Question 1

In the audit of a nonpublic company,the auditors have a responsibility to report on all FASB-required supplementary information.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following procedures is not a procedure that is completed near the end of the engagement?

Accepted Answer

A) Review cash transactions. 
B) Review to identify subsequent events. 
C) Obtain the lawyer's letter. 
D) Obtain the letter of representations.

Question 3

In auditing the balance sheet,most revenue and expense accounts are also audited.Which accounts are most likely to be audited when auditing Accounts Receivable?

Accepted Answer

A) Sales and Cost of Goods Sold. 
B) Interest and Bad Debt Expense. 
C) Sales and Bad Debt Expense. 
D) Interest and Cost of Goods Sold.

Question 4

Which of the following is not a procedure normally performed while completing the audit?

Accepted Answer

A) Obtain a lawyer's letter. 
B) Obtain a representations letter. 
C) Perform an overall review using analytical procedures. 
D) Obtain confirmation of capital stockholdings from shareholders.

Question 5

One reason why the independent auditors perform analytical procedures on the client's operations is to identify:

Accepted Answer

A) Weaknesses of a material nature in internal control. 
B) Non-compliance with prescribed control procedures. 
C) Improper separation of accounting and other financial duties. 
D) Unusual transactions.

Question 6

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year,irrespective of whether the misstatements occurred in the current or previous years is referred to as the:

Accepted Answer

A) Evaluation materiality approach. 
B) Iron curtain approach. 
C) Projected misstatement approach. 
D) Rollover approach.

Question 7

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?

Accepted Answer

A) Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. 
B) Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. 
C) Determine whether reportable conditions have been corrected. 
D) Develop an estimate of the total likely misstatement in the financial statements.

Question 8

A CPA reviews a client's payroll procedures.The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:

Accepted Answer

A) Reviewing and approving time reports for subordinate employees. 
B) Distributing payroll checks to employees. 
C) Hiring subordinate employees. 
D) Initiating requests for salary adjustments for subordinate employees.

Question 9

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?

Accepted Answer

A) Miscellaneous revenue. 
B) Professional fees. 
C) Travel expense. 
D) Repairs and maintenance.

Question 10

Management estimates the company's allowance for doubtful accounts as $200,000,and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000.The likely misstatement in this situation is:

Accepted Answer

A) $0 
B) $30,000 
C) $40,000 
D) $50,000

Question 11

An auditor will ordinarily examine invoices from lawyers primarily in order to:

Accepted Answer

A) Substantiate accruals. 
B) Assess the legal ramifications of litigation in progress. 
C) Estimate the dollar amount of contingent liabilities. 
D) Identify possible unasserted litigation, claims and assessments.

Question 12

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:

Accepted Answer

A) Confirmation of related lawsuits with the claimants. 
B) Qualification of the audit report. 
C) An assessment that loss of the litigation is probable. 
D) An adverse opinion.

Question 13

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated.These considerations will affect the audit report as follows:

Accepted Answer

A) If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. 
B) If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. 
C) If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. 
D) If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

Question 14

Which of the following auditing procedures is ordinarily performed last?

Accepted Answer

A) Reading of the minutes of the directors' meetings. 
B) Confirming accounts payable. 
C) Obtaining a management representation letter. 
D) Testing of the purchasing function.

Question 15

The review of audit working papers by the audit partner is normally completed:

Accepted Answer

A) Prior to year-end. 
B) Immediately as each working paper is completed. 
C) Near the completion of the audit. 
D) After issuance of the audit report, but prior to required subsequent event review procedures.

Question 16

A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively,immaterial amounts.This year the auditors estimate that the accrual is understated by an additional $60,000.In this year's audit $55,000 represents a material amount.Assuming that the entire understatement is to be recorded,following SEC SAB 108 the decrease in this year's income due to these understatements is:

Accepted Answer

A) $0 
B) $60,000 
C) $110,000 
D) $140,000

Question 17

Analytical procedures are required as a part of the

Accepted Answer

A) Detailed tests of balances. 
B) Internal control assessment. 
C) Procedures performed near the end of the audit. 
D) Substantive testing.

Question 18

When auditing the statement of cash flows of a profitable,growing company which combination is most likely? $\begin{array} { c } 
&\text { Cash flows}&\text { Cash flows}\
& \text { from operations } & \text { from investing } \ \text { A) } & \text { Positive } & \text { Positive } \ \text { B) } & \text { Positive } & \text { Negative } \ \text { C) } & \text { Negative } & \text { Positive } \ \text { D) } & \text { Negative } & \text { Negative } \end{array}$

Accepted Answer

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

Question 19

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job?

Accepted Answer

A) A surprise observation of a paycheck distribution. 
B) A test of payroll extensions. 
C) Analytical comparisons of budgeted to actual payroll expense. 
D) Comparison of payee names on canceled payroll checks with the payroll register.

Question 20

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:

Accepted Answer

A) Separate the custody of assets from the accounting for those assets. 
B) Establish clear lines of authority and responsibility. 
C) Separate duties within the accounting function. 
D) Separate the authorization of transactions from the custody of related assets.

Exam 16: Auditing Operations and Completing the Audit