Financial Auditing _ 18e_ Final Exam

1. Passage of the Sarbanes-Oxley Act led to the establishment of the:

A. Auditing Standards Board.

B. Accounting Enforcement Releases Board.

C. Public Company Accounting Oversight Board.

D. Securities and Exchange Commission.

2. Which of the following best describes the reason why independent auditors report on

financial statements?

A. A management fraud may exist and it is more likely to be detected by independent

auditors.

B. Different interests may exist between the company preparing the statements and the

persons using the statements.

C. A misstatement of account balances may exist and is generally corrected as the result

of the independent auditors' work.

D. Poorly designed internal control may be in existence.

3. Primary responsibility for the financial statements lies with:

A. Option A

B. Option B

C. Option C

D. Option D

4. Which of the following is explicitly included as a part of the description of

management's responsibility in an unmodified audit report?

A. Management is responsible for making a judgment on which misstatements are

material vs. immaterial.

B. Management is responsible for providing auditors with all relevant evidence.

C. Management is responsible for the design, implementation, and maintenance of

internal control.

D. Management is responsible for listing all illegal acts with a direct effect on financial

statement amounts and disclosures.

5. Independence of a CPA with respect to a client is not impaired if:

A. The CPA has a loan to an officer of the client.

B. The CPA has an immaterial direct interest in the client.

C. The CPA is trustee for the client's pension plan.

D. The CPA has an immaterial joint, closely held business investment with the client.

6. The AICPA Code of Professional Conduct will ordinarily be considered to have been

violated when the CPA represents that specific consulting services will be performed for

a stated fee and it is apparent at the time of the representation that the:

A. Actual fee would be substantially higher.

B. Actual fee would be substantially lower than the fees charged by other CPAs for

comparable services.

C. Fee was a competitive bid.

D. CPA would not be independent.

7. Which of the following is a correct statement related to CPA legal liability under

common law?

A. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross

negligence.

B. CPAs are liable for either ordinary or gross negligence to identified third parties for

whose benefit the audit was performed.

C. CPAs may escape all personal liability through incorporation as a limited liability

corporation.

D. CPAs are guilty until they prove that they performed the audit with "good faith."

8. Which of the following is the best defense that a CPA can assert against common law

litigation by a stockholder claiming fraud based on an unqualified opinion on materially

misstated financial statements?

A. Lack of due diligence.

B. Lack of gross negligence.

C. Contributory negligence on the part of the client.

D. A disclaimer contained in the engagement letter.

9. Which of the following best describes the reason that auditors are concerned with the

detection of related party transactions?

A. The financial statements must often be adjusted for the effects of material related party

transactions.

B. Material related party transactions must be disclosed in the notes to the financial

statements.

C. The substance of related party transactions will differ from their form.

D. In a related party transaction one party has the ability to exercise significant influence

over the other party.

10. Which of the following is generally true about the sufficiency of audit evidence?

A. The amount of evidence that is sufficient varies inversely with the acceptable risk of

material misstatement.

B. The amount of evidence concerning a particular account varies inversely with the

materiality of the account.

C. The amount of evidence concerning a particular account varies inversely with the

inherent risk of the account.

D. When evidence is appropriate with respect to an account it is also sufficient.

11. Which of the following is correct concerning requirements about auditor

communications about fraud?

A. Fraud that involves senior management should be reported directly to the audit

committee regardless of the amount involved.

B. All fraud with a material effect on the financial statements should be reported directly

by the auditor to the Securities and Exchange Commission.

C. Fraud with a material effect on the financial statements should ordinarily be disclosed

by the auditor through use of an "emphasis of a matter" paragraph added to the audit

report.

D. The auditor has no responsibility to disclose fraud outside the entity under any

circumstances.

12. When a company has changed auditors, according to the Professional Standards:

A. The successor auditor has the responsibility to initiate contact with the predecessor

auditor to ask about the client before the engagement is accepted; the predecessor has no

responsibility to initiate this contact, even when aware of matters bearing on the integrity

of management.

B. The predecessor must always respond fully to all inquiries made by the successor

auditor.

C. The successor must discuss with the predecessor matters bearing on the engagement

prior to accepting the engagement.

D. The successor may choose not to attempt any communication with the predecessor

auditor.

13. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which

companies in the United States:

A. All companies.

B. SEC registrants.

C. Only those companies included in the Fortune 500.

D. All nonpublic companies.

14. When performing an audit of internal control under PCAOB requirements, auditors

evaluate control:

A. Option A

B. Option B

C. Option C

D. Option D

15. Which of the following is least likely to be a general control over computer

activities?

A. Procedures for developing new programs and systems.

B. Requirements for system documentation.

C. A change request log.

D. A control total.

16. General controls over IT systems are typically tested using:

A. Generalized audit software.

B. Observation, inspection, and inquiry.

C. Program analysis techniques.

D. Test data.

17. Using difference estimation, an auditor has taken a sample of 200 from a population's

40,000 items; that population has a book value of $200,000. She found that in her sample

the average audited value was $4.20, while the average book value was $5.20. What is

the estimated total audited value of the population?

A. $160,000.

B. $161,538.

C. $168,000.

D. $200,000.

18. Using ratio estimation, an auditor has taken a sample of 200 from a population's

40,000 items; that population has a book value of $200,000. She found that in her sample

the average audited value was $4.20, while the average book value was $5.20. What is

the estimated total audited value of the population?

A. $160,000.

B. $161,538.

C. $168,000.

D. $200,000.

19. Which procedure is an auditor most likely to use to detect a check outstanding at

year-end that was not recorded as outstanding on the year-end bank reconciliation?

A. Prepare a bank transfer schedule using the client's cash receipts and cash

disbursements journal.

B. Receive a cutoff statement directly from the client's bank.

C. Prepare a four column bank reconciliation using the year-end bank statement.

D. Confirm the year end balance using the standard form to confirm account balance

information with financial institutions.

20. Which of the following is not a control that generally is established over cash

transactions?

A. Separating cash handling from recordkeeping.

B. Centralizing the receipt of cash.

C. Depositing each day's receipts intact.

D. Obtaining a receipt for every disbursement.

21. Which of the following is an effective control that encourages receiving department

personnel to count and inspect all merchandise received?

A. Quantities ordered are excluded from the receiving department copy of the purchase

order.

B. Vouchers are prepared by accounts payable department personnel only after they

match item counts on the receiving report with the purchase order.

C. Receiving department personnel are expected to match and reconcile the receiving

report with the purchase order.

D. Internal auditors periodically examine, on a surprise basis, the receiving department

copies of receiving reports.

22. An inventory turnover analysis is useful to the auditor because it may detect:

A. Inadequacies in inventory pricing.

B. Methods of avoiding cyclical holding cost.

C. The optimum automatic reorder points.

D. The existence of obsolete merchandise.

23. The most reliable procedure for an auditor to use to test the existence of a client's

inventory at an outside location would be to:

A. Observe physical counts of the inventory items.

B. Trace the total on the inventory listing to the general ledger inventory account.

C. Obtain a confirmation from the client indicating inventory ownership.

D. Analytically compare the current-year inventory balance to the prior-year balance.

24. Which of the following would be least likely to address control over the initiation and

execution of equipment transactions?

A. Requests for major repairs are approved by a higher level than the department

initiating the request.

B. Prenumbered purchase orders are used for equipment and periodically accounted for.

C. Requests for purchases of equipment are reviewed for consideration of soliciting

competitive bids.

D. Procedures exist to restrict access to equipment.

25. Which of the following is not a control that should be established for purchases of

equipment?

A. Establishing a budget for capital acquisitions.

B. Requiring that the department in need of the equipment order the equipment.

C. Requiring that the receiving department receive the equipment.

D. Establishing an accounting policy regarding the minimum dollar amount of purchase

that will be considered for capitalization.

26. In violation of company policy, Lowell Company erroneously capitalized the cost of

painting its warehouse. The auditors examining Lowell's financial statements would most

likely detect this when:

A. Discussing capitalization policies with Lowell's controller.

B. Examining maintenance expense accounts.

C. Observing, during the physical inventory observation, that the warehouse had been

painted.

D. Examining the construction work orders supporting items capitalized during the year.

27. Which of the following audit procedures is best for identifying unrecorded trade

accounts payable?

A. Reviewing cash disbursements recorded subsequent to the balance sheet date to

determine whether the related payable applies to the prior period.

B. Investigating payables recorded just prior to and just subsequent to the balance sheet

date to determine whether they are supported by receiving reports.

C. Examining unusual relationships between monthly accounts payable balances and

recorded cash payments.

D. Reconciling vendors' statements to the file of receiving reports to identify items

received just prior to the balance sheet date.

28. An entity's internal control requires for every check request that there be an approved

voucher, supported by a prenumbered purchase order, and a prenumbered receiving

report. To determine whether checks are being issued for unauthorized expenditures, an

auditor most likely would select for testing from the population of:

A. Purchase orders.

B. Canceled checks.

C. Receiving reports.

D. Approved vouchers.

29. Which of the following statements is correct regarding accounts payable and the

auditor's procedures?

A. Because it is generally more difficult to discover a transaction that has not been

recorded than to discover one that has been recorded incorrectly, the audit objective of

completeness drives many of the substantive procedures applied to these balances.

B. A judgment whether an unrecorded payable should be recorded before the financial

statements are prepared depends entirely upon the source of the payable.

C. The confirmation of accounts payable selected from the year-end trial balance of such

accounts is most effective in discovering unrecorded liabilities.

D. Unrecorded payables are often discovered through examining vouchers payable

entered into the voucher register prior to the balance sheet date.

30. Changes in capital stock accounts should normally be approved by:

A. The board of directors.

B. The audit committee.

C. The stockholders.

D. The president.

31. Which of the following is an auditor most likely to confirm from the transfer agent

and registrar?

A. Total shares of stock issued.

B. Restrictions on the payment of dividends.

C. Total market value of outstanding shares of stock.

D. Gains from sale of treasury stock.

32. The auditors' program for the examination of long-term debt should include steps that

require the:

A. Verification of the existence of the bondholders.

B. Examination of any bond trust indenture.

C. Inspection of the accounts payable subsidiary ledger.

D. Investigation of credits to the bond interest income accounts.

33. Auditors must communicate internal control "significant deficiencies" to:

A. The audit committee.

B. The shareholders.

C. The SEC.

D. The Federal Trade Commission.

34. One reason why the independent auditors perform analytical procedures on the

client's operations is to identify:

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.

35. Which of the following is an analytical procedure that should be applied to the

income statement?

A. Select sales and expense items and trace amounts to related supporting documents.

B. Ascertain that the net income amount in the statement of cash flows agrees with the

net income amount in the income statement.

C. Obtain from the proper client representatives, the beginning and ending inventory

amounts that were used to determine costs of sales.

D. Compare the actual revenues and expenses with the corresponding figures of the

previous year and investigate significant differences.

36. If group auditors make no reference to component auditors whose work they have

relied on as a part of the basis for their report, the group auditors:

A. Are not required to investigate the professional reputation of the component auditors.

B. Are issuing an inappropriate report.

C. Are assuming responsibility for the work of the component auditors.

D. Are issuing a qualified opinion.

37. When an adverse opinion is expressed, the opinion paragraph should include a direct

reference to:

A. A note to the financial statements which discusses the basis for the opinion.

B. The Auditor's Responsibility section of the audit report which discusses the basis for

the opinion rendered.

C. A separate paragraph (section) which discusses the basis for the opinion rendered.

D. The consistency in the application of generally accepted accounting principles.

38. Under which of the following set of circumstances might the auditors disclaim an

opinion?

A. The financial statements contain a departure from generally accepted accounting

principles, the effect of which is material.

B. The group auditors decide to make reference to the report of component auditor who

audited a subsidiary.

C. There has been a material change between periods in the method of application of

accounting principles.

D. There are significant scope limitations on the audit.

39. An auditor identified a significant deficiency in internal control in December. The

client was informed and the client corrected the significant deficiency shortly before

year-end (December 31); the auditor agrees that the correction eliminates the significant

deficiency as of December 31. The appropriate audit report on internal control under a

PCAOB Standard No. 2 audit of internal control is:

A. Adverse.

B. Unqualified.

C. Unqualified with explanatory language relating to the significant deficiency.

D. Qualified.

40. Which of the following must be included in management's report internal control

under section 404 of the Sarbanes/Oxley Act of 2002?

A. It is management's responsibility to eliminate or publicly report on significant

deficiencies in internal control.

B. A detailed description of the COSO criteria.

C. Management's assessment of the operating effectiveness for the period from the

beginning to the end of the fiscal year under audit.

D. Identification of the framework used for evaluating internal control.

41. Under PCAOB internal control reporting standards, what are the auditor's

communication requirements to the audit committee with respect to material

weaknesses?

A. All must be communicated in written form.

B. All must be communicated in written form or orally.

C. Only those that violate the Foreign Corrupt Practices Act need be communicated, but

in written form.

D. Only those that violate the Foreign Corrupt Practices Act need be communicated, in

written form or orally.

42. A practitioner's report on agreed-upon procedures that is in the form of procedures

and findings should contain:

A. Negative assurance that the procedures did not necessarily disclose all reportable

conditions.

B. An acknowledgment of the practitioner's responsibility for the sufficiency of the

procedures.

C. A statement of restrictions on the use of the report.

D. A disclaimer of opinion on the entity's financial statements.

43. Which of the following requires modification of a review report?

A. A change in accounting principles.

B. A substantial doubt about a company's ability to continue as a going concern.

C. A departure from generally accepted accounting principles.

D. A change in an accounting estimate.

44. Which of the following is correct when a company is issuing summary financial

statements developed from audited financial statements?

A. Such summary statements should always have a CPA's report associated with them

when audited financial statements exist.

B. The CPA may issue a report on whether the summary information is fairly stated in all

material respects in relation to the basic financial statements.

C. The CPA should perform a compilation and review of the summary financial

statements.

D. The CPA who has audited the financial statements who is asked to report on the

summary statements should decline the engagement because the summary statements do

not include all disclosures necessary under generally accepted accounting principles.

45. Under the attestation standards, in which of the following circumstances is a review

report least likely to be issued?

A. Criteria are agreed-upon or only available to specified users.

B. Established criteria exist, but other criteria are used.

C. The subject matter departs from the criteria.

D. A significant limitation on the scope of the engagement has occurred.

46. To accept an engagement to examine a client's MD&A for annual financial

statements, the practitioners ordinarily must have:

A. Audited the most recent financial statement period to which the MD&A applies.

B. Determined that the client reports to the Securities and Exchange Commission.

C. Performed a detailed analysis of the client's controls over decision making.

D. Reviewed the quarterly MD&A information.

47. Which of the following is correct concerning service auditor and SysTrust reports?

A. They both result in restricted use reports.

B. A client must engage the CPA to perform both services as neither may be selected

independently of the other.

C. They both address system reliability.

D. They represent different names for the same service.

48. When a CPA is associated with a forecast, all of the following should be disclosed

except the:

A. Sources of information.

B. Character of the work performed by the CPA.

C. Major assumptions in the preparation of the forecast.

D. Probability of achieving estimates.

49. When a practitioner examines projected financial statements, the practitioner's report

should include a separate paragraph that:

A. Describes the limitations on the usefulness of the presentation.

B. Provides an explanation of the differences between an examination and a review.

C. States that the accountant is responsible for events and circumstances for a period not

exceeding one year after the report's date.

D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the

projection.

50. Which of the following is correct relating to an engagement to apply agreed-upon

procedures to prospective financial statements?

A. Use of the report is restricted to the specified users.

B. Such engagements are permissible for forecasts but not for projections.

C. Responsibility for the adequacy of the procedures performed is taken by the

practitioner.

D. Such engagements are not permissible under the professional standards.