End of Chapter 1 to 15 more random
1. In comparison to the external auditor, an internal auditor is more likely to be concerned with

internal control.
internal administrative control.
cost accounting procedures.
operational auditing.

2. Which of the following situations has the best chance of being detected when a CPA compares 2007 revenues and expenses with the prior year and investigates all changes exceeding a fixed percent?

An increase in property tax rates has not been recognized in the company’s 2007 accrual.
The company changed its capitalization policy for small tools in 2007.
Because of worsening economic conditions, the 2007 provision for uncollectible accounts was inadequate.
The cashier began lapping accounts receivable in 2007.

3. Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards should be performed with an attitude of

impartial conservatism.
professional skepticism.
objective judgment.
independent integrity.

4. Which one of the following statements is correct concerning the concept of materiality?

Materiality is determined by reference to guidelines established by the AICPA
Materiality depends only on the dollar amount of an item relative to other items in the financial statements
Materiality depends on the nature of an item rather than the dollar amount.
Materiality is a matter of professional judgment.

5. In performing an attestation engagement, a CPA typically

provides management consulting advice.
expresses a conclusion about an assertion
supplies litigation support services.
assesses control risk at a low level.

6. Which of the following statements about tests of controls is most accurate?

Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests.
Tests of controls include observations of the proper segregation of duties.
Tests of controls provide direct evidence about monetary misstatements in transactions.
Tests of controls ordinarily should be performed as of the balance sheet date or during the period subsequent to that date.

7. Which of the following most accurately describe the auditor’s responsibilities for reporting on internal control required by PCAOB Standard 2? The auditor tested

controls solely related to the reliability of financial reporting objective.
controls related to the reliability of financial reporting objective in addition to those controls related to operations and compliance with laws and regulations objectives that could materially affect financial reporting.
all controls related to the objectives of reliable financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations.
controls related to the compliance with laws and regulations objective

8. Which of the following is least likely to be comparable between similar corporations in the same industry line of business?

Return on assets before interest and taxes
Accounts receivable turnover
Earnings per share
Gross profit percent

9. Which of the following is ordinarily considered a test of control audit procedure?

Examining signatures on checks.
Preparing reconciliations of bank accounts as of the balance sheet date.
Sending confirmation letters to banks.
Counting and listing cash on hand.

10. When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(an)

qualified opinion only
adverse opinion
unqualified opinion
unqualified opinion with explanatory paragraph.

11. The most reliable type of audit evidence that an auditor can obtain is

confirmations received directly from third parties.
external documents.
calculations by the auditor from company records.
physical examination by the auditor.

12. Which of the following internal controls will most likely reduce write-offs of uncollectible accounts receivable?

Employees involved in the credit-granting function are separated from the sales function.
Shipping documents and sales invoices are matched by an employee who does not have the authority to write off uncollectible accounts receivable.
Employees responsible for authorizing sales and write-offs of uncollectible accounts receivable are denied access to cash.
Accounts receivable master file records are reconciled to the control account by an employee who is not involved in the credit-granting function.

13. The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on

statistical analysis.
substantive tests.
tests of controls.
internal control.

14. Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an automated application control that does a limit check for each check request is to be subjected to the auditor’s test data approach, the sample should include

one transaction.
a number of test items determined by the auditor to be sufficient under the circumstances.
a number of test items determined by the auditor’s reference to the appropriate sampling tables.
approximately 1,000 test items.

15. Which of the following best describes the operational audit?

It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.
It attempts and is designed to verify the fair presentation of a company's results of operations.
It concentrates on implementing financial and accounting control in a newly organized company.
) It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company

16. Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?

Unusual discrepancies exist between the entity’s records and confirmation replies.
Clerical errors are listed on a computer-generated exception report.
Property and equipment are usually sold at a loss before being fully depreciated
Monthly bank reconciliations usually include several in-transit items.

17. Major, Major, & Sharpe, CPAs, are the auditors of MacLain Technologies. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements were revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement that included the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if

the misstatements were caused primarily by MacLain
it can prove due diligence in the audit of the financial statements of MacLain
it can be shown that at least some of the investors did notactually read the audited financial statements.
MacLain had expressly assumed any liability in connection with the public offering

18. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.
The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements

19. Which of the following client IT systems generally can be audited without examining or directly testing the computer programs of the system?

A system that affects a number of essential master files and produces limited output
A system that does relatively complicated processing and produces little detailed output
A system that updates a few essential master files and produces no printed output other than final balances
A system that performs relatively uncomplicated processes and produces detailed output

20. A conceptually logical approach to the auditor’s evaluation of internal control consists of the following four steps: I. Determining the internal controls that should prevent or detect errors and fraud. II. Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. III. Determining whether the necessary procedures are prescribed and are being followed satisfactorily. IV. Considering the types of errors and fraud that can occur. What should be the order in which these four steps are performed?

I, II, III, and IV
I, III, IV, and II
III, IV, I, and II
IV, I, III, and II

21. Which of the following best describes what is meant by generally accepted auditing standards?

Audit objectives generally determined on audit engagements
Measures of the quality of the auditor's performance
Acts to be performed by the auditor
Procedures to be used to gather evidence to support financial statemen

22. Based on 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 could

increase inherent risk.
increase materiality levels.
decrease detection risk.
decrease substantive testing.

23. Sharp, CPA, was engaged by Peters & Sons, a partnership, to give an opinion on the financial statements that were to be submitted to several prospective partners as part of a planned expansion of the firm. Sharp’s fee was fixed on a per diem basis. After a period of intensive work, Sharp completed about half of the necessary field work. Then, because of unanticipated demands on his time by other clients, Sharp was forced to abandon the work. The planned expansion of the firm failed to materialize because the prospective partners lost interest when the audit report was not promptly available. Sharp offered to complete the task at a later date. This offer was refused. Peters & Sons suffered damages of $400,000 as a result. Under the circumstances, what is the probable outcome of a lawsuit between Sharp and Peters & Sons?

Peters & Sons will recover both punitive damages and damages for breach of contract
Neither Sharp nor Peters & Sons will recover against the other
Peters & Sons will recover damages for breach of contract.
Sharp will be compensated for the reasonable value of the services actually performed

24. An auditor of a public company identifies a material weakness in internal control. The auditor

may still be able to issue an unqualified opinion on internal control over financial reporting.
will be unable to issue an unqualified opinion on the financial statements.
must issue a qualified or disclaimer of opinion on internal control over financial reporting.
must issue an adverse opinion on internal control over financial reporting.

25. A material weakness in internal control represents a control deficiency that

more than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably
results in more than a remote likelihood that internal control will not prevent or detect material financial statement misstatements
reduces the efficiency and effectiveness of the entity’s operations.
exists because a necessary control is missing or not properly designed.

26. The 1136 Tenants case was important chiefly because of its emphasis on the legal liability of the CPA when associated with

letters for underwriters.
unaudited financial statements
an audit resulting in a disclaimer of opinion
an SEC engagement

27. 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?

Reasonable assurance
Inherent risk
Auditor judgment

28. What is the independent auditor’s principal purpose for obtaining an understanding of internal control and assessing control risk in a financial statement audit?

To comply with generally accepted accounting principles
To obtain a measure of assurance of management’s efficiency
To maintain a state of independence in mental attitude during the audit
To determine the nature, timing, and extent of subsequent audit work.

29. Which of the following circumstances is most likely to cause an auditor to consider whether material misstatements due to fraud exist in an entity’s financial statements?

The board of directors oversees the financial reporting process and internal control.
Management places little emphasis on meeting earnings projections of external parties.
Transactions selected for testing are not supported by proper documentation.
Significant deficiencies in internal control previously communicated to management have been corrected

30. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is

initial assessment of control risk, tests of controls, and substantive tests.
tests of controls, initial assessment of control risk, and substantive tests.
substantive tests, initial assessment of control risk, and tests of controls
initial assessment of control risk, substantive tests, and tests of controls.

31. Which of the following presumptions is correct about the reliability of audit evidence?

Information obtained indirectly from outside sources is the most reliable audit evidence.
Reliability of audit evidence refers to the amount of corroborative evidence obtained
Effective internal control provides more assurance about the reliability of audit evidence.
To be reliable, audit evidence should be convincing rather than merely persuasive

32. If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the

portion of the financial statements audited by the other auditor
nature of the inquiry into the other auditor's professional standing and extent of the review of the other auditor's work.
name of the other auditor.
reasons for being unwilling to assume responsibility for the other auditor's work.

33. The major reason an independent auditor gathers audit evidence is to

evaluate management.
detect fraud.
form an opinion on the financial statements
assess control risk.

34. An auditor strives to achieve independence in appearance to

become independent in fact.
maintain an unbiased mental attitude.
maintain public confidence in the profession.
comply with the generally accepted auditing standards of field work

35. Which of the following is true of generalized audit software programs?

They each have their own characteristics that the auditor must carefully consider before using in a given audit situation.
They enable the auditor to do all manual tests of control procedures less expensively.
They can be used on any computer without modification.
They can be used only in auditing online computer systems.

36. Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor?

Overstating the accounts receivable subsidiary records.
Overstating the accounts receivable control account.
Understating the sales journal.
Understating the cash receipts journal.

37. What is the meaning of the generally accepted auditing standard that requires the auditor be independent?

The auditor’s sole obligation is to third parties.
The auditor must be without bias with respect to the client under audit.
The auditor must adopt a critical attitude during the audit
The auditor may have a direct ownership interest in the client’s business if it is not material

38. Which of the following statements about tests of controls is incorrect? Tests of controls

must be done in every audit of a public company’s financial statements.
allow a reduction in the extent of substantive testing, as long as the results of the tests of controls are equal to or better than what the auditor expects.
provide persuasive evidence that a material misstatement exists when the auditor determines that the control is not being consistently applied
are often based on the same types of audit techniques used to gain an understanding of internal controls, except the extent of testing is generally greater when testing controls

39. Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the

auditing procedures followed and the testing performed in obtaining evidential matter.
evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit
auditor’s comments concerning the efficiency and competence of client management personnel.
copies of those client records examined by the auditor during the course of the engagement

40. Which of the following statements is not correct about materiality?

The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, whereas other matters are not important.
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 financial statements
Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
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 financial statements.

41. In general, an internal control deficiency may be defined as a condition under which misstatements would ordinarily not be detected within a timely period by

employees in the normal course of performing their assigned functions.
an auditor during the typical obtaining of an understanding of internal control and assessment of control risk.
a controller when reconciling accounts in the general ledger.
the chief financial officer when reviewing interim financial statements.

42. An auditor will use the test data approach to obtain certain assurances with respect to the

degree of data entry accuracy.
input data.
procedures contained within the program.
machine capacity.

43. As a result of analytical procedures, the auditor determines that the gross profit percentage has increased from 30 percent in the preceding year to 40 percent in the current year. The auditor should

require footnote disclosure.
consider the possibility of fraud or other misstatements in the financial state ments.
evaluate management’s performance in causing the improvement in gross profit.
document management’s plans for maintaining this trend.

44. What is the general character of the three generally accepted auditing standards classified as standards of field work?

The criteria of audit planning and evidence gathering
The competence, independence, and professional care of persons performing the audit
Criteria for the content of the auditor's report on financial statements and related foot note disclosures.
The need to maintain an independence in mental attitude in all matters pertaining to the audit

45. Analytical procedures used in planning an audit should focus on identifying

the various assertions that are embodied in the financial statements.
areas that may represent specific risks relevant to the audit.
the predictability of financial data from individual transactions.
material weaknesses of internal control.

46. A manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum for the return was not prepared until after the auditors had completed their field work. The returned merchandise was included in the physical inventory.

Credit memoranda are pre-numbered and all numbers are accounted for
Aged trial balance of accounts receivable is prepared
A reconciliation of the trial balance of customers’ accounts with the general ledger control is prepared periodically.
Receiving reports are prepared for all materials received and such reports are accounted for on a regular basis.

47. Which of the following best describes the reason why an independent auditor reports on financial statements?

) Different interests may exist between the company preparing the statements and the persons using the statements
A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work
A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.
Poorly designed internal controls may be in existence

48. Which of the following statements about a combined report on the financial state - ments and internal control over financial reporting is correct?

The auditor's report on internal control is for the same period as the financial statements.
The introductory, scope, and opinion paragraphs are unchanged from a report for an audit of the financial statements only.
GAAP is the framework used to evaluate internal control.
The report includes additional paragraphs for the definition and limitations of internal control.

49. A sales invoice for $5,200 was computed correctly but, by mistake, was key-entered as $2,500 to the sales journal and to the accounts receivable master file. The customer remitted only $2,500, the amount on his monthly statement.

Sales invoice numbers, prices, discounts, extensions, and footings are independently checked.
The customers’ monthly statements are verified and mailed by a responsible person other than the bookkeeper who prepared them.
Unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the accounts receivable able function.
Prelistings and predetermined totals are used to control postings.

50. A successor would most likely make specific inquiries of the predecessor auditor regarding

) the uncertainty inherent in applying sampling procedures.
specialized accounting principles of the client’s industry.
the competency of the client’s internal audit staff
disagreements with management as to auditing procedures

51. When a customer fails to include a remittance advice with a payment, it is common for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?

Credit manager
Accounts receivable clerk
Sales manager

52. Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, as well as

internal control.
adherence to specific rules or procedures

53. If a CPA firm is being sued for common-law fraud by a third party based on materially false financial statements, which of the following is the best defense the accountants can assert?

Lack of privity.
Nonnegligent performance.
A disclaimer contained in the engagement letter.
A disclaimer contained in the engagement letter.

54. When a nonpublic company auditor’s tests of controls identify deficiencies in internal control over financial reporting, the auditor

must communicate both significant deficiencies and material weaknesses to those charged with governance
may communicate orally or in writing to the board all significant deficiencies and material weaknesses identified.
must communicate to management all deficiencies identified.
must issue an adverse opinion on the financial statements.

55. When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether

the engagement should be accepted.
in the predecessor’s opinion internal control of the company has been satisfactory.
the predecessor’s work should be used
the company follows the policy of rotating its auditors.

56. What assurance does the auditor provide that errors, fraud, and direct-effect illegal acts that are material to the financial statements will be detected? Errors Fraud Direct-Effect Illegal Acts

Reasonable Reasonable Reasonable
Limited Negative Limited
Limited Limited Reasonable
Reasonable Limited Limited

57. When an auditor issues an unqualified opinion about internal control over financial reporting for a public company, the auditor has obtained reasonable assurance that

internal control over financial reporting is operating effectively.
the likelihood of fraud is minimal
there are no control deficiencies.
the financial statements are fairly presented in all material respects

58. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity’s income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate


59. Which of the following best describes the element of inherent risk that underlies the application of generally accepted auditing standards, specifically the standards of field work and reporting?

Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.
Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility.
Intercompany transactions are usually subject to less detailed scrutiny than arm’s-length transactions with outside parties.
The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts

60. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

Computations made by the auditor
Bank statement obtained from the client
Vendor’s invoice
Pre-numbered sales invoices

61. The general group of the generally accepted auditing standards includes a requirement that

due professional care be exercised by the audito
field work be adequately planned and supervised.
the auditor's report state whether or not the financial statements conform to generally accepted accounting principles.
informative disclosures in the financial statements be reasonably adequate.

62. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

It is difficult to prepare financial statements that fairly present a company's financial position, operations, and cash flows without the expertise of an independent auditor.
It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship of the affairs of the business.

63. Which of the following internal controls will best 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 sequentially numbered tags.
Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records
Have an independent auditing firm examine and report on management’s assertion about the design and operating effectiveness of the control activities relevant to inventory
Require an authorized officer’s signature on all requisitions for the more valuable items

64. As general IT controls weaken, the auditor is most likely to

reduce testing of automated application controls done by the computer
ignore obtaining knowledge about the design of general IT controls and whether they have been implemented.
expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit.
increase testing of general IT controls to conclude whether they are operating effectively.

65. In a common law action against an accountant, lack of privity is a viable defense if the plaintiff

is the accountant’s client.
is the client’s creditor who sues the accountant for negligence
can prove the presence of gross negligence that amounts to a reckless disregard for the truth.
bases the action upon fraud.

66. On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will

increase inherent risk.
decrease planned detection risk.
increase materiality levels.
decrease substantive testing.

67. The introductory paragraph of an auditor's report contains the following: "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 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

are an improper form of reporting.
indicate a division of responsibility
require a departure from an unqualified opinion
assume responsibility for the other auditor.

68. The date of the CPA's opinion on the financial statements of the client should be the date of the

closing of the client's books
completion of all important audit procedures
receipt of the client's letter of representation
submission of the report to the client.

69. Which of the following is an example of an application control?

Systems programmers are restricted from doing applications programming functions.
The client uses access security software to limit access to each of the accounting applications.
Employees are assigned a user ID and password that must be changed every quarter.
) The sales system automatically computes the total sale amount and posts the total to the sales journal master file.

70. The concept of materiality will be least important to the CPA in determining the

effects of the CPA’s direct financial interest in a client upon the CPA’s independence.
effects of audit exceptions upon the opinion.
scope of the audit of specific accounts.
specific transactions that should be reviewed.

71. Which of the following will be least likely to be included in an auditor’s tests of controls?


72. To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing?

Tests of trends and ratios
Substantive tests of transactions
Tests of details of balances
Tests of controls

73. The opinion paragraph of a CPA's report states: "In our opinion, except for the effects of not capitalizing certain lease obligations, as discussed in the preceding paragraph, the financial statements present fairly," in all material respects, … This paragraph expresses a(an)

Qualified opinion
Unqualified opinion.
Unqualified opinion with explanatory paragraph
Adverse opinion

74. Inherent risk and control risk differ from planned detection risk in that they

can be changed at the auditor’s discretion.
arise from the misapplication of auditing procedures
may be assessed in either quantitative or non-quantitative terms
exist independently of the financial statement audit

75. For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent In the As a In the Planning Stage Substantive Test Completion Stage

Yes No Yes
No Yes Yes
Yes No No
No Yes No

76. Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities, Inc. to the SEC. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. The customers have instituted legal action against Donalds based on Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934. Which of the following is likely to be Donalds’s best defense?

Their engagement letter specifically disclaimed any liability to any party that resulted from Markum’s fraudulent conduct.
They were not in privity of contract with the creditors
They did not intentionally certify false financial statements
Section 10b does not apply to them

77. A CPA will issue an adverse auditor's opinion if

the scope of the audit is limited by the client
major uncertainties exist concerning the company's future
the exception to the fairness of presentation is so material that an "except for" opinion is not justified
the auditor did not perform sufficient auditing procedures to form an opinion on the financial statements taken as a whole

78. Under the 1933 Securities Act, which of the following must be proven by the purchaser of the security? Reliance on the Fraud by Financial Statements The CPA

Yes Yes
No Yes
No No
Yes No

79. The permanent file of an auditor’s working papers most likely would include copies of the

bank statements.
attorney’s letters.
debt agreements.
lead schedule.

80. An IT system is designed to ensure that management possesses the information it needs to carry out its functions through the integrated actions of

production budgeting and sales forecasting activities.
data-gathering, analysis, and reporting functions.
a computer-based information retrieval and decision-making system.
statistical and analytical procedures functions.

81. In assessing whether to accept a client for an audit engagement, a CPA should consider Client Business Risk Acceptable Audit Risk

Yes Yes
No No
Yes No
No Yes

82. Independent auditing can best be described as

a branch of accounting.
a professional activity that measures and communicates financial and business data
a regulatory function that prevents the issuance of improper financial information.
a discipline that attests to the results of accounting and other functional operations and data

83. Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
Employees involved in the credit-granting function are separated from the sales function.
Shipping documents and sales invoices are matched by an employee who does not have the authority to write off bad debts.
Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.

84. An auditor will most likely disclaim an opinion because of

inadequate disclosure of material information
the client's failure to present supplementary information required by the Financial Accounting Standards Board (FASB).
the qualification of an opinion by the other auditor of a subsidiary when responsibility has been divided
a client-imposed scope limitation.

85. The first general standard, which states in part that the audit must be performed by a person or persons having adequate technical training, requires that an auditor have

ability in the planning and supervision of the audit work.
knowledge in the areas of financial accounting
education and experience in the field of auditing.
proficiency in business and financial matters

86. When using the work of a specialist, the auditor may identify and refer to the specialist in the auditor’s report if the

auditor wishes to indicate a division of responsibility.
specialist’s work provides the auditor greater assurance of reliability
specialist is not independent of the client
auditor expresses a qualified opinion as a result of the specialist’s findings.

87. An auditor uses assessed control risk to

identify transactions and account balances where inherent risk is at the maximum
indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
evaluate the effectiveness of the entity’s internal controls.
determine the acceptable level of detection risk for financial statement assertions.

88. Which of the following characteristics is most likely to heighten an auditor’s concern about the risk of material misstatements due to fraud in an entity’s financial statements?

The entity’s industry is experiencing declining customer demand.
Internal auditors have direct access to the board of directors and the entity’s management.
Employees who handle cash receipts are not bonded
The board of directors is active in overseeing the entity’s financial reporting policies.

89. Which of the following professional services is an attestation engagement?

The compilation of financial statements from a client's financial records.
A consulting service engagement to provide computer-processing advice to a client.
An income tax engagement to prepare federal and state tax returns. (4) The compilation of financial statements from a client's financial records
An engagement to report on compliance with statutory requirements

90. An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that

employees have stolen inventory just before year-end.
the client recently tightened its credit-granting policies.
fictitious credit sales have been recorded during the year.
an employee has been lapping receivables in both years.

91. Which of the following will most likely indicate the existence of related parties?

An unexplained increase in gross margin.
Failing to correct weaknesses in the client’s internal control structure.
Writing down obsolete inventory prior to year end.
Borrowing money at a rate significantly below the market rate

92. Which of the following is an effective audit planning procedure that helps prevent misunderstandings and inefficient use of audit personnel?

Arrange to make copies, for inclusion in the audit files, of those client supporting documents examined by the auditor.
Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information
Arrange to provide the client with copies of the audit programs to be used during the audit
Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing

93. If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first

make the investigation necessary to determine whether fraud has actually occurred.
request that management investigate to determine whether fraud has actually occurred
consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management.
consider whether fraud was the result of a failure by employees to comply with existing controls.

94. Which of the following types of documentary evidence should the auditor consider to be the most reliable?

Confirmation of an account payable balance mailed by and returned directly to the auditor
An audit schedule prepared by the client’s controller and reviewed by the client’s treasurer
A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
A check, issued by the company and bearing the payee’s endorsement, that is included with the bank statements mailed directly to the auditor

95. When auditing related party transactions, an auditor places primary emphasis on

confirming the existence of the related parties.
verifying the valuation of related party transaction
evaluating the disclosure of the related party transactions.
ascertaining the rights and obligations of the related parties

96. An independent audit aids in the communication of economic data because the audit

) confirms the accuracy of management’s financial representations
assures the readers of financial statements that any fraudulent activity has been corrected.
guarantees that financial data are fairly presented.
lends credibility to the financial statements

97. The primary objective of performing tests of controls is to obtain

sufficient, appropriate audit evidence to afford a reasonable basis for the auditor’s opinion, without the need for additional evidence.
a reasonable degree of assurance that the client’s internal controls are operating effectively on a consistent basis throughout the year.
knowledge and understanding of the client’s prescribed procedures and methods.
assurances that informative disclosures in the financial statements are reasonably adequate.

98. The independent audit is important to readers of financial statements because it

determines the future stewardship of the management of the company whose financial statements are audited.
measures and communicates financial and business data included in financial statements.
reports on the accuracy of all information in the financial statements
involves the objective examination of and reporting on management-prepared statements.

99. When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes that the

cost of internal control should not exceed the benefits expected to be derived there from.
separation of incompatible functions is necessary to ascertain that the internal control is effective
establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
employment of competent personnel provides assurance that management’s control objectives will be achieved

100. Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide

the results of internal examinations of financial and accounting matters to a company's top-level management
a measure of management performance in meeting organizational goals.
a means of assurance that internal accounting controls are functioning as planned.
aid to the independent auditor, who is conducting the audit of the financial statements.

101. Edison Corporation has a few large accounts receivable that total $1,400,000. Victor Corporation has a great number of small accounts receivable that also total $1,400,000. The importance of a misstatement in any one account is therefore greater for Edison than for Victor. This is an example of the auditor’s concept of

reasonable assurance.
comparative analysis.
relative risk.

102. During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be

evidence supporting financial statements.
a client-owned record of conclusions reached by the auditors who performed the engagement
) a record to be used as a basis for the following year’s engagement
support for the auditor’s representations as to compliance with auditing standards

103. An independent auditor has the responsibility to design the audit to provide reason able assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards?

Clerical mistakes in the accounting data underlying the financial statements.
Misappropriation of an asset or groups of assets.
Misinterpretation of facts that existed when the financial statements were prepared
Mistakes in the application of accounting principles.

104. An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)

qualified opinion with explanatory paragraph regarding consistency
unqualified opinion with explanatory paragraph
qualified opinion
unqualified opinion

105. Which of the following is not a primary purpose of audit documentation?

To coordinate the audit
To support the financial statements.
To assist in preparation of the audit report.
To provide evidence of the audit work performed

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

possibility that the nature and extent of substantive tests may be reduced.
factors that raise doubts about the auditability of the financial statements
operating effectiveness of internal controls.
risk that material misstatements exist in the financial statements.

107. Which of the following conditions will not normally cause the auditor to question whether material misstatements exist?

Bookkeeping errors are listed on an IT-generated error listing.
Differences exist between control accounts and supporting master files.
Differences are disclosed by confirmations.
Transactions are not supported by proper documentation.

108. Analytical procedures may be classified as being primarily

tests of details of balances.
tests of controls.
substantive tests.
tests of ratios.

109. In assessing whether to accept a client for an audit engagement, a CPA should consider Client Business Risk Acceptable Audit Risk

Yes No
No Yes
No No
Yes Yes

110. A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that

recorded cash receipts result from legitimate transactions.
cash receipts recorded in the cash receipts journal are reasonable.
cash receipts are correctly classified.
existing cash receipts are recorded.

111. The auditor looks for an indication on duplicate sales invoices to see whether the invoices have been verified. This is an example of

both a test of control and a substantive test of transactions.
a test of details of balances.
a substantive test of transactions.
a test of control.

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