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Audit Quizes 1

BS Accountancy (University of Batangas)

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11. When auditing contingent liabilities, which of the following procedures would be least
effective?
A. Reading the minutes of the board of directors.
B. Reviewing the bank confirmation letter.
C. Examining customer confirmation replies.
D. Examining invoices for legal services. C

12. When obtaining evidence regarding litigation against a client, the CPA would be least
interested in determining
A. An estimate of when the matter will be resolved.
B. The period in which the underlying cause of the litigation occurred.
C. The probability of an unfavorable outcome.
D. An estimate of the potential loss. A

13. The auditor's primary means of obtaining corroboration of management's information

concerning litigation is a
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the
litigation. A

14. An auditor should obtain evidential matter relevant to all the following factors concerning
third-party litigation against a client except the:
A. Period in which the underlying cause for legal action occurred.
B. Probability of an unfavorable outcome.
C. Jurisdiction in which the matter will be resolved.
D. Existence of a situation indicating an uncertainty as to the possible loss.C

15. An auditor will ordinarily examine invoices from lawyers primarily in order to
A. Substantiate accruals.
B. Assess the legal ramifications of litigation in progress.
C. Estimate the dollar amount of contingent liabilities.
D. Identify possible unasserted litigation, claims, and assessments. D

16. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and
assessments, the auditor should
A. Honor the confidentiality of the client-lawyer relationship.
B. Consider the refusal to be a scope limitation.
C. Seek to obtain the corroborating information from management.
D. Disclose this fact in a footnote to the financial statements. B

17. The refusal of a client's attorney to provide a representation on the legality of a particular act
committed by the client is generally
A. Sufficient reason to issue a "subject to" qualified opinion.
B. Considered to be a scope limitation.

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C. Insufficient reason to modify the auditor's report because of the attorney's obligation of
confidentiality.
D. Proper grounds to withdraw from the engagement without further consideration. B

18. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they could be issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business that is expected to double sales volume.
D. Settlement of litigation, in excess of the previously recorded liability. D

19. Which of the following situations would require adjustment to or disclosure in the financial
statements?
A. A merger discussion.
B. The application for a patent on a new production process.
C. Discussions with a customer that could lead to a 40 percent increase in the client's sales if
agreement is successful.
D. The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
D

20. An example of a Type I subsequent event is

A. A tornado that destroys a client's factory after the balance sheet date.
B. An event after the balance sheet date that confirms the auditor's belief (documented prior to
the end of the client's fiscal year) that a large portion of the client's inventory is obsolete.
C. Notification of an IRS audit after the balance sheet date.
D. The client's Board of Directors unexpectedly resigns after the balance sheet date. B

21. An auditor issued an audit report that was dual dated for a subsequent event that occurred
after the completion of field work but before issuance of the auditor's report. The auditor's
responsibility for events occurring subsequent to the completion of field work was
A. Limited to the specific event referenced.
B. Limited to include only events occurring before the date of the last subsequent event
referenced.
C. Extended to subsequent events occurring through the date of issuance of the report.
D. Extended to include all events occurring since the completion of field work. A

22. Which of the following procedures should an auditor generally perform regarding subsequent
events?
A. Compare the latest available interim financial statements issued after year-end with the
financial statements being audited.
B. Send second requests to the client's customers who failed to respond to initial accounts
receivable confirmation requests.
C. Communicate material weaknesses in internal controls to those charged with governance.
D. Review the cutoff bank statements for several months after year-end. A

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23. The purpose of analytical procedures at the completion of the audit includes all of the
following except:
A. Revising the audit plan.
B. Considering overall reasonableness of the financial statements.
C. Reviewing adequacy of evidence gathered to investigate unusual fluctuations.
D. Recalculating some of the ratios examined during audit planning. A

24. Which of the following auditing procedures is ordinarily performed last?

A. Confirming accounts payable.
B. Testing the purchasing function.
C. Reading the minutes of directors' meetings.
D. Obtaining a management representation letter. D

25. The date of the management representation letter should coincide with the
A. Date of the latest subsequent event referred to in the notes to the financial statements.
B. Balance sheet date.
C. Date of the auditor's report.
D. Date of the engagement agreement. C

26. Which of the following items should an auditor communicate to those charged with
governance in a publicly traded company?
A. Significant audit adjustments recorded by the company and management's consultation with
other accountants about significant accounting matters.
B. Significant audit adjustments recorded by the company but not management's consultation
with other accountants about significant accounting matters.
C. Management's consultation with other accountants about significant accounting matters but
not significant audit adjustments recorded by the company.
D. Neither significant audit adjustments recorded by the company nor management's consultation
with other accountants about significant accounting matters. A

27. The management letter is used

A. To allow management to corroborate oral representations to the auditor.
B. To confirm the terms of the audit engagement.
C. To list all reportable conditions with respect to internal controls.
D. To make recommendations to the client based on observations made during the audit. D

28. Ajax, Inc., is an affiliate of the audit client and is audited by another audit firm. Which of the
following is most likely to be used by the auditor to obtain assurance that all guarantees by the
client of the affiliate's indebtedness have been detected?
A. Send the standard bank confirmation request to all the client's lender banks.
B. Review client minutes and obtain a representation letter.
C. Examine supporting documents for all entries in intercompany accounts.
D. Obtain written confirmation of indebtedness from the auditor of the affiliate. B

29. Generally, loss contingencies that are judged to be remote

A. Should be disclosed in the footnotes.

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B. Should be recorded in the financial statements.

C. Should not be disclosed in the footnotes.
D. Should be recorded in the financial statements and the footnotes. C

30. Which of the following procedures would an auditor most likely perform to obtain evidence
about an entity's subsequent events?
A. Reconcile bank activity for the month after the balance sheet date with cash activity reflected
in the accounting records.
B. Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims,
and loss contingencies.
C. Review the treasurer's monthly reports on temporary investments owned, purchased, and sold.
D. Examine on a test basis the purchase invoices and receiving reports for several days after the
inventory date. B

31. Which of the following procedures would an auditor ordinarily perform during the review of
subsequent events?
A. An analysis of related party transactions for the discovery of possible irregularities.
B. A review of the cut-off bank statements for the period after the year-end.
C. An inquiry of the client's legal counsel concerning litigation.
D. An investigation of material weaknesses in internal control previously communicated to the
client. C

32. Which of the following is not an audit procedure that the independent auditor would perform
with respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for identifying,
evaluating, and accounting for litigation, claims, and assessments.
B. Obtain from management a description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date.
C. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer
has advised are likely to be asserted and must be disclosed.
D. Confirm directly with the client's lawyer that all claims have been recorded in the financial
statements. D

33. An attorney is responding to an independent auditor as a result of the audit client's letter of
inquiry. The attorney may appropriately limit the response to
A. Asserted claims and litigation.
B. Matters to which the attorney has given substantive attention in the form of legal consultation
or representation.
C. Asserted, overtly threatened, or pending claims and litigation.
D. Items that have an extremely high probability of being resolved to the client's detriment.
B

34. Which of the following is generally requested in a legal letter?

A. A request that the attorney comment on unasserted claims where his or her views differ from
management's evaluation.
B. A list of all attorneys that performed any work for the entity during the year.

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C. A statement indicating that the attorney is responsible for the fair presentation of unasserted
claims in the entity's financial statements.
D. A request that the attorney provide a copy of all invoices given to the client during the year.
A

35. Which of the following subsequent events will be least likely to result in an adjustment to the
financial statements?
A. Culmination of events affecting the realization of accounts receivable owned as of the balance
sheet date.
B. Culmination of events affecting the realization of inventories owned as of the balance sheet
date.
C. Material changes in the settlement of liabilities that were estimated as of the balance sheet
date.
D. Material changes in the quoted market prices of listed investment securities since the balance
sheet date. D

36. Subsequent events for which the auditor has a responsibility to actively search are defined as
events that occur subsequent to the
A. Balance sheet date.
B. Date of the auditor's report.
C. Balance sheet date but prior to the date of the auditor's report.
D. Date of the auditor's report and concern contingencies that are not reflected in the financial
statements. C

37. An auditor is concerned with completing various phases of the examination after the balance
sheet date. This "subsequent period" involving formal audit procedures extends to the date of the
A. Auditor's report.
B. Final review of the audit working papers.
C. Public issuance of the financial statements.
D. Delivery of the auditor's report to the client. A

38. A major customer of an audit client suffers a fire after year-end, but just prior to completion
of audit field work. The audit client believes that this event could have a significant direct effect
on the financial statements. The auditor should
A. Advise management to disclose the event in the notes to the financial statements.
B. Disclose the event in the auditor's report.
C. Withhold submission of the auditor's report until the extent of the direct effect on the financial
statements is known.
D. Advise management to adjust the financial statements. A

39. If an auditor dates the auditor's report on financial statements for the year ended December
31, 2011, as of February 10, 2012, except for Note J, as to which the date is March 3, 2012, the
auditor is acknowledging responsibility to actively search for and ensure proper handling by
management of
A. All subsequent events occurring through March 3, 2012.
B. All subsequent events occurring through February 10, 2012.

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C. All subsequent events occurring through February 10, 2012 and the specific subsequent event
referred to in Note J through March 3, 2012.
D. Only the specific subsequent event referred to in Note J as of March 3, 2012. C

40. Harvey, CPA is preparing an audit program for the purpose of ascertaining the occurrence of
subsequent events that may require adjustment or disclosure essential to a fair presentation of the
financial statements in conformity with generally accepted accounting principles. Which one of
the following procedures would be least appropriate for this purpose?
A. Confirm, as of the completion of field work, accounts receivable that have increased
significantly from the year-end date.
B. Read the minutes of the board of directors.
C. Inquire of management concerning events that may have occurred.
D. Obtain a lawyer's letter as of the completion of field work. A

41. A Type II subsequent event usually requires

A. An adjustment to the financial statements and the footnotes.
B. An adjustment to the financial statements but no special disclosure is required.
C. Disclosure in the footnotes.
D. Neither an adjustment to the financial statements nor disclosure in the footnotes. C

42. After field work audit procedures are completed, a partner of the CPA firm who has not been
involved in the audit performs a second or wrap-up review of the working papers. This second
review usually focuses on
A. The audit report, financial statements, and footnotes for consistency.
B. Irregularities involving the client's management and its employees.
C. The materiality of the adjusting entries proposed by the audit staff.
D. The communication of internal control weaknesses to those charged with governance. A

43. In the course of the examination of financial statements for the purpose of expressing an
opinion, the auditor normally prepares a schedule of unadjusted differences for which the auditor
did not propose adjustments when they were discovered. What is the primary purpose of this
schedule?
A. To point out to the responsible client officials the errors made by various company personnel.
B. To summarize the adjustments that must be made before the company can prepare and submit
its federal tax return.
C. To identify the potential financial statement effects of errors or disputed items that were
considered immaterial when discovered.
D. To summarize the errors made by the company so that corrections can be made after the
audited financial statements are released. C

44. Which of the following ratios is least likely to assist the auditor in determining whether the
client is experiencing financial difficulties?
A. Net worth/total liabilities.
B. Cash/total assets.
C. Total liabilities/total assets.
D. Net income before taxes/net sales.B

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45. As part of an audit, a CPA often requests a representation letter from the client. Which one of
the following is not a valid purpose of such a letter?
A. To provide audit evidence.
B. To emphasize to the client their responsibility for the fairness of the financial statements.
C. To satisfy himself or herself that a certain account balance is fairly stated when certain
customary auditing procedures are not performed.
D. To provide possible protection to the CPA against a charge of knowledge in cases where fraud
is subsequently discovered to have existed in the accounts. C

46. Which of the following expressions is least likely to be included in a client's representation
letter?
A. No events have occurred subsequent to the balance sheet date that require adjustment to or
disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that would have a
material effect on the financial statements in the event of noncompliance.
C. Management acknowledges responsibility for illegal actions committed by its employees.
D. Management has made available all financial statements and related data. C

47. "There are no violations or possible violations of laws or regulations whose effects should be
considered for disclosure in the financial statements or as a basis for recording a loss
contingency." The foregoing passage most likely is from a(an)
A. Client engagement letter.
B. Report on compliance with laws and regulations.
C. Management representation letter.
D. Attestation report on internal controls. C

48. Which of the following matters is an auditor required to communicate to those charged with
governance?
A. The basis for assessing control risk below the maximum.
B. The process used by management in formulating sensitive accounting estimates.
C. The auditor's preliminary judgments about materiality levels.
D. The justification for performing substantive procedures at interim dates. B

49. "There have been no communications from regulatory agencies concerning noncompliance
with or deficiencies in, financial reporting practices that could have a material effect on the
financial statements." The foregoing passage is most likely from a
A. Report on internal control.
B. Special report.
C. Management representation letter.
D. Letter for underwriters. C

50. When considering the use of management's written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations
A. Complement, but do not replace, substantive procedures designed to support the assertion.
B. Constitute sufficient evidence to support the assertion when considered in combination with
reliance on internal controls.

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C. Are not part of the evidential matter considered to support the assertion.
D. Replace reliance on internal controls as evidence to support the assertion. A

51. A written representation from a client's management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements should normally be
signed by the
A. Chief executive officer and the chief financial officer.
B. Chief financial officer and the chairman of the board of directors.
C. Chairman of the audit committee of the board of directors.
D. Chief executive officer, the chairman of the board of directors and the client's lawyer. A

52. Communications between the auditor and those charged with governance should include all
of the following except:
A. A summary of specific audit procedures used.
B. Significant audit adjustments.
C. Consultations with other accountants.
D. Major issues discussed with management before the auditor was retained. A

53. Which of the following events occurring after the issuance of a client's financial statements
and the auditor's report most likely would cause the auditor to make further inquiries about the
previously issued financial statements?
A. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going
concern.
B. A contingency is resolved that had been disclosed in the audited financial statements.
C. New information is discovered concerning undisclosed lease transactions in the audited
period.
D. A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold.
C

54. On February 25, a CPA issued an auditor's report expressing an unqualified opinion on
financial statements for the year ended January 31. On March 2, the CPA learned that, on
February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of
the ongoing deterioration of the financial condition of the entity's principal customer, which
finally led to the customer's bankruptcy. Management then refused to adjust the financial
statements for this subsequent event. The CPA determined that the information is reliable and
that there are creditors currently relying on the financial statements. The CPA's next course of
action most likely would be to
A. Notify the entity's creditors that the financial statements and the related auditor's report should
no longer be relied upon.
B. Notify each member of the entity's board of directors about management's refusal to adjust the
financial statements.
C. Issue revised financial statements and distribute them to each creditor known to be relying on
the financial statements.
D. Issue a revised auditor's report and distribute it to each creditor known to be relying on the
financial statements. B

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55. After an audit report containing an unqualified opinion on a nonpublic client's financial
statements is issued, the auditor learns that the client has decided to sell the shares of a subsidiary
that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should
A. Determine whether the information is reliable and, if it is determined to be reliable, request
that revised financial statements be issued.
B. Notify the entity that the auditor's report may no longer be associated with the financial
statements.
C. Describe the effects of this subsequently discovered information in communications with
persons known to be relying on the financial statements.
D. Take no action because the auditor has no obligation to make any further inquiries. D

56. An auditor's client has violated a minor requirement of its bond indenture that could result in
the trustee requiring immediate payment of the principal amount due. The client refuses to seek a
waiver from the bond trustee. Request for immediate payment is not considered likely. Under
these circumstances, the auditor must
A. Require classification of bonds payable as a current liability.
B. Contact the bond trustee directly.
C. Disclose the situation in the auditor's report.
D. Obtain an opinion from the company's attorney as to the likelihood of the trustee's
enforcement of the requirement. C

57. Auditors often request that the audit client send a letter of inquiry to those attorneys who
have been consulted with respect to litigation, claims, and/or assessments. The primary reason
for this request is to provide the auditor with
A. An estimate of the dollar amount of the probable loss.
B. An expert opinion as to whether a loss is possible, probable, or remote.
C. Information concerning the progress of cases to date.
D. Corroborative inquiries made of the client by the auditor. D

58. The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to
provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that existed at the date of
the balance sheet.
B. An expert opinion as to whether a loss is possible, probable, or remote.
C. The opportunity to examine the documentation concerning litigation, claims, and assessments.
D. Corroboration of the information furnished by management concerning litigation, claims, and
assessments. D

59. Which of the following statements extracted from a client's lawyer's letter concerning
litigation, claims, and assessments most likely would cause the auditor to request clarification?
A. "I believe that the possible liability to the company is nominal in amount."
B. "I believe that the action can be settled for less than the damages claimed."
C. "I believe that the plaintiff's case against the company is without merit."
D. "I believe that the company will be able to defend this action successfully." B

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60. An auditor's decision concerning whether or not to "dual date" the audit report is based upon
the auditor's willingness to
A. Extend auditing procedures.
B. Accept responsibility for all events between year-end and the audit report date.
C. Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the
auditor's report.
D. Assume responsibility for events subsequent to the issuance of the auditor's report. A

61. A Type I subsequent event usually requires

A. An adjustment to the financial statements.
B. No adjustment to the financial statements.
C. Withdrawal from the engagement.
D. None of the above. A

62. A disclosure of a contingent liability in the footnotes is made rather than adjusting the
financial statement accounts when
A. The outcome of the event is judged to be reasonably possible and the loss can be reasonably
estimated.
B. The loss can be reasonably estimated, but the outcome is unknown.
C. The outcome of the event is judged to be reasonably possible but the loss cannot be
reasonably estimated.
D. The outcome is unknown and the loss is reasonably estimable but the client does not want to
book the loss. C

63. Which of the following statements ordinarily is included among the written client
representations obtained by the auditor?
A. Compensating balances and other arrangements involving restrictions on cash balances have
been disclosed.
B. Management acknowledges responsibility for illegal actions committed by employees.
C. Sufficient evidential matter has been made available to permit the issuance of an unqualified
opinion.
D. Management acknowledges that there are no material weaknesses in the account balances.
A

64. Which of the following statements is correct about an auditor's required communication with
management and those charged with governance?
A. Any matters communicated to those charged with governance are also required to be
communicated to the entity's management.
B. The auditor is required to inform those charged with governance about significant errors
discovered by the auditor and subsequently corrected by management.
C. The auditor does not have any requirement to communicate with anyone outside of
management.
D. Weaknesses in internal control previously reported to those charged with governance are
required to be communicated to those charged with governance after each subsequent audit until
the weaknesses are corrected. B

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65. Which of the following statements is correct concerning an auditor's required communication
with those charged with governance?
A. This communication is required to occur before the auditor's report on the financial statements
is issued.
B. This communication should include management changes in the application of significant
accounting policies.
C. Any significant matter communicated to those charged with governance also should be
communicated to management.
D. Significant audit adjustments proposed by the auditor and recorded by management need not
be communicated to those charged with governance. B

66. For which of the following matters should an auditor obtain written management
representations?
A. Management's cost-benefit justifications for not correcting internal control weaknesses.
B. Management's knowledge of future plans that may affect the price of the entity's stock.
C. Management's compliance with contractual agreements that may affect the financial
statements.
D. Management's acknowledgment of its responsibility for employees' violations of laws. C

67. Key Co. plans to present comparative financial statements for the years ended December 31,
2010 and 2011, respectively. Smith, CPA, audited Key's financial statements for both years and
plans to report on the comparative financial statements on May 1, 2012. Key's current
management team was not present until January 1, 2011. What period of time should be covered
by Key's management representation letter?
A. January 1, 2010 through December 31, 2011.
B. January 1, 2010 through May 1, 2012.
C. January 1, 2011 through December 31, 2011.
D. January 1, 2011 through May 1, 2012. B

68. After issuance of the auditor's report, the auditor has no obligation to make any further
inquiries with respect to audited financial statements covered by an auditor's report unless
A. A lawsuit in which risk of loss was considered remote is resolved in the company's favor.
B. A development occurs that may affect the client's ability to continue as a going concern.
C. A material fraud is initiated by an employee after the report is issued.
D. Evidence of significant, non-arms-length, related party transactions that happened prior to
year-end is discovered. D

69. After an auditor has issued an audit report on a nonpublic entity, there is no obligation to
make any further audit tests or inquiries with respect to the audited financial statements covered
by that report unless
A. New information comes to the auditor's attention concerning an event that occurred prior to
the date of the auditor's report that may have affected the auditor's report.
B. Material adverse events occur after the date of the auditor's report.
C. Final determination or resolution was made on matters that had resulted in a qualification in
the auditor's report.

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D. Final determination or resolution was made of a contingency that had been disclosed in the
financial statements and no liability arose from the resolution. A

70. After issuance of the auditor's report, the auditor has no obligation to make any further
inquiries with respect to audited financial statements covered by that report unless
A. A final resolution of a contingency that had resulted in a qualification of the auditor's report is
made.
B. A development occurs that may affect the client's ability to continue as a going concern.
C. An investigation of the auditor's practice by a peer review committee ensues.
D. New information is discovered concerning undisclosed related party transactions of the
previously audited period. D

71. Who generally signs the legal letter?

A. The board of directors.
B. The audit partner.
C. The CEO of the entity being audited.
D. The entity's attorneys. C

The objective of analytical procedures performed as risk assessment procedures is to

A. Test individual account balances that depend on accounting estimates.

B. Identify material weaknesses in internal control.
C. Enhance the auditor's understanding of the client's business.
D. Evaluate the adequacy of evidence gathered in response to unusual balances identified during
the audit. C
An auditor's analytical procedures most likely would be facilitated if the entity
A. Segregates obsolete inventory before the physical inventory count.
B. Corrects material weaknesses in internal control before the beginning of the audit.
C. Develops its data from sources solely within the entity.
D. Uses a standard cost system that produces variance reports. D
Which of the following procedures would a CPA most likely perform in the planning stage of a
financial statement audit?

A. Communicate with those charged with governance about the prior year's audit adjustments.
B. Compare recorded financial information with anticipated results from budgets and forecasts.
C. Obtain representations from management regarding the availability of all financial records.
D. Make inquiries of the client's attorney regarding pending and threatened litigation and
assessments. B
Which of the following would be considered an analytical procedure?

A. Reconciling physical counts to perpetual records and general ledger balances.

B. Comparing inventory balances to recent sales activities.

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C. Testing purchasing, shipping, and receiving cutoff activities.

D. Projecting the deviation rate of a statistical sample to the population. B
Which of the following is ordinarily designed to detect possible material dollar misstatements in
the financial statements?

A. Computer controls.
B. Tests of controls.
C. Analytical procedures.
D. Post-audit working paper review. C
Which of the following statements is true concerning analytical procedures?

A. When expectations are more precise, significant variances are more likely to be due to
misstatements.
B. Analytical procedures can replace tests of controls in gathering evidence to support the
assessed risks of material misstatement.
C. Analytical procedures usually involve comparisons of ratios developed from recorded
amounts to assertions developed by management.
D. Analytical procedures are more efficient, but not more effective, than tests of details and
transactions. A
Which of the following most likely would cause an auditor to consider whether a client's
financial statements contain material misstatements?

A. The results of an analytical procedure disclose unexpected differences.

B. The chief financial officer will not sign the management representation letter until the last day
of the auditor's field work.
C. Audit trails of computer-generated transactions exist only for a short time.
D. Management did not disclose to the auditor that it consulted with other accountants about
significant accounting matters. A
Which of the following statements about analytical procedures is true?

A. Analytical procedures usually are effective and efficient for tests of controls.
B. Analytical procedures alone may provide the appropriate level of assurance for some
assertions.
C. Analytical procedures may be omitted entirely for some financial statement audits.
D. Analytical procedures used as risk assessment procedures should not use nonfinancial
information. B
Which of the following nonfinancial information would an auditor most likely consider in
performing analytical procedures during the planning phase of an audit?

A. Turnover of personnel in the accounting department.

B. Square footage of selling space.
C. Management's plans to repurchase stock.
D. Objectivity of audit committee members. B
In an audit of financial statements for which an auditor's assessment of risk is judgmental and
may not be sufficiently precise to identify all risks of material misstatement, the auditor should
take which of the following actions?

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A. Determine the effectiveness of general controls over classes of transactions characterized by

high transaction volume.
B. Discuss strategies to eliminate such risks with top management or those with equivalent
authority and responsibility.
C. Perform substantive procedures for all relevant assertions related to each material class of
transactions.
D. Consider whether risk assessment procedures are appropriate given preliminary levels of
materiality and tolerable misstatement. C
The sample size of a test of controls varies inversely with

Expected Population
Deviation Rate

Tolerable Population
Deviation Rate

No
Yes

Yes
Yes

No
No

Yes
No A
An entity's internal control requires that an approved voucher, a prenumbered purchase order,
and a prenumbered receiving report accompany every check request. To determine whether
checks are being issued for unauthorized expenditures, an auditor most likely would select items
for testing from the population of all

A. Receiving reports.
B. Canceled checks.
C. Approved vouchers.
D. Purchase orders. B
Which of the following best describes what the auditor means by the rate of occurrence in an
attribute sampling plan?

A. The number of deviations that can be estimated to be contained in the sample.

B. The estimated frequency with which a certain characteristic occurs within a population.
C. The dollar range within which the true population total can be expected to fall.
D. The degree of confidence that the sample is representative of the population. B

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Statistical sampling may be used to test the effectiveness of controls. The auditor's procedures
should result in a statistical conclusion about

A. The population value not being misstated by more than a fixed amount.
B. Population characteristics occurring at least once in the population.
C. Monetary precision exceeding a certain predetermined amount.
D. The relation of the population deviation rate to the tolerable rate. D
What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents
results in 3 deviations if the tolerable rate is 7%, the expected population deviation rate is 5%,
and the allowance for sampling risk is 2%?

A. Accept the sample results as support for the assessed risk of material misstatement because
the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation
rate.
B. Modify the planned assessed risk of material misstatement because the tolerable deviation rate
plus the allowance for sampling risk exceeds the expected population deviation rate.
C. Accept the sample results as support for the assessed risk of material misstatement because the
tolerable deviation rate minus the allowance for sampling risk equals the expected population
deviation rate.
D. Modify the assessed risk of material misstatement because the sample deviation rate plus the
allowance for sampling risk exceeds the tolerable deviation rate. D
An auditor who uses statistical sampling for attributes in testing internal controls should reduce
the planned reliance on a prescribed control when the

A. Sample rate of deviation is less than the expected population deviation rate used in planning
the sample.
B. Tolerable population deviation rate minus the allowance for sampling risk exceeds the sample
rate of deviation.
C. Sample rate of deviation plus the allowance for sampling risk equals the tolerable population
deviation rate.
D. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population
deviation rate. D
As a result of tests of controls, an auditor overrelied on controls and decreased substantive
testing. This assessment occurred because the true deviation rate in the population was

A. More than the deviation rate in the auditor's sample.

B. More than the risk of overreliance, based on the auditor's sample.
C. Less than the risk of overreliance, based on the auditor's sample.
D. Less than the deviation rate in the auditor's sample. A
In auditing accounts payable, an auditor's procedures most likely will focus primarily on the
relevant assertion about

A. Existence.
B. Valuation and allocation.
C. Classification and understandability.
D. Completeness. D

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The diagram below depicts the auditor's estimated maximum deviation rate compared with the
tolerable deviation rate and also depicts the true population deviation rate compared with the
tolerable deviation rate.

True State of Population

Auditor's Estimate Based on Sample Results
Deviation rate is less than tolerable rate.
Deviation rate exceeds tolerable rate.
Maximum deviation rate is less than tolerable rate.
I. Correct
III. Incorrect
Maximum deviation rate exceeds tolerable rate.
II. Incorrect
IV. Correct

As a result of testing controls, the auditor underrelies on the controls and increases substantive
testing. This is illustrated by situation

IV.
III.
II.
I. II
In determining the number of documents to select for a test to obtain assurance that all sales
returns have been properly authorized, an auditor should consider the tolerable rate of deviation
from the control activity. The auditor should also directly consider the

I. Likely rate of deviations

II. Allowable risk of underreliance

A. I only.
B. Either I or II.
C. II only.
D. Both I and II. A
Basic to a proper control environment are the quality and integrity of personnel who must
perform the prescribed procedures. Which is not a factor in providing for competent personnel?

A. Training programs.
B. Segregation of duties.
C. Hiring practices.
D. Performance evaluations. B
The auditor observes client employees while obtaining an understanding of internal control to

A. Prepare a flowchart.
B. Update information contained in the organization and procedure manuals.
C. Determine the extent of compliance with quality control standards.
D. Obtain knowledge of the design and implementation of relevant controls. D

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While performing interim audit procedures on accounts receivable, numerous unexpected errors
are found resulting in a change of risk assessment. Which of the following audit responses would
be most appropriate?

A. Move detailed analytical procedures from year end to an interim date.

B. Send negative accounts receivable confirmations instead of positive accounts receivable
confirmations.
C. Use more experienced audit team members to perform year-end testing.
D. Increase the dollar threshold of vouching customer invoices. C
A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the
invoice was approved and to ascertain the amount and other terms of the invoice. Which of the
following lists two tests that the auditor performed?

A. Tests of controls and tests of details.

B. Tests of details and substantive procedures.
C. Substantive analytical procedures and tests of controls.
D. Substantive procedures and analytical procedures. A
The auditor's understanding of internal control is documented to substantiate

A. Adherence to procedures for effective and efficient management decision making.

B. Conformity of the accounting records with generally accepted accounting principles.
C. Compliance with generally accepted auditing standards.
D. The fairness of the financial statement presentation. C
Which of the following most likely should be included as part of an auditor's tests of controls?

A. External confirmations.
B. Inspection.
C. Reconciliation.
D. Analytical procedures. B
Which of the following items is an example of an inherent limitation in an internal control
system?

A. Human error in decision making.

B. Segregation of employee duties.
C. Understaffed internal audit functions.
D. Ineffective board of directors. A
Internal control has five components: the control environment, risk assessment, information and
communication, monitoring, and control activities. Control activities relevant to an audit may be
categorized as policies and procedures that pertain to

A. Making a commitment to competence.

B. Developing a proper organizational structure.
C. Reviewing actual performance.
D. Maintaining effective human resource policies. C

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After obtaining an understanding of internal control and assessing the risks of material
misstatement in a financial statement audit, an auditor decided to perform tests of controls. The
auditor most likely decided that

A. An increase in the assessed level of control risk is justified for certain financial statement
assertions.
B. It would be efficient to perform tests of controls that would result in a reduction in substantive
procedures.
C. Additional evidence to support an expectation of operating effectiveness is not available.
D. There were many internal control weaknesses. B
Internal control is a function of management, and effective control is based upon the concept of
charge and discharge of responsibility and duty. Which of the following is one of the overriding
principles of internal control?

A. Responsibility for accounting activities and duties must be assigned only to employees who
are bonded.
B. Responsibility for accounting and financial duties should be assigned to one responsible
officer.
C. Responsibility for the accounting duties must be borne by the audit committee of the
company.
D. Responsibility for the performance of each duty must be fixed. D
An auditor should test bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether

A. The cash receipts journal was held open for a few days after year end.
B. Cash balances were overstated because of kiting.
C. Any unusual payments to or receipts from related parties occurred.
D. The last checks recorded before year end were actually mailed by year end. B
Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and
4, for late December and early in the following January. Your answer choice for each question
should be selected from this list.

Bank Account One

Disbursing Date
(Month/Date)
Per Bank/Per Books

Bank Account Two

Receiving Date
(Month/Day)
Per Bank/Per Books

1.
12/31
12/30
12/31

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12/30

2.
1/2
12/30
12/31
12/31

3.
1/3
12/31
1/2
1/2

4.
1/3
12/31
1/2
12/31

Which of the cash transfers would not appear as an outstanding check on the December 31 bank
reconciliation?

A. 1
B. 2
C. 3
D. 4 A
Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and
4, for late December and early in the following January. Your answer choice for each question
should be selected from this list.

Bank Account One

Disbursing Date
(Month/Date)
Per Bank/Per Books

Bank Account Two

Receiving Date
(Month/Day)
Per Bank/Per Books

1.
12/31
12/30
12/31
12/30

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2.
1/2
12/30
12/31
12/31

3.
1/3
12/31
1/2
1/2

4.
1/3
12/31
1/2
12/31

Which of the cash transfers would appear as a deposit in transit on the December 31 bank
reconciliation?

A. 1
B. 2
C. 3
D. 4 D
On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A
and deposited the check in the company account bank B to cover a previous theft of cash. The
disbursement has not been recorded. The auditor will best detect this form of kiting by

A. Comparing the detail of cash receipts as shown by the cash receipts records with the detail on
the confirmed duplicate deposit tickets for three days prior to and subsequent to year end.
B. Preparing from the cash disbursements book a summary of bank transfers for one week prior
to and subsequent to year end.
C. Examining paid checks returned with the bank statement of the next accounting period after
year end.
D. Examining the composition of deposits in both bank A and B subsequent to year end. C
The primary purpose of sending a standard confirmation request to financial institutions with
which the client has done business during the year is to

A. Corroborate information regarding deposit and loan balances.

B. Provide the data necessary to prepare a proof of cash.
C. Detect kiting activities that may otherwise not be discovered.
D. Request information about contingent liabilities and secured transactions. A
An independent auditor asked a client's internal auditor to assist in preparing a standard financial
institution confirmation request for a payroll account that had been closed during the year under

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audit. After the internal auditor prepared the form, the controller signed it and mailed it to the
bank. What was the major flaw in this procedure?

A. The account was closed, so the balance was zero.

B. The form was prepared by the internal auditor.
C. The internal auditor did not sign the form.
D. The form was mailed by the controller. D
Which of the following cash transfers results in a misstatement of cash at December 31, Year 1?

Bank Transfer Schedule

Disbursement
Recorded in books
Paid by Bank

Receipt
Recorded in books
Received by bank

1/4/Yr 2
1/5/Yr 2
12/31/Yr 1
1/4/Yr 2

12/31/Yr 1
1/5/Yr 2
12/31/Yr 1
1/4/Yr 2

1/4/Yr 2
1/11/Yr 2
1/4/Yr 2
1/4/Yr 2

12/31/Yr 1
1/4/Yr 2
12/31/Yr 1
12/31/Yr 1 A
An inappropriate audit procedure relative to accounts receivable is to determine that the

A. Accounts are collected by the balance sheet date.

B. Accounts represent the complete transaction process.
C. Accounts exist and are properly valued.
D. Client has rights in the accounts receivable. A
An auditor who has confirmed accounts receivable may discover that the sales journal was held
open past year end if

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A. Positive confirmation requests sent to debtors are not returned.

B. Most of the returned negative confirmation requests indicate that the debtor owes a larger
balance than the amount being confirmed.
C. Most of the returned positive confirmation requests indicate that the debtor owes a smaller
balance than the amount being confirmed.
D. Negative confirmation requests sent to debtors are not returned. C
An auditor most likely would review an entity's periodic accounting for the numerical sequence
of shipping documents and invoices to support management's financial statement assertion of

A. Occurrence.
B. Completeness.
C. Rights and obligations.
D. Valuation and allocation. B
Which of the following might be detected by an auditor's review of the client's sales cutoff?

A. Inflated sales for the year.

B. Unrecorded sales discounts.
C. Excessive goods returned for credit.
D. Lapping of year-end accounts receivable. A
An entity's financial statements were misstated over a period of years because large amounts of
revenue were recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this fraud by

A. Tracing a sample of journal entries to the general ledger.

B. Scanning the general journal for unusual entries.
C. Examining documentary evidence of sales returns and allowances recorded after year end.
D. Performing a revenue cutoff test at year end. B
During the process of confirming receivables as of December 31, Year 1, a positive confirmation
was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2."
The auditor would most likely

A. Reconfirm the zero balance as of January 10, Year 2.

B. Determine whether a customary trade discount was taken by the customer.
C. Verify that the amount was received.
D. Determine whether any changes in the account occurred between January 1 and January 9,
Year 2. C
Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption
is that an auditor will request confirmation of accounts receivable. Confirmation is necessary
when

A. Based on experience with similar engagements, responses are expected to be unreliable.

B. The combined assessed level of inherent and control risk is high.
C. Based on prior years' audit experience, response rates will be inadequate.
D. The accounts receivable are immaterial. B

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Which of the following procedures would an auditor most likely perform for year-end accounts
receivable confirmations when the auditor did not receive replies to second requests?

A. Intensify the study of internal control concerning the revenue cycle.

B. Review the cash receipts journal for the month prior to year end.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors. D
Which of the following comparisons would be most useful to an auditor in evaluating the results
of an entity's operations?

A. Current-year revenue to budgeted current-year revenue.

B. Prior-year accounts payable to current-year accounts payable.
C. Current-year warranty expense to current-year contingent liabilities.
D. Prior-year payroll expense to budgeted current-year payroll expense. A
The most effective audit procedure for determining the collectibility of an account receivable is
the

A. Review of authorization of credit sales to the customer and the previous history of collections.
B. Examination of the related sales invoice(s).
C. Review of the subsequent cash collections.
D. Confirmation of the account. C
To gain assurance that all inventory items in a client's inventory listing schedule are valid, an
auditor most likely would vouch

A. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count
sheets.
B. Items listed in receiving reports and vendors' invoices to the inventory listing schedule.
C. Inventory tags noted during the auditor's observation to items listed in receiving reports and
vendors' invoices.
D. Inventory tags noted during the auditor's observation to items listed in the inventory listing
schedule. A
To obtain assurance that items reflected in a client's perpetual inventory records actually exist, an
auditor would most likely trace

A. Items in the inventory perpetual records to inventory tags and the auditor's test counts.
B. Items listed in receiving reports and vendors' invoices to the perpetual inventory records.
C. Inventory tags noted during the auditor's test counts to items in the perpetual inventory
records.
D. Inventory tags noted during the auditor's test counts to items listed in receiving reports and
vendors' invoices. A
An auditor most likely would make inquiries of production and sales personnel concerning
possible obsolete or slow-moving inventory to support the relevant assertion about

A. Rights and obligations.

B. Valuation and allocation.
C. Existence.

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D. Classification and understandability. B

The audit of year-end physical inventories should include steps to verify that the client's
purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether
merchandise included in the physical count at year end was not recorded as a

A. Purchase in the current period.

B. Sale in the subsequent period.
C. Purchase return in the subsequent period.
D. Sale in the current period. D
Which of the following procedures would an auditor most likely perform in searching for
unrecorded liabilities?

A. Vouch a sample of cash disbursements recorded just after year end to receiving reports and
vendor invoices.
B. Trace a sample of accounts payable entries recorded just before year end to the unmatched
receiving report file.
C. Scan the cash disbursements entries recorded just before year end for indications of unusual
transactions.
D. Compare a sample of purchase orders issued just after year end with the year-end accounts
payable trial balance. A
The most reliable procedure for an auditor to use to test the existence of a client's inventory at an
outside location would be to

A. Obtain a confirmation from the client indicating inventory ownership.

B. Trace the total on the inventory listing to the general ledger inventory account.
C. Analytically compare the current-year inventory balance to the prior-year balance.
D. Observe physical counts of the inventory items. D
Which of the following procedures would an auditor most likely perform in searching for
unrecorded payables?

A. Contrast the ratio of accounts payable to purchases with the prior year's ratio.
B. Reconcile receiving reports with related cash payments made just prior to year end.
C. Compare cash payments occurring after the balance sheet date with the accounts payable trial
balance.
D. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase
orders. C
The audit procedures used to verify accrued liabilities differ from those employed for the
verification of accounts payable because

A. Accrued liabilities at year end will become accounts payable during the following year.
B. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts
payable is readily available.
C. Accrued liabilities usually pertain to services of a continuing nature whereas accounts payable
are the result of completed transactions.
D. Accrued liability balances are less material than accounts payable balances. C

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Unrecorded liabilities are most likely to be found during the review of which of the following
documents?

A. Unpaid bills.
B. Unmatched sales invoices.
C. Shipping records.
D. Bills of lading. A
Audit procedures applied to purchase transactions at year end address the cutoff assertion. An
entity should include goods in its inventory if it

A. Has paid for the goods.

B. Holds legal title to the goods.
C. Has physical possession of the goods.
D. Has sold the goods. B

The objective of the ordinary audit of FS is the expression of an opinion on: The fairness of
FS in all material respects
Auditors accumulate evidence to enable them to reach conclusions about the fairness of the
FS
The responsibility for adopting sound accounting policies and maintaing adequate IC rests with
the Company management
If the auditor insists on FS disclosures that the mgmt finds unacceptable, the auditor can Issue
an adverse report(Y)
Issue a qualified audit report (Y)
In certifying their annual FS, The CEO of a public co. certify that the FS comply with the
requirements of The Securities Exchange Act of 1934
The responsibility for the preparation of the FS and the footnotes belongs to the management
Profesional Skepticism: correct attitude regarding Auditors should assume mgmt is neither
dishonest nor honest
When an auditor believes that an illegal act MAY have occurred, the auditor should first inquire
of mgmt at a level above those to be involved
Which deemed a direct-effect illegal act? violation of federal income tax laws
The concept of reasonable assurance indicates that the auditor is not a guarantor of the
correctness of the FS
Auditor LEAST likely to do when aware of an illegal act contact the local law enforcement
officials regarding criminal wrongdoing
Audit designed to provide reasonable assurance of detecting Material errors in the FS
The auditor has considerable responsibility for notifying users as to whether or not the statements
are properly stated. This imposes upon the auditor a duty to: provide reasonable assurance
that the material misstatements will be detected
Auditors search of indirect effect illegal acts no reason to search UNLESS there is sufficient
evidence to believe they have occured

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Which of the following is most correct regarding the distinction between auditor's responsibility
for searching for errors and fraud no
Indirect effect illegal Acts auditor has no responsibility for searching for
If several employees collude to falsify documents, the chance a normal audit would uncover such
acts is very high
When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor
should make inquiries of mgmt regarding their policies for detecting & preventing illegal acts
and regarding their knowledge of violations, and then rely on normal audit procedures to detect
errors
When the auditor has reason to beleive an illegal act has occurred the auditor should
consider accumulating additional evidence to determine fi there is actually an illegal act
When the auditor knows that an illegal act has occurred, the auditor must consider the effects
on the FS including the adequacy of disclosures
If an auditor uncovers an illegal act at a public co, the auditor must notify The Securities
Exchange Commission
If an auditor conducted an audit in accordance with auditing standards, which of the following
would

the auditor likely detect?

A) unrecorded transactions

B) errors in postings of recorded transactions

C) counterfeit signatures on paid checks

D) fraud involving collusion B) errors in postings of recorded transactions

Which of the following statements best describes the auditor's responsibility with respect to
illegal acts

that do not have a material effect on the client's financial statements?

A) Generally, the auditor is under no obligation to notify parties other than personnel within the
client's

organization.

B) Generally, the auditor is under an obligation to inform the PCAOB.

C) Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.

D) Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign

Corrupt Practices Act. A) Generally, the auditor is under no obligation to notify parties other than
personnel within the client's

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Which of the following statements best describes the auditor's responsibility regarding the
detection of
fraud?
A) The auditor is responsible for the failure to detect fraud only when such failure clearly results
from
nonperformance of audit procedures specifically described in the engagement letter.
B) The auditor is required to provide reasonable assurance that the financial statements are free
of both
material errors and fraud
C) The auditor may extend auditing procedures to actively search for evidence of fraud where the
examination indicates that fraud may exist.
D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is
issued. B) The auditor is required to provide reasonable assurance that the financial statements
are free of both
material errors and fraud
The essence of the attest function is to:

A) assure the consistent application of correct accounting procedures.

B) determine whether the client's financial statements are fairly stated in accordance with an
applicable

financial reporting framework such as U.S. GAAP or IFRS.

C) examine individual transactions so that the auditor may certify as to their validity.

D) detect collusion and fraud.B) determine whether the client's financial statements are fairly
stated in accordance with an applicable
The auditor's evaluation of the likelihood of material employee fraud is normally done initially
as a part

A) tests of controls.

B) tests of transactions.

C) understanding the entity's internal control.

D) the assessment of whether to accept the audit engagement. C) understanding the entity's
internal control.
Illegal acts are defined in auditing standards as:

A) violations of laws or government regulations.

B) violations of laws or government regulations other than errors.

C) violations of laws or government regulations other than fraud.

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D) violations of law which would result in the arrest of the perpetrator. C) violations of laws
or government regulations other than fraud.
Most illegal acts affect the financial statements:

A) directly.

B) only indirectly.

C) both directly and indirectly.

D) materially if direct; immaterially if indirect. B) only indirectly.

With respect to the detection of indirect- effect illegal acts, auditing standards state that the
auditor

provides:

A) no assurance that they will be detected.

B) the same reasonable assurance provided for other items.

C) assurance that they will be detected, if material.

D) assurance that they will be detected, if highly material. A) no assurance that they will be
detected.
An auditor should recognize that the application of auditing procedures may produce evidence

indicating the possibility of errors or fraud and therefore should:

A) plan and perform the engagement with an attitude of professional skepticism.

B) not rely on internal controls that are designed to prevent or detect errors or fraud.

C) design audit tests to detect unrecorded transactions.

D) extend the work to audit most recorded transactions and records of an entity. A) plan and
perform the engagement with an attitude of professional skepticism.
List three of the reasons why auditors are responsible for "reasonable" but not "absolute"
assurance. -Most audit evidence results from TESTING A SAMPLE of a population.
Sampling involves some risk of not
uncovering material misstatements.
-Accounting presentations contain COMPLEX ESTIMATES, which inherently involve
uncertainty and can be
affected by future events. As a result, the auditor has to rely on evidence that is persuasive but
not
convincing.

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-Fraudulently prepared financial statements are often very difficult for the auditor to DETECT,
especially when there is collusion among management.
Why does the auditor divide the financial statements into smaller segments?
A)Using the cycle approach makes the audit more manageable.

B) Most accounts have few relationships with others and so it is more efficient to break the
financial

statements into smaller pieces.

C) The cycle approach is used because auditing standards require it.

D) All of the above are correct. A)Using the cycle approach makes the audit more
manageable.
Why does the auditor divide the financial statements into segments around the financial
statement

cycles?

A) Most auditors are trained to audit cycles as opposed to entire financial statements.

B) The approach aids in the assignment of tasks to different members of the audit team.

C) The cycle approach is required by auditing standards.

D) The cycle approach allows the auditor to detect indirect-effect illegal acts. B) The
approach aids in the assignment of tasks to different members of the audit team.
The most important general ledger account included in and affecting several cycles is the:

A) cash account.

B) inventory account.

C) income tax expense and liability accounts.

D) retained earnings account. A) cash account.

When using the cycle approach to segmenting the audit, the reason for treating capital
acquisition and repayment separately from the acquisition of goods and services is that:
A) the transactions are related to financing a company rather than to its operations.
B) most capital acquisition and repayment cycle accounts involve few transactions, but each is
often highly material and therefore should be audited extensively.
C) both A and B are correct.
D) neither A nor B is correct. C) both A and B are correct.
In describing the cycle approach to segmenting an audit, which of the following statements is not
true?

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A) All general ledger accounts and journals are included at least once.

B) Some journals and general ledger accounts are included in more than one cycle.

C) The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods
and
services and payment" cycle.

D) The "inventory and warehousing" cycle may be audited at any time during the engagement
since it is
unrelated to the other cycles. D) The "inventory and warehousing" cycle may be audited at any
time during the engagement since it is

unrelated to the other cycles.

Which of the following journals would be included most often in the various audit cycles?

A) cash receipts journal

B) cash disbursements journal

C) general journal

D) sales journal C) general journal

Auditors generally use a financial statement cycle approach when performing a financial
statement audit. Describe the transaction flow, using specific examples, from journals to
financial statements that produce financial statements. Transactions-sales, cash receipts,
acquisition of goods/services, cash disbursements, payroll
services and disbursements, and allocation and adjustments
Journals-sales, cash receipts, acquisitions, cash disbursements, payroll, and general
General ledger and subsidiary ledgers to General ledger trial balance to financial statements
Which of the following is not one of the three categories of assertions?

A) Assertions about classes of transactions and events for the period under audit

B) Assertions about financial statements and correspondence to GAAP

C) Assertions about account balances at period end

D) Assertions about presentation and disclosure B) Assertions about financial statements and
correspondence to GAAP
If a short-term note payable is included in the accounts payable balance on the financial
statement,

there is a violation of the:

A) completeness assertion.

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B) existence assertion.

C) cutoff assertion.

D) classification and understandability assertion. D) classification & understandability

assertion
International auditing standards and U.S. GAAP classify assertions into three categories. Which
of the
following is not a category of assertions that management makes about the accounting
information in financial statements?

A) Assertions about classes of transactions for the period under audit

B) Assertions about account balances at period end

C) Assertions about the quality of source documents used to prepare the financial statements

D) Assertions about presentation and disclosure C) Assertions about the quality of source
documents used to prepare the FS
Management assertions are:

A) directly related to the financial reporting framework used by the company, usually U.S.
GAAP or IFRS

B) stated in the footnotes to the financial statements.

C) explicitly expressed representations about the financial statements.

D) provided to the auditor in the assertions letter, but are not disclosed on the financial
statements. A) directly related to the financial reporting framework used by the co, usually
US GAAP or IFRS
Which of the following statements is true?

A) Auditors have generally found that the most effective and efficient way to conduct an audit is
to obtain
some assurance for each class of transaction and for the ending balance of the related account.

B) Management's assertions follow and are closely related to the audit objectives.

C) The auditor's primary responsibility is to find and disclose fraudulent management assertions.

D) Assertions about presentation and disclosure deal with whether the accounts have been
included in
the financial statements at appropriate amounts. A) Auditors have generally found that the
most effective and efficient way to conduct an audit is to obtain some assurance for each class of
transaction and for the ending balance of the related account

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Which of the following statements about the existence and completeness assertions is not true?

A) The existence and completeness assertions emphasize different audit concerns.

B) Existence deals with overstatements and completeness deals with understatements.

C) Existence deals with understatements and completeness deals with overstatements.

D) The completeness assertion deals with unrecorded transactions. C) Existence deals with
understatements and completeness deals with overstatement
Which of the following assertions is described as "this assertion addresses whether all
transactions that should be included in the financial statements are in fact included"?

A) occurrence

B) completeness

C) rights and obligations

D) existence B(completeness
Which of the following management assertions is not associated with transaction-related audit
objectives?

A) Occurrence

B) Classification and understandability

C) Accuracy

D) Completeness B) Classification & Understandability

Briefly explain each management assertion related to classes of transactions and events for the
period under audit. -Occurrence. Transactions and events that have been recorded have
occurred and pertain to the entity.
-Completeness. All transactions and events that should have been recorded have been recorded.
-Accuracy. Amounts and other data relating to recorded transactions and events have been
recorded
appropriately.
-Classification. Transactions and events have been recorded in the proper accounts.
-Cutoff. Transactions and events have been recorded in the correct accounting period.
Briefly explain each management assertion related to account balances at period end. •
Existence. Assets, liabilities, and equity interests exist.

• Completeness. All assets, liabilities, and equity interests that should have been recorded have
been
recorded.

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• Valuation and allocation. Assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation adjustments are appropriately
recorded.

• Rights and obligations. The entity holds or controls the rights to assets, and liabilities are the
obligation of the entity.
Briefly explain each management assertion related to presentation and disclosure. • Occurrence
and rights and obligations. Disclosed events and transactions have occurred and pertain
to the entity.

• Completeness. All disclosures that should have been included in the financial statements have
been
included.

• Accuracy and valuation. Financial and other information are disclosed appropriately and at
appropriate amounts.

• Classification and understandability. Financial and other information is appropriately presented

and
described and disclosures are clearly expressed.
1) Which of the following statements is true regarding the distinction between general audit
objectives and specific audit objectives for each account balance?
A) The specific audit objectives are applicable to every account balance on the financial
statements.
B) The general audit objectives are applicable to every account balance on the financial
statements.
C) The general audit objectives are stated in terms tailored to the engagement.
D) For any given class of transactions, usually only one audit objective must be met to conclude
the
transactions are properly recorded. B) The general audit objectives are applicable to every
account balance on the FS
The auditor is determining that the recorded sales are for the amount of goods shipped are
correctly

billed and recorded. She is gathering evidence about which transaction related audit objective?

A) existence

B) completeness

C) accuracy

D) cut-off C) accuracy
Which of the following combinations is correct?

A) Existence relates to whether the amounts in accounts are understated.

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B) Occurrence relates to whether balances exist.

C) Existence relates to whether amounts included exist.

D) Occurrence relates to whether the amounts in accounts occurred in the proper year. C)
Existence relates to whether amounts included exist
After general audit objectives are understood, specific audit objectives for each account balance
on the

financial statements can be developed. Which of the following statements is true?

A) There should be at least one specific objective for each relevant general objective.

B) There will be only one specific objective for each relevant general objective.

C) There will be many specific objectives developed for each relevant general objective.

D) There must be one specific objective for each general objective. A) There should be at least
one specific objective for each relevant general objective
In the context of the audit of sales, distinguish between the existence and completeness
transaction-
related audit objectives. State the effect on the sales account (overstatement or understatement)
of a violation of each objective. When testing the existence objective for sales, the auditor's
focus is on whether the sales that
have been recorded in the sales journal actually occurred. In contrast, tests of the completeness
objective are concerned with determining whether all sales that actually occurred have been
recorded in the sales journal. Violations of the existence objective result in overstatements of
sales; violations of the completeness objective result in understatements of sales.
Audit objective & assertion for: Vouch recorded sales from the sales journal to the file of bills of
lading. Occurrence; Occurence
Audit objective & assertion: Compare dates on the bill of lading, sales invoice, and sales journal
to test for delays in recording sales transactions Timing; Cutoff
Audit objective & assertions: Account for the sequence of prenumbered bill of lading & sales
invoices Completeness; Completeness
Audit objective & assertions: Trace from a sample of pre-listing of cash receipts to the cash
receipts journal, testing for names, amounts and dates Completeness & Accuracy;
Completeness & Accuracy
Audit objective & assertions: Examine customer order forms for credit approval by the credit
manager Occurrence; Occurence
Audit objective & assertions: Foot the purchases journal & trace the totals to the related general
ledger accounts Posting & summarization; Accuracy
Audit objective & assertions: recompute the cash discounts taken by the clinet Accuracy;
Accuracy
Audit objective & assertions: Compare dates on cancelled checks with the bank cancellation date
Timing; Cutoff

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Audit objective & assertions: Trace from a sample of cancelled checks to the cash disbursements
journal completeness; completeness
audit objectives & assertions: Examine supporting documentation for a sample of transactions
for authorized payee and amount and to determine services or goods were reciveed
Occurrence; Occurrence
In testing for cutoff, the objective is to determine:

A) whether all of the current period's transactions are recorded.

B) whether transactions are recorded in the correct accounting period.

C) the proper cutoff between capitalizing and expensing expenditures.

D) the proper cutoff between disclosing items in footnotes or in account balances. B) whether
transactions are recorded in the correct accounting period
The detail tie-in objective is not concerned that the details in the account balance:

A) agree with related subsidiary ledger amounts.

B) are properly disclosed in accordance with GAAP.

C) foot to the total in the account balance.

D) agree with the total in the general ledger. B) are properly disclosed in accordance with GAAP
The detail tie-in is part of the ________ assertion for account balances.

A) classification

B) valuation and allocation

C) rights and obligations

D) completeness B) valuation & allocation

The primary difference between an audit of the balance sheet and an audit of the income
statement is that the audit of the income statement deals with the verification of:

A) transactions.

B) balances.

C) costs.

D) cutoffs. A) transactions
Which of the following best describes tests of details of balances?

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A) audit procedures designed to test for monetary misstatements in the accounts summarized in
the
financial statements

B) audit procedures designed to test for the monetary amounts of transactions

C) audit procedures designed to test for reasonableness of account balances

D) audit procedures designed to test for effectiveness in recording accounting informationA)

audit procedures designed to test for monetary misstatements in the accounts summarized in the
financial statements
Which of the following statements is not true?

A) Balance-related audit objectives are applied to ending account balances.

B) Transaction-related audit objectives are applied to classes of transactions.

C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts.

D) Balance-related audit objectives are applied to both beginning and ending balances in balance
sheet

accounts. D) Balance-related audit objectives are applied to both beginning and ending
balances in balance sheet

accounts.
An important balance related objective is realizable value. Describe what is the purpose of this
audit
objective, what it is concerned with, and give an example. Purpose-assets are included on the
balance sheet at the amounts estimated to be realized.
Concept-whether an account balance has been reduced for declines from historical cost or when
accounting standards require a fair value accounting treatment for the account. It is concerned
with valuation and allocation.
Example-allowance for uncollectible accounts, write-downs of inventory.
Audit objective & assertion:Obtain an aged listing of accounts receivable. For a sample of
individual customers on the listing,agree the customer's name, amount, and other information
with the corresponding information in the accounts receivable master file. Detail tie-in;
Valuation & allocation
Audit objective & assertion: Examine details of sales for five days before and five days after
year-end to determine whether sales have been recorded in the proper period Cutoff;
Valuation & allocation
Audit objective & assertion: Asses the reasonableness of the balance in the allowance for
doubtful accounts Realizable value; Valuation & allocation
Audit objective & assertion: Inquire as to whether any AR have been factored or sold during the
period Rights & Obligations; Rights & Obligations

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Audit objective & assertion: Inquire as to whether there are any receivables from related parties
Classification; Valuation & Allocation
Tests of details of balances are specific audit procedures that are intended to:

A) test for monetary errors in the financial statements.

B) prove that the accounts with material balances are classified correctly.

C) prove that the trial balance is in balance.

D) identify the details of the internal control system.A) Test for monetary errors in the FS
Which of the following statements is not correct?

A) There are many ways an auditor can accumulate evidence to meet overall audit objectives.

B) Sufficient appropriate evidence must be accumulated to meet the auditor's professional

responsibility.

C) It is appropriate to minimize the cost of accumulating evidence.

D) Gathering evidence and minimizing costs are equally important considerations that affect the
approach
the auditor selects. D) Gathering evidence and minimizing costs are equally important
considerations that affect the approach
the auditor selects.
Two overriding considerations affect the many ways an auditor can accumulate evidence:

1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional

responsibility.

2. Cost of accumulating evidence should be minimized.

In evaluating these considerations:

A) the first is more important than the second.

B) the second is more important than the first.

C) they are equally important.

D) it is impossible to prioritize them. A) the first is more important than the second.
If the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding internal control, assessing control risk, testing
controls, and analytical
procedures, then the auditor:

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A) can issue an unqualified opinion.

B) can significantly reduce other substantive tests.

C) can write the engagement letter.

D) needs to perform additional tests of controls so that the assurance level can be increased.
B) can significantly reduce other substantive tests.
After the auditor has completed all audit procedures, it is necessary to combine the information
obtained to reach an overall conclusion as to whether the financial statements are fairly
presented. This is

a highly subjective process that relies heavily on:

A) generally accepted auditing standards.

B) the AICPA's Code of Professional Conduct.

C) generally accepted accounting principles.

D) the auditor's professional judgment. D) the auditor's professional judgment.

List the four phases of a Financial Statement Audit 1. Plan and design an audit approach

2. Perform tests of controls and substantive tests of transactions

3. Perform analytical procedures and tests of details of balances

4. Complete the audit and issue the report

Describe what analytical procedures and tests of details of balances are and give an example of
each. Analytical procedures use comparisons and relationships to assess whether account
balances
and other data appear reasonable. For example, examine sales transactions in the sales journal for
unusually large amounts and/or compare monthly sales with prior years.

Tests of details of balances are specific procedures intended to test for monetary misstatements in
balances of accounts in the financial statements. For example, direct written communication with
the client's customers to identify any incorrect amounts.
Define: Test of details of balances Audit procedures testing for monetary misstatements to
determine whether the balance-related audit objective have been satisfied for each significant
account balance
Define: Test of Controls Audit procedures designed to test the effectiveness of control
policies and procedures.
Define: Transaction-related audit objectives A set of six audit objectives the auditor must meet,
including timing, posting and summarization, and accuracy.
Define: Analytical Procedures Use of comparisons and relationships to assess whether
account balances or other data appears reasonable.

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Define: Management Assertions A set of six audit objectives the auditor must meet,
including timing, posting and summarization, and accuracy.
Define: Balance related audit objectives A set of nine audit objectives the auditor must meet,
including completeness, detail tie-in, and rights and obligations.
Define: Fraud An intentional misstatement of the FS

Which of the following auditor concerns most likely would be so serious that the auditor would
conclude that a financial statement audit cannot be performed?
a. The CPA lacks experience in the client's operations and industry.
b. There is substantial risk of management intentionally manipulating accounting records.
c. Management has imposed a restriction that the auditor believes will result in a qualified
opinion.
d. A portion of supporting evidence stored at an offsite storage facility was destroyed by a
hurricane. b. There is substantial risk of management intentionally manipulating accounting
records.
What is the primary objective of obtaining an understanding of the company's objectives,
strategies, and related business risks in a financial statement audit?
a. Determine whether sufficient objectives have been created.
b. Identify suggestions for addressing the risks.
c. Identify risks that may result in material misstatement of financial statements.
d. Provide a basis for issuing an opinion the financial statements. c. Identify risks that may
result in material misstatement of financial statements.
The auditor's responsibility regarding material misstatements caused by fraud is:
a. Less than the auditor's responsibility regarding material misstatements caused by error.
b. Greater than the auditor's responsibility regarding material misstatements caused by error.
c. The same as the auditor's responsibility regarding material misstatements caused by error.
d. Either less than or greater than the auditor's responsibility regarding material misstatements
caused by error, depending on the specific circumstances. c. The same as the auditor's
responsibility regarding material misstatements caused by error.
Which of the following is not true regarding fraud risk factors?
a. Lack of observation of the three fraud risk factors implies that there is no fraud risk.
b. Fraud risk factors are often present in circumstances where fraud has occurred.
c. The existence of all three fraud risk factors is not an absolute indication that fraud has
occurred.

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d. They include incentives/pressures, opportunity, and rationalization. a. Lack of observation

of the three fraud risk factors implies that there is no fraud risk.
Which one of the following is a true statement about the required risk assessment discussion?
a. The discussion should include consideration of the risk of management override of controls.
b. The discussion about the susceptibility of the entity's financial statements to material
misstatement must be held separately from the discussion about the susceptibility of the entity's
financial statements to fraud.
c. The discussion should involve all members who participate on the audit team, including the
engagement partner.
d. The risk assessment discussion should occur during the overall review stage of the audit.
a. The discussion should include consideration of the risk of management override of
controls.
A successor auditor's inquiries of the predecessor auditor should include questions regarding:
a. The assessment of the objectivity of the client's internal audit function.
b. Communications to management and those charged with governance regarding significant
deficiencies in internal control.
c. The number of engagement personnel the predecessor assigned to the engagement.
d. The response rate for confirmations of accounts receivable. b. Communications to
management and those charged with governance regarding significant deficiencies in internal
control.
Which of the following is true regarding performance of the following audit tasks while
obtaining an understanding of internal control?

Audit Tasks:
I. Obtain an understanding of the design of controls.
II.Determine whether internal controls have been implemented.
III. Evaluate the operating effectiveness of controls.

a. The auditor must perform I, II, and III.

b. The auditor must perform I and II, but may not perform III.
c. The auditor may, but is not required to, perform I, II, and III.
d. The auditor must perform I and II, and is allowed, but not required, to perform III. d. The
auditor must perform I and II, and is allowed, but not required, to perform III.
Jefferson, CPA, has identified five significant deficiencies in internal control during the audit of
Portico Industries, a nonissuer. Two of these conditions are considered to be material
weaknesses. Which best describes Jefferson's communication requirements?
a. Communicate all five significant deficiencies to Portico's management and those charged with
governance, distinguishing between significant deficiencies and material weaknesses.
b. Communicate all five significant deficiencies to Portico's management and those charged with
governance, but only require a management response with respect to the two material
weaknesses.
c. Communicate all five significant deficiencies to Portico's management and those charged with
governance, without distinction among the deficiencies.
d. Communicate the two material weaknesses to Portico's management and those charged with
governance, but not the three significant deficiencies that are not material weaknesses. a.

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Communicate all five significant deficiencies to Portico's management and those charged with
governance, distinguishing between significant deficiencies and material weaknesses.
Which of the following factors are included in an entity's control environment?
A. Participation of those charged with governance
B. Integrity and ethical values
C. Organizational structure
D. All of the Above D. All of the Above
Which of the following is true regarding the audit process?
a. Evaluating management's representations (as included in the representation letter) is an
important part of assessing control risk.
b. The auditor must perform some level of substantive tests before making a final assessment of
control risk.
c. Evaluating management's integrity is an important part of the planning process.
d. The auditor must assess control risk before performing substantive tests. d. The auditor
must assess control risk before performing substantive tests.
Which of the following statements is correct concerning corporations subject to the reporting
requirements of the Securities Exchange Act of 1934?
a. The quarterly report (form 10-Q) need only be filed with the SEC by those corporations that
are also subject to registration requirements of the Securities Act of 1933.
b. The annual report (form 10-K) must be filed with the SEC within 20 days of the end of the
corporation's fiscal year.
c. The annual report (form 10-K) need not include audited financial statements.
d. A current report (form 8-K) must be filed with the SEC within four days after a major change
in the company. d. A current report (form 8-K) must be filed with the SEC within four days
after a major change in the company.
Which of the following is not true about the relationship between quality control standards and
professional standards such as GAAS?
a. The adoption of quality control standards increases the likelihood of compliance with
professional standards on individual engagements.
b. A firm that has not adopted an appropriate system of quality control may still be in
compliance with professional standards with respect to individual engagements.
c. Quality control standards relate to the conduct of a firm's entire practice whereas professional
standards such as GAAS relate to the conduct of an individual engagement.
d. A firm's failure to establish or comply with an appropriate system of quality control implies
that the firm has also failed to follow professional standards on individual engagements. d. A
firm's failure to establish or comply with an appropriate system of quality control implies that the
firm has also failed to follow professional standards on individual engagements.
Tracing shipping documents to sales invoices provides evidence that:
a. Shipments to customers were recorded as sales.
b. All goods ordered by customers were shipped.
c. Sales billed to customers were actually shipped.
d. Shipments to customers were properly invoiced. d. Shipments to customers were properly
invoiced.
An auditor searching for unrecorded payables most likely would:
a. Obtain a sample of vendor invoices and recalculate the invoice amount.
b. Obtain the accounts payable listing and agree to subsequent cash payments.

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c. Compare subsequent bank statements with the accounts payable listing.

d. Compare cash disbursements made prior to year-end with vendor invoices. c. Compare
subsequent bank statements with the accounts payable listing.
An auditor wishes to test the completeness assertion for sales. Which of the following audit tests
would most likely accomplish this objective?
a. Compare accounts receivable turnover (net credit sales / average gross receivables) in the
current year to that achieved in the prior year.
b. Select large individual sales recorded during the year and review supporting documentation.
c. Select a sample of shipments occurring during the year and trace each one to inclusion in the
sales journal.
d. Use common size analysis to compare recorded sales to sales recorded by other companies in
the same industry. c. Select a sample of shipments occurring during the year and trace each
one to inclusion in the sales journal.
Which of the following documentation is not required for an audit in accordance with generally
accepted auditing standards?
a. The basis for the auditor's decision to perform tests of controls concurrently with obtaining an
understanding of internal control.
b. A written audit plan setting forth the procedures necessary to accomplish the audit objectives.
c. The auditor's understanding of the entity's control activities that help ensure achievement of
management's objectives.
d. The assessment of the risks of material misstatement at both the financial statement and
relevant assertion levels. a. The basis for the auditor's decision to perform tests of controls
concurrently with obtaining an understanding of internal control.
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher
register to the supporting documents. Which assertion would this test of controls most likely
support?
a. Occurrence.
b. Allocation and valuation.
c. Completeness.
d. Rights and obligations. a. Occurrence.
Which of the following statements is generally correct about audit evidence?
a. The more effective the internal control structure, the more assurance it provides about the
reliability of the accounting data and financial statements.
b. Appropriateness of audit evidence refers to audit evidence obtained from outside the entity.
c. Information obtained indirectly from independent outside sources is more persuasive than the
auditor's direct personal knowledge obtained through observation and inspection.
d. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained.
a. The more effective the internal control structure, the more assurance it provides about
the reliability of the accounting data and financial statements.
Which of the following types of audit evidence generally is the most reliable?
a. A bank confirmation.
b. Analytical procedures.
c. A bank statement.
d. Inquiries made of the audit committee. a. A bank confirmation.
Which of the following procedures is the auditor least likely to perform when an auditor decides
to use the work of an auditor's specialist as audit evidence?

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a. Inquire of the entity and the auditor's specialist about any known interests that the entity has
with the auditor's external specialist that may affect that specialist's objectivity.
b. Refer to the auditor's specialist in the audit report to indicate a division of responsibility.
c. Obtain knowledge of the specialist's qualifications.
d. Review the working papers of the auditor's specialist. b. Refer to the auditor's specialist in
the audit report to indicate a division of responsibility.
Which of the following auditing procedures most likely would assist an auditor in identifying
related party transactions?
a. Vouching accounting records for recurring transactions recorded just after the balance sheet
date.
b. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
c. Performing analytical procedures for indications of possible financial difficulties.
d. Reviewing confirmations of loans receivable and payable for indications of guarantees.
d. Reviewing confirmations of loans receivable and payable for indications of guarantees.
A condition that may result in a higher risk of material misstatement is:
a. The existence of simple alliances and joint ventures.
b. Application of new accounting pronouncements.
c. Abundant availability of capital and credit.
d. High tenure of employees. b. Application of new accounting pronouncements.
During planning, the auditor learns that competitive bids are not obtained by the purchasing
department. This knowledge may result in the auditor:
a. Decreasing the assessment of inherent risk.
b. Increasing the assessment of control risk.
c. Decreasing the assessment of control risk.
d. Increasing the assessment of inherent risk. b. Increasing the assessment of control risk.
As the acceptable level of detection risk increases, an auditor may:
a. Increase the risk of material misstatement.
b. Lower the assessed level of inherent risk.
c. Eliminate the assessed level of control risk from consideration as a planning factor.
d. Change the planned timing of substantive tests from year-end to interim. d. Change the
planned timing of substantive tests from year-end to interim.
An auditor is likely using attribute sampling when he or she selects a sample of:
a. Receivables and sends confirmations to client customers.
b. Purchase orders and examines them for indication of proper approval.
c. Cash receipts and traces them to the accounts receivable subsidiary ledger.
d. Invoices to verify proper extensions and footings. b. Purchase orders and examines
them for indication of proper approval.

A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued is the:
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.

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D) financial risk. B) acceptable audit risk.

A measure of the auditor's assessment of the likelihood that there are material misstatements in
an account before considering the effectiveness of the client's internal control is called:
A) control risk.
B) acceptable audit risk.
C) statistical risk.
D) inherent risk. D) inherent risk.
When inherent risk is high, there will need to be:
A)
A lower assessment of audit risk More evidence accumulated by the auditor
Yes Yes

B)
A lower assessment of audit risk More evidence accumulated by the auditor
No No

C)
A lower assessment of audit risk More evidence accumulated by the auditor
Yes No

D)
A lower assessment of audit risk More evidence accumulated by the auditor
No Yes D)
A lower assessment of audit risk More evidence accumulated by the auditor
No Yes
In what order should the following steps occur?
A. assess client business risk
B. understand the client's business and industry
C. perform preliminary analytical procedures
D. assess acceptable audit risk B) B, A, D, C
The auditor uses knowledge gained from the understanding of the client's business and industry
to assess:
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk. A) client business risk.
There are three main reasons why an auditor should properly plan audit engagements. Discuss
each of these reasons. Three reasons why an auditor should properly plan audit engagements are:
• To enable the auditor to obtain sufficient competent evidence for the circumstances. This is
essential for minimizing legal liability and maintaining a good profession reputation.
• To help keep audit costs reasonable. Given the competitive auditing environment, keeping costs
reasonable helps the firm obtain and retain clients.
• To avoid misunderstandings with the client. This is important for good client relations.
When an auditor decides there is higher inherent risk for an account, one potential effect is that
more audit evidence will be required for that account.
A) True

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B) False True
As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
A) True
B) False True
Acceptable audit risk is a measure of the auditor's willingness to accept that the financial
statements do not contain material misstatements after the audit is completed and a qualified
audit report has been issued.
A) True
B) False False
Two major factors that affect acceptable audit risk are the likely users of the financial statements
and the likelihood of issuing an unqualified audit opinion.
A) True
B) False False
One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is
important for:
A)
Good client relations Facilitating high-quality work at a reasonable cost
Yes Yes

B)
Good client relations Facilitating high-quality work at a reasonable cost
No No

C)
Good client relations Facilitating high-quality work at a reasonable cost
Yes No

D)
Good client relations Facilitating high-quality work at a reasonable cost
No Yes A)
Good client relations Facilitating high-quality work at a reasonable cost
Yes Yes
The auditor is likely to accumulate more evidence when the audit is for a company:
A)
Which has large amounts of debt Which is to be sold in the near future
Yes Yes

B)
Which has large amounts of debt Which is to be sold in the near future
No No

C)
Which has large amounts of debt Which is to be sold in the near future
Yes No

D)

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Which has large amounts of debt Which is to be sold in the near future
No Yes A)
Which has large amounts of debt Which is to be sold in the near future
Yes Yes
Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client's reason for the audit. B) Request that bank balances be confirmed.
Rodgers CPA has requested permission to communicate with predecessor auditor in order to
review certain workpapers for high risk accounts for a new audit client. The new audit clients
refusal to allow this communication to occur would impact Rodgers decision concerning:
A) the auditor's ability to design audit tests.
B) possible scope exception due to lack of access.
C) integrity of management concerning possible accounting misstatements.
D) violation of the GAAP rules concerning consistency and comparability of financial
information. C) integrity of management concerning possible accounting misstatements.
A successor auditor may perform which of the following for a new audit client?
A)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
Yes Yes

B)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
No No

C)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
Yes No

D)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
No Yes A)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
Yes Yes
Which of the following is not correct regarding an auditor's decision that a lower acceptable
audit risk is appropriate?
A) More evidence is accumulated.
B) Less evidence is accumulated.
C) Special care is required in assigning experienced staff.

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D) Review of audit documentation is performed by personnel not assigned to the engagement.

B) Less evidence is accumulated.
A written understanding detailing what the auditors will do in determining if the financial
statements are fair representations of the company's financial statements and what the auditor
expects from the client in performing an audit will normally be expressed in the:
A) management letter requested by the auditor.
B) engagement letter.
C) Audit Plan.
D) Audit Strategy for the client. B) engagement letter.
If an auditor is requested to perform nonaudit services for a public company audit client, who is
responsible for agreeing to those services with the audit firm?
A) the client's management
B) the client's chief executive officer
C) the client's chief financial officer
D) the client's audit committee D) the client's audit committee
Which of the following statements is true regarding communications between predecessor and
successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor's response can be limited to stating that no information will be provided.
C) The predecessor should communicate with the successor only if the client is public.
D) There must be communication between the predecessor and successor if the successor is to
accept the engagement. B) The predecessor's response can be limited to stating that no
information will be provided.
The purpose of an engagement letter is to:
A) document the CPA firm's responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
D) emphasize management's responsibility for approving the audit program. B) document
the terms of the engagement.
Written communication that the auditor will provide reasonable assurance for the detection of
fraud is found in:
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter. A) engagement letter.
Which of the following normally signs the engagement letter for an audit of a private company?
A) Management.
B) Board of directors representative
C) Audit committee representative
D) Corporate treasurer A) Management.
The first standard of field work, which states that the work is to be adequately planned and that
assistants, if any, are to be properly supervised, recognizes that:
A) early appointment of the auditor is advantageous to the auditor and the client.
B) acceptance of an audit engagement after the close of the client's fiscal year is generally not
permissible.

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C) appointment of the auditor subsequent to the physical count of inventories requires a

disclaimer of opinion.
D) performance of substantial parts of the examination is necessary at interim dates. A)
early appointment of the auditor is advantageous to the auditor and the client.
An engagement letter sent to a publicly held audit client usually would not include a:
A) reference to the auditor's responsibility for the detection of errors or irregularities.
B) estimation of the time to be spent on the audit work by audit staff and management.
C) statement that management advisory services would be made available upon request.
D) reference to management's responsibility for the financial statements. C) statement that
management advisory services would be made available upon request.
Jennings and Company has repositioned the firm's business strategy from the basis of competing
on costs to competing on product differentiation. All the following will increase, except:
A) Audit risk.
B) Business Risk.
C) Financial risk.
D) Risk of Material Misstatements. A) Audit risk.
The purpose of the requirement in having communication between the predecessor and successor
auditors is to:
A) allow the predecessor to disclose information which would otherwise be confidential.
B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor. B) help the
successor auditor to evaluate whether to accept the engagement.
The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when:
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor's work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity. C) there are actual or potential legal
problems between the client and the predecessor.
Which of the following best expresses the requirement to establish with the client an
understanding of the responsibilities the auditor and company is taking for the audit
engagement?
A) Management asserts there are no material misstatements in the financials.
B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to
provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management's assertion that they will provide the auditor with a risk assessment as to
material misstatements due to errors or fraud in the company's financial statements. C)
Auditors assert that their primary responsibility is to plan and perform the audit in order to
provide reasonable assurance as to the detection of material misstatement due to error or fraud.
Early appointment of the independent auditor will enable:
A) a more thorough examination to be performed.
B) a proper study and evaluation of internal control to be performed.
C) sufficient competent evidential matter to be obtained.

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D) a more efficient examination to be planned. D) a more efficient examination to be

planned.
An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should:
A) engage financial experts familiar with the nature of the business entity.
B) obtain a knowledge of matters that relate to the nature of the entity's business.
C) refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D) first inform management that an unqualified opinion cannot be issued. B) obtain a
knowledge of matters that relate to the nature of the entity's business.
Which is usually included in an engagement letter?
A)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
Yes Yes

B)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
No No

C)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
Yes No

D)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
No Yes D)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
No Yes
Which is usually included in an engagement letter?
A)
A reference to GAAP A reference to GAAS
Yes Yes

B)
A reference to GAAP A reference to GAAS
No No

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C)
A reference to GAAP A reference to GAAS
Yes No

D)
A reference to GAAP A reference to GAAS
No Yes A)
A reference to GAAP A reference to GAAS
Yes Yes
Which is usually included in an engagement letter?
A)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
Yes Yes

B)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
No No

C)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
Yes No

D)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
No Yes C)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
Yes No
When may the auditor refer to a specialist in the audit report?
A)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
Yes Yes

B)

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Only if the specialist's report

results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
No No

C)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
Yes No

D)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
No Yes C)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
Yes No
Which is usually included in the engagement letter?
A)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
Yes Yes

B)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
No No

C)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
Yes No

D)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
No Yes B)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information

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No No
Which is usually included in the engagement letter?
A)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
Yes Yes

B)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
No No

C)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
Yes No

D)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
No Yes B)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
No No
Discuss the factors an auditor should consider before accepting a company as an audit client.
The auditor should investigate and consider the prospective client's standing in the
business community, financial stability, management's integrity, and relations with its bankers,
attorneys, and previous CPA firm. The auditor should also determine whether he or she possesses
the required competence and independence to do the audit.
Discuss the primary purpose of an audit engagement letter. Is an engagement letter required?
The purpose of an audit engagement letter is to establish a clear understanding between
the auditor and the client regarding the terms of the engagement. An engagement is required for
both public and private company audits.
Discuss the essential activities involved in the initial planning of an audit. There are four
essential activities involved in the initial planning of an audit. These are:
1. Client acceptance or continuation. In the case of a new client, the auditor must determine
whether the client is one with which (s)he wishes to be associated. In the case of a continuing
client, an auditor must determine whether continuing the relationship is appropriate and in the
firm's best interest.
2. The auditor should identify why the client wants or needs an audit. The auditor should
determine the reason for the audit as soon as practical. The remainder of the planning activities
may be impacted by the client's reason for requesting the audit.
3. Obtain an understanding with the client about the terms of the engagement. An understanding
with the client should be obtained to avoid misunderstandings. Auditors are required to obtain an
understanding with their clients. This understanding must be written.

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4. Develop an overall audit strategy. The strategy should consider the reasons for the audit,
including engagement staffing and any required audit specialists. Setting a strategy helps the
auditor determine the resources required for the engagement.
Discuss the required communications between predecessor and successor auditors.
Auditing standards require a successor auditor to communicate with the predecessor
auditor whenever accepting a client that has been previously audited. The purpose of the
communication is to help the successor auditor evaluate whether to accept the engagement.
While the burden of initiating the communication rests on the successor auditor, the predecessor
auditor must respond to the request for information. However, because of the requirements
related to confidentiality, the predecessor must obtain the former client's permission prior to
providing information to the successor.
Discuss several reasons why an auditor may not wish to continue a relationship with an existing
audit client. There are a number of reasons an auditor may choose not to continue a
relationship with an existing client. Examples include:

1. Previous conflicts over accounting issues, scope of the audit, type of opinion, or fees.
2. Management integrity may be deemed to be insufficient.
3. Legal action initiated by either the auditor or client related to prior audit services.
4. If fees remain unpaid for services performed more than one year prior to the date of the
current year's audit report.
5. The presence of excessive risk which could result in financial failure of the client or lawsuits
against the audit firm.
Discuss four of the matters that should be specified in an engagement letter. Matters that
should be specified in the engagement letter include:
• Whether the auditor will perform an audit, a review, or a compilation, plus any other services
such as tax returns or management advisory services.
• Any restrictions to be imposed on the auditor's work.
• Restrictions on the audit work and deadlines for completing the audit.
• Assistance to be provided by the client's personnel in obtaining records and documents, and
schedules to be prepared for the auditor.
• Agreement on fees.
• The letter should state that the auditor is not responsible for the discovery of all acts of fraud.
Before accepting a new client, most CPA firms investigate the company to determine its
acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting
certain parties-namely the company's attorneys and bankers-during this investigation.
A) True
B) False False
For prospective clients that have previously been audited by another CPA firm, the predecessor
auditor is required to communicate with the successor auditor.
A) True
B) False False
When a successor auditor contacts a company's previous auditor, the predecessor auditor is
required to respond fully and without limit to the request for information.
A) True
B) False False

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A predecessor auditor who has been contacted by a successor auditor for information about the
client does not have to obtain permission from the former client before providing any
confidential information to the successor auditor because the confidentiality requirement does
not extend to former clients.
A) True
B) False False
An auditor must evaluate a specialist's professional qualifications and understand the objectives
of the specialist's work.
A) True
B) False True
To evaluate a specialist's work the auditor must himself/herself be considered a specialist.
A) True
B) False False
An engagement letter establishes a clear understanding of the terms of the engagement between
the client and the auditor, but it is optional for private companies.
A) True
B) False True
) Because of the requirements of Rule 201 of the AICPA's Code of Professional Conduct which
state that auditors should "undertake only those professional services that the member or the
member's firm can reasonably expect to be completed with professional competence," auditors
are not normally permitted to consult with, or rely on the work of, outside specialists during an
audit engagement.
A) True
B) False False
If a prospective client has been audited in the past, the successor auditor will typically rely solely
on the representations about the client by the predecessor auditor.
A) True
B) False False
A major consideration in assigning staff to an audit engagement is the experience levels required
for the work, while a less important consideration is maintaining staff continuity on the
engagement.
A) True
B) False False
When a successor auditor requests information from a company's previous auditor, and there are
legal problems or disputes between the client and the predecessor auditor, the predecessor
auditor's response to the new auditor may be limited to stating that no information will be
provided.
A) True
B) False True
An engagement letter can affect the CPA firm's legal responsibilities to the client, but does not
affect responsibility to external users of audited financial statements.
A) True
B) False True
In making client acceptance decisions the audit firm will consider:
A) inherent and control risk of the client.
B) audit risk to the CPA Firm.

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C) the client's business risk and the CPA Firm's engagement risk.
D) CPA Firm's potential ongoing revenue from the audit client. C) the client's business risk
and the CPA Firm's engagement risk.
Most auditors assess inherent risk as high for related parties and related-party transactions
because:
A) of the unique classification of related-party transactions required on the balance sheet.
B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income statement.
D) it is required by generally accepted accounting principles. B) of the lack of
independence between the parties.
The audit team gathers information about a new client's business and industry in order to obtain:
A) an understanding of the clients internal control system for financial reporting.
B) an understanding of how economic events and transactions have an effect on the company's
financial statements.
C) information about engagement risk.
D) information regarding whether the company is engaging in financial statement fraud. B) an
understanding of how economic events and transactions have an effect on the company's
financial statements.
The auditor determines that Mathews Company occupies the 3rd floor of an office tower for
which it pays no rent. The most likely explanation is:
A) they got lucky the landlord hasn't noticed the lack of payments.
B) landlord has weak internal controls over billings.
C) related party transaction in which a major shareholder owns the office tower.
D) Matthews Company is engaging in fraudulent activities. C) related party transaction in which
a major shareholder owns the office tower.
An official record of meetings of the board of directors and stockholders is included in the
corporate:
A) bylaws.
B) charter.
C) minutes.
D) license. C) minutes.
Related party transactions may be indicated when another company:
A) Subsidizes certain operating expenses of the company
B) Purchases its securities at their fair value
C) Loans to company at market rates
D) Has had a distributor relationship with the company for 10 years A) Subsidizes certain
operating expenses of the company
Which one of the following is not an inherent risk factor in the financial statements?
A) The company made 3 acquistions during the year in different lines of business.
B) The company's industry is experiencing downward pricing pressure for its goods and services.
C) The company's inventory, because of multiple locations, is difficult to count.
D) The company has hired 3 different chief accounting officers for the year. C) The
company's inventory, because of multiple locations, is difficult to count.
An auditor should examine minutes of the board of directors' meetings:
A) through the date of the financial statements.
B) through the date of the audit report.

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C) only at the beginning of the audit.

D) on a test basis. B) through the date of the audit report.
Which of the following would not likely be classified as a related-party transaction?
A) an advance of one week's salary to an employee
B) sales of merchandise between affiliated companies
C) loans or credit sales to the principal owner of the client company
D) exchanges of equipment between two companies owned by the same person A) an advance
of one week's salary to an employee
Which of the following best describes the coporate minutes of an entity?
A) official record of the meetings of the board of directors and the stockholders
B) unofficial record of the meeting of the board of directors
C) official record of management meeting with investors and creditors of the company
D) unofficial record of the board of directors meetings A) official record of the meetings of
the board of directors and the stockholders
An auditor searching for related party transactions should obtain an understanding of each
subsidiary's relationship to the total entity because:
A) the business structure may be deliberately designed to obscure related party transactions.
B) this may reveal whether transactions would have taken place if the parties had been unrelated.
C) transactions may have been consummated on terms equivalent to arm's-length transactions.
D) this may permit the audit of intercompany account balances to be performed as of concurrent
dates. B) this may reveal whether transactions would have taken place if the parties had been
unrelated.
Define the term "related party" and discuss why an auditor should identify the client's related
parties early in the audit. A related party is an affiliated company, principal owner of the
client company, or any other party with which the client deals where one of the parties can
influence the management or operating policies of the other. Auditors need to be aware of who
the client's related parties are early in the audit to enable the auditor to identify related-party
transactions, especially those that have not been disclosed.
What documents do auditors routinely obtain to aid in their understanding of a client's
governance system? Briefly discuss each of these documents. Auditors commonly obtain
organizational structure, code of ethics, and the minutes of meetings of the board of directors and
shareholders. Companies frequently communicate the entity's values and ethical standards
through policy statements and codes of conduct. The corporate minutes are the official record of
the meetings of the board of directors and stockholders. They include summaries of the most
important topics discussed and decisions made at the board meetings.
What are three factors that have increased the importance of obtaining an understanding of a
client's business and industry? How can an auditor obtain this understanding? Factors that
have increased the importance of obtaining an understanding of a client's business and industry
include:
• Advances in information technology have increased connectivity among companies, customers,
and vendors. Auditors must understand the risks associated with this increased connectivity.
• Recent significant declines in economic conditions around the world are likely to significantly
increase a client's business risks. Auditors need to understand the nature of the client's business
to understand the impact of major economic downturns on the client's financial statements and
ability to continue as a going concern.

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• Companies have expanded operations globally, often through joint ventures and strategic
alliances.
• Information technology affects internal control processes, improving the quality and timeliness
of accounting information.
• The increased importance of human capital and other intangible assets has increased accounting
complexity and the importance of management judgments and estimates.
• Many clients have invested in complex financial instruments which may have declined in
value, require complex accounting treatments, and often involve unknown counterparties who
may create unexpected financial risks for the client.

Auditors consider these factors using a strategic systems approach to understand the client's
business. The auditor can obtain a sound understanding of the client's business and industry
through several means, including discussions with previous auditors and by reviewing the
permanent files for the client; conferences with the client's personnel; studying AICPA industry
audit guides, textbooks, technical magazines, and specialized journals; and by participating in
industry associations and training programs.
There are three primary reasons for obtaining a thorough understanding of the client's industry
and external environment. What are these reasons? The three reasons are:
• Risks associated with specific industries may affect the auditor's assessment of client business
risk and acceptable audit risk.
• Certain inherent risks are typically common to all clients in certain industries. Familiarity with
those risks aids the auditor in assessing their relevance to the client.
• Many industries have unique accounting requirements that the auditor must understand to
evaluate whether the client's financial statements are in accordance with GAAP.
Auditors should obtain copies of the client's code of ethics and minutes of the meetings of the
board of directors to aid in their understanding of the company's management and governance
structure.
A) True
B) False True
Inherent risks typically vary across industries.
A) True
B) False False
Transactions with related parties must be disclosed in the financial statements if they are deemed
to be material.
A) True
B) False True
All known related parties must be identified and included in the auditor's permanent files related
to the client.
A) True
B) False True
Generally, auditors assess inherent risk as moderate for related party transactions because they
expect clients to be aware of their scrutiny of such transactions.
A) True
B) False False
The cr code of ethics typically establishes the company's fiscal year and frequency of stockholder
meetings.

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A) True
B) False False
Ordinarily, the auditor should review corporate minutes during the later stages of an audit.
A) True
B) False False
Material transactions between the client and the client's related parties must be disclosed in the
auditor's report.
A) True
B) False False
Two categories of audit-relevant information found in corporate code of ethics are authorizations
and discussions of matters affecting inherent risk.
A) True
B) False False
An auditor has accessed client business risk and the risk to material misstatements to the clients
financial statements. These are done in order to:
A) apply the audit risk model in determining the appropriate audit procedures to perform.
B) determine the reliance on the company's internal control systems for financial reporting.
C) determine the test of balances to be performed by the audit team.
D) assure the CPA firm that they can perform the audit effectively and efficiently, A) apply the
audit risk model in determining the appropriate audit procedures to perform.
Which of the following statements is most correct concerning audit risk?
A) Audit risk can be quantified with a reasonable degree of certainty.
B) Audit risk cannot be quantified with certainty.
C) Audit risk is the same for all audit client in the same industry.
D) Audit risk can be eliminated by having the correct audit procedures. B) Audit risk cannot
be quantified with certainty.
Define business risk. List several factors that may impact the auditor's assessment of business
risk. Business risk is the risk that a company will fail to achieve its objectives.
Factors that may impact business risk include:
• General economic conditions,
• Extent of competition within an industry,
• Changing regulatory requirements,
• Competence of management,
• Ability to maintain sufficient cash flows and secure financing, and
• Successful implementation of business strategies.
Auditors routinely conduct analytical procedures in the planning, testing, and completion phases
of the audit. Identify the primary and secondary purposes of performing analytical procedures in
each phase of the audit. Planning — The primary purposes are to understand the client's
business and industry and indicate areas of possible misstatements. The secondary purposes are
to assess going concern and reduce the extent of detailed tests.
• Testing — The primary purpose is to reduce the extent of detailed tests, while the secondary
purpose is to indicate areas of possible misstatements.
• Completion —The primary purpose is to indicate areas of possible misstatements, while the
secondary purpose is to assess going concern.
) During audit planning, the auditor uses analytical procedures primarily to:
A) identify weaknesses in internal control.

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B) determine if the company's financial statements appear reasonable and are free of material
misstatement.
C) determine the correspondence of the company's financial statements to the valuation and
accuracy audit objectives.
D) understand the client's business and industry and to indicate possible misstatements. D)
understand the client's business and industry and to indicate possible misstatements.
Which of the following is most correct with respect to the use of analytical procedures?
A) Analytical procedures may be used in evaluating balances in the testing phase as long as the
auditor also uses them in assessing the going concern assumption.
B) Analytical procedures must be used throughout the audit.
C) Analytical procedures used in the testing phase of the audit are primarily used to direct an
auditor's attention so that the auditor's understanding of the business is improved.
D) Analytical procedures are performed by studying plausible relationships between financial
and nonfinancial data. D) Analytical procedures are performed by studying plausible
relationships between financial and nonfinancial data.
Which of the following statements is not correct?
A) Analytical procedures used in the planning phase of the audit are primarily directed at
understanding the client's business and directing the auditor's attention to areas that may contain
possible misstatements.
B) Analytical procedures used in the completion phase are primarily aimed at assessing going
concern and secondarily aimed at directing the auditor's attention to areas that may contain
possible misstatements.
C) Analytical procedures must be used in the planning and completion phases of the audit, and
are optional in the testing phase.
D) Analytical procedures used in the completion phase are primarily aimed at directing the
auditor's attention to areas that may contain possible misstatements and secondarily aimed at
assessing going concern. B) Analytical procedures used in the completion phase are
primarily aimed at assessing going concern and secondarily aimed at directing the auditor's
attention to areas that may contain possible misstatements.
Discuss the four primary purposes of analytical procedures performed during the planning phase
of an audit. The four primary purposes of preliminary analytical procedures are:
• to help the auditor understand the client's industry and business,
• to help the auditor assess the going concern assumption,
• to indicate areas of possible misstatements, and
• to reduce the extent of detailed tests.
One purpose of performing preliminary analytical procedures in the planning phase of an audit is
to help the auditor make a preliminary assessment of control risk.
A) True
B) False False
Which of the following best describes the first standard of field work?
A) The auditor must adequately plan the work and properly supervise any assistants.
B) The auditor must have adequate technical training and proficiency to perform the audit.
C) The auditor must maintain independence in mental attitude in all matters relating to the audit.
D) The auditor must exercise due professional care in the performance of the audit and the
preparation of the report. C) The auditor must maintain independence in mental attitude in
all matters relating to the audit.

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Which of the following would not be classified as an analytical procedure?

A) Benchmarking the company's profitability ratios against others in the industry.
B) Variance analysis of actual versus budgeted amounts for production.
C) Reperforming the client's depreciation expense using the client's accounting policies for
capital expenditures made during the year.
D) Reconciling fixed asset dispositions with the fixed asset ledger . D) Reconciling fixed asset
dispositions with the fixed asset ledger .
Which of the following statements is not correct with respect to analytical procedures?
A) Auditing standards emphasize the need for auditors to develop and use expectations.
B) Analytical procedures must be performed throughout the audit.
C) Analytical procedures may be performed at any time during the audit.
D) Analytical procedures use comparisons and relationships to assess whether account balances
appear reasonable. B) Analytical procedures must be performed throughout the audit.
When performing planning analytical procedures for a client the auditor detected that the gross
profit percentage had declined by 50% from the previous year to the year currently under audit.
The auditor should:
A) investgate the possibility the client may have made an error in their cost of goods sold
computation.
B) assist management in developing greater cost efficiencies in their product line.
C) prepare a going concern opinion for the client.
D) advise the client to have extensive disclosure to alleviate investor concerns. A) investgate
the possibility the client may have made an error in their cost of goods sold computation.
When are auditors likely to encounter judgment problems in the use of analytical procedures?
A) Whenever the auditor places reliance on management's explanations for unusual fluctuations
in account balances without first developing independent expectations.
B) Whenever the auditor allows unaudited balances to unduly influence his/her expectations of
current balances.
C) Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations
when trying to explain what caused them.
D) The auditor is likely to encounter judgment problems in each of the above instances. D) The
auditor is likely to encounter judgment problems in each of the above instances.
The major concern when using nonfinancial data in analytical procedures is the:
A) accuracy of the nonfinancial data.
B) source of the nonfinancial data.
C) type of nonfinancial data.
D) presence of multiple sources of nonfinancial data. A) accuracy of the nonfinancial data.
Whenever an auditor compares client data to client-prepared budgets, there are two special
concerns. Indicate if the two items below are concerns.
A)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
A concern A concern

B)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget

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Not a concern Not a concern

C)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
A concern Not a concern

D)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
Not a concern A concern A)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
A concern A concern
Which is a liquidity activity ratio?
A) Profit margin
B) Inventory turnover
C) Return on assets
D) Times interest earned B) Inventory turnover

219. The following statements relate to the date of the auditor's report. Which is false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditor's report should not be earlier than the date on which the financial
statements are signed or approved by management.
C. The date of the auditor's report should not be later than the date on which the financial
statements are signed or approved by management.
D. The date of the auditor's report should always be later than the date of the financial statements
(i.e., the balance sheet date). C
220. In which of the following circumstances would an auditor most likely add an emphasis of
matter paragraph to the auditor's report while expressing an unqualified opinion?
A. There is a substantial doubt about the entity's ability to continue as a going concern.
B. Management's estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management's records retention policy.
A
221. An independent auditor discovers that a payroll supervisor of the company being audited
has misappropriated P50,000. The company's total assets and income before tax are P70 million
and P15 million, respectively. Assuming no other issues affect the report, the auditor's report will
most likely contain a/an
A. Unmodified opinion C. Adverse opinion.
B. Disclaimer of opinion D. Scope qualification A
222. A note to the financial statements of the Prudent Bank indicates that all of the records
relating to the bank's business operations are stored on magnetic disks, and that no emergency
backup systems or duplicate disks are stored because the bank and its auditors consider the

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occurrence of a catastrophe to be remote. Based upon this note, the auditor's report should
express
A. A qualified opinion C. An adverse opinion
B. An unmodified opinion D. A "subject to" opinion B
223. When would the auditor refer to the work of an appraiser in the auditor's report?
A. An adverse opinion is expressed based on a difference of opinion between the client and the
outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the auditor by
the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose
the use of the appraiser's work. A
Which of the following terms is used in the standard to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements, if any, that are
undetected due to an inability to obtain sufficient appropriate audit evidence?
A. Persuasive C. Material
B. Pervasive D. Extensive B
When audited financial statements are presented in a document (e.g., annual report) containing
other information, the auditor
A. Should read the other information to consider whether it is inconsistent with the audited
financial statements.
B. Has no responsibility for the other information because it is not part of the basic financial
statements.
C. Has an obligation to perform auditing procedures to corroborate the other information.
D. Is required to express a qualified opinion if the other information has a material misstatement
of fact. A
226. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. If the auditor concludes
that the financial statements do not require revision, but the client refuses to revise or eliminate
the material inconsistency, the auditor may
A. Disclaim an opinion on the financial statements after explaining the material inconsistency in
an emphasis of matter paragraph.
B. Revise the auditor's report to include an other matter paragraph describing the material
inconsistency.
C. Express a qualified opinion after discussing the matter with the client's directors.
D. Consider the matter closed because the other information is not in the audited statements.
B
227. An auditor may express a qualified opinion under which of the following circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes D
228. In which of the following situations would an auditor ordinarily choose between expressing
a qualified opinion or an adverse opinion?

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A. The auditor wishes to emphasize an unusually important subsequent event.

B. The financial statements fail to disclose information that is required by Philippine Financial
Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial doubt about
the entity's ability to continue as a going concern.
D. The auditor did not observe the entity's physical inventory and is unable to become satisfied
as to its balance by other auditing procedures. B
229. An auditor should disclose the substantive reasons for expressing an adverse opinion in the
Basis for Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements B
230. There are two broad financial reporting frameworks for comparatives: the corresponding
figures and the comparative financial statements. Which of the following statements is correct
concerning these reporting frameworks?
A. Under the corresponding figures framework, the corresponding figures for the prior period(s)
are integral part of the current period financial statements.
B. Under the corresponding figures framework, the corresponding figures for the prior period(s)
are considered separate financial statements.
C. Under the comparative financial statements framework, the comparative financial statements
for the prior period(s) are intended to be read in conjunction with the amounts and other
disclosures relating to the current period.
D. Under the comparative financial statements framework, the amounts and other disclosures for
the prior period(s) form part of the current period financial statements. A
231. In which of the following circumstances would an auditor's report least likely include
specific reference to the corresponding figures?
A. When the auditor's report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is resolved and properly dealt with in
the financial statements.
B. When the auditor's report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is unresolved, and results in a
modification of the auditor's report regarding the current period figures.
C. When the auditor's report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is unresolved, but does not result in a
modification of the auditor's report regarding the current period figures.
D. When the auditor's report on the prior period financial statements containing a material
misstatement included an unmodified opinion and the prior period financial statements have not
been revised and reissued, and the corresponding figures have not been properly restated and/or
appropriate disclosures have not been made. A
232. According to PSA 710, the incoming auditor may refer to the predecessor auditor's report on
the corresponding figures in the incoming auditor's report for the current period. The incoming
auditor's report should indicate
I. That the financial statements of the prior period were audited by another auditor.
II. The type of report issued by the predecessor auditor.
III. The date of the predecessor auditor's report.

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A. I and II only. C. I and III only.

B. II and III only. D. I, II, and III. D
233. When the prior period financial statements are not audited, the incoming auditor should
state in the auditor's report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding opening balances of
the current period.
A. I only C. Both I and II
B. II only D. Neither I nor II A
234. J, CPA, audited JST Company's prior-year financial statements. These statements are
presented with those of the current year for comparative purposes without J's auditor's report,
which expressed a qualified opinion. In drafting the current year's auditor's report, S, CPA, the
incoming auditor, should
I. Not name J as the predecessor auditor.
II. Indicate the type of report issued by J.
III. Indicate the substantive reasons for J's qualification.
IV. Indicate the date of J's auditor's report.
A. I, II, and IV only. C. I, II, and III only.
B. II, III, and IV only. D. I, II, III, and IV. D
235. The predecessor auditor, who is satisfied after properly communicating with the incoming
auditor, has reissued his/her auditor's report on prior year financial statements. The predecessor
auditor's report should
A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
D. Not refer to the report or the work of the incoming auditor. D
236. The following statements relate to unaudited prior year financial statements that are
presented in comparative form with audited current year financial statements. Which is
incorrect?
A. The incoming auditor should state in the auditor's report that the comparative financial
statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening balances of the
current period.
C. Clear disclosure in the financial statements that the comparative financial statements are
unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited figures are
materially misstated, the auditor should request management to revise the prior year's figures or
if management refuses to do so, appropriately modify the report. B

Assurance services are independent professional services that improve the quality of information
specifically for internal decision makers. False
Electronic commerce is an example of a category of assurance services. True
The purpose of an attestation engagement is to provide users of information with an opinion,
conclusion, or findings regarding the reliability of subject matter or an assertion about the subject
matter, as measured against suitable and available criteria. True

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Examples of attest engagements include examination, review, and agreed-upon procedures

engagements. True
Limited assurance is provided in a review engagement. True
Auditing standards do not allow private companies to have an audit of internal control over
financial reporting integrated with the audit of their financial statements. False
The practitioner's objective in an engagement to audit an entity's internal control is to assess
management's assessment of the effectiveness of internal controls. False
Under the attestation standards, a practitioner can either examine or perform agreed-upon
procedures on prospective financial information. True
In performing an attestation engagement, a CPA typically:

A) supplies litigation support services.

B) assesses control risk at a low level.

C) expresses a conclusion about an assertion.

D) provides management consulting advice. C) expresses a conclusion about an assertion.

Prospective financial statements may be prepared for:

A) only general use.

B) only limited use.

C) only internal use.

D) general, limited, and internal use. D) general, limited, and internal use.
Given one or more hypothetical assumptions, a responsible party may prepare, to the best of his
knowledge and belief, an entity's expected financial position, results of operations, and changes
in cash flows. Such prospective financial statements are known as:

A) pro forma financial statements.

B) financial projections.

C) partial presentations.

D) financial forecasts. B) financial projections.

Which of the following are prospective financial statements upon which an accountant may
appropriately report for general use?

A) Pro forma financial statements.

B) Financial projections.

C) Partial presentations.

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D) Financial forecasts. D) Financial forecasts.

Accepting an engagement to examine an entity's financial projections would most likely be
appropriate if distribution of the projections were limited to:

A) the general public on the entity's website.

B) potential stockholders who request a prospectus or a registration statement.

C) a bank with which the entity is negotiating for a loan.

D) all stockholders of record as of the report date. C) a bank with which the entity is
negotiating for a loan.
An examination of a financial forecast is a professional service that involves:

A) compiling or assembling a financial forecast that is based on management's assumptions.

B) limiting the distribution of the accountant's report to management and the board of directors.

C) assuming responsibility to update management on key events for one year after the report's
date.

D) evaluating whether the computations of prospective amounts are mathematically accurate and
assumptions are internally consistent.D) evaluating whether the computations of prospective
amounts are mathematically accurate and assumptions are internally consistent.
Limited assurance is provided in:

A) an audit engagement.

B) a compilation engagement.

C) a review engagement.

D) none of the items listed. C) a review engagement.

Absolute assurance is provided in:

A) an audit engagement.

B) a compilation engagement.

C) a review engagement.

D) none of the items listed. D) none of the items listed.

Reasonable assurance is provided in:

A) an audit engagement.

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B) a compilation engagement.

C) a review engagement.

D) none of the items listed. A) an audit engagement.

Which of the following should not be included in an accountant's standard report based upon the
compilation of an entity's financial statements?

A) A statement that a compilation is limited to presenting, in the form of financial statements,

information that is the representation of management.

B) A statement that the compilation was performed in accordance with standards established by
the American Institute of CPAs.

C) A statement that the accountant has not audited or reviewed the financial statements.

D) A statement that the accountant does not express an opinion but expresses only limited
assurance on the financial statements. D) A statement that the accountant does not express
an opinion but expresses only limited assurance on the financial statements.
During a review of the financial statements of a nonpublic entity, the CPA finds that the financial
statements contain a material departure from generally accepted accounting principles. If
management refuses to correct the problem, the CPA should:

A) disclose the departure in a separate paragraph of the report.

B) issue an adverse opinion.

C) attach a footnote explaining the effects of the departure.

D) issue a compilation report.A) disclose the departure in a separate paragraph of the report.
Which of the following procedures is not included in a review engagement of a nonpublic entity?

A) Inquiries of management.

B) Inquiries regarding significant events subsequent to the balance sheet date.

C) Any procedures designed to identify relationships among data that appear to be unusual.

D) A study and evaluation of internal control. D) A study and evaluation of internal

control.
Inquiry of the entity's personnel and analytical procedures are the primary bases for the issuance
of a(n):

A) compilation report on financial statements for a nonpublic company in its first year of
operations.

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B) auditor's report on financial statements supplemented with price-level information.

C) review report on comparative financial statements for a nonpublic company in its second year
of operations.

D) management advisory report prepared at the request of the entity's audit committee. C)
review report on comparative financial statements for a nonpublic company in its second year of
operations.
The report of a CPA on a review of the financial statements of a nonpublic entity should not
include a statement that:

A) management is responsible for the preparation and fair presentation of the financials in
accordance with GAAP.

B) the review was performed in accordance with generally accepted auditing standards.

C) the CPA is not aware of any material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted accounting principles.

D) a review consists principally of inquiries of company personnel and analytical procedures

applied to financial data. B) the review was performed in accordance with generally
accepted auditing standards.
Prior to commencing the compilation of financial statements of a nonpublic entity, the
accountant should:

A) perform analytical procedures sufficient to determine whether fluctuations among account

balances appear reasonable.

B) complete the preliminary phase of the study and evaluation of the entity's internal control.

C) verify that the financial information supplied by the entity agrees with the books of original
entry and supporting documentation.

D) acquire a knowledge of any specialized accounting principles and practices used in the
entity's industry. D) acquire a knowledge of any specialized accounting principles and
practices used in the entity's industry.
Compilation reports may include:

A) compilations when the accountant is not independent.

B) compilations with full disclosure.

C) compilations that omits substantially all disclosures.

D) any of the items listed. D) any of the items listed.

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In an examination of prospective financial statements, which of the following would not require
a revision of prospective financial information?

A) Mathematical errors.

B) Unreasonable or internally inconsistent assumptions.

C) Inappropriate or incomplete presentation.

D) All of the items listed may require a revision of prospective financial information. D) All
of the items listed may require a revision of prospective financial information.
May an accountant plan and perform an engagement to compile or review the financial
statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry
accounting principles?

A) Only a compilation could be performed without the specialized knowledge.

B) Only a review could be performed without the specialized knowledge.

C) Both a compilation and a review could be performed without the specialized knowledge.

D) Neither a compilation nor a review could be performed without the specialized knowledge.
D) Neither a compilation nor a review could be performed without the specialized
knowledge.
The report in a review engagement provides:

A) limited assurance.

B) positive assurance.

C) an opinion.

D) a summary of findings. A) limited assurance.

Compilations provide which of the following types of assurance about the fair presentation of
financial statements?

A) No assurance.

B) Negative assurance.

C) Limited assurance.

D) Reasonable assurance. A) No assurance.

Which of the following is not a main goal of the internal auditing profession?

A) Add value to an organization's operations.

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B) Help an organization to accomplish its objectives.

C) Provide reliable information to external users.

D) Improve the effectiveness of risk management of an organization. C) Provide reliable

information to external users.
The International Professional Practices Framework developed by the IIA includes all of the
following types of guidance, except:

A) International Standards for the Professional Practice of Internal Auditing.

B) Interpretations of Standards.

C) Code of Ethics.

D) Implementation Guidance.B) Interpretations of Standards.

Which of the following statements is true regarding the performance of an assurance service on
information systems reliability by a CPA?

A) The CPA is not permitted to provide any other services for the entity if he or she is to perform
the service.

B) The service will require the CPA to apply all of the attestation and auditing standards.

C) The service provides information regarding whether the information system provides reliable
information for internal operating decisions.

D) Performing the service will not require the collection of evidence. C) The service
provides information regarding whether the information system provides reliable information for
internal operating decisions.
Which of the following statements is not true concerning assurance services?

A) The growth in assurance services has been driven by users' demands for those services.

B) Assurance services focus on improving the quality of information or its context, for decision
makers.

C) Unlike audit and attestation engagements, an engagement to perform assurance services does
not require the CPA to consider information reliability.

D) Auditing and attestation services can be viewed as subsets of assurance services since there is
overlap in their objectives. C) Unlike audit and attestation engagements, an engagement to
perform assurance services does not require the CPA to consider information reliability.
Which of the following would be considered a part of a consulting services (non-assurance)
engagement?

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I. Expressing a conclusion about the reliability of an entity's financial statements.

II. Reviewing and commenting on a client-prepared business plan.

A) I only.

B) II only.

C) Both I and II.

D) Neither I nor II. B) II only.

Independence is:

A) required for financial statement audits but not for assurance services.

B) required for both financial statement audits and assurance services.

C) required for assurance services but not financial statement audits.

D) preferred but not required for financial statement audits and assurance services. B)
required for both financial statement audits and assurance services.
Blue Co., a privately-held entity, asked its tax accountant, Cook, a CPA in public practice, to
reproduce Blue's internally-prepared interim financial statements on Cook's computer when
Cook prepared Blue's quarterly tax return. Cook should not submit these financial statements to
Blue unless, at a minimum, Cook complies with the provisions of:

A) statements on Responsibilities in Tax Practice.

B) statements on Standards for Accounting and Review Services.

C) statements on Responsibilities in Unaudited Financial Services.

D) statements on Standards for Attestation Engagements. B) statements on Standards for

Accounting and Review Services.
An accountant may accept an engagement to apply agreed-upon procedures to prospective
financial statements provided that:

A) distribution of the report is restricted to the specified users involved.

B) the prospective financial statements also are examined.

C) responsibility for the adequacy of the procedures performed is taken by the accountant.

D) negative assurance is expressed on the prospective financial statements taken as a whole.

A) distribution of the report is restricted to the specified users involved.

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Accepting an engagement to compile a financial projection for a public company most likely
would be inappropriate if the projection were to be distributed to:

A) a bank with which the entity is negotiating for a loan.

B) a labor union with which the entity is negotiating a contract.

C) the principal stockholder, to the exclusion of the other stockholders.

D) all stockholders of record as of the report date. D) all stockholders of record as of the report
date.
The party responsible for assumptions identified in the preparation of prospective financial
statements is usually:

A) a third-party lending institution.

B) the entity's management.

C) the reporting accountant.

D) the entity's independent auditor. B) the entity's management.

Responding to a question such as "What would happen if..." is an attribute of which of the
following types of engagements?

A) Financial projection.

B) Financial forecast.

C) Financial forecast and financial projection.

D) Review. A) Financial projection.

When an accountant is not independent of an entity and is requested to perform a compilation of
the entity's financial statements, the accountant:

A) is precluded from accepting the engagement.

B) may accept the engagement and need not disclose the lack of independence.

C) may accept the engagement, should disclose the lack of independence, and may indicate the
reason for the lack of independence.

D) may accept the engagement and must disclose both the lack of independence and the reason
for the lack of independence. C) may accept the engagement, should disclose the lack of
independence, and may indicate the reason for the lack of independence.
Before performing a compilation of the financial statements of a nonpublic entity, an accountant
should:

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A) perform a thorough study and evaluation of the internal control system.

B) complete a series of inquiries concerning the entity's procedures for recording, classifying,
and summarizing transactions.

C) design working papers intended to provide sufficient competent evidential matter to afford a
reasonable basis for a compilation opinion.

D) obtain an understanding of the accounting principles and practices of the industry in which
the entity operates. D) obtain an understanding of the accounting principles and practices of
the industry in which the entity operates.
During a review of financial statements of a nonpublic entity, the CPA would be least likely to:

A) perform analytical procedures designed to identify relationships that appear to be unusual.

B) obtain written confirmation from banks regarding loans to the entity.

C) obtain reports from other accountants who reviewed a portion of the total entity.

D) read the financial statements and consider their conformance with generally accepted
accounting principles. B) obtain written confirmation from banks regarding loans to the entity.
Which of the following should be included in an accountant's standard report based upon the
review of a nonpublic entity's financial statements?

A) A statement that the review was performed in accordance with generally accepted audit
standards.

B) A statement that a review consists principally of inquiries and analytical procedures.

C) A statement that the review includes a study and evaluation of the internal controls of the
entity.

D) A statement that a review is substantially greater in scope than a compilation. B) A statement

that a review consists principally of inquiries and analytical procedures.
Which of the following procedures is usually included in a review engagement of a nonpublic
entity?

A) The confirmation of accounts receivable.

B) A study and evaluation of internal control.

C) An inquiry concerning subsequent events.

D) The observation of physical inventory counts. C) An inquiry concerning subsequent events.

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Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's
financial statements include:

A) analytical procedures designed to identify material weaknesses in internal control.

B) inquiries concerning actions taken at meetings of the stockholders and the board of directors.

C) analytical procedures designed to test the accounting records by obtaining corroborating

evidential matter.

D) inquiries of knowledgeable outside parties such as the entity's attorneys and bankers. B)
inquiries concerning actions taken at meetings of the stockholders and the board of directors.
During a review of the financial statements of a nonpublic entity, an accountant becomes aware
of inadequate disclosure that is material to the financial statements. If management refuses to
correct the financial statement presentations, the accountant should:

A) issue an adverse opinion.

B) issue an "except for" qualified opinion.

C) disclose this departure from generally accepted accounting principles in a separate paragraph
of the report.

D) express only limited assurance on the financial statement presentations. C) disclose this
departure from generally accepted accounting principles in a separate paragraph of the report.
Statements on Standards for Accounting and Review Services establish standards and procedures
for which of the following engagements?

A) Assisting in adjusting the books of account for a partnership.

B) Examining prospective financial statements.

C) Processing financial data for clients of other accounting firms.

D) Compiling an individual's personal financial statement to be used to obtain a mortgage.

D) Compiling an individual's personal financial statement to be used to obtain a
mortgage.
IIA Standards include:

A) attribute standards.

B) performance standards.

C) interpretations.

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D) both attribute standards and performance standards. D) both attribute standards and
performance standards.
An accountant is required to comply with the provisions of Statements on Standards for
Accounting and Review Services when:

I. Typing client-prepared financial statements, without modification, as an accommodation to a

client.

II. Preparing standard monthly journal entries for depreciation and expiration of prepaid
expenses.

A) I only.

B) II only.

C) Both I and II.

D) Neither I nor II. D) Neither I nor II.

In a review engagement, the accountant must make all of the following inquiries except those to:

A) Identify subsequent events having a material effect on the statements.

B) Understand internal controls.

C) Identify actions taken at stockholders' meetings.

D) Ascertain whether statements are in accordance with GAAP. B) Understand internal

controls.
Which of the following procedures is not usually performed by the accountant during a review
engagement of a nonpublic entity?

A) Inquiry about actions taken at meetings of the board of directors that may affect the financial
statements.

B) Issuance of a report stating that the review was performed in accordance with standards
established by the AICPA.

C) Reading of the financial statements to determine if they conform with generally accepted
accounting principles.

D) Communication of any material weaknesses discovered during the consideration of internal

control. D) Communication of any material weaknesses discovered during the
consideration of internal control.
The expectation that an internal auditor does not accept gifts that may impair judgment is based
on the code of ethics principle of:

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A) integrity.

B) objectivity.

C) confidentiality.

D) competency. B) objectivity.
Trust Service criteria cover:

A) hardware design.

B) confidentiality.

C) software design.

D) physical protection of computer systems. B) confidentiality.

According to the Statements on Standards for Accounting and Review Services, what response is
appropriate when an accountant, who is not independent, performs a compilation of financial
statements?

A) The accountant should state in the report that he/she is not independent.

B) The accountant should withdraw from the engagement.

C) The accountant should express a disclaimer opinion on the compilation.

D) The accountant should express an adverse opinion on the compilation. A) The accountant
should state in the report that he/she is not independent.
Which of the following would an accountant not need to know when conducting a compilation?

A) The accounting principles and practices of the industry in which the entity operates.

B) A general understanding of the nature of the entity's business transactions and the form of its
accounting records.

C) The accounting basis on which the financial statements are to be presented.

D) The accountant would need to know all of the other items listed when conducting a
compilation. D) The accountant would need to know all of the other items listed when
conducting a compilation.
When an accountant compiles a nonpublic entity's financial statements that omit substantially all
disclosures required by generally accepted accounting principles, the accountant should indicate
in the compilation report that the financial statements are:

A) restricted for internal use only by the entity's management.

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B) not to be given to financial institutions for the purpose of obtaining credit.

C) compiled in conformity with a comprehensive basis of accounting other than generally

accepted accounting principles.

D) not designed for those who are uninformed about the omitted disclosures. D) not
designed for those who are uninformed about the omitted disclosures.
Which of the following procedures is more likely to be performed in a review engagement of a
nonpublic entity than in a compilation engagement?

A) Gaining an understanding of the entity's business transactions.

B) Gaining an understanding of the accounting principles and practices in the industry.

C) Obtaining a representation letter from the chief executive officer.

D) Assisting the entity in adjusting the accounting records. C) Obtaining a representation letter
from the chief executive officer.
Statements on Standards for Accounting and Review Services (SSARS) require an accountant to
report when the accountant has:

A) typed client-prepared financial statements, without modification, as an accommodation to the

client.

B) provided an entity with a financial statement format that does not include dollar amounts, to
be used by the entity in preparing financial statements.

C) proposed correcting journal entries to be recorded by the client that change client-prepared
financial statements.

D) generated financial statements prepared in accordance with a special purpose framework

other than GAAP. D) generated financial statements prepared in accordance with a special
purpose framework other than GAAP.
A CPA's report on agreed-upon procedures related to management's assertion about an entity's
compliance with specified requirements should contain:

A) a statement of limitations on the use of the report.

B) an opinion about whether management's assertion is fairly stated.

C) negative assurance that control risk has not been assessed.

D) an acknowledgement of responsibility for the sufficiency of the procedures. A) a statement

of limitations on the use of the report.
Which of the following represents the order from the least assurance to the most assurance
provided for the types of services provided?

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A) Review, compilation, audit.

B) Compilation, review, audit.

C) Audit, review, compilation.

D) Audit, compilation, review. B) Compilation, review, audit.

Jones Retailing, a nonpublic entity, has asked Winters, CPA, to compile financial statements that
omit substantially all disclosures required by generally accepted accounting principles. Winters
may compile such financial statements, provided the:

A) reason for omitting the disclosures is explained in the engagement letter and acknowledged in
the management representation letter.

B) financial statements are prepared on a comprehensive basis of accounting other than generally
accepted accounting principles.

C) distribution of the financial statements is restricted to internal use only.

D) omission is not undertaken to mislead the users of the financial statements and is properly
disclosed in the accountant's report. D) omission is not undertaken to mislead the users of the
financial statements and is properly disclosed in the accountant's report.
During an engagement to review the financial statements of a nonpublic entity, an accountant
becomes aware of a material departure from GAAP. If the accountant decides to modify the
standard review report because management will not revise the financial statements, the
accountant should:

A) express negative assurance on the accounting principles that do not conform with GAAP.

B) disclose the departure from GAAP in a separate paragraph of the report.

C) issue an adverse or an "except for" qualified opinion, depending on materiality.

D) express positive assurance on the accounting principles that conform with GAAP. B)
disclose the departure from GAAP in a separate paragraph of the report.
Which set of standards was created by the AICPA to cover services relating to unaudited
financial statements?

A) Standards on Selective Audits and Review Services (SSARS).

B) Statement on Auditing Standards (SAS).

C) Statements on Compilation and Review Standards (SCRS).

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D) Statements on Standards for Accounting and Review Services (SSARS). D) Statements

on Standards for Accounting and Review Services (SSARS).
When engaged to compile the financial statements of a nonpublic entity, an accountant is
required to possess a level of knowledge of the entity's accounting principles and practices. This
requirement most likely will include obtaining a general understanding of the:

A) stated qualifications of the entity's accounting personnel.

B) design of the entity's internal controls placed in operation.

C) risk factors relating to misstatements arising from illegal acts.

D) internal control awareness of the entity's senior management. A) stated qualifications of the
entity's accounting personnel.
This concept, while used by both internal and external auditors, is typically assessed quite
differently for each.

A) Competence.

B) Objectivity.

C) Integrity.

D) Materiality.D) Materiality.

Shown below (1 through 5) are the five types of tests which auditors use to determine whether
financial statements are fairly stated. Which three are substantive tests?
1. risk assessment procedures
2. tests of controls
3. tests of transactions
4. analytical procedures
5. tests of details of balances
A) 1, 2, and 3.
B) 3, 4, and 5.
C) 2, 3, and 5.
D) 2, 3, and 4. B) 3, 4, and 5.
Collectively, procedures performed to obtain an understanding of the entity and its environment,
including internal controls, represent the auditor's:
A) audit strategy.
B) tests of controls.
C) risk assessment procedures.
D) tests of transactions. C) risk assessment procedures.
3) Which of the following would not be considered further audit procedures?
A) tests of controls
B) substantive analytical procedures

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C) tests of details of balances

D) risk assessment procedures D) risk assessment procedures
Which of the following procedures would most likely be performed in response to the auditor's
assessment of the risk of monetary misstatements in the financial statements?
A) Ratio analysis
B) Tests of controls
C) Tests of details of balances
D) Risk assessment procedures C) Tests of details of balances
Which of the following further audit procedures are used to determine whether all six transaction
related audit objectives have been achieved for each class of transactions?
A) tests of controls
B) risk assessment procedures
C) substantive tests
D) preliminary analytical procedures C) substantive tests
You are auditing Rodgers and Company. After performing substantive analytical procedures you
conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate
that:
A) details test of balances can be eliminated for those accounts.
B) certain test of balances procedures may be eliminated for those accounts.
C) control tests may be eliminated for those accounts.
D) control tests may be reduced for those accounts. B) certain test of balances procedures may
be eliminated for those accounts.
The purpose of tests of controls is to provide reasonable assurance that the:
A) accounting treatment of transactions and balances is valid and proper.
B) internal control procedures are functioning as intended.
C) entity has complied with GAAP disclosure requirements.
D) entity has complied with requirements of quality control. B) internal control
procedures are functioning as intended.
In the context of an audit of financial statements, substantive tests are audit procedures that:
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) are designed to test for dollar misstatements.
D) will increase proportionately with the auditor's reliance on internal control. C) are
designed to test for dollar misstatements.
Which of the following is true?
A) tests of details of balances focus on the ending balances for accounts in the client's ending
trial balance
B) tests of details of balances focus on the transactions during the period
C) tests of details of balances focus on the auditor's understanding of internal controls
D) tests of details of balances focus on comparisons of recorded amounts to expectations
developed by the auditor A) tests of details of balances focus on the ending balances for
accounts in the client's ending trial balance
A system walkthrough is primarily used to:
A) test balances.
B) test details of transactions.
C) gain an understanding of internal controls.

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D) determine acceptance of the client. C) gain an understanding of internal controls.

Risk assessment procedures are performed by auditors during an audit in order to:
A) determine the risk of material misstatement in the financial statements.
B) determine the amount of testing of internal control.
C) determine the extent of testing of details of balances.
D) determine the extent of testing of transactions. A) determine the risk of material
misstatement in the financial statements.
Tests of controls are directed toward the control's:
A) efficiency.
B) effectiveness.
C) efficiency and effectiveness.
D) cost benefit ratio. B) effectiveness.
A procedure designed to test for monetary misstatements directly affecting the correctness of
financial statement balances is a:
A) test of controls.
B) substantive test.
C) test of attributes.
D) monetary-unit sampling test. B) substantive test.
Which of the following is not a direct result of performing analytical procedures?
A) identify areas of potential misstatements
B) reduce detailed audit tests
C) understand the client's business
D) identify specific errors in the accounts D) identify specific errors in the accounts
The primary emphasis in most tests of details of balances is on the:
A) balance sheet accounts.
B) revenue accounts.
C) cash flow statement accounts.
D) expense accounts. A) balance sheet accounts.
Which of the following statements is not true?
A) Analytical procedures emphasize the overall reasonableness of transactions and balances.
B) Tests of controls are concerned with evaluating whether controls are sufficiently effective to
justify reducing control risk and thereby reducing analytical review procedures.
C) Substantive tests of transactions emphasize the verification of transactions recorded in the
journals and then posted in the general ledger.
D) Tests of details of balances emphasize the ending balances in the general ledger. B)
Tests of controls are concerned with evaluating whether controls are sufficiently effective to
justify reducing control risk and thereby reducing analytical review procedures.
Many auditors perform extensive analytical procedures on audits because: A) they are required
by GAAS.
B) they pinpoint errors in accounts.
C) they indicate areas of potential risk and misstatement.
D) they are required for tests of controls. C) they indicate areas of potential risk and
misstatement.
When controls are deemed ineffective and assessed control risk is at the maximum for a private
company, which of the following would normally be true?
A) no emphasis placed on the controls

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B) relatively little emphasis placed on the controls

C) moderate emphasis placed on the controls
D) heavy emphasis placed on the controls A) no emphasis placed on the controls
Which of the following is ordinarily designed to detect material dollar errors on the financial
statements?
A) Tests of controls
B) Analytical review procedures
C) Computer controls
D) Tests of details of balances D) Tests of details of balances
One difference between the procedures used to obtain an understanding of internal control and
procedures used to test those controls is that tests of controls are more extensive.
A) True
B) False True
Tests of controls provide evidence about the likelihood for misstatements in a client's financial
statements.
A) True
B) False True
An exception in a test of control provides only an indication of the likelihood of monetary
misstatements in the financial statements because tests of controls do not reveal whether
monetary misstatements have actually occurred.
A) True
B) False True
An exception in a substantive test of transactions provides an indication of the likelihood of
monetary misstatements in the financial statements because substantive tests of transactions do
reveal whether monetary misstatements have actually occurred.
A) True
B) False True
When analytical procedures are performed during substantive testing, they are typically more
focused and extensive than when performed as part of audit planning.
A) True
B) False True
Tests of controls should be performed after substantive tests of transactions.
A) True
B) False False
Substantive tests of transactions focus on the changes in the beginning and ending of the year
balances, particularly for the balance sheet.
A) True
B) False True
If tests of controls reveal that controls are sufficiently effective to justify reducing control risk,
the auditor is justified in reducing substantive audit tests.
A) True
B) False True
Analytical procedures are normally designed at the account level, whereas tests of controls and
substantive tests of transactions are normally designed at the transaction-related objective level.
A) True
B) False True

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Procedures to obtain an understanding of internal control may suffice for tests of controls when
the auditor is assessing control risk in a well defined transaction cycle that has not contained
material misstatements in prior audits.
A) True
B) False False
In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform.
Which of the following audit tests would be the most costly?
A) Analytical Procedures
B) Risk Assessment Procedures
C) Tests of Controls
D) Tests of Details of Balances D) Tests of Details of Balances
An exception or deficiency found in a test of controls:
A) indicates a financial statement misstatement.
B) indicates that a financial statement misstatement may be likely.
C) indicates that the financial statements are misstated.
D) indicates that an adverse opinion is warrarnted on the Audit of Internal Control. B)
indicates that a financial statement misstatement may be likely.
If no material differences are found using analytical procedures and the auditor concludes that
misstatements are not likely to have occurred:
A) other substantive tests may be reduced.
B) it will be necessary to increase the tests of balances.
C) it will not be necessary to perform tests of balances.
D) it will be necessary to increase the tests of transactions. A) other substantive tests may be
reduced.
Which of the following audit tests is usually the most costly to perform?
A) Analytical procedures
B) Tests of controls
C) Tests of balances
D) Substantive tests of transactions C) Tests of balances
An increased extent of tests of controls is most likely to occur when:
A) it is a first-year audit.
B) the auditor is doing a "fraud audit."
C) controls are effective and the preliminary control risk assessment is low.
D) controls are ineffective and the preliminary control risk assessment is high. C) controls are
effective and the preliminary control risk assessment is low.
When an auditor believes that analytical procedures indicate a reasonable possibility of
misstatement, the auditor usually would:
Perform additional tests of controls
Decide to modify tests of details of balances No
Yes
If the results of the tests of controls, substantive tests of transactions, and analytical procedures
are not consistent with the predictions, tests of details of balances will be:
A) eliminated.
B) increased.
C) unaffected.
D) changed. D) changed.

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The auditor would design which of the following audit tests to detect possible monetary errors in
the financial statements?
A) Control tests
B) Analytical procedures
C) Risk assessment procedures
D) Tests of operating effectives of controls over revenue and cash B) Analytical procedures
The reliance the auditor places on substantive tests in relation to the reliance placed on internal
control varies in a relationship that is ordinarily:
A) parallel.
B) inverse.
C) direct.
D) equal. B) inverse.
A deficiency uncovered in the audit of internal control is explained by which of the following in
relation to a financial statement misstatement?
A) the amount of the misstatement
B) the likelihood of the misstatement
C) the amount, likelihood, and classification of the misstatement
D) the amount and the classification of the misstatement B) the likelihood of the misstatement
Which of the following is not a valid basis for omitting an audit test in forming an opinion on the
clients financial statements?
A) the difficulty and expense involved in testing a particular item
B) the relative risk involved
C) the degree of reliance on the relevant internal controls
D) the relationship between the cost of obtaining evidence and its usefulness A) the
difficulty and expense involved in testing a particular item
Tests of controls are generally more costly to perform than analytical procedures.
A) True
B) False True
Substantive tests of details of balances are the most costly type of audit test to perform.
A) True
B) False False
Analytical procedures are the least costly type of audit test.
A) True
B) False True
If inherent risk is increased to medium from low, tests of details of balances can be reduced.
A) True
B) False False
The extent of tests of details of balances cannot be reduced when transaction-related audit
objectives have been satisfied by tests of controls or substantive tests of transactions.
A) True
B) False False
Tests of controls and substantive tests of transactions are normally conducted simultaneously on
the same transactions.
A) True
B) False True

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Under normal circumstances, there should be no variation in the audit evidence mix from cycle
to cycle for a given audit engagement.
A) True
B) False False
Analytical procedures are the most expensive type of audit test to perform because of the
expertise and training required to properly use them.
A) True
B) False False
The results of tests of controls and substantive tests of transactions affect the design of tests of
details of balances.
A) True
B) False True
If the auditor's preliminary assessment of control risk is decreased from high to medium, tests of
controls can be reduced.
A) True
B) False False
The most important consideration in developing the audit plan and audit program is the:
A) client's size.
B) client's industry.
C) audit firm's available personnel.
D) audit risk model used in its planning form. D) audit risk model used in its planning
form.
Auditors who test manual controls that rely on IT-generated reports must consider:
A) the benefits of relying on IT-generated reports.
B) separation of duties related to the IT-generated reports.
C) the controls related to the accuracy of the information in the report.
D) whether the manual controls are approved by the audit committee. C) the controls related
to the accuracy of the information in the report.
Auditing standards recognize that in instances where a significant amount of audit evidence is in
electronic form, it may not be possible to reduce detection risk to an acceptable level by
performing only substantive tests.
A) True
B) False True
In the audit of a public company, computer controls must be tested if they are considered to be
key controls for reducing the likelihood of material misstatements in the financial statements.
A) True
B) False True
Procedures to obtain an understanding of internal control may suffice for tests of controls when
the auditor is assessing automated controls.
A) True
B) False True
The evidence mix includes risk assessment procedures.
A) True
B) False False
A document that details what the auditor will do to gather sufficient, appropriate evidence is the:
A) audit strategy.

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B) audit program.
C) audit procedure.
D) audit risk model. B) audit program.
Auditors follow a four step approach to reduce assessed control risk. Which of the following is
not one of the four?
A) Apply transaction related audit objectives to a class of transactions.
B) Indentify accounts that have high inherent risk.
C) Identify key controls that reduce control risk.
D) For potential misstatements, design appropriate substantive tests of transactions. B)
Indentify accounts that have high inherent risk.
Auditing standards require a written audit program.
A) True
B) False True
When designing an audit program for tests of details of balances, the auditor should make
assumptions about inherent risk and control risk, and predictions concerning the outcome of tests
of controls, substantive tests of transactions, and analytical procedures.
A) True
B) False True
When testing details of balances, most audit procedures satisfy only one balance-related
objective, but more than one audit procedure should be used to test each objective.
A) True
B) False False
Substantive tests of transactions and control tests are often conducted simultaneously.
A) True
B) False True
Auditing standards require that tests of controls be performed on every audit engagement.
A) True
B) False False
Which of the following types of procedures will be performed in an audit of internal control over
financial reporting?
Procedures to obtain an understanding of internal control
Ratio Analysis Yes
No
What type of test is used to obtain more types of evidence than any other?
A) Substantive tests of transactions
B) Tests of controls
C) Analytical procedures
D) Tests of details D) Tests of details
Which audit tests involve physical examination and confirmation?
A) tests of controls
B) tests of transactions
C) tests of balances
D) analytical procedures C) tests of balances
Which of the following is generally not included in the "evidence mix"?
A) Tests of Controls
B) Substantive Tests of Transactions

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C) Risk Assessment Procedures

D) Tests of details of balances C) Risk Assessment Procedures
Which of the following types of evidence is not available when using substantive tests of
transactions?
A) Documentation
B) Confirmation
C) Inquiries of the client
D) Reperformance B) Confirmation
Analytical procedures provide fewer types of evidence than any other type of audit test.
A) True
B) False True
Presentation and disclosure related audit objectives would be performed in which phase of the
audit process?
A) plan and design audit approach
B) perform audit tests for controls and transactions
C) perform analytical procedures and tests of balances
D) complete the audit and issue the audit report D) complete the audit and issue the audit
report
Transaction related audit objectives would most likely be performed in which phase of the audit
process?
A) plan and design audit approach
B) perform audit tests for controls and transactions
C) perform analytical procedures and tests of balances
D) complete the audit and issue the audit report B) perform audit tests for controls and
transactions
Analytical procedures must be performed in:
A) the planning and test of control stages.
B) conjunction with tests of transactions and tests of details of balances.
C) the planning and completion stages.
D) the planning, test of control, and completion stages. C) the planning and completion
stages.
Which of the following tests commonly occur together?
A) substantive tests of transactions and tests of controls
B) substantive tests of transactions and obtaining an understanding of internal controls
C) analytical procedures and tests of controls
D) tests of controls and tests of details of balances A) substantive tests of transactions and tests
of controls
Tests of controls and substantive tests of transactions are an important determinant of the extent
of the auditor's use of tests of details of balances. Which of the following is true?
A) They are likely to be performed prior to the clients end of the fiscal year.
B) They are likely to eliminate the need for tests of details of balances.
C) They are likely to have no impact on the planned tests of details of balances. D) They are
likely to be used only in the audit of internal control. A) They are likely to be performed
prior to the clients end of the fiscal year.
When the auditor has completed the tests of details of balances and enters phase 4 of the audit
process, she must still perform audit procedures for which of the following?

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A) contingent liabilities and employee compensation

B) contingent liabilities and subsequent events
C) subsequent events and contractual commitments
D) subsequent events and unrecorded liabilities B) contingent liabilities and subsequent
events
Which of the following audit tests would be regarded as a test of controls?
A) Comparison of the inventory pricing to vendors' invoices.
B) Tests of the signatures on canceled checks to board of directors' authorizations.
C) Tests of the additions to property, plant, and equipment by physical inspections.
D) Review of the specific items making up the balance in a given general ledger account. B)
Tests of the signatures on canceled checks to board of directors' authorizations.
Which of the following audit tests form the basis for an auditor's report on internal control over
financial reporting?
A) Analytical procedures
B) Tests of transactions
C) Tests of controls
D) Tests of details of balances C) Tests of controls
After finishing the review phase of the study and evaluation of internal control in an audit, the
auditor should perform tests of controls on:
A) those controls that the auditor wants and plans to rely upon.
B) those controls in which material weaknesses were identified.
C) those controls that have a material effect upon the financial statement balances.
D) a random sample of the controls that were reviewed. A) those controls that the auditor
wants and plans to rely upon.
At what point in the audit process are tests of details most appropriately designed?
A) plan and design audit approach
B) perform audit tests for controls and transactions
C) perform analytical procedures and tests of balances
D) complete the audit and issue the audit report C) perform analytical procedures and tests
of balances
Which of the following is/are performed in an audit of internal control over financial reporting?
Procedures to obtain an understanding of internal control
Test of details of balances
Analytical Procedures Yes
No
No
Which of the following ultimately determines the specific audit procedures necessary to provide
an independent auditor with a reasonable basis for the expression of an opinion?
A) the audit program
B) the auditor's judgment
C) generally accepted auditing standards D) the auditor's working papers B) the auditor's
judgment
The auditor must communicate significant deficiencies in internal control only after the entire
audit is complete to ensure the auditor has a sufficient understanding of the circumstances
surrounding the deficiency.
A) True

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B) False False

When a CPA examines a client's projected financial statements, the CPA's report should: state
that the CPA performed procedures to evaluate management's assumptions.
Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a
nonpublic entity. Before the completion of the audit, Tech requested Davis to change the
engagement to a compilation of financial statements. Before Davis agrees to change the
engagement, Davis is required to consider the:

additional audit effort necessary to complete the audit.

reason given for Tech's request. Both I and II
The GAO standards list several threats to independence. The threat of familiarity is defined as:
when, due to a long or close relationship with management or other personnel, the auditor
will be too sympathetic or accepting of work.
Which of the following representations does an accountant make implicitly when issuing the
standard report for the compilation of a nonissuer's financial statements? The accountant is
independent with respect to the entity.
Heath Co.'s current ratio is 4:1. Which of the following transactions would normally increase its
current ratio? Selling inventory on account
According to the AICPA Code of Professional Conduct, what would a covered member most
appropriately do upon learning that another member of an attest engagement team is considering
employment with the client? Notify an appropriate person in the firm.
Which of the following factors most likely would assist an independent auditor in assessing the
objectivity of the internal auditor? The organizational status of the director of internal audit
If the business environment is experiencing a recession, the auditor most likely would focus
increased attention on which of the following accounts? Allowance for doubtful accounts
An auditor is reporting on condensed financial statements for an annual period that are derived
from the audited financial statements of an issuer. The auditor's opinion should indicate whether
the information in the condensed financial statements is fairly stated in all material respects:
in relation to the complete financial statements.
An auditor observes the mailing of monthly statements to a client's customers and reviews
evidence of follow-up on errors reported by the customers. This test of controls most likely is
performed to support management's financial statement assertion of: existence.
North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to
review and generate North's interim financial statements on King's microcomputer when King
prepared North's quarterly tax return. King should not submit these financial statements to North
unless, as a minimum, King complies with the provisions of: Statements on Standards for
Accounting and Review Services.
An auditor's report would be designated an audit of a special-purpose financial statement when it
is issued in connection with: a basis of accounting that the entity uses to comply with an
agreement between the entity and one or more third parties other than the auditor.
An auditor most likely would not rely on controls if the payroll department supervisor is
responsible for: authorizing payroll rate changes for all employees.
Which of the following levels would most likely address the risk of material misstatement by the
auditor's consideration of an entity's control environment? Financial statements

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Which of the following would most likely be associated with obtaining an understanding of
relevant internal factors when satisfying the obligation to understand the entity and its
environment on an audit? Revenue recognition practices
Russell CPA is auditing contingent liabilities. What generally is the primary risk of material
misstatement related to related financial statement disclosures? Completeness
Nile, CPA, on completing an audit, was asked by the client to provide technical assistance in
integrating a new IT system. The set of pronouncements designed to guide Nile in this
engagement is the Statement(s) on: Standards for Consulting Services.
Investment and property schedules are presented for purposes of additional analysis in an
auditor-submitted document. The schedules are not required parts of the basic financial
statements but accompany the basic financial statements. When reporting on such additional
information, the measurement of materiality is the: same as that used in forming an opinion on
the basic financial statements taken as a whole.
Which of the following is required of an accountant in reviewing a company's financial
statements under the Statements on Standards for Accounting and Review Services (SSARS)?
Obtain knowledge of the client's industry
Analytical procedures are required for which of the following? Audit planning
In planning an audit, the auditor's knowledge about the design of relevant control activities
should be used to: identify the types of potential misstatements that could occur.
A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended
December 31. The manager in charge of the audit is performing the final steps in the evidence
accumulation phase of the audit and notes that there have been several changes in Swenson
during the year under audit. Which of the following items would indicate there could be
substantial doubt about Swenson's ability to continue as a going concern for a reasonable period
of time? Recurring working capital shortages
Which of the following is correct regarding a compilation of financial statements engagement in
accordance with the Statements on Standards for Accounting and Review Services (SSARS)?
The accountant is not required to make inquiries nor perform procedures to corroborate
the information provided by the client.
Which of the following sampling methods would be used to estimate a numerical measurement
of a population, such as a dollar value? Variables sampling
Which of the following courses of action would an auditor most likely follow in planning a
sample of cash disbursements if the auditor is aware of several unusually large cash
disbursements? Stratify the cash disbursements population so that the unusually large
disbursements are selected
If a difference between auditor expectations and actual results in a financial statement audit test
cannot be explained, even after performing other audit procedures, which of the following is
likely to be the most appropriate initial auditor response? Aggregate a likely misstatement
A CPA firm should establish procedures for conducting and supervising work at all
organizational levels to provide reasonable assurance that the work performed meets the firm's
standards of quality. To achieve this goal, the firm most likely would establish procedures for:
reviewing engagement working papers and reports.
Independence is not required on which of the following types of engagements? Compilation
An auditor discovers that an account balance believed not to be materially misstated based on an
audit sample was materially misstated based on the total population of the account balance. This
is an example of which of the following sampling types of risks? Incorrect acceptance

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Title IV of the Sarbanes-Oxley Act of 2002 requires which of the following? All of the
answer choices are correct.
Which of the following is a valid statement related to the relationship of internal control using
information technology and financial reporting risk?Controls should be embedded into both the
software and hardware to preserve the integrity of data.
Which of the following tests of details most likely would help an auditor determine whether
accounts payable have been misstated? Examining vendor statements for amounts not
reported as purchases
Part of an auditor's process of establishing whether the preconditions for an audit are present
involves obtaining management's acknowledgement of its responsibility for all of the following
except: providing the auditor with restricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.
What is the most likely source of the following statement?

"There were unreasonable delays by management in permitting the commencement of the audit
and in providing needed information." Auditor's communication with those charged with
governance
As part of the process of observing a client's physical inventories, an auditor should be alert to:
the inclusion of any obsolete or damaged goods.
When assessing the internal auditor's competence, the independent CPA should obtain
information about the:educational background and professional certification of the internal
auditors.
Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries? Personnel
Which of the following would not be considered an analytical procedure? Projecting a deviation
rate by comparing the results of a statistical sample with the actual population characteristics
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? Inspect
the entity's reports of prenumbered shipping documents that have not been recorded in the sales
journal
Which of the following audit risk components may be assessed in nonquantitative terms?
Control risk, detection risk, and inherent risk
In reporting under Government Auditing Standards, an auditor most likely would be required to
communicate management's misappropriation of assets directly to a federal inspector general
when the fraudulent activities are: reported to the entity's governing body and the governing
body fails to make a required report to the federal inspector general.
The auditor should perform analytical procedures relating to revenue with the objective of
identifying unusual or unexpected relationships involving revenue accounts that may indicate a
material misstatement due to fraudulent financial reporting. Which of the following is not an
example of an analytical procedure? Observation of entity activities and operations
Which type of service organization control (SOC) report will provide assurance as to whether the
controls are suitably designed to achieve specified control objectives, whether those controls
have been placed in operation, and whether they operate effectively over a period of time?
Type 2

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Which of the following types of evidence would an auditor most likely examine to determine
whether internal control activities are operating as designed? Client records documenting
the use of EDP programs
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts.
What should the auditor do in an audit of financial statements? Document the auditor's
understanding of internal controls
If an accountant is performing a review engagement for a nonissuer and considers it necessary to
communicate a matter that is not presented in the financial statements, then the accountant
should include this information in which of the following paragraphs in the review report?
The other-matter paragraph
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level
manager. The auditor determines that this transaction is inconsequential and several similar
transactions would not be material to the financial statements in the aggregate. Which of the
following statements best describes the auditor's required response to the discovery? The
auditor should bring the transaction to the attention of an appropriate level of management.
Although the quantity and content of audit documentation varies with each particular
engagement, an auditor's permanent files most likely include: analyses of capital stock and
other owners' equity accounts.
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting employee timecards for proper approval by supervisors
Which of the following titles would be considered suitable for financial statements that are
prepared on a cash basis? Statement of revenues collected and expenses paid
Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented
with those of the current year for comparative purposes without Jewel's auditor's report, which
expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the
successor auditor, should:

not name Jewel as the predecessor auditor.

indicate the type of report issued by Jewel.
indicate the substantive reasons for Jewel's qualification. I, II, and III
The regulatory body that has the primary authority to develop requirements for performing
federal program compliance audits in accordance with the Single Audit Act is: the Office of
Management and Budget (OMB).
An auditor determines that the entity is presenting certain supplementary financial disclosures of
pension information that are required by the GASB. Under these circumstances, the auditor
should:compare the required supplementary information for consistency with the audited
financial statements.
Which of the following matters is an auditor required to communicate to those charged with
governance? The process used by management in formulating sensitive accounting estimates
The auditor's overall responses to address the assessed risks of material misstatement at the
financial statement level may include all of the following except: examining inventory counts.
In addition to the Statements on Standards for Accounting and Review Services (SSARS), which
of the other following standards must also be complied with in an annual review of the financial
statements of a nonissuer? Code of Professional Conduct and Statements on Quality Control
Standards

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Which of the following matters is covered in a typical comfort letter? An opinion as to

whether the audited financial statements comply in form with the accounting requirements of the
SEC
An auditor's program for the examination of long-term debt should include steps that require the:
examination of any bond trust indenture.
Which of the following statements is false with respect to management representation letters on a
review engagement? The accountant acknowledges his or her responsibility for the fair
presentation in the financial statements of financial position, results of operations, and cash
flows.
When auditing related party transactions, an auditor places primary emphasis on: evaluating the
disclosure of the related party transactions.
According to the PCAOB, which of the following tax services may be provided jointly with the
audit of an issuer's financial statements without impairing independence? Reviewing a proposed
transaction and informing the client of the tax consequences
An auditor who performed analytical procedures that compared current-year financial
information to the comparable prior period noted a significant increase in net income. Given this
result, which of the following expectations of recorded amounts would be unreasonable? A
decrease in retained earnings
Which of the following procedures would an auditor most likely perform in searching for
unrecorded liabilities?Vouch a sample of cash disbursements recorded just after year-end to
receiving reports and vendor invoices
Which of the following procedures should an accountant perform during an engagement to
review the financial statements of a nonissuer? Obtaining a representation letter from
members of management
Which of the following factors most likely would cause a CPA not to accept a new audit
engagement? The prospective client's unwillingness to permit inquiry of its legal counsel
Which of the following is not an example of conditions and events that may indicate the
existence of risks of material misstatement? Operating in an environment that is regulated by the
government
Which of the following services, if any, may an accountant who is not independent provide?
Compilations, but not reviews
According to the AICPA Code of Professional Conduct, which of the following financial
interests in the client during the period of the engagement impairs a CPA's independence? Only
direct and material indirect financial interests
In auditing computer-based systems, the integrated test facility: is a concurrent audit
technique where a special set of dummy master files is established and test transactions are
entered to test the programs using the dummy files during regular processing runs.
If the audit objective of a test of details is to detect overstatements of sales, the auditor should
vouch transactions from the: accounting records to the source documents.
What is the definition of fraud in an audit of financial statements? An intentional act that results
in a material misstatement in financial statements that are the subject of an audit
In performing a financial statement audit in accordance with Government Auditing Standards, an
auditor is required to report on the entity's compliance with laws and regulations. This report
should:state that compliance with laws and regulations is the responsibility of the entity's
management.

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1. This was the first year in five years that TWD operated at a profit, because the municipalities
received increased federal and state funding for environmental purposes. The audit risk would:
decrease.
2. TWD's Board of Directors is controlled by Mead, the majority stockholder, who also acts as
the chief executive officer. The audit risk would: increase.
3. The internal auditor reports to the controller and the controller reports to Mead. The audit risk
would: increase.
4. The accounting department has experienced a high rate of turnover of key personnel. The audit
risk would: increase.
5. TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to
monitor TWD's financial performance. The audit risk would: decrease.
6. TWD's employees are paid biweekly. The audit risk would: have no effect.
7. Bond has audited TWD for five years. The audit risk would: decrease
8. During 20X1, TWD changed its method of preparing its financial statements from the cash
basis to generally accepted accounting principles. The audit risk would: increase.
9. During 20X1, TWD sold half of its controlling interest in United Equipment Leasing (UEL)
Co. TWD retained significant interest in UEL. The audit risk would: increase.
10. During 20X1, litigation filed against TWD five years previous alleging that TWD discharged
pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD
included in prior years' financial statements are being removed for the 20X1 financial statements.
The audit risk would: decrease
11. During December 20X1, TWD signed a contract to lease disposal equipment from an entity
owned by Mead's parents. This related party transaction is not disclosed in TWD's notes to its
20X1 financial statements. The audit risk would: increase.
12. During December 20X1, TWD increased its casualty insurance coverage on several pieces of
sophisticated machinery from historical cost to replacement cost. The audit risk would: have
no effect.
13. Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of
20X1 disclosed a new policy. TWD guaranteed to several municipalities that it would refund the
federal and state funding paid to TWD if any municipality fails federal or state site cleanup
inspection in 20X2. The audit risk would: increase
14. An initial public offering of TWD's stock is planned for late 20X2. The audit risk would:
increase.
Passwords and biometric devices General
Edit checks Application
Procedures for system documentation General
Firewalls General
Automatic printed reports when errors are discovered by the system Application
Existence is one of the general assertions regarding a client's inventory balance. Which of the
following is not a substantive auditing procedure related to this assertion? Test the clerical
accuracy of inventory listings.
Completeness is one of the general assertions regarding a client's inventory balance. Which of
the following is not a substantive auditing procedure related to this assertion? Examine an
analysis of inventory turnover.

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Rights and obligations is one of the general assertions regarding a client's inventory balance.
Which of the following is not a substantive auditing procedure related to this assertion? Tour
the plant.
Valuation and allocation is one of the general assertions regarding a client's inventory balance.
Which of the following is not a substantive auditing procedure related to this assertion?
Review drafts of the financial statements.
Management makes assertions about the presentation and disclosure of inventory in the financial
statements. Which of the following is not a substantive auditing procedure related to these
assertions? Review industry experience and trends.
Which of the following substantive audit procedures would not satisfy the valuation and
allocation assertion related to a client's inventory balance? Use the work of specialists to
corroborate the nature of specialized products.
1. The _______ requires a member to be honest and candid within the constraints of client
confidentiality. integrity principle
2. The _______ requires a member to discharge professional responsibilities with competence
and diligence. due care principle
3. The _______ imposes the obligation to be impartial, intellectually honest, and free of conflicts
of interest and precludes relationships that may appear to impair a member's objectivity in
rendering attestation services.objectivity and independence principle
4. The _______ includes both the underlying basic principles and the official pronouncements
issued. None of the principles listed
5. The _______ requires that services be consistent with acceptable professional behavior for
members. scope and nature of services principle
6. The _______ requires that members accept the obligation to act in a way that will serve the
clients, credit grantors, or employers; honor the clients, credit grantors, or employers; and
demonstrate professionalism. public interest principle
7. The _______ requires members to exercise sensitive professional and moral judgments in all
their activities.responsibilities principle

During the course of an audit, an auditor finds evidence that an officer has entered fraudulent
transaction in the financial statements. The fraudulent transactions can be adjusted so the
statements are not materially misstated. What should the auditor do? Communicate the
matter to those charged with governance
Which of the following statements reflects an auditor's responsibility for detecting errors and
fraud? An auditor should design the audit to provide reasonable assurance of detecting errors
and fraud that are material to the financial statements
Which of the following groups within an entity is typically in the best position to perpetrate a
material fraud? Management
Which of the following parties should an auditor notify first when discovering an immaterial
fraud is committed by an accounting clerk? An appropriate level of management
Which of the following best characterizes an auditor's exercise of professional skepticism?
Having an attitude that includes a questioning mind
What is the definition of fraud in an audit of financial statements? An intentional act that results
in a material misstatement in financial statements that are the subject of an audit

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What is the primary objective of the fraud brainstorming session? Assess the potential for
material misstatement due to fraud
Which of the following procedures would an auditor most likely perform during an audit
engagement's overall review stage in formulating an opinion on an entity's financial statements?
Consider whether the results of audit procedures affect the assessment of the risk of
material misstatement due to fraud
Which of the following is a requirement of an audit of both an issuer's and a nonissuer's financial
statements? The auditor is required to assess the risk of fraud
Which of the following communications between the auditor with final responsibility for an
engagement and the audit engagement team regarding the susceptibility of a client's financial
statements to material misstatements due to error or fraud is required by auditing standards?
Discussing the need to maintain a questioning mind and to exercise professional
skepticism throughout the audit
Which of the following statements describes why a properly designed and executed audit may
not detect a material misstatement due to fraud? Audit procedures that are effective for
detecting an unintentional misstatement may be ineffective for an intentional misstatement that is
concealed through collusion
Which statement is true with respect to discussion among engagement personnel regarding the
risk of material misstatement due to fraud? Audit documentation must include a description of
the discussion
Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity,
and rationalization/attitude)? The fraud risk factors should be discussed by engagement
personnel during planning
An auditor prepares an unmodified opinion on financial statements that are materially misstated
due to fraud. Which of the following is true? The auditor will be considered to have met his or
her responsibility provided the audit was planned and performed appropriately, including a
specific assessment of the risk of material misstatement due to fraud
In planning an audit, an auditor should document in the working papers the auditor's risk
assessment of a material misstatement of the financial statements due to fraud. Which of the
following should be included in workpaper documentation if risk factors are identified as being
present? Those risk factors identified
Which of the following factors is most important concerning an auditor's responsibility to detect
errors and fraud? The risk that mistakes, falsifications, and omissions may cause the
financial statements to contain material misstatements
Which of the following statements is correct concerning an auditor's responsibility to report
fraud? The disclosure of fraudulent activities to parties other than the client's senior management
and those charged with governance is not ordinarily part of the auditor's responsibility
During the annual audit of Ajax Corp., an issuer, Jones, CPA, a continuing auditor, determined
that illegal political contributions had been made during each of the past 7 years, including the
year under audit. Jones notified the board of directors about the illegal contributions, but they
refused to take any action because the amounts involved were immaterial to the financial
statements. Jones should reconsider the intended degree of reliance to be placed on the
Management representation letter
Which of the following characteristics most likely would heighten an auditor's concern about the
risk of material misstatements arising from fraudulent financial reporting? Management displays
a significant disregard for regulatory authorities

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Which of the following characteristics most likely would heighten an auditor's concern about the
risk of intentional manipulation of financial statements? Management places substantial
emphasis on meeting earnings projections
Which of the following circumstances would an auditor most likely consider a risk factor relating
to misstatements arising from fraudulent financial reporting? Management is interested in
maintaining the entity's earnings trend by using aggressive accounting practices
Management has frequent disputes with the auditor on accounting matters
Which of the following factors most likely would heighten an auditor's concern about the risk of
fraudulent financial reporting Year-end adjustments by the entity that significantly affect
financial results
An auditor is evaluating a client's internal controls. Which of the following situations would be
the most difficult internal control issue for an auditor to detect? Two employees, who work in
different departments, are circumventing an internal control
Which of the following factors most likely would heighten an auditor's concern about the risk of
fraudulent financial reporting? Inability to generate cash flows from operations while
reporting substantial earnings growth
An overly complex organizational structure involving unusual lines of authority
A company has an internal audit function and is in a regulated industry. Which of the following
groups should the auditor approach to inquire about the risks of fraud within the entity?
Management, internal audit, and audit committee
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level
manager. The auditor determines that this transaction is inconsequential and several similar
transactions would not be material to the financial statements in the aggregate. Which of the
following statements best describes the auditor's required response to this discovery? The
auditor should bring the transaction to the attention of an appropriate level of management
Which of the following circumstances most likely would cause an auditor to suspect that there
are material misstatements in an entity's financial statements? Supporting accounting
records and files that should be readily available are not produced promptly when requested
Which of the following circumstances would most likely cause an auditor to suspect that material
misstatements arising from fraud exist in a client's financial statements? Significantly fewer
responses to confirmation requests are received than expected
Which of the following circumstances most likely would cause an auditor to consider whether
material misstatements exist in an entity's financial statements Transactions selected for
testing are not supported by proper documentation
Which of the following statements is correct with respect to fraud encountered during an audit
engagement of a nonissuer? It is often difficult to detect fraudulent intent in matter involving
accounting estimates and the application of accounting principles
Which of the following could indicate source document fraud? The same invoice number
appears on different invoices
Which of the following factors most likely would heighten an auditor's concern about the risk of
material misstatement arising from the misappropriation of assets? The entity's fixed assets lack
ownership identification
When performing a substantive teset of a random sample of cash disbursements, an auditor is
supplied with a photocopy of vendor invoices supporting the disbursements for one particular
vendor rather than the original invoices. The auditor is told that the vendor's original invoices

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have been misplaced. What should the auditor do in response to this situation? Reevaluate the
risk of fraud, and design alternate tests for the related transactions
An entity has failed to provide documentation for a newly acquired material asset and informs its
auditors that the documentation is lost. According to generally accepted government auditing
standards, what would this situation typically indicate to the auditors? A heightened risk of
fraud
Which of the following is least likely to aid the auditor in evaluating the risk of improper
revenue recognition due to fraud? Analysis of sales commissions over the most recent five-
year period
An auditor has identified a risk of material misstatement due to fraud related to the inventory
function. Which is least likely to be an appropriate response? Requesting that management
more closely monitor the inventory function
Which of the following situations represents a risk factor that relates to misstatements arising
from misappropriate of assets? A lack of independent checks
Which of the following situations most likely represents the highest risk of a material
misstatement arising from misappropriation of assets? A large number of bearer bonds on
hand
Inherent risk and control risk differ from detection risk in which of the following ways?
Inherent risk and control risk exist independently of the audit
The existence of audit risk is recognized by the statement in the auditor's standard report that the
auditor Obtains reasonable assurance about whether the financial statements are free of material
misstatement
In a financial statement audit of a nonissuer, an auditor would consider a judgemental
misstatement to be a misstatement that Involves an estimate
Which of the following best describes a type of judgemental misstatement? Differences
between management and the auditor's judgement regarding estimates
Which of the following is true about the term "factual misstatement"? It refers to
misstatements about which there is no doubt
Which of the following is a definition of control risk? The risk that a material misstatement
will not be prevented or detected on a timely basis by the client's internal controls
Which of the following is an important consideration when deciding the nature of tests to use in
a financial statement audit? The procedures to be applied on a particular engagement are a
matter of the auditor's professional judgement
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the
risk that Material misstatements may exist in the financial statements
An auditor assesses control risk because it Affects the level of detection risk that the auditor
may accept
Detection risk differs from both control risk and inherent risk in that detection riskCan be
changed at the auditor's discretion
An auditor uses the assessed level of control risk to Determine the acceptable level of detection
risk for financial statement assertions
Which of the following risks may be assessed in nonquantitative terms?
I. Control risk
II. Detection risk
III. Inherent risk I, II, and III

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In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the
following? The susceptibility of a financial statement assertion to a material misstatement
assuming there are not related controls
In an engagement to examine management's discussion and analysis (MD&A), which of the
following best defines control risk? The risk that material misstatements in the MD&A
presentation will not be prevented in a timely manner
Control risk should be assessed in terms of Financial statement assertions
Regardless of the assessed level of control risk, an auditor would perform some Substantive
tests to restrict detection risk for significant transactions
In an audit of financial statements for which an auditor's assessment of risk is judgemental and
may not be sufficiently precise to identify all risks of material misstatement, the auditor should
take which of the following actions? Perform substantive procedures for all relevant assertions
related to each material class of transactions
Which of the following should an auditor do when control risk is assessed at the maximum level?
Document the assessment
The acceptable level of detection risk is inversely related to the Assurance provided by
substantive tests
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed
risk of material misstatement from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would Decrease
detection risk
Which of the following types of risk increases when an auditor performs substantive analytical
audit procedures for financial statement accounts at an interim date? Detection
Which of the following types of risks most likely would increase if accounts receivable are
confirmed three months before year-end? Detection
In which of the following circumstances is substantive testing of accounts receivable before the
balance sheet date most appropriate? Internal controls during the remaining period are effective
When an auditor increases the assessed level of control risk because certain control activities
were determine to be ineffective, the auditor most likely would increase the Extent of tests
of details
Which of the following best identifies the effect of an increase in the risk of material
misstatement on detection risk and the extent of substantive procedures? The acceptable level
of detection risk decreases, and the extent of substantive procedures increases
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive tests should increase
Which of the following courses of action is the most appropriate if an auditor concludes that
there is a high risk of material misstatement?Select more effective substantive tests
As the acceptable level of detection risk increases, an auditor may change the Timing of
substantive tests from year-end to an interim date
As the acceptable level of detection risk decreases, an auditor may Postpone the planned timing
of substantive tests from interim dates to the year-end
When an auditor increases the assessed level of control risk because certain control activities
were determined to be ineffective, the auditor would most likely increase the Extent of tests
of details

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Under which of the following circumstances should an auditor consider confirming the terms of
a large complex sale? When the combined assessed level of inherent and control risk over the
sale is high
As a result of control testing, a CPA has decided to reduce control risk. What is the impact on
substantive testing sample size if all other factors remain constant? The sample size would be
lower
Which of the following is an example of an inherent risk that an auditor should consider?
Technological developments that may render inventory obsolete
Which of the following characteristics most likely would heighten an auditor's concern about the
risk of material misstatements in an entity's financial statements? The entity's industry is
experiencing a declining customer demand
Which of the following matter relating to an entity's operations would an auditor most likely
consider as an inherent risk factor in planning an audit? The entity enters into derivative
transactions as hedges
An audit team has concluded that inventory is highly susceptible to misappropriate and that a
potential misstatement would be material to the financial statements. How should the audit team
address the audit procedures to the increased risk? Review the client's control procedures over
the safeguarding of inventory, and perform a physical inventory count on the last day of the
current year
Which of the following is always necessary in a financial statement audit?
I. Tests of the operating effectiveness of controls
II. Analytical procedures
III. Risk assessment procedures II and III only
Audit evidence concerning proper segregation of duties ordinarily is best obtained by Direct
personal observation of the employees who apply control activities
An auditor generally tests the segregation of duties related to inventory by Personal inquiry and
observation
When the operating effectiveness of a control is not evidence by written documentation, an
auditor should obtain evidence about the control's effectiveness by Inquiry and other procedures
such as observation
When an auditor plans to rely on controls that have changed since they were last tested, which of
the following courses of action would be most appropriate? Test the operating effectiveness of
such controls in the current audit
Which of the following statements best describes why an auditor would use only substantive
procedures to evaluate specific relevant assertions and risks? Testing the operating
effectiveness of the relevant controls would not be efficient
During an audit of a nonissuer's financial statements, an auditor should perform tests of controls
to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant
controls if Substantive procedures alone cannot provide sufficient appropriate audit evidence
An auditor uses the knowledge provided by the understanding of internal control and the final
assessed risk of material misstatement primarily to determine the nature, timing, and extent of
the Substantive tests
After performing risk assessment procedures, an auditor decided not to perform tests of controls.
The auditor most likely decided that It would be inefficient to perform tests of controls that
would result in a reduction in planned substantive tests

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In assessing control risk, an auditor ordinarily selects from a variety of techniques, including
Reperformance and observation
An auditor's risk assessment is based on the assumption that controls are operating effectively.
Which of the following was not a step in making this assessment? Perform tests of details of
transactions to detect material misstatements in the financial statements
Under which circumstance would an auditor be most likely to perform substantive tests before
the balance sheet date? The account in question has very little activity from year to year
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including
Reperformance
Which of the following statements about performing tests of controls to support a lower level of
control risk is not true? Inquiry alone generally will support a conclusion for a lower
assessed level of control risk
When the auditor's risk assessment is based on the effective operation of controls, the audit will
most likely involve Identifying specific internal controls relevant to specific assertions
After obtaining an understanding of internal control and performing risk assessment procedures,
an auditor decided not to perform tests of controls. The auditor most likely concluded that the
Additional evidence to support a reduction in control risk was not cost-beneficial to
obtain
If an auditor's risk assessment is based on the effective operation of controls, the auditor will
likely Identify specific internal controls that are likely to detect or prevent material
misstatements
After obtaining an understanding of the entity and its environment, including its internal control,
an auditor decided to perform tests of controls. This is likely because The auditor's risk
assessment is based on the effective operation of controls
If interim substantive procedures for an account identified no exceptions, which of the following
would the auditor not perform on that account at year-end? Tests of details for the entire year
under audit
An auditor of a nonissuer should design the tests of details to ensure that sufficient audit
evidence supports which of the following? The planned level of assurance at the relevant
assertion level
Which of the following documentation is not required for an audit in accordance with generally
accepted auditing standards? The basis for the auditor's decision not to perform tests of controls
concurrently with obtaining an understanding of internal control
Which of the following would least likely affect the extent of the auditor's consideration of the
client's internal controls? The amount of time budgeted to complete the engagement
In order to respond to the increased risks that could be present in the initial audit of an entity, an
external auditor should consider the assignment of External audit personnel with appropriate
levels of capabilities and competence
Providing more supervision during an audit of a nonissuer in response to assessed risks of
material misstatement at the financial statement level is an example of An overall response
As part of understanding internal control, an auditor is not required to Obtain knowledge
about the operating effectiveness of internal control
Which of the following levels would most likely address the risk of material misstatement by the
auditor's consideration of an entity's control environment Financial statements

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Which of the following statements is correct concerning an auditor's assessment of control risk?
Assessing control risk may be performed concurrently during an audit with obtaining an
understanding of the entity's internal control
The objective of tests of details of transactions performed as tests of controls is to Evaluate
whether internal controls operated effectively
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts.
What should the auditor do in an audit of financial statements? Document the auditor's
understanding of internal controls
Which of the following audit techniques ordinarily would provide an auditor with the least
assurance about the operating effectiveness of an internal control activity? Preparation of system
flowcharts
Which of the following procedures would an auditor most likely perform prior to the balance
sheet date? Review detail and test significant travel and entertainment expenses
Before applying principal substantive tests to the details of accounts at an interim date prior to
the balance sheet date, an auditor should Consider whether the amounts of the year-end
balances selected for interim testing are reasonably predictable
How would an auditor of a noonissuer most appropriately respond to a heightened assessed risk
of material misstatement? By assigning more experienced staff or those with specialized
skills to high-risk areas
Which of the following procedures is considered a test of controls? An auditor interviews and
observes appropriate personnel to determine segregation of duties
While performing interim audit procedures of accounts receivable, numerous unexpected errors
are found resulting in a change of risk assessment. Which of the following audit responses would
be most appropriate? Use more experience audit team members to perform year-end testing
A client maintains a large data center where access is limited to authorized employees. How may
an auditor best determine the effectiveness of this control activity? Observe whether the data
center is monitored
Which of the following explanations best describes why an auditor may decide to reduce tests of
details for a particular audit objective? Analytical procedures have revealed no unusual or
unexpected results
An overall response to address a high-assessed risk of material misstatement at the financial
statement level of a nonissuer may include Providing more supervision of the audit team
Which of the following factors affecting the risk associated with a control is not a consideration
when designing the current-year audit procedures in an audit of internal control over financial
reporting for an issuer? Whether to control has been documented in flowchart or narrative
form
What is the most likely course of action that an auditor would take after de terming that
performing substantive tests on inventory will take less time than performing tests of controls?
Perform only substantive tests on inventory
An audit client sells 15 to 20 units of product annually. A large portion of the annual sales
occur in the last month of the fiscal year. Annual sales have not materially changed over the
past five years. Which of the following approaches would be most effective concerning the
timing of audit procedures for revenue? The auditor should inspect transactions occurring in
the last month of the fiscal year and review the related sale contracts to determine that revenue
was posted in the proper period

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In an environment that is highly automated, an auditor determines that it is not possible to reduce
detection risk solely by substantive tests of transactions. Under these circumstances, the auditor
most likely would Perform tests of controls to support a lower level of assessed control risk
Which of the following types of evidence would an auditor most likely examine to determine
whether internal controls are operating as designed? Client records documenting the use of EDP
programs
An auditor decides to perform substantive tests on a client's property and equipment balance as
of an interim date. The auditor has not obtained evidence about the operating effectiveness of
relevant controls. What additional work must be performed to extend the audit conclusions from
the interim date to the balance sheet date? Substantive procedures for the period between the
interim date and the balance sheet date
In performing interview and examining documents related to preliminary work in a financial
statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a
new product line. What should the auditor do as a result? Analyze the newly identified risk in
conjunction with other known business risks and consider whether there is an immediate
consequence for the risk of material misstatement at various levels of the audit
A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the
invoice was approved and to ascertain the amount and other terms of the invoice. Which of the
following lists two tests that the auditor performed? Tests of controls and tests of details
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 Tests of controls and limited tests of
current year property and equipment transactions
What is the primary purpose of reviewing conflict-of-interest statements sight by members of
management? To identify transactions with related parties
Which of the following steps should an auditor perform first to determine the existence of related
parties? Request a list of related parties from management
Which of the following auditing procedures most likely would assist an auditor in identifying
related party transactions? Reviewing confirmations of loans receivable and payable for
indications of guarantees
Which of the following auditing procedures most likely could assist an auditor in identifying
related party transactions? Reviewing confirmations of compensating balance arrangements
Which of the following auditing procedures most likely would assist an auditor in identifying
related party transactions? Reviewing accounting records for nonrecurring transactions
recognized near the balance sheet date
When an auditor becomes aware of a possible noncompliance with laws and regulations by a
client, the auditor should obtain an understanding of the nature of the noncompliance to
Evaluate the effect on the financial statements
When auditing related party transactions, an auditor places primary emphasis on Evaluating the
disclosure of the related party transactions
In auditing related party transactions, an auditor ordinarily places primary emphasis on The
adequacy of disclosure of the related party transactions
An auditor concludes that client management has been involved in noncompliance with a certain
law and that this fact has not been properly accounted for or disclosed. The auditor should
withdraw from the engagement if the Client refuses to accept the auditor's report as modified for
the noncompliance

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After determining that a related party transaction has, in fact, occurred, an auditor should Obtain
an understanding of the business purpose of the transaction
Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of
the entity's financial statements is responsible for Obtaining a general understanding of the
legal and regulatory framework applicable to the entity and how the entity is complying with that
framework
Which of the following statements is correct regarding the auditor's consideration of the
possibility of noncompliance with laws and regulations by clients? If specific information
concerning an act of noncompliance with laws and regulations comes to the auditor's attention,
the auditor should apply audit procedures specifically directed to ascertaining whether such an
act has occurred
The most likely explanation why the auditor's examination cannot reasonably be expected to
bring all acts of noncompliance with laws and regulations by the client to the auditor's attention
is that Acts of noncompliance with laws and regulations by clients often relate to operating
aspects rather than accounting aspects
Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does
Jones provide that direct effect acts of noncompliance with laws and regulations that are material
to XYZ's financial statements, and acts of noncompliance that have a material, but indirect effect
on the financial statements will be detected?
I. Direct effect noncompliance
II. Indirect effect noncompliance Direct effect noncompliance: Reasonable
Indirect effect noncompliance: None
If specific information comes to an auditor's attention that implies the existence of possible acts
of noncompliance with laws and regulations that could have a material, but indirect effect on the
financial statements, the auditor should next Apply audit procedures specifically directed to
ascertaining whether an act of noncompliance with laws and regulations has occurred
An auditor who discovers that client employees have committed an act of noncompliance with
laws and regulations that has a material effect on the client's financial statements most likely
would withdraw from the engagement if The client does not take the remedial action that the
auditor considers necessary
An auditor who discovers that a client's employees paid small bribes to municipal officials most
likely would withdraw from the engagement if Management fails to take the appropriate
remedial action
Which of the following information that comes to an auditor's attention most likely would raise a
question about the occurrence of noncompliance with laws and regulations? The discovery
of unexplained payments made to government employees
Which of the following relatively small misstatements most likely could have a material effect
on an entity's financial statements? An illegal payment to a foreign official that was not
recorded
Which of the following procedures would most likely assist an auditor in identifying related
party transactions? Review the minutes of the meetings of the board of directors and its
committees
Which of the following events most likely would indicate the existence of related parties? Selling
real estate at a price significantly different from appraised value
During an audit of a nonissuer, if the terms of a related party transaction are found to be
materially inconsistent with the explanations provided by management, an auditor should

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Consider the reliability of management's explanations and representations on other

significant matters
An auditor who discovers that a client's employees have paid small bribes to public officials
most likely would withdraw from the engagement if the Employees' actions affect the
auditor's ability to rely on management's representations
Which of the following information discovered during an audit most likely would raise a
question concerning possible noncompliance with laws and regulations? The entity prepared
several large checks payable to cash during the year
An auditor of a manufacturer would most likely question whether that client has committed acts
of noncompliance with laws and regulations if the client has Been forced to discontinue
operations in a foreign country
Which of the following procedures most likely would assist an auditor in determining whether
management has identified all accounting estimates that could be material to the financial
statements? Review the lawyer's letter for information about litigation
Which of the following ultimately determines the sufficiency and appropriateness of audit
evidence to support the auditor's conclusions? Professional judgement
Which of the following statements concerning audit evidence is correct? The measure of the
sufficiency of audit evidence lies in the auditor's judgement
What type of evidence would provide the highest level of assurance in an attestation
engagement? Evidence obtained from independent sources
Which of the following types of audit evidence is the most persuasive? Bank statements
obtained from the client
Which of the following presumptions does not relate to the reliability of audit evidence? An
auditor's opinion, to be economically useful, is formed within reasonable time and based on
evidence obtained at a reasonable cost
Which of the following factors would most likely influence an auditor's consideration of the
reliability of data when performing analytical procedures? Whether the data were developed
under a system with adequate controls
Which of the following presumptions is correct about the reliability of audit evidence? An
effective internal control structure provides more assurance about the reliability of audit evidence
Which of the following documents are examples of audit evidence generated by the client?
Shipping documents and receiving reports
Which of the following statements concerning audit evidence is correct? A client's accounting
data cannot be considered sufficient audit evidence to support the financial statements
PCAOB standards state that the relevance of audit evidences depends on all but which of the
following? The auditor's risk assessment
After testing a client's internal control activities, an auditor discovers a number of significant
deficiencies in the operation of a client's internal controls. Under these circumstances the auditor
most likely would Increase the assessment of control risk and increase the extent of
substantive tests
Which of the following would provide an auditor with the most reliable evidence regarding the
existence of accounts receivable? An accounts receivable confirmation received by the
auditor from the client's customer
Which of the following evidence provides the greatest assurance of reliability?
A. Bank statement
B. Cash disbursements journal

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C. Cash receipts journal

D. Bank reconciliation A. Bank statement
Which of the following sources of corroborating information would most likely increase the
assurance that an auditor of a nonissuer obtains from management's representations? A
confirmation received from the entity's bank
Which of the following types of audit evidence generally is the most reliable?
A. Confirmation of account information
B. Analytical procedures
C. Inquiries made of management
D. Review of prior-year audit procedures A. Confirmation of account information
Which of the following procedures would be most effective in reducing attestation risk?
Examination of evidence
Which of the following procedures would yield the most reliable evidence? A
recalculation of bad debt expense
An auditor may achieve audit objectives related to particular assertions by Performing analytical
procedures
Which of the following procedures would an auditor most likely use to identify unusual year-end
transactions? Performing analytical procedures
In determining whether transactions have been recorded, the direction of the audit testing should
be from the Original source documents
If not already performed during the overall review stage of the audit, the auditor should perform
analytical procedures relating to which of the following transaction cycles? Revenue
The objective of tests of details of transactions performed as substantive tests is to Detect
material misstatements in the financial statements
Which of the following is an analytical procedure? Comparing current-year balances to prior-
year balances
Which of the following steps should be performed first in applying analytical procedures?
Develop an expectation of a balance or ratio by using relationships that are expected to
exist
Which of the following most likely would cause an auditor to consider whether a client's
financial statements contain material misstatements? The results of an analytical
procedure disclose unexpected differences
Which of the following statements is correct regarding the predictability of analytical procedures
in a financial statement audit?Relationships involving income statement accounts tend to be
more predictable than relationships involving only balance sheet accounts
Auditors try to identify predictable relationships when using analytical procedures. Relationships
involving transactions from which of the following accounts most likely would yield the highest
level of evidence? Interest expense
Relationships among income statement accounts tend to be more predictable than balance sheet
accounts because they represent transactions over a period of time
An auditor's decision whether to apply analytical procedures as substantive tests usually is
determined by the Precision and reliability of the data used to develop expectations
Analytical procedures used in the overall review stage of an audit generally include
Considering unusual or unexpected account balances that were not previously identified
An auditor has identified the controller's review of the bank reconciliation as a control to test. In
connection with this test, the auditor interviews the controller to understand the specific data

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reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is
properly prepared by the accountant and reviewed by the controller as evidence by their
respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
Inquiry and inspection of controls
If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper
authorization of transactions, then the auditor is conducting An inspection
Analytical procedures are required for Audit planning
Which of the following is an analytical procedure that an auditor most likely would perform
during the final review stage of an audit? Reading the financial statements and considering
whether there are any unusual or unexpected balances that were not previously identified
To be effective, analytical procedures in the overall review stage of an audit engagement should
be performed by A manager or partner who has a comprehensive knowledge of the client's
business and industry
For audits of financial statements made in accordance with generally accepted auditing
standards, the use of analytical procedures is required to come extent
I. As a substantive test
II. In the final review stage II only
Which of the following would not be considered an analytical procedure? Projecting a deviation
rate by comparing the results of a statistical sample with the actual population of characteristics
Which of the following is true about using analytical procedures as a substantive test?
Analytical procedures are not required to be used as a substantive test and are more likely
to be used for accounts that are predictable
A primary objective of analytical procedures used in the final review stage of an audit is to
Assist the auditor in evaluating the overall financial statement presentation
Analytical procedures used in planning an audit should focus on Enhancing the auditor's
understanding of the client's business
If the objectives of a test of details is to detect overstatements of sales, the auditor should trace
transactions from the Accounting records to the source documents
In testing the existence assertion for an asset, an auditor ordinarily works from the Accounting
records to the supporting evidence
Which of the following would not be considered an analytical procedure? Projecting an error
rate by comparing the results of a statistical sample with the actual population characteristics
Analytical procedures performed in the final review stage of an audit generally would include
Considering the adequacy of the evidence gathered in response to unexpected balances
and identified in planning
The auditor should consider certain factors is assessing the efficiency and effectiveness of
analytical procedures as compared to tests of details. In determining whether and to what extent
analytical procedures should be used, which of the following should the auditor consider? The
nature of the assertion tested
Which of the following best explains why an analytical procedure might be used as a substantive
test? To achieve audit objectives in the most effective and efficient manner possible
Which of the following is a true statement regarding documentation requirements for analytical
procedures? When an analytical procedures is used as the principal substantive test of a
significant financial statement assertion, the auditor is required to document both the auditor's
expectation and the factors considered in developing that expectation

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The purpose of applying analytical procedures in the overall review stage of an audit includes
assisting the auditor in all of the following except Enhancing the understanding of the client's
business (done during planning not review)
When applying analytical procedures during an audit, which of the following is the best
approach for developing expectations? Identifying reasonable explanations for unexpected
differences before talking to client management
Which of the following is a management assertion regarding account balances at the period end?
The entity holds or controls the rights to assets, and liabilities are obligations of the entity
Although regression analysis has the same objective as trend analysis, ratio analysis, and
nonstatistical predictive modeling, which is to identify the potential for material misstatement,
regression analysis has the following advantage over the other methods Provides direct and
quantitative measures of the precision of the expectation
Which of the following circumstances most likely would cause an auditor to suspect that there
are material misstatements in an entity's financial statements? There are unusual
discrepancies between the entity's records and confirmation replies
Which of the following activities is an analytical procedure an auditor would perform in the final
overall review stage of an audit to ensure that the financial statements are free from material
misstatement? Comparing the current year's financial statements with those of the prior year
Which of the following would be considered an analytical procedure? Comparing inventory
balances to recent sales activities
Which of the following pairs of accounts would be analyzed together in the audit
documentation? Notes receivable and interest income
Which of the following actions is an analytical procedure that an auditor most likely would use
while auditing a company's notes payable? Multiplying the average outstanding loan balance
by the interest rate and comparing the result to interest expense actually recorded
Analytical procedures performed in the overall review stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely would
indicate that Additional tests of details are required
Which of the following disclaimers of liability included within a response to an auditor's
confirmation request would allow the auditor to rely on the confirmation as appropriate audit
evidence for an audit of a nonissuer? Information is furnished as a matter of courtesy without a
duty to do so and without responsibility, liability, or warranty, expressed or implied
Which of the following ratios would an engagement partner most likely calculate when
reviewing the balance sheet in the overall review stage of an audit? Total debt/total assets
Analytical procedures are most appropriate when testing which of the following types of
transactions? Operating expense transactions
An auditor's analytical procedures most likely would be facilitated if the entity Uses a
standard cost system that produces variance reports
Confirmation of accounts receivable that have been categorized initially by an auditor as
"expectations" most likely could be due to Payments mailed to the client that have not been
recorded
Which of the following procedures would an auditor most likely perform when auditing the
statement of cash flows? Reconcile the amounts included in the statement of cash flows to
the other financial statement amounts
Analytical procedures performed during an audit indicate that accounts receivable doubled since
the end of the prior year. However, the allowance for doubtful accounts as a percentage of

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accounts receivable remained the same. Which of the following client expectations would satisfy
the auditor? The client opened a second retail outlet during the current year and its credit sales
approximately equaled the older outlet
An auditor compares annual revenues with similar amounts from the prior year and investigates
all changes exceeding 10%. This procedure most likely could indicate that Unrealized gains from
increases in the value of the available-for-sale securities were recorded in the income account for
trading securities
Which of the following procedures would an auditor most likely perform to test controls relating
to management's assertion about the completeness of cash receipts for cash sales at a retail
outlet? Observe the consistency of the employees' use of cash registers and tapes
To measure how effectively an entity employs its resources, an auditor calculates inventory
turnover by dividing average inventory into Cost of goods sold
A company would use which of the following to determine the days in inventory? Numerator:
Ending inventory
Denominator: Cost of goods sold divided by 365
In analyzing a company's financial statements, which financial statement would a potential
investor primarily use to assess the company's liquidity and financial flexibility? Balance sheet
The accounts receivable turnover ratio increased significantly over a two-year period. This trend
could indicate that The company is more aggressively collecting customer accounts
Which of the following comparisons would an auditor most likely make in evaluating an entity's
costs and expenses? The current year's payroll expense with the prior year's payroll expense
What effect would the sale of a company's trading securities at their carrying amounts for cash
have on each of the following ratios?
I. Current ratio
II. Quick ratio No effect on either
Which of the following results of analytical procedures would most likely indicate possible
unrecorded liabilities?Accounts payable as a percentage of total liabilities of 25%, compared to
35% for the prior period
An auditor discovered that a client's accounts receivable turnover is substantially lower for the
current year than for the prior year. This may indicate that There was an improper cutoff of
sales at the end of the year
Which of the following ratios would an engagement partner most likely consider in the overall
review stage of an audit? Cost of goods sold/average inventory
An auditor discovered that a client's accounts receivable turnover is substantially lower for the
current year that for the prior year. This may indicate that Fictitious credit sales have been
recorded during the year
In a comparison of 20X2 to 20X1 , Neir Co.'s inventory turnover ratio increased substantially
although sales and inventory amounts were essentially unchanged. Which of the following
statements explains the increased inventory turnover ratio? Gross profit percentage decreased
At December 30, Year 3, Vida Co. had cash of $200,000, a current ratio of 1:5:1 and a quick ratio
of .5:1. On December 31, Year 3, all cash was used to reduce accounts payable. How did these
cash payments affect
I. Current ratio
II. Quick ratio Current ratio: Increased
Quick ratio: Decreased

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For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting employee time cards for proper approval by supervisors
While performing a test of details during an audit, an auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was, in
fact, not materially misstated. This situation illustrates the risk of Incorrect rejection
Which of the following is a characteristic of nonstatistical sampling? It requires judgement
to select a sample
In determining the sample size for a test of controls, an auditor should consider the likely rate of
deviations, the allowable risk of assessing control risk too low, and the Tolerable deviation
rate
Which of the following factors are considered in determining the sample size for a test of
controls?
I. Expected deviation rate
II. Tolerable deviation rate Both I and II
Which of the following statements its correct about the sample size in statistical sampling when
testing internal controls? The auditor should consider the tolerable rate of deviation from the
controls being tested in determining the sample size
An auditor who uses statistical sampling for attributes in testing internal controls should reduce
the planned reliance on a prescribed control when the Sample rate of deviation plus the
allowance for sampling risk exceeds the tolerable rate
Which of the following statements is correct concerning statistical sampling in tests of controls?
There is an inverse relationship between the sample size and the tolerable rate
Which of the following statements is generally correct about the sample size in statistical
sampling when testing internal controls? The population size has little or no effect on the
sample size
Samples to test internal control are intended to provide a basis for an auditor to conclude whether
The control activities are operating effectively
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
Effectiveness of the audit
To determine the sample size for a test of controls, an auditor should consider the tolerable
deviation rate, the allowable risk of assessing risk too low, and the Expected deviation rate
The sample size of a test of controls varies inversely with
I. Expected population deviation rate
II. Tolerable rate II only
Which of the following is a sample risk that is associated with the efficiency of an audit? Risk of
assessing control risk too high
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is
that they provide a scientific basis for planning the Sample size
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that
the statistical methods Provide an objective basis for quantitatively evaluating sample risk
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps
an auditor to Measure the sufficiency of the audit evidence obtained
Which of the following would be a consideration in planning an auditor's sample for a test of
controls? The auditor's allowable risk of assessing control risk too low
Which of the following factors would the auditor not explicitly consider when determining
sample size in an attribute sample for a test of controls? The tolerable misstatement

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Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific control activities at a given rate ordinarily result in
misstatements at a lower rate
Which of the following statements about audit sampling risks is correct for a nonissuer?
Nonsampling risk can arise because an auditor failed to recognize misstatements
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting purchase orders for proper approval by supervisors
In performing tests of controls over authorization of cash disbursements, which of the following
statistical sampling methods would be most appropriate? Attribute
In attribute sampling, a 25% change in which of the following factors will have the smallest
effect on the size of the sample? Number of items in the population
An auditor is selecting prenumbered purchase orders for testing an entity's internal control
activities related to their proper approval before office equipment is ordered. The auditor is
matching random numbers with the purchase orders to inspect. If a random number matches a
voided purchase order, the auditor ordinarily would replace the voided purchase order with
another if the voided purchase order Has been properly voided in the normal course of business
An auditor discovers that an account balance believed not to be materially misstated based on an
audit sample was materially misstated based on the total population of the account balance. This
is an example of which of the following sampling types of risks? Incorrect acceptance
Which of the following audit procedure most likely will involve sampling?Testing of process for
approval of credit to customers for sales on account
An auditor should consider the tolerable rate of deviation when determining the number of check
requests to select for a test to obtain assurance that all check requests have been properly
authorized. The auditor should also consider
I. The average dollar value of the check requests
II. The allowable risk of assessing control risk too low II only
Which of the following types of sampling allows an auditor to quantify sampling risk?
Attribute
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses
control risk lower than appropriate. The most likely explanation for this situation is that The
deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the
population exceeds the tolerable rate
As a result of tests of controls, an auditor assesses control risk too high. This incorrect
assessment most likely occurred because Control risk based on the auditor's sample is greater
than the true operating effectiveness of the client's control activity
As as 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 The
deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the
population is less than the tolerable rate
An auditor is using statistical sampling in testing whether cash disbursements were properly
authorized. The smaple results indicate that the sample rate of deviation plus the allowance for
sampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely
would reduce the Planned reliance on the presribed control
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive
testing. This assessment occurred because the true deviation rate in the population was More
than the deviation rate in the auditor's sample

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The degree of audit risk always present in an audit engagement is referred to as a combination of
nonsampling and sampling risk. Which of the following is an example of nonsampling risk?
The auditor selecting inappropriate auditing procedures
For which of the followign audit tests would a CPA most likely use attribute sampling?
Identifying entries posted to incorrect accounts
If an auditor of a nonissuer discovers an unexpectedly high number of deviations during
procedures performed on a sample to test management's review and approval of time sheets, the
the auditor would most appropriately Increase the assessed risks of material misstatement
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The
auditor designed a statistical sample that would provide 1 percent risk of assessing control risk
too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The
auditor estimated from previous experience that about 2½ percent of the sales invoices lacked
approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The
auditor then determined the computed upper deviation rate to be 8 percent.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary
assessment of control risk because the Tolerable rate (7%) was less than the upper
deviation rate (8%)
In assessing the tolerable rate of deviations of a test of controls that was performed using
statistical sampling, an auditor should consider that Deviations from pertinent controls at a given
rate ordinarily result in misstatements at a lower rate
What is an auditor's evaluation of a statistical sample for attribute when a test of 50 documents
results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and
the allowance for sampling risk is 2%? Modify the planned assessed level of control risk
because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate
An auditor examining inventory most likely would use variables sampling rather than attributes
sampling to Estimate whether the dollar amount of inventory is reasonable
In determining the number of documents to select for a test to obtain assurance that all sales
returns have been properly authorized, an auditor should consider the tolerable rate of deviation
from the control activity. The auditor should also consider the
I. Likely rate of deviations
II. Allowable risk of assessing control risk too high I only
An auditor uses an attribute sampling plan to determine whether large expenditures are being
properly approved. The auditor is willing to accept a 2% risk of assessing control risk too low,
and has a tolerable rate of 5%. A sample of 100 invoices is selected, and only one is found to be
lacking appropriate approval. One invoice selected by the auditor cannot be located. Which
statement is true? There is not enough information given to determine whether the auditor
should rely on this control
Which of the following sampling methods would an auditor use to estimate a numerical
measurement of a population, such as the dollar value of inventory? Variable sampling
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a
population into meaningful groups if The population has highly variable recorded amounts
When planning a sample for a substantive test of details, an auditor should consider tolerable
misstatement for the sample. This consideration should Be related to preliminary judgements
about materiality levels
In addition to evaluating the frequency of deviations in tests of controls, an auditor should also
consider certain qualitative aspects of deviations. The auditor most likely would give broader

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consideration to the implications of a deviation if it was Initially concealed by a forged

document
Which of the following sample planning factors would influence the sample size for a
substantive test for details for a specific account?
I. Expected amount of misstatements
II. Measure of tolerable misstatementBoth I and II
How would increase in tolerable misstatement and assessed level of control risk affect the
sample size in a substantive test of details? Increase in tolerable misstatement: Decrease sample
size
Increase in assessed level of risk: Increase sample size
Which of the following would be a consideration in planning a sample for a test of subsequent
cash receipts? Preliminary judgements about materiality levels
The use of the ratio estimation sampling as compared to other sampling techniques is most
effective when The calculated audit amounts are approximately proportional to the client's book
amounts
Which of the following characteristics most likely would be an advantage of using classical
variables sampling rather than proabibility-proportional-to-size (PPS) sampling? The selection
of negative balances requires no special design considerations
Which of the following is the primary objective of probability proportional to sample size?
To identify overstatement errors
An auditor is determining the sample size for an inventory observation using mean-per-unit
estimation, which is a variables sampling plan. To calculate the required sample size, the auditor
usually determines the
I. Variability in the dollar amounts of inventory items
II. Risk of incorrect acceptance Both I and II
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than
unstratified MPU because it usually Produces an estimate having a desired level of precision
with a smaller sample size
Which of the following statements is correct concerning probability proportional to size (PPS)
sampling, also known as dollar unit sampling? The auditor controls the risk of incorrect
acceptance by specifying that risk level for the sampling plan
When using classical variables sampling for estimation, an auditor normally evaluates the
sampling results by calculating the possible error in either direction. This statistical concept is
known as Precision
An auditor may decide to decrease the acceptable level of risk when The cost and effort of
selecting additional sample items is low
In selecting an appropriate sample for a substantive test, the auditor most likely would stratify
the population if the Auditor plans to give greater representation to large recorded amounts
Which of the following courses of action would an auditor most likely follow in planning a
sample of cash disbursements if the auditor is aware of several unusually large cash
disbursements? Stratify the cash disbursements population so that the unusually large
disbursements are selected
Which of the following objectives is achieved when an auditor decides to employ classical
variable sampling? To determine the inventory quantities on hand
While testing a sample of an audit client's bank reconciliations during the year under audit, an
auditor notices that several immaterial deposits in transit did not clear the bank in a timely

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manner. The auditor suspects that there may be fraud. Which of the following audit responses is
most appropriate in this situation? The auditor should consider the implications for the
integrity of management or employees and the possible effect on other aspects of the audit
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of
$1,000,000. The auditor selected a sample of every twentieth item from the population that
represented the asset account balance and discovered overstatements of $3,700 and
understatements of $200. Under these circumstances, the auditor most likely would conclude that
There is an unacceptably high risk that the actual misstatements in the population exceed
the tolerable misstatement because the total projected misstatement is more than the tolerable
misstatement

Which of the following methods for determining inventory cost is not allowed by GAAP?
standard cost
Which cycle is not directly linked to the production cycle? - Finance and investment cycle.
Which cycle is directly linked to the production cycle? - Revenue and collection cycle.
- Acquisition and expenditure cycle.
- Payroll cycle.
To determine the client's planned amount and timing of production of a product, the auditor
reviews the Production plan.
An auditor reviews job cost sheets to test which transaction assertion? accuracy
Which of the following is an internal control weakness for a company whose inventory of
supplies consists of a large number of individual items? The warehouse manager is
responsible for maintenance of perpetual inventory records.
To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs
the analysis___ by product
Which of the following procedures would best prevent or detect the theft of valuable items from
an inventory that consists of hundreds of different items selling for $1 to $10 and a few items
selling for hundreds of dollars? Have separate warehouse space for the more valuable items
with frequent periodic physical counts and comparison to perpetual inventory records.
An auditor usually traces the details of the test counts made during the observation of physical
inventory counts to a final inventory compilation. This audit procedure is undertaken to provide
evidence that items physically present and observed by the auditor at the time of the physical
inventory count are______ Included in the final inventory schedule.
A retailer's physical count of inventory was higher than that shown by the perpetual records.
Which of the following could explain the difference? Credit memos for several items
returned by customers had not been recorded.
From the auditors' point of view, inventory counts are more acceptable prior to the year-end
when____ Accurate perpetual inventory records are maintained.
Which of the following internal control activities most likely addresses the completeness
assertion for inventory? Receiving reports are prenumbered, and the numbering sequence is
checked periodically.

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When auditing inventories, an auditor would least likely verify that All inventory owned by the
client is on hand at the time of the count.
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control
risk is high, an auditor would probably____ Request the client to schedule the physical
inventory count at the end of the year.
An auditor selected items for test counts while observing a client's physical inventory. The
auditor then traced the test counts to the client's inventory listing. This procedure most likely
obtained evidence concerning management's balance assertion of____ completeness
Which of the following auditing procedures probably would provide the most reliable evidence
concerning the entity's assertion of rights and obligations related to inventories? Inspect
agreements to determine whether any inventory is pledged as collateral or subject to any liens.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
management's balance assertions about___ Valuation and allocation.
An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain
evidence concerning management's balance assertions about_____ valuation
When evaluating inventory controls, an auditor would be least likely to_____ Consider
policy and procedure manuals.
When testing a company's cost accounting system, the auditor uses procedures that are primarily
designed to determine that___ Costs have been properly assigned to finished goods, work-
in-process, and cost of goods sold.
The auditor tests the quantity of materials charged to work-in-process by vouching these
quantities to____ material requisitions
Your client counts inventory three months before the end of the fiscal year because controls over
inventory are excellent. Which procedure is not necessary for the roll forward? Request the
client to recount inventory at the end of the year.
An auditor is examining a nonpublic company's inventory procurement system and has decided
to perform tests of controls. Under which of the following conditions do GAAS require tests of
controls be performed by an auditor? The auditor believes that testing the controls could lead to a
reduction in overall audit time and cost.

Which of the following approaches is most suitable for auditing the finance and investment
cycle?

a. Perform extensive tests of controls and limit substantive procedures to analytical procedures
b. Ignore internal controls and perform extensive substantive procedures
c. Gain an understanding of internal controls and perform extensive substantive procedures
d. Ignore internal controls and limit substantive procedures to analytical procedures c. Gain
an understanding of internal controls and perform extensive substantive procedures
Loan covenants are used for what reason? To protect the lender from the borrower's
substantially weakening of the latter's financial position.
A related party is a person or entity that... Can exert significant influence over or be
influenced by the company.
Jones was engaged to examine the financial statements of Gamma Corporation for the year
ended June 30. Having completed an examination of the investment securities, what is the best

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method of verifying the accuracy of recorded dividend income? Comparing recorded

dividends with a standard financial reporting service's record of dividends.
When the client holds a large amount of negotiable securities, auditors need to plan to guard
against... Substitution of securities already counted for other securities that should be on
hand but are not.
In connection with the audit of an issue of long-term bonds payable, the audit team should...
Ascertain that the client has obtained the opinion of counsel on the legality of the issue.
Which of the following is the most important audit consideration when examining the
stockholders' equity section of a client's balance sheet?

a. Changes in the capital stock account are verified by an independent stock transfer agent
b. Stock dividends and stock splits during the year under audit were approved by the
stockholders
c. Stock dividends are capitalized at par or stated value on the dividend declaration date.
d. Entries in the capital stock account can be traced to resolutions in the minutes of meetings of
the board of directors. d. Entries in the capital stock account can be traced to resolutions in the
minutes of meetings of the board of directors.
If the auditors discover that the carrying amount of a client's investments is overstated because of
a loss in value that is other than a temporary decline in market value, they should insist that...
The loss in value be recognized in the financial statements.
The primary reason for preparing a reconciliation between interest-bearing obligations
outstanding during the year and interest expense in the financial statements is to... Detect
unrecorded liabilities.
The auditors should insist that a representative of the client be present during the inspection and
count of securities to... Acknowledge the receipt of securities returned.
When independent stock transfer agents are not employed and the corporation issues its own
stock and maintains stock records, canceled stock certificates should be defaced to prevent
reissuance and attached to their corresponding stubs.
When a client company does not maintain its own capital stock records, the auditors should
obtain written confirmation from the transfer agent and registrar concerning... The number of
shares issued and outstanding.
All corporate capital stock transactions should ultimately be traced to the...Minutes of the
meetings of the board of directors.
An audit plan for the examination of the retained earnings account should include a step that
requires verification of the... Authorization for both cash and stock dividends declared and paid.

and

Gain or loss resulting from disposition of treasury shares

When an entity uses a trust company as custodian of its marketable securities, the possibility of
concealing fraud most likely would be reduced if the... Trust company has no direct contact
with the entity employees responsible for maintaining investment accounting records.
An audit team would most likely verify the interest earned on bond investments by...
Recomputing the interest earned on the basis of face amount, interest rate, and period
held.

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A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the
auditors are unable to count securities at the balance sheet date, they most likely will...
Request the client to have the bank seal the safe deposit box until the auditors can count
the securities at a subsequent date.
An audit team testing long-term investments would ordinarily use analytical procedures to
ascertain the reasonableness of the... Completeness of recorded investment income.
In auditing for unrecorded long-term bonds payable, an audit team most likely will...
Compare interest expense with the bond payable amount for reasonableness.

(The recorded interest expense should reconcile with the outstanding bonds payable. If interest
expense appears excessive relative to the recorded bonds payable, unrecorded long-term
liabilities may exist.)
An audit plan to examine long-term debt most likely would include steps that require
Correlating interest expense recorded for the period with outstanding debt.
Which of the following questions would auditors most likely include on an internal control
questionnaire for notes payable?

a. Are assets that collateralize notes payable critically needed for the entity's continuing
existence?
b. Are two or more authorized signatures required on checks that repay notes payable?
c. Are the proceeds from notes payable used to purchase noncurrent assets?
d. Are direct borrowings on notes payable authorized by the board of directors? d. Are direct
borrowings on notes payable authorized by the board of directors?
An audit team's purpose in reviewing the documentation concerning the renewal of a note
payable shortly after the balance sheet date most likely is to obtain evidence concerning
management's assertion about... classification
Which audit procedure would not likely be performed for audits of investments? Confirm
investments with registrar.
Which of the following audit procedures would not likely be performed for audits of
shareholder's equity?

a. Read board of directors' minutes for authorization of equity transactions

b. Confirm outstanding common and preferred stock with stock registrar
c. Compare valuation of stock to published market prices
d. Obtain management representation about number of shares issued and outstanding c.
Compare valuation of stock to published market prices
ABC stock has 100 shares of IBM stock that it holds as an investment. The stock was purchased
three years ago and has been in the client's safe deposit box along with other investment
securities. During an inspection of securities held by the client, the auditor noted the 100 shares
of IBM stock had a different CUSIP number than the number listed when purchased and the
number verified during the previous audit. What would be the auditor's main concern about this
discover? There had been unauthorized buying and selling of investment securities.
Which of the following sets of information does an auditor usually confirm on one form?

a. Accounts receivable and accrued interest receivable.

b. Cash in bank and collateral for loans.

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c. Inventory on consignment and contingent liabilities.

d. Accounts payable and purchase commitments. b. Cash in bank and collateral for loans.
In performing a count of negotiable securities, an auditor records the details of the count on a
security count worksheet. What other information is usually included on this worksheet? An
acknowledgment by a client representative that the securities were returned intact.
Which of the following controls would a company most likely use to safeguard marketable
securities when an independent trust agent is not employed?

a. The internal auditor and the controller independently trace all purchases and sales of
marketable securities from the subsidiary ledgers to the general ledger.
b. The chairman of the board verifies the marketable securities, which are kept in a bank safe-
deposit box, each year on the balance sheet date.
c. Two company officials have joint control of marketable securities, which are kept in a bank
safe-deposit box.
d. The investment committee of the board of directors periodically reviews the investment
decisions delegated to the treasurer. c. Two company officials have joint control of marketable
securities, which are kept in a bank safe-deposit box
In establishing the existence and ownership of a long-term investment in the form of publicly-
traded stock, an auditor should inspect the securities or: Confirm the number of shares owned
that are held by an independent custodian.
In auditing long-term bonds payable, an auditor most likely would: Compare interest expense
with the bond payable amount for reasonableness.
In performing tests concerning the granting of stock options, an auditor should: Trace the
authorization for the transaction to a vote of the board of directors.
When an entity uses a trust company as custodian of its marketable securities, the possibility of
concealing fraud most likely would be reduced if the: Trust company has no direct contact
with the entity employees responsible for maintaining investment accounting records.
An auditor scans a client's investment records for the period just before and just after the year-
end to determine that any transfers between categories of investments have been properly
recorded. The primary purpose of this procedure is to obtain evidence about management's
financial statement assertions of: Understandability and classification, and valuation and
accuracy.
When a company's stock record books are maintained by an outside registrar or transfer agent,
the auditor should obtain confirmation from the registrar or transfer agent concerning the:
Number of shares issued and outstanding.
When a client engages in transactions involving derivatives, the auditor should: Develop an
understanding of the economic substance of each derivative.
An auditor usually determines whether dividend income from publicly-held investments is
reasonable by computing the amounts that should have been received by referring to
Records produced by investment services.
An auditor's inquiries of management disclosed that the entity recently invested in a series of
energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these
circumstances, the auditor should Examine the contracts for possible risk exposure and the
need to recognize losses.
An auditor is testing the reasonableness of dividend income from investments in publicly-held
companies. The auditor most likely would compute the amount that should have been received

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and recorded by the client by:Electronically accessing the details of dividend records on the
Internet.
An auditor's analytical procedures indicate a lower than expected return on an equity method
investment. This situation most likely could have been caused by An error in recording
amortization of the excess of the investor's cost over the investment's underlying book value.
During an audit of an entity's stockholders' equity accounts, the auditor determines whether there
are restrictions on retained earnings resulting from loans, agreements, or state law. This audit
procedure most likely is intended to verify management's assertions related to Classification
and understandability

D. 1. IT has several significant effects on an entity. Which of the following would be

important from an auditing perspective?
I. The potential for material misstatement.
II. The visibility of information.
III. Changes in the organizational structure.

A. I and II only
B. I and III only
C. II and III only
D. I, II and III
B. 2. The use of a computer changes the processing, storage, and communication of
financial information. A CIS environment may affect the following, except

A. The accounting and internal control systems of the entity.

B. The overall objective and scope of an audit.
C. The auditor's design and performance of tests of control and substantive procedures to satisfy
the audit objectives.
D. The specific procedures to obtain knowledge of the entity's accounting and internal control
systems.
B. 3. The following are benefits of using IT-based controls, exсept

A. Ability to process large volume of transactions.

B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with computer-based controls.
D. Reduction in misstatements due to consistent processing of transactions.
B. 4. Which of the following statements concerning the Internet is incorrect?

A. The Internet is a shared public network that enables communication with other entities and
individuals around the world.
B. The Internet is a private network that only allows access to authorized persons or entities.
C. The internet is interoperable, which means that any computer connected to the Internet can
communicate with any other computer connected to the internet.
D. The internet is a worldwide network that allows entities to engage in e-commerce/e-business
activities.

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C. 5. In planning the portions of the audit which may be affected by the client's CIS
environment, the auditor should obtain an understanding of the significance and complexity of
the CIS activities and the availability of data for use in the audit. The following relate to the
complexity of CIS activities except when

A. Transactions are exchanged electronically with other organizations (for example, in electronic
data interchange systems [EDI]).
B. Complicated computations of financial information are performed by the computer and/or
material transactions or entries are generated automatically without independent validation.
C. Material financial statement assertions are affected by the computer processing.
D. The volume of transactions is such that users would find it difficult to identify and correct
errors in processing.
B. 6. The auditor shall consider the entity's CIS environment in designing audit procedures
to reduce risk to an acceptably low level. Which of the following statements is incorrect?

A. The auditor's specific audit objectives do not change whether financial information is
processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not influenced by the
methods of computer processing.
C. The audit may use either manual audit procedures, computer-assisted audit techniques
(CAATs), or a combination of both to obtain sufficient appropriate audit evidence.
D. In some CIS environments, or maybe difficult or impossible for the auditor to obtain certain
data for inspection, inquiry, or confirmation without the aid of a computer.
D. 7. Regardless of the nature of an entity's information system, the auditor must consider
internal control. In a CIS environment, the auditor must, at a minimum, have

A. A background in programming procedures.

B. An expertise in computer systems analysis.
C. A sufficient knowledge of the computer's operating system.
D. A sufficient knowledge of the computer information system.
B. 8. Who is ultimately responsible for the design and implementation of cost-effective
controls in a CIS environment?

A. The internal audit manager

B. The entity's management
C. The CIS manager
D. The control group in the CIS department
D. 9. Are the following risks greater in CIS than in manual systems?
1. Erroneous data conversion
2. Erroneous source document preparation 3. Repetition of errors
4. Concentration of data

A. Yes Yes No Yes

B. Yes Yes No No
C. Yes Yes Yes Yes
D. Yes No Yes Yes

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C. 10. Which of the following is not a hardware element in an IT environment?

A. Scanners
B. CD-ROM drive
C. Application programs
D. Modems
B. 11. Which of the following computer hardware elements is not associated with data
input?

A. Touch screen
B. Printer
C. Mouse
D. Optical scanner
D. 12. A hardware element that takes the computer's digital information and transforms it
into signals that can be sent over ordinary telephone lines is a/an

A. Intelligent terminal
B. Point-of-sale terminal
C. Terminal emulator
D. Modem
D. 13. Uninterruptible power supplies are used in computer facilities to minimize the risk of

A. Crashing disk drive read-write heads.

B. Dropping bits in data transmission.
C. Failing to control concurrent access to data.
D. Losing data stored in main memory
A. 14. In a computer system, the parts of the operating system program and language
translator program are stored in the

A. Read only memory (ROM).

B. Random access memory (RAM).
C. Magnetic tape drive.
D. Magnetic disk drive.
D. 15. A characteristic that distinguishes computer processing from manual processing is

A. The potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
B. Errors or fraud in computer processing will be detected soon after their occurrences.
C. Most computer systems are designed so that transaction trails useful for audit purposes do not
exist.
D. Computer processing virtually eliminates the occurrence of computational errors normally
associated with manual processing.
A. 16. An affordable yet powerful self-contained general-purpose computer which consists
typically of a central processing unit (CPU), monitor, keyboard, disk drives, printer cables, and
modems is a/an

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A. Personal computer
B. Mainframe
C. On-line computer
D. Terminal
A. 17. A CIS where two or more personal computers are linked together through the use of
special software and communication lines and allows the sharing of application software, data
files, and computer peripherals such as printers and optical scanners is a/an

A. Local area network (LAN)

B. On-line system
C. Batch processing system
D. Wide area network (WAN)
B. 18. A file server in a local area network (LAN) is

A. A workstation that is dedicated to a single user on the LAN.

B. A computer that stores programs and data files for users of the LAN.
C. The cabling that physically interconnects the nodes of the LAN.
D. A device that connects the LAN to other networks.
A. 19. Audit team members can use the same database and programs when their PCs share a
hard disk and printer on a LAN. Which of the following communication devices enables a PC to
connect to a LAN?

A. A network interface card (NIC) that plugs into the motherboard.

B. A fax modem that sends signals through telephone lines.
C. An internal modem that plugs into the motherboard.
D. An external modem with a cable connection to a serial port.
C. 20. A computer information system that allows individual users to develop and execute
application programs, enter and process data, and generate reports in a decentralized manner is
called a/an

A. Online system
B. Batch processing system
C. End-user computing
D. Networking
D. 21. Which of the following statements most likely represents a disadvantage for an entity
that maintains data files on personal computers (PCs) rather than manually prepared files?

A. It is usually more difficult to compare recorded accountability with the physical count of
assets.
B. Random error associated with processing similar transactions in different ways is usually
greater.
C. Attention is focused on the accuracy of the programming process rather than errors in
individual transactions.
D. It is usually easier for unauthorized persons to access and alter the files.
C. 22. The following are risks specific to IT environments, except

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A. Reduced segregation of duties.

B. Loss of data due to insufficient backup.
C. Increased human involvement.
D. Reliance on the functioning capabilities of hardware and software.
C. 23. Most personal computers have both a CD-ROM drive and a hard disk drive. The
major difference between the two types of storage is that a hard disk

A. Is suitable for an online system, whereas a CD-ROM is not.

B. Provides an automatic audit trail, whereas a CD-ROM does not.
C. Has a much larger storage capacity than a CD-ROM.
D. Is a direct-access storage medium, whereas a CD-ROM is a sequential-access storage
medium.
B. 24. What type of online computer system is characterized by data that are assembled from
more than one location and records that are updated immediately?

A. Online, batch processing system

B. Online, real-time processing system
C. Online, inquiry system
D. Online, downloading/uploading system
B. 25. Misstatement in a batch computer system caused by incorrect programs or data may
not be detected immediately because

A. The processing of transactions in a batch system is not uniform.

B. There are time delays in processing transactions in a batch system.
C. The identification of errors in input data typically is not part of the program.
D. Errors in some transactions may cause rejection of other transactions in the batch.
A. 26. Which of the following features is least likely to be found in an online, real-time
processing system?

A. Turnaround documents
B. User manuals
C. Preformatted screens
D. Automatic error correction
D. 27. Which of the following is usually not a factor to consider in designing and
implementing an online, real-time system?

A. Priority allocation
B. Queues
C. Interrupts
D. Hardware diagnostics
B. 28. Workstations or terminals are an integral component of online computer systems.
Which of the following statements concerning workstations is incorrect?

A. Workstations may be located either locally or at remote sites.

B. Both local and remote workstations require the use of telecommunications to link them to the
main computer.

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C. Local workstations are connected directly to the main computer through cables.
D. Workstations may be used by different users, for different purposes, in different locations, all
at the same time.
B. 29. Online computer systems use workstations or terminals that are located either locaily
or at remote sites. There are two types of workstations: general purpose terminals and special
purpose terminals
General purpose terminals include the following, except

A. Basic keyboard and monitor

B. Point of sale devices
C. Intelligent terminal
D. Personal computers
C. 30. The "test data approach "

A. Involves reprocessing actual entity data using the entity's computer software.
B. Involves reprocessing actual entity data using the auditor's computer software.
C. Is where dummy transactions are prepared by the auditor and processed under the auditor's
control using the entity's computer software.
D. Is where actual transactions are prepared by the auditor.
C. 31. Which of the following is a primary example of source data automation?

A. A subsidiary ledger
B. A utility bill
C. Point-of-sale (POS) scanners in malls
D. A bill of lading
D. 32. Express Padala, Inc. stated in one of its mission statements that "positive control of
each package will be maintained by utilizing. . . electronic tracking and tracing systems."
Express Padala uses what type of IT system?

A. Batch processing which features immediate updating as to the location of packages.

B. Real-time processing which features updating at fixed time periods.
C. Batch processing which features updating at fixed time periods.
D. Real-time processing which features immediate updating as to the location of packages.
C. 33. In a file-oriented approach to data and information, data is maintained in many
separate files. This may create problems for organizations because of

A. Multiple users.
B. Multiple transaction files.
C. Multiple master files which may contain redundant data.
D. A lack of sophisticated file maintenance software.
C. 34. _______ refers to the combination of the database, the Database Management System
(DBMS), and the application programs that access the database through the DBMS.

A. Data warehouse
B. Database administrator
C. Database system

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D. Database manager
C. 35. Who is the individual responsible for the database?

A. Data coordinator
B. Database master
C. Database administrator
D. Database manager
B. 36. Which feature of many database systems simplifies the creation of reports by
allowing users to specify the data elements desired and the format of the output?

A. Report generator
B. Report writer
C. Report printer
D. Report creator
A. 37. Which of the following is probably the most significant effect of database technology
on accounting?

A. Quicker access to and greater use of accounting information in decision-making.

B. Replacement of the double-entry system.
C. Change in the nature of financial reporting.
D. Elimination of traditional records such as journals and ledgers.
A. 38. An entity should that data processing and quickly as possible. The following would
typically.be capacity can be restored as smoothly have a disaster recovery plant to ensure part of
an adequate disaster recovery plan, except

A. A system upgrade due to operating system software changes.

B. Backup computer and telecommunications facilities
C. Scheduled electronic vaulting of files
D. Interrupted power systems installed for key system components.
D. 39. Which of the following statements concerning computer program modifications is
incorrect?

A. After the amended program has received. final approval, the change is implemented by
replacing the production version with the developmental version.
B. During the modification process, the developmental version of the program must be kept
separate from the production version.
C. When a program change is submitted for approval, a list of all required updates should be
compiled and then approved by management and program users.
D. Only material program changes should be thoroughly tested and documented.
B. 40. Old and new systems operating simultaneously in all locations is a test approach
known as parallel testing. Pilot testing involves implementing a new system in one part of the
organization, while other locations continue to use the current system.

A. True; False
B. Both are True
C. False; True

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D. Both are False

A. 41. A collection of data that is shared and used by a number of different users for
different purposes is a

A. Database
B. Memory
C. File
D. Record
C. 42. Which of the following computer software is used to create, maintain, and operate a
database?

A. Application software
B. Systems software
C. Database management system (DBMS)
D. Database administrator
B. 43. The two important characteristics of a database system are

A. The database and the DBMS.

B. Data sharing and data independence.
C. The DBMS and data sharing.
D. The DBMS and data independence.
B. 44. To protect the integrity of the database, data sharing by different users requires
organization, coordination, rules, and guidelines. The individual responsible for managing the
database resource is the

A. Programmer
B. Database administrator
C. User
D. CIS manager
B. 45. An auditor who wishes to trace data through several application programs should
know what programs use the data, which files contain the data, and which printed reports display
the data. In a database system, the information could be found in a

A. Decision table
B. Data dictionary
C. Database schema
D. Data encryptor
A. 46. Which of the following is the greatest advantage of a database system?

A. Data redundancy can be reduced.

B. Backup and recovery procedures are minimized.
C. Multiple occurrences of data items are useful for consistency checking.
D. Conversion to a database system is inexpensive and can be accomplished quickly.
D. 47. The following statements relate to a database management system (DBMS)
application environment. Which is false?

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A. Data definition is independent of any one program.

B. The physical structure of the data is independent of user needs.
C. Data are used concurrently by different users.
D. Data are shared by passing files between programs or systems.
C. 48. Which of the following is an advantage of a database management system (DBMS)?

A. A decreased vulnerability as the DBMS has numerous security controls to prevent disasters.
B. Each organizational unit takes responsibility and control for its own data.
C. Data independence from application programs.
D. The cost of the CIS department decreases because users are now responsible for establishing
their own data handling techniques.
B. 49. Which of the following is usually a benefit of transmitting transactions in an
electronic data interchange (EDI) environment?

A. A reduced need to test computer controls related to sales and collections transactions.
B. A compressed business cycle with lower year-end receivables balances.
C. No need to rely on third-party service providers to ensure security.
D. An increased opportunity to apply statistical sampling techniques to account balances.
B. 50. The internal controls over computer processing include both manual procedures and
procedures designed into computer programs (programmed control procedures). These manual
and programmed control procedures comprise the general CIS controls and CIS application
controls. The purpose of general CIS controls is to

A. Establish specific control procedures over the accounting applications in order to provide
reasonable assurance that all transactions are authorized and recorded and are processed
completely, accurately, and on a timely basis.
B. Establish a framework of overall controls over the CIS activities and to provide a reasonable
level of assurance that the overall objectives of internal control are achieved.
C. Provide reasonable assurance that systems are developed and maintained in an authorized and
efficient manner.
D. Provide reasonable assurance that access to data and. computer programs is restricted to
authorized personnel.
D. 51. CIS application controls include the following, except

A. Controls over input.

B. Controls over-processing and computer data files.
C. Controls over output.
D. Controls over access to systems software and documentation.
C. 52. The auditor is required to consider how an entity's general CIS controls affect the CIS
applications significant to the au- dit. Accordingly, the auditor should

A. Review the design of t.e general CIS controls only.

B. Review the design of the CIS application controls only.
C. Review the design of the general CIS controls before reviewing the CIS application controls
D. Review the design of the CIS application controls before reviewing the design of the general
CIS controls.

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A. 53. The two broad categories of IT controls are general controls and application controls.
General controls include controls

A. For developing, maintaining, and modifying computer programs.

B. That relate to the correction and resubmission of erroneous data.
C. Designed to provide reasonable assurance that only authorized users receive output from
processing.
D. Designed to provide reasonable assurance that all data submitted for processing have been
properly authorized.
B. 54. Which of the following statements concerning application controls is correct?

A. Application controls relate to all aspects of the IT function.

B. Application controls relate to the processing of individual transactions.
C. Application controls relate to various aspects of the IT function including software and
hardware acquisitions.
D. Application controls relate to various aspects of the IT function including physical security
and the processing of transactions in various cycles.
D. 55. The significance of hardware controls is that they

A. Ensure that run-to-run totals in application systems are consistent.

B. Reduce the incidence of user input errors in online systems.
C. Ensure correct programming of operating system functions.
D. Assure that machine instructions are executed correctly.
A. 56. The following statements relate to internal control in an electronic data interchange
(EDI) environment. Which is true?

A. In EDI systems, preventive controls are generally more important than detective controls.
B. Control objectives for EDI systems generally are different from the objectives for other
computer information systems. -
C. Internal controls that relate to the segregation of duties generally are the most important
controls in EDI systems.
D. Internal controls in EDI systems rarely permit control risk at below the maximum.
A. 57. An entity has recently converted its revenue/receipt cycle from a manual processing
to an online, real-time processing system. Which is the most probable result associated with
conversion to the new computerized processing system?

A. Less segregation of traditional duties.

B. Significant increase in processing time.
C. Reduction in the entity's risk exposures.
D. Increase in processing errors.
C. 58. The most important segregation of duties in the organization of the information
systems function is

A. Using different programming personnel to maintain utility programs from those who maintain
the application programs.

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B. Having a separate information officer at the top level of the organization outside of the
accounting function.
C. Assuring that those responsible for programming the system do not have access to data
processing operations.
D. Not allowing the data librarian to assist in data processing operations.
C. 59. A systems analyst should have access to each of the following, except

A. Edit criteria
B. Source code
C. Password identification tables
D. User procedures
C. 60. Which of the following would represent an internal control weakness in an IT
environment?

A. The computer librarian maintains custody of computer application programs and files.
B. The data control group is solely responsible for distributing computer-generated reports.
C. Computer operators have access to operator instructions and have the authority to modify
application programs.
D. Computer programmers write the modify programs designed by systems analysis.
A. 61. The manager of computer operations prepares a weekly schedule of planned computer
processing and sends a copy to the computer librarian. The control objective this procedure
serves is to

A. Authorize the release of data files to computer operators.

B. Specify the distribution of computer results.
C. Specify file retention and disaster recovery policies.
D. Keep improper and unauthorized transactions from entering the computer facility.
B. 62. One of the major problems in a CIS environment is that incompatible duties may be
performed by the same individual. One compensating control is the use of

A. Computer-generated hash totals

B. A computer log
C. A self-checking digit system
D. Echo checks
B. 63. In the organization of the information systems function, the most important separation
of duties is

A. Using different programming personnel to maintain utility programs from those who maintain
the application programs.
B. Assuring that those responsible for programming the system do not have access to data
processing operations.
C. Not allowing the data librarian to assist in data processing operations.
D. Having a separate information officer at the top level of the organization outside of the
accounting function.

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A. 64. An entity has recently converted its purchasing cycle from a following is a probable
result associated with conversion to manual process to an online computer system. Which of the
new IT system?

A. Traditional duties are less separated

B. Increased processing time.
C. Reduction in the entity's risk exposure.
D. Increased processing errors.
D. 65. An entity should plan the physical location of its computer facility. Which of the
following is the primary consideration for selecting a computer site?

A. It should be in the basement or on the ground floor.

B. It should maximize the visibility of the computer.
C. It should minimize the distance that data control personnel must travel to deliver data and
reports and be easily accessible by a majority of company personnel.
D. It should provide security.
A. 66. Which of the following statements regarding security concerns for notebook
computers is false?

A. The primary methods of control usually involve application controls.

B. Centralized control over the selection and acquisition of hardware and software is a major
concern.
C. Some conventional controls such as segregation of duties may not be feasible.
D. As their use becomes more sophisticated, the degree of concern regarding physical security
increases.
A. 67. The following are a database administrator's responsibilities, except

A. Develop application programs to access the database.

B. Design the content and organization of the database.
C. Protect the database and its software.
D. Monitor and improve the efficiency of the database.
C. 68. Which of the following groups should have the operational responsibility for the
accuracy and completeness of computer-based information?

A. External auditors
B. Internal auditors
C. Users
D. Top management
A. 69. An inexperienced computer operator mounted an incorrect version of the accounts
receivable master file on a tape drive during processing. Consequently, the entire processing run
had to be repeated at a prohibitive cost. Which of the following software controls would be most
effective in preventing this type of operator error from affecting the processing of files?

A. File header and label check

B. Data transmission check
C. Memory isolation protection

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D. Unauthorized access protection

C. 70. Which of the following is the best method to prevent unauthorized alteration of online
records?

A. Computer sequence checks

B. Computer matching
C. Database access controls
D. Key verification
D. 71. Which of the following would least likely ensure the development of an effective
application system?

A. Involvement of management in the development stage.

B. Active participation by user departments in the development stage.
C. Post-implementation reviews.
D. Prioritization of application systems to be developed.
A. 72. Which of the following would most likely cause a problem in the computer program
development process?

A. User specifications are inadvertently misunderstood.

B. Programmers use specialized application tools to simulate the system being developed.
C. Programmers take a longer amount of time to develop the computer program than expected.
D. Written user specifications are used to develop detailed program code.
C. 73. Which of the following controls would most likely provide protection against
unauthorized changes in production programs?

A. Restricting programmer access to the computer room.

B. Requiring two operators to be present during equipment operation.
C. Limiting program access solely to operators.
D. Implementing management review of daily run logs.
B 74. Which of the following would most likely indicate that a computer virus is present?

A. Numerous copyright violations due to unauthorized use of purchased software.

B. Unexplained losses of or changes to data.
C. Frequent power surges that harm computer equipment.
D. Inadequate backup, recovery, and contingency plans.
A. 75. Which of the following operating procedures would most likely increase an entity's
exposure to computer viruses?

A. Downloading public-domain software from electronic bulletin boards.

B. Installing original copies of purchased software on hard disk drives.
C. Frequent backup of files.
D. Encryption of data files.
C. 76. An entity installed antivirus software on all its personal computers. The software was
designed to prevent initial infections, stop replication attempts, detect infections after their
OCcurrence, mark affected system components, and remove viruses from infected components.
The major risk in relying on antivirus software is that it may

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A. Consume too many system resources.

B. Interfere with system operations.
C. Not detect certain viruses.
D. Make software installation too complex.
D. 77. The accountant who prepared a spreadsheet model for workload forecasting left the
company, and his successor was unable to understand how to use the spreadsheet. The best
control to permit new employees to understand internally developed programs is

A. Adequate backups are made for spreadsheet models.

B. Use of end-user computing resources is monitored.
C. End-user computing efforts are consistent with strategic plans.
D. Documentation standards exist and are followed.
B. 78. What is the appropriate term for the process of monitoring, evaluating, and modifying
a system?

A. Feasibility study
B. Maintenance
C. Implementation
D. Analysis
A. 79. Program documentation is a control designed primarily to provide reasonable
assurance that

A. Programs are kept up to date and perform as intended.

B. No one uses the computer hardware for personal reasons.
C. Programs are free of syntax and logic errors.
D. Programmers have access to operational materials.
B. 80: An entity updates its accounts receivable master file weekly and retains the master
files and corresponding update transactions for if the most recent two-week period. The purpose
of this periodic retention of master files and transaction data is to

A. Validate groups of update transactions for each version.

B. Permit reconstruction of the master file needed.
C. Verify run-to-run control totals for receivables.
D. Match internal labels to avoid writing on the wrong volume.
A. 81. An entity's contingency plans for computer information systems should include
appropriate backup arrangements. Which of the following arrangements would be considered too
vendor-dependent when vital operations require almost immediate availability of computer
resources?

A. A "cold site" arrangement.

B. A "hot site" arrangement.
C. A "cold and hot site" arrangement.
D. Using excess capacity at another data center within the entity.
D. 82. Which of the following is the primary objective of security software?

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A. To detect the presence of computer viruses.

B. To monitor the segregation of functional responsibilities within applications.
C. To prevent installation of unauthorized utility software.
D. To control access to information system resources.
B. 83. All administrative and professional staff in an entity's legal department prepare
documents on terminals connected to a host LAN file server. Which of the following is the best
control over unauthorized access to sensitive documents in the system?

A. Required entry of passwords for access to the system.

B. Required entry of passwords for access to individual documents.
C. Physical security for all disks containing document files.
D. Periodic server backup and storage in a secure area.
B. 84. An internal auditor has just concluded a physical security audit of a data center which
is primarily engaged in top- secret defense contract work. The auditor has recommend- ed
biometric authentication for workers entering the building. The recommendation might include
devices that verify all of the following, except

A. Fingerprints
B. Password patterns
C. Speech patterns
D. Retina patterns
A. 85. Which of the following best describes the process called authentication?

A. The system verifies the identity of the user.

B. The user identifies himself/herself to the system.
C. The user indicates to the system that the transaction was processed correctly.
D. The system verifies that the user is entitled to enter the transactions requested.
A. 86. Which of the following assurances is not provided by an application control?

A. Review and approval procedures for new systems are set by policy and adhered to.
B. Authorized transactions are completely processed once and only once.
C. Transaction data are complete and accurate.
D. Processing results are received by the intended user.
C. 87. Data processing activities may be classified in terms of three stages or processes:
input, processing, and output. Which of the following activities is not normally associated with
the input stage?

A. Recording
B. Batching
C. Reporting
D. Verifying
C. 88. Which of the following is the purpose of input controls?

A. To ensure the authorization of access to data files.

B. To ensure the completeness, accuracy, and validity of updating.
C. To ensure the completeness, accuracy, and validity of input.

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D. To ensure the authorization of access to program files.

A. 89. If a control total were to be computed on each of the following data items, which
would best be identified as a hash total for a payroll IT application?

A. Employee numbers.
B. Total debit and credit amounts.
C. Gross wages earned by employees.
D. Total hours worked.
C. 90. An entity uses the account code 699 for depreciation expense. However, one of the
company data input clerks of- ten codes depreciation expense as 996. The highest ac- count code
in the company's system is 700. What programmed control procedure would detect this error?

A. Pre-data input check.

B. Sequence check.
C. Valid-code test.
D. Valid-character test.
B. 91. Which of the, following provides the most valuable information for detecting
unauthorized input from a terminal?

A. User error report

B. Transaction log
C. Error file
D. Console log printout
D. 92. Many customers, managers, employees, and suppliers have blamed the computer for
making errors. In reality, computers make very few mechanical errors. Which of the follow- ing
is the most likely source of errors in a fully operational computer-based system?

A. Systems analysis and programming

B. Operator error
C. Processing
D. Input
A. 93. Data conversion is the transcription of transaction data from source documents to
magnetic tape or disk suitable for computer processing. Which of the following data conversion
methods is most difficult to audit?

A.Keying data to risk for online processing.

B. Keying data to risk for batch processing.
C. Reading source data using optical character recognition.
D. Keying data to source documents for magnetic ink character recognition.
A. 94. Which of the following best describes the online data processing control called
preformatting?

A. The display of a document with blanks for data items to be entered by the terminal operator.
B. A program initiated prior to regular input to discover errors in data before entry so that the
errors can be corrected.

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C. A series of requests for required input data that requires an acceptable response to each
request before a subsequent request is made.
D. A check to determine if all data items for a transaction have been entered by the terminal
operator.
B. 95. When erroneous data are detected by computer program controls, such data may be
excluded from processing and printed on an error report. Who should review and follow up this
error report?

A. Systems analyst
B. Data control group
C. Computer operator
D. Computer programmer
D. 96. If a payroll system continues to pay employees who have been terminated, control
weaknesses most likely exist because

A. Input file label checking routines built into the program were ignored by the operator.
B. Programmed controls such as limit checks should have been built into the system.
C. Procedures were not implemented to verify and control the receipt by the computer processing
department of all transactions before processing.
D. There were inadequate manual controls maintained out-side the computer system.
C. 97. In the accounting system of Samantha Company, the amounts of cash disbursements
entered at a computer terminal are transmitted to the computer, which immediately transmits the
amounts back to the terminal for display on the terminal screen. This display enables the operator
to

A. Establish the validity of the account number.

B. Prevent the overpayment of the account.
C. Verify the accuracy of the amount entered.
D. Verify the authorization of the disbursement.
B. 98. Which of the following input validation checks is least likely to be appropriate in an
online, real-time system?

A. Sign check
B. Sequence check
C. Reasonableness check
D. Redundant data check
A. 99. A receiving clerk keyed in a shipment from a remote terminal and inadvertently
omitted the purchase order number. Which of the following controls would most likely detect
this error?

A. Completeness check
B. Compatibility check
C. Sequence check
D. Reasonableness test
D. 100. A wholesaler of automotive parts has a computerized billing system. Because of a
clerical error while entering information from the sales order, one of its customers was billed for

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only three of the five items ordered and received. Which of the following controls could have
prevented or promptly detected this clerical error?

A. Periodic comparison of total accounts receivable per accounts receivable master file with total
accounts. receivable per accounts receivable control account.
B. A completeness check that does not allow a sales invoice to be processed if key fields are
blank.
C. Prenumbered shipping documents together with a procedure for follow up anytime there is not
a one-to-one relationship between shipping documents and sales invoices.
D. Matching Line control counts produced by the computer with predetermined line control
counts.
C. 101. Which of the following computerized control procedures would most likely provide
reasonable assurance that data uploaded from personal computers to a mainframe are complete
and that no additional data are added?

A. Field-level edit controls that test each field for alphanumerical integrity.
B. Self-checking digits to ensure that only authorized part numbers are added to the database.
C. Batch control totals, including financial totals and hash totals.
D. Passwords that effectively limit access to only those authorized to upload the data to the
mainframe.
A. 102. An entity's labor distribution report requires extensive corrections each month
because of labor hours charged to inactive jobs. Which of the follòwing data processing input
controls appears to be missing?

A. Validity check
B. Limit check
C. Missing data check
D. Control total
B. 103. If, in reviewing an application system, it is noted that batch controls are not used,
which of the following statements by the user of the system is acceptable as a compensating
control?

A. "The volume of transactions prohibits batching."

B. "We do a 100% physical review of the input document to the output document."
C. "We do a 100% key verification of all data input."
D. "The supervisor must approve all inputs."
C. 104. A mail-order retailer of low-cost novelty items is receiving an increasing number of
complaints from customers about the wrong merchandise being shipped. The order code for
items has the format WWXXYYZZ, which has the following meaning:

WW - major category
XX - minor category YY identifies the item
ZZ - identifies the catalog

In many cases, the wrong merchandise was sent because adjacent characters in the order code
had been transposed. The most effective control to prevent this erroneous input is to

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A. Use a master file reference for all order codes to verify the existence of items.
B. Separate the parts of the order code with hyphens to make the characters easier to read.
C. Add check digits to the order codes and verify them for each order.
D. Require customers to specify the name for each item they order.
B. 105. Which of the following is the major purpose of the auditor's study and evaluation of
the company's computer processing operations?

A. Ensure the exercise of due professional care.

B. Evaluate the reliability and integrity of financial information.
C. Become familiar with the company's means of identifying, measuring, classifying, and
reporting information.
D. Evaluate the competence of computer processing operating personnel.
D. 106. When the auditor chooses to use only the non-IT segment of a client's control to
assess control risk, it is referred to as auditing around the computer. Which one of the following
conditions need not be present to apply this audit approach?

A. The output must be listed in sufficient detail to enable the auditor to trace individual
transactions.
B. The source documents must be filed in a manner that makes it possible to locate them.
C. The source documents must be available in a nonmachine language.
D. Computer programs must be available in English.
C. 107. The following statements relate to the auditor's assessment of control risk in an
entity's computer environment. Which is correct?

A. The auditor usually can ignore the computer system if he/she can obtain an understanding of
the controls out-side the computer information system.
B. If the general controls are ineffective, the auditor ordinarily can assess control risk at a low
level if the application controls are effective.
C. The auditor's objectives with respect to the assessment of control risk are the same as in a
manual system.
D. The auditor must obtain an understanding of the internal control and test controls in computer
environments.
A. 108. Computer programs and data that the auditor may use as part of the audit procedures
to process data of audit significance contained in an entity's information system are called

A. CAATS
B. DOOGS
C. BIIKS
D. BIIRDS
D. 109. One common type of CAAT is the use of audit software to process data of audit
significance from the entity's information system. An audit software that has widespread
popularity because it is easy to use and requires little computer background on the part of the
auditor; it can be used on both mainframe and PC systems; it allows the auditor to perform
his/her tests independent of the entity's computer processing personnel; and it can be used to
audit the data in most file formats and structures is called a

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A. Customized program
B. Purpose-written program
C. Utility program
D. Package or generalized audit software (GAS).
B. 110. Customized or purpose-written programs perform audit tasks in specific
circumstances where package audit software is deemed unsuitable usually because system
constraints make it difficult or impossible to use. A purpose-written program may be developed
by

1. The auditor
2. The entity being audited
3. An outside programmer hired by the auditor

A. No Yes Yes
B. Yes Yes Yes
C. Yes No No
D. No No No
B. 111. These computer programs are enhanced productivity tools that are typically part of a
sophisticated operating systems environment, for example, data retrieval software or code
comparison software.

A. Purpose-written programs
B. System management programs.
C. Utility programs
D. Generalized audit software
A. 112. Embedded audit routines are sometimes built into an entity's computer information
system to provide data for later use by the auditor. One technique involves embedding audit
software modules within an application system to provide continuous monitoring of the entity's
transactions. These audit modules are used to create logs that collect transaction information for
subsequent review by the auditor. These logs are called

A. Systems control audit review files (SCARFS)

B. Console logs
C. Computer logs.
D. IT logs
D. 113. When an accounting application is processed by computer, an auditor cannot verify
the reliable operation of programmed controls by

A. Periodically submitting auditor-prepared test data to same computer process and evaluating
the results.
B. Constructing a processing system for accounting applications and processing actual data from
throughout the period through both the client's program and the auditor's program.
C. Manually comparing detailed transaction files used by an editing program with the program's
generated error listings to determine that errors were properly identified by the edit program.

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D. Manually reperforming, as of a moment in time, the processing of input data and comparing
the simulated results with the actual results.
B. 114. Auditing through the computer must be used when

A. Generalized audit software is not available.

B. Processing is primarily online and updating is real-time.
C. Input transactions are batched and system logic is straightforward.
D. Processing primarily consists of sorting the input data and updating the master file
sequentially.
A. 115. When an auditor tests a computer information system, which of the following is true
of the test data approach?

A. Test data are processed by the client's computer programs under the auditor's control.
B. Several transactions of each type must be tested.
C. Test data must consist of all possible valid and invalid conditions.
D. The program tested is different from the program used throughout the year by the entity.
C. 116. An auditor who is testing IT controls in a payroll system would most likely use test
data that contain conditions such as

A. Payroll checks with unauthorized signatures.

B. Deductions not authorized by employees. C. Time tickets with invalid job numbers.
D. Overtime not approved by supervisors.
C. 117. Auditors have learned that increased computerization has created more opportunities
for computer fraud but has also led to the development of computer audit techniques to detect
frauds. A type of fraud that has occurred in the banking industry is a programming fraud in which
the programmer designs a program to calculate daily interest on savings accounts to four decimal
points. The programmer then truncates the last two digits and adds it to his account balance.
Which of the following CAATs would be most effective in detecting this type of fraud?

A. Generalized audit software that selects account balances for conformation with the depositor.
B. Snapshot
C. Parallel simulation
D. SCARF (Systems Control and Audit Review File).
C. 118. To obtain evidence that online access controls are properly functioning, an auditor is
most likely to

A. Vouch a random sample of processed transactions to assure proper authorization.

B. Create checkpoints at periodic intervals after live data processing to test for unauthorized use
of the system.
C. Enter invalid identification numbers or passwords to as- certain whether the system rejects
them.
D. Examine the transaction log to discover whether any transactions were lost or entered twice
because of a system malfunction.
B. 119. Which of the following CAATS allows fictitious and real transactions to be
processed together without the knowledge of client operating personnel?

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A. Data entry monitor

B. Integrated test facility (ITF)
C. Parallel simulation
D. Input control matrix
C. 120. In auditing an online perpetual inventory system, an auditor selected certain file-
updating transactions for detailed testing. The audit technique that will provide a computer trail
of all relevant processing steps applied to a specific transaction is called

A. Snapshot
B. Simulation
C. Tagging and tracing
D. Code comparison

1. Which statement is incorrect regarding audit evidence?

a. Audit evidence is all the information used by the auditor in arriving at the conclusions on
which the audit opinion is based.
b. Audit evidence includes the information contained in the accounting records underlying the
financial statements and other information.
c. Audit evidence is cumulative in nature.
d. Auditors are expected to address all information that may exist. D
2. Accounting records least likely include
a. The records of initial entries and supporting records.
b. The general and subsidiary ledgers.
c. Work sheets and spreadsheets supporting cost allocations.
d. Comparable data about competitors (benchmarking). D
3. Other information that the auditor may use as audit evidence least likely includes
a. Minutes of meetings.
b. Confirmations from third parties.
c. Information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection.
d. Adjustments to the financial statements that are not reflected in formal journal entries. D
4. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit evidence.
b. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and
its reliability in providing support for, or detecting misstatements in, the classes of
transactions, account balances, and disclosures and related assertions.
c. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the
risk, the more audit evidence is likely to be required) and also by the quality of such audit
evidence (the higher the quality, the less may be required).
d. Merely obtaining more audit evidence may compensate for its poor quality. C
5. Which of the following statements is incorrect regarding relevance of audit evidence?
a. A given set of audit procedures may provide audit evidence that is relevant to certain

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assertions, but not others.

b. The auditor often obtains audit evidence from different sources or of a different nature that
is relevant to the same assertion.
c. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit
evidence regarding another assertion.
d. None of the above. C
6. Which of the following generalizations in assessing the reliability of audit evidence is
incorrect? a. Audit evidence is more reliable when it is obtained from independent sources
outside the
entity.
b. Audit evidence that is generated internally is not affected by the effectiveness of the controls
imposed by the entity.
c. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly or by inference.
d. Audit evidence is more reliable when it exists in documentary form. B
7. Which statement is incorrect regarding audit evidence?
a. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.
b. Accounting records alone do not provide sufficient audit evidence.
c. The auditor uses professional judgment and exercises professional skepticism in evaluating the
quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support
the audit opinion.
d. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure for
which there is no alternative. D
8. The auditor uses assertions in assessing risks by considering the different types of potential
misstatements that may occur, and thereby designing audit procedures that are responsive to the
assessed risks. Assertions used by the auditor fall into the following categories:
I. Assertions about classes of transactions and events for the period under audit.
II. Assertions about account balances at the period end.
III. Assertions about presentation and disclosure.
a. I, II and III
b. I and II only
c. II and III only
d. II only A
9. Assertions about classes of transactions and events for the period under audit least likely
include
a. Transactions and events that have been recorded have occurred and pertain to the entity. b. All
transactions and events that should have been recorded have been recorded.
c. Transactions and events have been recorded in the correct accounting period.
d. All assets, liabilities and equity interests that should have been recorded have been recorded.
D
10. Assertion about account balances at period end which means assets, liabilities, and equity
interests are included in the financial statements at appropriate amounts is
a. Existence
c. Completeness
b. Rights and obligations

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d. Valuation and allocation D

11. Accuracy and valuation assertions about presentation and disclosure means
a. Disclosed events, transactions, and other matters have occurred and pertain to the entity. b. All
disclosures that should have been included in the financial statements have been
included.
c. Financial information is appropriately presented and described, and disclosures are clearly
expressed.
d. Financial and other information are disclosed fairly and at appropriate amounts. D
12. The auditor obtains audit evidence to draw reasonable conclusions on which to base the audit
opinion by performing audit procedures to:
a. Obtain an understanding of the entity and its environment, including its internal control, to
assess the risks of material misstatement at the financial statement and assertion levels.
b. Test the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.
c. Detect material misstatements at the assertion level.
d. All of the above. D
13. The auditor is not always required to perform
a. Risk assessment procedures. c. Substantive procedures. b. Test of controls. d. Both a and c
B
14. Tests of controls are necessary
a. When the auditor's risk assessment includes an expectation of the operating effectiveness of
controls.
b. When substantive procedures alone provide sufficient appropriate audit evidence.
c. When risk assessment procedures by themselves do not provide sufficient appropriate
audit evidence.
d. Under no circumstances. A
15. Which statement is incorrect regarding Inspection as an audit procedure?
a. Inspection consists of examining records or documents or physical examination of assets.
b. Inspection of tangible assets may provide reliable audit evidence with respect to their
existence and about the entity's rights and obligations on the assets.
c. Inspection of individual inventory items ordinarily accompanies the observation of inventory
counting.
d. Some documents represent direct audit evidence of the existence of an asset. B
16. Which of the following audit procedures is used extensively throughout the audit and often is
complementary to performing other audit procedures?
a. Inspection b. Observation c. Inquiry d. Confirmation C
17. Which statement is incorrect regarding Inquiry?
a. Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence.
b. Responses to inquiries might provide information that differs significantly from other
information that the auditor has obtained.
c. Responses to inquiries may provide a basis for the auditor to modify or perform additional
audit procedures.
d. Inquiry alone is sufficient to test the operating effectiveness of controls. D
18. Observation
a. Consists of looking at a process or procedure being performed by others.

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b. Consists of seeking information of knowledgeable persons, both financial and non-financial,

throughout the entity or outside the entity.
c. Is the process of obtaining a representation of information or of an existing condition directly
from a third party.
d. Is the auditor's independent execution of procedures or controls that were originally performed
as part of the entity's internal control.A
19. This consists of checking the mathematical accuracy of documents or records.
a. Reperformance b. Recalculation c. Confirmation d. Inspection B
20. Which of the following is a false statement about audit objectives?
a. Audit objectives should be developed in light of management assertions about the financial
statement components.
b. Selection of tests to meet audit objectives should depend upon the understanding of
internal control.
c. The auditor should resolve any substantial doubt about any of management's material
financial statement assertions
d. There should be a one-to-one relationship between audit objectives and procedures. D
21. Which of the following is the best explanation of the difference, if any, between audit
objectives and audit procedures?
a. Audit procedures establish broad general goals, audit objectives specify the detailed work to be
performed.
b. Audit objectives are tailor-made for each assignment, audit procedures are generic in
application.
c. Audit objectives define specific desired accomplishments; audit procedures provide the means
of achieving audit objectives.
d. Audit procedures and audit objectives are essentially the same. C
22. Walastik, Inc. has significant information that is transmitted, processed, maintained, and
accessed electronically. The auditor has concluded that it is not possible to reduce detection risk
to an acceptable level by performing only substantive tests for a number of financial statement
assertions. The auditor's alternative strategy is to
a. Increase the acceptable audit risk.
b. Focus audit tests on other assertions for which substantive tests prove to be effective.
c. Require management to change its information system to provide appropriate evidence.
d. Perform tests of controls to gather evidential matter to use in assessing control risk related to
those assertions. D
The competence of evidence available to an auditor is least likely to be affected by
a. The relevance of such evidence to the financial statement assertion being investigated. b. The
relationship of the preparer of such evidence to the entity being audited.
c. The timeliness of such audit evidence.
d. The sampling method employed by the auditor to obtain a sample of such evidence. D
24. Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client's internal audit staff held in private.
b. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
c. Analytical procedures performed by the auditor on the entity's trial balance.
d. Inspection of bank statements obtained directly form the client's financial institution. D
25. The most reliable form of documentary evidence are those documents that are
a. Prenumbered

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c. Easily duplicated
b. Internally generated
d. Authorized by a responsible official D
26. Which of the following presumptions does not relate to the competence of audit evidence?
a. The more effective internal control, the more assurance it provides about the accounting data
and financial statements.
b. An auditor's opinion, to be economically useful, is formed within a reasonable time and based
on evidence obtained at a reasonable cost.
c. Evidence obtained from independent sources outside the entity is more reliable than evidence
secured solely within the entity.
d. The independent auditor's direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly.B
27. Assuming a low assessed level of control risk, which of the following audit procedures is
least likely to be performed?
a. Physical inspection of a sample of inventory.
b. Search for unrecorded cash receipts.
c. Obtaining of a client representation letter. d. Confirmation of accounts receivable. B
28. You have been assigned to audit the maintenance department of an organization. Which of
the following is likely to produce the least reliable audit evidence?
a. Notes on discussions with mechanics in the maintenance operation.
b. A schedule comparing actual maintenance expenses with budgeted expenses and those of the
prior period and disclosing important differences.
c. A narrative covering review of user reports on maintenance service.
d. An analysis of changes in certain maintenance department ratios.A
29. Which of the following auditing procedures is ordinarily performed last? a. Reading of the
minutes of the directors' meetings.
b. Confirming accounts payable.
c. Obtaining a management representation letter.
d. Testing of the purchasing function.C
30. Before applying substantive tests to the details of asset accounts at an interim date, an auditor
should assess
a. Control risk at below the maximum level.
b. Inherent risk at the maximum level.
c. The difficulty in controlling the incremental audit risk.
d. Materiality for the accounts tested as insignificant. C
31. Before applying principal substantive tests to the details of accounts at an interim date prior
to the balance sheet date, an auditor should
a. Assess control risk as below the maximum for the assertions embodied in the accounts selected
for interim testing.
b. Determine that the accounts selected for interim testing are not material to the financial
statements taken as a whole.
c. Consider whether the amounts of the year-end balances selected for interim testing are
reasonably predictable.
d. Obtain written representations from management that all financial records and related data will
be made available. C

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32. If an auditor conducts an audit of financial statements in accordance with generally accepted
auditing standards, which of the following will the auditor most likely detect?
a. Misposting of recorded transactions
c. Forgery
b. Unrecorded transactions
d. Collusive fraud A
1. It means the materials prepared by and for, or obtained and retained by the auditor in
connection with the performance of the audit.
a. Documentation c. Engagement letter
b. Audit evidence d. Audit report A
Which of the following is not a purpose of working papers?
a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support the auditor's
opinion.
d. Support the client's financial statements. D
3. Why does an auditor document audit evidence?
a. To comply with the requirements of gathering all available evidence.
b. To provide client reference for all account balances and correcting entries.
c. To support audit opinion and to provide evidence that the audit was carried out in accordance
with PSA.
d. To document all records of misstatements noted in the financial statements. C
4. Working papers that record the procedures used by the auditor to gather evidence should be
a. Considered the primary support for the financial statements being audited.
b. Viewed as the connecting link between the books of accounts and the financial statements.
c. Designed to meet the circumstances of the particular engagement.
d. Destroyed when the audited entity ceases to be a client. C
5. Which of the following conditions constitutes inappropriate working paper preparation?
a. Flowcharts are included in the working papers.
b. Findings are cross-referenced to supporting documentation.
c. Tick marks are explained in working papers.
d. All forms and directives used by the auditee department are included in the working papers.
D
6. An auditor's working papers will ordinarily be least likely to include documentation showing
how the
a. Client's schedules were prepared.
b. Engagement was planned.
c. Understanding of the client's internal control was obtained and control risk was assessed.
d. Unusual matters were resolved. A
7. Which of the following is usually included or shown in the auditor's working papers?
a. The procedures used by the auditor to verify the personal financial status of members of the
client's management team
b. Analyses that are designed to be a part of, or a substitute for, the client's accounting records
c. Excerpts from authoritative pronouncements that support the underlying generally accepted
accounting principles used in preparing the financial statements

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d. The manner in which exceptions and unusual matters disclosed by the auditor's procedures
were resolved or treated D
8. The form and content of working papers are affected by matters such as the:
I. Nature of the engagement.
II. Form of the auditor's report.
III. Nature and complexity of the business.
IV. Nature and condition of the entity's accounting and internal control systems.
V. Needs in the particular circumstances for direction, supervision and review of work
performed by assistants.
VI. Specific audit methodology and technology used in the course of the audit.

a. All of the above c. I, II and III only

b. All except V and VI d. All except VI A
9. Which of the following is not generally included in the working papers file?
a. An indication as to who performed the audit procedures and when they were performed.
b. Documentation of the auditor's understanding of the accounting and internal control
systems.
c. Copy of the internal audit's audit program.
d. Analyses of significant ratios and trends. C
10.Although the quantity and content of audit working papers vary with each particular
engagement, an auditor's permanent files most likely include
a. Schedules that support the current year's adjusting entries.
b. Prior years' accounts receivable confirmations that were classified as exceptions.
c. Documentation indicating that the audit work was adequately planned and supervised.
d. Analyses of capital stock and other owners' equity accounts. D
11. Audit working papers are indexed by means of reference numbers. The primary purpose of
indexing is to
a. Permit cross-referencing and simplify supervisory review.
b. Support the audit report.
c. Eliminate the need for follow-up reviews.
d. Determine that working papers adequately support findings, conclusions, and reports. A
12. The audit working paper that reflects the major components of an amount reported in the
financial statements is the
a. Interbank transfer schedule c. Supporting schedule
b. Carryforward schedule d. Lead schedule D
13. An auditor ordinarily uses a working trial balance resembling the financial statements
without footnotes, but containing columns for
a. Cash flow increases and decreases c. Reclassifications and adjustments
b. Audit objectives and assertions d. Reconciliations and tickmarks C
14. In the course of the audit of financial statements for the purpose of expressing an opinion
thereon, the auditor will normally prepare a schedule of unadjusted differences for which he did
not propose adjustment when they were uncovered. The primary purpose served by this schedule
is to
a. Point out to the responsible client officials the errors made by various company personnel.
b. Summarize the adjustments that must be made before the company can prepare and submit its
income tax returns.

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c. Identify the potential financial statement effects of errors or disputed items that were
considered immaterial when discovered.
d. Summarize the errors made by the company so that corrections can be made after the audited
financial statements are released. C
15. Which of the following analyses appearing in a predecessor's working papers is the successor
auditor least likely to be interested in reviewing?
a. Analysis of noncurrent balance sheet accounts.
c. Analysis of income statement accounts.
b. Analysis of current balance sheet accounts.
d. Analysis of contingencies. C
16. In an internal audit, the audit supervisor determines that working papers are complete
a. When satisfied that the audit objectives have been met and the working papers support the
conclusions.
b. When working papers refer to the steps outlined in the audit program.
c. Only after the auditor who prepared the working papers has signed and dated them.
d. When proper cross-references to other working papers are noted.A
17. Standardized working papers are often used, chiefly because they allow working papers to be
prepared more
a. Efficiently b. Professionally c. Neatly d. Accurately A
18. Ordinarily, the audit may use schedules, analyses and other documentation prepared by entity
personnel in order to:
a. Lessen auditor's responsibility.
b. Eliminate the need to apply any audit procedures on verifying their correctness.
c. Emphasize that the responsibility on financial statements rests with the client management.
d. Improve audit efficiency. D
19. Working papers which contain information relating primarily to the audit of a single period.
a. Current audit files c. Financial reporting files
b. Permanent audit files d. Correspondence files A
20. Which of the following is the least required of the audit working papers?
a. Substitute for the entity's accounting records.
b. Confidentiality of information included in the working papers.
c. Safe custody of the working papers.
d. Retention for a period sufficient to meet the needs of the practice. A
1. All the information used by the auditor in arriving at the conclusion on which the audit opinion
is based. It includes the information contained in the accounting records underlying the financial
statements (underlying accounting data) and other information (corroborating information).
A. Audit evidence C. Audit opinion
B. Audit risk D. Audit program A
2. Which of the following statements is/are correct?

Statement 1: Audit evidence comprises source documents and accounting records, underlying the
financial statements and corroborating information from other sources.

Statement 2: Audit evidence is obtained to form an appropriate mix of tests of control and
substantive procedures.

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Statement 3: The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.

A. Statements 1 and 2 only C. Statement 2 and 3 only

B. Statements 1 and 3 only D. All statements are correct D
3. All of the following are underlying accounting data, except:
A. Records of initial entries and supporting documents
B. General and subsidiary ledgers
C. Worksheets and spreadsheets for cost allocations
D. Minutes of meetings D
4. The measure of the quantity of audit evidence is:
A. Sufficiency C. Appropriateness
B. Competence D. Relevance A
5. The measure of the quality of audit evidence is:
A. Sufficiency C. Appropriateness
B. Competence D. Relevance C
6. An evidence to be considered appropriate must be:
A. Relevant C. Reliable
B. Relevant and reliable D. Relevant or reliable B
7. The following statements are correct, except:
A. The greater the risk of misstatement, the more audit evidence is likely to be required.
B. The higher the quality of audit evidence, the less may be required.
C. Obtaining more audit evidence will compensate for its poor quality.
D. The sufficiency and appropriateness of audit evidence are interrelated. C
8. The appropriateness of audit evidence available to an auditor is least likely to be affected by:
A. The relationship of the source or prepare of the evidence to the entity being audited.
B. The relevance of the evidence to the financial statement assertion being investigated.
C. The timeliness of the audit evidence.
D. The sampling method employed by the auditor to obtain a sample of the evidence. D
11. Ultimately, what is sufficient appropriate audit evidence depends on:
A. The users of the financial statements under audit.
B. The professional judgment of the client's management and those charged with governance.
C. The professional judgment of the auditor.
D. A combination of the professional judgment of the auditor and the client's management.
C
12. The auditor's judgment as to what is sufficient appropriate audit evidence is influenced by
such factors as:

A. The auditor's assessment of the nature and level of inherent risk at both the financial statement
level and the account balance or class of transaction level.
B. The nature of the internal control structure and the assessment of control risk.
C. The materiality of the item being examined.
D. The experience gained during previous audits.
E. The results of the audit procedures, including fraud or error which may have been found.
F. The source and reliability of information available.

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A. A, B, D, F, G C. A, B, F
B. A, B, D, E, F D. A, B, C, D, E, F D
13. Which of the following statements regarding reliability of evidence is incorrect?
A. Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
B. The condition of internal control of the entity does not contribute to the reliability of audit
evidence.
C. Audit evidence that is generated internally is more reliable when the related controls are
effective.
D. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly. B
14. Which of the following is the least reliable evidence?
A. Confirmation from third parties
C. Documentary form evidence
B. Observation of the inventory count
D. Photocopies and facsimiles D
15. Which of the following statement is/are correct?

Statement 1: The auditor considers the relationship between the cost of obtaining audit evidence
and the usefulness of the information obtained.

Statement 2: The difficulty and the expense involved are valid basis of omitting an audit
procedure for which there is no alternative.

Statement 3: The auditor relies on audit evidence that is persuasive rather than conclusive.

Statement 4: The auditor uses professional judgment and exercise professional skepticism to
determine the sufficiency and appropriateness of evidence.

A. Only one statement is correct

C. Only three statements are correct
B. Only two statements are correct
D. All statements are correct C
16. Assertions used by the auditor fall into the following categories, except:
A. Assertions about the faithful representations
B. Assertions about account balances
C. Assertions about classes of transactions and events
D. Assertions about presentation and disclosure A
17. Management assertions are:
A. Stated in the footnotes to the financial statements
B. Implied or express representations about the accounts in the financial statements.
C. Explicitly expressed representations about the financial statements.
D. Provided to the auditor in the assertions letter, but are not disclosed in the financial
statements. B
18. Management assertions are:
A. Directly related to PSAs

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C. Directly related to GAAP

B. Indirectly related to PSAs
D. Indirectly related to GAAP C
19. Assertions about account balances at the period-end include valuation and allocation, which
means that
A. Assets, liabilities and equity interest exist.
B. All assets, liabilities and equity interests that should have been recorded have been recorded.
C. Assets, liabilities and equity interests are included in the financial statements at appropriate
amounts and any resulting valuation or allocation adjustments are appropriately recorded.
D. The entity holds or controls the rights to assets, liabilities are the obligations of the entity.
C
20. The assertion of cut-off means that:
A. All transactions and events that should have been recorded
B. Amounts and other data relating to recorded transactions and events have been recorded
appropriately
C. Transactions and events have been recorded in the correct accounting period
D. Transactions and events have been recorded in the proper accounts. C
21. The assertion of occurrence means that:
A. All transactions and events that should have been recorded are recorded
B. Amounts and other data relating to recorded transactions and events have been recorded
appropriately
C. Transactions and events that have been recorded have occurred, and pertain to the entity
D. Transactions and events have been recorded in the proper accounts C
22. Which description refers to the completeness assertion?
A. All disclosures that should have been included in the financial statements have been included.
B. Disclosed events, transactions and other matters have occurred and pertain to the entity,
C. Financial information is appropriately presented and described, and disclosures are clearly
expressed.
D. Financial and other information are disclosed fairly and at appropriate amounts. A
23. Confirming proper title to equipment supports which of the following assertions?
A. Existence or occurrence
C. Presentation and disclosure
B. Insurance or coverage
D. Rights and obligations D
25. The completeness assertion addresses whether
A. All of the assets on the balance sheet exist.
B. All recorded transactions occurred.
C. The entity has property rights to all assets on the balance sheet.
D. All of the transactions, which occurred during the period, were recorded. D
26. The auditor notices that a client's cash basis financial statements are prepared with accrual
basis financial titles. This situation bears on which financial statement assertion?
A. Valuation or allocation
C. Rights and obligations
B. Presentation and disclosure
D. Completeness B
27. When vouching,

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A. The direction of the test is from recorded item back to the underlying support.
B. A complete examination of the transactions in the account is performed.
C. Recomputations are performed.
D. The auditor selects a transaction and follows it forward to recording in the accounting records.
A
28. Which of the following statements relating to the competence of evidential matter is always
true?
A. Evidence gathered by auditors must be both valid and relevant to be considered competent.
B. Properly designed analytical procedures will detect material misstatements.
C. Evidential matter gathered by an auditor from outside a client is reliable.
D. Oral representations made by management are not valid. A
29. The process of vouching helps establish that all recorded transactions
A. Have been completed
C. Are valid
B. Are complete
D. Are presented properly C
30. Acts to be performed in order to obtain audit evidence
A. Audit standards C. Audit program
B. Audit procedures D. Audit strategy B
31. Which of the following best describes the primary purpose of audit procedures?
A. To detect fraud
B. To comply with generally accepted accounting principles
C. To gather corroborative evidence to support the audit opinion
D. To verify the accuracy of account balances C
32. Audit procedures performed to obtain an understanding of the entity and its environment,
including its internal control.
A. Risk assessment procedures
C. Substantive procedures
B. Tests of control
D. Analytical procedures A
33. Audit procedures to test the operating effectiveness in preventing or detecting and correcting
material misstatements at the assertion level.
A. Risk assessment procedures
C. Substantive procedures
B. Tests of control
D. Analytical procedures B
34. Audit procedures to detect material misstatements at the assertion level.
A. Risk assessment procedures
C. Substantive procedures
B. Tests of control
D. Analytical procedures C
36. It includes test of details of classes of transactions, account balances, and disclosures and
analytical procedures.
A. Risk assessment procedures
C. Substantive procedures
B. Tests of control

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D. Analytical procedures C
37. Test of controls are necessary to be performed:
A. When auditor's risk assessment includes an expectation of the operating effectiveness of
controls.
B. When substantive procedures alone do not provide sufficient appropriate audit evidence.
C. Both a and b
D. No circumstance will require tests of controls. C
38. Examining records or documents, whether internal or external, in paper form, electronic
form, or other media.
A. Inspection of records or documents C. Observation
B. Inspection of tangible assets D. Inquiry A
39. Physical examination of the assets.
A. Inspection of records or documents C. Observation
B. Inspection of tangible assets D. Inquiry B
40. Consists of looking at a process or procedures being performed by others.
A. Inspection of records or documents C. Observation
B. Inspection of tangible assets D. Inquiry C
41. Consists of seeking information from knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.
A. Inspection of records or documents C. Observation
B. Inspection of tangible assets D. Inquiry D
42. The process of obtaining a representation of information or of an existing condition directly
from third party. It is a specific type of inquiry.
A. Reperformance C. Reconciliation
B. Confirmation D. Recomputation B
44. Auditor's independent execution of procedures or controls that were originally performed as
part of the entity's internal control.
A. Reperformance C. Reconciliation
B. Confirmation D. Recomputation A
45. Evaluation of financial information made by study of plausible relationships among both
financial and non-financial data.
A. Reperformance C. Reconciliation
B. Confirmation D. Analytical procedures D
46. Which statement is incorrect regarding the nature of further audit procedures?
A. The nature of further audit procedures refers to their purpose and type.
B. Certain audit procedures may be more appropriate for some assertions than others.
C. The auditor is required to obtain audit evidence about the accuracy and completeness of
information produced by the entity's information system when that information is used in
performing audit procedures.
D. The higher the auditor's assessment of inherent and control risks, the less reliable and relevant
is the audit evidence sought by the auditor from substantive procedures. D
47. The more the planned reliance of the auditor on the operating effectiveness of internal
controls,
A. The more the extent of the auditor's tests of controls.
B. The less the extent of the auditor's tests of controls.
C. The more the reliance of the auditor on information generated by the entity.

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D. The less the reliance of the auditor on information generated by the entity. A
48. In the context of an audit of financial statements, substantive tests are audit procedures that
A. May be eliminated under certain conditions.
B. Are designed to discover significant subsequent events.
C. May be either tests of transactions, direct tests of financial balances, or analytical tests.
D. Will increase proportionately with the auditor's reliance on internal control. C
49. Which of the following methods is considered the best combination in obtaining audit
evidence assuming documentary evidence is available to the auditor?
A. Inspection and reperformance C. Inquiry and inspection
B. Observation and inquiry D. Inquiry and analytical procedures C
50. As required by PSA 500, the auditor's substantive procedures should include the following:
A. Agreeing the financial statements to the underlying accounting records.
B. Examining material journal entries and other adjustments made during the course of preparing
the financial statements.
C. Both a and b.
D. Neither a nor b. C
52. Physical examination of tangible assets is not a sufficient form of evidence when the auditor
wants to determine the:
A. Existence of the asset
C. Condition or quality of the asset
B. Quantity and description of the asset
D. Ownership of the asset D
53. Which of the following audit procedures is used extensively throughout the audit but does
not, by itself, provide sufficient appropriate evidence?
A. Inspection of records or documents C. Inquiry
B. Observation D. Inspection of tangible assets C
54. Evidence obtained directly by the auditor is more reliable than information obtained
indirectly. Which of the following is not an example of the auditor's direct knowledge?
A. Inspection C. Computation
B. Observation D. Inquiry D
55. Confirmation is most likely to be the relevant form of evidence with regard to assertions
about accounts receivable when the auditor has concerns about the receivables'
A. Valuation C. Existence
B. Classification D. Completeness C
56. Confirmation is the process of obtaining a representation of information or of an existing
condition directly from a third party. Traditionally, confirmation is used to verify:
A. Individual transactions between organizations, such as sales transactions.
B. Fixed asset additions.
C. Bank balances and accounts receivables.
D. All three of the above. C
57. Who signs the confirmation requests:
A. The appropriate level of management C. The CEO/CFO of the client
B. The audit partner D. Both management and the auditor A
58. A confirmation requests letter should always be sent under the control of:
A. The client C. The recipient
B. The auditor D. Both a and b B

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59. Negative confirmation requests may be used when:

A. The assessed levels of inherent and control risks are high
B. A large number of large balances is involved
C. A substantial number of errors is expected
D. The auditor has no reason to believe that the respondents will disregard these requests D
60. When the recipient has accomplished the confirmation request, replies should be:
A. Sent directly to the auditor
B. Sent directly to the client, after which the client gives the replies to the auditor
C. Sent directly to the auditor, with another copy of the reply going to the client
D. Not sent back since a confirmation request does not necessitate replies A
61. Where no response is received to a positive confirmation request, the auditor should
A. Contact the recipient to elicit a response and perform alternative procedures as necessary
B. Issue a qualified opinion or an adverse opinion, depending on the materiality involved
C. Issue a qualified opinion or a disclaimer of opinion on grounds of a scope limitation
D. Contact the recipient/respondent in order to force a response from such recipient A
62. The primary source for evidence to corroborate the existence of pending litigation is:
A. Vendor confirmations C. management representation letters
B. Disclosures in financial statements D. attorney confirmations D
63. The following are purposes of analytical procedures, except:
A. Assist the auditor in planning the nature, timing and extent of other audit procedures
B. As a test to obtain audit evidence about the suitability of design and effective operation of
internal controls.
C. As a substantive procedure when their use can be more effective or efficient that tests of
details in reducing detection risk for specific financial statement assertions
D. As an overall review of the financial statements in the final review stage of the audit. B
64. Where there are unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by
ABCD
Corroboration of management's responses Yes No Yes No
Consideration of the need to apply other audit
procedures based on the results of management Yes Yes No No
inquiries A
65. Evidential matter consists of both underlying accounting data and corroborating information,
which support the accounting data. Which of the following is considered corroborating
information?
A. Data files C. Subsidiary ledgers
B. Records of electronic fund transfers D. General ledger B
69. In testing for lower-of-cost-or-net realizable value, the auditor is gathering evidence to
support which of the following assertions?
A. Pricing C. Valuation
B. Accuracy D. Rights and obligations C
70. When performing trend analysis,
A. Profitability ratios are required C. Comparison to budget may be performed
B. Expected values are calculated D. Solvency ratios are computed C
1. Which of the following statements concerning audit evidence is correct?
A. To be appropriate, audit evidence should be either reliable or relevant, but it need not be both.

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B. The measure of validity of audit evidence lies in the auditor's judgment.

C. The difficulty and expense of obtaining audit evidence concerning an account balance is a
valid basis for omitting the test.
D. A client's accounting records can be sufficient audit evidence to support the financial
statements. B
2. Which of the following statements concerning audit evidence is correct?

Statement 1: The quantity of audit evidence is affected by the risk of misstatement and also by
the quality of such audit evidence.

Statement 2: The reliability of audit evidence is influenced by its source and by its nature and is
dependent on the individual circumstances under which it is obtained.

A. Both statements are true C. True; False

B. Both statements are false D. False; True A
3. Management makes certain assertions that are embodied in financial statement components;
for example, two such categories of assertions are completeness and valuation and allocation.
Which of the following is not a broad category of management assertions?
A. Rights and obligations
C. Existence
B. Completeness
D. Error or fraud D
4. The objective of tests of details of transactions performed as substantive tests is to
A. Comply with generally accepted auditing standards
B. Attain assurance about the reliability of the accounting s system
C. Detect material misstatements in the financial statements
D. Evaluate whether management's policies and procedures operated effectively C
5. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements
C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records C
6. In determining whether transactions have been recorded, the direction of the audit testing
should be from the
A. General ledger balance
C. Original source documents
B. Adjusted trial balance
D. General journal entries C
7. Which of the following statements concerning evidential matter is true?
A. Appropriate evidence supporting management's assertions should be convincing rather than
merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence created within the
entity
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding
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D. A client's accounting records cannot be considered sufficient evidence to support the financial
statements D
8. Which of the following is an example of "other information" that could be used by an auditor
as evidential matter supporting financial statements
A. Worksheet supporting cost allocations C. Special journals
B. Confirmation of accounts receivable D. Accounting manuals B
9. Audit evidence can come in different forms with different degrees of persuasiveness. Which of
the following is the least persuasive type of evidence?
A. Bank statement obtained from the client
B. Test counts of inventory made by the auditor
C. Prenumbered purchase order forms
D. Correspondence from the client's attorney about litigation C
10. Which of the following statements concerning audit evidence is correct?
A. An audit usually involves the authentication of documentation
B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but
not others
C. Audit evidence obtained from an independent external source is always reliable
D. An entity's accounting records can be sufficient audit evidence to support the financial
statements B
11. In which of the following circumstances would be the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances
C. A small number of accounts may be in dispute and the accounts receivable balance arises from
sales to a few major customers
D. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances D
12. Which of the following might be detected by an auditor's review of the client's sale cut-off?
A. Excessive goods returned for credit
B. Unrecorded sales discounts
C. Lapping of year-end accounts receivable
D. Inflated sales for the year D
13. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
A. Vouching amounts of accounts subsidiary ledger to details on shipping documents
B. Comparing receivable turnover ratios with industry statistics for reasonableness
C. Inquiring about receivables pledged under loan agreements
D. Assessing the allowance for uncollectible accounts for reasonableness D
14. Confirmation is "the process of obtaining and evaluating a direct communication from a third
party in response to a request about a particular item affecting financial statement assertions."
Two assertions for which confirmation of accounts receivable balances provides primary
evidence are
A. Completeness and valuation
C. Rights and obligations and existence

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B. Valuation and rights and obligations

D. Existence and completeness C
15. Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second requests
A. Review the cash receipts journal for the month prior to year-end
B. Intensity the study of internal control concerning the revenue cycle
C. Increase the assessed level of detection risk for the existence assertion
D. Inspect the shipping records documenting the merchandise sold to the debtors D
16. Which of the following is an essential control procedure to ensure the accuracy of the
recorded inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test
D. Established a cutoff for goods received and shipped. D
17. Effective internal controls over inventories are designed and implemented for the following
reasons, except
A. Inventories typically represent a large component of an entity's current tasks.
B. Inventories are the most liquid asset.
C. Inventories directly affect the financial directly affect the financial performance of an entity.
D. Inventories typically represent a large portion of an entity's total assets. B
19. The primary source of information to be reported about litigation, claims, and assessments is
the
A. Client's lawyer C. Client's management
B. Courts records D. Independent auditor C
20. Which of the following is an audit procedure that an auditor most likely would perform
concerning litigation, claims and assessments?
A. Request the clients lawyer to evaluate whether the client's pending litigations, claims and
assessment indicate a going concern problem
B. Examine the legal documents in the client's lawyer's possession concerning litigations, claims
and assessment to which the lawyer has devoted substantive attention
C. Discuss with management its policies and procedures adopted for evaluating and accounting
for litigations, claims and assessments
D. Confirm directly with the client's lawyer that all litigations, claims and assessment have been
recorded or disclosed in the financial statements C
22. Although the validity of evidential matter is dependent on the circumstances under which it is
obtained, there are three general presumptions that have some usefulness. The situations given
below indicate the relative reliability a CPA has placed on two types of evidence obtained in
different situations. Which of these is an exception to one of the general presumptions?
A. The CPA places more reliance on the balance in the scrap sales account at Plant A, where the
CPA has made limited tests of transactions because of effective controls, than at Plant B, where
the CPA has made extensive tests of transactions because of ineffective controls.
B. The CPA places more reliance on the CPAs computation of interest payable on outstanding
bonds than on the amount confirmed by the trustee.
C. The CPA places more reliance on the report of an expert on an inventory of precious gems
than on the CPA's physical observation of the gems.

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D. The CPA places more reliance on a schedule of insurance coverage obtained from the
company's insurance agent than on one prepared by the internal audit staff.C
24. An auditor audits an accounting estimate by any of the following means except
A. Testing the process used by management to develop the estimate.
B. Obtaining a confirmation from an independent source.
C. Developing an independent expectation.
D. Reviewing subsequent events or transactions. B
25. When analytical procedures are used as substantive tests, some account relationships are
more predictable than others. For which of the following accounts is the prior-year balance likely
to be the best predictor of the current year-end balance?
A. Accounts payable C. Revenues
B. Cash D. Inventory C
26. Which of the following best describes the most important stage of an auditor's statistical
analysis of significant ratios and trends?
A. Computation of significant ratios and trends.
B. Reconciliation of statistical data to the client's accounting ratios.
C. Interpretation of significant variations and unusual relationships.
D. Comparison of statistical data to prior-year statistics and to similar data published by
government and private sources. C
11. According to PSA 230 ''Documentation'', working papers do not
A. Assist in the planning and performance of the audit.
B. Assist in the supervision and review of the audit work.
C. Record the audit evidence resulting from the audit work performed to support an auditor's
opinion.
D. Prove the independence of the auditor. D
12. Statement 1: Working papers are the property of the auditor.
Statement 2: Although portions of or extracts from the working papers maybe made available to
the entity at the discretion of the auditor, they may be substitute for the entity's accounting
records.
A. Only statement one is correct C. Both statements are correct
B. Only statement two is correct D. Both statements are incorrect A
13. Statement 1: The auditor should prepare working papers which are sufficiently complete and
detailed to provide an overall understanding of the audit.
Statement 2: The auditor should record in the working papers information on planning the audit
work, the nature, timing and extent of the audit procedures performed, the results thereof, and the
conclusions drawn from the audit evidence obtained.
A. Only statement one is correct
B. Only statement two is correct
C. Both statements are correct
D. Both statements are incorrect C
14. The form and content of working papers are affected by matters such as the following except:
A. Nature of the engagement
B. Type of opinion to be rendered by the auditor
C. Nature and complexity of the business
D. Needs in the particular circumstances for the direction, supervision and review of work
performed by assistants. B

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15. Audit working papers are used to record the results of the auditor's evidence gathering work.
When preparing working papers, the auditor should remember that
A. Working papers should be designed to meet the circumstances and the auditor's need for each
engagement
B. Working papers should be kept on the client's premises so as to provide ready access to them
by the client.
C. Working papers should be at the primary support for the financial statements being examined.
D. Working papers should be considered as a substitute for the client's accounting records.
A
16. The primary purpose of audit working papers is to
A. Provide evidence of compliance with auditing standards
B. Provide management with an independent copy of financial records.
C. Provide protection against litigation
D. Document deficiencies in client policies and procedures A
17. Which of the following is incorrect?
A. Documentation prepared at the time the work is performed is likely to be more accurate than
documentation prepared subsequently.
B. The auditor ordinarily includes from audit documentation superseded drafts of working papers
and financial statements, notes that reflect incomplete or preliminary thinking, previous copies of
documents corrected for typographical or other errors, and duplicates of documents.
C. It is neither necessary nor practicable to document every matter the auditor considers during
the audit.
D. Oral explanations by the auditor, on their own, do not represent adequate support for the work
the auditor performed or conclusions the auditor reached, but may be used to explain or clarify
information contained in the audit documentation. B
18. During an audit engagement, pertinent data are compiled and included in the audit working
papers. The working papers primarily are considered to be
A. A client-owned record of conclusions reached by the auditors who performed the engagement
B. Evidence supporting financial statements
C. Support for the auditor's representations as to compliance with generally accepted auditing
standards.
D. A record to be used as a basis for the following year's engagement. C
19. Audit working papers should not
A. Include any client-prepared papers or documents other than those prepared by the CPA or his
assistant.
B. Be kept by the CPA after review and completion of the audit except for items required for the
income tax return or the permanent file.
C. Be submitted to the client to support the financial statements and to provide evidence of the
audit work performed.
D. Be themselves be expected to provide sufficiency support for the auditor's opinion. C
21. Which of the following is not a factor affecting the independent auditor's judgement about
the quantity, type and content of audit working papers?
A. The needs for supervision and review of the work performed by assistants.
B. The nature and condition of the client's records and internal control.
C. The expertise of the client personnel and their participation in preparing schedules.

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D. The type of financial statements, schedules, or other information on which the auditor is
reporting. C
22. Although the quantity, type and content of working paper will vary with the circumstance, the
working papers generally include the
A. Copies of those client records examined by the auditor during the course of the engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the partner
responsible for the audit.
C. Auditor's comments concerning the efficiency and competence of client management
personnel.
D. Auditing procedures followed, and the testing performed in obtaining evidential matter.
D
26. Documentation is a form of evidence
A. Used in every financial statement audit
B. Used in most financial statement audit
C. Used on the rare occasions when it is both readily available and less costly than other
procedures.
D. Used when nothing is available that is more competent A
27. An audit working paper that shows the detailed evidence and procedures regarding the
balance in the accumulated depreciation account in the year under audit will be found in the
A. Current file of working papers
B. Permanent file of working papers
C. Other information working papers in the current file
D. Planning memorandum in the current file.A
28. In the case of recurring audits, some working papers files may be classified as audit files
which are updated with new information of continuing importance. This type of audit file is
known as:
A. Current audit file C. Electronic audit file
B. Permanent audit file D. Planning memorandum file B
30. A schedule listing account balances for the current and previous years, and columns for
adjusting and reclassifying entries proposed by the auditors to arrive at the final amount that will
appear in the financial statements, is referred to as a
A. Working trial balance C. Summarizing schedule
B. Lead schedule D. Supporting schedule A
31. What do you call the type of working paper where matters of importance are noted down for
further verification?
A. Summary sheet C. Agenda Sheet
B. Audit program D. Supporting schedules. C
32. The current file of the auditor's working papers generally should include.
A. A flowchart of the internal controls
C. A copy of the financial statements
B. Organization charts
D. Copies of bond and note indentures C
33. The permanent file portion of the auditor's working papers generally should include
A. A copy of the engagement letter.
B. A copy of key customer confirmation
C. Names and addresses of audit staff personnel on the engagements.

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D. Time and expense reports.D

34. The permanent (continuing) file of an auditor's working paper most likely would include
copies of the
A. Lead schedules C. Banks statements
B. Attorney's letter D. Debt agreements D
35. The current file of an auditor's working paper most likely would include copy of the
A. Bank reconciliation C. Articles of incorporation
B. Pension plan contract D. Flowchart of the internal control activities A
36. The permanent file section of the working papers that is kept for each audit client most likely
contains
A. Review notes pertaining to questions and comments regarding the audit work performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and internal controls. D
37. In general, which of the following statements is correct with respect to ownership,
possession, or access to working papers prepared by a CPA firm in connection with an audit?
A. The working papers may be obtained by third parties where they appear to be relevant to
issues raised in litigation.
B. The working papers are subject to the privileged communication rule which, in a majority of
jurisdictions, prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fees.
D. The working papers must be retained by the CPA firm for a period of ten years. B
38. For what minimum period should audit working papers be retained by the independent CPA?
A. For the period during which the entity remains a client of the independent CPA.
B. For the period during which an auditor-client relationship exists but not more than six (6)
years
C. For the statutory period within which legal action may be brought against the independent
CPA.
D. For as long as the CPA is in public practice. C
39. Which of the following documentation is required for an audit in accordance with PSA?
A. An internal control questionnaire C. A planning memorandum or checklist
B. A client engagement letter D. A client representation letter D
42. In documenting the nature, timing and extent of audit procedures performed, the auditor
should record
I. Who performed the audit work and the date such work papers was completed
II. Who reviewed the audit work and the date and extent of such review
A. I only C. Both I and II
B. II Only D. Neither I nor II C
1. Of the following, which is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between auditor and vendors.
c. Copies of sales invoices inspected by the auditor.
d. Computations made by the auditor. C
2. Analytical procedures are
a. Substantive tests designed to evaluate a system of internal control.
b. Tests of controls designed to evaluate the validity of management's representation letter.

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c. Substantive tests designed to evaluate the reasonableness of financial information.

d. Tests of controls designed to evaluate the reasonableness of financial information. C
3. Which of the following best describes the primary purpose of audit procedures?
a. To detect errors or irregularities.
b. To comply with generally accepted accounting principles.
c. To gather corroborative evidence.
d. To verify the accuracy of account balances. C
4. The procedures specifically outlined in an audit program are primarily designed to
a. Protect the auditor in the event of litigation.
b. Detect errors or irregularities.
c. Test internal control structure.
d. Gather evidence. D
5. Which of the following is ordinarily designed to detect possible material dollar errors on the
financial statements?
a. Tests of controls.
b. Analytical procedures.
c. Computer controls.
d. Post audit working paper review. B
6. Which of the following statements relating to the competence of evidential matter is always
true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more relevant
than data developed under unsatisfactory conditions.
c. Oral representations made by management are not valid.
d. Evidence gathered by auditors must be both valid and relevant to be considered competent.
D
7. In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions.
b. Are designed to discover significant subsequent events.
c. May be either tests of transactions, direct tests of financial balances, or analytical tests.
d. Will increase proportionately with the auditor's assessment of control risk. C
9. Which of the following factors will least affect the independent auditor's judgment as to the
quantity, type, and content of the working papers desirable for a particular engagement?
a. Nature of the auditor's report.
b. Nature of the financial statements, schedules, or other information upon which the auditor is
reporting.
c. Need for supervision and review.
d. Number of personnel assigned to the audit. D
11. Which of the following is not a primary purpose of audit working papers?
a. To coordinate the examination.
b. To assist in preparation of the audit report.
c. To support the financial statements.
d. To provide evidence of the audit work performed. C
12. The understanding between the client and the auditor as to the degree of responsibility to be
assumed by each is normally set forth in a(n)
a. Representation letter.

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b. Engagement letter.
c. Management letter.
d. Comfort letter. B
13. Audit evidence takes different forms and varies in persuasiveness. Which of the following is
the least persuasive type of evidence?
a. Vendor's invoice.
b. Bank statement obtained from the client.
c. Computations made by the auditor.
d. Canceled checks. B
14. The following statements were made in a discussion of audit evidence by two independent
auditors. Which statement is untrue?
a. "I am seldom convinced beyond all doubt about all aspects of the financial statements being
audited."
b. "I would not undertake that procedure because, at best, the results would only be persuasive
and I'm looking for convincing evidence."
c. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."
d. "I evaluate the usefulness of the evidence I can obtain against the cost to obtain it." B
15. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather than at year-end.
b. Nature of substantive tests from a less effective to a more effective procedure.
c. Timing of tests of controls by performing them at several dates rather than at one time.
d. Assessed level of inherent risk to a higher amount. B
16. When an independent auditor is approached to perform an audit for the first time, he or she
should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor
may be able to provide the successor with information that will assist the successor in
determining whether
a. The predecessor's work should be used.
b. The company rotates auditors.
c. Control risk is low, in the predecessor's opinion.
d. The engagement should be accepted. D
17. The purpose of tests of controls is to provide reasonable assurance that
a. The extent of substantive testing is minimized.
b. Evidence will be obtained to determine an assessed level of control risk.
c. Errors and irregularities are prevented or detected in a timely manner.
d. The auditor has an understanding of the control environment. B
19. Which of the following is not a factor affecting the independent auditor's judgment about the
quantity, type, and content of audit working papers?
a. The needs for supervision and review of the work performed by assistants.
b. The nature and condition of the client's records and internal controls.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of the financial statements, schedules, or other information on which the auditor is
reporting. C
22. Using laptop computers in auditing may affect the methods used to review the work of staff
assistants because
a. Supervisory personnel may not have an understanding of the capabilities and limitations of
computers.

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b. Working paper documentation may not contain readily observable details of calculations.
c. The audit field work standards for supervision may differ.
d. Documenting the supervisory review may require assistance of management services
personnel. B
23. Which of the following persons is not a specialist upon whose work an auditor may rely?
a. Actuary.
b. Appraiser.
c. Internal auditor.
d. Engineer. C
24. In which of the following instances would an auditor be least likely to require the assistance
of a specialist?
a. Assessing the value of inventories of works of art.
b. Determining the quantities of materials stored in piles.
c. Determining the value of unlisted securities.
d. Determining the assessed value of fixed assets. B
Of the following procedures, which is not considered part of "obtaining an understanding of the
client's environment?"
a. Examining trade publications to gain a better understanding of the client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding
of operations.
d. Studying the internal controls over cash receipts and disbursements. B
If working papers are to have the characteristics that will ensure that they achieve their primary
purposes, which of the following is the most important?
a. Working papers must be of standard format and standard content.
b. Working papers must be properly indexed and cross- referenced to the draft audit report.
c. Working papers must provide sufficient, competent, and useful information to support the
audit report. d. Working papers must be arranged in logical order following the audit program
sequence. C
Which of the following is not an example of analytical evidence?
a. Compared inventory turnover by major class with the prior year on a monthly and quarterly
basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined invoices for plant asset additions to determine whether the client had erroneously
recorded ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated significant variations from budgeted
amounts. C
Choose the best illustration of objective audit evidence from the following
a. The paid invoice file containing invoices matched with receiving reports and purchase orders.
b. Management's assertion that payment procedures require matching of invoice with receiving
report and purchase order.
c. Clerical staff assurances that management policy regarding payment of invoices--matching of
invoice with receiving report and purchase order--is always followed.
d. The treasurer's statement of not remembering any exceptions in which an invoice was
submitted for payment that was not accompanied by a matching receiving report and purchase
order. A

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An initial (first-time) audit requires more audit time to complete than a recurring audit. One of
the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar to the auditor and need to be
carefully studied.
d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.
C
Which of the following is a basic tool used by the auditor to control the audit work and review
the progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program. D
An auditor wants to develop an audit test to evaluate the reasonableness of the quantity of scrap
material resulting from a certain production process compared to industry standards. Which
would be the most competent type of evidence available to satisfy this objective?
a. Documentary.
b. Hearsay.
c. Physical.
d. Analytical. D
As part of audit planning, CPAs should design audit programs for each individual audit and
should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information available.
c. Provide assurances that the objectives of the audit are met.
d. Ensure that only material items are audited. C
Of the following audit procedures, which best supports the valuation objective?
a. Performing a lower of cost or market test of the client's inventories.
b. Reviewing a contingent liability footnote for proper wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking. A
An assumption underlying analytical procedures is that
a. These procedures cannot replace tests of balances and transactions.
b. Statistical tests of financial information may lead to the discovery of material errors in the
financial statements.
c. The study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
d. Relationships among data may reasonably be expected to exist and continue in the absence of
known conditions to the contrary. D
An auditor is examining accounts receivable. What is the most competent type of evidence in
this situation?
a. Interviewing the personnel who record accounts receivable.
b. Verifying that postings to the receivable account from journals have been made.
c. Receipt by the auditor of a positive confirmation. d. No response received for a request for a
negative confirmation. C

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With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures that will be
performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.
D
Which of the following statements about working papers is correct?
a. Working papers are not permitted to be used as a reference source by the client.
b. The auditor should document the understanding of the client's internal control obtained to plan
the audit
c. Working papers may be regarded as a substitute for the client's accounting records.
d. When reporting on comparative financial statements, the independent auditor may discard
working papers after two years. B
Which of the following factors is most important in determining the competence of audit
evidence?
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence. A
When reviewing audit working papers, the primary responsibility of an audit supervisor is to
determine that:
a. Each worksheet is properly identified with a descriptive heading.
b. Working papers are properly referenced and kept in logical groupings.
c. Standard departmental procedures are adhered to with regard to work paper preparation and
technique. d. Working papers adequately support the audit findings, conclusions, and report.
D
Auditors apply analytical procedures to the client's
operations in order to identify
a. Improper separation of accounting and other financial duties.
b. Weaknesses of a material nature in the client's internal control.
c. Unusual transactions.
d. Noncompliance with prescribed control procedures. C
Which of the following workpapers would one normally expect to find in the permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to marketable securities.
d. A workpaper analyzing customer replies to confirmation requests. A
Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and investigate significant
variations.
b. Examine monthly performance reports and investigate significant revenue and expense
variances.
c. Confirm customers' accounts receivable and clear all material exceptions.

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d. Compare sales trends and profit margins with industry averages and investigate significant
differences. C
In evaluating the reasonableness of advertising expense, which of the following would be the
best evidence?
a. Oral evidence obtained through discussions with company marketing executives and
representatives of the advertising agency retained.
b. Documentary evidence obtained by vouching charges to the account and by retracing charges
from source documents to the account.
c. Analytical evidence developed by comparing the ratio of advertising expenses to sales with
historical data for the company and industry.
d. Arithmetical evidence developed by re-computing charges submitted by the advertising
agency and paid by the company. C
Which of the following is not a consideration in the development of audit programs?
a. Internal control over the recording of plant asset additions and repairs and maintenance
expenditures is found to be weak.
b. The client constructed a major addition to its central manufacturing facility during the year
under audit.
c. The client is a private university located in the Midwest.
d. The client's board or directors is elected by the stockholders at the annual meeting. D
Audit working papers are used to record the results of the auditor's evidence-gathering
procedures. When preparing working papers, the auditor should remember that working papers
should be
a. Kept on the client's premises so that the client can have access to them for reference purposes.
b. The primary support for the financial statements being examined.
c. Considered as a part of the client's accounting records that are retained by the auditor.
d. Designed to meet the circumstances and the auditor's needs on each engagement. D
Which of the following is not a typical analytical procedure?
a. Study of relationships of financial information with relevant nonfinancial information.
b. Comparison of financial information with similar information regarding the industry in which
the entity operates.
c. Comparison of recorded amounts of major disbursements with appropriate invoices.
d. Comparison of recorded amounts of major disbursements with budgeted amounts. C
Which of the following is an example of inferential evidence?
a. The auditor observes the taking of the client's physical inventory and performs test counts.
b. The auditor inspects marketable securities for
existence.
c. An auditor, who notes that customer accounts receivable have increased significantly in the
current year as a percentage of sales, suspects that a larger proportion of the accounts will prove
uncollectible.
d. The auditor counts cash on hand at year-end. C
Which of the following would be least likely to be comparable between similar corporations in
the same industry line of business?
a. Earnings per share.
b. Return on total assets before interest and taxes.
c. Accounts receivable turnover.
d. Operating cycle. A

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Which of the following is not an example of confirmation evidence?

a. Requesting the client's outside legal counsel to evaluate the possible outcome of pending
litigation.
b. Questioning the client's employees about existing internal control policies and procedures.
c. Requesting the client's customers to verify year-end accounts receivable balances.
d. Requesting payees to respond in writing to the terms contained in notes payable appearing in
the client's ledger. B
A CPA, in performing an independent audit, would most likely use recalculation as a substantive
test for which of the following expense-related accounts?
a. Purchases of supplies.
b. Interest expense.
c. Advertising expense.
d. Repairs and maintenance expense. B
During the course of an audit engagement, an auditor prepares and accumulates audit working
papers. The primary purpose of the audit working papers is to
a. Aid the auditor in adequately planning his work. b. Provide a point of reference for future audit
engagements.
c. Support the underlying concepts included in the preparation of the basic financial statements.
d. Support the auditor's opinion. D
Which of the following is not an appropriate auditing procedure supporting fairness of financial
presentation?
a. Inspecting plant asset additions for existence.
b. Recalculating accrued interest on notes payable.
c. Examining invoices in support of legal fees recorded during the fiscal year.
d. Reviewing the client's production quality control program. D
Sales commissions as a percentage of sales declined significantly during the year under audit. Of
the following possible causes, the most likely is
a. Sales increased during the year.
b. The sales force was reduced at the end of the year.
c. Sales commission rates were increased at the beginning of the year.
d. Fictitious sales were recorded at year-end to inflate earnings. Commissions were not recorded
on these sales. D
Which of the following is responsible for the fairness of the representations made in financial
statements?
a. Client's management.
b. Independent auditor.
c. Audit committee.
d. AICPA. A
An audit program provides proof that
a. Sufficient competent evidential matter was obtained. b. The work was adequately planned.
c. There was compliance with generally accepted standards of reporting.
d. There was a proper study and evaluation of internal control. B
During the working paper review, an audit supervisor finds that the auditor's reported findings
are not adequately cross-referenced to supporting documentation. The supervisor will most likely
instruct the auditor to

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a. Prepare a working paper to indicate that the full scope of the audit was carried out.
b. Familiarize him/herself with the sequence of working papers so that he(she) will be able to
answer questions about the conclusions stated in the report.
c. Eliminate any cross-references to other working papers since the system is unclear.
d. Provide a workpaper indexing system that shows the relationship between findings,
conclusions, and the related facts. D
Generally, what source of evidence should most impact audit conclusions?
a. External
b. Inquiry.
c. Oral.
d. Informal. A
Most of the independent auditor's work in formulating an opinion on the financial statements
consists of
a. Studying and evaluating internal control.
b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with assets. B
During an audit of the accounts receivable function, you found that the accounts receivable
turnover rate had fallen from 7.3 to 4.3 over the last three years. What is the most likely cause of
the decrease in the turnover rate?
a. An increase in the discount offered for early payment. b. A more liberal credit policy.
c. A change from net 30 to net 25.
d. Greater cash sales. B
To test for unsupported entries in the ledger, the direction of audit testing should be from the
a. Ledger entries.
b. Journal entries.
c. Externally generated documents.
d. Original source documents. A
Which of the following does not describe one of the functions of audit workpapers?
a. Facilitates third-party reviews.
b. Aids in the planning, performance, and review of audits.
c. Provides the principal evidential support for the auditor's report.
d. Aids in the professional development of the operating staff. D
The principal reason for developing a written audit program is to help assure that the
a. Audit work is properly supervised.
b. Audit work is properly planned and documented. c. Audit report contains only significant
findings.
d. Work of different auditors is properly coordinated. B
One of the primary roles of an audit program is to:
a. Serve as a tool for planning, directing, and controlling audit work.
b. Document an auditor's understanding of the internal control.
c. Provide for a standardized approach to the audit engagement.
d. Delineate the audit risk accepted by the auditor. A
The principal purpose for cross-indexing audit working papers is to
a. Give the working papers a professional appearance.
b. Explain the use of tick marks.

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c. Provide explanation of the audit steps performed. d. Provide a trail for the auditor and the
reviewer. D
Audit information is generally considered relevant when it is:
a. Derived through valid statistical sampling.
b. Objective and unbiased.
c. Factual, adequate, and convincing.
d. Consistent with the audit objectives. D
External auditors often confirm assertions contained in the organization's financial statements
and accounting records with third parties. Which of the following best explains why
confirmation produces evidence of high quality?
a. Written assertions from knowledgeable third parties provide sufficient evidence to achieve
most audit objectives.
b. Confirmation by knowledgeable third parties is usually the most relevant evidence available.
c. Confirmation by knowledgeable third parties is usually the least costly evidence available.
d. Confirmation by knowledgeable third parties is highly competent because of its independent
source. D
As a category of evidence, documents may be external or internal. As an auditor reviewing your
client's accounts receivable, which of the following is an example of internal documentary
evidence?
a. The carrier's bill of lading.
b. Sales invoice copies.
c. A customer's purchase order.
d. A vendor's month-end statement. B

Shown below (1 through 5) are the five types of tests which auditors use to determine whether
financial statements are fairly stated. Which three are substantive tests?
1. risk assessment procedures
2. tests of controls
3. tests of transactions
4. analytical procedures
5. tests of details of balances 3, 4, and 5
Collectively, procedures performed to obtain an understanding of the entity and its environment,
including internal controls, represent the auditor's risk assessment procedures
Which of the following would not be considered further audit procedures? risk assessment
procedures
Which of the following procedures would most likely be performed in response to the auditor's
assessment of the risk of monetary misstatements in the financial statements? Tests of details
of balances
Which of the following further audit procedures are used to determine whether all six transaction
related audit objectives have been achieved for each class of transactions? substantive tests
You are auditing Rodgers and Company. After performing substantive analytical procedures you
conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate
that: certain test of balances procedures may be eliminated for those accounts
The purpose of tests of controls is to provide reasonable assurance that the internal control
procedures are functioning as intended.

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In the context of an audit of financial statements, substantive tests are audit procedures that
are designed to test for dollar misstatements
Which of the following is true? tests of details of balances focus on the ending balances for
accounts in the client's ending trial balance
A system walkthrough is primarily used to: gain an understanding of internal controls.
Risk assessment procedures are performed by auditors during an audit in order to determine the
risk of material misstatement in the financial statements.
Tests of controls are directed toward the control's: effectiveness
A procedure designed to test for monetary misstatements directly affecting the correctness of
financial
statement balances is a: substantive test.
Which of the following is not a direct result of performing analytical procedures? identify
specific errors in the accounts
The primary emphasis in most tests of details of balances is on the: balance sheet accounts
Which of the following statements is not true? Tests of controls are concerned with
evaluating whether controls are sufficiently effective to justify
reducing control risk and thereby reducing analytical review procedures.
Many auditors perform extensive analytical procedures on audits because: they indicate areas of
potential risk and misstatement
When controls are deemed ineffective and assessed control risk is at the maximum for a private
company, which of the following would normally be true? no emphasis placed on the controls
Which of the following is ordinarily designed to detect material dollar errors on the financial
statements? Tests of details of balances
In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform.
Which of the following audit tests would be the most costly? Tests of Details of Balances
An exception or deficiency found in a test of controls: indicates that a financial statement
misstatement may be likely.
If no material differences are found using analytical procedures and the auditor concludes that
misstatements are not likely to have occurred: other substantive tests may be reduced.
Which of the following audit tests is usually the most costly to perform? Tests of balances
An increased extent of tests of controls is most likely to occur when: controls are effective
and the preliminary control risk assessment is low
If the results of the tests of controls, substantive tests of transactions, and analytical procedures
are not
consistent with the predictions, tests of details of balances will be: changed.
The auditor would design which of the following audit tests to detect possible monetary errors in
the
financial statements? Analytical procedures
The reliance the auditor places on substantive tests in relation to the reliance placed on internal
control
varies in a relationship that is ordinarily: inverse.
A deficiency uncovered in the audit of internal control is explained by which of the following in
relation to a financial statement misstatement? the likelihood of the misstatement
Which of the following is not a valid basis for omitting an audit test in forming an opinion on the
clients financial statements? the difficulty and expense involved in testing a particular item

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The most important consideration in developing the audit plan and audit program is the: audit
risk model used in its planning form.
Auditors who test manual controls that rely on IT-generated reports must consider: the
controls related to the accuracy of the information in the report.
A document that details what the auditor will do to gather sufficient, appropriate evidence is the:
audit program
Auditors follow a four step approach to reduce assessed control risk. Which of the following is
not one
of the four? Indentify accounts that have high inherent risk
What type of test is used to obtain more types of evidence than any other? Tests of details
Which audit tests involve physical examination and confirmation? tests of balances
Which of the following is generally not included in the "evidence mix"? Risk Assessment
Procedures
Which of the following types of evidence is not available when using substantive tests of
transactions? Confirmation
Presentation and disclosure related audit objectives would be performed in which phase of the
audit
process? complete the audit and issue the audit report
Transaction related audit objectives would most likely be performed in which phase of the audit
process? perform audit tests for controls and transactions
Analytical procedures must be performed in:the planning and completion stages
Which of the following tests commonly occur together? substantive tests of transactions and
tests of controls
Tests of controls and substantive tests of transactions are an important determinant of the extent
of the
auditor's use of tests of details of balances. Which of the following is true? They are likely to be
performed prior to the clients end of the fiscal year
When the auditor has completed the tests of details of balances and enters phase 4 of the audit
process,
she must still perform audit procedures for which of the following? contingent liabilities and
subsequent events
Which of the following audit tests would be regarded as a test of controls? Tests of the signatures
on canceled checks to board of directors' authorizations.
Which of the following audit tests form the basis for an auditor's report on internal control over
financial reporting? Tests of controls
After finishing the review phase of the study and evaluation of internal control in an audit, the
auditor
should perform tests of controls on those controls that the auditor wants and plans to rely upon.
At what point in the audit process are tests of details most appropriately designed?perform
analytical procedures and tests of balances
Which of the following ultimately determines the specific audit procedures necessary to provide
an
independent auditor with a reasonable basis for the expression of an opinion? the auditor's
judgment

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1) A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unqualified opinion has been issued is
the:
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk. B) acceptable audit risk.
2) A measure of the auditor's assessment of the likelihood that there are material misstatements in
an account before considering the effectiveness of the client's internal control is called:
A) control risk.
B) acceptable audit risk.
C) statistical risk.
D) inherent risk. D) inherent risk.
3) When inherent risk is high, there will need to be:
A)
A lower assessment of audit risk More evidence accumulated by the auditor
Yes Yes

B)
A lower assessment of audit risk More evidence accumulated by the auditor
No No

C)
A lower assessment of audit risk More evidence accumulated by the auditor
Yes No

D)
A lower assessment of audit risk More evidence accumulated by the auditor
No Yes D)
A lower assessment of audit risk More evidence accumulated by the auditor
No Yes
4) In what order should the following steps occur?
A. Assess client business risk
B. Understand the client's business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
A) D, B, C, A
B) B, A, C, D
C) B, D, A, C
D) D, C, B, A B) B, A, C, D
5) The auditor uses knowledge gained from the understanding of the client's business and
industry to assess:
A) client business risk.
B) control risk.
C) inherent risk.
D) audit risk. A) client business risk.

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7) When an auditor decides there is higher inherent risk for an account, one potential effect is
that more audit evidence will be required for that account.
A) True
B) False A) True
8) As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
A) True
B) False A) True
9) Obtaining sufficient appropriate evidence is essential if the CPA firm is to minimize legal
liability.
A) True
B) False A) True
10) A 100 % audit risk is complete certainty.
A) True
B) False B) False
1) One of the purposes of an engagement letter is to avoid misunderstandings with the client.
This is important for:
A)
Good client relations Facilitating high-quality work at a reasonable cost
Yes Yes

B)
Good client relations Facilitating high-quality work at a reasonable cost
No No

C)
Good client relations Facilitating high-quality work at a reasonable cost
Yes No

D)
Good client relations Facilitating high-quality work at a reasonable cost
No Yes A)
Good client relations Facilitating high-quality work at a reasonable cost
Yes Yes
2) The auditor is likely to accumulate more evidence when the audit is for a company:
A)
Which has large amounts of debt Which is to be sold in the near future
Yes Yes

B)
Which has large amounts of debt Which is to be sold in the near future
No No

C)
Which has large amounts of debt Which is to be sold in the near future
Yes No

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D)
Which has large amounts of debt Which is to be sold in the near future
No Yes A)
Which has large amounts of debt Which is to be sold in the near future
Yes Yes
3) Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy.
B) Request that bank balances be confirmed.
C) Schedule engagement staff and audit specialists.
D) Identify the client's reason for the audit. B) Request that bank balances be confirmed.
4) Smith, CPA has requested permission to communicate with the predecessor auditor in order to
review certain workpapers for high risk accounts for a new audit client. The new audit client's
refusal to allow this communication to occur would impact Rodgers decision concerning:
A) the auditor's ability to design audit tests.
B) possible scope exception due to lack of access.
C) the desirability of accepting the prospective engagement.
D) violation of the GAAP rules concerning consistency and comparability of financial
information. C) the desirability of accepting the prospective engagement.
5) A successor auditor may perform which of the following for a new audit client?
A)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
Yes Yes

B)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
No No

C)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
Yes No

D)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
No Yes A)
Speak to local attorneys, banks and other businesses regarding the company's reputation Speak to
the predecessor auditors about disagreements they had with management
Yes Yes
6) When dealing with audit risk:
A) audit risk should not be a factor when determining if a new client should be accepted.
B) audits with a low acceptable audit risk generally result in lower audit fees.
C) if management of a company has a reputation of integrity, but is also known to take
aggressive financial risks, the auditor should not accept the company as a new client.

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D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the
auditor may still accept the engagement but increase the audit fee. D) if the auditor concludes
that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the
engagement but increase the audit fee.
7) A written understanding detailing what the auditors will do in determining if the financial
statements are fair representations of the company's financial statements and what the auditor
expects from the client in performing an audit will normally be expressed in the:
A) management letter requested by the auditor.
B) engagement letter.
C) Audit Plan.
D) Audit Strategy for the client. B) engagement letter.
8) If an auditor is requested to perform nonaudit services for a public company audit client, who
is responsible for agreeing to those services with the audit firm?
A) The client's management
B) The client's chief executive officer
C) The client's chief financial officer
D) The client's audit committee D) The client's audit committee
9) Which of the following statements is true regarding communications between predecessor and
successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor's response can be limited to stating that no information will be provided.
C) The predecessor should communicate with the successor only if the client is public.
D) The predecessor auditor of a public company does not need permission from the client before
communicating with the successor auditor. B) The predecessor's response can be limited to
stating that no information will be provided
10) The purpose of an engagement letter is to:
A) document the CPA firm's responsibility to external users of the audited financial statements.
B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
D) emphasize management's responsibility for approving the audit program. B) document
the terms of the engagement.
11) Written communication that the auditor will provide reasonable assurance for the detection of
fraud is found in:
A) engagement letter.
B) representation letter.
C) responsibility letter.
D) client letter. A) engagement letter.
12) Which of the following normally signs the engagement letter for an audit of a private
company?
A) Management
B) Board of directors representative
C) Audit committee representative
D) Corporate treasurer A) Management
13) The two major factors affecting acceptable audit risk are:
A) inherent risk and the intended uses of the financial statements.

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B) control risk and the intended uses of the financial statements.

C) the likely statement users and the intended uses of the statements.
D) the audit firm and the intended uses of the statements C) the likely statement users and the
intended uses of the statements.
14) An engagement letter sent to a publicly held audit client usually would not include a:
A) reference to the auditor's responsibility for the detection of errors or irregularities.
B) estimation of the time to be spent on the audit work by audit staff and management.
C) statement that management advisory services would be made available upon request.
D) reference to management's responsibility for the financial statements. C) statement that
management advisory services would be made available upon request.
15) The preliminary audit strategy:
A) is set before the auditor understands the client's reasons for the audit.
B) guides the development of the audit plan.
C) is determined after the engagement staffing is set.
D) is the detailed steps to be followed for the substantive audit tests. B) guides the
development of the audit plan.
16) The purpose of the requirement in having communication between the predecessor and
successor auditors is to:
A) allow the predecessor to disclose information which would otherwise be confidential.
B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor. B) help the
successor auditor to evaluate whether to accept the engagement.
17) The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when:
A) the predecessor auditor has poor relations with the successor auditor.
B) the client is dissatisfied with the predecessor's work.
C) there are actual or potential legal problems between the client and the predecessor.
D) the predecessor believes that the client lacks integrity. C) there are actual or potential legal
problems between the client and the predecessor.
18) Which of the following best expresses the understanding of the terms of the engagement that
exist between the client and the CPA firm?
A) Management asserts there are no errors, material or immaterial, in the general ledger.
B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to
provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management asserts that they will provide the auditor with a risk assessment as to material
misstatements due to errors or fraud in the company's financial statements. C) Auditors assert that
their primary responsibility is to plan and perform the audit in order to provide reasonable
assurance as to the detection of material misstatement due to error or fraud.
19) When selecting staff for the audit engagement:
A) only staff members who are CPAs should be assigned to the audit.
B) only managers and above need to have appropriate competence and capabilities to perform
the audit.
C) continuity of staff members from year to year should not be a factor.

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D) staff assigned to the audit must be knowledgeable about the client's industry. D) staff
assigned to the audit must be knowledgeable about the client's industry.
20) An auditor who accepts an audit engagement and does not possess the industry expertise of
the business entity should:
A) engage financial experts familiar with the nature of the business entity.
B) obtain a knowledge of matters that relate to the nature of the entity's business.
C) refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D) first inform management that an unqualified opinion cannot be issued. B) obtain a
knowledge of matters that relate to the nature of the entity's business.
21) Which is usually included in an engagement letter?
A)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
Yes Yes

B)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
No No

C)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
Yes No

D)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
No Yes D)
Estimate of hours required to
complete audit Dollar estimate of fees to be billed to
the client
No Yes
22) Which is usually included in an engagement letter?
A)
A reference to standards acceptable in the United States of America A reference to GAAS
Yes Yes

B)
A reference to standards acceptable in the United States of America A reference to GAAS
No No

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C)
A reference to standards acceptable in the United States of America A reference to GAAS
Yes No

D)
A reference to standards acceptable in the United States of America A reference to GAAS
No Yes A)
A reference to standards acceptable in the United States of America A reference to GAAS
Yes Yes
23) Which is usually included in an engagement letter?
A)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
Yes Yes

B)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
No No

C)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
Yes No

D)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
No Yes C)
The financial statements are
the responsibility of the
company's management Ratios to be used by the auditor in the planning phase
Yes No
24) When may the auditor refer to a specialist in the audit report?
A)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
Yes Yes

B)

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Only if the specialist's report

results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
No No

C)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
Yes No

D)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
No Yes C)
Only if the specialist's report
results in a modification of the audit
opinion Only if the specialist assisted in the audit of an account material to the financial
statements
Yes No
25) Which is usually included in the engagement letter?
A)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
Yes Yes

B)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
No No

C)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
Yes No

D)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information
No Yes B)
The projected type of opinion on the financials statement to be audited Name(s) of the client
personnel responsible for supplying the auditor with information

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No No
26) Which is usually included in the engagement letter?
A)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
Yes Yes

B)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
No No

C)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
Yes No

D)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
No Yes B)
List of audit procedures to be used
in inventory observation The auditors' assessment of Audit Risk
No No
33) Before accepting a new client, most CPA firms investigate the company to determine its
acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting
certain parties-namely the company's attorneys and bankers-during this investigation.
A) True
B) False B) False
34) For prospective clients that have previously been audited by another CPA firm, the
predecessor auditor is required to communicate with the successor auditor.
A) True
B) False B) False
35) When a successor auditor contacts a company's previous auditor, the predecessor auditor is
required to respond fully and without limit to the request for information.
A) True
B) False B) False
36) A predecessor auditor who has been contacted by a successor auditor for information about
the client does not have to obtain permission from the former client before providing any
confidential information to the successor auditor because the confidentiality requirement does
not extend to former clients.
A) True
B) False B) False
37) An auditor must evaluate a specialist's professional qualifications and understand the
objectives of the specialist's work.
A) True

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B) False A) True
38) Because of audit risk, some CPA firms now refuse any new clients in certain high-risk
industries.
A) True
B) False A) True
39) An engagement letter establishes a clear understanding of the terms of the engagement
between the client and the auditor, but it is optional for private companies.
A) True
B) False A) True
40) Because of the requirements of Rule 201 of the AICPA's Code of Professional Conduct
which state that auditors should "undertake only those professional services that the member or
the member's firm can reasonably expect to be completed with professional competence,"
auditors are not normally permitted to consult with, or rely on the work of, outside specialists
during an audit engagement.
A) True
B) False B) False
41) If a prospective client has been audited in the past, the successor auditor will typically rely
solely on the representations about the client by the predecessor auditor.
A) True
B) False B) False
42) A major consideration in audit staffing is the need for continuity from year to year.
A) True
B) False A) True
43) When a successor auditor requests information from a company's previous auditor, and there
are legal problems or disputes between the client and the predecessor auditor, the predecessor
auditor's response to the new auditor may be limited to stating that no information will be
provided.
A) True
B) False A) True
44) An engagement letter can affect the CPA firm's legal responsibilities to the client, but does
not affect responsibility to external users of audited financial statements.
A) True
B) False A) True
1) In making client acceptance decisions, the audit firm will consider:
A) inherent and control risk of the client.
B) audit risk to the CPA Firm.
C) the client's business risk and the risk of material misstatements in the financial statements.
D) CPA Firm's potential ongoing revenue from the audit client. C) the client's business risk
and the risk of material misstatements in the financial statements.
2) Most auditors assess inherent risk as high for related parties and related-party transactions
because:
A) of the unique classification of related-party transactions required on the balance sheet.
B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income statement.
D) it is required by generally accepted accounting principles. B) of the lack of
independence between the parties.

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3) The audit team gathers information about a new client's business and industry in order to
obtain:
A) an understanding of the clients internal control system for financial reporting.
B) an understanding of how economic events and transactions have an effect on the company's
financial statements.
C) information about control risk.
D) information regarding whether the company is engaging in financial statement fraud. B) an
understanding of how economic events and transactions have an effect on the company's
financial statements.
4) The auditor determines that Mathews Company occupies the 3rd floor of an office tower for
which it pays no rent. The most likely explanation is:
A) they got lucky the landlord hasn't noticed the lack of payments.
B) landlord has weak internal controls over billings.
C) a related party transaction in which a major shareholder owns the office tower.
D) Matthews Company is engaging in fraudulent activities. C) a related party transaction in
which a major shareholder owns the office tower.
5) An official record of meetings of the board of directors and stockholders is included in the
corporate:
A) bylaws.
B) charter.
C) minutes.
D) license. C) minutes.
6) A related party transaction may be indicated when another company:
A) subsidizes certain operating expenses of the company.
B) purchases its securities at their fair value.
C) loans to company at market rates.
D) has had a distributor relationship with the company for 10 years. A) subsidizes certain
operating expenses of the company.
7) Which of the following is not a primary reason for obtaining a good understanding of the
client's industry and external environment?
A) Risk associated with a specific industry may affect the auditor's assessment of client business
risk.
B) Risk associated with a specific industry may affect the auditor's assessment of acceptable
audit risk.
C) Risk associated with a specific industry may affect the auditor's assessment of acceptable
control risk.
D) Many control risks are common to all clients in certain industries. C) Risk associated
with a specific industry may affect the auditor's assessment of acceptable control risk.
8) An auditor should examine minutes of the board of directors' meetings:
A) through the date of the financial statements.
B) through the date of the audit report.
C) only at the beginning of the audit.
D) on a test basis. B) through the date of the audit report.
9) Which of the following would most likely not be classified as a related-party transaction?
A) An advance of one week's salary to an employee
B) Sales of merchandise between affiliated companies

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C) Loans or credit sales to the principal owner of the client company

D) Exchanges of equipment between two companies owned by the same person A) An advance
of one week's salary to an employee
10) Which of the following best describes the corporate minutes of an entity?
A) Official record of the meetings of the board of directors and the stockholders
B) Unofficial record of the meeting of the board of directors
C) Official record of management meeting with investors and creditors of the company
D) Unofficial record of the board of directors meetings A) Official record of the meetings of
the board of directors and the stockholders
11) Related party:
A) transactions must be disclosed in the footnotes even if the amounts are immaterial.
B) disclosures include the nature of the related party relationship and a description of the
transaction.
C) transactions are considered arms-length transactions.
D) disclosures are required only for public companies. B) disclosures include the nature of
the related party relationship and a description of the transaction.
16) Auditors should obtain copies of the client's code of ethics and minutes of the meetings of the
board of directors to aid in their understanding of the company's management and governance
structure.
A) True
B) False A) True
17) Many inherent risks are common to all clients in certain industries.
A) True
B) False A) True
18) Transactions with related parties must be disclosed in the financial statements if they are
deemed to be material.
A) True
B) False A) True
19) All know related parties must be identified and included in the auditor's permanent files
related to the client.
A) True
B) False A) True
20) Because of the lack of independence between related parties, the Sarbanes-Oxley Act
prohibits all related party transactions.
A) True
B) False B) False
21) Management's philosophy and operating style influence the risk of material misstatements in
the financial statements.
A) True
B) False A) True
22) Ordinarily, the auditor should review corporate minutes during the later stages of an audit.
A) True
B) False B) False
23) Material transactions between the client and the client's related parties must be disclosed in
the auditor's report.
A) True

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B) False B) False
24) A tour of the client's facilities can help the auditor assess physical safeguards over assets and
interpret accounting data related to assets such as factory equipment.
A) True
B) False A) True
1) An auditor has accessed client business risk and the risk of material misstatements to the
clients financial statements. These are done in order to:
A) apply the audit risk model to determine the appropriate extent of audit evidence.
B) determine the reliance on the company's internal control systems for financial reporting.
C) determine the test of balances to be performed by the audit team.
D) assure the CPA firm that they can perform the audit effectively and efficiently. A) apply the
audit risk model to determine the appropriate extent of audit evidence.
2) Business risk:
A) is the risk after considering the effectiveness of top management controls.
B) is the risk that the client's internal controls will fail.
C) can include a new technology which threatens to erode a company's competitive advantage.
D) cannot be mitigated by management. C) can include a new technology which threatens to
erode a company's competitive advantage.
4) Management is the primary source for identifying client business risks.
A) True
B) False A) True
5) Sarbanes-Oxley encourages management to certify that it has informed the auditor and audit
committee of any significant deficiencies in internal control.
A) True
B) False B) False
1) Auditors perform preliminary analytical procedures to better understand the client's business
and to assess client business risk.
A) True
B) False A) True
2) In order to be meaningful, a company's ratios should be compared to their prior year's ratios,
not industry benchmarks.
A) True
B) False B) False
1) During audit planning, the auditor uses analytical procedures primarily to:
A) identify weaknesses in internal control.
B) determine if the company's financial statements appear reasonable and are free of material
misstatement.
C) determine the correspondence of the company's financial statements to the valuation and
accuracy audit objectives.
D) determine the nature, extent, and timing of audit procedures. D) determine the nature,
extent, and timing of audit procedures.
2) Which of the following is most correct with respect to the use of analytical procedures?
A) Analytical procedures may be used in evaluating balances in the testing phase as long as the
auditor also uses them in assessing the going concern assumption.
B) Analytical procedures must be used throughout the audit.

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C) Analytical procedures used in the testing phase of the audit are primarily used to direct an
auditor's attention so that the auditor's understanding of the business is improved.
D) Analytical procedures are performed by studying plausible relationships between financial
and nonfinancial data. D) Analytical procedures are performed by studying plausible
relationships between financial and nonfinancial data.
3) Analytical procedures:
A) are not a type of audit evidence.
B) are not required during the completion phase of the audit.
C) performed during the planning phase of the audit are used as a substantive test in support of
account balances.
D) performed in the completion phase serve as a final review for material misstatements or
financial problems. D) performed in the completion phase serve as a final review for material
misstatements or financial problems.
6) One purpose of performing preliminary analytical procedures in the planning phase of an audit
is to help the auditor make a preliminary assessment of control risk.
A) True
B) False B) False
1) Which of the following is a correct statement regarding analytical procedures?
A) A major strength in using industry ratios for auditing is the difference between the nature of
the client's financial information and that of the firms making up the industry totals.
B) Common-size financial statements display all items as a percentage change from a base year.
C) Auditors should investigate the most significant differences between budgeted and actual
results.
D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide
gross sales by sales returns and allowances. C) Auditors should investigate the most significant
differences between budgeted and actual results.
2) Which of the following would not be classified as an analytical procedure?
A) Benchmarking the company's profitability ratios against others in the industry
B) Variance analysis of actual versus budgeted amounts for production
C) Reperforming the client's depreciation expense using the client's accounting policies for
capital expenditures made during the year
D) Reconciling fixed asset dispositions with the fixed asset ledger D) Reconciling fixed asset
dispositions with the fixed asset ledger
3) Which of the following statements is not correct with respect to analytical procedures?
A) Auditing standards emphasize the need for auditors to develop and use expectations.
B) Analytical procedures must be performed throughout the audit.
C) Analytical procedures may be performed at any time during the audit.
D) Analytical procedures use comparisons and relationships to assess whether account balances
appear reasonable. B) Analytical procedures must be performed throughout the audit.
4) When performing planning analytical procedures for a client the auditor detected that the
gross profit percentage had declined by 50% from the previous year to the year currently under
audit. The auditor should:
A) investigate the possibility the client may have made an error in their cost of goods sold
computation.
B) assist management in developing greater cost efficiencies in their product line.
C) prepare a going concern opinion for the client.

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D) advise the client to have extensive disclosure to alleviate investor concerns. A) investigate
the possibility the client may have made an error in their cost of goods sold computation.
5) When are auditors likely to encounter judgment problems in the use of analytical procedures?
A) Whenever the auditor places reliance on management's explanations for unusual fluctuations
in account balances without first developing independent expectations
B) Whenever the auditor allows unaudited balances to unduly influence his/her expectations of
current balances
C) Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations
when trying to explain what caused them
D) The auditor is likely to encounter judgment problems in each of the above instances. D) The
auditor is likely to encounter judgment problems in each of the above instances.
6) The major concern when using nonfinancial data in analytical procedures is the:
A) accuracy of the nonfinancial data.
B) source of the nonfinancial data.
C) type of nonfinancial data.
D) presence of multiple sources of nonfinancial data. A) accuracy of the nonfinancial data.
7) Whenever an auditor compares client data to client-prepared budgets, there are two special
concerns. Indicate if the two items below are concerns.
A)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
A concern A concern

B)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
Not a concern Not a concern

C)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
A concern Not a concern

D)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget A)
Assessing whether the budgets were realistic plans Client data may have been altered to conform
to the budget
A concern A concern
1) Which is a liquidity activity ratio?
A) Profit margin
B) Inventory turnover
C) Return on assets
D) Times interest earned B) Inventory turnover
2) When using financial ratios, the most important comparisons are to those of previous years for
the company and to industry averages or similar companies for the same year.

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A) True
B) False A) True
3) The most widely used profitability ratio is return on assets.
A) True
B) False B) False
4) The quick ratio has the same denominator as the current ratio.
A) True
B) False A) True

Management's emphasis on meeting projected profit goals most likely would significantly
influence an entity's control environment when: a significant portion of management
compensation is represented by stock options.
An auditor is required to establish an understanding with a client regarding the services to be
performed for each engagement. This understanding generally includes: the auditor's
responsibility for ensuring that the appropriate level of management is aware of any significant
deficiencies that come to the auditor's attention.
Which of the following actions should the auditor first take in response to discovering a
deviation from the prescribed control procedure? Make inquiries to understand the potential
consequence of the deviation
After making inquiries about credit-granting policies, an auditor selects a sample of sales
transactions and examines evidence of credit approval. This test of controls most likely supports
management's financial statement assertion(s) of: valuation or allocation.
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher
register to the supporting documents. Which assertion would this test of controls most likely
support? Existence
Which of the following is a step in an auditor's decision to assess control risk below the
maximum? Identify specific control activities that are likely to detect or prevent material
misstatements.
Which of the following should an auditor do when control risk is assessed at the maximum level?
Document the assessment
A weakness in internal control over recording retirements of equipment may cause an auditor to:
select certain items of equipment from the accounting records and locate them in the
plant.
After obtaining an understanding of the internal control and assessing control risk at maximum,
an auditor did not want to perform additional tests of controls. The auditor most likely concluded
that the: additional evidence to support a reduction in control risk was not cost beneficial
to obtain.
What is the most likely course of action that an auditor would take after determining that
performing substantive tests on inventory will take less time than performing tests of controls?
Perform only substantive tests on inventory
The auditor's objective in performing an audit of internal control over financial reporting is to:
express an opinion on the effectiveness of the internal controls over financial reporting.
In performing an integrated audit of internal controls with an audit of the financial statement, the
auditor should design tests to accomplish which of the following objectives?

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I. To obtain sufficient evidence to support the auditor's opinion on internal control over financial
reporting as of year-end
II. To obtain sufficient evidence to support the auditor's control risk assessments for purposes of
the audit of financial statements Both I and II
In the course of an audit, the auditor realized that a particular internal control was deficient, but
elected not to test that control. The auditor has determined that: the control would not present
a reasonable possibility of material misstatement to the financial statements.
When planning and performing the audit of internal controls, the auditor addresses controls that
could result in material misstatements due to fraud and controls identified to address
management override. The controls that may address these risks include all of the following
except for: controls over audit procedures performed.
Which of the following tests of controls most likely would help assure an auditor that goods
shipped are properly billed? Examine shipping documents for matching sales invoices.
An auditor observes the mailing of monthly statements to a client's customers and reviews
evidence of follow-up on errors reported by the customers. This test of controls most likely is
performed to support management's financial statement assertion of: existence.
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:
reperformance and observation.
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: tests of controls and limited tests of
current year property and equipment transactions.
Evidence concerning the proper segregation of duties for receiving and depositing cash receipts
ordinarily is obtained by: observing the employees who are performing the control activities.
Which of the following statements concerning material weaknesses and significant deficiencies
is correct? All material weaknesses are significant deficiencies.
Which of the following statements is correct concerning significant deficiencies in an audit?
An auditor may communicate significant deficiencies during an audit or after the audit's
completion.
Which of the following statements describes an auditor's obligation to identify deficiencies in the
design or operation of internal control? The auditor need not search for significant
deficiencies but should document and communicate any significant deficiencies that are
discovered.
In reporting on an entity's internal control over financial reporting, a practitioner should include a
paragraph that describes the: inherent limitations of any internal control.
The auditor's report on an audit of internal control should include which of the following?A
definition of internal control
When reporting on an entity's internal control over financial reporting, the auditor may choose to
issue which of the following? Both, a combined report containing both an opinion on the
financial statements and an opinion on internal control and separate reports on the entity's
financial statements and on internal control
Which of the following statements is correct concerning an auditor's required communication of
significant deficiencies? An auditor's report on significant deficiencies should include a
restriction on the distribution of the report.
In the integrated audit of an issuer, which of the following would not be considered an entity-
level control? The outside auditor's assessment process of internal auditor competence and
objectivity

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Each of the following statements is correct regarding the likely sources of potential
misstatements in an integrated audit of a nonissuer, except: an evaluation of the entity's
information technology risk and controls should be performed separately from the top-down
approach.
After obtaining an understanding of the entity and its environment and assessing the risk of
material misstatement, an auditor decided to perform tests of controls. The auditor most likely
decided that: it would be efficient to perform tests of controls that would result in a reduction in
planned substantive tests.
During an audit of a nonissuer's financial statements, an auditor should perform tests of controls
to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant
controls if: substantive procedures alone cannot provide sufficient appropriate audit evidence.
When planning an engagement to audit the effectiveness of the entity's internal control in an
integrated audit of a nonissuer, a practitioner would least likely consider which of the following
factors? The evaluation of the operating effectiveness of the controls
A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the
invoice was approved and to ascertain the amount and other terms of the invoice. Which of the
following lists two tests that the auditor performed? Tests of controls and tests of details
Which of the following procedures most likely would not be included in a review engagement of
a nonpublic entity? Assessing control risk
Which of the following procedures would an auditor ordinarily perform first in evaluating the
reasonableness of management's accounting estimates? Obtain an understanding of how
management developed its estimates.
"In connection with an audit of our financial statements, management has prepared, and
furnished to our auditors, a description and evaluation of certain contingencies." The foregoing
passage most likely is from: an audit inquiry letter to legal counsel.
The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to
provide the auditor with: corroboration of the information furnished by management about
litigation, claims, and assessments.
Which of the following procedures should an auditor generally perform regarding subsequent
events? Compare the latest available interim financial statements with the financial
statements being audited
Zero Corp. suffered a loss that would have a material effect on its financial statements on an
uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly
due to a natural disaster 10 days after Zero's balance sheet date, but one month before the
issuance of the financial statements and the auditor's report. Under these circumstances:
I. the financial statements should be adjusted.
II. the event requires financial statement disclosure, but no adjustment.
III. the auditor's report should be modified for a lack of consistency. II only
On August 13, a CPA completed fieldwork on an engagement to audit financial statements for
the year ended June 30. On August 27, an event came to the CPA's attention that should be
disclosed in the notes to the financial statements. The event was properly disclosed by the entity,
but the CPA decided not to dual date the auditor's report and dated the report August 27. Under
these circumstances, the CPA was taking responsibility for: all subsequent events that occurred
through August 27.

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Which of the following items would most likely require an adjustment to the financial statements
for the year ended December 31, Year 1? Loss on an uncollectible trade receivable recorded
in Year 1 from a customer that declared bankruptcy in Year 2
For which of the following matters should an auditor obtain written management
representations? Management's compliance with contractual agreements that may affect the
financial statements
Key Co. plans to present comparative financial statements for the years ended December 31,
20X1 and 20X2, respectively. Smith, CPA, audited Key's financial statements for both years and
plans to report on the comparative financial statements on May 1, 20X3. Key's current
management team was not present until January 1, 20X2. What period of time should be covered
by Key's management representation letter? January 1, 20X1, through May 1, 20X3
A purpose of a management representation letter is to reduce: the possibility of a
misunderstanding concerning management's responsibility for the financial statements.
The date of the management representation letter should coincide with the date of the:
auditor's report.
A client decides not to make an auditor's proposed adjustments that collectively are not material
and wants the auditor to issue the report based on the unadjusted numbers. Which of the
following statements is correct regarding the financial statement presentation? The financial
statements are free from material misstatement, and no disclosure is required in the notes to the
financial statements.
Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity's ability to continue as a going concern? Usual trade credit
from suppliers is denied.
An auditor believes that there is substantial doubt about an entity's ability to continue as a going
concern for a reasonable period of time. In evaluating the entity's plans for dealing with the
adverse effects of future conditions and events, the auditor most likely would consider, as a
mitigating factor, the entity's plans to: extend the due dates of existing loans.
An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if
the: auditor modifies the report because of the difference between the client's and the
specialist's valuations of an asset.
In an audit of financial statements, which of the following would most likely be considered a
known misstatement? An unrecorded liability related to services rendered by a vendor during the
period under audit
In evaluating the overall effect of audit findings on the auditor's report, the auditor should
document all of the following except: the auditor's conclusion as to whether undetected
misstatements, individually or in aggregate, do or do not cause the financial statements to be
materially misstated, and the basis for that conclusion.
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be
satisfied that the: estimate of the total likely misstatement is less than a material amount.
A client decides not to make an auditor's proposed adjustments that collectively are not material
and wants the auditor to issue the report based on the unadjusted numbers. Which of the
following statements is correct regarding the financial statement presentation? The financial
statements are free from material misstatement, and no disclosure is required in the notes to the
financial statements.

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Which of the following most likely would cause an auditor to consider whether a client's
financial statements contain material misstatements? The results of an analytical
procedure disclose unexpected differences.
In which of the following situations would an auditor ordinarily choose between expressing a
qualified opinion or an adverse opinion? Conditions that cause the auditor to have substantial
doubt about the entity's ability to continue as a going concern are inadequately disclosed.
Which of the following statements is a basic element of the auditor's standard report? An
audit includes assessing significant estimates made by management.
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to
the auditor's report for: neither an unjustified accounting change nor a material weakness
in internal control.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
Management does not provide reasonable justification for a change in accounting
principles.
The auditor report is required to contain either an expression of opinion regarding the financial
statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The
objective is to prevent: misinterpretations regarding the degree of responsibility the
auditor is assuming.
Which of the following phrases would an auditor most likely include in the auditor's report when
expressing a qualified opinion because of inadequate disclosure? Except for the omission of
the information discussed in the preceding paragraph
In the first audit of a new client, an auditor was able to extend auditing procedures to gather
sufficient evidence about consistency. Under these circumstances, the auditor should: not
refer to consistency in the auditor's report.
The introductory paragraph of an auditor's report contains the following sentences: "We did not
audit the financial statements of EZ, Inc., a wholly-owned subsidiary, which statements reflect
total assets and revenues constituting 27 percent and 29 percent, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is
based solely on the report of the other auditors."
These sentences: indicate a division of responsibility.
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall
Corp., a company that is not March's client. Monday expects to present Wall's audited financial
statement with March's auditor's report to First Federal Bank to obtain financing in Monday's
attempt to purchase Wall. In these circumstances, March's auditor's report would usually be
addressed to: Monday Corp., the client that engaged March.
What is the most likely source of the following statement?
"As discussed in Note 14 to the financial statements, the Company has had numerous dealings
with businesses controlled by, and people who are related to, the officers of the Company."
Auditor's report
Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a
whole, but the auditor's report included a statement that the current asset portion of the entity's
balance sheet was fairly stated. The inclusion of this statement is: not appropriate because it
may tend to overshadow the auditor's disclaimer of opinion.

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An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the
entity being reported on had significant transactions with related parties. The inclusion of this
separate paragraph: is appropriate and would not negate the unmodified opinion.
An auditor issued an audit report that was dual dated for a subsequent event occurring after the
original date of the auditor's report but before issuance of the related financial statements. The
auditor's responsibility for events occurring subsequent to the original report date was: limited
to the specific event referenced.
If an auditor is unable to obtain sufficient appropriate audit evidence to support management's
assertions about the nature of a matter involving an uncertainty and its presentation or disclosure
in the financial statements, the auditor should: consider the need to express a qualified
opinion or to disclaim an opinion because of a scope limitation.
If an auditor concludes that a matter involving a risk or an uncertainty is not adequately disclosed
in the financial statements in conformity with an applicable financial reporting framework, the
auditor should: express a qualified or an adverse opinion.
When qualifying an opinion because of an insufficiency of audit evidence, an auditor should
refer to the situation in: the basis for qualified opinion paragraph.
Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any
physical inventories. These inventories account for 40% of the entity's assets. Alternative
auditing procedures cannot be applied due to the nature of the entity's records. Under these
circumstances, the auditor should express: a disclaimer of opinion.
When an auditor has substantial doubt about an entity's ability to continue as a going concern
because of the probable discontinuance of operations, the auditor most likely would express a
qualified opinion if: information about the entity's ability to continue as a going concern is not
disclosed.
A CPA's standard report on audited financial statements would be inappropriate if it referred to:
the CPA's assessment of sampling risk factors.

The objective of the ordinary audit of financial statements is the expression of an opinion on:
A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements.
C) the accuracy of the annual report.
D) the accuracy of the balance sheet and income statement. A
If the auditor believes that the financial statements are not fairly stated or is unable to reach a
conclusion because of insufficient evidence, the auditor:
A) should withdraw from the engagement.
B) should request an increase in audit fees so that more resources can be used to conduct the
audit.
C) has the responsibility of notifying financial statement users through the auditor's report.
D) should notify regulators of the circumstances. C
Auditors accumulate evidence to:
A) defend themselves in the event of a lawsuit.
B) justify the conclusions they have otherwise reached.
C) satisfy the requirements of the Securities Acts of 1933 and 1934.
D) enable them to reach conclusions about the fairness of the financial statements. D

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The responsibility for adopting sound accounting policies and maintaining adequate internal
control rests with the:
A) board of directors.
B) company management.
C) financial statement auditor.
D) company's internal audit department. B
In certifying their annual financial statements, the CEO and CFO of a public company certify
that the financial statements comply with the requirements of:
A) GAAP.
B) the Sarbanes-Oxley Act.
C) the Securities Exchange Act of 1934.
D) GAAS. C
Which of the following statements is true of a public company's financial statements?
A) Sarbanes-Oxley requires the CEO only to certify the financial statements.
B) Sarbanes-Oxley requires the CFO only to certify the financial statements.
C) Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.
D) Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.
C
The responsibility for the preparation of the financial statements and the accompanying footnotes
belongs to:
A) the auditor.
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes. B
The auditor's best defense when material misstatements are not uncovered is to have conducted
the audit:
A) in accordance with generally accepted auditing standards.
B) as effectively as reasonably possible.
C) in a timely manner.
D) only after an adequate investigation of the management team. A
In order to provide reasonable assurance the audit must be performed with an attitude of
professional skepticism. Which of the following is most correct regarding the "attitude" of
professional skepticism?
A) auditors should assume that management is dishonest
B) auditors should assume that management is neither dishonest nor honest
C) auditors should assume that management is honest and mistakes are unintentional
D) auditors should assume that management is incumbent in preparing financial statements
B
Which of the following is not one of the reasons that auditors provide only reasonable assurance
on the financial statements?

A) The auditor commonly examines a sample, rather than the entire population of transactions.
B) Accounting presentations contain complex estimates which involve uncertainty.
C) Fraudulently prepared financial statements are often difficult to detect.
D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases D
Which of the following statements is most correct regarding errors and fraud?

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A) An error is unintentional, whereas fraud is intentional.

B) Frauds occur more often than errors in financial statements.
C) Errors are always fraud and frauds are always errors.
D) Auditors have more responsibility for finding fraud than errors. A
When an auditor believes that an illegal act may have occurred, the auditor should first:
A) inquire of management at a level above those likely to be involved.
B) consult with legal counsel of others knowledgeable about the illegal acts.
C) accumulate additional evidence.
D) withdraw from the engagement. A
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
that misstatements, whether caused by errors or fraud, that are not ________ are detected.
A) important to the financial statements
B) statistically significant to the financial statements
C) material to the financial statements
D) identified by the client C
Fraudulent financial reporting is most likely to be committed by whom?
A) line employees of the company
B) outside members of the company's board of directors
C) company management
D) the company's auditors C
Which of the following would most likely be deemed a direct-effect illegal act?
A) violation of federal employment laws
B) violation of federal environmental regulations
C) violation of federal income tax laws
D) violation of civil rights laws C
The concept of reasonable assurance indicates that the auditor is:
A) not a guarantor of the correctness of the financial statements.
B) not responsible for the fairness of the financial statements.
C) responsible only for issuing an opinion on the financial statements.
D) responsible for finding all misstatements. A
Which of the following is the auditor least likely to do when aware of an illegal act?
A) Discuss the matter with the client's legal counsel.
B) Obtain evidence about the potential effect of the illegal act on the financial statements.
C) Contact the local law enforcement officials regarding potential criminal wrongdoing. C
Auditing standards require that an audit be designed to provide reasonable assurance of
detecting:
A) material errors in the financial statements.
B) fraud in the financial statements.
C) material errors and fraud in the financial statements.
D) inadequate disclosure in the notes to the financial statements. A
The auditor has considerable responsibility for notifying users as to whether or not the statements
are properly stated. This imposes upon the auditor a duty to:
A) provide reasonable assurance that material misstatements will be detected.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial statements.
D) be an insurer of the fairness in the statements. A

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"The auditor should not assume that management is dishonest, but the possibility of dishonesty
must be considered." This is an example of:
A) unprofessional behavior.
B) an attitude of professional skepticism.
C) due diligence.
D) a rule in the AICPA's Code of Professional Conduct. B
If the auditor were responsible for making certain that all of management's assertions in the
financial statements were absolutely correct:
A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically practical. D
The auditor's best defense when existing material misstatements in the financial statements are
not uncovered in the audit is:
A) the audit was conducted in accordance with auditing standards.
B) the financial statements are the client's responsibility.
C) the client is guilty of contributory negligence.
D) the client is guilty of fraudulent misrepresentation A
Which of the following is most correct with regard to the auditor's search of indirect-effect
illegal acts that may have been committed by the client?
A) No reason to search unless there is sufficient evidence to believe they have occurred.
B) Same audit responsibility as the search for financial statement fraud.
C) Same audit responsibility as the search for misappropriated assets.
D) No reason to search as they would have an indirect effect on the financial statements. A
Which of the following statements is usually true?
A) It is easier for the auditor to uncover fraud than errors.
B) It is easier for the auditor to uncover indirect-effect illegal acts than fraud.
C) The auditor's responsibility for detecting direct-effect illegal acts is similar to the
responsibility to detect fraud.
D) The auditor's responsibility for detecting indirect-effect illegal acts is similar to the
responsibility to detect fraud. C
Which is the following is most correct regarding the distinction(s) between the auditor's
responsibilities for searching for errors and fraud.
A) little
B) a significant
C) no
D) various C
In comparing management fraud with employee fraud, the auditor's risk of failing to discover the
fraud is:
A) greater for management fraud because managers are inherently more deceptive than
employees.
B) greater for management fraud because of management's ability to override existing internal
controls.
C) greater for employee fraud because of the higher crime rate among blue collar workers.
D) greater for employee fraud because of the larger number of employees in the organization
B

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Which of the following statements is correct with respect to the auditor's responsibilities relative
to the detection of indirect-effect illegal acts?
A) The auditor has no responsibility for searching for indirect-effect illegal acts.
B) The auditor has the same responsibility for searching for indirect-effect illegal acts as any
other potential misstatement that may occur.
C) Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-
effect.
D) Discovery of indirect-effect illegal acts is usually easier than discovery of fraud. A
When comparing the auditor's responsibility for detecting employee fraud and for detecting
errors, the profession has placed the responsibility:
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering either one.
D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
C
If several employees collude to falsify documents, the chance a normal audit would uncover such
acts is:
A) very low.
B) very high.
C) zero.
D) none of the above A
When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor
should:
A) include audit procedures which have a strong probability of detecting illegal acts.
B) still include some audit procedures designed specifically to uncover illegalities.
C) ignore the issue.
D) make inquiries of management regarding their policies for detecting and preventing illegal
acts and regarding their knowledge of violations, and then rely on normal audit procedures to
detect errors, irregularities, and illegalities. D
When the auditor has reason to believe an illegal act has occurred, the auditor should:
A) inquire of management only at one level below those likely to be involved with the illegality.
B) begin communication with the FASB in accordance with PCAOB regulations.
C) consider accumulating additional evidence to determine if there is actually an illegal act.
D) withdraw from the engagement. C
When the auditor knows that an illegal act has occurred, the auditor must:
A) report it to the proper governmental authorities.
B) consider the effects on the financial statements, including the adequacy of disclosure.
C) withdraw from the engagement.
D) issue an adverse opinion. B
If an auditor uncovers an illegal act at a public company, the auditor must notify:
A) local law enforcement officials.
B) the Public Company Accounting Oversight Board.
C) the Securities and Exchange Commission.
D) all of the above. C
If an auditor conducted an audit in accordance with auditing standards, which of the following
would the auditor likely detect?

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A) unrecorded transactions
B) errors in postings of recorded transactions
C) counterfeit signatures on paid checks
D) fraud involving collusion B
Which of the following statements best describes the auditor's responsibility with respect to
illegal acts that do not have a material effect on the client's financial statements?
A) Generally, the auditor is under no obligation to notify parties other than personnel within the
client's organization.
B) Generally, the auditor is under an obligation to inform the PCAOB.
C) Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.
D) Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act. A
Which of the following statements best describes the auditor's responsibility regarding the
detection of fraud?
A) The auditor is responsible for the failure to detect fraud only when such failure clearly results
from nonperformance of audit procedures specifically described in the engagement letter.
B) The auditor is required to provide reasonable assurance that the financial statements are free
of both material errors and fraud
C) The auditor may extend auditing procedures to actively search for evidence of fraud where the
examination indicates that fraud may exist.
D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is
issued. B
The essence of the attest function is to:
A) assure the consistent application of correct accounting procedures.
B) determine whether the client's financial statements are fairly stated in accordance with an
applicable financial reporting framework such as U.S. GAAP or IFRS.
C) examine individual transactions so that the auditor may certify as to their validity.
D) detect collusion and fraud.B
The auditor's evaluation of the likelihood of material employee fraud is normally done initially
as a part of:
A) tests of controls.
B) tests of transactions.
C) understanding the entity's internal control.
D) the assessment of whether to accept the audit engagement. C
Illegal acts are defined in auditing standards as:
A) violations of laws or government regulations.
B) violations of laws or government regulations other than errors.
C) violations of laws or government regulations other than fraud.
D) violations of law which would result in the arrest of the perpetrator. C
Most illegal acts affect the financial statements:
A) directly.
B) only indirectly.
C) both directly and indirectly.
D) materially if direct; immaterially if indirect. B
With respect to the detection of indirect- effect illegal acts, auditing standards state that the
auditor provides:

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A) no assurance that they will be detected.

B) the same reasonable assurance provided for other items.
C) assurance that they will be detected, if material.
D) assurance that they will be detected, if highly material A
An auditor should recognize that the application of auditing procedures may produce evidence
indicating the possibility of errors or fraud and therefore should:
A) plan and perform the engagement with an attitude of professional skepticism.
B) not rely on internal controls that are designed to prevent or detect errors or fraud.
C) design audit tests to detect unrecorded transactions.
D) extend the work to audit most recorded transactions and records of an entity. A
Why does the auditor divide the financial statements into smaller segments?
A) Using the cycle approach makes the audit more manageable.
B) Most accounts have few relationships with others and so it is more efficient to break the
financial statements into smaller pieces.
C) The cycle approach is used because auditing standards require it.
D) All of the above are correct. A
Why does the auditor divide the financial statements into segments around the financial
statement cycles?
A) Most auditors are trained to audit cycles as opposed to entire financial statements.
B) The approach aids in the assignment of tasks to different members of the audit team.
C) The cycle approach is required by auditing standards.
D) The cycle approach allows the auditor to detect indirect-effect illegal acts. B
The most important general ledger account included in and affecting several cycles is the:
A) cash account.
B) inventory account.
C) income tax expense and liability accounts.
D) retained earnings account. A
When using the cycle approach to segmenting the audit, the reason for treating capital
acquisition and repayment separately from the acquisition of goods and services is that:
A) the transactions are related to financing a company rather than to its operations.
B) most capital acquisition and repayment cycle accounts involve few transactions, but each is
often highly material and therefore should be audited extensively.
C) both A and B are correct.
D) neither A nor B is correct. C
In describing the cycle approach to segmenting an audit, which of the following statements is not
true?
A) All general ledger accounts and journals are included at least once.
B) Some journals and general ledger accounts are included in more than one cycle.
C) The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods
and services and payment" cycle.
D) The "inventory and warehousing" cycle may be audited at any time during the engagement
since it is unrelated to the other cycles. D
Which of the following journals would be included most often in the various audit cycles?
A) cash receipts journal
B) cash disbursements journal
C) general journal

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D) sales journal C
Which of the following is not one of the three categories of assertions?
A) Assertions about classes of transactions and events for the period under audit
B) Assertions about financial statements and correspondence to GAAP
C) Assertions about account balances at period end
D) Assertions about presentation and disclosure B
If a short-term note payable is included in the accounts payable balance on the financial
statement, there is a violation of the:
A) completeness assertion.
B) existence assertion.
C) cutoff assertion.
D) classification and understandability assertion. D
International auditing standards and U.S. GAAP classify assertions into three categories. Which
of the following is not a category of assertions that management makes about the accounting
information in financial statements?
A) Assertions about classes of transactions for the period under audit
B) Assertions about account balances at period end
C) Assertions about the quality of source documents used to prepare the financial statements
D) Assertions about presentation and disclosure C
Management assertions are:
A) directly related to the financial reporting framework used by the company, usually U.S.
GAAP or IFRS
B) stated in the footnotes to the financial statements.
C) explicitly expressed representations about the financial statements.
D) provided to the auditor in the assertions letter, but are not disclosed on the financial
statements. A
Which of the following statements is true?
A) Auditors have generally found that the most effective and efficient way to conduct an audit is
to obtain some assurance for each class of transaction and for the ending balance of the related
account.
B) Management's assertions follow and are closely related to the audit objectives.
C) The auditor's primary responsibility is to find and disclose fraudulent management assertions.
D) Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts. A
Which of the following statements about the existence and completeness assertions is not true?
A) The existence and completeness assertions emphasize different audit concerns.
B) Existence deals with overstatements and completeness deals with understatements.
C) Existence deals with understatements and completeness deals with overstatements.
D) The completeness assertion deals with unrecorded transactions. C
Which of the following assertions is described as "this assertion addresses whether all
transactions that should be included in the financial statements are in fact included"?
A) occurrence
B) completeness
C) rights and obligations
D) existence B

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Which of the following management assertions is not associated with transaction-related audit
objectives?
A) Occurrence
B) Classification and understandability
C) Accuracy
D) Completeness B
Which of the following statements is true regarding the distinction between general audit
objectives and specific audit objectives for each account balance?
A) The specific audit objectives are applicable to every account balance on the financial
statements.
B) The general audit objectives are applicable to every account balance on the financial
statements.
C) The general audit objectives are stated in terms tailored to the engagement.
D) For any given class of transactions, usually only one audit objective must be met to conclude
the transactions are properly recorded. B
The auditor is determining that the recorded sales are for the amount of goods shipped are
correctly billed and recorded. She is gathering evidence about which transaction related audit
objective?
A) existence
B) completeness
C) accuracy
D) cut-off C
Which of the following combinations is correct?
A) Existence relates to whether the amounts in accounts are understated.
B) Occurrence relates to whether balances exist.
C) Existence relates to whether amounts included exist.
D) Occurrence relates to whether the amounts in accounts occurred in the proper year. C
After general audit objectives are understood, specific audit objectives for each account balance
on the financial statements can be developed. Which of the following statements is true?
A) There should be at least one specific objective for each relevant general objective.
B) There will be only one specific objective for each relevant general objective.
C) There will be many specific objectives developed for each relevant general objective.
D) There must be one specific objective for each general objective. A
In testing for cutoff, the objective is to determine:
A) whether all of the current period's transactions are recorded.
B) whether transactions are recorded in the correct accounting period.
C) the proper cutoff between capitalizing and expensing expenditures.
D) the proper cutoff between disclosing items in footnotes or in account balances. B
The detail tie-in objective is not concerned that the details in the account balance:
A) agree with related subsidiary ledger amounts.
B) are properly disclosed in accordance with GAAP.
C) foot to the total in the account balance.
D) agree with the total in the general ledger B
The detail tie-in is part of the ________ assertion for account balances.
A) classification
B) valuation and allocation

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C) rights and obligations

D) completeness B
The primary difference between an audit of the balance sheet and an audit of the income
statement is that the audit of the income statement deals with the verification of:
A) transactions.
B) balances.
C) costs.
D) cutoffs. A
Which of the following best describes tests of details of balances?
A) audit procedures designed to test for monetary misstatements in the accounts summarized in
the financial statements
B) audit procedures designed to test for the monetary amounts of transactions
C) audit procedures designed to test for reasonableness of account balances
D) audit procedures designed to test for effectiveness in recording accounting informationA
Which of the following statements is not true?
A) Balance-related audit objectives are applied to ending account balances.
B) Transaction-related audit objectives are applied to classes of transactions.
C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts.
D) Balance-related audit objectives are applied to both beginning and ending balances in balance
sheet accounts. D
Tests of details of balances are specific audit procedures that are intended to:
A) test for monetary errors in the financial statements.
B) prove that the accounts with material balances are classified correctly.
C) prove that the trial balance is in balance.
D) identify the details of the internal control system.A
Which of the following statements is not correct?
A) There are many ways an auditor can accumulate evidence to meet overall audit objectives.
B) Sufficient appropriate evidence must be accumulated to meet the auditor's professional
responsibility.
C) It is appropriate to minimize the cost of accumulating evidence.
D) Gathering evidence and minimizing costs are equally important considerations that affect the
approach the auditor selects. D
Two overriding considerations affect the many ways an auditor can accumulate evidence:

1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional

responsibility.
2. Cost of accumulating evidence should be minimized.

In evaluating these considerations:

A) the first is more important than the second.
B) the second is more important than the first.
C) they are equally important.
D) it is impossible to prioritize them. A
If the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding internal control, assessing control risk, testing
controls, and analytical procedures, then the auditor:

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A) can issue an unqualified opinion.

B) can significantly reduce other substantive tests.
C) can write the engagement letter.
D) needs to perform additional tests of controls so that the assurance level can be increased.
B
After the auditor has completed all audit procedures, it is necessary to combine the information
obtained to reach an overall conclusion as to whether the financial statements are fairly
presented. This is a highly subjective process that relies heavily on:
A) generally accepted auditing standards.
B) the AICPA's Code of Professional Conduct.
C) generally accepted accounting principles.
D) the auditor's professional judgment. D
Auditors must make decisions regarding what evidence to gather and how much to accumulate.
Which of the following is a decision that must be made by auditors related to evidence?
A)
Sample size Timing of audit procedures
Yes Yes

B)
Sample size Timing of audit procedures
No No

C)
Sample size Timing of audit procedures
Yes No

D)
Sample size Timing of audit procedures
No Yes C
2) Audit procedures are concerned with the nature, extent, and timing in gathering audit
evidence. Which, of the following, is true as to the timing of audit procedures?
A)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes Yes

B)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No No

C)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes No

D)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No Yes A

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Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the
choices below which provides the auditor with the most reliable audit evidence?
A) general ledger account balances
B) confirmation of accounts receivable balance received from a customer
C) internal memo explaining the issuance of a credit memo
D) copy of month-end adjusting entries B
Which of the following is not a characteristic of the reliability of evidence?
A) effectiveness of client internal controls
B) education of auditor
C) independence of information provider
D) timeliness B
The auditor must gather sufficient and appropriate evidence during the course of the audit.
Sufficient evidence must:
A) be well documented and cross-referenced in the audit documents.
B) be based on sources that are external to company.
C) provide evidence that prove or disprove an audit objective/assertion.
D) be persuasive enough to enable the auditor to issue an audit report. D
Audit evidence obtained directly by the auditor will not be reliable if:
A) the auditor lacks the competence to evaluate the evidence.
B) it is provided by the client's attorney.
C) the client denies its veracity.
D) it is impossible for the auditor to obtain additional corroboratory evidence. A
Appropriateness of evidence is a measure of the:
A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning of evidence. B
Which of the following statements regarding the relevance of evidence is correct?
A) To be relevant, evidence must pertain to the audit objective of the evidence.
B) To be relevant, evidence must be persuasive.
C) To be relevant, evidence must relate to multiple audit objectives.
D) To be relevant, evidence must be derived from a system including effective internal controls.
A
Two determinants of the persuasiveness of evidence are:
A) competence and sufficiency.
B) relevance and reliability.
C) appropriateness and sufficiency.
D) independence and effectiveness. C
The two characteristics of the appropriateness of evidence are:
A) relevance and timeliness.
B) relevance and accuracy.
C) relevance and reliability.
D) reliability and accuracy C
Which of the following forms of evidence would be least persuasive in forming the auditor's
opinion about marketable securities and other investments held by the company?

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A) Responses to auditor's questions by the president and controller regarding the investments
account.
B) Correspondence with a stockbroker regarding the quantity of client's investments held in
street name by the broker.
C) Minutes of the board of directors authorizing the purchase of stock as an investment.
D) The auditor's count of marketable securities. A
Which of the following statements is not correct?
A) It is possible to vary the sample size from one unit to 100% of the items in the population.
B) The decision of how many items to test should not be influenced by the increased costs of
performing the additional tests.
C) The decision of how many items to test must be made by the auditor for each audit procedure.
D) The sample size for any given procedure is likely to vary from audit to audit. B
For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which
statement below is not correct regarding the appropriateness of audit evidence?
A) The more effective the internal control system, the more assurance it provides the auditor
about the reliability of financial reporting by the client.
B) An auditor's opinion, to be economically useful and profitable to the auditing firm needs to be
formed within a reasonable time and based on evidence obtained that assures profits for the
auditing firm.
C) Evidence obtained from independent sources outside the entity is generally more reliable than
evidence secured solely within the entity.
D) The independent auditor's direct personal knowledge, obtained through inquiry, observation
and inspection, is generally more persuasive than information obtained indirectly. B
Which one of the following is not one of the primary purposes of audit documentation prepared
by the audit team?
A) A basis for planning the audit.
B) A record of the evidence accumulated and the results of the tests.
C) A basis for review by supervisors and partners.
D) A basis for determining work deficiencies by peer review teams. D
Which of the following is the most objective type of evidence?
A) A letter written by the client's attorney discussing the likely outcome of outstanding lawsuits.
B) The physical count of securities and cash.
C) Inquiries of the credit manager about the collectability of noncurrent accounts receivable.
D) Observation of cobwebs on some inventory bins. B
Due professional care, the third general standard, is concerned with what is done by the
independent auditor and how well it is done. For example, due care in the matter of audit
documentation requires that audit documentation of the evidence gathered by the auditor meets
which of the following criteria?
A) Workpapers be indexed to the general ledger accounts and include both a permanent file and a
general file.
B) The content be sufficient to provide support for the auditor's opinion, including the auditor's
representation as to compliance with auditing standards.
C) Audit evidence is principally gathered to determine if the client's financial statements, as
prepared by management, can be relied upon to make managerial decisions about the firm.
D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing
firm in the case of a lawsuit by investors. B

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Which items affect the sufficiency of evidence when choosing a sample?

A)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes Yes

B)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No No

C)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes No

D)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No Yes C
Determine which of the following is most correct regarding the reliability of audit evidence.
A) Information that is indirectly obtained from external sources is the most reliable audit
evidence.
B) Reliability of audit evidence is dependent upon the evidence being convincing.
C) Reliability of evidence refers to the amount of evidence obtained.
D) An effective internal control system provides more reliable audit evidence. D
Evidence is generally considered appropriate when:
A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
C) it has the qualities of being relevant, objective, and free from known bias.
D) it consists of written statements made by managers of the enterprise under audit. C
Given the economic and time constraints in which auditors can collect evidence about
management assertions about the financial statements, the auditor normally gathers evidence that
is:
A) irrefutable.
B) conclusive.
C) persuasive.
D) completely convincing. C
Which of the following statements is not a correct use of the terminology in relation to audit
evidence?
A) Evidence obtained from an independent source outside the client organization is more reliable
than that obtained from within.
B) Documentary evidence is more reliable when it is received by the auditor indirectly rather
than directly.
C) Documents that originate outside the company are considered more reliable than those that
originate within the client's organization.
D) External evidence, such as communications from banks, is generally regarded as more
reliable than answers obtained from inquiries of the client. B
Evidence is usually more persuasive for balance sheet accounts when it is obtained:
A) as close to the balance sheet date as possible.

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B) only from transactions occurring on the balance sheet date.

C) from various times throughout the client's year.
D) from the time period when transactions in that account were most numerous during the fiscal
period. A
Which of the following statements is true?
A) A large sample of highly competent evidence is persuasive if it is relevant to the objective
being tested.
B) A large sample of evidence that is neither competent nor timely is not persuasive.
C) A small sample of only one or two pieces of relevant, competent, and timely evidence lacks
persuasiveness.
D) The persuasiveness of evidence can be evaluated after considering its sufficiency. A
Which of the following statements relating to the competence of evidential matter is always true?
A) Evidence from outside an enterprise is always reliable.
B) Accounting data developed under satisfactory conditions of internal control are more relevant
than data developed under unsatisfactory internal control conditions.
C) Oral representations made by management are not reliable evidence.
D) Evidence must be both reliable and relevant to be considered appropriate. D
Calculating the gross margin for the current year under audit as a percent of sales and comparing
it with previous years is what type of evidence?
A) physical examination
B) analytical procedures
C) observation
D) inquiry B
When the auditor develops supporting evidence for amounts posted to account balances with
documentary evidence, that process is called:
A) inquiry.
B) confirmation.
C) vouching.
D) physical examination C
An example of an external document that provides reliable information for the auditor is:
A) employees' time reports.
B) bank statements.
C) purchase order for company purchases.
D) carbon copies of checks. B
An example of a document the auditor receives from the client, but which was prepared by
someone outside the client's organization, is a:
A) confirmation.
B) sales invoice.
C) vendor invoice.
D) bank reconciliation. C
"The use of comparisons and relationships to assess whether account balances or other data
appear reasonable compared to the auditor's expectations" is a definition of:
A) analytical procedures.
B) tests of transactions.
C) tests of balances.
D) auditing. A

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Often, auditor procedures result in significant differences being discovered by the auditor. The
auditor should investigate further if:
A)
Significant differences are not expected but do exist Significant differences are expected but do
not exist
Yes Yes

B)
Significant differences are not expected but do exist Significant differences are expected but do
not exist
No No

C)
Significant differences are not expected but do exist Significant differences are expected but do
not exist
Yes No

D)
Significant differences are not expected but do exist Significant differences are expected but do
not exist
No Yes A
When the auditor uses tracing as an audit procedure for tests of transactions she is primarily
concerned with which audit objective?
A) Occurrence
B) Completeness
C) Cutoff
D) Classification A
When the auditor used the audit procedure vouching she is primarily concerned with which of
the following audit objectives when testing classes of transactions?
A) Occurrence
B) Completeness
C) Authorization
D) Classification B
When auditors use documentation to support recorded transactions and amounts, the process is
usually called:
A) tracing.
B) confirmations.
C) vouching.
D) reperformance. C
Analytical procedures must be used during which phase(s) of the audit?
A)
Test of Controls Planning Completion
Yes Yes Yes

B)
Test of Controls Planning Completion

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No Yes Yes

C)
Test of Controls Planning Completion
Yes No No

D)
Test of Controls Planning Completion
No No No B
Auditors may decide to replace tests of details with analytical procedures when possible because
the:
A) analytical procedures are more reliable.
B) analytical procedures are considerably less expensive.
C) analytical procedures are more persuasive.
D) tests of details are more difficult to interpret. B
When making decisions about evidence for a given audit, the auditor's goal is to obtain a
sufficient amount of timely, reliable evidence that is relevant to the information being verified. In
addition, the goal of audit efficiency is to gather and evaluate the information:
A) no matter the cost involved in obtaining such evidence.
B) even if cost is irrelevant to the auditor, because they bill the client for costs incurred.
C) at the lowest possible total cost.
D) at the cost suggested in the engagement letter. C
) "Physical examination" is the inspection or count by the auditor of items such as:
A) cash, inventory, and payroll timecards.
B) cash, inventory, canceled checks, and sales documents.
C) cash, inventory, canceled checks, and tangible fixed assets.
D) cash, inventory, securities, notes receivable, and tangible fixed assets. D
Which of the following statements is most correct regarding the primary purpose of audit
procedures?
A) to detect all errors or fraudulent activities as well as illegal activities
B) to comply with auditing standards promulgated by the PCAOB for publicly held clients
C) to gather corroborative audit evidence about management's assertions regarding the client's
financial statements
D) to determine the amount of errors in the balance sheet accounts in order to adjust the accounts
to actual C
Given the audit procedures below, which one provides the most reliable evidence?
A) Confirmations
B) Recalculation
C) Reperformance
D) Observations A
Confirmations would almost always be used, assuming all the accounts below are material, for:
A) individual transactions between organizations, such as sales transactions.
B) bank balances and accounts receivable.
C) fixed asset additions.
D) payroll expenses. B
To be considered reliable evidence, confirmations must be controlled by:

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A) a client employee responsible for accounts receivable.

B) a financial statement auditor.
C) a client's internal audit department.
D) a client's controller or CFO. B
Indicate whether confirmation of accounts receivable and accounts payable, provided they each
are significant accounts, is required or optional:
A)
Accounts Receivable Accounts Payable
Required Required

B)
Accounts Receivable Accounts Payable
Required Optional

C)
Accounts Receivable Accounts Payable
Optional Required

D)
Accounts Receivable Accounts Payable
Optional Optional B
The Auditing Standards Board has concluded that analytical procedures are so important that
they are required during:
A) planning and test of control phases.
B) planning and completion phases.
C) test of control and completion phases.
D) planning, test of control, and completion phases. B
A benefit obtained from comparing the client's data with industry averages is that it provides
a(n):
A) benchmark to compare the company against industry averages.
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets.
D) comparison of "what is" with "what should be." A
The primary purpose of performing analytical procedures in the planning phase of an audit is to:
A) help the auditor obtain an understanding of the client's industry and business.
B) assess the going concern assumption.
C) indicate possible misstatements.
D) reduce detailed tests. A
Which of the following is not a correct combination of terms and related type of audit evidence?
A) Inquire inquiries of client
B) Count physical examination
C) Recompute documentation
D) Read documentation C
Which of the following is not one of the major types of analytical procedures?
A) compare client with industry averages
B) compare client with prior year

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C) compare client with budget

D) compare client with SEC averages D
An important benefit of industry comparisons is as:
A) an aid to understanding the client's business.
B) an indicator of errors.
C) an indicator of fraud.
D) a least-cost indicator for audit procedures A
The auditor is concerned that a client is failing to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to:
A) select a sample of duplicate sales invoices and trace each to related shipping documents.
B) trace a sample of shipping documents to related duplicate sales invoices.
C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.
D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts
Receivable account in the general ledger. B
In performing your audit for a privately-held firm your inquiries have yielded that one of the
company's owner's primary motivations is to pay the least amount of income tax that is possible.
Based on this observation which audit objective for ending inventory would the auditor be most
concerned about ascertaining?
A) Completeness
B) Accuracy
C) Rights and obligations
D) Existence A
Which of the following statements is not correct?
A) Analytical procedures are used to isolate accounts or transactions that should be investigated
more extensively.
B) For certain immaterial accounts, analytical procedures may be the only evidence needed.
C) In some instances, other types of evidence may be reduced when analytical procedures
indicate that an account balance appears reasonable.
D) Analytical procedures use supporting documentation to determine which account balances
need additional detailed procedures. D
You are auditing the company's purchasing process for goods and services. You are primarily
concerned with the company not recording all purchase transactions. Which audit procedure
below would be the most effective audit procedure in this case?
A) Vouching from the accounts payable account to the vendor invoices.
B) Tracing vendor invoices to recorded amounts in the accounts payable account.
C) Confirmation accounts payable recorded amounts.
D) Reconciling the accounts payable subsidiary ledger to the accounts payable account. B
Which of the following discoveries through the use of analytical procedures would most likely
indicate a relatively high risk of financial failure?
A) A decline in gross margin percentages.
B) An increase in the balance in fixed assets.
C) An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable,
while at the same time accounts receivable turnover also decreased.
D) A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio
of profits to total assets. D

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Which of the following statements is correct regarding the costs involved in obtaining evidence?
(Physical examination is usually the
least expensive type of audit
evidence/Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence)
A. Yes/Yes
B.No/No
C Yes/No
D. No/Yes D
An analytical procedure used to test the reasonableness of an account balance occurs when the
auditor calculates the expected balance and compares it with the actual balance. The auditor's
expected account balance may be determined by:
A) using industry standards.
B) using Dun and Bradstreet reports.
C) relating it to another account that involves financial statement articulation.
D) inquiry of the client. C
Which of the following best describes one of the primary objectives of audit documentation?
A) Defend against claims of a deficient audit.
B) Provide a basis for reviewing the work of subordinates.
C) Provide reasonable assurance that the audit was conducted in accordance with auditing
standards.
D) Provide additional support of recorded amounts to the client. C
The permanent files included as part of audit documentation do not normally include:
A) a copy of the current and prior years' audit programs.
B) copies of articles of incorporation, bylaws and contracts.
C) information related to the understanding of internal control.
D) results of analytical procedures from prior years. A
The auditor's results of evidence gathering procedures are contained in audit documentation for
the audit. When preparing the requisite audit, documentation should be cognizant of:
A) Documents are kept by the client for easy reference for their accounting staff.
B) Audit documents should be considered as a substitute for the clients accounting records.
C) Audit documents are designed to facilitate the review and supervision of the work performed
by the audit team by a reviewing partner.
D) Audit documents are the sole source of evidence that an auditor uses in forming an opinion
about the client's financial statements. C
Audit documentation should provide support for:
A)
The audit report The financial statements
Yes Yes

B)
The audit report The financial statements
No No

C)
The audit report The financial statements
Yes No

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D)
The audit report The financial statements
No Yes C
What client information is needed by auditors in creating lead schedules?
A) Interim statements prepared by the client for the company's 3rd quarter financial results.
B) General ledger information, including unadjusted ending balances and beginning balances for
accounts.
C) A schedule of adjusting entries made by the client for all balance sheet accounts.
D) Detailed transaction information that may explain the changes in balance sheet accounts for
the current year under audit. B
Audit documentation should possess certain characteristics. Which of the following is true
regarding those characteristics? (Audit documentation should be indexed and cross-
referenced/Audit documentation should be organized to benefit the client's staff)
A. Yes/Yes
B. No/No
C. Yes/No
D. No/Yes C
The permanent audit file would usually include the following:
A) client's working trial balance
B) summary of the risk assessment procedures performed
C) organizational chart of the company's employees
D) summary of the auditors test of controls for the current years audit C

B. 1. All the information used by the auditor in arriving at the conclusions on which the
audit opinion is based is called

A. Audit information
B. Audit evidence
C. Accounting records
D. Corroborating information
C. 2. An entity's accounting records generally include the records of initial entries and
supporting records induding

A. Confirmations from third parties.

B. Information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection.
C. Worksheets and spreadsheets supporting cost allocations.
D. Other information developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning.
D. 3. Audit evidence comprises
I. Information that supports and corroborates management's assertions.
II. Any information that contradicts management's assertions.

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A. I only
В. II only
C. Neither I nor II
D. Both I and II
B. 4. As defined in PSA 500, ______ is an individual or organization possessing the
expertise in a field other than accounting or auditing, whose work in that field is used by the
entity to assist the entity in preparing the financial statements.

A. Auditor's expert
B. Management's expert
C. Auditor's internal expert
D. Auditor's external expert
D. 5. If a management's expert's work is used to prepare the information to be used as audit
evidence, the auditor shall

I. Evaluate the competence, capabilities and objectivity of the management's expert.

II. Obtain an understanding of the work of the management's expert.
III. Evaluate the appropriateness of the management's expert's work as audit evidence for the
relevant assertion.

A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
D. 6. Which of the following statements concerning the management's expert's competence,
capabilities, and objectivity is correct?

A. Objectivity relates to the ability of the management's expert to exercise the competence in the
circumstances.
B. Competence relates to the possible effects that bias, conflict of interest or the influence of
others may have on the professional or business judgment of the management's expert.
C. Capability relates to the nature and level of expertise of the management's expert.
D. The management's expert's competence, capabilities, and objectivity are important factors in
relation to the reliability of any information prepared by the management's expert.
D. 7. Audit evidence is information used to draw reasonable conclusions on which to base
the auditor's opinion. Audit evidence is obtained by performing
I. Risk assessment procedures
II. Further audit procedures

A. I only
В. II only
C. Either I or II
D. Both I and II
C. 8. Which of the following statements concerning audit evidence is correct?

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A. Appropriateness is the measure of the quantity of audit evidence.

B. Sufficiency is the measure of the quality of audit evidence, that is, its relevance and reliability.
C. The quantity of audit evidence needed is affected by its quality and the risk of misstatement.
D. The sufficiency and appropriateness of audit evidence are not interrelated.
B. 9. Which of the following statements concerning audit evidence is correct?

A. An audit usually involves the authentication of documentation.

B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but
not others.
C. Audit evidence obtained from an independent external source is always reliable.
D. An entity's accounting records can be sufficient audit evidence to support the financial
statements.
D. 10. Which of the following generalizations does not relate to the reliability of audit
evidence?

A. Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
B. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly or by inference.
C. Audit evidence that is generated internally is more reliable when the related controls imposed
by the entity are effective.
D. An auditor's opinion, to be economically useful, is formed within a reasonable time and based
on audit evidence obtained at a reasonable cost.
D. 11. Which of the following statements concerning audit evidence is false?

A. The auditor uses professional judgment and exercises professional skepticism in evaluating
the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to
support the audit opinion.
B. The auditor ordinarily finds it necessary to rely on audit evidence that is persuasive rather than
conclusive.
C. Informing the audit opinion, the auditor does not examine all the information available
because conclusions ordinarily can be reached by using sampling approaches and other means of
selecting items for testing.
D. The difficulty and expense of obtaining audit evidence concerning an account balance is a
valid basis for committing the test.
A. 12. In representing that the financial statements are presented fairly, in all material
respects, in accordance with the applicable financial reporting framework, management
implicitly or explicitly makes regarding the recognition, measurement, presentation, and
disclosure of the various elements of financial statements and related disclosures.

A. Assertions
B. Allegations
C. Conclusions
D. Assurances
D. 13. The auditor is required to use assertions for classes of transactions, account balances,
and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of

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material misstatement and the design and performance of further audit procedures. Assertions
about classes of transactions include occurrence, completeness, accuracy, cutoff, and

A. Valuation and allocation

B. Rights and obligations
C. Existence
D. Classification
D. 14. The following are assertions about account balances at the period end, except

A. Existence
B. Rights and obligations
C. Valuation and allocation
D. Cutoff
D. 15. The following are assertions about presentation and disclosure, except

A. Occurrence and rights and obligations

B. Accuracy and valuation
C. Classification and understandability
D. Existence
A. 16. Which of the following statements concerning the auditor's use of assertions is
correct?

A. The auditor may combine the assertions about transactions and events with the assertions
about account balances.
B. In every audit engagement, the auditor should use the assertions as described in PSA 500, i.e.,
the assertions should always fall into three categories: assertions about classes of transactions
and events, account balances, and presentation and disclosure.
C. There should always be a separate assertion related to cutoff of transactions and events.
D. The completeness assertion deals only with whether all transactions and events that should
have been recorded have been recorded.
C. 17. Which of the following statements concerning audit objectives is incorrect?

A. The auditor should resolve any substantial doubt about any of management's material
financial statement assertions.
B. Selection of tests to meet audit objectives should depend upon the understanding of internal
control.
C. There should be a one-to-one relationship between audit objectives and procedures.
D. Audit objectives should be developed in light of management assertions about the financial
statement elements.
C. 18. The primary difference between an audit of the balance sheet and an audit of the
income statement is that the audit of the income statement addresses the verification of

A. Cutoffs
B. Authorizations
C. Transactions
D. Costs

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A. 19. Which of the following would least likely affect the appropriateness of evidence
available to an auditor?

A. The sampling method employed by the auditor to obtain a sample of such evidence.
B. The relevance of such evidence to the financial statement assertion being verified.
C. The relationship of the preparer of such evidence to the entity being audited.
D. The timeliness of such evidence.
D. 20. Which of the following forms of documentary evidence would be considered the most
reliable by an auditor?

A. Internally generated
B. Prenumbered
C. Easily duplicated
D. Authorized by a responsible official
C. 21. The objective of tests of details of transactions performed as substantive tests is to

A. Attain assurance about the reliability of the accounting system.

B. Evaluate whether management's policies and procedures operated effectively.
C. Detect material misstatements in the financial statements.
D. Comply with Philippine Standards on Auditing (PSAs).
D. 22. In testing the existence assertion for an asset, an auditor ordinarily works from the

A. Potentially unrecorded items to the financial statements.

B. Financial statements to the potentially unrecorded items.
C. Supporting evidence to the accounting records.
D. Accounting records to the supporting evidence.
B. 23. In determining whether transactions have been recorded the direction of the audit
testing should be from the

A. General journal entries

B. Original source documents
C. General ledger balances
D. Adjusted trial balance
A. 24. Which of the following audit procedures consists of looking at a process or procedure
being performed by others?

A. Observation
B. Inspection of records and documents
C. Inspection of tangible assets
D. Inquiry
C. 25. Which of the following elements ultimately determines the specific auditing
procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?

A. Materiality
B. Audit risk
C. Auditor judgment

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D. Reasonable assurance
C. 26. The auditor should apply analytical procedures
I. As risk assessment procedures.
II. As substantive procedures.
III. In the overall review at the end of the audit.

A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
D. 27. Analytical procedures include the consideration of comparisons of the entity's
financial information with
I. Comparable information for prior periods.
II. Anticipated results of the entity.
III. Similar industry information.

A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
D. 28. When of the following should be considered by the auditor when designing and
performing analytical procedures as substantive procedures?
I. The suitability of using substantive analytical procedures given the assertions.
II. The reliability of the data, whether internal or external, from which the expectation of
recorded amounts or ratios is developed.
III. Whether the expectation is sufficiently precise to identify a material misstatement at the
desired level of assurance.
IV. The amount of any difference of recorded amounts from expected values that is acceptable.

A. I, II and III only

B. I, III, and IV only
C. II, III, and IV only
D. I, II, III, and IV
A. 29. The following statements relate to the use of analytical procedures as substantive
procedures. Which is false?

A. Substantive analytical procedures are applicable when there is only a small volume of
transactions.
B. The application of substantive analytical procedures is based on the expectation that
relationships among data exist and continue in the absence of known conditions to the contrary.
C. The presence of relationships among data provides evidence as to the completeness, accuracy,
and occurrence of transactions captured in the information produced by the entity's information
system.
D. Reliance on the results of substantive analytical procedures will depend on the auditor's
assessment of the risk that the analytical procedures may identify relationships as expected when,
in fact, a material misstatement exists.

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C. 30. Which of the following should be considered by the auditor in determining the
suitability of substantive analytical procedures given the assertions?
I. The assessment of the risk of material misstatement.
II. Any tests of details directed toward the same assertion.

A. I only
B. II only
C. Both I and II
D. Neither I nor II
D. 31. The reliability of data is influenced by its source and by its nature and is dependent on
the circumstances under which it is obtained. Which of the following should the auditor consider
in determining whether data is reliable for purposes of designing substantive analytical
procedures?
I. Source of the information available.
II. Comparability of the information available.
III. Nature and relevance of the information available.
IV. Controls over the preparation of the information.

A. I, III, and IV only

B. II, III, and IV only
C. I, II, and III only
D. I, II, III, and IV
C. According to PSA 520, when analytical procedures identify significant fluctuations or
relationships that are inconsistent with other relevant information or that deviate from predicted
amounts, the auditor should investigate and obtain adequate explanations and appropriate
corroborative audit evidence. The auditor's investigation of unusual fluctuations and
relationships ordinarily begins with inquiries of management, followed by
I. Corroboration of management's responses.
II. Consideration of the need to apply other audit procedures based on the results of such
inquiries, if management is unable to provide an explanation or if the explanation is not
considered adequate.

A. I only
B. II only
C. Both I and II
D. Neither I nor II
A. 33. The following are the auditor's principal objectives in the audit of revenues, except

A. To determine whether all cash owned by the entity at the balance sheet date is included on the
balance sheet.
B. To determine whether earned revenue has been recorded and recorded revenue has been
earned.
C. To determine whether revenues are reported in the income statement at the appropriate
amounts.

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D. To determine whether revenues are properly classified, described, and disclosed in the
financial statements, including notes, in conformity with an applicable financial reporting
framework.
A. 34. Auditors are often concerned with the possibility of overstatement of sales and
receivables. However, management may also have reasons for understating these balances.
Which of the following would explain understatement of sales and receivables?
I. To avoid paying taxes.
II. To windowdress the financial statements.
III. To meet budgets and forecasts.

A. I only
В. II only
C. I and III only
D. I, II, and III
D. 35. In the audit of which of the following general ledger accounts will tests of controls be
particularly appropriate?

A. Bank charges
B. Equipment
C. Bonds payable
D. Sales
A. 36. Which of the following might be detected by an auditor's review of the entity's sales
cutoff?

A. Inflated sales for the year.

B. Lapping of year-end accounts receivable. C. Unrecorded sales discounts.
D. Excessive goods returned for credit.
C. 37. An auditor most likely would review a client's periodic accounting for the numerical
sequence of shipping documents and sales invoices to support management's financial statement
assertion of

A. Existence
B. Rights and obligations
C. Completeness
D. Valuation and allocation
B. 38. If the objective of a test of details of transactions is to detect overstatements of sales,
the auditor's direction of testing should be from the

A. Cash receipts journal to the sales journal.

B. Accounting records to the source documents.
C. Source documents to the accounting records.
D. Sales journal to the cash receipts journal.
D. 39. Cutoff tests designed to detect credit sales made before the end of the year that have
been recorded in the subsequent year provide assurance about management's assertion of

A. Accuracy

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B. Classification
C. Rights and obligations
D. Cutoff
B. 40. An auditor most likely would limit substantive audit tests of sales transactions when
control risk is assessed as low for the occurrence assertion concerning sales transactions and the
auditor has already gathered evidence supporting

A. Beginning and ending inventory balances.

B. Cash receipts and accounts receivable.
C. Cutoffs of sales and purchases.
D. Shipping and receiving activities.
D. 41. Tracing bills of lading to sales invoices provides evidence that

A. Invoiced sales were shipped.

B. Recorded sales were shipped.
C. Shipments to customers were recorded as sales.
D. Shipments to customers were invoiced.
A. 42. The auditor finds a situation in which one person has the ability to collect receivables,
make deposits, issue credit memos, and record receipt of payments. The auditor suspects the
individual may be stealing cash receipts. Which of the following audit procedures would be most
effective on discovering fraud in this scenario?

A. Perform a detailed review of debits to sales discounts, sales returns and allowances, or other
debit accounts, excluding cash posted to the cash receipts journal. B. Take a sample of bank
deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal. C.
Send negative confirmations to all outstanding accounts receivable customers. D. Send positive
confirmations to a random selection of customers.
C. 43. Which of the following most likely would give the most assurance concerning the
valuation and allocation assertion of accounts receivable?

A. Vouching amounts in the subsidiary ledger to details on shipping documents.

B. Inquiring about receivables pledged under loan agreements.
C. Assessing the allowance for bad debts for reasonableness.
D. Comparing receivable turnover ratios with industry statistics for reasonableness.
D. 44. Which of the following is not a principal objective in auditing accounts receivable?

A. To determine whether receivables are carried at their net realizable value.

B. To determine whether receivables are properly classified, described, and disclosed in the
financial statements, including notes, in accordance with the applicable financial reporting
framework.
C. To determine whether the entity has real claims in all receivables on the balance sheet.
D. To determine whether the accounts are collected by the balance sheet date.
C. 45. A large university has relatively ineffective internal control. To obtain assurance that
all tuition revenue has been recorded, the auditor should

A. Confirm a sample of tuition payments with the students.

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B. Prepare a year-end bank reconciliation.

C. Compare business office revenue records with registrar's office records of students enrolled.
D. Observe tuition payment procedures on a surprise basis.
B. 46. The process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information about a particular item
affecting assertions made by management in the financial statements is called

A. Reperformance
B. External confirmation
C. Inquiry
D. Recalculation
C. 47. The confirmation of customers' accounts receivable rarely provides reliable evidence
about the valuation assertion because

A. Customers may not be inclined to report understatement errors in their accounts.

B. Auditors typically select many accounts with low recorded balances to be confirmed.
C. It is not practicable to ask the customer to confirm detailed information relating to its ability
to pay the account.
D. Recipients usually respond only if they disagree with the information on the request.
A. 48. Auditors may use positive and/or negative forms of confirmation requests. An auditor
most likely will use

A. The negative form for small balances.

B. The positive form, when the combined assessed level of inherent and control risk for related
assertions is acceptably low, and the negative form when it is unacceptably high.
C. The positive form to confirm all balances regardless of size.
D. A combination of the two forms, with the positive form used for trade balances and the
negative form for other balances.
C. 49. The following statements relate to the use of negative confirmation requests. Which is
true?

A. Negative confirmation requests are effective when detection risk is low.

B. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
C. Unreturned negative confirmation requests rarely provide significant explicit evidence.
D. Negative confirmation requests are effective when understatements of account balances are
suspected.
D. 50. In confirming accounts receivable, an auditor decided to confirm customers' account
balances rather than individual invoices. Which of the following most likely would be included
with the client's confirmation letter?

A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the
account balance is correct.
B. An auditor-prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor.
C. A client-prepared letter remaining the customer that a nonresponse will cause a second request
to be sent.

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D. A client-prepared statement of account showing the details of the customer's account balance
B. 51. Which of the following statements would an auditor most likely add to the negative
form of confirmations of accounts receivable to encourage timely consideration by the recipient?

A. "This is not a request for payment; remittances should not be sent to our auditors in the
enclosed envelope."
B. "If you do not report any differences within 15 days, it will be assumed that this statement is
correct."
C. "The following invoices have been selected for confirmation and represent amounts that are
overdue."
D. "Report any differences on the enclosed statement directly to our auditors; no reply is
necessary if this amount agrees with your records."
A. 52. An auditor confirms a representative number of open accounts as of December 31 and
investigates respondents' exceptions and comments. By this procedure, the auditor is most likely
to learn of which of the following?

A. One of the cashiers has been covering a personal embezzlement by lapping.

B. The credit manager has misappropriated remittances from customers whose accounts have
been written off.
C. One of the sales clerks has not been preparing charge slips for credit sales to family and
friends.
D. One of the computer processing control clerks has been removing all sales invoices applicable
to his account from the data file.
B. 53. During the process of confirming receivables as of December 31, 200A, a positive
confirmation was returned indicating the "balance owed as of December 31 was paid on January
6, 200B." The auditor will most likely

A. Reconfirm the zero balance as of January 7, 200B.

B. Verify that the amount was received.
C. Determine whether a cash discount was taken by the customer.
D. Determine whether there were any changes in the account between January 1 and January 6,
200B.
A. 54. A company has computerized sales and cash receipts journals. The computer
programs for these journals have been properly debugged. The auditor's examination of the
accounting records revealed that the total of the accounts receivable subsidiary accounts differs
materially from the accounts receivable control account. This discrepancy could indicate

A. Credit memoranda being improperly recorded.

B. Statements being intercepted prior to mailing.
C. Lapping of receivables.
D. Receivables not being properly aged.
C. 55. To reduce the risks associated with accepting fax responses to requests for
confirmations of accounts receivable, an auditor most likely would

A. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are
noted.

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B. Consider the faxes to be nonresponses and evaluate them as unadjusted differences.

C. Verify the sources and contents of the faxes in telephone calls to the senders.
D. Examine the shipping documents that provide evidence for the existence assertion.
C. 56. PSA 505 defines confirmation as "the process of obtaining and evaluating audit
evidence through a representation of information or an existing condition directly from a third
party in response to a request for information about a particular item affecting assertions in the
financial statements or related disclosures." Two assertions for which confirmation of accounts
receivable balances provides primary evidence are

A. Completeness and valuation and allocation.

B. Valuation and allocation and rights and obligations.
C. Rights and obligations and existence.
D. Existence and completeness.
C. 57. For accounts receivable, negative confirmation is less effective than positive
confirmation because

A. Some recipients may report incorrect balances that require extensive follow-up.
B. A majority of recipients usually lack the willingness to respond objectively.
C. The auditor cannot infer that all nonrespondents have verified their account information.
D. Negative confirmations do not produce evidence that is statistically quantifiable.
A. 58. Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second requests?

A. Inspect the shipping records documenting the merchandise sold to the debtors.
B. Review the cash receipts journal for the month prior to year-end.
C. Intensify the study id internal control concerning the revenue cycle.
D. Increase the assessed level of detection risk for the existence assertion.
B. 59. Which of the following is the most effective procedure for determining the
collectibility of an account receivable?

A. Confirmation of the account.

B. Review of the subsequent cash collections.
C. Review of authorization of credit sales to the customer and the previous history of collections.
D. Examination of the related sales invoice(s).
D. 60. An auditor reconciles the total of the accounts receivable December 31. By this
procedure, the auditor is most likely subsidiary ledger to the general ledger control account as of
to learn of which of the following?

A. An account balance is past due and should be written off.

B. A December invoice was improperly computed.
C. A December check from a customer was posted in error to the account of another customer
with a similar name.
D. An opening balance on a subsidiary ledger account was improperly carried forward from the
previous accounting period.
B. 61. Once a CPA has determined that accounts receivable have increased because of slow
collections in a tight money environment, the CPA is likely to

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A. Review the entity's credit and collection policy.

B. Expand tests of collectibility.
C. Review the going concern ramifications.
D. Increase the balance in the allowance for bad debts account.
D. 62. All of the following are examples of substantive procedures to verify the valuation of
net accounts receivable, except the

A. Comparison of the allowance for bad debts with past records.

B. Recomputation of the allowance for bad debts.
C Inspection of the aging schedule and credit records of past due accounts.
D. Inspection of accounts for current versus noncurrent status in the statement of financial
position.
D. 63. The most likely reason for the auditor to be concerned about the valuation of cash is
that

A. The proof of cash cannot be reconciled.

B. The client uses a checking account.
C. Both currency and negotiable securities are on hand.
D. The client has foreign currency accounts.
C. 64. When counting cash on hand, the auditor must exercise control overall cash and other
negotiable assets to prevent

A. Theft
B. Deposits in transit
C. Substitution
D. Irregular endorsement
A. 65. The best evidence regarding year-end bank balances is documented in the

A. Bank reconciliations
B. Interbank transfer schedule
C. Cash in bank lead schedule
D. Cutoff bank statement
B. 66. Which of the following sets of information does an auditor usually confirm on one
form?

A. Accounts receivable and accrued interest receivable.

B. Cash in bank and collateral for loans.
C. Accounts payable and purchase commitments.
D. Inventory on consignment and contingent liabilities.
D. A. Detect kiting activities that may otherwise not be discovered.
B. Provide the data necessary to prepare a proof of cash.
C. Request that a cutoff bank statement and related check be sent to the auditor.
D. Seek information about other deposit and loan amount that come to the attention of the
institution in the process of completing the confirmation.

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A. 68. Which of the following items is not requested on a standard bank account balance
confirmation form?

A. The principal amount paid on a direct liability.

B. Maturity date of a direct liability.
C. Description of collateral for a direct liability.
D. The interest rate of a direct liability.
B. 69. Which of the following is not considered an objective of the audit of cash?

A. Cash is stated at its realizable value.

B. Compensating cash balances are reported as other current assets.
C. Cash is properly classified, described, and disclosed in the financial statements, including
notes, in accordance with the applicable financial reporting framework.
D. The client has ownership rights in the reported cash.
D. 70. The purpose of a proof of cash is to

A. Validate that the client's bank did not make an error during the period being examined.
B. Confirm that the client has properly separated the custody function from the recording
function with respect to cash.
C. Prove that the client's year-end balance of cash is fairly stated.
D. Determine whether any unauthorized disbursements or unrecorded deposits were made for the
given time period.
B. 71. An internal auditor would be concerned about the possibility of fraud if

A. Only one person has access to the petty cash fund.

B. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in
the bank daily.
C. The monthly bank statement reconciliation is performed by the same employee who maintains
the perpetual inventory records.
D. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person.
B. 72. Purchase cutoff procedures test the completeness assertion. An entity should include
goods in its inventory if it

A. Has paid for the goods.

B. Holds legal title to the goods.
C. Has physical possession of the goods.
D. Has sold the goods.
C. 73. In auditing accounts payable, an auditor's procedures most likely will focus primarily
on management's assertion of

A. Existence
B. Valuation and allocation
C. Completeness
D. Presentation and disclosure

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A. 74. Which of the following is the primary audit test to determine if accounts payable are
valued properly?

A. Vouching accounts payable to supporting documentation.

B. An analytical procedure.
C. Verification that accounts payable are reported as a current liability in the balance sheet.
D. Examination of cash disbursements subsequent to year-end.
A. 75. Which of the following procedures is least likely to be performed before the balance
sheet date?

A. Search for unrecorded liabilities.

B. Confirmation of accounts receivable.
C. Attendance at the physical inventory count
D. Testing internal control over cash.
B. 76. An auditor performs a test to determine whether all merchandise for which the client
was billed was received. The population for this test consists of all

A. Receiving reports
B. Vendors' invoices
C. Canceled checks
D. Merchandise received
D. 77. Which of the following is a substantive procedure that an auditor would most likely
perform to verify the existence and valuation of recorded accounts payable?

A. Confirming accounts payable balances with known suppliers who have zero balances.
B. Investigating the open purchase order file to ascertain that prenumbered purchase orders are
used and accounted for.
C. Receiving the client's mail, unopened, for a reasonable period of time after year-end to search
for unrecorded vendor's invoices.
D. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and
receiving reports.
B. 78. When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely is

A. Amounts recorded in the accounts payable subsidiary ledger.

B. Vendors with whom the entity has previously done business.
C. Invoices filed in the entity's open invoice file.
D. Payees of checks drawn in the month subsequent to the balance sheet date.
B. 79. Unrecorded liabilities are most likely to be found during the review of which of the
following documents?

A. Bills of lading
B. Unpaid bills
C. Unmatched sales invoices
D. Shipping records

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C. 80. Which of the following audit procedures is least likely to detect an unrecorded
liability?

A. Reading the minutes of meetings of the board of directors.

B. Analysis and recomputation of interest expense.
C. Analysis and recomputation of depreciation expense.
D. Mailing of bank confirmation forms.
A. 81. When title to merchandise in transit has passed to the audit client, the auditor engaged
in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance
with respect to the

A. Quality
B. Quantity
C. Price
D. Terms
D. 82. Which of the following audit procedures is best for identifying unrecorded trade
accounts payable?

A. Reconciling vendors' statements to the file of receiving reports to identify items received just
prior to the balance sheet date.
B. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments.
C. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports.
D. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to prior period.
A. 83. In a payables application, checks are authorized and paid based on matching purchase
orders, receiving reports, and vendor invoices. Partial payments are common. An appropriate
audit procedure for verifying that a purchase order has not been paid twice is to sort the

A. Check register file by purchase order, compute total amounts paid by purchase order, compare
total amounts paid with purchase order amounts, and investigate any discrepancies between the
total amounts paid and purchase order amounts.
B. Receiving report file by vendor invoice amounts and investigate any discrepancies between
the total amounts received and vendor invoice amounts.
C. Vendor invoice file by purchase order, compute total amounts invoiced by purchase order,
compare total amounts invoiced with purchase order amounts, and investigate any discrepancies
between the total amounts involved and purchase order amounts.
D. Receiving report file by purchase order, compute total amounts received by purchase order,
compare total amounts received with purchase order amounts, and investigate any discrepancies
between the total amounts received and purchase order amounts.
B. 84. Which of the following procedures relating to the examination of accounts payable
could the auditor delegate entirely to the client's employees?

A. Mail confirmations for selected account balances.

B. Prepare a schedule of accounts payable.

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C. Test footings in the accounts payable ledger.

D. Reconcile unpaid invoices to vendors' statements.
C. 85. In an audit of a purchasing department, which of the following usually is considered a
risk factor?

A. Purchase specifications are developed by the department requesting the material.

B. Purchases are not rotated among suppliers included on an approved vendor list.
C. Purchases are made from parties related to buyers or other company officials.
D. Purchases are made against blanket or open purchase orders for certain types of items.
B. 86. The following statements compare confirmation of accounts payable with vendors
and confirmation of accounts receivable with customers. Which is false?

A. As compared with the confirmation of accounts receivable, the confirmation of accounts

payable will tend to emphasize accounts with zero balances at the balance sheet date.
B. Statistical sampling techniques are more appropriate in the confirmation of accounts
receivable than in the confirmation of accounts payable.
C. It is less likely that the confirmation request sent to the vendor will show the amount owed
than that the request sent to the customer will show the amount due.
D. Confirmation of accounts receivable with customers is a more widely accepted auditing
procedure than is confirmation of accounts payable with vendors.
A. 87. Which of the following procedures would an auditor least likely perform before the
balance sheet date?

A. Confirmation of accounts payable

B. Identification of related parties
C. Assessment of control risk
D. Attendance at the physical inventory count
A. 88. Which of the following statements concerning the auditor's attendance at the physical
inventory count is incorrect?

A. A financial statement audit should always include attendance at the physical inventory count.
B. If the auditor is unable to attend the physical inventory count on the date planned due to
unforeseen circumstances, he/she should take or observe some physical counts on an alternative
date and, when necessary, perform audit procedures on intervening transactions.
C. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that reference to a scope
limitation need not be made.
D. Inventories that are under the custody and control of third parties (for example, inventories
located in public warehouses) may be verified by obtaining direct confirmation from the
custodians, provided that, depending on the materiality of the amount involved, additional
procedures should be applied as deemed necessary.
D. 89. PSA 501 states that in planning attendance at the physical inventory count, the auditor
considers the risks of material misstatement related to inventory as well as the nature of the
internal control related to inventory. Which of the s lowing would the auditor also consider?

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I. Whether adequate procedures are expected to be e tablished and proper instructions issued for
the physica inventory count.
II. The timing of the count.
III. The locations at which inventories are held.
IV. Whether an expert's assistance is to be sought.

A. I and IV only
B. II and III only
C. II, III, and IV only
D. I, II, III, and IV
D. 90. According to PSA 501, when inventories are under the custody and control of a third
party, the auditor would ordinarily obtain direct confirmation from the third party as to the
quantities and condition of inventories held on behalf of the entity. Which of the following would
the auditor also consider?
I. The integrity and independence of the third party.
II. Observing, or arranging for another auditor to observe, the physical inventory count.
III. Obtaining another auditor's report on the adequacy of the third party's internal control for
ensuring that inventories are correctly counted and adequately safeguarded.
IV. Inspecting documentation regarding inventories held by third parties (for example, warehouse
receipts) or obtaining confimation from other parties when such inventories have been pledged
as collateral.

A. I, II, and IV only

B. I, III, and IV only
C. II, III and IV only
D. I, II, III and IV
D. 91. In an audit of inventories, an auditor is least likely to verify that

A. The client has used proper inventory pricing.

B. Damaged goods and obsolete items have been properly accounted for.
C. The financial statement presentation of inventories is appropriate.
D. All inventory owned by the client is on hand at the time of the count.
C. 92. An auditor selected items for test counts while observing a client's physical inventory.
The auditor then traced the test counts to the client's inventory listing. This procedure most likely
obtained evidence concerning management's assertion of

A. Existence
B. Rights and obligations
C. Completeness
D. Valuation and allocation
A. 93. An auditor is most likely to inspect loan agreements under which an entity's
inventories are pledged to support management's financial statement assertion of

A. Presentation and disclosure

B. Existence
C. Completeness

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D. Valuation and allocation

A. 94. If the perpetual inventory records show lower quantities of inventory than the
physical count, an explanation of the difference might be unrecorded

A. Purchases
B. Sales
C. Sales discounts
D. Purchase discounts
B. 95. A client maintains perpetual inventory records in both quantities titles and pesos. If
the assessed level of control risk is high. an auditor will probably

A. Increase the extent of tests of controls relevant to the inventory cycle.

B. Request the client to schedule the physical inventory count at the end of the year.
C. Apply gross profit tests to ascertain the reasonableness of the physical counts.
D. Insist that the client perform physical counts of inventory items several times during the year.
C. 96. While obtaining an understanding of the client's internal control system in the
production cycle, management stated that the sale of scrap was well controlled. Which of the
following is the best audit procedure to verify this assertion?

A. Interviewing persons responsible for collecting and storing the scrap.

B. Comparing current revenue from scrap sales with that of prior periods.
C. Comparing the quantities of scrap expected from the production process with the quantities
sold.
D. Comparing the results of a physical inventory of scrap on hand with perpetual inventory
records.
B. 97. To obtain evidence as to the reasonableness and completeness of inventory balances,
auditors often perform analytic procedures. Which of the following quantitative relationships is
not applicable to inventory balances?

A. Number of days' sales in inventory

B. Debt-to-equity ratio
C. The gross profit percentage
D. Inventory turnover ratios
A. 98. An auditor concluded that no excessive costs for an idle plant were charged to
inventory. This conclusion most likely related to the auditor's objective to obtain evidence about
the financial statement assertions regarding inventory, including presentation and disclosure and

A. Valuation and allocation

B. Completeness
C. Rights and Obligations
D. Existence
A. 100. The audit of year-end physical inventories should include steps to verify that the
client's purchases and sales cutoff were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a

A. Sale in the current period.

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B. Purchase in the current period.

C. Sale in the subsequent period.
D. Purchase return in the subsequent period.
D. 99. An auditor's attendance at the physical inventory at the client's main plant at year-end
provides direct evidence to support which of the following objectives?

A. Accuracy of the priced-out inventory.

B. Determination of goods in the hands of consignees.
C. Evaluation of lower of cost or net realizable value test.
D. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for
obsolescence.
A. 101. PSA 501 states that when inventory is material to the financial statements, the
auditor should obtain sufficient appropriate audit evidence regarding its existence and condition
by attendance at physical inventory counting unless impracticable. Which of the following
statements concerning this audit procedure is incorrect?

A. Regardless of the inventory system operated by the client, an annual physical count must be
made of each item in the inventory, and test counts must be made by the auditor.
B. Inventories located in public warehouses may be verified by direct confirmation in writing
from the custodians, provided that, depending on the materiality of these inventories, additional
procedures are applied as deemed necessary.
C. When the well-kept perpetual inventory records are checked by the client periodically by
comparisons with physical counts, the auditor's observation procedures usually can be performed
either during or after the end of the period under audit.
D. The independent auditor, when asked to audit financial statements covering the current period
and one or more periods for which he/she had not observed or made some physical counts, may
be able to become satisfied as to such prior inventories through appropriate alterna- tive
procedures.
C. 102. Which of the following audit procedures probably provides the most reliable
evidence concerning the entity's assertion of rights and obligations related to inventories?

A. Inspect the open purchase order file for significant commitments that should be considered for
disclosure.
B. Trace test counts noted during the entity's physical count to the entity's summarization of
quantities. is pledged as collateral or subject to any liens.
C. Inspect agreements to determine whether any inventory
D. Select the last few shipping advice used before the physical count and determine whether the
shipments were recorded as sales.
A. 103. After accounting for a sequence of inventory tags, an auditor traces a sample of tags
to the physical inventory listing to obtain evidence that all items

A. Répresented by inventory tags are included in the listing.

B. Represented by inventory tags are bona fide.
C. Included in the listing have been counted.
D. Incduded in the listing are represented by inventory tags.

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B. 104. When outside firms of nonaccountants specializing in the taking of physical

inventories are used to count, list, price, and subsequently compute the total peso amount of
inventory on hand at the date of the physical count, the auditor will ordinarily

A. Consider the reduced audit effort with respect to the physical count of inventory as a scope
limitation.
B. Make or observe some physical counts of the inventory, recompute certain inventory
calculations, and test certain inventory transactions.
C. Consider the report of the outside inventory-taking firm to be an acceptable alternative
procedure to the observation of physical inventories.
D. Not reduce the extent of work on the physical count of inventory.
C. 105. Periodic or cycle counts of selected inventory items are made at various times
during the year rather than a single inventory count at year-end. Which of the following is
necessary if the auditor plans to observe inventories at interim dates?

A. Inventory balances are rarely at low levels.

B. Complete recounts by independent teams are performed.
C. Perpetual inventory records are maintained.
D. Unit cost records are integrated with production accounting records.
B. 106. Purchase cutoff procedures should be designed to test whether all inventory

A. Purchased and received before year-end was paid for.

B. Purchased and received before year-end was recorded.
C. Owned by the company is in the possession of the company at year-end.
D. Ordered before year-end was received.
A. 107. Which of the following is the best audit test to evaluate the accuracy of the inventory
records for materials inventory in a production operation?

A. Reconcile quantities on hand per physical counts of selected items with perpetual inventory
records and verify pricing.
B. Trace selected inventory receipts to perpetual inventory records.
C. Vouch selected postings in the perpetual inventory records to source documents.
D. Perform turnover tests for materials inventory.
C. 108. An auditor is most likely to learn of slow-moving inventory through

A. Inquiry of sales personnel.

B. Inquiry of warehouse personnel.
C. Review of perpetual inventory records.
D. Physica! observation of inventory.
D. 110. Which of the following audit procedures most likely would provide assurance about
a manufacturing entity's inventory valuation?

A. Tracing test counts to the entity's inventory listing.

B. Reviewing shipping and receiving cutoff procedures for inventories.
C. Obtaining confirmation of inventories pledged under loan agreements.
D. Testing the entity's computation of standard overhead rates.

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A. 111. Which of the following is not one of the auditor's primary objectives in an audit of
trading securities?

A. To determine whether securities are authentic.

B. To determine whether securities actually exist.
C. To determine whether securities are the property of the client.
D. To determine whether securities are properly classified on the balance sheet.
C. 112. A company makes a practice of investing excess short-term cash in trading securities
that are traded regularly on the Philippine Stock Exchange (PSE). A reliable test of the valuation
of those securities is

A. Calculation of premium or discount amortization.

B. Confirmation of securities held by the broker.
C. Consideration of current market quotations.
D. Recalculation of investment value using a valuation model.
A. 113. Which of the following is the most effective audit procedure for verification of
dividends earned on investments in equity securities?

A. Reconciling amounts received with published dividend records.

B. Recomputing selected extensions and footings of dividend schedules and comparing totals to
the general ledger.
C. Comparing dividends received in the current year with that of the preceding year.
D. Tracing deposited dividend checks to the cash receipts book.
D. 114. Which of the following audit procedures would give the least assurance of the
existence of securities held by the entity?

A. Confirmation from the custodian.

B. Simultaneous count of liquid assets.
C. Vouching all changes during the year to supporting documentation.
D. Examination of paid checks issued in payment of securities purchased.
A. 115. In confirming with an outside agent, such as a financial institution, that the agent is
holding investment securities in the client's name, an auditor most likely gathers evidence in
support of management's financial statement assertions of existence and

A. Rights and obligations

B. Completeness
C. Presentation and disclosure
D. Valuation and allocation
B. 116. In establishing the existence and ownership of an investment held by a corporation
in the form of publicly-traded stock, an auditor should inspect the securities or

A. Determine that the investment is carried at the lower of cost or market.

B. Confirm the number of shares owned that are held by an independent custodian.
C. Inspect the audited financial statements of the investee company.
D. Obtain written representations from management confirming that the securities are properly
classified as trading securities.

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A. 117. The auditor is making an assessment as to whether the client has adopted the
appropriate accounting policy for its investment in the voting stock of the investee. The auditor
should obtain evidence primarily by

A. Inquiries to the client as to whether the client has the ability to exercise significant influence
over the financial and operating policy decisions of the investee.
B. Direct confirmation with the investee about the control or influence that can be exercised by
the client.
C. An independent, third party's opinion concerning the potential influence or control that can be
exercised by the client over the investee.
D. Comparison of the number of shares held by the investor with the investee's number of shares
outstanding according to the written confirmation.
B. 118. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the client owns a 30% voting Interest?

A. Historical cost of the investee company's assets.

B. Audited financial statements of the investee company.
C. Current fair value of the investee company's assets.
D. Market quotations of the Investee company's stock.
C. 119. An auditor is most likely to verify the interest earned on bond investments by

A. Verifying the receipt and deposit of interest checks.

B. Testing controls relevant to cash receipts.
C. Recomputing the interest earned on the basis of face amount, interest rate, and period held.
D. Confirming the bond interest rate with the issuer of the bonds.
A. 120. The auditor can best verify a client's bond sinking fund transactions and year-end
balance by

A. Confirmation with the bond trustee.

B. Confirmation with individual holders of retired bonds,
C. Examination and count of the bonds retired during the year.
D. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
A. 121. In the audit of property, plant, and equipment, the auditor tries to do all of the
following except to

A. Assess the adequacy of replacement funds.

B. Obtain an understanding of internal control.
C. Determine the extent of property abandoned during the year.
D. Judge the reasonableness of the depreciation.
B. 122. Which of the following combinations of procedures is an auditor most likely to
perform to obtain evidence about fixed asset additions?

A. Confirming ownership and corroborating transactions through inquiries of client personnel.

B. Inspecting documents and physically examining assets.
C. Recomputing calculations and obtaining written management representations.

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D. Observing operating activities and comparing balances to prior period balances.

C. 123. If an auditor tours a production facility, which of the following misstatements or
questionable practices is most likely to be detected by the audit procedure specified?

A. Depreciation expense on fully depreciated machinery has been recognized.

B. Insurance coverage on the facility has lapsed.
C. Necessary facility maintenance has not been performed.
D. Overhead has been overapplied.
B. 124. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence
in support of the audit assertion that all

A. Expenditures for property and equipment have been recorded in the proper period.
B. Expenditures for property and equipment have not been charged to expense.
C. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
D. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
A. 125. Determining that proper amounts of depreciation are expensed provides assurance
about management's assertions of valuation and allocation and

A. Presentation and disclosure

B. Existence
C. Completeness
D. Rights and obligations
D. 126. The auditor is least likely to learn of retirements of equipment through-which of the
following?

A. Review of depreciation.
B. Analysis of the debits to accumulated depreciation account.
C. Review of insurance policy riders.
D. Review of the purchase returns and allowances account.
B. 127. One audit procedure for an audit of facilities and equipment is to test the accuracy of
recorded depreciation. Which of the following is the best source of evidence that the equipment
in question is in service?

A. A review of inventory documentation for the equipment.

B. A comparison of depreciation schedules with the maintenance and repair logs for the same
equipment.
C. A comparison of depreciation schedules with a listing of insurance appraisals for the same
equipment.
D. A review of depreciation policies and procedures.
A. 128. When few property and equipment transactions occur during the year, the continuing
auditor usually obtains an understanding of the related internal controls and performs

A. Extensive tests of current year property and equipment transactions.

B. Tests of controls.

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C. Analytical procedures to substantiate current year additions to property and equipment.

D. A thorough examination of the balances at the beginning the current year.
B. 129. In violation of a company policy, Victoria Company erroneously capitalized the cost
of painting its warehouse. The auditor examining Victoria's financial statements will most likely
detect this misstatement when

A. Observing, during the physical inventory observation, that the warehouse had been painted.
B. Examining the construction work orders supporting items capitalized during the year.
C. Examining maintenance expense accounts.
D. Discussing capitalization policies with Victoria's controller.
A. 130. During an audit of a publicly held company, the auditor should obtain written
confirmation regarding debenture transactions from the

A. Trustee
B. Client's attorney
C. Debenture holders
D. Internal auditors
B. 131. A bond trust indenture is the contractual agreement between the bondholders and the
issuing company. In an audit of bonds payable, an auditor expects the trust indenture to include
the

A. Subscription list.
B. Description of the collateral.
C. Effective yield of the bonds issued.
D. Issuing company's debt-to-equity ratio at the time of issuance.
D. 132. An auditor's program to audit long-term debt should include steps that require

A. Verifying the existence of the bondholders.

B. Inspecting the accounts payable subsidiary ledger.
C. Investigating credits to the bond interest income account.
D. Examining bond trust indentures.
C. 133. In auditing long-term bonds payable, an auditor most likely will

A. Confirm the existence of individual bondholders at year-end.

B. Perform analytical procedures on the bond premium and discount accounts.
C. Compare interest expense with the bond payable amount for reasonableness.
D. Examine documentation of assets purchased with bond proceeds for liens.
B. 134. An auditor's purpose in reviewing the renewal of a note payable shortly after the
balance sheet date most likely is to obtain evidence concerning management's assertion about

A. Existence
B. Presentation and disclosure
C. Completeness
D. Valuation and allocation
D. 135. In the audit of a medium-sized manufacturing concern, which one of the following
areas can be expected to require the least amount of audit time?

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A. Revenue
B. Assets
C. Liabilities
D. Shareholders' equity
A. 136. In an audit of shareholders' equity, an auditor is most concerned that

A. Share capital transactions are properly authorized.

B. All changes in the shareholders' equity accounts are monitored by an independent transfer
agent and registrar.
C. Share splits are charged to retained earnings at par or stated value.
D. Dividends declared during. the year were approved by the shareholders.
C. 137. Which of the following transactions would not require a debit to retained earnings?

A. An appropriation of retained earnings for treasury shares.

B. A 5% stock dividend.
C. A two-for-one share split
D. A 25% stock dividend
B. 138. The auditor is concerned with establishing that dividends are paid to client
corporation shareholders owning shares as of the

A. Payment date
B. Record date
C. Declaration date
D. Issue date
A. 139. When a client company does not maintain its own share records, the auditor should
obtain written confirmation from the transfer agent and registrar concerning

A. The number of shares issued and outstanding.

B. Restrictions on the payment of dividends.
C. The number of shares subject to agreements to repurchase.
D. Guarantees of preference share liquidation value.
D. 140. If the client corporation has a material amount of treasury shares on hand at year-
end, the auditor should

A. Count the certificates only if the company reports treasury shares as an asset.
B. Not count the certificates if treasury shares are reported as a deduction from total
shareholders' equity.
C. Count the certificates only if the company had material treasury share transactions during the
year.
D. Count the certificates at the same time other securities are counted.
B. 141. During an audit of a company's shareholders' equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements, or law. This
audit procedure most likely is intended to verify management's assertion of

A. Existence

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B. Presentation and disclosure

C. Completeness
D. Valuation and allocation
C. 142. An audit program for the retained earnings account should include a step that
requires verification of the

A. Gain or loss resulting from disposition of treasury shares.

B. Approval of the adjustment to the beginning balance as a result of a write-down of an account
receivable.
C. Authorization for both cash and stock dividends.
D. Fair value used to charge retained earnings to account for a two-for-one share split.
B. 143. In auditing payroll, an auditor most likely would

A. Observe entity employees during a payroll distribution.

B. Compare payroll costs with entity standards and budgets.
C. Trace individual employee deductions to entity journal entries.
D. Verify that checks representing unclaimed wages are mailed.
A. 144. An auditor is most likely to perform substantive tests of details on payroll
transactions and balances when

A. Analytical procedures indicate unusual fluctuations in recurring payroll entries.

B. Cutoff tests indicate a substantial amount of accrued payroll expense.
C. The assessed level of control risk relative to payroll transactions is low.
D. Accrued payroll expense consists primarily of unpaid commissions.
B. 145. Which of the following audit procedures would provide the least relevant evidence
in determining that payroll payments were made to bona fide employees?

A. Reconcile time cards in use to employees on the job.

B. Test the payroll account bank reconciliation by tracing outstanding checks to the payroll
register.
C. Examine canceled checks for proper endorsement and compare with personnel records.
D. Test for segregation of the authorization for payment from the hire/fire authorization.
D. 146. One payroll audit objective is to determine whether the employees received pay in
amounts recorded in the payroll journal. To achieve this objective, the auditor should

A. Determine whether a proper segregation of duties exists between recording payroll and
reconciling the payroll bank account.
B. Requesting that a company official distribute all paychecks.
C. Reconcile the payroll bank account.
D. Compare canceled payroll checks with the payroll journal.
B. 147. Substantive procedures for payroll transactions and balances primarily focus on
analytical procedures to identify unexpected fluctuations in recurring payroll entries. Which of
the following is an appropriate analytical procedure for payroll?

A. Reconcile the payroll bank account.

B. Compare the relationship of hours worked and payroll with that of the preceding year.

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C. Inspect authorization on time cards.

D. Compare authorized wage rates with payroll records.
A. 148. To check the accuracy of hours worked, an auditor would ordinarily compare clock
cards with

A. Shop job time tickets

B. Personnel records
C. Time recorded in the payroll register
D. Labor variance reports
C. 149. An auditor found that employee time cards in one department are not properly
approved by the supervisor. Which of the following could occur?

A. Payroll checks might not be distributed to the appropriate payees.

B. The wrong hourly rate could be used to calculate gross pay.
C. Employees might be paid for hours they did not work.
D. Duplicate paychecks might be issued.
A. 150. As used in PSA 230 (Audit Documentation), it refers to the record of audit
procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.

A. Audit documentation
B. Audit file
C. Audit planning memorandum
D. Management letter.
D. 151. According to PSA 230, working papers may be in the form of data stored on paper
or on electronic or other media. Working papers
I. Assist in the planning and performance of the audit.
II. Assist in the supervision and review of the audit work.
III. Record the audit evidence resulting from the audit work performed to support the auditor's
opinion.

A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
C. 152. The following statements relate to the form and content of working papers. Which is
false?

A. The auditor should prepare working papers which are sufficiently complete and detailed to
provide an overall understanding of the audit.
B. The auditor should include in the working papers information on planning the audit work; the
nature, timing, and extent of the audit procedures performed and the results of such procedures;
and the conclusions drawn from the audit evidence obtained.
C. Working papers should include documentation of every matter the auditor considers during
the audit.
D. Working papers should include the auditor's reasoning on all significant matters which require
the exercise of judgment, together with his/her conclusion thereon.

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A. 153. The primary purpose of audit working papers is to

A. Provide evidence of the planning and execution of audit procedures performed.

B. Comply with the Philippine Standards on Auditing (PSAS).
C. Document weaknesses in internal control with recommendations to management for
improvement.
D. Serve as a means for the preparation of the financial statements.
D. 154. Working papers that record the procedures used by the auditor to gather audit
evidence should be

A. Destroyed when the audited entity ceases to be a client.

B. Considered the primary support for the financial statements being audited.
C. Viewed as the connecting link between the books of accounts and the financial statements.
D. Designed to meet the circumstances of the particular engagement.
B. 155. Which of the following conditions constitutes inappropriate working paper
preparation?

A. Tick marks explained in working papers.

B. All forms and directives used by the client are included in the working papers.
C. Flowcharts are included in the working papers.
D. Findings are cross-referenced to supporting documentation.
A. 156. Which of the following factors would least likely affect the form, content, and extent
of an auditor's working papers?

A. The content of the representation letter.

B. The identified risks of material misstatement.
C. The audit methodology and tools used.
D. The significance of the audit evidence obtained.
A. 157. An auditor's working papers will ordinarily be least likely to include documentation
showing how the

A. Client's schedules were prepared.

B. Unusual matters were resolved.
C. Understanding of the client's internal control was obtained and control risk was assessed.
D. Engagement was planned.
B. 158. Which of the following is usually included or shown in the auditor's working
papers?

A. The procedures used by the auditor to verify the personal financial status of members of the
client's management team.
B. The manner in which exceptions and unusual matters disclosed by the auditor's procedures
were resolved or treated.
C. Analyses that are designed to be a part of, or an attribute for, the client's accounting records.
D. Excerpts from authoritative pronouncements that support the financial reporting framework
used in preparing the financial statements.

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C. 159. Audit working papers are indexed by means of reference numbers. Which of the
following is the primary purpose of indexing?

A. Determine that working papers adequately support findings, conclusions, and reports.
B. Support the audit opinion.
C. Permit cross-referencing and simplify supervisory review.
D. Eliminate the need for follow-up reviews.
A. 160. Although the quantity and content of audit working papers vary with each particular
engagement, an auditor's permanent files most likely include

A. Analyses of share capital and other shareholders' equity elements.

B. Schedules that support the current year's adjusting entries.
C. Prior years' accounts receivable confirmations that were classified as exceptions.
D. Documentation indicating that the audit work was adequately planned and supervised.
C. 161. The audit working paper that reflects the major components of an amount reported
in the financial statements is the

A. Supporting schedule
B. Interbank transfer schedule
C. Lead schedule
D. Carryforward schedule
A. 162. Which of the following analyses appearing in a predecessor's working papers is the
successor auditor least likely to be interested in reviewing?

A. Analysis of income statement accounts.

B. Analysis of noncurrent assets and liabilities.
C. Analysis of current assets and liabilities.
D. Analysis of shareholders' equity accounts.
B. 163. An auditor ordinarily uses a working trial balance resembling the financial
statements without footnotes, but containing columns for

A. Cash flow increases and decreases.

B. Reclassifications and adjustments.
C. Audit objectives and assertions.
D. Reconciliations and tickmarks.
A. 164. Auditors often use standardized working papers primarily because they allow
working papers to be prepared more

A. Efficiently
B. Accurately
C. Neatly
D. Professionally
A. 165. Using personal computers in auditing may affect the methods used to review the
work of staff assistants because

A. Working paper documentation may not contain readily observable details of calculations.

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B. The quality control standards may differ.

C. Documenting the supervisory review may require assistance of consulting services personnel
D. Supervisory personnel may not have an understanding of the capabilities and limitations of
personal computers.
A. 166. Audit documentation is the record of audit procedures performed, relevant audit
evidence, and the auditor's conclusions. Which of the following statements concerning audit
documentation is incorrect?

A. Audit documentation should include superseded drafts of working papers and financial
statements.
B. Audit documentation prepared after the performance of the audit work is likely to be less
accurate than documentation prepared at the time such work is performed.
C. Audit documentation may include abstracts or copies of the entity's records such as significant
and specific contracts and agreements.
D. Audit documentation is not a substitute for the entity's accounting records.
C. 167. The auditor shall assemble the audit documentation in a/an

A. Working paper
B. Workpaper
C. Audit file
D. Audit memorandum
B. 168. The auditor is required to complete the administrative process of assembling the
final audit file on a timely basis after the date of the auditor's report. The time limit within which
to complete the assembly of the audit file is ordinarily

A. Not more than 30 days after the date of the auditor's report.
B. Not more than 60 days after the date of the auditor's report.
C. Not more than 90 days after the end of the entity's reporting period.
D. Not more than 60 days after the date the entity's financial statements are authorized for issue.
D. 169. Audit documentation may be recorded on paper or on electronic or other media. The
following are examples of audit documentation, except

A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning significant matters
D. The entity's accounting records
A. 170. The completion of the assembly of the final audit file after the date of the auditor's
report does not ordinarily involve

A. The performance of new audit procedures or the drawing of new conclusions.

B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file assembly process.
C. 109. The physical count of inventory of a retailer was higher than shown by the perpetual
records. Which of the following could explain the difference?

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A. Inventory items had been counted but the tags placed on the items had not been taken off the
items and added to the inventory accumulation sheets.
B. An item purchased "FOB shipping point" had not arrived yet at the date of the inventory count
and had not been reflected in the perpetual records.
C. Credit memos for several items returned by customers had not been recorded.
D. No journal entry had been made on the retailer's books for several items returned to its
suppliers.

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