1.

Upon receipt of customer’s checks in the mailroom, a responsible employee

should prepare a remittance listing that is forwarded to the cashier. A copy of the
listing should be sent to the

a. Internal auditor to investigate the listing for unusual transactions

b. Treasurer to compare the listing with the monthly bank statement
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable
records. 
d. Entity’s bank to compare the listing with the cashier’s deposit slip.

2. Which of the following procedures most likely would not be a control designed to
reduce the risk of errors in the billing process?

a. Comparing control totals for shipping for shipping documents with

corresponding totals for sales invoices
b. Using computer programmed controls on the pricing and mathematical
accuracy of sales invoices.
c. Matching shipping documents with approved sales orders before invoice
preparation.
d. Reconciling the control totals for sales invoices with the accounts receivable
subsidiary ledger. 

3. Internal control is strengthened when the quantity of merchandise ordered is

omitted from the copy of purchase order sent to the

a. Department that initiated the requisition

b. Receiving department 
c. Purchasing agent
d. Accounts payable department

4. The ultimate purpose of assessing control risk is to contribute to the auditor’s

evaluation of the risk that

a. Tests of controls may fail to identify procedures relevant to assertions.

b. Material misstatements may exist in the financial statements. 
c. Specified controls requiring segregation of duties may be circumvented by
collusion.
d. Entity policies may be overridden by senior management.

5. Control risk should be assessed in terms of

 a. Specific cntrol procedures
b. Types of potential fraud.
c. Financial statement assertions. 
d. Control environment factors.

6. When assessing control risk below the maximum level, an auditor is required to
document the auditor’s

                                       Basis for

Understanding of                                      Concluding That
The Entity’s Control                                    Control Risk Is Below
Environment                                            The Maximum Level

a. Yes                                                              No 

b. No                                                               Yes
c. Yes                                                              Yes
d. No                                                                No

7. Which of the following is least likely to be evidence the auditor examines to

determine whether controls are operating effectively?

a. Records documenting usage of computer programs

b. Canceled supporting documents
c. Confirmations of accounts receivable 
d. Signatures on authorization forms

8. Which of the following statements is correct concerning an auditor’s assessment

of control risk?

a. Assessing control may risk may be performed concurrently during an audit

with obtaining an understanding of the entity’s internal control. 
b. Evidence about the operation of controls in prior audits may not be
considered during the current year’s assessment of control risk
c. The basis for an auditor’s conclusions about the assessed level of control risk
need not be documented unless control risk is assessed at the maximum
level.
d. The lower the assessed level of control risk, the less assurance the evidence
must provide that the control procedures are operating effectively.

9. Sound internal control dictates that immediately upon receiving checks from
customers by mail, a responsible employee should
 a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a pre-numbered sales invoice.
c. Prepare a duplicate listing of checks received. 
d. Record the checks in the cash receipts journal.

10. Regardless of the assessed level of control risk, an auditor would perform some

a. Tests of controls to determine the effectiveness of internal control policies.

b. Analytical procedures to verify the design of internal control procedures
c. Substantive tests to restrict detection risk for significant transaction classes. 
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk.

11. Reportable conditions are matters that come to an auditor’s attention that should
be communicated to an entity’s audit committee because they represent

a. Disclosures of information that significantly contradict the auditor’s going

concern assumption
b. Material fraud or illegal acts perpetrated by high-level management.
c. Significant deficiencies in the design or operation of internal control. 
d. Material fraud or illegal acts perpetrated by high-level management.

12. Which of the following statements is correct concerning an auditor’s required

communication of reportable conditions?

a. A reportable condition previously communicated during the prior year’s audit

that remains uncorrected, causes a scope limitation.
b. An auditor should perform tests of controls on reportable conditions before
communicating them to the client.
c. An auditor’s report on reportable conditions should include a restriction on the
distribution of the report. 
d. An auditor should communicate reportable conditions after tests of controls,
but before commencing substantive tests.

13. An auditor suspects that a client’s cashier is misappropriating cash receipts for
personal use by lapping customer checks received in the mail. In attempting to
uncover this embezzlement scheme, the auditor most likely would compare the

a. Dates checks are deposited per bank statements with the dates remittance
credits are recorded. 
b. Daily cash summaries with the sums of the cash receipts journal entries
 c. Individual bank deposit slips with the details of the monthly bank statements
d. Dates uncollectible accounts are authorized to be written off with the dates
the write-offs are actually recorded.

14. An auditor uses the knowledge provided by the understanding of internal control
and the assessed level of control risk primarily to

a. Determine whether procedures and records concerning the safeguarding of

assets are reliable
b. Ascertain whether the opportunities to allow any person to both perpetrate
and conceal fraud are minimized
c. Modify the initial assessments of inherent risk and preliminary judgments
about materiality levels.
d. Determine the nature, timing and extent of substantive tests for financial
statements assertions.

15. Management philosophy and operating style most likely would have a significant
influence on an entity’s control environment when

a. The internal auditor reports directly to management.

b. Management is dominated by one individual. 
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process.

16. Which of the following department most likely would approve changes in pay
rates and deductions from employee salaries?

a. Human Resources/Personnel 
b. Treasurer.
c. Controller.
d. Payroll.

17. During the consideration of internal control in a financial statement audit, an

auditor is not obligated to

a. Search for significant deficiencies in the operation of the internal control.

b. Understand the internal control and the information system
c. Determine whether the control activities relevant to audit planning have been
placed in operation.
d. Perform procedures to understand the design of internal control.
18. After assessing control risk at below the maximum level, an auditor desires to
seek a further reduction in the assessed level of control risk. At this time, the
auditor would consider whether

a. It would be efficient to obtain an understanding of the entity’s information

system.
b. The entity’s internal controls have been placed in operation.
c. The entity’s internal controls pertain to any financial statement assertions.
d. Additional evidential matter sufficient to support a further reduction is likely to
be available. 

19. To obtain evidential matter about control risk, an auditor selects tests from a
variety of techniques including

a. Inquiry. 
b. Analytical procedures.
c. Calculations.
d. Confirmation.

20. Which of the following procedures concerning accounts receivable would an

auditor most likely perform to obtain evidential matter in support of an assessed
level of control risk below the maximum level?

a. Observing an entity’s employee prepare the schedule of past due accounts

receivable. 
b. Sending confirmation requests to an entity’s principal customers to verify the
existence of accounts receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. omparing an entity’s uncollectible accounts receivable.

21. Which of the following is a control that most likely could improve management’s
ability to supervise company activities effectively?

a. Monitoring compliance with internal control requirements imposed by

regulatory bodies.
b. Limiting direct access to assets by physical segregation and protective
devices.
c. Establishing budgets and forecasts to identify variances from expectations. 
d. Supporting employees with the resources necessary to discharge their
responsibilities.
22. In planning an audit, the auditor’s knowledge about the design of relevant
controls should be used to

a. Identify the types of potential misstatements that could occur. 

b. Assess the operation efficiency of internal control.
c. Determine whether controls have been circumvented by collusion.
d. Document the assessed level of control risk.

23. The objective of tests of details of transactions performed as tests of control is to

a.  Monitor the design and use of entity documents such as prenumbered

shipping forms.
b. Determine whether internal controls have been placed in operation.
c. Detect material misstatements in the account balances of the financial
statements.
d. Evaluate whether internal controls operated effectively. 

24. Tracing shipping documents to pre-numbered sales invoices provides evidence

that

a. No duplicate shipments or billings occurred.

b. Shipments to customers were properly invoiced. 
c. All goods ordered by customers were shipped.
d. All pre-numbered sales invoices were accounted for.

25. Which of the following controls most likely would reduce the risk of diversion of
customer receipts by an entity’s employees?

a. A bank lockbox system. 

b. Pre-numbered remittance advices.
c. Monthly bank reconciliation.
d. Daily deposit of cash receipts.

26. Which of the following audit procedures would an auditor most likely perform to
test controls relating to management’s assertion concerning the completeness of
sales transactions?

a. Verify that extensions and footings on the entity’s sales invoices and monthly
customer statements have been recomputed.
 b. Inspect the entity’s reports of pre-numbered shipping documents that have
not been recorded in the sales journal. 
c. Compare the invoiced prices on pre-numbered sales invoices to the entity’s
authorized price list.
d. Inquire about the entity’s credit granting policies and the consistent
application of credit checks.

27. An auditor’s letter issued on reportable conditions relating to an entity’s internal

control observed during a financial statement audit should

a. Include a brief description of the tests of controls performed in searching for

reportable conditions and material weaknesses.
b. Indicate that the reportable conditions should be disclosed in the annual
report to the entity’s shareholders.
c. Include a paragraph describing management’s assertion concerning the
effectiveness of internal control.
d. Indicate that the audit’s purpose was to report on the financial statements and
not to provide assurance on internal control. 

28. Which of the following controls most likely addresses the completeness assertion
for inventory?

a. Work in process account is periodically reconciled with subsidiary records.

b. Employees responsible for custody of finished goods do not perform the
receiving function.
c. Receiving reports are prenumbered and periodically reconciled. 
d. There is separation of duties between payroll department and inventory
accounting personnel.

29. In obtaining an understanding of an entity’s controls that are relevant to audit

planning, an auditor is required to obtain knowledge about the

a. Design of the controls included in the internal control components.

b. Effectiveness of the controls that have been placed in operation
c. Consistency with which the controls are currently being applied.
d. Controls related to each principal transaction class and account balance.

30. During the consideration of internal control in a financial statement audit, an

auditor is not obligated to

a. Search for significant deficiencies in the operation of the internal control. 

b. Understand the internal control and the information system.
c. Determine whether the controls relevant to audit planning have been placed
in operation.
d. Perform procedures to understand the design of internal controls.