auditing questions

1. Intentionally reporting product sales in the financial statements for the period prior to when

they actually occurred is a violation of which generally accepted accounting principle?

a. Periodicity

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b. Matching

c. Historical cost

d. Revenue recognition


2. Walden Industries is being sued by a former employee for wrongful termination. It is

probable that the company will lose the case and be ordered to pay the plaintiff a significant

sum of money. If Walden fails to report this information somewhere in its financial

statements, it is violating the GAAP concept of:

a. Materiality

b. Full disclosure

c. Matching

d. Cost-benefit


3. A company’s financial statements are the responsibility of:

a. The independent auditors

b. The shareholders

c. The accounting department

d. Management


4. Under Sarbanes-Oxley, chief executive officers and chief financial officers are required to

personally certify annual and quarterly SEC filings. Which of the following is an item that

they must certify in their reports?

a. They have disclosed to the audit committee any material control weakness.

b. The financial statements were prepared in conformity with GAAP.

c. The company’s internal controls have prevented or detected all material instances of

fraud during the last year.

d. All of the above


5. The Sarbanes-Oxley Act placed restrictions on the types of services that public accounting

firms are allowed to perform for audit clients. Which of the following services are public

audit firms now expressly prohibited from performing for their audit clients?

a. Quarterly review services

b. Tax services

c. Bookkeeping services

d. All of the above


6. Under Sarbanes-Oxley, pubic accounting firms must rotate the lead partner or the partner

reviewing the audit every year.

a. True

b. False


7. Staff Accounting Bulletin Topic 13, “Revenue Recognition,” indicates that revenue is

considered realized or realizable and earned when four criteria are met. Which of the

following is one of these criteria?

a. Collectibility is reasonably assured.

b. Goods have been scheduled to be delivered or services have been scheduled to be

rendered within the current fiscal period.

c. The seller has located alternate buyers.

d. All of the above are criteria for revenue recognition.


8. An unusual growth in the number of days’ sales in receivables can be a red flag for which of

the following financial statement fraud schemes?

a. Timing differences

b. Fictitious revenues

c. Improper asset valuation

d. All of the above


9. An organization that seeks to fraudulently minimize its net income due to tax considerations

may do so by:

a. Recording fictitious revenues

b. Omitting existing liabilities

c. Expensing capitalized expenditures

d. Underestimating warranty repairs expense


10. An inability to generate cash flows from operations while reporting earnings and earnings

growth is a red flag for which of the following financial statement fraud schemes?

a. Improper asset valuation

b. Fictitious revenues

c. Concealed liabilities and expenses

d. All of the above


11. GAAP strictly prohibits companies from engaging in all related-party transactions because,

without an arm’s-length business negotiation process, the company may suffer economic

harm and ultimately injure unsuspecting shareholders.

a. True

b. False


12. Which of the following is a common target for improper asset valuation schemes?

a. Accounts receivable

b. Business combinations

c. Inventory valuation

d. All of the above


13. In the vertical analysis of an income statement, _____________ is assigned 100 percent, with

all other items expressed as a percentage thereof.

a. Gross sales

b. Net sales

c. Net income

d. Gross margin


14. The technique for analyzing the percentage change in individual financial statement items

from one accounting period to the next is known as:

a. Ratio analysis

b. Vertical analysis

c. Horizontal analysis

d. Correlation analysis


15. Sally Lauren is the external auditor for Modus Industries, a public company that

manufactures disk drives. As she analyzes the numbers, she finds that the quick ratio, which

has typically remained consistent, increased from 1.7 to 2.3 over the previous year. What

type of financial statement fraud scheme could be occurring?

a. Inflated inventory

b. Omitted expenses

c. Fictitious accounts receivable

d. None of the above

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