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principles of auditing and other assurance services
Questions and Answers of
Principles Of Auditing And Other Assurance Services
Internal auditors should be objective in performing audits. Which of the following situations violates standards concerning objectivity?(1) The auditor who reviews accounts receivable worked in that
Identify the six stages of ethical development. What level of development would typically be attained by a professional such as an auditor?
Briefly describe the responsibility of the PCAOB concerning standards for the professional conduct of auditors of public companies and explain how it came to have that role. What is the role of the
All of the following non-audit services are identified by the SEC as generally impairing an auditor’s independence excepta. Information systems design and implementation.b. Human resource
Under the SEC’s rules regarding independence, which of the following must a client disclose?a. Only fees for the external audit.b. Only fees for internal and external audit services provided by the
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational and also aa. List of violations that would cause the automatic suspension of a CPA’s license.b.
Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Cable’s management informed Drake that it suspected the accounts receivable were materially overstated.
Which of the following best describes whether a CPA has met the required standard of care in auditing a client’s financial statements?a. Whether the client’s expectations are met with regard to
Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King’s financial statements, Safe Bank loaned King
How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors’ liability to
In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Hansen must prove thata. Jay knew of the misstatements.b. Jay was negligent.c. The
Under the Private Securities Litigation Reform Act of 1995, Baker, CPA, reported certain uncorrected illegal acts to Supermart’s board of directors.Baker believed that failure to take remedial
Which of the following is not a provision of the Sarbanes-Oxley Act of 2002?a. A requirement to retain audit workpapers for at least five years.b. It is a criminal offense to take any harmful action
Which of the following is a provision of the Foreign Corrupt Practices Act?a. It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a
Describe the principles used in SysTrust to evaluate a system as reliable.
An assurance report on information can provide assurance about the information’sa. Reliability.b. Relevance.c. Timeliness.d. All of the above.
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements, provided thata. The prospective financial statements are also examined.b. Responsibility
When compiling the financial statements of a nonpublic entity, an accountant shoulda. Review agreements with financial institutions for restrictions on cash balances.b. Understand the accounting
The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity states thata. A review includes assessing the accounting principles used and significant
Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating thata. The scope of the inquiry and the analytical procedures performed
The general accreditation granted by the Institute of Internal Auditors is known as thea. CFE.b. CGAP.c. CFSA.d. CIA.
Which of the following is not one of the general areas of the IIA’s International Standards for the Professional Practice of Internal Auditing?a. Performance standards.b. Implementation
The four principles of the IIA Code of Ethics area. Confidentiality, competency, objectivity, and integrity.b. Objectivity, independence, compliance, and due diligence.c. Honesty, integrity,
Which of the following assurances is not provided by an unqualified opinion on a SysTrust report?a. There are procedures to protect the system against unauthorized physical access.b. The financial
Which of the following reasons best explains why a practitioner should obtain an engagement letter for a PrimePlus engagement?a. Attestation standards require that the practitioner use an engagement
Which of the following is not a type of PrimePlus service?a. Assurance services.b. Consulting/facilitating services.c. Direct services.d. Systems design services.PROBLEMS
You have audited the financial statements of the Orange Grove Savings and Loan for the year ended December 31, 2007. Orange Grove’s management is required to provide a report about the
After defining the population, the auditor must make what additional decisions concerning the population?
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and thea. Expected population deviation rate.b. Computed
The allowance for sampling risk wasa. 51⁄2 percent.b. 51⁄2 percent.c. 31⁄2 percent.d. 1 percent.
What is an auditor’s evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations if the tolerable deviation rate is 7 percent, the expected population
Following is a list of audit procedures used as tests of controls in the revenue process.1. Observing and evaluating segregation of duties.2. Testing of whether sales invoices are supported by
In obtaining evidence in support of financial statement assertions, the auditor develops specific audit procedures to access those assertions.
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
Miller Retailing, Inc., maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to help in performing the audit, the
During the initial planning phase of an audit, a CPA most likely woulda. Identify specific internal control activities that are likely to prevent fraud.b. Evaluate the reasonableness of the
To help plan the nature, timing, and extent of substantive procedures, preliminary analytical procedures should focus ona. Enhancing the auditor’s understanding of the client’s business and of
The primary objective of final analytical procedures is toa. Obtain evidence from details tested to corroborate particular assertions.b. Identify areas that represent specific risks relevant to the
Trend analysis is best described bya. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data.b. Development
Arthur, CPA, is auditing the RCT Manufacturing Company as of December 31, 2007. As with all engagements, one of Arthur’s initial procedures is to make overall checks of the client’s financial
An auditor’s primary consideration regarding an entity’s internal controls is whether theya. Prevent management override.b. Relate to the control environment.c. Reflect management’s philosophy
Which of the following statements about internal control is correct?a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur.b. The
Regardless of the assessed level of control risk, an auditor would perform somea. Tests of controls to determine the effectiveness of internal controls.b. Analytical procedures to verify the design
Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?a. Reviewing standard bank confirmations for indications of cash
Management makes assertions about components of the financial statements.Match the management assertions shown in the left-hand column with the proper description of the assertion shown in the
The confirmation process is defined as the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting
Audit documentation is the auditor’s record of work performed and conclusions reached on an audit engagement.
Audits can be categorized into five types: (1) financial statement audits,(2) audits of internal control, (3) compliance audits, (4) operational audits, and (5) forensic audits.
Which of the following is a misappropriation of assets?a. Classifying inventory held for resale as supplies.b. Investing cash and earning a 3 percent rate of return as opposed to paying off a loan
Sandy Pitts is auditing Hofmeister Hardware Company, a fast-growing retail hardware chain in the Atlanta area. While Pitts has previously worked on this engagement, this is her first year as the
Cendant Corporation (Cendant). On December 17, 1997, CUC International merged with HFS Incorporated to form Cendant. Cendant operates primarily in three business segments—alliance marketing,
Which of the following most likely would be called an assurance service?a. Performance measurement.b. Tax planning.c. Personal financial planning.d. Systems design and implementation.
Aside from cash balances, what other information is requested by an AICPA standard form to confirm account balance information with financial institutions (Figure 11-7)? Figure 11-7: Bank
Identify several major internal audit activities.
What are the primary sources of an internal auditor's independence?
Operational audits generally have been performed by internal auditors but may be performed by independent accountants. A primary purpose of an operational audit is to provide:a. A means of assuring
What is the purpose of the general and technical standards of the AICPA Code of Professional Conduct?
Adopted by member vote in 1988, the AICPA's Code of Professional Conduct provides members with principles and rules about their responsibilities to the public, to clients, and to their colleagues in
In this case, Evergreen is most likely a:a. Foreseeable third party.b. Foreseen third party.c. Primary beneficiary.d. Client.
Claiming to have relied on an unqualified opinion and December 31, 2005 audited financial statements Hasting & Ford LLP issued for Jasper Manufacturing, Dual Manufacturing has sued Hasting & Ford to
Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to conceal the misappropriation and unlikely to be detected?a. Understating the sales journal.b.
Which of the following cash transfers misstates cash at December 31, 2005? Interbank Transfers Disbursement Receipt Recorded in books Paid by bank Recorded in books Received by bank a. 12/31/05
Discuss why the AICPA has such strict requirements on audit opinions when the auditor is not independent.
The following questions concern audit reports other than unqualified audit reports with standard wording. Choose the best response.a. A CPA will issue an adverse auditor’s opinion if(1) the scope
Distinguish between the effect on a CPA firm’s practice of enforcing the rules of conduct by the AICPA versus a state Board of Accountancy.
State the third standard of field work. Explain the meaning of each of the major phrases of the standard.
What are the two criteria that auditors of public companies consider when determining whether memos, correspondence, and other documents must be maintained in the audit files?
How does the sufficiency of evidence differ between procedures to obtain an understanding of internal control and tests of controls?
Vial-tek has an existing loan in the amount of \(\$ 3.5\) million with an annual interest rate of \(9.5 \%\). The company provides an internal company-prepared financial statement to the bank under
Fred Oatly is the loan officer of the National Bank of Dallas. National has a loan of \(\$ 260,000\) outstanding to Regional Delivery Service, a company specializing in delivering products of all
Rose & Co., CPAs in Kansas City, MO, have satisfactorily completed the audit of the financial statements of Dale, Booster & Co., a partnership, for the year ended December 31, 20X1. The financial
Give the purposes of each of the following procedures that may be included in internal control, and explain how each procedure contributes to strong internal control:a. Forecasting of expenditures
Nova Land Development Corporation is a closely held corporation engaged in purchasing large tracts of land, subdividing the tracts, and installing paved streets and utilities. The corporation does
Valley Finance Company opened four personal loan offices in neighboring cities on January 2. Small cash loans are made to borrowers who repay the principal with interest in monthly installments over
In meeting the control objective of safeguarding of assets, which depart- ment should be responsible for the following?
For an appropriate segregation of duties, journalizing and posting sum- mary payroll transactions should be assigned toa. The treasurer's department.b. General accounting.c. Payroll accounting.d. The
An auditor who is testing IT controls in a payroll system would most likely use test data (discussed in Advanced Module 1 in Chapter 6) that contain conditions such asa. Deductions not authorized by
It would be appropriate for the payroll department to be responsible for which of the following functions?a. Approval of employee time records.b. Preparation of periodic governmental reports as to
Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions?a. Trace a sample of time sheets to the payroll register.b. Recompute the
An auditor is most likely to perform substantive tests of details on payroll transactions and balances whena. Cutoff tests indicate a substantial amount of accrued payroll expense.b. The level of
The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and thata. Independent internal verification of
Which of the following control activities would be most likely to as- sist in reducing the control risk related to the occurrence of inventory transactions?a. Inventory manager does not have ability
Which of the following would most likely be an internal control activity de- signed to detect errors and fraud concerning the custody of inventory?a. Periodic reconciliation of work in process with
Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees whoa. Issue raw materials obtain materials requisitions for each issue and prepare daily
An auditor's tests of controls over the issuance of raw materials to pro- duction would most likely includea. Reconciliation of raw materials and work-in-process perpetual inven- tory records to
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all itemsa. Included in the listing have been
Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor
When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not available for inspection. The policy's absence most likely
Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions?a. Periodic physical inspection and reconciliation of plant
To strengthen control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodica. Increase in insurance coverage.b. Inspection of equipment and
Due to a weakness observed in a client's control over recording retirement of equipment, the auditor may decide toa. Trace additions to the "other assets" account to search for equipment that is
Which of the following procedures is most likely to prevent the improper disposition of equipment?a. Separation of duties between those authorized to dispose of equipment and those authorized to
Which of the following situations would not support the auditor's decision to reduce control risk below maximum for the audit of intangible assets?a. The client employs a qualified specialist who
Which of the following control activities would most likely allow for a reduction in the scope of the auditor's tests of depreciation expense?a. Review and approval of the periodic equipment
When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performsa. Substantive analytical procedures for
Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed-asset additions?a. Inspecting documents and physically examining assets.b.
A client has established a bond sinking fund to repurchase a portion of the outstanding bonds each year. The auditor can best verify the client's bond sinking fund transactions and year-end bond
The primary responsibility of a bank acting as a registrar of capital stock is toa. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.b.
To obtain evidence on the authorization assertion, an auditor should trace corporate stock issuances and treasury stock transactions to thea. Numbered stock certificates.b. Articles of
Although the quantity and content of audit working papers vary with each particular engagement, an auditor's permanent files most likely includea. Schedules that support the current year's adjusting
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