a. Such evidence is too costly in relation to its reliability. b. The client may conceal items form the auditor. c. The observation must occur at a specific time, which is often difficult to arrange. d. The auditor may overlook items when conducting the observation.
2. Which of the following is a non-statistical sampling technique?
a. Discovery sampling. b. Stratified sampling. c. Block sampling. d. Systematic sampling.
3. The client representation letter should be signed by
a. The CFO and the Chairman of the Board. b. The CEO and the Chairman of the Board. c. The CFO and the controller. d. The CEO and the CFO.
4. An auditor should obtain written representations from management concerning litigation, claims and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for the purpose has been recorded by
a. The auditor independently of management. b. Management, the client's lawyer, and the auditor. c. The auditor and the client's lawyer. d. Management and the auditor.
5. With regard to litigation, claims and assessments, the auditor should obtain evidential matter as to
a. The time frame in which the underlying cause for legal action occurred. b. The degree of probability of an unfavorable outcome. c. The amount or range of potential loss. d. All of the above.
6. The tolerable rate of deviations for a test of controls is generally
a. Lower than the expected rate of errors in the related accounting records. b. Higher than the expected rate of errors in the accounting records. c. Identical to the expected rate of errors in the accounting period. d. Unrelated to the expected rate of errors in the accounting periods.
7. Given random selection, the same sample size, and the same tolerable error rate for the testing of the two unequal populations, the risk of non-sampling error for the smaller population is
a. Higher than the risk for the larger population. b. Lower than the risk for the larger population. c. The same as the risk for the larger population. d. Indeterminable relative to the risk for the larger population.
8. Discovery sampling should be used if a CPA estimates that the occurrence rate of a certain characteristic in a population being examined is approximately
a. 20%. b. 0%. c. 5%. d. 10%.
9. A number of factors influences the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size
a. Greater reliance on internal controls. b. Greater reliance on analytical procedures. c. Smaller expected frequency of errors. d. Smaller measure of tolerable error.
10. Which of the following is not a disadvantage of statistical sampling
a. Cost of designing samples. b. Complexity of use. c. May result in an unrepresentative sample. d. All of these are disadvantages.
11. When are analytical procedures required?
a. During the planning and reviewing stages. b. During the planning and substantiating stages. c. During substantiating and reviewing stages. d. During planning, substantiating and reviewing stages.
12. Which of the following is a limitation when relying on analytical procedures
a. Differences of accounting methods between firms. b. Changes may be due to misstatement or just random change. c. Analytical procedures are overall tests and may not detect some types of errors. d. All of the above are limitations.
13. Which of the following would not normally be included in the work papers?
a. Working trial balance. b. Schedule of management changes during the year. c. Lead schedules. d. Proposed adjusting journal entries.
14 Which of the following audit procedures would be least likely to detect a related party transaction?
a. Reviewing the work of a specialist. b. Reviewing large or unusual year-end transactions. c. Reviewing SEC filings. d. Reviewing the terms of loan agreements.
a. Inspection. b. Inquiries. c. Observation. d. Confirmations. e. Recalculation.
16. Auditors may use positive and / or negative forms of confirmation requests for accounts receivable. An auditor most likely will use
a. The positive form to confirm all balances regardless of size. b. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory. c. A combination of the two forms, with the positive form used for large balances and the negative form for the small balances. d. A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables.
17. Analytical procedures may be applied to payroll to detect unusual items. Which of the following procedures would be an appropriate analytical procedure for payroll?
a. Review payroll account reconciliation. b. Comparison of the relationship of hours worked to payroll with that of the preceding year. c. Inspect authorizations on time cards. d. Compare rates authorized under union contract with payroll records.
18. The auditor should determine that accounts receivable are properly presented on the balance sheet and that disclosure is adequate. Which of the following is not a specific substantive audit objective related to the presentation and disclosure of A/R?
a. All receivables resulted from properly authorized credit approvals. b. Accounts receivable are presented as current assets. c. Any material pledge or assignment of accounts receivable is disclosed in a footnote. d. Receivables are reported at net realizable value.
19. Which of the following is normally requested on a bank confirmation?
a. Open letters of credit. b. Restrictions on withdrawals. c. Contingent liabilities. d. The interest rate on interest-bearing accounts. e. None of these are requested.
20. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because
21. Positive confirmations of accounts receivable are least likely to be used
22. Which of the following audit procedures would detect an understatement of a purchase discount?
a. Verify footings and cross footings of purchases and disbursement records. b. Compare purchase invoice terms with disbursement records and checks. c. Compare approved purchase orders to receiving reports. d. Verify the receipt of items ordered and invoiced.
23. On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by
a. Preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year end. b. Comparing the detail of cash receipts as shown by the cash receipts records with the detail of the confirmed duplicate tickets for three days prior to and subsequent to year end. c. Examining paid checks returned with the bank statement of the next accounting period after year end. d. Examining the composition of deposits in both bank A and B subsequent to year end.
24. In deciding whether recorded sales are valid, which of the following items of evidence would be considered most competent?
a. A copy of the customer's purchase order. b. A memo from the director of the shipping department stating that another employee verified the personal delivery of the merchandise to the customer. c. Accounts receivable records showing amounts due from the customer. d. The shipping document, the independent bill of lading, and the invoice for the merchandise.
25. An auditor should ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year end balance because this procedure
a. Provides for confirmation regarding compensating balance arrangements. b. Detects kiting activities that may otherwise not be discovered. c. Seeks information about indebtedness to the bank. d. Verifies securities held by the bank in safekeeping.
26. Which of the following is the best audit procedure for determining the existence of unrecorded liabilities at year end?
a. Examine a sample of invoices dated a few days prior to and subsequent to year end to ascertain whether they have been properly recorded. b. Examine a sample of cash disbursements in the period subsequent to year end. c. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of Accounts Payable. d. Examine unusual relationships between monthly A/P balances and recorded purchases.
27. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted. b. Represented by inventory tags are included in the listing. c. Included in the listing are represented by inventory tags. d. Represented by inventory tags are bona fide.
28. A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record
a. Sales. b. Sales discounts. c. Purchases. d. Purchase returns.
29. A bookkeeper perpetrated a theft by preparing erroneous W-2 forms. The bookkeeper's FICA withheld was overstated by $500 and the FICA withheld from all other employees was understated. Which of the following is an audit procedure which would detect such fraud?
a. Multiplication of the applicable rate by the individual gross taxable earnings and comparison to the payroll register. b. Utilizing form W-4 and withholding charts to determine whether deductions authorized per pay period agree with amounts deducted per pay period. c. Footing and cross footing of the payroll register followed by tracing postings to the general ledger. d. Vouching canceled checks to federal tax forms 941.
30. In evaluating the reasonableness of an accounting estimate, an auditor is most likely to concentrate on key factors and assumptions that are:
a. Deviations from historical patterns. b. Similar to industry guidelines. c. Objective and not susceptible to bias. d. Consistent with prior periods.
31. The entity has legal right to all accounts receivable at the balance sheet date.
32. Accounts receivable are stated at net realizable value.
33. Accounts receivable are properly described and presented in the financial statements.
34. Consigned inventories represent assets that actually exist at the balance sheet date.
35. Inventories are properly valued at the lower of cost or market at the balance sheet date.
a. Determine that the responsibility for maintaining the inventory records is segregated from the responsibility for custody of property equipment.
b. Recalculate inventory balances and trace to financial statements.
c. Physically examine a sample of inventory items.
d. Determine that any impairments in the price of inventory have been properly recorded.
e. Verify that transfers from work in progress to finished good status have been properly recorded.
f. Obtain positive confirmations as of the balance sheet date of inventory held by independent custodians.
g. Analyze the relationship of accounts receivable and sales and compare it with relationships for preceding periods.
h. Perform sales cut-off tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period.
i. Review the aged trial balance for significant past due accounts.
j. Review loan agreements for indications of whether accounts receivable have been factored or pledged.
k. Review the accounts receivable trial balance for amounts due from the officers and employees.
36. Tracing would generally be more important than vouching in the revenue cycle.
TRUE FALSE
37. Taking a sample of payroll register entries and comparing them to personnel records would constitute vouching.
38. Tracing from sales orders to the sales journal tells the auditor that the sale and related receivable have been recorded.
39. Using and accounting for pre-numbered shipping documents most directly relates to the valuation assertion.
40. When an auditor compares interest expense to recorded liabilities the assertion the auditor is most concerned with is completeness.
41. Reviewing a company's liabilities and expenses for commingling relates to the valuation assertion.
42. Vouching would generally be more important than tracing in the payroll cycle.
43. Use of an allowance account in the revenue cycle could relate to valuation assertion, but probably does not relate to the rights assertion.
44. Confirmation of accounts receivable is always required by GAAP.
45. An effective audit procedure to detect lapping would be the use of a lockbox or segregation of functions.
Items 46 through 55 represent a series of unrelated statements, questions, excerpts, and comments taken from various parts of an auditor's working paper file. Below the items is a list of the likely sources of the statements, questions, excerpts, and comments. Select, as the best answer for each item, the most likely source. Select only one source for each item. A source may be selected once, more than once or not at all.
B. Communication with predecessor auditor
C. Auditor's engagement letter.
D. Report on Reportable Conditions.
E. Auditor's communication with the audit committee.
You get the idea!