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Question 1 of 50

Which of the following statements is false?

Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence.

Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.

A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level.

The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing.

Question 2 of 50

Jonathan Davis, CPA takes out an automobile loan with Silicon Valley Bank (SVB) of San Jose while attending the Silicon Valley University in San Jose. Jonathan graduates one year later and is hired as an auditor by Better Accountants, LLP. His first assigned audit engagement is with SVB, a client of Better Accountants. As a new audit assistant, Jonathan continues to pay his automobile loan payments each month.

According to the AICPA, why is Jonathan considered a covered member for SVB independence purposes?

He graduated in the same area as the client is operating.

He will be working on the engagement.

He has a direct financial interest in SVB.

He has an immaterial direct financial interest in SVB.

None of these answers are correct.

Question 3 of 50

If ______________________, the CPA would still be considered independent.

A CPA's father was a salesman at the CPA's audit client and now a major portion of the father's pension fund is invested in the audit client.

A CPA's son works summers at the audit client and has earned 10 shares of stock in the audit client.

A CPA's cousin works as a web-site designer at the audit client.

A CPA's brother is the Vice-President of Sales at the CPA's audit client.

The CPA would not be considered independent in any of these situations.

Question 4 of 50

A company has in place a process that is designed to ensure that no employee is paid for more than 80 hours of sick pay. This is an example of a(an) ___________.

cash management control

input control

entity-wide control

output control

processing control

Question 5 of 50

All of the following are findings from COSO's analysis of fraud, except:

The is heavy involvement in fraud by the CEO and/or CFO.

The amount and incidence of fraud remains high.

The majority of frauds take place at companies that are traded on the New York Stock Exchange (NYSE).

The most common fraud involved revenue recognition.

One-third of companies changed auditors during the latter part of the fraud.

Question 6 of 50

Research consistently shows that there are three factors associated with most frauds. The three factors are:

1. Incentives or Pressures

2. Opportunities

3. Attitudes or Rationalization

With each factor, there are indicators that the factor may exist.

Which of the following indicators is not associated with the Opportunities factor?

Complex or difficult to understand transactions.

Audit firm focus is on consulting for higher fees rather that audit services.

Ineffective monitoring by management.

Aggressive accounting stance.

Weak or nonexistent internal controls.

Question 7 of 50

All of the following statements are true except:

The type of audit evidence known as inquiry does not ordinarily provide sufficient audit evidence of the absence of a material misstatement, nor is it alone sufficient to test the operating effectiveness of controls.

Audit evidence consists of both information that corroborates management's assertions and information that contradicts such assertions.

A limitation of observation is that observing a process on one day does not necessarily indicate how the transactions were processed on a different day or over a relevant period of time.

Audit evidence used to support an audit opinion is obtained soley from audit procedures.

The auditor uses professional judgment to determine which audit procedures to perform.

Question 8 of 50

Which of the following statements is true?

The Center for Audit Quality has the primary authority to set auditing standards.

Since the auditor is not responsible for the presentation of financial statements, he/she has no responsibility for fraud in the financial statements.

The treasurer's diversion of hundreds of thousands of dollars into a personal money market account is an example of fraudulent financial reporting.

The Center for Audit Quality was started by the International Federation of Accountants.

A CFO intentionally overstating sales to boost profits is an example of fraudulent financial reporting.

Question 9 of 50

Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002?

All of these are management responsibilities.

Certify the accuracy of financial statements.

Establish a corporate code of conduct.

Ensuring financial statements and disclosures are accurate.

Designing internal controls.

Question 10 of 50

_________________ are considered to be transaction controls.

Controls to monitor other controls.

Physical controls to safeguard assets.

Policies that address significant business control practices.

None of these are considered to be transaction controls.

Centralized processing controls.

Question 11 of 50

____________ is an example of alternative procedures for the confirmation of accounts receivable.

Review of subsequent collections on account by the client.

Inquiry of management.

Providing an estimate of the allowance for doubtful accounts to be recorded by the client.

Tracing source documents to recorded amounts.

None of these answers are correct.

Question 12 of 50

Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct?

A member must adequately plan and supervise the performance of professional services.

A member must not take on an engagement that is beyond the member's professional competence.

A member must exercise duties prudently and professionally.

A member firm must not advertise services to competing clients.

None of these answers are correct.

Question 13 of 50

Which of the following statements is true?

The Center for Audit Quality has the primary authority to set auditing standards.

The Center for Audit Quality was started by the International Federation of Accountants.

The five major components of an organization's internal control are: the control environment, risk assessment, control activities, information and communication, and monitoring.

In an audit, management is considered the "client".

Controls to monitor results of operations are considered to be transaction controls.

Question 14 of 50

The auditor would perform an audit procedure to ________________ in order to determine whether any accounts receivables are pledged or assigned to others.

Examine subsequent collections.

None of these answers are correct.

Test a sample of transactions to the general ledger.

Review loan agreements and board of directors' meeting minutes.

Derive an independent estimate of the allowance and compare it to pledged assets.

Question 15 of 50

An example of ________________________ is when an auditor selects a sample of items recorded and traces them back to the supporting documentation.

Direct testing for rights.

Directional testing for existence.

Directional testing for completeness.

Direct testing for valuation.

Accuracy testing for presentation.

Question 16 of 50

In which of the following independent situations, is it most likely that fraud related to revenue recognition will be identified by the auditor?

Gross margin is equivalent in the current period to previous periods and is below that of the industry.

Sales are higher in the month preceding each quarter end.

Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors.

The sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

Sales have decreased 5% in the current period over the previous period and is consistent with the results of competitors.

Question 17 of 50

An auditor may use ______________ as a defense under the Securities Act of 1933?

Scienter

Immaterial loss

Due Care

Independence

Contributory Negligence

Question 18 of 50

______________ is the audit report referred to when the auditor has no reservations about management's financial statements.

A peer review

An unqualified report

An adverse report

An integrated report

A qualified report

Question 19 of 50

Which of the following statements regarding significant provisions of the PCAOB is false?

Foreign accounting firms must comply with the same rules related to the PCAOB as domestic accounting firms.

The SEC has oversight and enforcement authority over the PCAOB.

The lead partner and reviewing partner must rotate off the issuer (audit) engagement at least every five years.

Accounting firms auditing public companies must register with the PCAOB.

The PCAOB is an agency of the U.S. government.

Question 20 of 50

Which of the following statements is true?

It is true that when an auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recalculation by footing.

It is true that the purpose of performing analytical procedures in the planning stage of an audit is to gather audit evidence and make conclusions about account balances.

It is true that the risk of misstatement refers to the combination of inherent risk and control risk.

It is true that the process of sending disbursements to suppliers is part of the revenue cycle.

It is true that the net profit margin ratio provides information about a company's liquidity.

Question 21 of 50

The best definition of a scienter is _________________________.

A material omission of facts.

A causal connection between a misstatement and a material loss.

A wrongful state of mind when making a misrepresentation.

Fraudulent conduct in the purchase of a security.

None of these choices is correct.

Question 22 of 50

The first phase in an audit is ________________.

Understanding internal controls.

Testing of account balances.

Client acceptance or client continuance.

Understanding the client.

None of these answers are correct.

Question 23 of 50

The public expects which of the following from a firm's external auditors?

The public expects all of these from a firm's external auditors.

Understand and enforce principles that best portray the spirit of FASB concepts.

Be neutral to preparers and users of financial information.

Recognize that the investing public is the primary user of audit services.

Take responsibility for the discovery of fraud.

Question 24 of 50

Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to _________________.

Increase

Remain the same

Become less difficult to ascertain

Decrease

Become more difficult to ascertain

Question 25 of 50

_______________________ are most often involved in perpetrating fraudulent financial reporting.

The chief executive and chief financial officers.

The treasurer and the board of directors.

The controller and accounting manager.

The shareholders and the chief operating officer.

The auditors and the attorneys.

Question 26 of 50

Which of the following statements is true?

The revenue cycle considered by auditors includes the sales process but not collections.

The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.

The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction and collecting the receivable.

Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised.

Auditors and management should agree on what is considered material.

Question 27 of 50

Which of the following statements is false?

The relevance of audit evidence depends on the audit assertion being tested.

Audit documentation should include the initials or electronic signature in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.

The client's verbal evidence is more reliable than evidence from independent outside sources.

The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.

Analytical procedures are a type of substantive evidence.

Question 28 of 50

The _____________ is recognized for providing guidance on a framework for internal control.

COSO

SEC

AICPA

IAASB

PCAOB

Question 29 of 50

All of the following statements are true, except:

It is true that when the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence.

It is true that the auditor uses professional judgment to determine which audit procedures to perform.

It is true that audit evidence consists of both information that corroborates management's assertions and information that contradicts such assertions.

It is true that when the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high, the auditor is more likely to use negative confirmations.

It is true that inherent and control risks are risk controlled by the auditor.

Question 30 of 50

An audit program is created to specify _____________________.

The audit team to be assigned to the audit engagement.

How an auditor should think while performing audit procedures.

Audit objectives and procedures to be followed during the audit process.

The audit procedures that will be performed every year for the client.

The type of audit opinion to be rendered based upon procedures performed.

Question 31 of 50

In smaller audit firms, it is typical that __________________________.

The firm has multiple teams that overlap across engagements.

The type of work is primarily external audits.

None of these answers are correct.

The firm has multiple teams that work on the audit of a single entitiy and then disband.

The firm has a relatively higher level of staff turnover.

Question 32 of 50

An auditor uses an aged accounts receivable report to accomplish which of the following?

Select the type of confirmations that will be sent to banks.

Identify debits in the receivables balance that should be reclassified to payables.

Assess the adequacy of the allowance for doubtful accounts.

To uncover lapping

Encourage the client to collect on receivables that are long past due.

Question 33 of 50

The most common criteria against which the auditor measures the fairness of financial statement presentation for a U.S.-based company is:

Generally accepted accounting standards

Government accounting principles

Sarbanes-Oxley compliance

Generally accepted accounting principles

Auditing standards

Question 34 of 50

As the risk of material misstatement increases, detection risk will _____________.

none of these answers are correct

stay the same

decrease

severely increase

see a medium increase

Question 35 of 50

Which of the following statements is false?

A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery as revenue.

When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently.

Touring a company's plant offers much insight into potential audit issues.

An appropriate mix of evidence for a low risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high risk client could include 60% tests of details, 20% analytics, and 20% tests of controls.

The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing.

Question 36 of 50

Which of the following statements is false?

It is true that the consideration of fraud in financial statement audits is a relatively new concept derived originally from the Sarbanes-Oxley Act.

It is correct that, according to professional audit standards, the audit team should assemble early in the planning stages of an audit to conduct a fraud "brainstorming" meeting in order to determine the types of fraud that may occur with the client.

It is true that users rely on the auditors' independent assessment of financial statement presentation because few users have direct knowledge of the company's operations.

It is true that if an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly.

It is true that auditing exists because users need unbiased information on which to assess management performance and make economic decisions.

Question 37 of 50

A company will implement credit approval policies primarily _______________.

to determine revenue recognition policies.

to ensure the realization of receivables.

to minimize sales returns and allowances.

to ensure customer satisfaction.

to prevent lapping by the accounts receivable department.

Question 38 of 50

Consider the following scenario:

Sally Davis, controller of Silicon Valley University, spends three days researching the accounting statements to find loopholes in the "rules" and to make a case for recognizing revenue earlier, rather than in later years. In the end, Sally and the other members of management determine that they will reduce the company's deferred revenue accounts and begin accounting for all revenues as agreements are signed.

What are the motivations of Silicon Valley University management based solely on the information above?

Rationalization

Convenience

Skepticism

Pressures

Opportunity

Question 39 of 50

Of the following types of audit evidence, _________________ is the most reliable?

Evidence from the client's organization.

Directly observable evidence.

Facsimiles of documents.

Copies of client prepared documents.

Evidence from a poorly controlled system.

Question 40 of 50

Which of the following statements is false?

Positive confirmations require a response from the customer whether or not they agree or disagree with the indicated account balance.

Negative confirmations are used when the customer has a large number of relatively small customer balances.

A side letter is a contract addendum and it does not increase audit risk.

An alternative procedure for non-responses to positive confirmations is to examine supporting documents.

If confirmations are returned as undeliverable, the auditor should determine the reason.

Question 41 of 50

If an auditor were to divulge confidential information obtained from a client in order to __________________. It would be considered a violation of the standard of confidentiality.

To respond to the information request of a shareholder.

To initiate a complaint with the AICPA's ethics division.

To respond to a quality review request of the state board of accountancy.

To ensure adequate disclosure in accordance with GAAP.

All of these would be violations of the standard of confidentiality.

Question 42 of 50

All of the following statements are false, except:

Communication between an auditor and an audit client is deemed to be privileged communication in most states.

The SEC and PCAOB independence rules for auditors are identical.

Rule 102, Integrity and Objectivity,of the AICPA Professional Code of Conduct, does not apply to a CPA who is a corporate CFO.

The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor independence requirements.

Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved.

Question 43 of 50

_________________ is the first phase in an audit.

Client acceptance or client continuance

Understanding the client

Understanding internal controls

Testing the revenue cycle

Testing of account balances

Question 44 of 50

Which one of the following is a requirement pf the reporting standards included in the generally accepted auditing standards?

The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate, the auditor must so state in the auditor's report.

The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an opinion can be expressed.

None of these answers are correct.

The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.

The auditor will identify in the auditor's report, those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period.

Question 45 of 50

One form of _____________ is when a cross-sectional analysis of revenue recorded across multiple sales locations is performed.

correlation analysis

completeness analysis

trend analysis

regression analysis

common size analysis

Question 46 of 50

According to the framework for ethical decision making, which of the following should the decision maker consider?

Whether the rights framework would cause any course of action to be added.

None of these choices should be considered by the decision maker.

All possible alternative courses of action.

The consequences associated with possible actions.

All of these choices should be considered by the decision maker.

Question 47 of 50

_______________ would be the least reliable type of evidence?

Letters of communication from the Securities Exchange Commission.

None of these answers are correct.

Evidence from an easily overridden information system.

Physical examination of perpetual inventory.

Confirmations returned by bank directly to the auditor.

Question 48 of 50

All of the following are threats to an auditor's independence, except:

Advocacy threat

Financial self-interest threat

Political association threat

Self-review threat

Management participation threat

Question 49 of 50

All of the following are true, except:

Tracing is a process that helps establish that recorded transactions are valid.

The auditor uses professional judgment to determine which audit procedures to perform.

The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues.

An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger.

Valid evidence obtained in an audit for testing the cutoff of gross sales includes receiving reports for returned merchandise.

Question 50 of 50

If _________________________, this would indicate that fraud is pervasive throughout the company under audit.

The company's management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales.

The company's management takes an overly aggressive approach to revenue recognition.

The company's management drives luxury vehicles and takes vacations to exotic places.

The company's management negotiates deals with vendors in such a manner as to pay lower prices.

All of these would indicate that fraud is pervasive.