Ch 13-21 3

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1. 

A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:

A) An emphasis of matter paragraph should be added to the audit report.

B) A separate report should be issued on the required supplementary information.

C) An adverse opinion on the required supplementary information.

D) The required supplementary information should not be referred to.

 

An emphasis of matter paragraph should be added to the audit report.

 
2. 

Consider a company whose sales are initiated by customers either through the Internet, or in a retail store. Which of the following is correct?

A) These types of sales represent two major classes of transactions within the sales process.

B) These types of sales represent two sales processes within a major evaluation processing cycle.

C) These sales represent a sales assertion on completeness.

D) These events represent nonroutine transactions that must be investigated in detail.

 
These types of sales represent two major classes of transactions within the sales process.
 
3. 

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion?

A) The statements are not in conformity with FASB requirements regarding the capitalization of leases.

B) Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence.

C) The chief executive officer refuses the auditor access to minutes of board of directors' meetings.

D) Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

 
The statements are not in conformity with FASB requirements regarding the capitalization of leases.
 
4. 

A comprehensive examination of an operating unit or a complete organization to evaluate its systems, controls, and performance, as measured by management's objectives is called a(an):

A) Compilation.

B) Consultation.

C) Operational Audit.

D) "Yellow Book" audit.

 

Operational Audit.

 
5. 

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:

A) Likely misstatements in the financial statements.

B) Known misstatements in the financial statements.

C) Known, projected and other estimated misstatements in the financial statements.

D) Known, projected and potential misstatements in the financial statements.

 
Known, projected and other estimated misstatements in the financial statements.
 
6. 

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

A) Tests of controls and extensive tests of property and equipment balances at the end of the year.

B) Analytical procedures for current year property and equipment transactions.

C) Tests of controls and limited tests of current year property and equipment transactions.

D) Analytical procedures for property and equipment balances at the end of the year.

 
Tests of controls and limited tests of current year property and equipment transactions.
 
7. 

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the:

A) Evaluation materiality approach.

B) Iron curtain approach.

C) Projected misstatement approach.

D) Rollover approach.

 
Iron curtain approach.
 
8. 

To minimize the opportunities for fraud, unclaimed cash payroll should be:

A) Deposited in a safe deposit box.

B) Held by the payroll custodian.

C) Deposited in a special bank account.

D) Held by the controller.

 
Deposited in a special bank account.
 
9. 

Costs paid with federal assistance that appear to be in violation of a law or regulation are known as:

A) Questioned costs.

B) Noncompliance costs.

C) Improper costs.

D) Illegal costs.

 
Questioned Costs
 
10. 

A legal aid society provides free legal aid to low-income individuals with funds passed-through the state welfare department from the U.S. Department of Health and Human Services. In this situation, which organization is the primary recipient of the funds?

A) The state welfare department.

B) The Department of Health and Human Services.

C) The legal aid society.

D) The individual receiving the aid.

 

The state welfare department.

 
11. 

The operational auditors' preliminary conclusions about potential problem areas are summarized as:

A) The definition of purpose.

B) The audit program.

C) The preliminary survey.

D) The audit report.

 

The preliminary survey.

 
12. 

Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client?

A) Direct audit of the ending balance.

B) Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

C) Audit of changes in the accounts since inception of the company.

D) Audit of selected purchases and retirements for the last few years.

 
Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.
 
13. 
In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the:

A) Extent of the control risk.

B) Extent of property abandoned during the year.

C) Adequacy of replacement funds.

D) Reasonableness of the depreciation.

 

Adequacy of replacement funds.

 
14. 

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:

A) Attempt to determine whether their report is still being relied upon by third parties.

B) Notify regulatory agencies.

C) Notify legal counsel.

D) Wait until the beginning of the next year's audit to determine whether misstatements have occurred.

 
Attempt to determine whether their report is still being relied upon by third parties.
 
15. 

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is:

A) $0

B) $30,000

C) $40,000

D) $50,000

 
$30,000
 
16. 

The auditor's program to examine interest-bearing debt most likely will include steps that require:

A) Comparing the book value of the debt to its year-end market value.

B) Vouching borrowing and repayment transactions.

C) Verifying the proper presentation of the debt through confirmation.

D) Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.

 
Vouching borrowing and repayment transactions.
 
17. 

Which of the following must be included in management's report internal control under section 404 of the Sarbanes/Oxley Act of 2002?

A) It is management's responsibility to eliminate or publicly report on significant deficiencies in internal control.

B) A detailed description of the COSO criteria.

C) Management's assessment of the operating effectiveness for the period from the beginning to the end of the fiscal year under audit.

D) Identification of the framework used for evaluating internal control.

 
Identification of the framework used for evaluating internal control.
 
18. 

It would be appropriate for the payroll accounting department to be responsible for which of the following functions?

A) Approval of employee time records.

B) Maintenance of records of employment, discharges, and pay increases.

C) Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

D) Distribution of paychecks to employees.

 
Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
 
19. 

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:

A) Express an adverse opinion with a basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

B) Express an unmodified opinion with an emphasis of matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements.

C) Disclaim an opinion and explain all of the reasons therefore.

D) Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason therefore since that reason will be included in the notes to the statements.

 
Express an adverse opinion with a basis for modification paragraph disclosing the reason (the accounting change) for the opinion.
 
20. 

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?

A) Review minutes of board of directors' meeting.

B) Review the latest available interim financial statements.

C) Inquire about any unusual adjustments made subsequent to the balance sheet date.

D) Review changes in internal control during the period subsequent to the balance sheet date.

 
Review changes in internal control during the period subsequent to the balance sheet date.
 
21. 

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should:

A) Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit.

B) Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

C) Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure.

D) Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

 

Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

 
22. 

Which of the following modifications of the auditors' report does not include an additional paragraph?

A) The report is qualified because the financial statements contain a material departure from generally accepted accounting principles.

B) The report includes an emphasis of a matter.

C) The audit report indicates a division of responsibility between two CPA firms.

D) The report is qualified because the scope of the auditors' work was limited.

 
The audit report indicates a division of responsibility between two CPA firms.
 
23. 

An auditor's report on comparative financial statements should be dated as of the date of the:

A) Issuance of the report.

B) Accumulation of sufficient appropriate audit evidence.

C) Latest financial statements being reported on.

D) Last related-party transaction disclosed in the statements.

 

Accumulation of sufficient appropriate audit evidence.

 
24. 

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:

A) The auditors may still issue an unmodified opinion.

B) The auditors should issue a qualified report for the departure from generally accepted accounting principles.

C) The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented.

D) The auditors should disclaim an opinion on the overall financial statements.

 
The auditors should issue a qualified report for the departure from generally accepted accounting principles.