chapter 17.doc

CHAPTER 17: Auditing the Investing and

Financing Cycles

Multiple Choice

REQUIRED: Indicate the best answer choice for each of the following.

1.Which one of the following is an investing activity?

c.selling land

2.The specific account balance audit objective, the entity owns or has rights to all recorded plant assets at the balance sheet date, relates to the:

a.rights and obligations assertion.

3.The specific account balance audit objective, plant assets and related expenses are properly identified and classified in the financial statements, relates to the:


b.completeness assertion.

c.existence or occurrence assertion.

d.valuation or allocation assertion.

e.presentation or disclosure assertion.

4.The specific account balance audit objective, plant assets are stated at cost less accumulated depreciation, relates to the:






5.The specific account balance audit objective, plant asset balances include the effects of all applicable transactions for the period, relates to the:






6.The audit significance of the financial ratio, fixed asset turnover, is:

a.this financial ratio provides a reasonableness test of the entitys proportion of equity that may be compared with prior years experience or industry data.

b.an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation.

c.an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets.

d.this financial ratio provides a test of the entitys ability to generate earnings to cover the cost of service debt.

e.this financial ratio provides a reasonableness test of shareholders equity given the companys earnings and financing structure.

7.The audit significance of the financial ratio, return on common equity is:






8.The audit significance of the financial ratio, times interest earned, is:






9.The substantive test of calculating fixed asset turnover is categorized under:

a.initial procedures.

b.analytical procedures.

c.tests of details of transactions.

d.tests of details of balances.

e.presentation and disclosure.

10.The substantive test of determining the significance of plant assets, and changes in plant assets, to the entity is categorized under:






11.The substantive test of inspecting plant asset additions is categorized under:






12.The substantive test of vouching plant asset disposals to supporting documentation is categorized under:






13.The substantive test of comparing financial statement presentation with GAAP is categorized under:






14.The following procedures may be useful to the auditor in determining whether all retirements have been recorded except:

a.analyze the miscellaneous expense account for proceeds from sales of plant assets.

b.investigate the disposition of facilities associated with discontinued product lines and operations.

c.trace retirement work orders and authorizations for retirements to the accounting records.

d.review insurance policies for termination or reductions of coverage.

e.make inquiry of management as to retirements.

15.The financing cycle interfaces with the:

a.investing cycle.

b.expenditure cycle.

c.revenue cycle.

d.production cycle.

e.personnel services cycle.

16.The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders equity balances are properly identified and classified in the financial statements, relates to the:






17.The specific financing cycle audit objective, stockholders equity balances include the effects of all transactions pertaining to paid-in capital and retained earnings through the balance sheet date, relates to the:






18.The specific financing cycle audit objective, all recorded long-term debt balances are obligations of the reporting entity, relates to the:






19.The specific financing cycle audit objective, stockholders equity balances represent the owners interests that exist at the balance sheet date, relates to the:






20.The specific financing cycle audit objective, long-term debt and related income statement balances and stockholders equity balances are properly valued in accordance with GAAP, relates to the:






21.The ratio times interest earned is calculated as:

a.(interest expense + capitalized interest) income before interest and income taxes.

b.net income (interest expense + capitalized interest).

c.income before interest and income taxes (interest expense + capitalized interest).

d.(interest expense + capitalized interest) net income.

e.income before interest and income taxes (interest income + capitalized interest).

22.The classes of transactions associated with the audit of plant assets do not include:

a.disposals of fixed assets.

b.repair and maintenance transactions.

c.depreciation expense.

d.board minutes authorizing asset acquisitions.

e.manufacture of fixed assets.

23.Dividend payout rate is calculated as:

a.total dividends operating income.

b.cash dividends operating income.

c.total dividends by net income.

d.operating income total dividends.

e.cash dividends net income.

24.During inspection of the stock certificate book, the auditor determines that all unissued certificates are intact. This relates primarily to the:

a.completeness assertion.

b.valuation or allocation assertion.


d.rights and obligations assertion.


25.The following statement about inherent risk for long-lived assets is not true:

a.The rights and obligations assertion is significant because assets are usually pledged as collateral for the underlying debt.

b.Impairment of long-lived assets poses an inherent risk for the valuation assertion.

c.The completeness assertion rarely presents a high inherent risk.

d.Misstatements of disclosures represent only a moderate inherent risk.

e.Inherent risk for the existence assertion is often low.

26.Analytical procedures used to audit plant assets often include calculation of :

a.return on common equity.

b.return on total assets.

c.interest bearing debt to total assets.

d.inventory turnover.

e.sustainable growth rate.

27.The auditor will normally find evidence concerning the proper authorization of

transactions in the financing cycle by:

a.direct confirmation by the investors.

b.inquiring of the audit committee.

c.inquiring of management.

d.reading the copies of the contracts.

e.reading the minutes of the board of directors meetings.

28.Return on common stockholders equity is calculated as:

a.net income weighted average common shares outstanding.

b.(net income preferred dividends) average common stockholders equity.

c.weighted average common shares outstanding net income.

d.average common stockholders equity (net income preferred dividends).

e.operating income average common stockholders equity.

29.Earnings per share is calculated as:

a.net income weighted average common shares outstanding.

b.(net income preferred dividends) average common stockholders equity.

c.weighted average common shares outstanding net income.

d.average common stockholders equity (net income preferred dividends).

e.operating income average common stockholders equity.

30.Entries for dividend declarations and retained earnings appropriations are traced to the minutes book. In determining the propriety of the distribution, the auditor should:

a.establish that preferential or other rights of stockholders and any restrictions on dividend distributions have been recognized.

b.establish the number of shares outstanding on the date of record and verify the accuracy of the total dividend declaration by recalculation.

c.ascertain the propriety of the entry to record the declaration.

d.review the minutes to provide evidence of stockholders equity transactions authorized during the year.

e.trace dividend payments to canceled checks and other documentation.

31.The use of variable interest entities increase inherent risks:

a.with respect to presentation and disclosure of shareholders equity.

b.when they are included in the clients consolidated financial statements

c.except when authorized by the board of directors.

d.as to the completeness assertions for investing and financing.

e.with respect to the rights and obligations assertions for shareholders equity.

32.The disclosure committee would not ordinarily:

a.review and confirm financing transactions with the bond trustee or transfer agent.

b.review reporting of transactions involving variable interest entities.

c.review amortization of bond premiums or discounts at the time of issuance.

d.review controls over the completeness of transactions.

e.review the accounting for fixed asset disposals.

Answers to Multiple Choice

1.c12.c23.e

2.a13.e24.a

3.e14.a25.c

4.d15.b26.b

5.b16.e27.e

6.c17.b28.b

7.e18.a29.a

8.d19.c30.d

9.b20.d31.d

10.a21.c32.a

11.d22.d

CHAPTER 18: Auditing Investments and

Cash Balances

Multiple Choice


1.Investing in marketable securities interfaces with the:

a.revenue cycle and the expenditure cycle.

b.production cycle and expenditure cycle.

c.production cycle and the revenue cycle.

d.financing cycle and the revenue cycle.

e.financing cycle and the expenditure cycle.

2.The specific audit objective for the audit of investments, all investments are included in the balance sheet investment accounts, relates to the:

a.existence or occurrence assertion.


c.rights and obligations assertion.



3.The specific audit objective for the audit of investments, investment balances are properly identified and classified in the financial statements, relates to the:






4.The specific audit objective for the audit of investments, investment revenues, and realized and unrealized gains and losses, are reported at proper amounts, relates to the:






5.The specific audit objective for the audit of investments, all recorded investments are owned by the reporting entity, relates to the:






6.The specific audit objective for the audit of investments, recorded investment asset and equity balances represent investments that exist at the balance sheet date, relates to the:






7.The primary source document for recording investing transactions is the:

a.bond contract.

b.brokers advice.

c.stock certificate.

d.bond certificate.

e.bond indenture.

8.Which one of the following is a contract stating the terms of the bonds issued by a

corporation?

a.bond contract

b.brokers advice

c.stock certificate

d.bond certificate

e.bond indenture

9.The company officer who is assigned the authority and responsibility for investing transactions should have all of the following characteristics except:

a.is of unquestioned integrity.

b.possesses the knowledge and skills required of a person charged with executing such transactions.

c.has the ability to understand the auditors procedures relating to investing transactions.

d.realizes the importance of observing all prescribed control procedures.

e.can assist other participating members of management in making initial and ongoing assessments of risks associated with individual investments.

10.Inspecting and counting securities on hand relates to:






11.Analyzing ratio results relative to expectations based on prior year, budgeted, or other data relates to:






12.The inspecting and counting of securities on hand is ordinarily performed

simultaneously with the auditors:

a.observing of the inventory counting.

b.inspecting of major additions to plant assets.

c.confirming of securities held by others.

d.counting of cash.

e.recalculating of investment revenue earned.

13.Which of the following is correct concerning the inspecting and counting of securities on hand?

a.All securities should be controlled by the auditor until the count is completed.

b.The custodian need not be present during the count.

c.A receipt should be provided by the auditor to the custodian when the securities are returned.

d.The auditor should observe the brokers advice number on the document.

e.The auditor should observe the name of the broker.

14.Which of the following is not true concerning the confirmation of securities held by outsiders for safekeeping?

a.Confirmations should be requested as of the date other securities are counted.

b.The auditor must control the mailings.

c.The auditor should receive responses directly from the custodian.

d.The data confirmed are the same as the data that should be noted when the auditor is able to inspect the securities.

e.Either positive or negative confirmations can be used.

15.Initial procedures for substantive tests of investments would not ordinarily include:

a.understanding investment policies regarding the proportion of investments in government securities, corporate bonds, and equity securities.

b.understanding an entitys policy for investing excess cash, its financing activities, and its ability to generate free cash flow.

c.checking the mathematical accuracy of client-prepared schedules of investments.

d.determining that subsidiary investment ledgers agree with related general ledger control account balances.

e.understanding economic drivers that allow an entity to engage in investing activities.

16.In auditing investments, auditors may compare current-year and prior-year balances or compare actual results for the amount of investments and investment income with budgets or the documentation of managements plans. Unexpected differences would would be least likely to pertain to assertions about:

a.existence of occurrence.

b.completeness.

c.rights and obligations.

d.valuation or allocation.


17.Verification procedures for investment income is least likely to include:

a.recalculation by the auditor.

b.reference to published investment information.

c.inspection of bond certificates.

d.review of any bond premium amortization schedules.

e.direct confirmation with the investee.

18.The transaction cycle that does not interface directly with cash is the:

a.revenue cycle.

b.expenditure cycle.

c.production cycle.

d.financing cycle.

e.investing cycle.

19.The specific audit objective, recorded cash balances exist at the balance sheet date, is derived from the:






20.The specific audit objective, year-end transfers of cash between banks are recorded in the proper period, is derived from the:






21.The specific audit objective, recorded cash balances are realizable at the amounts stated on the balance sheet and agree with supporting schedules, is derived from the:






22.The specific audit objective, the entity has legal title to all cash balances shown at the balance sheet date, is derived from the:






23.The specific audit objective, cash balances are properly identified and classified in the balance sheet, is derived from the:






24.The performance of cash cutoff tests provides evidence for which of the following assertions?

Existence orRights andValuation orPresentation

OccurrenceCompletenessObligationsAllocationor Disclosure

a.((

b.((

c.((

d.((

e.((

25.The confirmation of bank deposit and loan balances with banks provides evidence for which of the following assertions?



a.(((

b.((((

c.(((

d.(((

e.(((

26.The use of bank cutoff statements to verify bank reconciliation items, detect any unrecorded checks that have cleared the bank, and look for evidence of window dressing provides evidence for which of the following assertions for cash in bank?



a.((((

b.((((

c.((((

d.((((

e.((((

27.The auditor should trace bank transfers using a bank transfer schedule primarily to determine if:

a.cash has been understated due to kiting.

b.cash has been overstated due to kiting.

c.cash has been understated due to lapping.

d.cash has been overstated due to lapping.

e.any unusual cash receipts or payments occurred.

28.In working with the bank reconciliation and the bank cutoff statement, the auditor finds that a prior-period check was not on the reconciliation as an outstanding check. This may be an indication of:

a.window dressing.

b.lapping.

c.kiting.

d.an attempt to conceal a cash shortage.

e.an attempt to overstate cash.

29.Which of the following bank transfers appears to be an example of kiting aimed at concealing a cash shortage?

Date ofDate of

DisbursementReceipt

BooksBankBooksBank

a. 12/28 1/03 12/28 12/28

b. 1/03 1/05 1/03 1/03

c. 12/30 1/03 12/30 12/30

d. 1/02 1/04 12/30 12/30

e. 1/03 1/05 1/03 12/31

30.Which of the following bank transfers appears to be an example of kiting aimed at overstating the cash position at year-end?

Date ofDate of

DisbursementReceipt

BooksBankBooksBank

a. 12/28 1/03 12/28 12/28

b. 1/03 1/05 1/03 1/03

c. 12/30 1/03 12/30 12/30

d. 1/02 1/04 12/30 12/30

e. 1/03 1/05 1/03 12/31

31.Evidence of kiting is least likely to come from:

a.bank transfer schedules.

b.cash cutoff tests.

c.tested reconciliations.

d.confirmation of bank balances.

e.bank cutoff statements.

32.During the count of cash on hand, it is not necessary for the auditor to:

a.control both cash and non-cash negotiable instruments held by the client.

b.insist on the presence of an internal auditor throughout the count.

c.insist on the presence of the custodian of the cash throughout the count.

d.obtain a signed receipt from the custodian on return of the funds.

e.ascertain that all undeposited funds are payable to the order of the client, either directly or through endorsement.

33.The control of all funds during the count of cash on hand is meant primarily to prevent:

a.transfers by the client.

b.any chance of double counting.

c.unauthorized disbursements.

d.client personnel from viewing the count procedure.

e.lapping or kiting by the client.

34.The standard bank confirmation, developed jointly by the AICPA, the American Bankers Association, and the Bank Administration Institute, requests information about all of the following except:

a.deposit balances.

b.loan interest rates.

c.loan balances.

d.other deposit or loan accounts that may have come to the attention of the bank official.

e.secondary endorsements.

35.In confirming bank deposits, the auditor need not:

a.send two copies of the standard confirmation to the bank.

b.send requests for accounts with zero balances at the end of the year.

c.have the bank return the original to the client.

d.personally mail the requests.

e.make sure the bank returns the response to him or her directly.

36.Information concerning other arrangements with banks is usually obtained from the clients banks in separate communications. This information is likely to include:

a.compensating liabilities.

b.contingent balances.

c.lines of credit.

d.average daily balances.

e.credit limits.

37.The auditor is most likely to review the client's bank reconciliation when the acceptable level of detection risk is:

a.high.

b.low.

c.very high.

d.very low.

e.moderate.

38.When detection risk is very low, the auditor should:

a.scan the clients bank reconciliation and verify the mathematical accuracy of the reconciliation.

b.review the clients bank reconciliation.

c.prepare the reconciliation from data in the clients possession.

d.prepare the reconciliation from information obtained directly from the bank.

e.prepare the proof of cash from data in the clients possession.

39.The auditor may obtain the year-end bank statement directly from the bank and prepare the reconciliation personally. This step is most likely when:

a.the auditor suspects possible material misstatements.

b.it is impracticable to obtain confirmations.

c.detection risk is set at high.

d.detection risk is set at moderate.

e.detection risk is set at low.

40.Which of the following would not normally be done by the auditor in connection with the bank cutoff statement?

a.receive the bank statement directly from the bank

b.trace all checks dated in the subsequent period to the outstanding check list on the reconciliation

c.trace deposits in transit on the bank reconciliation to deposits on the bank statement

d.scan the cutoff statement for unusual items

e.scan the enclosed data for unusual items

41.In working with the bank reconciliation and the bank cutoff statement, the auditor finds that many of the checks on the outstanding checklist did not clear during the cutoff period. This may be an indication of:

a.lapping.

b.kiting.

c.window dressing.



42.When material in amount, a bank overdraft should be treated as a:

a.current asset.

b.current liability.

c.current contra-asset.

d.reduction in current assets.

e.reduction in current liabilities.

43.Which of the following would not be included in the current asset section of the balance sheet?

a.bond sinking fund cash

b.cash on deposit

c.cash in bank ( general

d.cash in bank ( payroll

e.petty cash

44.Misappropriation of assets is always present when an employee is involved with:

a.kiting.

b.window dressing.

c.an attempt to conceal a cash shortage.

d.an attempt to overstate cash.

e.lapping.

45.Audit tests to detect lapping involve which of the following?

a.confirm accounts payable

b.compare details of cash disbursements journal entries with the details of corresponding daily deposit slips

c.prepare a bank transfer schedule

d.make a surprise cash count

e.use a bank cutoff statement

46.A surprise confirmation of accounts receivable at an interim date is useful when the auditor suspects:

a.kiting.

b.window dressing.

c.lapping.



47.Misrepresentation of the class of investment of equity securities, as held-to-maturity versus available-for-sale :

a.makes no difference because all marketable equity securities are marked to market.

b.would be readily detected by standard analytical procedures applicable to investments in equity securities.

c.would not materially effect presentation and disclosure assertions for investments.

d.is an important consideration in designing substantive tests of balances of investments in equity securities.

e.allows management to defer or accelerate the recognition of unrealized gains and losses in income.

48.Common documents and records relating to the investing cycle would not ordinarily include:

a.stock certificates.

b.bond certificates.

c.bond indentures.

d.stock indentures.

e.brokers statements.

49.For investments accounted for using the equity method:

a.audited financial statements of the investee generally constitute sufficient evidence regarding the underlying net assets and the results of operations of the investee.

b.post acquisition debits and credits can be tested using statistical sampling where control risk is low.

c.brokers advices would provide most of the evidence necessary to satisfy audit objectives pertaining to all five categories of financial statement assertions.

d.initial procedures would involve obtaining an understanding of the rationale behind managements classification of the investments.

e.analytical procedures may reduce the amount of evidence needed from other substantive tests.


1.a16.c31.d46.c

2.b17.e32.b47.e

3.e18.c33.a48.d

4.d19.a34.e49.a

5.c20.b35.c

6.a21.d36.c

7.b22.c37.e

8.e23.e38.d

9.c24.a39.a

10.d25.b40.b

11.b26.a41.c

12.d27.b42.b

13.a28.c43.a

14.e29.e44.e

15.a30.d45.d

CHAPTER 19: Completing the Audit and Postaudit

Responsibilities

QUESTIONS

Multiple Choice


1.Which of the following is not among the characteristics of the procedures performed in completing the audit?

a.They are optional since they have only an indirect impact on the opinion to be expressed.

b.They involve many subjective judgments by the auditor.

c.They are performed after the balance sheet date.

d.They are usually performed by audit managers or other senior members of the audit team who have extensive audit experience with the client.

e.They do not pertain to specific transaction cycles or accounts.

2.Which of the following is not among the specific auditing procedures the auditor performs to obtain additional audit evidence?

a.making subsequent events review

b.reading minutes of meetings

c.reviewing evidence concerning litigation, claims, and assessments

d.obtaining client representation letter

e.performing analytical procedures

3.By definition, subsequent events occur between:

a.the interim and balance sheet date.

b.the balance sheet date and the report date.

c.the report date and the date the report is issued.

d.the date the report is approved and the date the report is issued.

e.the balance sheet date and the date the report is issued.

4.Pro forma data attached to the financial statements are only required with:

a.a material type 1 subsequent event.

b.a very material type 1 subsequent event.

c.a material type 2 subsequent event.

d.a very material type 2 subsequent event.

e.either a material type 1 or a very material type 2 subsequent event.

5.Which of the following events in a subsequent period is an example of a type 1 subsequent event?

a.issuance of long-term bonds

b.settlement of warranties in excess of recorded amounts

c.purchase of a business

d.issuance of preferred stock

e.casualty loss resulting from a flood

6.In regard to identifying and evaluating subsequent events, AU 560.12 specifies that the auditor inquires of management having responsibility for financial and accounting matters as to:

a.any substantial contingent liabilities or commitments existing at the balance sheet date or report date.

b.any significant changes in capital stock, long-term debt, or working capital to the date of inquiry.

c.the current status of items previously accounted for on the basis of tentative, preliminary, or conclusive data.

d.whether any unusual adjustments have been made since the report date.

e.litigation, claims, and assessments.

7.Which of the following events in the subsequent period is an example of a Type 2 subsequent event?

a.realization of recorded year-end receivables at a different amount than recorded

b.settlement of recorded year-end estimated product warranty liabilities at a different amount than recorded

c.purchase of a machine

d.purchase of a business

e.sale of equipment

8.Ordinarily, type 1 subsequent events require:

a.adjustment.

b.adjustment and disclosure.

c.a disclaimer.

d.inclusion as a reportable condition.

e.Disclosure.

9.Ordinarily, type 2 subsequent events require:

a.adjustment.

b.adjustment and disclosure.

c.a disclaimer.

d.inclusion as a reportable condition.

e.disclosure.

10.In regard to identifying and evaluating subsequent events, AU 560.12 specifies that the auditor inquires of management having responsibility for financial and accounting matters as to all of the following except:

a.any substantial contingent liabilities or commitments existing at the balance sheet date or date of inquiry.

b.any significant changes in capital stock, long-term debt, or working capital to the date of inquiry.

c.the minutes of meetings of directors, stockholders, and other appropriate committees.

d.the current status of items previously accounted for on the basis of tentative, preliminary, or inconclusive data.

e.whether any unusual adjustments have been made since the balance sheet date.

11.In working with the minutes of meetings of stockholders, board of directors, and its subcommittees, the auditor should:

a.read the minutes of all important meetings.

b.read the minutes of all meetings.

c.read the significant items in all meetings.

d.read the minutes of all stockholders meetings.

e.scan the minutes of all meetings.

12.Which of the following subsequent events is least likely to be discovered by reading the latest interim financial statements?

a.a new bond issue authorization

b.a major increase in the writeoff of receivables.

c.a treasury stock purchase made immediately after year-end.

d.the discontinuance of a product line.

e.the payment of a cash dividend.

13.Which of the following subsequent events is least likely to be discovered by reading the minutes of meetings?

a.a new bond issue authorization

b.the payment of a cash dividend.

c.a treasury stock purchase.

d.the discontinuance of a product line.

e.a major increase in the writeoff of receivables.

14.Which of the following is not an example of a loss contingency?

a.guarantees of obligations of others

b.income tax disputes under appeal

c.the clients claim against another for patent infringement

d.secondary endorsements

e.product warranties

15.The auditor is required to obtain evidential matter on litigation, claims, and

assessments. This information need not include the:

a.existence of the condition or situation.

b.period in which the underlying cause for legal action occurred.

c.degree of probability of an unfavorable outcome.

d.description and evaluation of the situation.

e.amount or range of potential loss.

16.The primary source of information about litigation, claims, and assessments is:

a.the board of directors.

b.the clients attorneys.

c.management.

d.direct confirmation with the other party involved.

e.the audit committee.

17.The letter of audit inquiry to the clients lawyer(s) is the auditors primary means of obtaining:

a.initial information about litigation, claims, and assessments.

b.initial information about unasserted claims.

c.corroboration of the information on litigation, claims, and assessments provided by the other party to the matter.

d.corroboration of the information on litigation, claims, and assessments provided by management.

e.corroboration of the information on litigation, claims, and assessments provided by the auditors attorneys.

18.A lawyers refusal to respond to a letter of audit inquiry normally requires the auditor to:

a.issue a qualified opinion or a disclaimer of opinion.

b.issue an unqualified opinion with an explanatory paragraph.

c.issue a qualified or adverse opinion.

d.issue a standard three-paragraph unqualified opinion.

e.contact the clients in-house attorney for the relevant information.

19.The auditor is required to obtain certain written representations from management in meeting the:

a.first standard of field work.

b.third standard of field work.

c.third standard of reporting.

d.second standard of field work.

e.second standard of reporting.

20.The auditor relies on the client representation letter to:

a.confirm written representations given to the auditor.

b.document the continuing materiality of client representations.

c.guarantee the absence of management fraud.

d.reduce the possibility of misunderstanding concerning managements representations.

e.replace more costly evidence gathering procedures.

21.The client representation letter should include representations about all of the following except:

a.financial statements.

b.completeness of information.

c.recognition, measurement, and disclosures.

d.subsequent events.

e.major client policy changes.

22.The client representation letter will not normally be:

a.prepared on the clients stationery.

b.addressed to the auditor.

c.sent to the audit committee.

d.dated as of the date of the auditors report.

e.signed by the CEO and the CFO.

23.A clients refusal to provide a client representation letter to the auditor will normally require the auditor to:

a.issue a qualified opinion or a disclaimer of opinion.

b.issue an unqualified opinion with an explanatory paragraph.



e.contact the audit committee for the relevant information.

24.A client has provided a client representation letter to the auditor, but the auditor is not able to support a management representation that is material to the financial statements. This will normally require the auditor to:

a.issue an unqualified opinion with an explanatory paragraph.

b.issue a qualified opinion or a disclaimer of opinion.



e.withdraw from the engagement.

25.Analytical procedures in the overall review should be:

a.applied to every item on the financial statements.

b.performed by the partner or manager on the engagement.

c.based on financial statement data before all audit adjustments and reclassifications have been recognized.

d.performed only when material misstatement is expected.

e.performed only when unusual or unexpected balances and relationships are anticipated.

26.The following steps are taken during the evaluation of the audit findings:

A:Making technical review of financial statements

B:Making final review(s) of working papers

C:Making final assessment of materiality and audit risk

D:Formulating opinion and drafting audit report

E:Evaluating whether there is substantial doubt about the entitys ability to continue as a going concern

The order in which these steps should be performed is:

a.ABCDE.

b.CEADB.

c.EDCAB.

d.BAECD.

e.ADCEB.

27.The auditors determination of misstatements in an account should include all of the following except:

a.known misstatements.

b.projected uncorrected misstatements through audit sampling techniques.

c.estimated misstatements detected through analytical procedures and quantified by other auditing procedures.

d.uncorrected misstatements specifically identified through substantive tests of details of transactions and balances.

e.corrected misstatements specifically detected by the tests of details.

28.The auditor, concluding that substantial doubt does not exist, usually decides to disclose all of the following except:

a.possible discontinuance of operations.

b.the possible effects of pertinent conditions and events.

c.information about the recoverability or classification of recorded expense amounts or the amounts or classification of income amounts.

d.managements plans.

e.managements evaluation of the significance of pertinent conditions and events and any mitigating factors.

29.In making the technical review of the financial statements, the auditor is likely to use a detailed financial statement checklist provided by the:

a.CPA firm.

b.client.

c.AICPA.

d.SEC.

e.internal auditors.

30.Before reaching a final decision on the opinion to be issued, a conference generally is held with the client. At this meeting, all of the following may be expected, except:

a.an oral report of the auditors major findings.

b.the auditors rationale for proposed adjustments or additional disclosures.

c.managements attempt to defend its position.

d.agreement between the auditor and client on the changes to be made.

e.delivery of the management letter.

31.During the final reviews of the working papers, the partner in charge of the engagement would ordinarily be expected to review all working papers:

a.reviewed by managers.

b.prepared by managers.

c.prepared by seniors.

d.reviewed by seniors.

e.prepared by the staff assistants.

32.The partners review of the working papers should not be designed to obtain assurance that:

a.the judgments exercised by subordinates were reasonable and appropriate in the circumstances.

b.the working papers support the auditors opinion.

c.assistants have followed proper work paper techniques.

d.all significant accounting, auditing, and reporting questions raised during the audit have been properly resolved.

e.the work done by subordinates has been accurate and thorough.

33.Professional standards require the auditor to communicate certain matters pertaining to the audit to those who have responsibility for overseeing the financial reporting process. This communication would normally include all of the following except:

a.the auditors responsibility under GAAS.

b.specific audit procedures performed.

c.significant audit adjustments.

d.difficulties encountered in performing the audit.

e.significant accounting policies.

34.The management letter is least likely to include comments on:

a.internal control matters that are not considered to be reportable conditions.

b.recommendations regarding the management of resources.

c.tax-related matters.

d.recommendations regarding the management of value-added services noted during the audit.

e.the auditors rationale for proposed additional statement disclosures.

35.The practice of dual dating is associated with:

a.subsequent events between the balance sheet date and the report date.

b.subsequent events between the balance sheet date and the issuance of the report.

c.subsequent events between the report date and the issuance of the report.

d.the discovery of omitted procedures.

e.the discovery of facts existing at the report date.

36.When an investigation of the discovery of facts existing at the report date confirms the existence of the fact and the auditor believes the information is important to those relying or likely to rely on the financial statements, the auditor should immediately:

a.take steps to prevent future reliance on the audit report.

b.notify the SEC or other regulatory agency.

c.notify the audit committee.

d.resign from the engagement.

e.take no action since the auditor is not responsible for such matters.

37.The auditor is most likely to discover omitted audit procedures during:

a.preparation of the management letter.

b.follow-up procedures performed in compliance with generally accepted auditing standards.

c.the conference held with the client prior to issuing the audit report.

d.a postengagement review performed as part of the firms quality control inspection program.

e.the final review of the working papers.


1.a11.b21.e31.b

2.c12.a22.c32.c

3.e13.e23.a33.b

4.d14.c24.b34.e

5.b15.d25.b35.c

6.b16.c26.d36.a

7.d17.d27.e37.d

8.a18.a28.c

9.e19.b29.a

10.c20.d30.e

CHAPTER 20: Attest and Assurance Services, and Related Reports

QUESTIONS

Multiple Choice


1.Which one of the following is not identified as an Attest Service?

a.Managements assertion about internal control.

b.Agreed-upon procedure engagements.

c.A forecast.

d.A compilation of financial statements.

e.SysTrust.

2.The basic levels of assurance are as follows except:

a.audit or examination-level assurance.

b.complete assurance.

c.review-level assurance.

d.agreed-upon assurance.

e.no assurance.

3.Whether the entity maintains effective controls to provide reasonable assurance that customers transactions using e-commerce are completed and billed as agreed defines:

a.transaction integrity.

b.information protection.

c.risk assessment.

d.performance measurement.

e.ElderCare services.

4.Whether the entity maintains effective controls to provide reasonable assurance that private customer information obtained as a result of e-commerce is protected from uses not related to the entitys business defines:

a.transaction integrity.

b.information protection.

c.risk assessment.

d.performance measurement.

e.ElderCare services.

5.Whether the system processing is complete, accurate, timely, and authorized defines:

a.system security.

b.system availability.

c.system maintainability.

d.system verifiability.

e.system integrity.

6.Whether the system is protected against unauthorized physical and logical access defines:

a.system security.

b.system availability.

c.system integrity.

d.system verifiability.

e.system maintainability.

7.The auditors special report on financial statements prepared on an OCBOA should contain all of the following except:

a.an introductory paragraph.

b.a scope paragraph.

c.an exclusion paragraph.

d.an explanatory paragraph.

e.an opinion paragraph.

8.In performing an attest engagement, a CPA performs all of the following except:

a.relies on management statements.

b.gathers evidence to support the assertions.

c.objectively assesses the measurements of assertions.

d.objectively assesses the communications of the individual making the assertions.

e.reports the findings.

9.In the balanced scorecard approach to performance measurement, the goal of product quality relates to the:

a.innovation perspective.

b.financial perspective.

c.managerial perspective.

d.internal perspective.

e.customer perspective.

10.In the balanced scorecard approach to performance measurement, the goal of manufacturing efficiency relates to the:

a.innovation perspective.

b.financial perspective.


d.internal perspective.


11.In regard to CPA Elder Care services, ensuring that expected revenues are received relates to:

a.insurance services.

b.assurance services.

c.consulting services.

d.indirect services.

e.direct services.

12.In regard to CPA Elder Care services, reviewing and reporting on financial transactions relate to:





e.direct services.

13.In regard to CPA Elder Care services, housing and support service needs relate to:





e.direct services.

14.In the balanced scorecard approach to performance measurement, the goal of product innovation relates to the:

a.financial perspective.

b.internal perspective.


d.innovation perspective.


15.In the balanced scorecard approach to performance measurement, revenue goals relate to the:

a.financial perspective.

b.internal perspective.


d.innovation perspective.


16.The attestation standards provide guidance on assessing inherent risk for all of the following except:

a.fraud.

b.control.

c.detection.

d.all of the above.

e.none of the above.

17.Organizations that manage risk well are more likely to achieve or exceed their objectives because they have the capacity and ability to do all of the following except:

a.identify and exploit opportunities.

b.identify and manage risks that could affect achieving their objectives.

c.make good decisions quickly.

d.respond and adapt to unexpected events.

e.all of the above.

18.Best practices in approaching risk management include the following steps except:

a.identify risks.

b.calculate revenue losses from risks.

c.analyze and assess risks.

d.design strategies for managing risk.

e.measure, monitor and report risks.

19.Traditional performance tracking methods focus on all of the following except:

a.sales.

b.net income.

c.needed information to anticipate the future.

d.gross margin.

e.return on assets.

20.A WebTrust engagement addresses the risk associated with all of the following except:

a.business and information privacy practices.

b.transaction integrity.

c.information protection.

d.all of the above.

e.none of the above.


1.

d

6.

a

11.

e

16.

d

2.

b

7.

c

12.

b

17.

e

3.

a

8.

a

13.

c

18.

b

4.

b

9.

e

14.

d

19.

c

5.

e

10.

d

15.

a

20.

d

CHAPTER 21 Internal, Operational, and

Governmental Auditing

QUESTIONS

Multiple Choice


1.Which of the following items is a misquote from the IIAs definition of internal auditing?

a....an independent, objective staff function...

b.designed to add value

c.and improve an organizations operations.

d.It helps an organization accomplish its objectives

e.by bringing a systematic, disciplined approach

2.Which of the following is not a correct interpretation of the definition of internal auditing provided by the IIA?

a.Employees of the organization may conduct internal auditing activities.

b.Internal auditing is a line activity within the organization.

c.All phases of the entitys operations fall within the scope of internal auditing.

d.The auditors judgment has value when it is free of bias.

e.Internal auditing exists to aid or benefit the entire organization.

3.To become a certified internal auditor (CIA), an individual must meet all of the following except:

a.pass the examination.

b.have a minimum of five years experience as an internal auditor.

c.have auditing experience in public accounting.

d.comply with IIAs practice standards and code of ethics.

e.meet continuing professional education requirements.

4.The new IIA standards includes all of the following except:

a.attribute standards.

b.performance standards.

c.implementation standards.

d.quality control standards.

e.all of the above standards.

5.The standards for the professional practice of internal auditing include all of the following except:

a.professional proficiency.

b.performance of audit work.

c.management of the accounting department.

d.independence.

e.scope of work.

6.The IIA Code of Ethics Rules of Conduct regarding integrity include all of the following except:

a.shall perform their work with honesty, diligence, and responsibility.

b.shall observe the law and make disclosures expected by the law and the profession.

c.shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization.

d.shall be licensed by a governmental agency.

e.shall respect and contribute to the legitimate and ethical objectives of the organization.

7.Internal auditor independence would not be impaired if the auditor:

a.made management decisions relating to financial activities.

b.assumes operating responsibilities.

c.reports directly to the controller.

d.reports directly to the treasurer.

e.makes recommendations based on audit findings.

8.The most time consuming phase of an operational audit is the:

a.select auditee phase.

b.plan audit phase.

c.perform audit phase.

d.report findings phase.

e.report follow-up phase.

9.The essential parts of the definition of operational auditing do not include:

a.evaluating an organizations operations.

b.effectiveness, efficiency, and economy of operations.

c.recommendations for improvement.

d.systematic process.

e.reporting to stockholders.

10.The phases of an operational audit include all of the following except:

a.plan audit.

b.perform follow-up.

c.report findings to management.

d.accept client.

e.perform audit.

11.In selecting an auditee for operational auditing, an understanding of the potential auditees is obtained by all of the following except:

a.applying analytical procedures to quantify trends and unusual relationships.

b.reviewing background file data on each auditee.

c.touring the auditees facilities to ascertain how it accomplishes its objectives.

d.interviewing the manager of the activity about specific problem areas.

e.conducting mini audit probes to confirm or clarify the auditors understanding of potential problems.

12.In the auditee selection phase of an operational audit, the main criterion for selection is:

a.ease of evaluating the area.

b.potential for improvement in the effectiveness, efficiency, and economy of operations.

c.ease of developing the audit plan.

d.expected cost of the examination.

e.the extent of resources controlled by the area.

13.Planning is especially critical in an operational audit due to this type of audits:

a.complexity.

b.difficulty.

c.diversity.

d.critical perspective.

e.multiplicity.

14.In the audit performance phase of an operational audit, the auditor relies primarily on:

a.tests of compliance and tests of balances.

b.confirming and vouching.

c.tests of transactions and tests of balances.

d.inquiring and observation.

e.tracing and vouching.

15.Which of the following is normally documented in the working papers prepared during an operational audit?

a.the recommendations.

b.the work scheduled.

c.the expected results.

d.the final feedback.

e.the comments of the auditee.

16.A report on an operational audit should include all of the following except:

a.a statement of the objectives and scope of the audit.

b.a summary of the findings.

c.recommendations for improvement.

d.comments of the auditee.

e.a detailed description of the work done in the audit.

17.Copies of operational audit reports are ordinarily sent to who?

a.senior management and the audit committee.

b.senior management.

c.the auditee.

d.the audit committee.

e.the external auditor the audit committee.

18.AICPA standards recognize an operational audit as a form of:

a.attestation services.

b.management consulting services.

c.accounting services.

d.audit services.

e.review services.

19.The U.S. GAO establishes audit standards for audits of all of the following except government:

a.programs.

b.activities.

c.functions.

d.funds received by government organizations.

e.organizations.

20.The GAO audit standards are recognized as:

a.GACAS.

b.GASS.

c.GAAS.

d.GASB.

e.GAGAS.

21.Governmental financial related audits include determining all of the following except whether:

a.the entitys internal controls over financial reporting is suitably designed and implemented to achieve the control objectives.

b.the entitys internal controls over safeguarding assets is suitably designed

and implemented to achieve the control objectives.

c.the financial statements are presented in accordance with GAAP.

d.financial information is presented in accordance with established or stated criteria.

e.the entity has adhered to specific financial compliance requirements.

22.Governmental economy and efficiency audits include determining all of the following except:

a.whether the entity is acquiring, protecting and using its resources economically and efficiently.

b.the causes of inefficiencies.

c.whether the entity has complied with laws and regulations concerning matters of economy and efficiency.

d.the effectiveness of the organizations programs, activities, or functions.

e.the causes of uneconomical practices.

23.Governmental program audits include determining all of the following except:

a.the causes of the ineffectiveness of the organizations programs, activities, or functions.

b.the effectiveness of the organizations programs, activities, or functions.

c.the extent to which the desired results or benefits established by the legislature or other authorizing body are being achieved.

d.whether the entity has complied with significant laws applicable to the program.

e.whether the entity has complied with significant regulations applicable to the program.

24.The categories of generally accepted government auditing standards (GAGAS) that apply to financial audits are:

a.general and field work.

b.general, fieldwork, and reporting.

c.general standards only.

d.field work and reporting.

e.general and reporting.

25.A general standard that is unique to governmental audits is:

a.qualifications.

b.independence.

c.quality control.

d.due professional care.

e.planning.

26.The five additional field work standards included by GAGAS comprise all of the following except:

a.auditor communication.

b.audit follow-up.

c.noncompliance other than illegal acts.

d.working papers.

e.documentation of the assessment of detection risk for assertions significantly dependent on computerized information systems.

27.The five additional reporting standards included by GAGAS comprise all of the following except:

a.compliance with GAGAS.

b.compliance with internal controls.

c.report distribution.

d.privileged and confidential operations.

e.compliance with laws and regulations.

28.GAGAS requires auditors to report deficiencies in internal control that they consider to be reportable conditions. Examples of such reportable conditions include all of the following except:

a.absence of appropriate segregation of duties consistent with appropriate control objectives.

b.evidence of failure to safeguard assets from loss, damage, or misappropriation.

c.absence of a sufficient level of control consciousness within the organization.

d.failure to follow-up and correct previously identified deficiencies in internal control.

e.absence of an efficient use of audit resources.

29.Which of the following is not a stated objective of the Single Audit Act?

a.improve the financial management of state and local governments and nonprofit organizations with respect to federal financial assistance programs.

b.establish uniform requirements for audits of federal financial assistance provided to state and local governments.

c.improve and coordinate the practice monitoring programs of auditors who perform government audits.

d.promote the efficient and effective use of audit resources.

e.ensure that federal departments and agencies, to the maximum extent practicable, rely on and use audit work done pursuant to the requirements of the Single Audit Act.

30.A federal agency that has the responsibility for implementing the requirements for single audits for a particular state or local government is a(n):

a.conscious agency.

b.cognizant agency.

c.sentient agency.

d.perceptive agency.

e.observant agency.

31.In order to provide sufficient evidence to support an opinion on compliance, the auditor should set the scope of the audit to address specific requirements such as all of the following, except:

a.types of procedures allowed or not allowed.

b.eligibility.

c.matching.

d.reporting.

e.special tests and provisions.

32.The auditors report(s) under the Single Audit Act includes all of the following except a(n):

a.opinion on the financial statements.

b.report on internal control.

c.report on compliance.

d.report on audit follow-up.

e.schedule of findings and questioned costs.

33.Internal auditors are expected to apply and uphold the following principles except:

a.integrity.

b.objectivity.

c.independence.

d.confidentiality.

e.competency.


1.a11.a21.c31.a

2.b12.b22.d32.d

3.b13.c23.a33.c

4.d14.d24.b

5.c15.a25.c

6.d16.e26.e

7.e17.a27.d

8.c18.b28.e

9.e19.d29.c

10.d20.e30.b