End of Chapter 6 to 10
1. Which of the following best describes the reason why an independent auditor reports on financial statements?

A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.
) 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
Poorly designed internal controls may be in existence

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

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

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

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

4. 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?

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

5. 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

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

6. 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?

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

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

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

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

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

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

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

10. 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.
To be reliable, audit evidence should be convincing rather than merely persuasive
Reliability of audit evidence refers to the amount of corroborative evidence obtained
Effective internal control provides more assurance about the reliability of audit evidence.

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

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

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

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

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

copies of those client records examined by the auditor during the course of the engagement
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.
auditing procedures followed and the testing performed in obtaining evidential matter.

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

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

15. 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 to provide the client with copies of the audit programs to be used during the audit
Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information
Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing

16. 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

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

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

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

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

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

Yes Yes
Yes No
No Yes
No No

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

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

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

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

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

23. 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 No
No Yes Yes
Yes No No

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

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

25. 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 cashier began lapping accounts receivable in 2007.
Because of worsening economic conditions, the 2007 provision for uncollectible accounts was inadequate.
The company changed its capitalization policy for small tools in 2007.

26. 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.

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

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

28. 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


29. 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

comparative analysis.
reasonable assurance.
relative risk.

30. 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?

Auditor judgment
Inherent risk
Reasonable assurance

31. 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.
Intercompany transactions are usually subject to less detailed scrutiny than arm’s-length transactions with outside parties.
Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility.
The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts

32. 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.

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

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

34. 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

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

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

employment of competent personnel provides assurance that management’s control objectives will be achieved
establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
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

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

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

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

all controls related to the objectives of reliable financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations.
controls solely related to the reliability of financial reporting objective.
controls related to the compliance with laws and regulations 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.

38. 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.

39. 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

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.
employees in the normal course of performing their assigned functions.
the chief financial officer when reviewing interim financial statements.

40. 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
exists because a necessary control is missing or not properly designed.
reduces the efficiency and effectiveness of the entity’s operations.

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

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.
may still be able to issue an unqualified opinion on internal control over financial reporting.
must issue an adverse opinion on internal control over financial reporting.

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

must communicate to management all deficiencies identified.
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 issue an adverse opinion on the financial statements.

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

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.
possibility that the nature and extent of substantive tests may be reduced.

44. An auditor uses assessed control risk to

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

45. 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.
increase materiality levels.
decrease substantive testing.
decrease planned detection risk.

46. 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.
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
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.

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