Accountant Terms Flashcards

The auditor can best verify a client's bond sinking fund transactions and year-end balance by: A) Confirmation with individual holders of retired bonds. B) Confirmation with the bond trustee. C) Recomputation of interest expense, interest payable, and amortization of bond discount or premium. D) Examination and count of the bonds retired during the year. Confirmation with the bond trustee. A material weakness involves a reasonable possibility that what size misstatement will not be prevented or detected? A) Immaterial. B) Material. C) More than inconsequential. D) Substantial. Material Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A) Sale of long-term debt or capital stock. B) Loss of a plant as a result of a flood. C) Major purchase of a business which is expected to double the sales volume. D) Settlement of litigation in excess of the recorded liability. Settlement of litigation in excess of the recorded liability A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A) $0 B) $60,000 C) $110,000 D) $140,000 60,000 Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): A) Extrapolation difference. B) Known misstatement. C) Likely misstatement. D) Projected misstatement. Known misstatement An auditor identified a material weakness in internal control in August. The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminates the material weakness prior to year-end. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: A) Adverse. B) Unqualified. C) Disclaimer. D) Qualified. Unqualified Which of the following is not one of the attribute standards of the IIA's Standards for the Professional Practice of Internal Auditing? A) Independence and objectivity. B) Outsourcing. C) Proficiency and professional care. D) Purpose, authority, and responsibility. Outsourcing. In an audit in accordance with generally accepted auditing standards, the auditors must test compliance with those laws and regulations that: A) Have a direct and material effect on the financial statements. B) Have a direct and material effect on major federal programs. C) Have a material direct or indirect effect on the financial statements. D) Have a material effect on major or nonmajor programs. Have a direct and material effect on the financial statements. Which of the following is an analytical procedure that should be applied to the income statement? A) Select sales and expense items and trace amounts to related supporting documents. B) Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. C) Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales. D) Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent? A) Stock certificates should exist for all outstanding stock and be held by the owner of the stock. B) Stock certificates should exist for all outstanding stock and be held either by the owner of the stock or a representative of the owner (e.g., brokerage firm). C) A lack of stock certificates is ordinarily considered a material weakness in internal control. D) Stock certificates often are not issued in today's electronic environment. Stock certificates often are not issued in today's electronic environment. The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to: A) Indicate in the auditors' report, that the "other financial information" is only compiled. B) Consider whether the "other financial information" is accurate by performing a limited review. C) Obtain written representations from managements as to the material accuracy of the "other financial information." D) Read and consider the manner of presentation of the "other financial information." Read and consider the manner of presentation of the "other financial information." The auditors include an emphasis of matter paragraph in report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph: A) Is appropriate and would not negate the unmodified opinion. B) Is considered a qualification of the opinion. C) Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. D) Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." Is appropriate and would not negate the unmodified opinion. Analytical procedures are required as a part of the: A) Detailed tests of balances. B) Internal control assessment. C) Procedures performed near the end of the audit. D) Substantive testing. Procedures performed near the end of the audit. Which of the following is an auditor most likely to confirm from the transfer agent and registrar? A) Total shares of stock issued. B) Restrictions on the payment of dividends. C) Total market value of outstanding shares of stock. D) Gains from sale of treasury stock. Total shares of stock issued. Which of the following is not explicitly included in an audit report for a nonpublic company? A) A statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. B) A statement that the auditor's responsibility is to express an opinion on the financial statements. C) A statement that the financial statements are the responsibility of management. D) A title with the word "independent." A statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. The minimum likelihood of loss involved in the consideration of a control deficiency that is less than a significant deficiency is: A) Remote. B) More than remote. C) Probable. D) Not considered. Not considered. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditor with: A) An estimate of the dollar amount of the probable loss. B) An expert opinion as to whether a loss is possible, probable or remote. C) Information concerning the progress of cases to date. D) Corroborative audit evidence. Corroborative audit evidence. The term "except for" in an audit report is: A) Used in an adverse opinion. B) No longer considered appropriate. C) Used in a qualified opinion. D) Used for an unmodified opinion when an emphasis of matter paragraph is added. Used in a qualified opinion. The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for audits in accordance with Government Auditing Standards? A) A report on the entity's internal control. B) Material indications of illegal acts should be reported in a document with distribution restricted to senior officials of the entity audited. C) Instances of abuse, fraud, mismanagement, and waste should be reported to the organization with legal oversight authority over the entity audited. D) All privileged and confidential information discovered should be reported to the senior officials of the organization that arranged for the audit. A report on the entity's internal control. After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: A) Increase current dividend distributions. B) Reduce existing lines of credit. C) Increase ownership equity. D) Purchase assets formerly leased. Not sure In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate? A) The auditor is not independent with respect to the enterprise being audited. B) The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements. C) The statements are not in conformity with generally accepted accounting principles regarding pension plans. D) A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence. The statements are not in conformity with generally accepted accounting principles regarding pension plans. Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation? A) Scope limitations imposed by the client. B) Reliance placed upon the report of component auditors. C) Inability to obtain sufficient appropriate audit evidence. D) Inadequate accounting records. Reliance placed upon the report of component auditors. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an): A) Change in accounting principle. B) Limitation in the scope of the audit. C) Uncertainty. D) Related party transaction. Limitation in the scope of the audit. Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A) Investigation of variances within a formal budgeting system. B) Review and approval of the monthly depreciation entry by the plant supervisor. C) Segregation of duties of employees in the accounts payable department. D) Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions. Investigation of variances within a formal budgeting system. One reason why the independent auditors perform analytical procedures on the client's operations is to identify: A) Weaknesses of a material nature in internal control. B) Non-compliance with prescribed control procedures. C) Improper separation of accounting and other financial duties. D) Unusual transactions. Unusual transactions Which of the following is a strong indicator that a material weakness in internal control exists? A) Restatement of previously issued financial statements to reflect a correction. B) Inadequate controls over non-routine transactions. C) Inadequate controls over the period-end financial reporting process. D) Weaknesses in a control activity. Inadequate controls over non-routine transactions. The auditors are least likely to learn of retirements of equipment through which of the following? A) Review of the purchase returns and allowances account. B) Review of depreciation. C) Analysis of the debits to the accumulated depreciation account. D) Review of insurance policy riders. Review of the purchase returns and allowances account. The existence of a material weakness led to an adverse opinion in the internal control audit report of a publicly traded company. Which of the following statements is correct if management believes that it has remediated the weakness? A) Management may engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit. B) Management is required to engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit. C) Management may not engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit. D) Management may engage the auditors to modify the prior adverse audit report be modified to an unqualified report. Management may engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit. For the highest degree of independence the director of internal auditing should report directly to: A) The controller. B) The audit committee of the board of directors. C) The executive vice-president. D) The chief accountant. The audit committee of the board of directors. Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A) Must not refer to the audit of the component auditor. B) Must refer to the audit of the component auditor. C) May refer to the audit of the component auditor. D) May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor. May refer to the audit of the component auditor.