1.

The purpose of establishing quality control policies and procedures for deciding whether to
accept or continue a client relationship is to

A. Monitor the risk factors concerning misstatements arising from the misappropriation of assets

B. Provide reasonable assurance that personnel are adequately trained to fulfill their
responsibilities

C. Minimize the likelihood of associating with clients whose management lacks integrity

D. Document objective criteria for the CPA firm;s responses to peer review comments
c
2.Which of the following conditions most likely would pose the greatest risk in accepting a new
audit engagement?

A. Staff will need to be rescheduled to cover the new client

B. There will be a client-imposed scope limitation
C. The firm will have to hire a specialist in one audit area
D. The client's financial reporting system has been in place for 10 years
b
3.Audit plans should be designed so that

A. Most of the required procedures can be performed as interim work

B. Inherent risk is assessed at a sufficiently low level
C. The auditor can make constructive suggestions to management
D. The audit evidence gathered supports the auditor's conclusions
d
The existence of audit risk is recognized by the statement in the auditor's standard report that the

A. Auditor is responsible for expressing an opinion on the financial statements, which are the
responsibility of the management
B. Financial statements are presented fairly, in all material respects, in conformity with GAAP
C. Audit includes examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements
D. Auditor obtains reasonable assurance about whether the financial statements are free of
material misstatement.
d
The risk that an auditor's procedures will lead to the conclusion that a material misstatement does
NOT exist in an account balance when, in fact, such misstatement does exist, is

A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk
d
As the acceptable level of detection risk decreases, an auditor may

A. Reduce substantive testing by relying on the assessments of inherent risk and control risk
B. Postpone the planned timing of substantive tests from interim dates to year-end
C. Eliminate the assessed level of inherent risk from consideration as a planning factor
D. Lower the assessed level of control risk from a high level to a low level
b
The acceptable level of detection risk is inversely related to the

A. Assurance provided by substantive procedures

B. Risk of misapplying auditing procedures
C. Preliminary judgement about materiality levels
D. Risk of failing to discover material misstatements
a
Prior to beginning the field work on a new audit engagement in which a CPA does NOT possess
expertise in the industry in which the client operates, the CPA should

A. Reduce audit risk by lowering initial levels of materiality

B. Design special substantive procedures to compensate for the lack of industry expertise
C. Engage financial experts familiar with the nature of the industry
D. Perform risk assessment procedures
d
To obtain an understanding of a continuing client in planning an audit, an auditor most likely
would

A. Perform tests of details of transactions and balances

B. Read internal audit reports
C. Real specialized industry journals
D. Reevaluate the risks of material misstatement
b
The primary objective of analytical procedures used in the final review stage of an audit is to

A. Obtain evidence from details testing to corroborate particular assertions

B. Identify areas that represent specific risks relevant to the audit
C. Assist the auditor in assessing the validity of the conclusions reached
D. Satisfy doubts when questions arise about a client's ability to continue in existence
c
Because of the risk of material misstatement due to fraud, an audit of financial statements in
accordance with GAAS should be planned and performed with an attitude of

A. Objective judgement
B. Independent integrity
C. Professional skepticism
D. Impartial conservatism
c
Which of the following situations represents a risk factor that relates to misstatements arising
from misappropriation of assets?

A. A high turnover of senior management

B. A lack of independent checks
C. A strained relationship between management and the predecessor auditor
D. An ineligibility to generate cash flow from operations
b
For which of the following judgements may an independent auditor share responsibility with an
entity's internal auditor who is assessed to be both competent and objective? (yes/no)

assessment of inherent risk, assessment of control risk

no no
For which of the following judgements may an independent auditor share responsibility with an
entity's internal auditor who is assessed to be both competent and objective? (yes/no)

materiality of misstatements, evaluation of accounting estimates

no no
During an audit, an internal auditor may provide direct assistance to an independent CPA in
(yes/no)

obtaining an understanding of internal control, performing tests of controls, performing

substantive tests
yes yes yes
The ultimate purpose of understanding the entity and its environment and assessing inherent risk
and control risk is to contribute to the auditor's assessment of the risk that

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

b. material misstatements may exist in the financial statements
c. specified controls requiring separation of duties may be circumvented by collusion
d. entity policies may be inappropriately overridden by senior mgmt
b
the risk of material misstatements should be assessed in terms of

a. specific controls
b. types of potential fraud
c. financial statement assertions
d. control environment factors
c
The auditor should perform tests of controls when

a. substantive procedures alone do not provide sufficient appropriate evidence at the relevant
assertion level
b. tests of details and substantive analytical procedures provide sufficient appropriate audit
evidence to support the assertion being evaluated
c. the auditor is not able to obtain an understanding of internal controls
d. the owner-manager performs virtually all the functions of internal control
a
When assessing the risk of material misstatement at a low level, an auditor is required to
document the auditor the auditor's (yes/no) understanding of the entity;s control environment,
overall responses to assessed risks
yes yes
Which of the following is a step in an auditor's decision to test controls?

a. analytical procedures have detected conditions that may indicate weak controls
b. tests of details of transactions and account balances have identified potential errors and fraud
c. the risk assessment includes an expectation of the effectiveness of controls
d. document that the additional audit effort to perform tests of controls exceeds the potential
reduction in substantive procedures
c
An auditor may decide to perform only substantive procedures for certain assertions because the
auditor believes

a. controls are not relevant to the assertions

b. the entity's control components are interrelated
c. sufficient appropriate audit evidence to support the assertions is likely to be available
d. more emphasis on tests of controls than substantive tests is warranted
a
An auditor is LEAST likely to test controls that provide for

a. approval of the purchase and sale of trading securities

b. classification of revenue and expense transactions by product line
c. separation of the functions of recording disbursements and reconciling the bank acct
d. comparison of receiving reports and vendors' invoices with purchase orders
b
After obtaining an understanding of a client's internal control an auditor may decide not to test
the effectiveness of the computer control procedures. Which of the following is NOT a valid
reason for choosing to omit tests or controls?

a. the controls duplicate operative controls existing elsewhere in the system

b. there appears to be major weaknesses that would preclude relying on the controls
c. the time and dollar costs of testing exceed the time and dollar savings in substantive testing if
the tests of controls show the controls to be operative
d. the operating effectiveness of controls appears to support a reduced assessment of the risk of
material misstatement.
d
to test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques,
including

a. inquiry and analytical procedures

b. reperformance and observation
c. comparison and confirmation
d. inspection and verification
b
An auditor generally tests the separation of duties related to inventory by

a. personal inquiry and observation

b. test counts and cutoff procedures
c. analytical procedures and invoice recomputation
d. document inspection and reconciliation
a
Which of the following procedures concerning accts rec. is an auditor most likely to perform to
obtain evidential matter in support of the effectiveness of controls?

a. observing an entity's employee prepare the schedule of past due accts rec
b. sending confirmation requests to an entity's principal customers to verify the existence of accts
rec.
c. inspecting an entity's analysis of accts rec for unusual balances
d. comparing an entity;s uncollectible accts expense with actual uncollectable accts rec
a
The objective of tests of details of transactions performed as tests of controls is to

a. monitor the design and use of entity documents such as prenumbered shipping forms
b. determine whether internal controls have been implemented
c. detect material misstatements in the acct balances of the fs
d. evaluate whether internal controls operated effectively
d
when an auditor increases the planned assessed risk of material misstatement because certain
controls were determined to be ineffective, the auditor will most likely increase the

a. extent of tests of details

b. assessed inherent risk
c. extent of tests of controls
d. acceptable detection risk
a
when numerous property and equipment transactions occur during the year, an auditor who plans
to assess the rmm at a low level usually performs

a. tests of controls and extensive tests of prop and equip balances at the end of the year
b. analytical procedures for current year prop and equip transactions
c. tests of controls and limited tests of current year prop and equip transactions
d. analytical procedures for prop and equip balances at the end of the year
c
A client maintains perpetual inventory records in both quantities and dollars. If the assessed rmm
is high, an auditor will probably

a. apply gross profit tests to ascertain the reasonableness of physical counts

b. increase the extent of tests of controls relevant to the inventory cycle
c. request the client to schedule the physical inventory count at the end of the year
d. insist that the client perform physical counts of inventory items several times during the year
c
The auditor may compensate for a high assessed level of control risk by increasing the

a. level of detection risk

b. extent of tests of controls
c. preliminary judgement about audit risk
d. extent of substantive analytical procedures
d
Regardless of the assessed rmm, an auditor should perform some

a. tests of controls to determine their effectiveness

b. analytical procedures to verify the design of controls
c. substantive procedures to restrict detection risk for significant transaction classes
d. dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control
risk
c
which of the following explanations best describes why an auditor may decide to reduce tests of
details for a particular audit objective?

a. the audit is being performed soon after the bs date

b. audit staff are experienced in performing the planned procedures
c. analytical procedures have revealed no unusual or unexpected results
d. there were many transactions posted to the account during the period
c
The objective of tests of details of transactions performed as substantive procedures is to

a. comply with GAAS

b. Attain assurance about the reliability of the accounting system
c. detect material misstatements at the relevant assertion levels
d. evaluate whether mgmt's policies and procedures operated effectively
c
An auditor most likely would limit substantive audit tests of sales transactions when the rmm is
assessed as low for the existence and occurrence assertions concerning sales transactions and the
auditor has already gathered evidence supporting

a. opening and closing inventory balances

b. cash receipts and accts rec
c. shipping and receiving activities
d. cutoffs of sales and purchases
b
If the objective of a test of details is to detect overstatements of sales, the auditor should compare
transactions in the
a. cash receipts journal with the sales journal
b. sales journal with the cash receipts journal
c. source documents with the accounting records
d. accounting records with the source documents
d
Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor's

a. awareness of the consistency in the application of GAAP between periods

b. evaluation of all matters of continuing accounting significance
c. opinion of an subsequent events occuring since the predecessor's audit report was issued
d. understanding as to the reasons for the change of auditors
d
Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's
predecessor auditor was Post, CPA, who has been terminated. Under these circumstances, which
part should initiate the communications between Hill and Post?

a. Hill, successor auditor

b. Post, predecessor auditor
c. monday's controller or CFO
d. chairman of Monday's board of directors
a
Which of the following factors most likely would cause a CPA to not accept a new audit
engagement?

a. the prospective client has alreasdy completes its physical inventory count
b. the CPA lacks an understanding of the prospective client's operations and industry
c. the CPA is unable to review the predecessor auditor's working papers
d. the prospective client is unwilling to make all financial records avalable to the CPA
d
The scope an nature of an auditor;s contractual obligation to a client is ordinarily set forth in the

a. management representation letter

b. scope paragraph of the auditor's report
c. engagement letter
d. introductory paragraph of the auditor's report
c
Which of the following matters generally is included in an auditor's engagement letter?

a. Management's responsibility for the entity's compliance with laws and regulations
b. the factors to be considered in setting preliminary judgement about materiality
c. management's vicarious liability for illegal acts committed by its employees
d. the auditor's acceptance of the responsibility to search for significant internal control
deficiencies
a
During the initial planning phase of an audit, a CPA most likely would

a. identify specific internal control activities that are likely to prevent fraud
b. evaluate the reasonableness of the client's accounting estimates
c. discuss the timing of the audit procedures with the client's management
d. inquire of the client's attorney as to whether any unrecorded claims are probable of assertion
c
Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?

a. coordinating the assistance of entity personnel in data preparation

b. discussing matters that may affect the audit with audit firm personnel
c. selecting a sample of vendors' invoices for comparison with receiving reports
d. reading the currnt year's interim financial statements
c
The senior auditor responsible for coordinating the field work usually schedules a pre audit
conference with the audit team primarily to

a. give guidance to the staff regarding both technical and personnel aspects of the audit
b. discuss staff suggestions concerning the establishment an maintenance of time budgets
c. establish the need for using the work specialists and internal auditors
d. provide an opportunity to document staff disagreements regarding technical issues
a
The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the

a. timing of inventory observation procedures to be performed

b. evidence to be gathered to provide a sufficient basis for the auditor's opinion
c. procedures to be undertaken to discover litigation, claims, and assessments
d. pending legal matters to be included in the inquiry of the client's attorney
a
In developing a preliminary audit strategy, an auditor should consider

a. whether the allowance for sampling risk exceeds the achieves upper precision limit
b. findings from substantive tests performed at interim dates
c. whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not
disclosed in the financial statements
d. the planned reliance on controls
d
When planning an audit, an auditor should

a. consider whether substantive tests may be reduced based on the results of the internal control
questionnaire
b. make preliminary judgements about materiality levels for audit purposes
c. conclude whether changes in compliance with prescribed controls require a change in the
reliance on controls
d. prepare a preliminary draft of the management representation letter
b
Prior to beginning the field work on a new audit engagement in which a CPA does not possess
expertise in the industry in which the client operates, the CPA should

a. reduce audit risk by lowering the preliminary levels of materiality

b. design special substantive tests to compensate for the lack of industry expertise
c. engage financial experts familiar with the nature of the industry
d. obtain a knowledge of matters that relate to the nature of the entity's business
d
To obtain an understanding of a continuing client's business in planning the audit, an auditor
most likely would

a. perform tests of details of transactions and balances

b. review prior year audit documentation and the permanent file for the client
c. read specialized industry journals
d. reevaluate the client's internal control
b
an auditor obtains knowledge about a new client's business and its industry to

a. make constructive suggestions concerning improvements to the client's internal control

b. develop an attitude of professional skepticism concerning management's fs assertions
c. evaluate whether the aggregatio of known misstatements causes the fs to be materially
misstated as a whole
d. understand the events and transactions that may have an effect on the client's fs
d
A basic premise 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 misstatements in
the fs
c. The study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations
d. plausible relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary
d
The objective of performing analytical procedures in planning an audit is to identify the
existence of

a. unusual transactions and events

b. illegal acts that went undetected because of internal control weaknesses
c. related party transactions
d. recorded transactions that were not properly authorized
a
For audits of fs made in accordance with GAAS, the use of analytical procedures is required to
some extent (yes/no)

in the planning stage

as a substantive test
in the final review stage
yes
no
yes
To be effective, analytical procedures in the in the overall review stage of an audit engagement
should be performed by

a. the staff accountant who performed the substantive auditing procedures

b. the managing partner who has responsibility for all audit engagements at that practice office
c. a manager or partner who has a comprehensive knowledge of the client's business and industry
d. the CPA firm's quality control manager or partner who has responsibility for the firm's peer
review program
c
Analytical procedures used in planning an audit should focus on

a. reducing the scope of tests of controls and substantive tests

b. providing assurance that potential material misstatements will be identified
c. enhancing the auditor's understanding of the client's business
d. assessing the adequacy of the available evidential matter
c
Which of the following statements concerning analytical procedures is true?

a. analytical procedures may be omitted entirely for some fs audits

b. analytical procedures used in planning the audit should not use non financial info
c. analytical procedures usually are effective and efficient for tests of controls
d. analytical procedures alone may provide the appropriate level of assurance for some assertions
d
Which of the following procedures would an auditor most likely perform in planning a fs audit?

a. inquiring of the client's legal counsel concerning pending litigation

b. comparing the fs with anticipated results
c. examining computer generated exception reports to verify the effectiveness of IC
d. searching for unauthorizd transactions that may aid in detecting unrecorded liabilities
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. objectivity of audit committee members
c. square footage of selling space
d. management's plans to repurchase stock
c
Which of the following would not be considered an analytical procedure?

a. estimating payroll expense by multiplying the number of employees by the average hourly
wage rate and the total hours worked
b. projecting an error rate by comparing the results of a statistical sample with the actual
population characteristics
c. computing accounts receivable turnover by dividing credit sales by the average net receivables
d. developing the expected sales based on the sales trend of the prior 5 years
b
An auditor's decision either to apply analytical procedures as substantive tests or to perform tests
of transactions and account balances usually is determined by the

a. availability of data aggregated at a high level

b. relative effectiveness and efficiency of the tests
c. timing of tests performed after the balance sheet date
d. auditor's familiarity with industry trends
b
An auditor;s analytical procedures performed during the overall review stage indicated that the
client's accts rec had doubled since the end of the prior year. However, the allowance for
doubtful accts as a percentage of accounts rec remains the same. Which of the following client
expectations most likely would satisfy the auditor?

a. the client liberalized its credit standards in the current year and sold much more merchandise
to customers with poor credit ratings
b. twice as many accts rec were written off in the prior year as in the current year
c. a greater percentage of accts rec were currently listed in the "more than 90 days overdue"
category than in the prior year
d. the client opened a second retail outlet in the current year and its credit sales approximately
eqaled the older, established outlet
d
Which of the following items tend to be the most predictable for purposes of analytical
procedures applied as substantive tests?

a. relationships involving balance sheet accounts

b. transactions subject to management discretion
c. relationships involving income statement accounts
d. data subject to audit testing in the prior year
c
Which of the following factors would least influence an auditor's consideration of the reliability
of data for purposes of analytical procedures?

a. whether the data were processed in a computer system or in a manual accounting system
b. whether sources within the entity were independent of those who are responsible for the
amount being audited
c. whether the data were subjected to audit testing in the current or prior year
d. whether the data were obtained from independent sources outside the entity or from sources
within the entity
a
The primary objective of analytical procedures used in the final review stage of an audit is to

a. obtain evidence from details testing to corroborate particular assertions

b. identify areas that represent specific risks relevant to to the audit
c. assist the auditor in assessing the validity of the conclusions reached
d. satisfy doubts when questions arise about a client's ability to continue in existence
c
Analytical procedures used in the overall review stage of an audit generally include

a. considering unusual or unexpected account balances that were not previously identified
b. performing tests of transactions to corroborate management's fs assertions
c. gathering evidence concerning account balances that have not changed from the prior year
d. retesting controls that appeared to be ineffective during th assessment of control risk
a
The existence of audit risk is recognized by the statement in the auditor's standard report that the

a. auditor is responsible for expressing an opinion on the fs, which are the responsibility of
management
b. fs are presented fairly, in all material respects, in conformity with GAAP
c. audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the fs
d. auditor obtains reasonable assurance about whether the fs are free of material misstatement
d
The risk that na auditor;s procedures will lead to the ocnclusion that a material misstatement
does not exist in an account balance when, in fact, such misstatement does exist is

a. audit risk
b. inherent risk
c. control risk
d. detection risk
d
As the acceptable level of detection risk decreases, an auditor may

a. reduce substantive testing by relying on the assessments of inherent risk and control risk
b. postpone the planned timing of substantive tests from interim dates to the year-end
c. eliminate the assessed level of inherent risk from consideration as a planning factor
d. lower the assessed level of control risk from a high level to a low level
b
The acceptable level of detection risk is inversely related to the

a. assurance provided by substantive tests

b. risk of misapplying auditing procedures
c. preliminary judgement about materiality levels
d. risk of failing to discover material misstatements
a
Inherent risk and control risk differ from detection risk in that they

a. arise from the misapplication of auditing procedures

b. ay be assessed in either quantitative or nonquantitative terms
c. exist independently of the fs audit
d. can be changed at the auditor's discretion
c
Which of the following audit risk components may be assessed in nonquantitative terms (yes/no)

control risk
detection risk
inherent risk
a
Which of the following would an auditor most likely use in determining the auditor's preliminary
judgement about materiality?

a. the anticipated sample size of the planned substantive tests

b. the entity's annualized interim fs
c. the results of the ic questionnaire
d. the contents of the management representation letter
b
When expressing an unqualified opinion, the auditor who evaluated the audit findings should be
satisfied that the

a. amount of known misstatement is documented in the mgmt rep letter

b. estimate of the total likely misstatement is less that a material amount
c. amount of known misstatement is acknowledged and recorded by the client
d. estimate of the total likely misstatement includes the adjusting entries already recorded by the
client
b
Which of the following is a false statement about materiality?

a. the concept of materiality recognizes that some matters are important for fair presentation of fs
in conformity with GAAP, while other matters are not important
b. an auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the fs
c. materiality judgements are made in light of surrounding circumstances and necessarily involve
both quantitative and qualitative judgements
d. an auditor's consideration of materiality is influenced by the auditor's perception of the needs
of a reasonable person who will rely on the fs
b
Because of the rmm due to fraud, an audit of fs in accordance with GAAS should be planned and
performed with an attitude of
a. objective judgement
b. independent integrity
c. professional skepticism
d. impartial conservatism
c
Which of the following statements describes why a properly designed audit may not detect a
material fraud?

a. audit procedures that are effective for detecting an unintentional misstatement may be
ineffective for an intentional misstatement that is concealed through collusion
b. an audit is designed to provide reasonable assurance of detecting material errors, but there is
no similar responsibility concerning material fraud
c. the factors considered in assessing control risk indicated an increased risk of intentional
misstatements, but only a low risk of unintentional errors in the fs
d. the auditor did not consider factors influencing audit risk for account balances that have
effects pervasive to the fs taken as a whole
a
In every audit, the members of the audit team must discuss the potential for material
misstatementdue to errors or fraud. THis discussion

a. must include all members of the audit team

b. includes brainstorming about how assets can be misappropriated
c. must be deferred until the auditor begins information gathering procedures
d. normally excludes consideration of how fraud might be concealed
b
During the consideration of fraud in an fs audit, the auditor should identify and assess risks that
may result in material misstatements due to fraud. This assessment

a. must state an overall judgement about whether an identified risk is high, medium, or low
b. requires an observation that three fraud conditions are present
c. follows the auditor's determination that the entity's antifraud programs and controls are
operating effectively
d. is based on evaluating whether the entity's antifraud programs and controls have been suitably
designed and implemented
d
Which of the following circumstances most likely would cause an auditor to consider whether
material misstatements exist in an entity's fs?

a. mgmt places little emphasis on meeting earnings projections

b. the BoD makes all major financing decisions
c. significant deficiencies and material weaknesses previously communicated to mgmt are not
corrected
d. transactions selected for testing are not supported by proper documentation
d
Which of the following characteristics most likely will heighten an auditor;s concern about the
rmm due to fraud in an entity's fs?

a. the entity's industry is experiencing declining customer demand

b. employees who handle cash receipts are not bonded
c. bank reconciliations usually include in transit deposits
d. equipment is often sold at a loss before being fully depreciated
a
Mgmt's attitude toward aggressive financial reporting and its emphasis on meeting projected
profit goals most likely would significantly influence an entity's control environment when

a. external policies established by parties outside the entity affect its accounting practices
b. mgmt is dominated by one individual who is also a shareholder
c. internal auditors have direct access to the BoD and the entity;s mgmt
d. the audit committee is active in overseeing the entity;s financial reporting policies
b
Which of the following situations represents a risk factor that related to misstatements arising
from misappropriation of assets?

a. a high turnover of senior mgmt

b. a lack of independent checks
c. a strained relationship between mgmt and the predecessor auditor
d. an inability to generate cash flow from operations
b
Disclosure of fraud to parties other than a client's senior mgmt and its audit committee ordinarily
is not part of an auditor's responsibility. However, to which of the following outside parties may
a duty to disclose fraud exist? (yes/no)

To the SEC when the client reports and auditor change

To a successor auditor when the successor auditor makes appropriate inquiries
To a governmental agency from which the client receives financial assistance
yes
yes
yes
Which of the following must an auditor document wrt/ the consideration of fraud in an fs audit?

a. reasons for not identifying mgmt override as a fraud risk

b. results of the retrospective review of accounting estimates for all years presented in the
comparative statements
c. instances of the auditor's exercise of professional skepticism during the consideration of fraud
d. reasons for not identifying improper revenue recognition as a fraud risk
d
When auditing related party transactions, an auditor placed primary emphasis on

a. confirming the existence of the related parties

b. verifying the valuation of the related aprty transactions
c. evaluating the disclosure of the related party transactions
d. ascertaining the rights and obligations of the related parties
c
An auditor searching for related party transactions should obtain an understanding of each
subsidiary's relationship to the total entity because

a. this may permit the audit of intercompany account balances to be performed as of concurrent
dates
b. intercompany transactions may have been consummated on terms equivalent to arm's length
transactions
c. this may reveal whether particular transactions would have taken place if the parties had not
been related
d. the business structure may be deliberately designed to obscure related party transactions
d
Which of the following procedures most likely could assist an auditor in identifying related party
transactions?

a. performing tests of controls concerning the segregation of duties

b. evaluating the reasonableness of mgmt's accounting estimates
c. reviewing confirmations of compensating balance arrangements
d. scanning the accounting records for recurring transactions
c
Which of the following most likely would indicate the existence of related parties?

a. writing down obsolete inventory just before year end

b. failing to correct previously identified ic deficiencies
c. depending on a single product for the success of the entity
d. borrowing money at an interest rate significantly below the mkt rate
d
Which of the following is true about related party transactions?

a. in the absence of evidence to the contrary, related party transactions should be assumed to be
outside the ordinary course of business
b. an auditor should determine whether a particular transaction woud have occurred if the parties
had not been related
c. an auditor should substantiate that the related party transactions were consummated on terms
equivalent to those that prevail in arm's-length transactions
d. the audit procedures directed toward identifying related party transactions should include
considering whether transactions are occurring but are not being given proper accounting
recognition
d
After determining that a related party transaction has occurred, an auditor should

a. add a separate paragraph to the standard report to explain the transaction

b. perform analytical procedures to verify whether similar transactions occurred, but were not
recorded
c. obtain an understanding of the business purpose of the transaction
d. substantiate that the transaction was consummated on terms equivalen to an arm's length
transaction
c
An auditor most ikely wold modify an unqualified opinion if the entity's fs include a note on
related party transactions

a. disclosing loans to related parties at interest rates significantly below prevailing market rates
b. describing an exchange of real estate for similar property in an nonmonetary related party
transaction
c. stating that a particular related part transaction occurred on terms equivaleent to those that
would have prevailed in an arm's length transaction
d. presenting the dollar volume of related party transactions and the effects of any change from
prior periods in the method of establishing terms
c
The primary objective of procedures performed to obtain an understanding of ic is to provide an
auditor with

a. knowledge necessary for audit planning

b. evidential matter to use in assessing inherent risk
c. a basis for modifying tests of controls
d. an evaluation of the consistency of application of management's policies
a
an auditor uses the knowledge provided by the understanding of ic and assessed level of control
risk primarily to

a. determine whether procedures and records concerning the safeguarding of assets are reliable
b. ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud
are minimized
c. modify the initial assessments of inherent risk and preliminary judgements about materiality
levels
d. determine the nature, timing, and extent of substantive tests for fs assertions
d
In an audit of fs, an auditor's primary consideration regarding an ic is whether the control

a. reflects management's philosophy and operating style

b. affects mgmt's fs assertions
c. provides adequate safeguards over access to assets
d. enhances mgmt's decision making processes
b
An auditor would most likely be concerned with controls that provide reasonable assurance
about the

a. efficiency of mgmt's decision making processes

b. appropriate prices the entity should charge for is products
c. decision to make expenditures for certain advertising activities
d. entity's ability to initiate, auhorize, record, process, and report financial data
d
Which of the following is a mgmt control method that most likely could improve mgmt's ability
to supervise company activities effetively?

a. monitoring compliance with ic requirements imposed by regulatory bodies

b. limiting direct access to assets by physical segregation and protective devices
c. establishing budgets and forecasts to identify variances from expectations
d. supportign employees with the resources necessary to discharge their responsibilities
c
Which of the following are considered control environment factors? (yes/no)

detection risk
commitment to competence
no
yes
Which of the following is not a component of ic?

a. control risk
b. monitoring
c. information and communication
d. the control environment
a
Which of the following factors are included in an entity's control environment? (yes/no)

Audit committee participation

integrity and ethical values
organizational structure
yes
yes
yes
Which of the following components of ic includes development and use of training policies that
communicate prospective roles and responsibilities to employees?

a. monitoring
b. control environment
c. risk assessment
d. control activities
b
Proper segregation of duties reduces the opportunities o allow persons to be in positions both to

a. journalize entries and prepare fs

b. record cash receipts and cash disbursements
c. establish ic and authorize transactions
d. perpetrate and conceal errors and fraudulent acts
d
Proper segregation of functional responsibilities to achieve effective ic calls for separation of
functions of

a. authorization execution and payment

b. authorization recording and custody
c. custody execution and reporting
d. authorization payment and recording
b
IC can provide only reasonable assurance of achieving an entity's control objectives. the
likelihood of achieving those objectives is affected by which limitation inherent to ic?

a. the auditor's primary responsibility is the detection of fraud

b. the BoD is active and independent
c. the cost of IC should not exceed its benefits
d. mgmt monitors ic
c
Which of the following most likely would not be considered an inherent limitation of the
potential effectiveness of an entity's ic?

a. incompatible duties
b. mgmt override
c. faulty judgement
d. collusion among employees
a
An independent auditor is concerned with controls designed to safeguard assets that are relevant
to the reliability of financial reporting. Adequate safeguards over access to and use of assets
means protection from

a. any mgmt decision that would unprofitably use company resources

b. only those losses arising from fraud
c. losses such as those arising from settign a product price too low and subsequently realizing
operating losses from the product's sale
d. losses arising from access by unauthorized persons
d
In obtaining an understanding of controls that are relevant to audit planning, an auditor is
required to obtain knowledge about the

a. design of the controls included in the ic components

b. effectiveness of the controls that have been implemented
c. consistency with which the controls are currently being applied
d. controls related to each principal transaction class and account balance
a
In obtaining an understanding of ic in a fs audit, an auditor is not obligated to

a. determine whether the controls have been implemented

b. perform procedures to understand the design of ic
c. document the understanding of the entity's ic components
d. search for significant deficiencies in the operation of ic
d
As part of understanding ic, an auditor is not required to

a. consider factors that affect the rmm

b. ascertain whether ICs have been implemented
c. identify the types of potential misstatements that can occur
d. obtain knowledge about the operating effectiveness of ic
d
In planning an audit of certain accounts, an auditor may conclude that specific procedures used
to obtain an understanding of an entity's ic need not be included because of the auditor's
judgements about materiality and assessments of

a. control risk
b. detection risk
c. sampling risk
d. inherent risk
d
When obtaining an understanding of an entity's ICs, an auditor should concentrate on their
substance rather than their form because

a. the controls may be operating effectively but may not be documented

b. management may establish appropriate controls but not enforce compliance with them
c. the controls may be so inappropriate that the auditor assesses control risk at the max
d. mgmt may implement controls whose costs exceed their benefits
b
In obtaining an understanding of a manufacturign entity's ic concerning inventory balances, an
auditor most likely would

a. review the entity's descriptions of inventory policies and procedures

b. perform test counts of inventory during the entity's physical count
c. analyze inventory turnover stats to identify slow moving and obsolete items
d. analyze monthly production reports to identify variances and unusual transactions
a
An auditor should obtain sufficient knowledge of an entity's information system relevant to
financial reporting to understand the

a. safeguards used to limit access to computer facilities

b. process used to prepare significant accounting estimates
c. procedures used to assure the proper supervision of staff
d. policies used to detect the concealment of fraud
b
In an audit of fs in accordance with GAAS, an auditor is required to
a. identify specific controls relevant to mgmt's fs assertions
b. perform tests of controls to evaluate the effectiveness of the entity's accounting system
c. determine whether procedures are suitably designed to prevent or detect material misstatement
d. document the auditor's understanding of the entity's ic
d
An auditor's flowchart of a client;s accounting system is a diagrammatic representation that
depicts the auditor's

a. assessment of control risk

b. identification of weaknesses in the system
c. assessment of the control environment's effectiveness
d. understanding of the system
d
An advantage of using systems flowcharts to document information about ic instead of using ic
questionnaires is that systems flowcharts

a. identify ic weaknesses more prominently

b. provide a visual depiction of clients' activities
c. indicate whether controls are operating effectively
d. reduce the need to observe clients' employees performing routine tasks
b
The ultimate purpose of understanding the client and assessing control risk is to contribute to the
auditor's evaluation of the risk that

a. tests of controls may fall to identify procedures relevant to assertions

b. material misstatements may exist in the fs
c. specified controls requiring segregation of duties may be circumvented by collusion
d. entity policies may be inappropriately overridden by senior management
b
control risk should be assessed in terms of

a. specific controls
b. types of potential fraud
c. fs assertions
d. control environment factors
c
The auditor should perform tests of controls when the auditor's risk assessment includes an
expectation of the operating effectiveness of ic or when

a. substantive procedure alone do not provide sufficient appropriate evidence at the relevant
assertion level
b. tests of details and substantive analytical procedures provide sufficient appropriate evidence to
support the assertion being evaluated
c. the auditor is not able to obtain an understanding of ic
d .the owner-manager performs virtually all the functions of ic
a
An auditor may decide to assess control risk at the maximum level for certain assertions because
the auditor believes that

a. controls are unlikely to pertain to the assertions

b. the entity's control components are interrelated
c. sufficient evidential matter to support the assertions is likely to be available
d. more emphasis on tests of controls than substantive tests is warranted
a
Which of the following is a step in an auditor's decision to rely on internal controls?

a. apply analytical procedures to both financial data and nonfinancial info to detect conditions
that may indicate weak controls
b. perform tests of details of transactions and account balances to identify potential errors and
fraud
c. identify specific controls that are likely to detect or prevent material misstatements and
perform tests of controls
d. document that the additional audit effort to perform tests of controls exceeds the potential
reduction in substantive testing
c
Which of the following is not a step in an auditor's decision to assess control risk at a low level?

a. evaluate the effectiveness of the control activity with tests of controls

b. obtain an understanding of the entity's control environment
c. perform tests of details of transactions to detect material misstatements in the fs
d. consider whether controls can have a pervasive effect on fs assertions
c
A nonissuer audit client failed to maintain copies of its procedures manuals and organizational
flowcharts. What should the auditor do in an audit of fs?

a. issue a qualified opinion on the basis of a scope limitation

b. document the auditor's understanding of ICs
c. assess control risk at the maximum level
d. restrict the auditor's responsibility to assess the effectiveness of controls in the audit
engagement letter
c
Which of the following tests of controls most likely will help assure an auditor that goods
shipped are properly billed?

a. scan the sales journal for sequential and unusual entries

b. examine shipping documents for matching sales invoices
c. compare the accts rec ledger to daily sales summaries
d. inspect unused sales invoices for consecutive prenumbering
b
An auditor is least likely to test controls that provide for

a. approval of the purchase and sale of trading securities

b. classification of revenue and expense transactions by product line
c. segregation of the functions of recording disbursements and reconciling the bank acct
d. comparison of receiving reports and vendors' invoices with purchase orders
b
After obtaining an understanding of a client's ic, an auditor may decide not to test the
effectiveness of the computer control procedures. Which of the following is not a valid reason
for choosing to omit tests of controls?

a. the controls duplicate operative controls existing elsewhere in the system

b. there appear to be major weaknesses that would preclude relying on the controls
c. the time and dollar costs of testing exceed the time and dollar savings in substantive testing if
the tests of controls to be operative
d. the operating effectiveness of controls appears to support a reduced assessment of control risk
d
When assessing control risk at a low level, an auditor is required to document the auditor's
(yes/no)

Understanding of the entity's control environment

Basis for concluding that control risk is at a low level
yes
yes
Which of the following procedures is an auditor most likely to include in the planning phase of
an fs audit?

a. obtain an understanding of the entity's risk assessment process

b. identify specific controls designed to prevent fraud
c. evaluate the reasonableness of the entity's accounting estimates
d. perform cutoff tests of the entity's sales and purchases
a
The auditor should perform tests of control when the auditor's risk assessment includes an
expectation

a. of a low level of inherent risk

b. of the operating effectiveness of internal control
c. that the controls are not suitably designed
d. that the controls are not being applied
b
Which of the following procedures most likely will provide an auditor with sufficient evidence
about whether an entity's controls are suitably designed and have been implemented to prevent or
detect material misstatements?

a. inquiring of entity peronnel about the controls

b. performing analytical procedures using data aggregated at a high level
c. voucing a sample of transactions from the general ledger to the general journal
d. observing the entity's personnel applying the controls
d
To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques
including

a. inquiry and analytical procedures

b. re performance and observation
c. comparison and confirmation
d. inspection and verification
b
Which of the following is true related to the auditor's consideration of controls?

a. misstatements detected by the auditor's substantive procedures should be considered when

assessing the effectiveness of related controls
b. the absence of misstatements detected by an auditor's substantive procedures should be
considered evidence that controls related to the relevant assertion being tested are effective
c. a material misstatement detected by the auditor, but not detected by the entity, should be
considered a material weakness in internal control
d. the auditor should consider testing and documenting the efficiency of the entity's controls
related to relevant assertions
a
An auditor generally tests the segregation of duties related to inventory by

a. personal inquiry and observation

b. test counts and cutoff procedures
c. analytical procedures and invoice recomputation
d. document inspection and reconciliation
a
Which of the following procedures concerning accts rec is an auditor most likely to perform to
obtain evidential matter in support of a low assessed level of control risk?

a. observing an entity's employee prepare the schedule of past due accts rec
b. sending confirmation requests to an entity's principal customers to verify the existence of accts
rec
c. inspecting an entity analysis of accts rec for unusual balances
d. comparing an entity;s uncollectible accounts'expense with actual uncollectible accts rec.
a
An auditor assesses control risk because it

a. is relevant to the auditor;s understanding of the control environment

b. provides assurance that the auditor's materiality levels are appropriate
c. indicates to the auditor where inherent risk may be the greatest
d. affects the level of detection risk that the auditor may accept
d
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of control risk 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
a. increase inherent risk
b. increase materiality levels
c. decrease inherent risk
d. decrease detection risk
d
An auditor uses the knowledge provided by the understanding of IC and the final assessed level
of control risk primarily to determine the nature, timing, and extent of the

a. attribute tests
b. compliance tests
c. tests of controls
d. substantive tests
d
The objective of tests of details of transactions performed as tests of controls is to

a. monitor the design and use of entity documents such as prenumbered shipping forms
b. determine whether ICs have been implemented
c. detect material misstatements in the acct balances of the fs
d. evaluate whether ICs operated effectively
d
When an auditor increases the planned assessed level of control risk because certain controls
were determined to be ineffective, the auditor will most likely increase the

a. extent of tests of details

b. level of inherent risk
c. extent of tests of controls
d. level of detection risk
a
When numerous property and equipment transactions occur during the year, an auditor who
plans to assess control risk at a low level usually performs

a. tests of controls and extensive tests of prop and equip balances at the end of the year
b. analytical procedures for current year property and equipment transactions
c. tests of controls and limited tests of current year property and equipment transactions
d. analytical procedures for property and equipment balances at the end of the year
c
An auditor may compensate for a high assessed level of control risk by increasing the

a. level of detection risk

b. extent of tests of controls
c. preliminary judgement about audit risk
d. extent of substantive analytical procedures
d
Regardless of the assessed rmm, an auditor would perform some

a. tests of controls to determine their effectiveness

b. analytical procedures to verify the design of controls
c. substantive tests to restrict detection risk for significant transaction classes
d. dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control
risk
c
In a computerized payroll system environment, an auditor is least likely to use test data to test
controls related to

a. missing employee numbers

b. proper approval of overtime by supervisors
c. time tickets with invalid job numbers
d. agreement of hours per clock cards with hours on time tickets
b
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?

a. inspect the policy manual establishing this control activity

b. ask the chief technology officer about known problems
c. observe whether the data center is monitored
d. obtain a list of current data center employees
c
To obtain evidence that online access controls properly functioning, an auditor most likely will

a. create checkpoints at periodic intervals after live data processing to test for unauthorized use
of the system
b. examine the transaction log to discover whether any transactions were lost or entered twice
because of a system malfunction
c. enter invalid identification numbers or passwords to ascertain whether the system rejects them
d. vouch a random sample of processed transactions to assure proper authorization
c
When an accounting application is processed by a computer, an auditor cannot verify the reliable
operation of automated controls by

a. manually comparing detail transaction files used by an edit program with the program's
generated error listings to determine that errors were properly identified by the edit program
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 reperforming, as of a moment in time, the processing of input data and comparing
the simulated results with the actual results
d. periodically submitting auditor-prepared test data to the same computer process and evaluating
results
c
To obtain evidence that user identification and password controls are functioning as designed, an
auditor should

a. review the online transaction log to ascertain whether employees using passwords have access
to data files and computer programs
b. examine a sample of password holders and access authority to determine whether they have
access authority incompatible with their other responsibilities
c. extract a random sample of processed transactions and ensure that transactions are
appropriately authorized
d. observe the file librarian's activities to discover whether other systems personnel are permitted
to operate computer equipment without restriction
b
An auditor most likely should test for the presence of unauthorized computer program changes
by running a

a. program with test data

b. check digit verification program
c. source code comparison program
d. program that computes control totals
c
Which of the following statements is not true of the test data approach to testing an accounting
system?

a. test data are processed by the client;s computer programs under the auditor's control
b. the test data need consist of only those valid and invalid conditions that interest the auditor
c. only one transaction of each type need be tested
d. the test data must consist of all possible valid and invalid conditions
d
When an auditor tests a computerized accounting system, which of the following is true of the
test data approach?

a. several transaction of each type must be tested

b. test data are processed by the client's computer programs under the auditor's control
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 client
b
In parallel simulation, actual client data are processed using an auditor's software program. An
advantage of using parallel simulation, instead of performing tests of controls without a
computer is

a. the test includes all types of transaction errors and exceptions that may be encountered
b. the client's computer personnel do not know when the data are being tested
c. there is no risk of creating potentially material errors in the client's data
d. the size of the sample can be greatly expanded at relatively little additional cost