Auditing CPA Review – Midterm

1.     Failure to detect material dollar misstatements in the financial statements is a risk which the auditor primarily mitigates by
Answer

a.   Performing substantive procedures.

b.   Performing tests of controls.

c.    Assessing internal control.

d.   Obtaining a client representation letter.

2.         Which of the following gives, as Dr. Moore described, a “warm and fuzzy feeling” when an auditor determines that the client has
Answer

a.         a requirement that two signatures are required on checks

b.         a budget and variance analysis system

c.          an annual quality control review

d.         an internal audit staff  ?????

3.         Which of the following procedures is least likely to be performed as a part of obtaining an understanding during an audit engagement of a new audit client previously audited by another CPA?
Answer

a.         Communication with the predecessor auditor.

b.         Performing analytical procedures.

c.          Obtaining confirmation of cash balances.

d.         Considering internal control

4.         If internal control is properly designed, the same employee should not be permitted to
Answer

a.         Sign checks and cancel supporting documents.

b.         Receive merchandise and prepare a receiving report.

c.          Prepare disbursement vouchers and sign checks.

d.         Initiate a request to order merchandise and approve merchandise received.

5.         During the process of confirming receivables as of December 31, 2007, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, 2008.” The auditor would most likely
Answer

a.         Determine whether there were any changes in the account between January 1 and January 9, 2008

b.         Determine whether a customary trade discount was taken by the customer.

c.          Reconfirm the zero balance as of January 10, 2008.

d.         Verify that the amount was received.

6.         An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to
Answer

a.         Verify that cash disbursements were for goods actually received.

b.         Test whether payments were for goods actually ordered.

c.          Determine that purchases were properly recorded.

d.         Identify unusually large purchases that should be investigated further

7.         Which of the following is not an objective of a well-designed system of internal control?
Answer

a.         Accurate reliable financial statements

b.         Safeguarding of assets.

c.          Adherence with applicable laws and regulations.

d.         Maintaining proper segregation of duties

8.         A weakness in internal control over recording retirements of equipment may cause an auditor to
Answer

a.         Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

b.         Select certain items of equipment from the accounting records and locate them in the plant.

c.          Inspect certain items of equipment in the plant and trace those items to the accounting records.

d.         Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used

9.         Which of the following is not an interrelated component of internal control?
Answer

a.         Control activities

b.         Risk assessment

c.          Monitoring

d.         Management integrity

10         The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
Answer

a.         Entity policies may be inappropriately overridden by senior management.

b.         Specified controls requiring segregation of duties may be circumvented by collusion.

c.          Tests of controls may fail to identify procedures relevant to assertions.

d.         Material misstatements may exist in the financial statements

11.        Which of the following statements concerning audit evidence is true?
Answer

a.         A client’s accounting data can be sufficient audit evidence to support the financial statements.

b.         To be competent, audit evidence should be either persuasive or relevant, but it need not be both

c.          The measure of the validity of audit evidence lies in the auditor’s judgment.

d.         The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test

12.        When auditing related party transactions, an auditor places primary emphasis on
Answer

a.         Ascertaining the rights and obligations of the related parties.

b.         Evaluating the disclosure of the related party transactions.

c.          Verifying the valuation of the related party transactions.

d.         Confirming the existence of the related parties

13.        In the consideration of internal control, the auditor is basically concerned that internal control provides reasonable assurance that
Answer

a.         Controls have not been circumvented by collusion.

b.         Misstatements have been prevented or detected.

c.          Operational efficiency has been achieved in accordance with management plans.

d.         Management cannot override controls.

14.        Which of the following is least likely to be a procedure used for planning/acceptance of an engagement?
Answer

a.         Contacting the predecessor auditor

b.         communicating with the client’s attorney and other third parties

c.          review financial statements

d.         determine internal control risk

15.        Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include
Answer

a.         Schedules that support the current year’s adjusting entries.

b.         Prior years’ accounts receivable confirmations that were classified as exceptions.

c.          Documentation indicating that the audit work was adequately planned and supervised.

d.         Analyses of capital stock and other owners’ equity accounts.

16.        Of the following, which is the least persuasive type of audit evidence?
Answer

a.         Documents mailed by outsiders to the auditor.

b.         Correspondence between auditor and vendors.

c.          Copies of sales invoices inspected by the auditor.

d.         Computations made by the auditor

17.        Which of the following did not have substantive changes under the new clarification standards?
Answer