Auditing Chapter 5 Review – Flashcards
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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 A. Adequacy of the preplanned audit program B. Ability to establish consistency in application of accounting principles between years C. Apparent scope limitation D. Integrity of management
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D. Integrity of management
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In assessing whether to accept a client for an audit engagement, a CPA should consider the A. The entity's business risk B. The CPA's engagement risk C. The entity's business risk and the CPA's engagement risk D. Neither the entity's business risk nor the CPA's engagement risk
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C. The entity's business risk and the CPA's engagement risk
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Evaluating a prospective client requires the following step(s): A. Communicate with the predecessor auditor B. Preplan the audit C. Establish the terms of the engagement D. None of the above
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A. Communicate with the predecessor auditor
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A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n) A. Client representation letter B. Letter of audit inquiry C. Management letter D. Engagement letter
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D. Engagement letter
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Engagement letters include all of the following except A. A list of additional services that will be provided B. A list of adjusting journal entries C. Information about the audit fee D. Arrangements involving the use of specialists
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B. A list of adjusting journal entries
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To provide for the greatest degree of independence in performing internal audit functions, an internal auditor most likely should report to the A. Financial vice-president B. Corporate controller C. Board of directors D. Corporate stockholders
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C. Board of directors
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All of the following refer to an internal auditor's competence except A. The party in the entity to which the internal auditor reports B. The quality of internal audit documents and reports C. Professional certification D. Supervision and review of internal audit activities
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A. The party in the entity to which the internal auditor reports
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An independent auditor might consider the procedures performed by the internal auditors because A. They are employees whose work must be reviewed during substantive testing B. They are employees whose work might be relied upon C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations D. Their degree of independence may be inferred by the nature of their work
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B. They are employees whose work might be relied upon
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As generally conceived, the audit committee of a publicly held company should be made up of A. Representatives of the major equity interests (preferred stock, common stock) B. The audit partner, the chief financial officer, the legal counsel, and at least one outsider C. Representatives from the client's management, investors, suppliers, and customers D. Members of the board of directors who are not officers or employees
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D. Members of the board of directors who are not officers or employees
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To emphasize auditor independence from management, publicly traded corporations are required to A. Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee B. Establish a policy of discouraging social contact between employees of the corporation and the independent auditors C. Request that a representative of the independent auditor be on hand at the annual stockholders' meeting D. Have the independent auditor report to an audit committee of independent members of the board of directors
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Have the independent auditor report to an audit committee of independent members of the board of directors
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Which of the following situations would most likely require special audit planning? A. Some items of factory and office equipment do not bear identification numbers B. Depreciation methods used on the client's tax return differ from those used on the books C. Assets costing less than $500 are expensed even though the expected life exceeds one year D. Inventory is comprised of precious stones
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D. Inventory is comprised of precious stones
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An auditor obtains knowledge about a new client's business and its industry in order to A. Make constructive suggestions concerning improvements to the client's internal control structure B. Develop an attitude of professional skepticism concerning management's financial statement assertions C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated D. Understand the events and transactions that may have an effect on the client's financial statements
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D. Understand the events and transactions that may have an effect on the client's financial statements
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Which of the following is an example of a related party transaction? A. An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A B. A long term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor C. A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A D. A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A
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D. A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A
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An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of A. Management fraud B. Related party transactions C. Window dressing D. Weak internal control
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B. Related party transactions
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Which of the following would not necessarily be a related party transaction? A. Sales to another corporation with a similar name B. Purchases from another corporation that is controlled by the corporation's chief stockholder C. Loan from the corporation to a major stockholder D. Sale of land to the corporation by the spouse of a director
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A. Sales to another corporation with a similar name
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The existence of a related party transaction may be indicated when another entity A. Sells real estate to the corporation at a price that is comparable to its appraised value B. Absorbs expenses of the corporation C. Borrows from the corporation at a rate of interest which equals the current market rate D. Lends to the corporation at a rate of interest which equals the current market rate
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B. Absorbs expenses of the corporation
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In the context of an audit of financial statements, substantive procedures are audit procedures that A. May be eliminated under certain conditions B. Are primarily designed to discover significant subsequent events C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures D. Will increase proportionately with an increase in the auditor's reliance on internal control
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C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures
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Which of the following is not an audit procedure that is commonly used in performing tests of controls? A. Inquiring B. Observing C. Confirming D. Inspecting
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C. Confirming
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Which of the following is not a typical analytical procedure? A. Study of relationships of the financial information with relevant nonfinancial information B. Comparison of the financial information with similar information regarding the industry in which the entity operates C. Comparison of recorded amounts of major disbursements with appropriate invoices D. Comparison of the financial information with budgeted amounts
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C. Comparison of recorded amounts of major disbursements with appropriate invoices
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Analytical procedures may be classified as being primarily which of the following? A. Tests of controls B. Substantive procedures C. Tests of ratios D. Detailed tests of balances
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B. Substantive procedures
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Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements? A. Tests of controls B. Analytical procedures C. Computer controls D. Post-audit review of audit documents
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B. Analytical procedures
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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 planning phase of the audit by the use of A. Tests of transactions and balances B. A preliminary review of internal controls C. Specialized audit programs D. Analytical procedures
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D. Analytical procedures
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An example of an analytical procedure is the comparison of A. Financial information with similar information regarding the industry in which the entity operates B. Recorded amounts of major disbursements with appropriate invoices C. Results of a statistical sample with the expected characteristics of the actual population D. EDP generated data with similar data generated by a manual accounting system
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A. Financial information with similar information regarding the industry in which the entity operates
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Analytical procedures used in planning an audit should focus on identifying A. Material weaknesses in internal control B. The predictability of financial data from individual transactions C. The various assertions that are embodied in the financial statements D. Areas that may represent specific risks relevant to the audit
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D. Areas that may represent specific risks relevant to the audit
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Analytical procedures are A. Never required B. Required for planning, substantive testing, and overall review of the financial statements C. Required for planning and overall review of the financial statements D. Required during planning only
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C. Required for planning and overall review of the financial statements
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As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should A. Express an opinion which is qualified due to the inability of the client company to continue as a going concern B. Evaluate management's performance in causing this decline C. Require footnote disclosure D. Consider the possibility of an error in the financial statements
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D. Consider the possibility of an error in the financial statements
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An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence to the A. Securities and Exchange Commission B. Client's legal counsel C. Stock exchanges where the company's stock is traded D. The audit committee of the board of directors
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D. The audit committee of the board of directors
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When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining A. Whether the predecessor's work should be utilized B. Whether the company follows the policy of rotating its auditors C. Whether, in the predecessor's opinion, the company's internal controls have been satisfactory D. Whether the engagement should be accepted
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D. Whether the engagement should be accepted
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Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? A. Analysis of balance sheet accounts B. Analysis of income statement accounts C. All matters of continuing accounting significance D. Facts that might bear on management integrity
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D. Facts that might bear on management integrity
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Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A. The prospective client's unwillingness to permit inquiry of its legal counsel B. The inability to review the predecessor auditor's documentation C. The CPA's lack of understanding of the prospective client's operations and industry D. Indications that management has not investigated employees in key positions before hiring them
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A. The prospective client's unwillingness to permit inquiry of its legal counsel
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An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if A. The payments violated the client's policies regarding the prevention of illegal acts B. The client receives financial assistance from a federal government agency C. Documentation that is necessary to prove that the bribes were paid does not exist D. Management fails to take the appropriate remedial action
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D. Management fails to take the appropriate remedial action
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A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's A. Engagement letter B. Audit working papers C. Engagement letter and audit working papers D. It would not be typical to allow a review of either the engagement letter or the audit working papers
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B. Audit working papers
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An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes A. Management's responsibility to guarantee that there are no material misstatements due to fraud B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud D. The auditor's responsibility for the fairness of the financial statements
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B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud
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Which of the following matters generally is included in an auditor's engagement letter? A. Management's responsibility for the entity's compliance with laws and regulations B. The factors to be considered in setting preliminary judgments about materiality C. Management's liability for illegal acts committed by its employees D. The auditor's responsibility to guarantee accuracy of the financial statements
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A. Management's responsibility for the entity's compliance with laws and regulations
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In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the A. Quality of the internal auditor's work B. Organization's commitment to integrity and ethical values C. Influence of management on the scope of the internal auditor's duties D. Organizational levels to which the internal auditor reports
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A. Quality of the internal auditor's work
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Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? A. Obtaining a written representation letter from the client's management B. Examining documents to detect illegal acts having a material effect on the financial statements C. Considering whether the client's accounting estimates are reasonable in the circumstances D. Determining the extent of involvement of the client's internal auditors
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D. Determining the extent of involvement of the client's internal auditors
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Evaluating a prospective client requires the following steps(s): A. Communicate with the SEC. B. Preplan the audit. C. Determine if the firm is independent of the client. D. Communicate with the AICPA.
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C. Determine if the firm is independent of the client.
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The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants A. That immaterial fraud is not to be reported to the client's audit committee B. How the results of various auditing procedures performed by the assistants should be evaluated C. How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk D. How overall materiality was selected
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B. How the results of various auditing procedures performed by the assistants should be evaluated
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Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit? A. Reading "conflict-of-interest" statements obtained by the client from its management B. Scanning accounting records for large transactions at or just prior to the end of the period under audit C. Reading minutes of the Board of Directors meetings for authorization or discussion of material transactions D. Confirming purchase and sale transactions with the vendors and/or customers involved
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D. Confirming purchase and sale transactions with the vendors and/or customers involved
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A dual-purpose test A. Simultaneously tests debits and credits B. Is a procedure completed by both the internal and external auditors C. Is useful to both the entity and the auditor D. Is both a substantive test of transactions and a test of controls
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D. Is both a substantive test of transactions and a test of controls
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The auditor generally gives most emphasis to ratio and trend analysis in the examination of the A. Statement of Changes in Stockholders' Equity and Retained earnings B. Income Statement C. Balance Sheet D. Statement of Cash Flows
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B. Income Statement
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The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should A. Consider the matter a scope limitation B. Perform additional audit procedures to investigate the matter further C. Intensify the examination with the expectation of detecting management fraud D. Withdraw from the engagement
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B. Perform additional audit procedures to investigate the matter further
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Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures? A. Relationships involving balance sheet accounts B. Transactions subject to management discretion C. Relationships involving income statement accounts D. Data subject to audit testing in the prior year
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C. Relationships involving income statement accounts
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An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by A. Availability of data aggregated at a high level B. Relative effectiveness and efficiency of the tests C. Timing of tests performed after the balance sheet date D. Auditor's familiarity with industry trends
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B. Relative effectiveness and efficiency of the tests
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Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except A. Tracing transactions through the system to determine whether procedures are being applied as prescribed B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts) and similar data for the industry in which the entity operates C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience D. Study of the relationships of financial data with relevant nonfinancial data
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A. Tracing transactions through the system to determine whether procedures are being applied as prescribed
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A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be A. $528,000 B. $540,000 C. $588,000 D. $600,000
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C. $588,000
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Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? A. Turnover of personnel in the accounting department B. Objectivity of audit committee members C. Square footage of selling space D. Management's plans to repurchase stock
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C. Square footage of selling space
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A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2009. The number of subscribers increased steadily throughout the year and at December 31, 2009, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2009 and was increased to $12 for new members on April 1, 2009. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the receipts from subscriptions for the year ended December 31, 2009, would be approximately A. $179,400 B. $171,600 C. $164,400 D. $163,800
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D. $163,800
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Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that A. Fraud exists within the relevant accounts B. Internal control activities are not operating effectively C. Additional tests of details are required D. The communication with the audit committee should be revised
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C. Additional tests of details are required
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Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business? A. Earnings per share B. Return on total assets before interest and taxes C. Accounts receivable turnover D. Operating cycle
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A. Earnings per share
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Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit? A. Quick assets divided by accounts payable B. Accounts receivable divided by inventory C. Interest payable divided by interest receivable D. Total debt divided by total assets
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D. Total debt divided by total assets
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Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. The details of most recorded transactions are not available after a specified period of time B. Internal control activities requiring segregation of duties are subject to management override C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements D. Management has a reputation for consulting with several accounting firms about significant accounting issues
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C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements
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Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques B. Management's disregard of its responsibility to maintain an adequate control environment C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions D. Management's refusal to permit the CPA to perform substantive procedures before the year-end
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B. Management's disregard of its responsibility to maintain an adequate control environment
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Before accepting an engagement to audit a new client, a CPA is required to obtain A. An understanding of the prospective client's industry and business B. The prospective client's signature on the engagement letter C. A preliminary understanding of the prospective client's control environment D. The prospective client's consent to make inquiries of the predecessor auditor, if any
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D. The prospective client's consent to make inquiries of the predecessor auditor, if any
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The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the A. Methods of statistical sampling to be used in confirming accounts receivable B. Pending legal matters to be included in the inquiry of the client's attorney C. Evidence to be gathered to provide a sufficient basis for the auditor's opinion D. Timing of the audit
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D. Timing of the audit
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The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning A. Adequate financial statement disclosures B. Compliance with the statutory laws and regulations C. Scope limitations resulting from their inaction D. The integrity of management
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D. The integrity of management
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During the initial planning phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud B. Evaluate the reasonableness of the client's accounting estimates C. Discuss the timing of the audit procedures with the client's management D. Inquire of the client's attorney as to any unrecorded claims
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C. Discuss the timing of the audit procedures with the client's management
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Which of the following procedures would an auditor most likely include in the initial planning of an examination of financial statements? A. Assess the need for the use of specialists in the audit B. Inquiring of the client's attorney as to any claims that are likely to be asserted C. Obtaining a written representation letter from the client's management D. Determining whether necessary internal controls procedures are being applied as prescribed
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A. Assess the need for the use of specialists in the audit
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An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by A. Scanning the general journal for unusual entries B. Performing a revenue cutoff test at year-end C. Tracing a sample of journal entries to the general ledger D. Examining documentary evidence of sales returns and allowances recorded after year-end
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A. Scanning the general journal for unusual entries
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Under the Sarbanes-Oxley Act, the audit committee of a public company has the following requirement(s): A. Each member of the committee must be a board member and shall be independent. B. The audit committee must pre-approve all audit and non-audit services. C. The audit committee must establish and maintain procedures to handle all issues which relate to accounting, internal control, and auditing. D. All of the above.
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D. All of the above.
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An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings B. Twice as many accounts receivable were written off in the prior year than in the current year C. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet
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D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet
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Which of the following is a general audit test: A. Fee assessment procedures. B. Tests of controls. C. Preparation of corporate tax returns. D. Active testing procedures
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B. Tests of controls.
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In correct order, general types of audit tests include: A. Substantive procedures, tests of controls, and risk assessment procedures. B. Substantive procedures, risk assessment procedures, and tests of controls. C. Risk assessment procedures, tests of controls, and substantive procedures. D. Risk assessment procedures, substantive procedures, and tests of controls.
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C. Risk assessment procedures, tests of controls, and substantive procedures.
