. 
C)  Purchase equipment and production facilities currently being leased. 
D)  Negotiate reductions in required dividends being paid on preferred stock.

Question 20

The negative request form of accounts receivable confirmation is useful particularly when the:

Accepted Answer