ACCT Auditing
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question (2 points each). (60 points)
1) Which of the following is not an area of the general standards?
1. A) Internal control.
2. B) Independence.
3. C) Quality control.
4. D) Due professional care.
2) In the performance of an audit, a CPA:
A) is legally liable for detecting an immaterial client fraud.
B) Must strictly follow GAAP for privately held clients.
C) Must exercise constructive professional care in the performance of their audit responsibilities.
D) Must exercise due professional care in the performance of their audit responsibilities.
3) Which of the following is an account that is not affected by the sales and collection cycle?
A) Cash
B) Accounts receivable
C) Allowance for doubtful accounts
D) Accounts payable
4) The audit procedure "examine duplicate copies of notes payable to determine whether the notes payable were dated on or before the balance sheet date" is done for which of the following balance-related audit objective?
A) Completeness
B) Cutoff
C) Detail tie-in
D) Existence
5) When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customer's account that employee may be suspected of:
A) Kiting.
B) Lapping.
C) Floating.
D) Shorting.
6) Which of the following is an objective of the Single Audit Act?
A) Establish uniform requirements for audits of federal financial assistance provided to state and local governments
B) Provides guidance on examining and reporting on management's written assertion about the effectiveness of an entity's internal control over financial reporting
C) Describe the transaction or event that is reflected in the pro forma financial information
D) Determining whether there have been any significant events subsequent to the balance sheet date that would materially affect fair values and would require disclosure
7) When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?
A) An increase in the tolerable misstatement
B) An increase in the acceptable risk of incorrect acceptance
C) Decrease in the tolerable misstatement
D Small expected misstatements
8) An auditor uses assessed control risk to
A) Evaluate the effectiveness of the entity's internal controls.
B) Identify transactions and account balances where inherent risk is at the maximum.
C) Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
D) Determine the acceptable level of detection risk for financial statement assertion.
9) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called:
A) Finance.
B) Auditing.
C) Accounting.
D) Economics.
10) Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?
A) The auditor commonly examines a sample, rather than the entire population of transactions.
B) Accounting presentations contain complex estimates which involve uncertainty.
C) Fraudulently prepared financial statements are often difficult to detect.
D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
11) Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?
A) The auditor commonly examines a sample, rather than the entire population of transactions.
B) Accounting presentations contain complex estimates which involve uncertainty.
C) Fraudulently prepared financial statements are often difficult to detect.
D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
12) The most important balance-related audit objectives in the audit of cash include all but which of the following?
A) Occurrence
B) Existence
C) Completeness
D) Accuracy
13) Which of the following is not a function within the inventory cycle?
A) Process the goods
B) Process invoices for shipped goods.
C) Store raw materials
D) Ship finished goods
14) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.
A) Accuracy
B) Existence
C) Completeness
D) None of the above
15) Which of the following audit objectives is conduct to determine that all investments owned by the entity at the balance sheet date are included in the financial statements?
A) Accuracy
B) Completeness
C) Existence
D) Presentation and disclosure
16) Auditing standards require that the audit report must be titled and that the title must:
A) Include the word "independent."
B) Indicate if the auditor is a CPA.
C) Indicate if the auditor is a proprietorship, partnership, or corporation.
D) Indicate the type of audit opinion issued.
17) In order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that:
A) The internal control policies and procedures are developed by the auditors.
B) The purpose of an audit is to prevent fraud.
C) Management is responsible for the preparation of the financial statements.
D) Management can restrict the auditor's access to important information relevant to the financial statements.
18) Which of the following is least likely to be comparable between similar corporations in the same industry line of business?
A) Account Receivable turnover.
B) Earnings per share.
C) Gross profit percent.
D) Return on assets before interest and taxes.
19) When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use:
A) Audit sampling.
B) Estimation sampling.
C) Poor judgment.
D) Representative sampling.
20) According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?
A) The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution.
B) The auditor is also an attorney who advises the client as its general counsel.
C) An employee of the auditor serves as treasurer of a charitable organization that is a client.
D) The client owes the auditor fees for two consecutive annual audits.
21) The auditor selects a sample of shipping documents to determine whether bills have been sent for the goods shipped. This test would satisfy the audit objective of
A) Existence
B) Completeness
C) Presentation and disclosure
D) Valuation
22) Which of the following is the principle "weakness" of using negative confirmations for your tests of details of balances for accounts receivable?
A) Response rates are generally too low to draw any conclusions
B) Conclusions drawn from receiving no reply may not be correct
C) Cannot not be used when account balances "bunch" around a mean value
D) Can only be used for large balance accounts
23) An auditor prepares an analysis of the repair and maintenance expense account to consider if any items should be classified as capital expenditures. This procedure would be most applicable to the audit objective of
A) Verifying that the company owns its fixed assets.
B) Verifying that the repairs exist.
C) Verifying that the repairs are complete
D) Verifying that the fixed assets are complete.
24) A positive confirmation is more reliable evidence than a negative confirmation because:
A) Fewer confirmations can be sent out.
B) Follow-up procedures are performed if a response is not received from the debtor.
C) The auditor has a document which can be used in court.
D) The debtor's lack of response indicates agreement with the stated balance.
25) You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities. You have decided to vouch a sample of entries in the accounts payable master file to supporting documents. Which assertion is this test of controls most likely to support?
A) Accuracy
B) Classification
C) Completeness
D) Occurrence
26) Confirmation of accounts receivable balances normally provides evidence concerning the:
A) Valuation of the balances.
B) Rights of the balances.
C) Existence of the balances.
D) Completeness of the balances.
27) Which one of the following is not a Field Work Standard?
A) Understand the entity and its environment including internal control.
B) Due professional care.
C) Sufficient appropriate audit evidence.
D) Adequate planning and supervision.
28) Which of the following statements concerning audit evidence is true?
A) The measure of the quantity and quality of audit evidence lies in the auditor's professional judgment
B) To be appropriate, audit evidence should be either persuasive or relevant, but need not be reliable.
C) The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
D) A client's accounting records can be sufficient audit evidence to support the financial statements.
29) An auditor's unqualified report
A) States that the financial statements are accurate representations.
B) States that the financial statements are fair representations
C) States that the financial statements comport in all respects with GAAP
D) States that the financial statements comport in all respects with GAAS.
30) When another auditor is involved in examining a portion of the financial statements, and the primary auditor decides to make no reference to the other auditor in the audit report,
A) The auditor is issuing a shared opinion report.
B) The auditor is accepting responsibility for the other auditor's work.
C) The auditor is not responsible for the other auditor's work.
D) The auditor is issuing an adverse opinion.
Essay: Write your answer in the space provided or on a separate sheet of paper
I. A CPA, has completed the audit of the financial statements of a Corporation as of and for the year ended December 31, 2015. The CPA also audited and reported on the Corporation's financial statement for the prior year. Note 3 of the Corporation's financial statement described $500,000 investment that the Corporation has with a foreign affiliate. Note 3 also described the Corporation's has an equity earning of with the same affiliate of $400,000, which is included the Corporation's net income. The CPA was unable to obtain audited financial statements to support the Company's investment described in Note 3. Although the CPA performed other auditing procedures, the CPA was unable to be satisfied as to the carrying value of the investment or the equity in the Corporation's earnings.
1. Given the information provided above, state the appropriate audit report (audit opinion) the CPA should write.
2. Given your answer in part a, write the appropriate audit report.
II. Following are commonly audit procedures:
1. Accounts payable represent all amounts owed by the entity at the balance sheet date arising from the purchase of goods and services.
2. Recorded cash transactions represent receipts and disbursements that actually occurred during the period covered by the financial statements
3. All payroll amounts are based on correct wage rates and hours, and are accurately computed, summarized, and classified in the appropriate general ledger accounts.
4. Purchase transactions, accounts payable, returns, and payroll transactions are recorded in the proper period.
5. Cost of sales is based on correct costs and quantities, is properly summarized and posted to the cost of sales and inventory control accounts, and, if appropriate, is credited in the perpetual inventory records.
6. The entity has legal title and ownership rights to cash and cash equivalents.
7. Production costs incurred and charged to work in process, transfers to finished goods, and cost of sales (and returns) are recorded in the proper period.
8. All shipments (and returns) of goods during the period covered by the financial statements are reflected in cost of sales.
Required:
(a) Identify the audit objective (completeness, existence, accuracy, cutoff, presentation and disclosure, right and obligation)