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Q:
The management letter is used
A. To allow management to corroborate oral representations to the auditor.
B. To confirm the terms of the audit engagement.
C. To list all reportable conditions with respect to internal controls.
D. To make recommendations to the client based on observations made during the audit.
Q:
Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?
A. Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters.
B. Significant audit adjustments recorded by the company but not management's consultation with other accountants about significant accounting matters.
C. Management's consultation with other accountants about significant accounting matters but not significant audit adjustments recorded by the company.
D. Neither significant audit adjustments recorded by the company nor management's consultation with other accountants about significant accounting matters.
Q:
The date of the management representation letter should coincide with the
A. Date of the latest subsequent event referred to in the notes to the financial statements.
B. Balance sheet date.
C. Date of the auditor's report.
D. Date of the engagement agreement.
Q:
Which of the following auditing procedures is ordinarily performed last?
A. Confirming accounts payable.
B. Testing the purchasing function.
C. Reading the minutes of directors' meetings.
D. Obtaining a management representation letter.
Q:
The purpose of analytical procedures at the completion of the audit includes all of the following except:
A. Revising the audit plan.
B. Considering overall reasonableness of the financial statements.
C. Reviewing adequacy of evidence gathered to investigate unusual fluctuations.
D. Recalculating some of the ratios examined during audit planning.
Q:
Which of the following procedures should an auditor generally perform regarding subsequent events?
A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
B. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests.
C. Communicate material weaknesses in internal controls to those charged with governance.
D. Review the cutoff bank statements for several months after year-end.
Q:
An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of field work but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of field work was
A. Limited to the specific event referenced.
B. Limited to include only events occurring before the date of the last subsequent event referenced.
C. Extended to subsequent events occurring through the date of issuance of the report.
D. Extended to include all events occurring since the completion of field work.
Q:
An example of a Type I subsequent event is
A. A tornado that destroys a client's factory after the balance sheet date.
B. An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the client's fiscal year) that a large portion of the client's inventory is obsolete.
C. Notification of an IRS audit after the balance sheet date.
D. The client's Board of Directors unexpectedly resigns after the balance sheet date.
Q:
Which of the following situations would require adjustment to or disclosure in the financial statements?
A. A merger discussion.
B. The application for a patent on a new production process.
C. Discussions with a customer that could lead to a 40 percent increase in the client's sales if agreement is successful.
D. The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
Q:
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business that is expected to double sales volume.
D. Settlement of litigation, in excess of the previously recorded liability.
Q:
The refusal of a client's attorney to provide a representation on the legality of a particular act committed by the client is generally
A. Sufficient reason to issue a "subject to" qualified opinion.
B. Considered to be a scope limitation.
C. Insufficient reason to modify the auditor's report because of the attorney's obligation of confidentiality.
D. Proper grounds to withdraw from the engagement without further consideration.
Q:
If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should
A. Honor the confidentiality of the client-lawyer relationship.
B. Consider the refusal to be a scope limitation.
C. Seek to obtain the corroborating information from management.
D. Disclose this fact in a footnote to the financial statements.
Q:
An auditor will ordinarily examine invoices from lawyers primarily in order to
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.
Q:
An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against a client except the:
A. Period in which the underlying cause for legal action occurred.
B. Probability of an unfavorable outcome.
C. Jurisdiction in which the matter will be resolved.
D. Existence of a situation indicating an uncertainty as to the possible loss.
Q:
The auditor's primary means of obtaining corroboration of management's information concerning litigation is a
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.
Q:
When obtaining evidence regarding litigation against a client, the CPA would be least interested in determining
A. An estimate of when the matter will be resolved.
B. The period in which the underlying cause of the litigation occurred.
C. The probability of an unfavorable outcome.
D. An estimate of the potential loss.
Q:
When auditing contingent liabilities, which of the following procedures would be least effective?
A. Reading the minutes of the board of directors.
B. Reviewing the bank confirmation letter.
C. Examining customer confirmation replies.
D. Examining invoices for legal services.
Q:
If there is substantial doubt about the entity's ability to continue as a going concern, the auditor should obtain information about the management's plans to mitigate the problem and assess the likelihood that such plans can be implemented.
Q:
The auditor must perform final analytical procedures before deciding on the appropriate audit report to issue for the entity.
Q:
Dual dating is used to identify unrecorded contingent liabilities.
Q:
An example of a Type II event or condition is an uncollectible account receivable resulting from continued deterioration of a customer's financial condition leading to bankruptcy after the balance sheet date.
Q:
An example of a Type I event or condition is the settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year-end financial statements.
Q:
Type II subsequent events are conditions that require an adjustment to the account balance shown on the financial statements.
Q:
A legal letter will include and evaluate all contingent liabilities of the company.
Q:
Reading contracts and loan agreements is one way to identify unrecorded contingent liabilities.
Q:
An example of a contingent liability is an income tax dispute.
Q:
Every contingent liability must be recorded.
Q:
The auditor should insist that a representative of the client be present during the physical examination of securities in order to
A. Lend authority to the auditor's directives.
B. Detect forged securities.
C. Coordinate the return of all securities to proper locations.
D. Acknowledge the receipt of securities returned.
Q:
In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?
A. Confirmation from the broker.
B. Inspection and count of stocks and bonds.
C. Vouching all changes during the year to brokers' advices and statements.
D. Examination of canceled checks issued in payment of securities purchased.
Q:
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the
A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
B. Securities are registered in the name of the trust company, rather than the entity itself.
C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.
D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
Q:
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
B. The cashier makes the daily deposit at a local bank.
C. The cashier prepares the daily deposit.
D. The cashier endorses the checks.
Q:
Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
A. There is no access to securities between the year-end and the date of the auditor's security count.
B. Proceeds from the sale of investments are received by an employee who does not have access to securities.
C. Investment acquisitions are authorized by a member of the Board of Directors before execution.
D. Access to securities requires the presence of two designated officials.
Q:
Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
A. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.
C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger.
D. A designated member of the board of directors controls the securities in a bank safe-deposit box.
Q:
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the
A. Chief Accountant.
B. Internal Auditor.
C. Cashier.
D. Treasurer.
Q:
A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be
A. An investment committee of the Board of Directors.
B. The chief operating officer.
C. The corporate controller.
D. The treasurer.
Q:
A primary purpose of the proof of cash is to
A. Prevent fraud.
B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements.
C. Investigate variances from expected cash balances.
D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
Q:
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:
A. Cutoff bank statement.
B. Year-end bank statement.
C. Bank confirmation.
D. General ledger.
Q:
An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether
A. The cash receipts journal was held open for a few days after the year-end.
B. The last checks recorded before the year end were actually mailed by the year-end.
C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
Q:
An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to
A. Verify the cash balance reported on the bank confirmation inquiry form.
B. Verify reconciling items on the client's bank reconciliation.
C. Detect lapping.
D. Detect kiting.
Q:
The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since
A. The confirmation form also seeks information about indebtedness to the bank.
B. This procedure will detect kiting activities that would otherwise not be detected.
C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards.
D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.
Q:
The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?
A. Confirming all December 31 bank balances.
B. Counting the cash working fund at the close of business on December 31.
C. Preparing independent bank reconciliations as of December 31.
D. Preparing and detail testing a bank transfer schedule.
Q:
Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?
A. Authorization.
B. Completeness.
C. Cutoff.
D. Accuracy.
Q:
Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Cutoff.
Q:
An auditor ordinarily should 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 not otherwise be discovered.
C. Seeks information about indebtedness to the bank.
D. Verifies securities held by the bank in safekeeping.
Q:
An imprest cash account is
A. Used for investing in marketable securities.
B. The principal cash account for an entity.
C. One that contains a stipulated amount of money and is used for limited purposes.
D. The principal checking account for a branch of an entity.
Q:
All of the following can assist the auditor in testing the existence assertion for investment securities except:
A. Physical examination.
B. Comparing fair value to cost.
C. Confirmation with the issuer.
D. Confirmation with the custodian.
Q:
In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding
A. Existence.
B. Rights and obligations.
C. Completeness.
D. All of the above.
Q:
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
A. Notes receivable and interest income.
B. Accrued interest receivable and accrued interest payable.
C. Notes payable and notes receivable.
D. Interest income and interest expense.
Q:
An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to
A. Dividend record books produced by investment advisory services.
B. Stock indentures published by corporate transfer agents.
C. Stock ledgers maintained by independent registrars.
D. Annual audited financial statements issued by the investee companies.
Q:
To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
A. Inspect the stock certificates evidencing the investment.
B. Examine the audited financial statements of the investee company.
C. Review the broker's advice or canceled check for the investment's acquisition.
D. Obtain market quotations from financial newspapers or periodicals.
Q:
An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the
A. Valuation of marketable equity securities.
B. Classification of gains and losses on the disposal of securities.
C. Completeness of recorded investment income.
D. Existence and ownership of investments.
Q:
Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?
A. Tracing interest declarations to an independent record book.
B. Recomputing interest earned using the interest rate and bond amount.
C. Confirming the interest rate with the issuer of the bonds.
D. Vouching the receipt and deposit of interest checks.
Q:
If fraud is suspected, auditors may complete all of the following procedures except:
A. Testing for kiting.
B. Footing the bank reconciliation and the outstanding checks listing.
C. Performing a proof of cash.
D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items.
Q:
An interbank transfer schedule
A. Is another name for the proof of cash.
B. Helps the auditor test for kiting.
C. Is on a standard bank confirmation.
D. Is used to examine client bank reconciliations.
Q:
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks?
A. Review the composition of authenticated deposit slips.
B. Review subsequent bank statements received directly from the banks.
C. Prepare a schedule of bank transfers.
D. Prepare year-end bank reconciliations.
Q:
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the
A. Check register for the last month is reviewed.
B. Cutoff bank statement is reconciled.
C. Bank confirmation is reviewed.
D. Search for unrecorded liabilities is performed.
Q:
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions?
A. Proof of cash.
B. Bank reconciliation.
C. Cash confirmation.
D. Evaluate ratio of cash to current liabilities.
Q:
The least crucial element of internal control over cash is
A. Separation of cash record-keeping from custody of cash.
B. Preparation of the monthly bank reconciliation.
C. Batch processing of checks.
D. Separation of cash receipts from cash disbursements.
Q:
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A. A bank lockbox system.
B. Prenumbered remittance advices.
C. Monthly bank reconciliations.
D. Daily deposit of cash receipts.
Q:
Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.
Q:
If the client maintains custody of its investments, the auditor normally examines the actual securities.
Q:
It is generally more efficient to follow a substantive strategy for auditing investments.
Q:
Kiting is an audit procedure used to test the accuracy of the cash receipts.
Q:
A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconciliation.
Q:
A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor.
Q:
The auditor's use of analytical procedures for auditing cash is limited.
Q:
An imprest cash account is used for specific purposes and generally maintains a very small balance.
Q:
The general cash account is normally the principal account used to disburse payroll.
Q:
The cash account is affected by all of the entity's business processes.
Q:
Below is information relating to the inventory management of your audit client, Quick Sell. Using analytical procedures, identify any concerns you have about misstatements in the financial statements.
Q:
You are auditing the allowance for doubtful accounts (ADA) and perform the analytical procedures shown below. Assume that no significant changes have occurred during the year in either the client's credit policies or customer base. What concerns, if any, about adjusting the ADA should the auditor have based on the information shown below?
Q:
You are auditing accounts receivable for a small company and have found the following results:
Q:
Use the following scenario to answer thefollowing questions:An economy has two workers, Smith and Ricardo. Each day they work, Smith can produce 4 computers or 16 smartphones, and Ricardo can produce 6 computers or 12 smartphones.The opportunity cost for Ricardo to produce one smartphone is ________ computer(s).a. one-quarter of a b. one-half of a c. oned. twoe. four
Q:
Use the following scenario to answer the following questions:Karl and Jager produce cars and trucks. Karl can produce 10 cars per hour or 5 trucks per hour. Jager can produce 12 cars per hour or 4 trucks per hour.Based on the scenario, which of the following is true?a. Jager has an absolute advantage in producing cars, but not trucks.b. Jager has an absolute advantage in producing trucks, but not cars.c. Jager has an absolute advantage in producing both goods.d. Jager has an absolute advantage in producing neither good.e. Karl has a comparative advantage in producing both goods.
Q:
Use the following scenario to answer the following questions:Rosa and Dirk produce basketballs and footballs. Rosa can produce six basketballs per hour or two footballs per hour. Dirk can produce three basketballs per hour or four footballs per hour.Based on the scenario, which of the following is true?a. Dirk has an absolute advantage in producing basketballs, but not footballs.b. Dirk has an absolute advantage in producing footballs, but not basketballs.c. Dirk has an absolute advantage in producing both goods.d. Dirk has an absolute advantage in producing neither good.e. Rosa has a comparative advantage in producing both goods.
Q:
Based on the scenario, Rosa has
a. an absolute advantage in producing basketballs, but not footballs.
b. an absolute advantage in producing footballs, but not basketballs.
c. an absolute advantage in producing both goods.
d. an absolute advantage in producing neither good.
e. no comparative advantage.
Q:
If this economy produces more than 20 houses per year, the opportunity cost of a house will ________ because ________.
a. decrease; production will be specialized
b. increase; an input with a higher opportunity cost must be used
c. decrease; inputs will be obtained at lower cost
d. increase; all gains from trade have already been exploited
e. remain the same; Natasha and Jameson produce in constant ratios regardless of level of output
Q:
If both Natasha and Jameson produce the good for which each has a comparative advantage, total output of this economy will be
a. 10,000 pounds of cheese.
b. 30 houses.
c. 10,000 pounds of cheese and 30 houses.
d. 5,000 pounds of cheese.
e. 5,000 pounds of cheese and 20 houses.
Q:
By the principle of comparative advantage, Jameson should specialize in producinga. both cheese and houses. b. cheese. c. houses.d. neither cheese nor houses.e. a little of both goods.
Q:
Use the following scenario to answer the following questions:Natasha can produce either 5,000 pounds of cheese or 20 houses per year. Jameson can produce either 5,000 pounds of cheese or 10 houses per year.By the principle of comparative advantage, Natasha should specialize in producinga. both cheese and houses. b. cheese. c. houses.d. neither cheese nor houses.e. a little of both goods.