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Items 1 5 are based on the following independent situations for which your

will recommend an appropriate audit opinion from the following alternatives:






1. During the course of his audit of the financial statements of a

corporation for the purpose of expressing an opinion on the
statements, a CPA is refused permission to inspect the minutes book.
The corporation secretary instead offers to five the CPA a certified
copy of resolutions and actions relating to accounting matters.
2. During 2015, the research staff of Saliksik Research Corporation
devoted its entire efforts toward developing a new pollution-control
device. All costs that could be attributed directly to the project were
accounted for as deferred charges and classified on the balance sheet
at December 31, 201, as a noncurrent asset. In the course of his audit
of the corporations 2015 financial statements, Andok, CPA, found
persuasive evidence that the research conducted to date would
probably result in a marketable product. The deferred research charges
are significantly material in relation to both income and total assets.
3. On January 2, 2015, the Reebok Auto Supply Company received a
notice from its primary supplier that effective immediately, all
wholesale prices would be increased 10 percent. On the basis of the
notice, Reebok Auto Supply revalued its December 31, 2015, Inventory
to reflect the higher costs. The inventory constituted a material
proportion of total assets; however, the effect of the revaluation was
material to current assets but not to total assets of net income. The
increase in valuation is adequately disclosed in the notes to the
financial statements.
4. You were engaged to audit the Steelman Companys financial
statements after the close of the companys fiscal year. Because you
were not engaged until after the balance sheet date, you were not able
to physically observe inventory, which is highly material. On the
completion of your audit, you are satisfied that Steelmans financial
statements are presented fairly, including inventory about which you
were able to satisfy yourself by the use of alternative audit procedures.
5. A CPA has completed his audit of the financial statements of a bus
company for the year ended December 31, 2015. Prior to 2015, the
company had been depreciating its buses over a 10-year period.
During 2015, the company determined that a more realistic estimated





life for its buses was 12 years and computed the 2015 depreciation on
the basis of the revised estimate. The CPA has satisfied himself that
the 12-year life is reasonable. The company has adequately disclosed
the change in estimated useful lives of its buses and the effect of the
change on 2015 income in a note to the financial statements.
The following statements relate to the auditors responsibilities
regarding related parties and transactions with such parties. Which is
A. The auditor is responsible for the identification and disclosure of
related parties and transactions with such parties.
B. Management is required to implement adequate internal control to
ensure that transactions with related parties are appropriately
identified in the information system and disclosed in the financial
C. The auditor should have sufficient understanding of the entity and
its environment to identify event, transactions, and practices that
may result in a risk of material misstatement regarding related
parties and transactions with such parties.
D. A financial statements audit cannot be expected to detect all
related party transactions.
Which of the following statements best describes a positive for
confirmation of a accounts receivable balance?
A. The customer will be asked to indicate to the auditor the current
balance in the account.
B. The customer will be asked to respond to the confirmation request
only if the balance indicated in the request is incorrect.
C. The customer will be asked to inform the auditor whether the
balance indicated in the request is correct and to respond
regardless of whether such stated balance is correct.
D. The customer will be asked to indicate to the auditor the balance in
his/her account only if it is positive (i.e., greater than zero).
Which of the following statements relating to stratification is Incorrect?
A. When performing tests of details of transactions and account
balances, the population is often stratified by monetary value.
B. The results of audit procedures applied to a sample of items within a
stratum can be projected to the entire population.
C. When verifying the valuation assertion for accounts receivable,
account balances may be stratified by age.
D. Stratification reduces the variability of items within each stratum.
Which of the following fraudulent activities most likely could be
perpetrated due to the lack of effective internal controls in the revenue
A. Fictitious transactions may be recorded that cause and
understatement of revenues and overstatement of receivable.

B. Claims received from customer for goods returned may be

intentionally recorded in other customers accounts.
C. Authorization of credit memos by personnel who receive cash may
permit the misappropriation of cash.
When an auditor modifies an opinion because of inadequate
disclosure, the auditor should describe the nature of the omission in a
separate Basis for Modification paragraph and modify the
If an auditor wishes to select a random sample that must have a
10 percent acceptable risk of assessing control risk too low and a
tolerable deviation rate of 10 percent, the size of the sample he or she
must select will decrease as the estimate of the
A. Population deviation rate increases.
B. Population deviation rate decreases.
C. Population size increases.
D. Acceptable risk of assessing control risk too low increases.
As a result of sampling procedures applied as tests of controls,
an auditor incorrectly assesses control risk higher than appropriate.
The most likely explanation for this situation is that:
A. The deviation rate in the auditors sample is less than the tolerable
rate, but the deviation rate in the population exceed the tolerable
B. The deviation rate in the auditors sample exceeds the tolerable
rate, but the deviation rate in the population is less than the
tolerable rate.
C. The deviation rates of both the auditors sample and the population
exceed the tolerable rate.
D. The deviation rates of both the auditors sample and the population
are less than the tolerable rate.
Which of the following is most likely to be a response to the
auditors assessment that the risk of material misstatement due to
fraud for the existence of inventory is high?
A. Perform analytical procedures rather than taking tests counts.
B. Request that inventories be counted prior to year-end.
C. Request that inventory counts at the various locations be counted
on different dates so as to allow the same auditor to be present at
every count.
D. Observe tests counts of inventory at certain locations on an
unannounced basis.
The date of the end of the latest period covered by the financial
statements, which is normally the date of the most recent balance
sheet in the financial statements subject to audit is the
A. Date the financial statements are issued.
B. Date of the auditors report.

C. Date of the financial statements.

D. Date of approval of financial statements.
Which one of the following statements concerning sampling risk
and nonsampling risk is correct?
A. Neither sampling risk nor nonsampling risk can be reduced by the
B. Sampling risk, but not nonsampling risk, can be reduced by the
C. Nonsampling risl, but not sampling risk, can be reduced by the
D. Both sampling risk and nonsampling risk can be reduced by the
The following statements relate to the fundamental principles of
professional ethics:
The adverse effects of events causing an auditor to believe there
is substantial doubt about an entitys ability to continue as a going
concern would most likely be mitigated by evidence relating to the
A. Ability to expand operations into new product line in the future.
B. Feasibility of plans to purchase leased equipment at less than
market value.
C. Marketability of assets that management plans to sell.
D. Committed arrangements to convert preference shares to long-term
An audit clients description that its financial statements are
prepared in accordance with a particular applicable financial reporting
framework is appropriate only if
A. The financial statements are in substantial compliance with that
B. The financial statements adequately disclose the significant
accounting policies selected and applied.
C. The terminology used in the financial statements, including the title
of each financial statements, is appropriate.
D. The financial statements comply with all the requirements of that
framework that are effective during the period covered by the
financial statements.
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. A check, issued by the company and bearing the payees
endorsement, that is included with the bank statements mailed
directly to the auditor.

C. A working paper prepared by the clients controller and reviewed by

the clients treasurer.
D. Confirmation of an account payable balance mailed by and returned
directly to the auditor.
An auditor is auditing a mutual fund company that uses a
transfer agent to handle accounting for shareholders. Which of the
following actions by the auditor would be most efficient for obtaining
information about the transfer agents internal controls?
A. Review prior-year workpapers to determine whether the number of
transactions processed by the agent has materially increased.
B. Perform an audit on the internal control function of the agent.
C. Perform tests of controls on a sample of the audited firms
transactions through the agent.
D. Review report in internal control placed in operation and its
operating effectiveness produced by the agents own auditor.
Using laptop computers in conducting financial statement audits
may affect the methods used to review the work of staff assistants
A. Supervisory personnel may not have an understanding of the
capabilities and limitations of computes.
B. Working paper documentation may not contain readily observable
details of calculations.
C. The overall audit objectives may differ.
D. Documenting the supervisory review may require assistance of
management services personnel.
Which of the following statements concerning the auditors
responsibility regarding subsequent events is incorrect?
A. The auditor should perform audit procedures designed to obtain
sufficient appropriate audit evidence that all events up to the date
of the auditors report that may require adjustment of, or disclosure
in, the financial statements have been identified.
B. The audit procedures to identify events that may require adjustment
of, or disclosure in, the financial statements should be performed as
near as practicable to the date of issuance of the audited financial
C. When the auditor becomes aware of events which materially affect
the financial statements, the auditor should consider whether such
events are properly accounted for and adequately disclosed in the
financial statements.
D. The auditor does not have any responsibility to perform audit
procedures or make inquiry regarding the financial statements after
the date of the auditors report.
The primary purpose of the representation letter is the
A. Acceptance of the auditors engagement letter.

B. Evaluation by management of the auditors performance.

C. Acknowledgment of managements responsibility for the financial
D. Agreement by management to engage the auditor for the next
annual audit.
Which of the following circumstances may create self-interest
threats for a professional accountant in public practice?
A. A financial interest in a client or jointly holding a financial interest
with a client.
B. Performing a service for a client that directly affects the subject
matter of the assurance engagement.
C. Being the threatened with litigation.
D. Acting as an advocate on behalf of an assurance client in litigation
or disputes with third parties.
Accepting an engagement to examine an entitys financial
projection most likely could be appropriate if the projection were to be
distributed to
A. All employees who work for the entity.
B. Potential stockholders who request a prospectus or a registration
C. A bank with which the entity is negotiating for a loan.
D. All stockholders of record as of the report date.
Which of the following should be considered hen forming an
opinion on the audited financial statements?
Whether sufficient appropriate audit evidence has been
Whether uncorrected misstatements are material, individually or
in aggregate.
The qualitative aspects of the entitys accounting practices,
including indicators of possible bias in managements judgments.
A. I only
C. I and II only
B. I and III only D. I, II, and III
Which of the following audit procedures is best for identifying
unrecorded trade accounts payable?
A. Examining unusual relationships between monthly accounts payable
balances and recorded cash payments.
B. Reconciling vendors statements to the file of receiving reports to
identify items received just prior to the balance sheet date.
C. Reviewing cash disbursements recorded subsequent to the balance
sheet date to determine whether the related payables apply to the
prior period.
D. Investigating payables recorded just prior to and just subsequent to
the balance sheet date to determine whether they are supported by
receiving reports.

Which of the following statements ordinarily is not included
among the written client representations made by the chief executive
officer and the chief financial officer?
A. Sufficient evidential matter has been made available to the auditor
to permit the issuance of an unmodified opinion.
B. There are no unasserted claims or assessments that our lawyer has
advised us are probable of assertion and must be disclosed.
C. We have no plans or intentions that may materially affect the
carrying value or classification of assets and liabilities.
D. No events have occurred subsequent to the balance sheet date
that would require adjustment to, or disclosure in, the financial
When financial statements of the prior year are presented
together with those of the current year, the current auditor should
express an audit opinion on the financial statements of the prior year if
A. The current auditor has audited the statements of the prior year.
B. The client requests the current auditor to review the financial
statements of the prior year and report thereon.
C. The prior auditor previously disclaimed an opinion on the prior year
financial statements.
D. The statements of the prior year were unaudited.
An accountant may perform an agreed-upon procedures
engagement regarding prospective financial statements provided that
A. Use of the report is to be restricted to the specified users.
B. The prospective financial statements are also examined.
C. Responsibility for the sufficiency of the procedures performed is
taken by the accountant.
D. Negative assurance is expressed on the prospective financial
statements taken as a whole.
Attribute sampling in statistical sampling is
A. A method of sampling that divides the population into strata and
then selects random sample from the strata.
B. 0