Which of the following best describes the reason why an independent auditor reports on financial statements?

a) A misappropriation of assets may exist, and it is more likely to be detected by independent auditors

b) Different interests may exist between the company preparing the statements and the persons using the statements

c) A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work

d) Poorly designed internal controls may be in existence

Because of the risk of material misstatement, an audit should be planned and performed with an attitude of...

a) objective judgement

b) independent integrity

c) professional skepticism

d) impartial conservatism

The major reason an independent auditor gathers audit evidence is to...

a) form an opinion on the financial statements

b) detect fraud

c) evaluate management

d) assess control risk

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards?

a) Misappropriation of assets or groups of assets

b) Clerical mistakes in the accounting data underlying the financial statements

c) Mistakes in the application of accounting principles

d) Misinterpretation of facts that existed when the financial statements were prepared

What assurance does the auditor provide that errors and fraud that are material to the financial statements will be detected?

Error                                                  Fraud

a) Limited                                          Negative

b) Reasonable                                 Reasonable

c) Limited                                            Limited

d) Reasonable                                      Limited

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

a) Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion

b) An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud

c) The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements

d) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole

An auditor reviews aged accounts receivable to assess likelihood of collection to support management's assertion about account balances of...

a) existence

b) completeness

c) valuation and allocation

d) rights and obligations

An auditor will most likely review an entity's periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management's assertion about classes of transactions of...

a) occurence

b) completeness

c) accuracy

d) classification

In the audit of accounts payable, an auditor's procedures will most likely focus primarily on management's assertion about account balances of...

a) existence

b) completeness

c) valuation and allocation

d) classification and understandability 

The auditor's responsibility regarding material misstatements caused by fraud...

a) less than the auditor's responsibility regarding material misstatements caused by error

b) greater than the auditor's responsibility regarding material misstatements caused by error

c) the same as the auditor's responsibility regarding material misstatements caused by error

d) either less than or greater than the auditor's responsibility regarding material misstatements caused by error

When determining the auditor's or management's responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect?

a) The auditor is not responsible for preventing noncompliance with laws and regulations

b) Management and those charged with governance are responsible for ensuring that the company's operations are conducted in accordance with all applicable laws and regulations

c) The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations

d) The auditor is expected to detect the client's noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself

While auditing a client's accounting estimates used for their specific elements and accounts, the auditor has certain responsibilities. Which of the following is not a required audit procedure that the auditor would perform when evaluating a client's accounting estimate?

a) Verify that all material accounting estimates have been developed

b) Ensure that the accounting estimates used are properly disclosed in accordance with GAAP

c) Determine if the accounting estimates used are consistent with those of the client's primary competitors 

d) Evaluate the degree of uncertainty that is associated with the client's accounting estimates

Which of the following types of documentary evidence should the auditor consider to be the most reliable?

a) A sales invoice issued by the client and supported by a delivery receipt from an outside trucker

b) Confirmation of an account payable balance mailed by and returned directly to the auditor

c) A check, issued by the company and bearing the payee's endorsement, that is included with the bank statements mailed directly to the auditor

d) An audit schedule prepared by the client's controller and reviewed by the client's treasurer

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

a) Vendor's invoice

b) Bank statement obtained from the client

c) Computations made by the auditor

d) Prenumbered sales invoices

Which of the following presumptions is correct about the reliability of audit evidence?

a) Information obtained indirectly from outside sources is the most reliable audit evidence

b) To be reliable, audit evidence should be convincing rather than merely persuasive.

c) Reliability of audit evidence refers to the amount of corroborative evidence obtained

d) Effective internal control provides more assurance about the reliability of audit evidence

For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent...

In the planning stage               As a substantive test              In the completion stage

a) Yes                                    No                                            Yes 

b) No                                     Yes                                            No

c) No                                     Yes                                            Yes

 d) Yes                                     No                                              No

Which of the following situations has the best chance of being detected when a CPA compares 2016 revenues and expenses with the prior year and investigates all changes exceeded a fixed percent?

a) An increase in property tax rate has not been recognized in the company's 2016 accrual

b) The cashier began lapping accounts receivable in 2016

c) Because of worsening economic conditions, the 2016 provision for uncollectible accounts was inadequate

d) The company changed its capitalization policy for small tools in 2016

Which of the following would not be considered to be an analytical procedure?

a) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked

b) Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics

c) Computing accounts receivable turnover by dividing credit sales by the average net receivables

d) Developing the expected current year sales based on the sales trend of the prior five years

Which of the following is not a primary purpose of audit documentation?

a) To coordinate the audit

b) To assist in preparation of the audit report

c) To support the financial statements

d) To provide evidence of the audit work performed

During an audit engagement, pertinent data are compiled and included in the audit files. The audit files are primarily considered to be...

a) a client owned record of conclusions reached by the auditors who performed the engagement

b) evidence supporting financial statements

c) support for the auditor's representations as to compliance with auditing standards

d) a record to be used as a basis for the following year's engagement 

Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the...

a) copies of those client records examined by the auditor during the course of the engagement

b) evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit

c) auditor's comments concerning the efficiency and competence of client management personnel 

d) auditing procedures followed and the testing performed in obtaining audit evidence

According to PCAOB audit standards, audit documentation must be retained for...

a) one year

b) three years

c) five years

d) seven years

Which of the following types of audit evidence is generally the most reliable?

a) A bank statement

b) A bank confirmation

c) Analytical procedures

d) Inquiries made of the audit committee

An auditor most likely would apply analytical procedures in the overall review stage of an audit to...

a) identify unusual or unexpected balances that were not previously identified

b) obtain an understanding of high-risk areas

c) evaluate the design and implementation of internal control

d) identify related party transactions that may not have been previously identified

1) Misappropriation of assets

2) Improper financial reporting

Took an asset from the company and used it for personal reasons (cash is the main one, inventory)

Usually lower level employees intently perform this type of fraud

Booking a journal entry with a poor description to meet certain covenants

Create year-end bonuses

Doing entries to make a quarterly goal 

Often are the upper management who intently do this

Step 1) Define the problem

Step 2) Gather the facts and make sure the fact gathering process is as free from bias that it can be

Step 3) Look at alternatives 

Step 4) Make your decison

Step 5) Document your conclusion clearly & concisely

** These steps lead to a defensible conclusion, they do NOT make your professional judgement perfect **

1) Balance sheet approach (work down the balance sheet, audit those accounts plus any income statement accounts) 

2) Cycle approach (break the client down into cycles)

1) Sales and collection

2) Acquisitions and payments

3) Payroll and human resources

4) Inventory and warehousing 

5) Capital acquisition and payment schedule

**Cycle approach is pretty similar for each cycle**

1) Existence/occurrence 

2) Completeness

3) Valuation/allocation

4) Obligation/rights

5) Presentation/documentation

1) Occurence/existence

2) Completeness

3) Valuation

         a) Accuracy

      b) Posting

              c) Classification

4) Timing

1) Existence

2) Completeness

3) Valuation

       a) Accuracy

             b) Classification

   c) Cutoff

              d) Detailed tie-in

                 e) Realizable value

4) Rights

1) Physical examination

2) Confirmation

3) Inspection

4) Analytical procedures

5) Inquiry

6) Recalculations

7) Re-performance

8) Observation

1) Provider of evidence (evidence is more reliable if it comes from outside the company- independence)

2) Internal controls (evidence is better quality if generated by an entity with strong internal controls)

3) Direct auditor knowledge (physically examining items gives auditors direct knowledge, more direct knowledge makes evidence better quality)

4) Provider qualifications (is the person giving us detail qualified to give it to us? provider's knowledge gives reliability to evidence)

5) Objectivity (more reliable since it's black and white- confirms, footing, physical counts), subjective information is less reliable (estimates, like collectibles)

6) Timeliness (some items need to be checked at certain times for it to be reliable- inventory)

Efficient: quantity of evidence, do we have enough? how do we know if we have enough? (number of expected misstatements, efficiency of internal control)

Appropriate: quality of evidence, do we have to change our procedures to make evidence more appropriate?, for evidence to be appropriate it needs to be RELIABLE (see 6 components of reliability)