ACCOUNTING
Chapter 1
1. An audit that involves obtaining and evaluating evidence in order to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations is a(n):
2. State accountancy laws are administered by:
3. A CPA performing audits of governmental entities must adhere to standards established by:
4. The subject matter of auditing consists of:
5. When providing audit services, the CPA is expected to be:
6. The audit report on internal control is a variation of which type of audit?
Matching 5-1
The professional standards identify five categories of assertions made by management that are contained in the financial statements. If any of these assertions is a misrepresentation, the statements could be materially misstated. The categories of assertions identified by the profession are:
A. Existence or occurrence
B. Completeness
C. Rights and obligations
D. Valuation or allocation
E. Presentation and disclosure
Following is a list of errors encountered during the conduct of an audit.
REQUIRED: Using the letters given above, indicate the assertion that is being misrepresented by each listed error.
1. A short-term loan obtained from the bank was not recorded.
2. The current portion of long-term debt was excluded from the current liabilities section of the balance sheet.
3. The fact that certain inventories were pledged as collateral on a bank loan was not mentioned in the statements.
4. Reported sales include transactions from the subsequent period.
5. A number of shipments were made that were never billed.
6. Clerical errors were made in the compilation of the physical inventory count.
7. Several fictitious sales were booked during the period.
8. Legal title has not been obtained to a truck purchased from a private party.
9. Some of the inventory is obsolete, with no current market.
10. Accrued liabilities include the utility bills of the owner.
11. The allowance for doubtful accounts was understated because of the failure to properly age the receivables at year-end.
12. The disposal of several pieces of machinery was never recorded.
13. Utility bills for the current period were recorded and paid in the following period.
14. A piece of land, carried as an investment, has been written up to reflect current appraisals of the property.
15. The subsidiary accounts receivable ledger is out of balance with the control account.
Chapter Six
1. Choices about audit evidence are influenced by all of the following except:
2. Specific audit objectives are normally:
3. Which of the following would not be considered corroborating information?
4. Which of the following would not be considered an analytical procedure?
5. Because of the effects of circulation, some audit evidence is more reliable than other audit evidence. Which of the following is generally considered to be the most reliable?
Chapter 8
True/False
REQUIRED: For each of the following items, indicate whether it is (T) True or (F) False. For those marked “False,” identify the error(s) and indicate the change or changes that are needed to make the statement true.
1. The FASB definition of materiality is stated in explicit quantitative terms.
2. Preliminary judgments about materiality are set for planning purposes and may be changed as the audit progresses.
3. In audit planning, the auditor should recognize that there may be several levels of materiality.
4. The auditor's preliminary judgment about materiality cannot be made before the financial statement date, when annual amounts become known.
5. Materiality judgments involve both quantitative and qualitative considerations.
6. Material misstatement is not possible for individual accounts with balances below the auditor's preliminary judgment about materiality.
7. Many auditors make the allocation of materiality on the basis of the balance sheet account balances alone.
8. Materiality should be allocated to the various accounts in proportion to their recorded balances.
9. As more materiality is allocated to an account, the amount of audit work on that account increases.
10. Analytical procedures are defined as “evaluations of financial information made by a study of plausible relationships among financial data components.”
Chapter 11
True/False
REQUIRED: For each of the following items, indicate whether it is (T) True or (F) False. For those marked “False,” identify the error(s) and indicate the change or changes that are needed to make the statement true.
1. An auditor will normally plan to perform tests of controls only if it has been determined that effective internal controls have been placed in operation.
2. Public company auditors must test controls related to all significant financial statement assertions.
3. Assessing control risk is the process of evaluating the effectiveness of an entity’s internal control in preventing or detecting material misstatement in the financial statements.
4. Internal control risk assertions are made for internal controls as a whole, not for individual assertions.
5. The auditor may base an assessment of control risk on the evidence collected while obtaining an understanding of internal controls.
6. Internal controls over the completeness assertion generally start by examining information recorded in the general ledger and tracing it backward through the systems of accounting and internal control.
7. Internal controls over the valuation and allocation assertion are similar to those for the existence and occurrence assertion.
8. To arrive at an assessment of control risk below the maximum, evidence must be obtained about the operating effectiveness of the necessary controls.
9. Control risk assessments may be expressed in quantitative or qualitative terms.
10. If control risk is assessed at the maximum, only this conclusion needs to be documented and not the basis for the assessment.
Matching 13-1
Careful consideration of sample design must be made to achieve efficient and effective statistical samples. This is accomplished through explicit specification of key factors and relating them through mathematical models. Consideration of the same factors in nonstatistical samples may help to produce more efficient and effective samples, even if the factors are not explicitly quantified.
REQUIRED: For each of the factors listed below, indicate its effect on sample size by inserting a D (for direct) or an I (for inverse) in the appropriate column(s).
Effect on
Factor Sample Size
1. Population size
2. Variation in the population
3. Tolerable misstatement
4. Expected misstatement
5. Risk of incorrect acceptance
6. Risk of incorrect rejection
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