Auditing Exam 2

An auditor's primary consideration regarding an entity's internal controls is whether the policies and procedures A. Affect the financial statement assertions. B. Prevent management override. C. Relate to the control environment. D. Reflect management's philosophy and operating style.

A. Affect the financial statement assertions.

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders? A) Billing. B) Shipping. C) Credit. D) Sales Order

A) Billing.

Which of the following would be an improper technique when using monetary-unit statistical sampling in an audit of accounts receivable? A) Combining negative and positive dollar misstatements in the appraisal of a sample. B) Using a sampling technique in which the same account balance could be selected more than once. C) Selecting a random starting point and then sampling every nth dollar. D) Defining the sampling unit in the population as an individual dollar and not as an individual account balance

A) Combining negative and positive dollar misstatements in the appraisal of a sample.

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date? A) Compare shipping documents with sales records. B) Apply gross profit rates to inventory disposed of during the period. C) Trace payments received subsequent to the balance sheet date. D) Send accounts receivable confirmation requests

A) Compare shipping documents with sales records.

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger? A) Daily sales summaries are compared to daily postings to the accounts receivable ledger. B) Each sales invoice is supported by a prenumbered shipping document. C) The accounts receivable ledger is reconciled daily to the control account in the general ledger. D) Each shipment on credit is supported by a prenumbered sales invoice

A) Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Which of the following control activities may prevent the failure to bill customers for some shipments? A) Each shipment should be supported by a prenumbered sales invoice that is accounted for. B) Each sales order should be approved by authorized personnel. C) Sales journal entries should be reconciled to daily sales summaries. D) Each sales invoice should be supported by a shipping document

A) Each shipment should be supported by a prenumbered sales invoice that is accounted for.

Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure? A) Examine shipping documents. B) Review collections during the year being examined. C) Intensify the study of the entity's system of internal control with respect to receivables. D) Increase the balance in the allowance for uncollectible accounts

A) Examine shipping documents.

All of the following are important controls over credit memos except: A) proper segregation of duties to ensure that sales discounts taken were earned. B) credit memos should be approved by someone other than whoever initiated it. C) credit memos should be supported by a receiving document for returned goods. D) proper segregation of duties between access to customer records and authorizing credit memos

A) proper segregation of duties to ensure that sales discounts taken were earned.

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process? A) Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme. B) Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables. C) Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped. D) Omission of shipping documents could go undetected, causing an understatement of inventory.

A) Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.

Which of the following strategies most likely could improve the accuracy of the confirmation of accounts receivable? A) Including a monthly statement of the customer's account with the confirmation. B) Restricting the selection of accounts to be confirmed to those customers with relatively large balances. C) Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail. D) Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner

A) Including a monthly statement of the customer's account with the confirmation.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following? A) One of the cashiers has been covering a personal embezzlement by lapping. B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends. C) One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file. D) The credit manager has misappropriated remittances from customers whose accounts have been written off.

A) One of the cashiers has been covering a personal embezzlement by lapping.

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following? A) The credit manager's opinion. B) An aging schedule of past due accounts. C) Subsequent year collections of amounts in accounts receivable at the balance sheet date. D) Ratios calculated showing the past relationship of the valuation allowance to net credit sales

A) The credit manager's opinion.

Which one of the following statements is true regarding two random samples, drawn in the same way, from the same population, one of size 30 and one of size 300? A) The two samples are expected to have the same sample mean. B) The larger sample is more likely to produce a large sample mean. C) The smaller sample will have a smaller 95% confidence interval for the mean. D) The smaller sample will, on average, produce a lower estimate of the variance of the population.

A) The two samples are expected to have the same sample mean.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's assertion about account balances of: A) accuracy, valuation and allocation. B) completeness. C) existence or occurrence. D) rights and obligations

A) accuracy, valuation and allocation.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about: A) accuracy, valuation and allocation. B) completeness. C) existence. D) rights and obligations

A) accuracy, valuation and allocation.

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because: A) entities are more likely to overstate than understate revenues. B) entities are more likely to understate than overstate revenues. C) it is difficult to determine when services have been performed. D) the allowance for doubtful accounts often is understated

A) entities are more likely to overstate than understate revenues.

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. Such a situation illustrates the risk of: A) incorrect rejection. B) incorrect acceptance. C) assessing control risk too high. D) assessing control risk too low.

A) incorrect rejection.

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the: A) meter department records to the billing (sales) register. B) billing (sales) register to the meter department records. C) accounts receivable ledger to the billing (sales) register. D) billing (sales) register to the accounts receivable ledger

A) meter department records to the billing (sales) register.

Which is not a key segregation of duties for the revenue process? Different parties should: A) prepare shipping orders and prepare bills of lading. B) perform the credit and billing functions. C) perform the shipping and billing functions. D) receive cash and adjust accounts receivable

A) prepare shipping orders and prepare bills of lading.

Monetary-unit sampling is said to eliminate the need to stratify the sample because: A) sample items are selected in proportion to their dollar amount. B) the risk of incorrect acceptance is inversely related to sample size. C) tolerable misstatement is considered when determining sample size. D) the upper limit on misstatements can be computed based on statistical principles

A) sample items are selected in proportion to their dollar amount.

Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: A) send positive confirmation requests. B) send negative confirmation requests. C) examine evidence of subsequent cash receipts. D) inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

A) send positive confirmation requests.

The use of the ratio projection is most effective when: A) the dollar amount of the misstatement is expected to relate to the dollar amount of items tested. B) a small number of differences exist in the population. C) estimating populations whose records consist of quantities but not book values. D) large understatement differences exist in the population

A) the dollar amount of the misstatement is expected to relate to the dollar amount of items tested.

In monetary-unit sampling, population size is: A) the dollar balance in an account. B) the number of items in an account. C) unrelated to sample size. D) included in the denominator of the formula to determine sample size

A) the dollar balance in an account.

An auditor established a $60,000 tolerable misstatement for an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population of 1,000 items that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that: A) there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement. B) there is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. C) the asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. D) the asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements

A) there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would: A) validate the sender of electronic information. B) examine subsequent cash receipts for the accounts in question. C) consider the electronic responses to the confirmations to be exceptions. D) mail second requests to the electronic respondents

A) validate the sender of electronic information.

11. Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A. A bank lockbox system. B. Prenumbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.

A. A bank lockbox system.

30. Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report? A. A change in accounting estimate. B. A change in accounting principle. C. A change in the companies included in combined financial statements. D. A correction of an error in principle.

A. A change in accounting estimate.

Which of the following best illustrates the concept of sampling risk? A. A randomly chosen sample may not be representative of the population as a whole (regarding the characteristic being tested). B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize errors in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection.

A. A randomly chosen sample may not be representative of the population as a whole (regarding the characteristic being tested).

34. Which of the following is generally requested in a legal letter? A. A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation. B. A list of all attorneys that performed any work for the entity during the year. C. A statement indicating that the attorney is responsible for the fair presentation of unasserted claims in the entity's financial statements. D. A request that the attorney provide a copy of all invoices given to the client during the year.

A. A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.

51. An auditor may reasonably issue an "except for" qualified opinion for A. A scope limitation or an unjustified accounting change. B. A scope limitation, but not an unjustified accounting change. C. An unjustified accounting change, but not a scope limitation. D. Neither an unjustified accounting change nor a scope limitation.

A. A scope limitation or an unjustified accounting change.

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

A. A summary of specific audit procedures used.

65. When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should A. A. B. B. C. C. D. D.

A. A.

Following are several statements regarding accounting records or audit documentation. Which of the statements is correct? A. Accounting records belong to the client. B. Documentation of an auditor's understanding of client's internal control system is not necessary. C. Audit documents may be regarded as a substitute for the client's accounting records. D. The independent auditor may discard audit documents after two years.

A. Accounting records belong to the client.

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements? A. Accounts receivable confirmation requests yield significantly fewer responses than expected. B. Audit trails of computer-generated transactions exist only for a short time. C. The chief financial officer does not sign the management representation letter until the last day of the auditor's field work. D. Management consults with other accountants about significant accounting matters.

A. Accounts receivable confirmation requests yield significantly fewer responses than expected.

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

A. Advise management to disclose the event in the notes to the financial statements.

61. A Type I subsequent event usually requires A. An adjustment to the financial statements. B. No adjustment to the financial statements. C. Withdrawal from the engagement. D. None of the above.

A. An adjustment to the financial statements.

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

A. An estimate of when the matter will be resolved.

Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements? A. An illegal payment to a foreign official that was not recorded. B. A piece of obsolete office equipment that was not retired. C. A petty cash fund disbursement that was not properly authorized. D. An uncollectible account receivable that was not written-off.

A. An illegal payment to a foreign official that was not recorded.

37. Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? A. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities. B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date. C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. D. A designated member of the board of directors controls the securities in a bank safe-deposit box.

A. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.

35. A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be A. An investment committee of the Board of Directors. B. The chief operating officer. C. The corporate controller. D. The treasurer.

A. An investment committee of the Board of Directors.

58. An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except: A. An opinion as to whether the basis of accounting used is appropriate under the circumstances. B. An opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting. C. Reference to the note to the financial statements that describes the basis of presentation. D. A statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.

A. An opinion as to whether the basis of accounting used is appropriate under the circumstances.

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that A. Any disputes over significant accounting issues have been settled to the auditor's satisfaction. B. The auditor is satisfied that Stankey will be highly profitable in the future. C. The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct. D. The auditor has determined that Stankey's management is not qualified to lead the company.

A. Any disputes over significant accounting issues have been settled to the auditor's satisfaction.

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should A. Assess the difficulty in controlling audit risk for the remainder of the period. B. Investigate significant fluctuations that have occurred in the asset and liability accounts since the previous balance sheet date. C. Select only those accounts which can effectively be sampled during year-end audit work. D. Consider the compliance tests that must be applied at the balance sheet date to extend the audit conclusions reached at the interim date.

A. Assess the difficulty in controlling audit risk for the remainder of the period.

Which of the following procedures would an auditor most likely include in the initial planning of an examination of financial statements? A. Assess the need for the use of specialists in the audit. B. Inquiring of the client's attorney as to any claims that are likely to be asserted. C. Perform detailed testing of the individual financial statement accounts. D. Determining whether necessary internal controls procedures are being applied as prescribed.

A. Assess the need for the use of specialists in the audit.

Which of the following statements concerning control risk is correct? A. Assessing control risk and obtaining an understanding of an entity's internal controls may be performed concurrently. B. When control risk is at the maximum level, an auditor is required to document the basis for that assessment. C. Control risk may be assessed sufficiently low to eliminate substantive procedure for significant transaction classes. D. When assessing control risk, an auditor should not consider evidence obtained in prior audits about the operation of control activities.

A. Assessing control risk and obtaining an understanding of an entity's internal controls may be performed concurrently.

A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because A. Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion. B. An audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud. C. The factors considered in assessing control risk indicated an increased risk of error but only a low risk of fraud in the financial statements. D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

A. Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion.

Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion? A. Auditor judgment. B. Materiality. C. Relative risk. D. Reasonable assurance.

A. Auditor judgment.

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

A. Auditor's report.

Due professional care requires A. Auditors to plan and perform their duties with the skill and care that is commonly expected of accounting professionals. B. The examination of all available corroborating evidence. C. The exercise of error-free judgment. D. A study and review of internal controls that includes tests of controls.

A. Auditors to plan and perform their duties with the skill and care that is commonly expected of accounting professionals.

57. When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should A. Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles. B. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. C. Not express an opinion on whether the statements are presented in conformity with the basis of accounting used. D. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

A. Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles.

66. In the first audit of a client, because of the client's record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor would A. Be unable to express an opinion on the current year's results of operations and cash flows. B. Express a qualified opinion on the financial statements because of a client-imposed scope limitation. C. Withdraw from the engagement and refuse to be associated with the financial statements. D. Specifically state that the financial statements are not comparable to the prior year because of an uncertainty.

A. Be unable to express an opinion on the current year's results of operations and cash flows.

13. When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover A. Both years. B. Only the current year. C. Only the current year, but the prior year's report should be presented. D. Only the current year, but the prior year's report should be referred to.

A. Both years.

25. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Cash flows from operating activities are negative. B. Research and development projects are postponed. C. Significant related party transactions are pervasive. D. Stock dividends replace annual cash dividends.

A. Cash flows from operating activities are negative.

59. Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements? A. First standard. B. Second standard. C. Third standard. D. Fourth standard.

A. First standard.

38. Which of the following would be considered a change that does not affect consistency? A. Change expected to have a material future effect. B. Change in accounting principle. C. Correction of an error in principle. D. None of the above are considered changes that do not affect consistency.

A. Change expected to have a material future effect.

A customer intended to order 100 units of product Z96014, but incorrectly ordered nonexistent product Z96015. Which of the following controls most likely would detect this error? A. Check digit verification. B. Record count. C. Hash total. D. Redundant data check.

A. Check digit verification.

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

A. Chief executive officer and the chief financial officer.

11. Which of the following parties is responsible for the fairness of the representations made in financial statements? A. Client's management. B. Independent auditor. C. Audit committee. D. AICPA.

A. Client's management.

Evaluating a prospective client requires the following step(s): A. Communicate with the predecessor auditor. B. Preplan the audit. C. Establish the terms of the engagement. D. None of the above.

A. Communicate with the predecessor auditor.

Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales invoices. B. Observe the client's distribution of payroll checks. C. Confirm a sample of recorded receivables by direct communication with the debtors. D. Review standard bank confirmations for indications of kiting.

A. Compare a sample of shipping documents to related sales invoices.

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

A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited.

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

A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

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

A. Complement, but do not replace, substantive procedures designed to support the assertion.

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

A. Confirm, as of the completion of field work, accounts receivable that have increased significantly from the year-end date.

Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the: A. Difficulty and expense involved in testing a particular item. B. Assessment of control risk at a low level. C. Low inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness.

A. Difficulty and expense involved in testing a particular item.

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably A. Disclose the fraud to the appropriate level of the client's management. B. Disclose the fraud to appropriate authorities external to the client. C. Discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud. D. Modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements.

A. Disclose the fraud to the appropriate level of the client's management.

21. An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to A. Dividend record books produced by investment advisory services. B. Stock indentures published by corporate transfer agents. C. Stock ledgers maintained by independent registrars. D. Annual audited financial statements issued by the investee companies.

A. Dividend record books produced by investment advisory services.

Management documentation should include all of the following except: A. Documentation regarding the auditor's evaluation of internal controls. B. Documentation regarding management's testing and evaluation of the controls. C. Documentation regarding the safeguarding of assets. D. Documentation on the controls designed in all five components of internal control.

A. Documentation regarding the auditor's evaluation of internal controls.

Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business? A. Earnings per share. B. Return on total assets before interest and taxes. C. Accounts receivable turnover. D. Operating cycle.

A. Earnings per share.

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

A. Extend auditing procedures.

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would 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. Extent of tests of details.

The acceptable level of detection risk is inversely related to the A. Extent of the substantive procedures. B. Risk of misapplying auditing procedures. C. Planning materiality. D. Risk of failing to discover material misstatements.

A. Extent of the substantive procedures.

An example of an analytical procedure is the comparison of A. Financial information with similar information regarding the industry in which the entity operates. B. Recorded amounts of major disbursements with appropriate invoices. C. Results of a statistical sample with the expected characteristics of the actual population. D. EDP generated data with similar data generated by a manual accounting system.

A. Financial information with similar information regarding the industry in which the entity operates.

Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation? A. Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually. B. Flynt Corporation's CFO was arrested last year for embezzling money from the company. C. For the current year, the auditor found a material misstatement in Flynt's sales recognition that was undetected by the internal controls. D. Flynt's audit committee is deemed to be ineffective.

A. Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually.

Which of the following is correct concerning required auditor communications about fraud? A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. D. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

An entity's IT infrastructure refers to A. Hardware components. B. Programmers. C. Software. D. Data provided by the system.

A. Hardware components.

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to A. Identify areas of relatively high risk of misstatement and plan the audit accordingly. B. Provide suggestions for improvement to the client. C. Serve as a basis for setting audit risk and materiality. D. Decide whether to perform an audit for the client.

A. Identify areas of relatively high risk of misstatement and plan the audit accordingly.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Inability to generate cash flows from operations while reporting substantial earnings growth. B. Management's lack of interest in increasing the entity's earnings trend. C. Large amounts of liquid assets that are easily converted into cash. D. Inability to borrow necessary capital without granting debt covenants.

A. Inability to generate cash flows from operations while reporting substantial earnings growth.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls? A. Incompatible duties. B. Management override. C. Mistakes in judgment. D. Collusion among employees.

A. Incompatible duties.

A substantive strategy differs from a reliance strategy in that a substantive strategy includes A. Increased implementation of detailed tests of transactions and balances. B. Extra tests of controls. C. Increased emphasis on verbal representations from management. D. Setting control risk at a minimum level.

A. Increased implementation of detailed tests of transactions and balances.

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods A. Influence the design of internal controls. B. Affect the auditor's planning materiality levels. C. Assist in evaluating the planned audit assertions. D. Determine the auditor's acceptable level of audit risk.

A. Influence the design of internal controls.

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including A. Inquiry. B. Analytical procedures. C. Calculation. D. Confirmation.

A. Inquiry.

Which of the following procedures most likely would be included as part of an auditor's tests of controls? A. Inspection. B. Reconciliation. C. Confirmation. D. Analytical procedures.

A. Inspection.

The advantages of generalized audit software include all of the following except: A. It involves auditing while the data are being processed (real-time). B. It is easy to use. C. The time to develop the application is usually short. D. An entire population can be examined in some instances.

A. It involves auditing while the data are being processed (real-time).

To test for unsupported entries in the ledger, the direction of audit testing should start from the A. Ledger entries. B. Journal entries. C. Externally generated documents. D. Original source documents.

A. Ledger entries.

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

A. Letter of audit inquiry to the client's lawyer.

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

A. Limited to the specific event referenced.

Before accepting an engagement to audit a new client, an auditor is required to A. Make inquiries of the predecessor auditor. B. Tell the client whether or not the auditor is willing to issue a "clean" opinion. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Become a member of the client's board of directors.

A. Make inquiries of the predecessor auditor.

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 judgments about materiality. C. Management's liability for illegal acts committed by its employees. D. The auditor's responsibility to guarantee accuracy of the financial statements.

A. Management's responsibility for the entity's compliance with laws and regulations.

For a complex IT system, auditors are least likely to use which of the following when documenting their understanding of internal controls? A. Narratives. B. Internal control questionnaires. C. Flowcharts. D. Organization charts.

A. Narratives.

61. When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's A. Net income. B. Retained earnings. C. Assets. D. Working capital.

A. Net income.

Which of the following would not necessarily be a related party transaction? A. Sales to another corporation with a similar name. B. Purchases from another corporation that is controlled by the corporation's chief stockholder. C. Loan from the corporation to a major stockholder. D. Sale of land to the corporation by the spouse of a director.

A. Sales to another corporation with a similar name.

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are A. Susceptible to bias. B. Consistent with prior periods. C. Insensitive to variations. D. Similar to industry guidelines.

A. Susceptible to bias.

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

A. New information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.

40. The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor's report should make A. No reference to the report or the work of the successor auditor. B. Reference to the work of the successor auditor in the scope paragraph. C. Reference to both the work and the report of the successor auditor in the opinion paragraph. D. Reference to the report of the successor auditor in the scope paragraph.

A. No reference to the report or the work of the successor auditor

22. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? A. Notes receivable and interest income. B. Accrued interest receivable and accrued interest payable. C. Notes payable and notes receivable. D. Interest income and interest expense.

A. Notes receivable and interest income.

28. Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash? A. Occurrence. B. Completeness. C. Cutoff. D. Accuracy.

A. Occurrence.

In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion? A. Occurrence. B. Cutoff. C. Authorization. D. Classification.

A. Occurrence.

Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence. B. Completeness. C. Authorization. D. Classification.

A. Occurrence.

The three PCAOB standards of fieldwork are concerned with A. Planning and supervision and understanding the client's internal control system. B. Choosing evidence with due professional care. C. Adequate training to understand the client's internal controls system. D. Ensuring consistency in financial statements for periods presented.

A. Planning and supervision and understanding the client's internal control system.

13. Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A. Proof of cash. B. Bank reconciliation. C. Cash confirmation. D. Evaluate ratio of cash to current liabilities.

A. Proof of cash.

In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the A. Quality of the internal auditor's work. B. Organization's commitment to integrity and ethical values. C. Influence of management on the scope of the internal auditor's duties. D. Organizational levels to which the internal auditor reports.

A. Quality of the internal auditor's work.

The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as A. Reasonable assurance. B. Management responsibility. C. Limited liability. D. Management by exception.

A. Reasonable assurance.

Footing is an example of A. Recalculation. B. Confirmation. C. Inquiries. D. Analytical procedures.

A. Recalculation.

Walkthroughs usually involve all of the following audit procedures except: A. Reperformance. B. Inquiry. C. Observation. D. Inspection.

A. Reperformance.

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

A. Revising the audit plan.

An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by A. Scanning the general journal for unusual entries. B. Performing a revenue cutoff test at year-end. C. Tracing a sample of journal entries to the general ledger. D. Examining documentary evidence of sales returns and allowances recorded after year-end.

A. Scanning the general journal for unusual entries.

An example of audit evidence with a medium level of reliability is A. Scanning. B. Recalculation. C. Observation. D. All of the above.

A. Scanning.

Which of the following is the least persuasive documentation in support of an auditor's opinion? A. Schedules of details of physical inventory counts conducted by the client. B. Notation of auditor's inferences drawn from ratios and trends. C. Notation of appraisers' conclusions documented in the auditor's working papers. D. Lists of negative confirmation requests for which no response was received by the auditor.

A. Schedules of details of physical inventory counts conducted by the client.

During consideration of internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to A. Search for significant deficiencies in the operation of internal control. B. Understand the internal control environment and the information system. C. Determine whether the controls relevant to audit planning have been placed in operation. D. Perform procedures to understand the design of internal control.

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

Evidence is reliable if it A. Signals the true state of a management assertion. B. Applies to the period being audited. C. Relates to the audit assertion being tested. D. Is consistent with management's assertions.

A. Signals the true state of a management assertion.

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

A. Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters.

Which of the following is true regarding management's documentation of internal controls? A. Some documentation should focus on controls designed to detect fraud. B. Documentation should focus on controls over the interim financial reporting process. C. Documentation must be done on paper. D. Inadequate documentation is usually considered an insignificant deficiency in internal control.

A. Some documentation should focus on controls designed to detect fraud.

As the acceptable level of detection risk decreases, the assurance directly provided from A. Substantive procedures should increase. B. Substantive procedures should decrease. C. Tests of controls should increase. D. Tests of controls should decrease.

A. Substantive procedures should increase.

When an auditor tests a computerized accounting system, which of the following is true of the test data approach? A. Test data are processed by the client's computer programs under the auditor's control. B. Test data must consist of all possible valid and invalid conditions. C. Testing a program at year end provides assurance that the client's processing was accurate for the full year. D. Several transactions of each type must be tested.

A. Test data are processed by the client's computer programs under the auditor's control.

A limit test is a A. Test to ensure that a numerical value does not exceed some predetermined value. B. Check to ensure that the value in a field falls within an allowable range of values. C. Check to ensure that the data in a field have the proper arithmetic sign. D. Check on a field to ensure that it contains either all numeric or alphabetic characters.

A. Test to ensure that a numerical value does not exceed some predetermined value.

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

A. The audit report, financial statements, and footnotes for consistency.

Which of the following is not true? A. The auditor should not communicate with management until the audit of internal control over financial reporting is finished. B. Written communication between the auditor and management about internal control over financial reporting should include the definitions of control deficiencies, significant deficiencies, and material weaknesses. C. The auditor should not include in the audit report that no significant deficiencies were noted during an audit of internal control over financial reporting. D. If fraud is discovered, the auditor must report it to the appropriate level of management.

A. The auditor should not communicate with management until the audit of internal control over financial reporting is finished.

Which of the following concerning the auditor's report on internal control over financial reporting is correct? A. The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work. B. In the report on internal control over financial reporting, the auditor can issue only a qualified or an unqualified opinion. C. The auditor needs to state management's assessment of internal control over financial reporting, but does not necessarily need to comment on whether he or she agrees. D. An unqualified opinion is required if a material weakness is identified.

A. The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work.

39. Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards. B. The cashier makes the daily deposit at a local bank. C. The cashier prepares the daily deposit. D. The cashier endorses the checks.

A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

Which of the following is not a misstatement of the financial statements? A. The client uses different inventory accounting methods for internal and external reporting. B. A departure from GAAP. C. The footnote for pensions is omitted. D. A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller.

A. The client uses different inventory accounting methods for internal and external reporting.

30. The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since A. The confirmation form also seeks information about indebtedness to the bank. B. This procedure will detect kiting activities that would otherwise not be detected. C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards. D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.

A. The confirmation form also seeks information about indebtedness to the bank.

Which of the following is not a concept that is included in the scope paragraph of the auditor's report? A. The conformance of the financial statements with generally accepted accounting principles. B. The audit was conducted in accordance with applicable auditing standards. C. The audit was planned and performed to obtain reasonable, rather than absolute, assurance. D. An audit involves examining items on a test (i.e. sampling) basis.

A. The conformance of the financial statements with generally accepted accounting principles.

Which element(s) is/are pervasive to the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? A. The elements of materiality and audit risk. B. The element of internal control. C. The element of corroborating evidence. D. The element of reasonable assurance.

A. The elements of materiality and audit risk.

According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity? A. The entity's CEO and/or CFO. B. The entity's board of directors. C. An internal control specialist. D. The external auditor.

A. The entity's CEO and/or CFO.

Which of the following statements is generally correct about the appropriateness of audit evidence? A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements. B. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained. C. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection. D. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity.

A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

All of the following refer to an internal auditor's competence except: A. The party in the entity to which the internal auditor reports. B. The quality of internal audit documents and reports. C. Professional certification. D. Supervision and review of internal audit activities.

A. The party in the entity to which the internal auditor reports.

20. If the principal auditor decides to make reference to the other auditor's examination, the introductory paragraph must specifically indicate the A. The portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor.

A. The portion of the financial statements examined by the other auditor.

The four PCAOB standards of reporting are concerned with all of the following except A. The presentation of the financial statements based on GAAS. B. The presentation of the financial statements based on GAAP. C. Whether principles are consistently applied, whether all informative disclosures have been made and the degree of responsibility the auditor is taking. D. The degree of responsibility the auditor is taking.

A. The presentation of the financial statements based on GAAS.

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A. The prospective client's unwillingness to permit inquiry of its legal counsel. B. The inability to review the predecessor auditor's documentation. C. The CPA's lack of understanding of the prospective client's operations and industry. D. Indications that management has not investigated employees in key positions before hiring them.

A. The prospective client's unwillingness to permit inquiry of its legal counsel.

Which of the following statements is not true with respect to assurance, attest, and audit services? A. These services are applied only to financial statements and financial statement accounts. B. These services all involve obtaining and evaluating evidence. C. These services all involve determining the correspondence of some information to a set of criteria. D. These services all involve issuing a report.

A. These services are applied only to financial statements and financial statement accounts.

The main difference between SAS and AU is A. They are the same except that SAS are organized chronologically and the AU are organized by topical area. B. SAS are issued by the ASB and AU are issued by the PCAOB. C. SAS are issued by the PCAOB and AU are issued by the ASB. D. SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP.

A. They are the same except that SAS are organized chronologically and the AU are organized by topical area.

43. Which of the following is not one of the auditor's primary objectives in an examination of marketable securities? A. To determine whether securities are authentic. B. To determine whether securities are the property of the client. C. To determine whether securities actually exist. D. To determine whether securities are properly classified on the balance sheet.

A. To determine whether securities are authentic.

The normal sequence of documents and operations on a well-prepared systems flowchart is A. Top to bottom and left to right. B. Bottom to top and left to right. C. Top to bottom and right to left. D. Bottom to top and right to left.

A. Top to bottom and left to right.

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except: A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts) and similar data for the industry in which the entity operates. C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience. D. Study of the relationships of financial data with relevant nonfinancial data.

A. Tracing transactions through the system to determine whether procedures are being applied as prescribed.

40. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. B. Securities are registered in the name of the trust company, rather than the entity itself. C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.

A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's A. Understanding of the internal control. B. Reasons for deciding not to extend the review. C. Basis for concluding that errors and fraud will be prevented. D. Completed internal control questionnaire.

A. Understanding of the internal control.

49. When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the client's financial statement? A. When the auditor believes the financial statements are misleading. B. When the auditor was unable to observe the taking of the physical inventory. C. When the auditor is uncertain about the outcome of a material uncertainty. D. When the auditor has performed insufficient auditing procedures to express an opinion.

A. When the auditor believes the financial statements are misleading.

The current audit file usually includes A. Working trial balance. B. Organizational chart. C. Accounting manual. D. Copies of important contracts.

A. Working trial balance.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations? A) The positive confirmation form must always be used to confirm all balances regardless of size. B) A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances. C) A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables. D) The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory

B) A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.

Which of the following tests of controls most likely would 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 accounts receivable ledger to daily sales summaries. D) Inspect unused sales invoices for consecutive prenumbering

B) Examine shipping documents for matching sales invoices.

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? A) Expected amount of misstatement but not the measure of tolerable misstatement. B) Expected amount of misstatement and the measure of tolerable misstatement. C) Measure of tolerable misstatement but not the expected amount of misstatement. D) Neither the expected amount of misstatement nor the measure of tolerable misstatement.

B) Expected amount of misstatement and the measure of tolerable misstatement.

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities? A) Fictitious purchases. B) Fictitious sales. C) Selling and general expenses erroneously being recorded as merchandise purchases. D) Unrecorded sales

B) Fictitious sales.

Using nonstatistical sampling, which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements? A) Set the tolerable deviation rate at a lower level than originally planned. B) Identify the large and unusual disbursements as individually significant and test 100 percent. C) Increase the sample size to reduce the effect of the unusually large disbursements. D) Continue to draw new samples until all the unusually large disbursements appear in the sample.

B) Identify the large and unusual disbursements as individually significant and test 100 percent.

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

B. Cash/total assets.

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting: A) opening and closing inventory balances. B) cash receipts and accounts receivable. C) receiving activities. D) cutoffs of sales and purchases

B) cash receipts and accounts receivable.

In general, revenue is recognized when: A) goods are shipped. B) an entity satisfies a performance obligation. C) it is recorded in the sales journal. D) it is received in cash

B) an entity satisfies a performance obligation.

When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ________ assertion. A) cutoff B) authorization and accuracy C) occurrence D) completeness

B) authorization and accuracy

Tracing copies of sales invoices to shipping documents will provide evidence that all: A) shipments to customers were recorded as receivables. B) billed sales were shipped. C) accounts receivable ledger is complete. D) shipments to customers were billed

B) billed sales were shipped.

To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the: A) customer order file. B) bills of lading file. C) open invoice file. D) sales invoice file

B) bills of lading file.

In statistical or nonstatistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if: A) monetary-unit sampling (MUS) is used. B) classical variables sampling is used in order to focus on large items. C) the auditor's estimated tolerable misstatement is extremely small. D) the standard deviation of recorded amounts is relatively small

B) classical variables sampling is used in order to focus on large items.

Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables': A) valuation. B) classification. C) existence. D) completeness

B) classification.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of: A) authorization and accuracy. B) completeness. C) cutoff. D) occurrence

B) completeness.

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of: A) classification. B) cutoff. C) occurrence. D) authorization and accuracy

B) cutoff.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an: A) understatement of revenues, receivables, and inventory. B) overstatement of revenues and receivables and an understatement of inventory. C) understatement of revenues and receivables and an overstatement of inventory. D) overstatement of revenues, receivables, and inventory

B) overstatement of revenues and receivables and an understatement of inventory.

Immediately upon receipt of cash, a responsible employee should: A) record the amount in the cash receipts journal. B) prepare a control listing. C) update the subsidiary accounts receivable records. D) prepare a deposit slip in triplicate

B) prepare a control listing.

The control environment component of internal controls includes all of the following except: A. Management's operating style. B. Access to computer programs. C. Organizational structure. D. Human resource policies and practices.

B. Access to computer programs.

When reviewing bank confirmations for any liens on receivables, the auditor is testing the ________ assertion. A) valuation and allocation B) rights and obligations C) existence D) completeness

B) rights and obligations

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely: A) send positive confirmation requests. B) send negative confirmation requests. C) examine evidence of subsequent cash receipts instead of sending confirmation requests. D) use statistical sampling instead of sending confirmation requests

B) send negative confirmation requests.

Tracing shipping documents to prenumbered sales invoices provides evidence that: A) no duplicate shipments or billings occurred. B) shipments to customers were properly billed. C) all goods ordered by customers were shipped. D) all prenumbered sales invoices were accounted for

B) shipments to customers were properly billed.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when: A) recipients are likely to return positive confirmation requests without verifying the accuracy of the information. B) the combined assessed level of inherent and control risk relative to accounts receivable is low. C) a small number of accounts receivable are involved but a relatively large number of errors are expected. D) the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence

B) the combined assessed level of inherent and control risk relative to accounts receivable is low.

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

B. "I believe that the action can be settled for less than the damages claimed."

The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence? A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined." B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence." C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather." D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it."

B. "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."

31. Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification.

B. A change from an unacceptable accounting principle to a generally accepted one.

33. When an auditor expresses an adverse opinion, the opinion paragraph should include A. The principal effects of the departure from generally accepted accounting principles. B. A direct reference to a separate paragraph disclosing the basis for the opinion. C. The substantive reasons for the financial statements being misleading. D. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

B. A direct reference to a separate paragraph disclosing the basis for the opinion.

Which of the following is a known misstatement? A. A management estimate that is outside the range of reasonable outcomes determined by the auditor. B. A fixed asset being recorded at the incorrect cost. C. A projected misstatement resulting from errors found during sampling. D. Difference in judgment between the auditor and management.

B. A fixed asset being recorded at the incorrect cost.

Engagement letters include all of the following except: A. A list of additional services that will be provided. B. A list of adjusting journal entries. C. Information about the audit fee. D. Arrangements involving the use of specialists.

B. A list of adjusting journal entries.

A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is A. A material weakness. B. A significant deficiency. C. An insignificant deficiency. D. A probable deficiency.

B. A significant deficiency.

Public reporting on the effectiveness of internal control over financial reporting, as required by the Sarbanes-Oxley Act, includes A. A statement that the public accounting firm that audited the financial statements has provided input on the design of internal controls. B. A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting. C. An explicit statement as to whether management agrees with the public accounting firm's assessment of internal controls. D. A detailed statement describing changes or additions to the internal control environment that occurred in the current year.

B. A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting.

The existence of a related party transaction may be indicated when another entity A. Sells real estate to the corporation at a price that is comparable to its appraised value. B. Absorbs expenses of the corporation under audit. C. Borrows from the corporation at a rate of interest which equals the current market rate. D. Lends to the corporation at a rate of interest which equals the current market rate.

B. Absorbs expenses of the corporation under audit.

When an entity moves into a significant new line of business, all of the following increase except: A. Client risk. B. Acceptable audit risk. C. Risk of material misstatement. D. Entity business risk.

B. Acceptable audit risk.

It is important for the CPA to consider the competence of the audit client's employees because their competence bears directly and importantly upon the A. Cost/benefit relationship of the system of internal control. B. Achievement of the objectives of the system of internal control. C. Comparison of recorded accountability with assets. D. Timing of the tests to be performed.

B. Achievement of the objectives of the system of internal control.

AAA & Associates recently finished auditing LinktheEarth Corporation's internal control over financial reporting. AAA found a number of material weaknesses in the company's internal control. LinktheEarth's management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end? A. Unqualified report. B. Adverse report. C. Qualified report. D. Disclaimer on opinion.

B. Adverse report.

In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure A. Reflects management's philosophy and operating style. B. Affects management's financial statement assertions. C. Provides adequate safeguards over access to assets. D. Enhances management's decision-making processes.

B. Affects management's financial statement assertions.

Which of the following statements is not correct about materiality? A. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. B. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually. C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. 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 financial statements.

B. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements. B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.

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

B. An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the client's fiscal year) that a large portion of the client's inventory is obsolete.

24. Which of the following would be considered a change that affects consistency? A. Change in accounting estimate. B. Change in accounting principle. C. Change in classification and reclassification. D. All of the above.

B. Change in accounting principle.

The first PCAOB standard of reporting requires that, "the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles." This passage requires A. A statement of fact by the auditor. B. An opinion by the auditor. C. An implied measure of fairness. D. An objective measure of compliance.

B. An opinion by the auditor.

Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements? A. Tests of controls. B. Analytical procedures. C. Computer controls. D. Post-audit review of audit documents.

B. Analytical procedures.

36. An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions? A. Financial position and results of operations arising from cash transactions. B. Assets and liabilities arising from cash transactions and revenue collected and expenses paid. C. Balance sheet and income statement resulting from cash transactions. D. Cash balance sheet and the source and application of funds.

B. Assets and liabilities arising from cash transactions and revenue collected and expenses paid

For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date? A. Withdrawals from Federal Bank of more than $5 million must include a manager's signature. B. At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals. C. Federal Bank has just started establishing trusts for its customers and it has only set up ten. Before making an investment for a trust, bank employees must verify that the investment is in accordance with stated investment policies. D. On an annual basis, Federal Bank management performs credit checks on its loan customers before determining the value of loans it will not be able to collect on.

B. At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals.

Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use A. Discovery sampling. B. Attributes sampling. C. Stratified sampling. D. Variables sampling.

B. Attributes sampling.

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's A. Engagement letter. B. Audit working papers. C. Engagement letter and audit working papers. D. It would not be typical to allow a review of either the engagement letter or the audit working papers.

B. Audit working papers.

Audit documentation prepared on audits of public clients is the property of the A. Shareholders. B. Auditor. C. Management of the entity being audited. D. SEC.

B. Auditor.

Why do auditors generally use a sampling approach to evidence gathering? A. Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. B. Auditors must balance the cost of the audit with the need for precision. C. Auditors must limit their exposure to their client to maintain independence. D. The auditor's relationship with the client is generally adversarial, so the auditor will not have access to all of the financial information of the company.

B. Auditors must balance the cost of the audit with the need for precision.

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of A. Authorization, execution, and payment. B. Authorization, recording, and custody. C. Custody, execution, and reporting. D. Authorization, payment, and recording.

B. Authorization, recording, and custody.

21. When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the A. Possibility of purchasing certain assets rather than leasing them. B. Capability of extending the due dates of existing debt. C. Appropriateness of changing depreciation methods from double declining balance to straight line. D. Marketability of property and equipment that management plans to keep.

B. Capability of extending the due dates of existing debt.

The permanent audit file usually includes A. Working trial balance. B. Organizational chart. C. Audit plan. D. Audit programs.

B. Organizational chart.

An auditor is least likely to test the internal controls that provide for A. Approval of the purchase and sale of marketable securities. B. Classification of revenue and expense transactions by product line. C. Segregation of the functions of recording disbursements and reconciling the bank account. D. Comparison of receiving reports and vendors' invoices with purchase orders.

B. Classification of revenue and expense transactions by product line.

Which is not an attribute of an external auditor? A. Independence. B. Client advocacy. C. Objectivity. D. Concern for the public interest.

B. Client advocacy.

24. All of the following can assist the auditor in testing the existence assertion for investment securities except: A. Physical examination. B. Comparing fair value to cost. C. Confirmation with the issuer. D. Confirmation with the custodian.

B. Comparing fair value to cost.

27. Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash? A. Occurrence. B. Completeness. C. Authorization. D. Cutoff.

B. Completeness.

Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence. B. Completeness. C. Cutoff. D. Classification.

B. Completeness.

Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Presentation and disclosure.

B. Completeness.

Assessing control risk below maximum involves all of the following except: A. Identifying specific controls to rely on. B. Concluding that controls are ineffective. C. Performing tests of controls. D. Analyzing the achieved level of control risk after performing tests of controls.

B. Concluding that controls are ineffective.

Which of the following types of documentary evidence should the auditor consider to be the most reliable? A. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker. B. Confirmation of an account payable balance mailed by and returned directly to the auditor. C. A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditor. D. A working paper prepared by the client's controller and reviewed by the client's treasurer.

B. Confirmation of an account payable balance mailed by and returned directly to the auditor.

23. Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Inspecting title documents to verify whether any assets are pledged as collateral. B. Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

B. Confirming with third parties the details of arrangements to maintain financial support.

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

B. Consider the refusal to be a scope limitation.

17. The refusal of a client's attorney to provide a representation on the legality of a particular act committed by the client is generally A. Sufficient reason to issue a "subject to" qualified opinion. B. Considered to be a scope limitation. C. Insufficient reason to modify the auditor's report because of the attorney's obligation of confidentiality. D. Proper grounds to withdraw from the engagement without further consideration.

B. Considered to be a scope limitation.

The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general file. B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards. C. Ownership be determined by the legal statutes of the state where the auditor practices. D. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers, and partners.

B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards.

According to the COSO definition of safeguarding of assets A. Controls over financial reporting are effective if they provide reasonable assurance that asset losses will not occur. B. Controls over financial reporting are effective if they provide reasonable assurance that losses are properly reflected in the financial statements. C. Both A and B. D. Neither A nor B.

B. Controls over financial reporting are effective if they provide reasonable assurance that losses are properly reflected in the financial statements.

50. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A. Detect kiting activities that may otherwise not be discovered. B. Corroborate information regarding deposit and loan balances. C. Provide the data necessary to prepare a proof of cash. D. Request information about contingent liabilities and secured transactions.

B. Corroborate information regarding deposit and loan balances.

An effective control environment A. Allows management to identify all relevant risks. B. Creates a commitment to competence. C. Guarantees that all controls are followed as prescribed. D. Requires an internal audit department.

B. Creates a commitment to competence.

14. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the A. Check register for the last month is reviewed. B. Cutoff bank statement is reconciled. C. Bank confirmation is reviewed. D. Search for unrecorded liabilities is performed.

B. Cutoff bank statement is reconciled.

General controls include all of the following except: A. Organizational controls. B. Data validation controls. C. Access security controls. D. Application system acquisition controls.

B. Data validation controls.

The permanent (continuing) file of an auditor's working papers most likely would include copies of the A. Bank statements. B. Debt agreements. C. Lead schedules. D. Attorney's letters.

B. Debt agreements.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would A. Decrease amount of substantive testing. B. Decrease detection risk. C. Increase detection risk. D. Increase materiality levels.

B. Decrease detection risk.

What is the general character of the work conducted in performing a forensic audit for a company? A. Providing assurance that the financial statements are not materially misstated. B. Detecting or deterring fraudulent activity. C. Offering an opinion on the reliability of the specific assertions made by management. D. Identifying the causes of an entity's financial difficulties.

B. Detecting or deterring fraudulent activity.

The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as A. Sampling risk. B. Detection risk. C. Nonsampling risk. D. Inherent risk.

B. Detection risk.

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements? A. A management fraud may exist and it is more likely to be detected by auditors if they are independent. B. Different interests may exist between the company preparing the statements and the parties using the statements. C. A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated. D. A poorly designed internal control system may be in place.

B. Different interests may exist between the company preparing the statements and the parties using the statements.

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by A. Employment of temporary personnel to aid in the separation of duties. B. Direct participation by the owner of the business in the record-keeping activities of the business. C. Engaging a CPA to perform monthly bookkeeping. D. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

B. Direct participation by the owner of the business in the record-keeping activities of the business.

29. When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(n) A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified/unmodified opinion with a separate explanatory/emphasis-of-matter paragraph.

B. Disclaimer of opinion.

Which of the following is not a primary objective of internal control as established by COSO? A. Efficiency and effectiveness of operations. B. Effective purchasing systems. C. Compliance with laws and regulations. D. Reliable financial reporting.

B. Effective purchasing systems.

Internal controls are not designed to provide reasonable assurance that A. Transactions are executed in accordance with management's authorization. B. Embezzlement will be eliminated. C. Access to assets is permitted only in accordance with management's authorization. D. Amounts recorded for assets is compared with the actual existing assets at reasonable intervals.

B. Embezzlement will be eliminated.

In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that A. Operational efficiency has been achieved in accordance with management plans. B. Errors and fraud have been prevented or detected. C. Controls have not been circumvented by collusion. D. Management can not override the system.

B. Errors and fraud have been prevented or detected.

20. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would A. Inspect the stock certificates evidencing the investment. B. Examine the audited financial statements of the investee company. C. Review the broker's advice or canceled check for the investment's acquisition. D. Obtain market quotations from financial newspapers or periodicals.

B. Examine the audited financial statements of the investee company.

Due professional care requires auditors to A. Obtain independent, third party (non-client) documentation as evidence for all information presented in the financial statements. B. Exercise professional skepticism during the audit. C. Disregard any evidence generated by the client during the audit. D. Find every error contained in the financial statements prepared by management.

B. Exercise professional skepticism during the audit.

Which assertions may be tested for the "account balances" category of management assertions? A. Existence, accuracy, rights and obligations, completeness. B. Existence, rights and obligations, completeness, valuation and allocation. C. Occurrence, rights and obligations, completeness, valuation and allocation. D. Occurrence, accuracy, rights and obligations, completeness.

B. Existence, rights and obligations, completeness, valuation and allocation.

17. If fraud is suspected, auditors may complete all of the following procedures except: A. Testing for kiting. B. Footing the bank reconciliation and the outstanding checks listing. C. Performing a proof of cash. D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items.

B. Footing the bank reconciliation and the outstanding checks listing.

Auditors are most likely to gather audit evidence solely using substantive procedures A. If transactions are recurring. B. For non-recurring, unusual transactions. C. If control risk is very low. D. If the entity has a well-designed automated system.

B. For non-recurring, unusual transactions.

16. An interbank transfer schedule A. Is another name for the proof of cash. B. Helps the auditor test for kiting. C. Is on a standard bank confirmation. D. Is used to examine client bank reconciliations.

B. Helps the auditor test for kiting.

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants A. That immaterial fraud is not to be reported to the client's audit committee. B. How the results of various auditing procedures performed by the assistants should be evaluated. C. How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk. D. How overall materiality was selected.

B. How the results of various auditing procedures performed by the assistants should be evaluated.

The five step process in the audit of ICFR includes A. Form an opinion on the safeguarding of the entity's assets. B. Identify controls to test using a top-down, risk-based approach. C. Form an opinion on the fairness of the presentation of the financial statements. D. Form an opinion on the effectiveness of internal controls in meeting operational goals.

B. Identify controls to test using a top-down, risk-based approach.

Assessing control risk at below the maximum most likely would involve A. Changing the timing of substantive procedures by omitting interim testing and performing the tests at year-end. B. Identifying specific internal controls relevant to specific assertions. C. Performing more extensive substantive procedures with larger sample sizes than originally planned. D. Reducing inherent risk for most of the assertions relevant to significant account balances.

B. Identifying specific internal controls relevant to specific assertions.

The auditor generally gives most emphasis to ratio and trend analysis in the examination of the A. Statement of Changes in Stockholders' Equity and Retained Earnings. B. Income Statement. C. Balance Sheet. D. Statement of Cash Flows.

B. Income Statement.

The fourth PCAOB standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements. The overall purpose of the fourth standard of reporting is to require that reports A. State that the examination of financial statements has been conducted in accordance with generally accepted auditing standards. B. Indicate the character of the auditor's examination and the degree of responsibility assumed by the auditor. C. Imply that the auditor is independent in fact as well as in appearance with respect to the financial statements under examination. D. Express whether the accounting principles used in preparing the financial statements have been applied consistently in the period under examination.

B. Indicate the character of the auditor's examination and the degree of responsibility assumed by the auditor.

Which of the following audit procedures would an auditor be least likely to perform using a generalized computer audit program? A. Searching records of accounts receivable balances for credit balances. B. Investigating inventory balances for possible damaged goods. C. Selecting accounts receivable for positive and negative confirmation. D. Listing of unusually large inventory balances.

B. Investigating inventory balances for possible damaged goods.

Which of the following sampling methods would be used to estimate a numerical measurement of population, such as the dollar value of an account? A) Attributes sampling. B) Stop-or-go sampling. C) Classical variables sampling. D) Random-number sampling

C) Classical variables sampling.

Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether: A. It is independent of management B. It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations. C. It asks management difficult questions. D. It interacts regularly with internal auditors.

B. It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations.

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

B. January 1, 2010 through May 1, 2012.

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when A. The internal auditor reports directly to management. B. Management is dominated by one individual. C. Accurate management job descriptions delineate specific duties. D. The audit committee actively oversees the financial reporting process.

B. Management is dominated by one individual.

Management'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. Management is dominated by one individual. C. Internal auditors have direct access to the board of directors and the entity's management. D. The audit committee is active in overseeing the entity's financial reporting policies.

B. Management is dominated by one individual.

The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the A. Partner assigned to the audit engagement. B. Management of the company. C. Auditor in charge of the fieldwork. D. Securities and Exchange Commission.

B. Management of the company.

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. B. Management's disregard of its responsibility to maintain an adequate control environment. C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. D. Management's refusal to permit the CPA to perform substantive procedures before the year-end.

B. Management's disregard of its responsibility to maintain an adequate control environment.

57. Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist? A. Management is objective and transparent in their assumptions. B. Management's key assumptions are subject to volatility. C. The entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an active market. D. The entity does not have control weaknesses in its valuation processes.

B. Management's key assumptions are subject to volatility.

Forensic audits include all of the following except A. Criminal investigations. B. Manufacturers' assertions about product quality. C. Employee fraud. D. Management fraud.

B. Manufacturers' assertions about product quality.

The Public Company Accounting Oversight Board's role is to A. Conduct the final review of auditors' work before the auditor's opinion is issued. B. Oversee the auditors of public companies in order to protect the interests of investors. C. Conduct audits of governmental entities. D. Sanction auditors who fail to follow GAAS.

B. Oversee the auditors of public companies in order to protect the interests of investors.

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

B. Matters to which the attorney has given substantive attention in the form of legal consultation or representation.

Under Statements on Auditing Standards, which of the following would be classified as an error? A. Misappropriation of assets for the benefit of management. B. Misinterpretation by management of facts that existed when the financial statements were prepared. C. Preparation of records by employees to cover a fraudulent scheme. D. Intentional omission of the recording of a transaction to benefit a third party.

B. Misinterpretation by management of facts that existed when the financial statements were prepared.

Potential benefits of an entity's controls in an IT environment include all of the following except: A. Reduction in the risk that controls will be circumvented. B. More accurate accounting estimates. C. Consistent application of predefined business rules. D. More timely information.

B. More accurate accounting estimates.

As the acceptable level of detection risk decreases, an auditor may change the A. Timing of tests of controls by performing them at an interim date rather than at year-end. B. Nature of substantive procedures from less effective to more effective procedures. C. Timing of tests of controls by performing them at several dates rather than at one time. D. Assessed level of risk of material misstatement to a higher amount.

B. Nature of substantive procedures from less effective to more effective procedures.

62. A special report related to compliance with contractual provisions provides A. Positive assurance. B. Negative assurance. C. No assurance. D. None of the above.

B. Negative assurance.

35. Other bases of accounting (special purpose frameworks) include all of the following except: A. Tax basis. B. Non-GAAP methods used for internal reporting. C. Cash basis. D. Regulatory basis.

B. Non-GAAP methods used for internal reporting.

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

B. Notify each member of the entity's board of directors about management's refusal to adjust the financial statements.

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by A. Reperformance and corroboration. B. Observation and inquiry. C. Inspection and vouching. D. Confirmation and recomputation.

B. Observation and inquiry.

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions and that leave no transaction trail is A. Inspection. B. Observation. C. Reperformance. D. Reconciliation.

B. Observation.

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA, who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued.

B. Obtain a knowledge of matters that relate to the nature of the entity's business.

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

B. Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, and loss contingencies.

The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should A. Consider the matter a scope limitation. B. Perform additional audit procedures to investigate the matter further. C. Intensify the examination with the expectation of detecting management fraud. D. Withdraw from the engagement.

B. Perform additional audit procedures to investigate the matter further.

An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts A. Identify whether segregation of duties prevent collusion. 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. Provide a visual depiction of clients' activities.

32. When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n) A. Qualified opinion or a disclaimer of opinion. B. Qualified opinion or an adverse opinion. C. Adverse opinion or a disclaimer of opinion. D. Qualified opinion or an unqualified opinion.

B. Qualified opinion or an adverse opinion.

45. If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an) A. Disclaimer of opinion. B. Qualified opinion. C. Review report. D. Unqualified opinion with a separate explanatory paragraph.

B. Qualified opinion.

18. Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? A. Tracing interest declarations to an independent record book. B. Recomputing interest earned using the interest rate and bond amount. C. Confirming the interest rate with the issuer of the bonds. D. Vouching the receipt and deposit of interest checks.

B. Recomputing interest earned using the interest rate and bond amount.

48. Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. Reimbursement vouchers are not prenumbered. B. Reimbursement of the fund from the general cash account occurs twice or more each week. C. The custodian occasionally uses the cash fund to cash employee checks. D. The custodian endorses reimbursement checks.

B. Reimbursement of the fund from the general cash account occurs twice or more each week.

An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of A. Management fraud. B. Related party transactions. C. Window dressing. D. Weak internal control.

B. Related party transactions.

An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by 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. Relative effectiveness and efficiency of the tests.

12. Which of the following situations will not result in modification of the auditor's report because of a scope limitation? A. Restriction imposed by the client. B. Reliance placed on the report of another auditor. C. Inability to obtain sufficient appropriate evidential matter. D. Inadequacy in the accounting records.

B. Reliance placed on the report of another auditor.

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

B. Review client minutes and obtain a representation letter.

A flowchart is most frequently used by an auditor in connection with the A. Preparation of generalized computer audit programs. B. Review of the client's internal controls. C. Use of statistical sampling in performing an audit. D. Performance of analytical procedures of account balances.

B. Review of the client's internal controls.

The auditor should consider all of the following when deciding whether substantive procedures will be performed at an interim date except: A. The level of control risk. B. Scheduling conflicts in the audit firm that make interim testing more convenient. C. Whether business conditions will change after the interim date. D. The ability to examine the remaining period.

B. Scheduling conflicts in the audit firm that make interim testing more convenient.

An "in-charge" auditor typically holds the rank of A. Associate. B. Senior. C. Manager. D. Partner.

B. Senior.

Typically, an external auditor first gets supervisory experience at what level of authority? A. Associate. B. Senior. C. Manager. D. Partner.

B. Senior.

As opposed to a manual control, an automated control A. Can never be circumvented. B. Should function consistently in the absence of program changes. C. Need not be tested by the auditor. D. Must be tested using the same techniques as a manual control.

B. Should function consistently in the absence of program changes.

Analytical procedures may be classified as being primarily which of the following? A. Tests of controls. B. Substantive procedures. C. Tests of ratios. D. Detailed tests of balances.

B. Substantive procedures.

The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n) A. Analytical procedure. B. Test of controls. C. Substantive procedure. D. Functional test.

B. Test of controls.

Which of the following is a general audit test? A. Fee assessment procedures. B. Tests of controls. C. Preparation of corporate tax returns. D. Active testing procedures.

B. Tests of controls.

Which of the following is false? A. Regardless of the achieved level of control risk in connection with the audit of the financial statements, auditing standards require the auditor to perform some substantive procedures for all significant accounts and disclosures. B. The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective. C. The audit of internal control is intended to draw conclusions about the effectiveness of internal control over financial reporting as of a specific date. D. The auditor is required by AS5 to evaluate the implications of the financial statement audit for the effectiveness of internal control over financial reporting.

B. The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective.

For publicly-held companies, which of the following is integrated into the audit of financial statements? A. Budgetary information audit. B. The audit of internal controls. C. Audit of management forecasts. D. Audit of interim financial statements.

B. The audit of internal controls.

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

B. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.

An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means A. The auditor must consider the integrated thoughts and ideas of everyone on the audit staff. B. The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way. C. The auditor must integrate the same objectives whether auditing internal control or auditing the financial statements. D. Two independent CPA firms must work together on the audit.

B. The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way.

Which statement concerning audit evidence is not valid? A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited. B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated. C. The auditor weighs the cost of obtaining evidence with its usefulness. D. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected.

B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated.

All of the following represent an increased opportunity for management to commit fraud except: A. Significant related party transactions. B. The auditor's relationship with management is strained. C. Management is dominated by a single person. D. The financial statements included highly subjective estimates.

B. The auditor's relationship with management is strained.

An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes A. Management's responsibility to guarantee that there are no material misstatements due to fraud. B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud. C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. D. The auditor's responsibility for the fairness of the financial statements.

B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.

Engagement risk is A. The risk of issuing an incorrect audit opinion. B. The auditor's risk of loss from events arising in connection with financial statements audited and reported upon. C. The overall risk of material misstatement. D. The risk of the client's financial failure.

B. The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.

Which of the following would an auditor most likely use in determining the auditor's planning materiality? A. The anticipated sample size for planned substantive procedures. B. The entity's annualized interim (i.e. quarterly) financial statements. C. The results of the internal control questionnaire. D. The contents of the management representation letter.

B. The entity's annualized interim (i.e. quarterly) financial statements.

Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an audit client. B. The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated. C. The overall risk that a material misstatement exists in the financial statements. D. The risk that auditors use audit procedures that are inappropriate.

B. The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.

68. In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion? A. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. B. The financial statements fail to disclose information that is required by generally accepted accounting principles. C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

B. The financial statements fail to disclose information that is required by generally accepted accounting principles.

51. Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name. B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments. C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks. D. The controller compares the current market prices of recorded investments with the brokers' advices on file.

B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

Which of the following is not a concern as to whether a misstatement is qualitatively material? A. The misstatement hides a failure to meet analysts' expectations. B. The misstatement is less than 5% of pretax income. C. The misstatement increases management's compensation. D. The misstatement changes a small amount of profit to a small reported loss.

B. The misstatement is less than 5% of pretax income.

Client risk as defined in the text is A. The auditor's risk of loss from events arising in connection with financial statements audited and reported upon. B. The overall risk of material misstatement. C. The risk that audit procedures will fail to detect material misstatements. D. The risk of the client's financial failure.

B. The overall risk of material misstatement.

19. In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose A. The name of the other CPA and the type of report issued by the other CPA. B. The portion of the financial statements examined by the other CPA. C. The nature of Frazier's review of the other CPA's work. D. In a footnote the portions of the financial statements that were covered by the examinations of both auditors.

B. The portion of the financial statements examined by the other CPA.

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

B. The process used by management in formulating sensitive accounting estimates.

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because A. Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. B. The records may be accurate even though they are maintained by persons having incompatible functions. C. Substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the client's premises. D. Many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.

B. The records may be accurate even though they are maintained by persons having incompatible functions.

Which of the following is true with respect to the auditor's report? A. The report indicates that the client's financial statements were audited in accordance with generally accepted accounting standards. B. The report indicates that the client's financial statements were audited in accordance with applicable auditing standards. C. The report indicates that the client's financial statements were audited in accordance with the auditor's best judgment. D. The report indicates that the client's financial statements were audited in accordance with statements issued by the FASB.

B. The report indicates that the client's financial statements were audited in accordance with applicable auditing standards.

The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities except: A. The maintenance of asset records. B. The segregation of duties. C. The authorization by management of receipts and expenditures. D. The safeguarding of assets.

B. The segregation of duties.

An independent auditor might consider the procedures performed by the internal auditors because A. They are employees whose work must be reviewed during substantive testing. B. They are employees whose work might be relied upon. C. Their work impacts the cost/benefit tradeoff in evaluating inherent limitations. D. Their degree of independence may be inferred by the nature of their work.

B. They are employees whose work might be relied upon.

Which of the following is an advantage of generalized computer audit packages? A. They are all written in one identical computer language. B. They can be used for audits of clients that use differing IT equipment and file formats. C. They have reduced the need for the auditor to study input controls for IT-related procedures. D. Their use can be substituted for a relatively large part of the required compliance testing.

B. They can be used for audits of clients that use differing IT equipment and file formats.

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

B. This communication should include management changes in the application of significant accounting policies.

Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders? A. To promote an adversarial relationship between the auditor and the corporation's management. B. To enhance auditor independence from the management of the corporation. C. To encourage a policy of rotation of the independent auditors. D. To give management more leverage over the auditor's decisions.

B. To enhance auditor independence from the management of the corporation.

You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases? A. Vouching transactions in accounting records to vendor invoices. B. Tracing vendor invoices to accounting records. C. Recalculation of vendor invoice amounts. D. Confirmation of customer accounts.

B. Tracing vendor invoices to accounting records.

52. Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? A. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer. B. Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box. C. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger. D. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date.

B. Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box.

26. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Significant related party transactions are pervasive. B. Usual trade credit from suppliers is denied. C. Arrearages in preferred stock dividends are paid. D. Restrictions on the disposal of principal assets are present.

B. Usual trade credit from suppliers is denied.

31. An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to A. Verify the cash balance reported on the bank confirmation inquiry form. B. Verify reconciling items on the client's b ank reconciliation.C. Detect lapping. D. Detect kiting.

B. Verify reconciling items on the client's b

In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement for this sample would be: A) $5,000. B) $4,000. C) $2,000. D) $1,000

C) $2,000.

In a monetary-unit sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected misstatement of this sample was: A) $3,000. B) $4,000. C) $6,000. D) $8,000

C) $6,000.

What is channel stuffing? A) A company records revenue before delivery terms can be arranged. B) A company records revenue on goods that will be shipped overseas. C) A company induces distributors to buy substantially more inventory than they can promptly resell. D) A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods

C) A company induces distributors to buy substantially more inventory than they can promptly resell.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following? A) An October invoice was improperly computed. B) An October check from a customer was posted in error to the account of another customer with a similar name. C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. D) An account balance is past due and should be written off

C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

According to FASB ASC 606, which of the following is not part of the five-step approach for revenue recognition? A) Identify the contract(s) with a customer. B) Determine the transaction price. C) Determine whether the buyer will take a discount. D) Identify the performance obligations in the contract

C) Determine whether the buyer will take a discount.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? A) Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. B) Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts. C) Employees involved in the credit-granting function are separated from the sales function. D) Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit

C) Employees involved in the credit-granting function are separated from the sales function.

Which of the following most likely would be an advantage in using classical variables sampling rather than monetary-unit sampling? A) An estimate of the standard deviation of the population's recorded amounts is not required. B) The auditor rarely needs the assistance of a computer program to design an efficient sample. C) Inclusion of zero and negative balances generally does not require special design considerations. D) Any amount that is individually significant is automatically identified and selected

C) Inclusion of zero and negative balances generally does not require special design considerations.

For monetary-unit sampling, a sampling interval of 400 means that: A) every 400th item in the account will be selected in the sample. B) the average size of items in the account is 400. C) every 400th dollar in the account will be included in the sample. D) the average misstatement in sample items is $400.

C) every 400th dollar in the account will be included in the sample.

Which of the following misstatements is not related to the completeness assertion for revenue? A) Goods are shipped, but revenue is not recorded. B) This year's revenue is recorded next year. C) Next year's revenue is recorded this year. D) Revenue is not recognized for services that have been performed

C) Next year's revenue is recorded this year.

The formula for nonstatistical sampling sample sizes provided by the AICPA: A) must be used for nonstatistical sampling. B) includes a provision for the risk of incorrect acceptance. C) includes a measure for the expected misstatement in the population. D) is largely based on the variation of items in the account

C) includes a measure for the expected misstatement in the population.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D) The cashier endorses the checks

C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness? A) The owner reviews errors in billings to customers and postings to the subsidiary ledger. B) A controller receives the monthly bank statement directly and reconciles the checking accounts. C) The owner reviews credit memos before they are recorded. D) The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger

C) The owner reviews credit memos before they are recorded.

What is the primary objective of testing all individually significant items rather than sample testing? A) To increase the audit risk at which a decision will be reached from the results of the sample selected. B) To increase sample size. C) To accept no sampling risk for items greater than tolerable misstatement. D) To increase the size of the confidence bound around the projected misstatement

C) To accept no sampling risk for items greater than tolerable misstatement.

Which of the following is a test of controls for the transaction assertion of completeness for revenue? A) Test a sample of sales invoices for authorized customer orders. B) Review sales orders for proper credit approval. C) Trace shipping documents to sales invoices and the sales journal. D) Examine reconciliation of subsidiary ledger to general ledger control account

C) Trace shipping documents to sales invoices and the sales journal.

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a control listing. A copy of the listing should be sent to the: A) internal auditor to investigate the listing for unusual transactions. B) treasurer to compare the listing with the monthly bank statement. C) accounts receivable bookkeeper to update the subsidiary accounts receivable records. D) entity's bank to compare the listing with the deposit slip.

C) accounts receivable bookkeeper to update the subsidiary accounts receivable records.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because: A) many customers merely sign and return the confirmation without verifying its details. B) recipients usually respond only if they disagree with the information on the request. C) customers may not be inclined to report understatement errors in their accounts. D) auditors typically select many accounts with low recorded balances to be confirmed

C) customers may not be inclined to report understatement errors in their accounts.

Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to: A) evaluate internal control over credit sales. B) test the accuracy of recorded credit sales. C) evaluate the allowance for doubtful accounts. D) verify the existence of the recorded receivables

C) evaluate the allowance for doubtful accounts.

An entity's control activities include all of the following except: A. Performance reviews. B. Information processing. C. External auditor's tests of controls. D. Segregation of duties.

C. External auditor's tests of controls.

Monetary-unit sampling should not be used if: A) the population includes several large items. B) the auditor expects overstatement errors. C) many items in the account are expected to have errors. D) no items in the account are expected to have errors

C) many items in the account are expected to have errors.

An auditor is preparing to sample an entity's customer receivables for overstatement. A statistical sampling method that automatically provides stratification when using systematic selection is: A) attribute sampling. B) ratio-estimation sampling. C) monetary-unit sampling. D) mean-per-unit sampling

C) monetary-unit sampling.

The confidence factor for nonstatistical sampling is based on: A) the number of items in the account. B) auditor judgment. C) the risk of misstatement in the account and the level of desired confidence. D) variability in the population and the risk of misstatement in the account

C) the risk of misstatement in the account and the level of desired confidence.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an: A) understatement of revenues, receivables, and inventory. B) overstatement of revenues and receivables and an understatement of inventory. C) understatement of revenues and receivables and an overstatement of inventory. D) overstatement of revenues, receivables, and inventory

C) understatement of revenues and receivables and an overstatement of inventory.

42. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s) A. "Reasonable period of time, not to exceed one year" and "going concern." B. "Reasonable period of time, not to exceed one year" but not "going concern." C. "Going concern" but not "reasonable period of time, not to exceed one year." D. Neither "going concern" nor "reasonable period of time, not to exceed one year."

C. "Going concern" but not "reasonable period of time, not to exceed one year."

A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be A. $528,000. B. $540,000. C. $588,000. D. $600,000.

C. $588,000.

15. For which of the following events would an auditor issue a report that does not include any reference to consistency? A. A change in the method of accounting for inventories. B. A change from an accounting principle that is not generally accepted to one that is generally accepted. C. A change in the service life used to calculate depreciation expense. D. A change in accounting principle without reasonable justification from management.

C. A change in the service life used to calculate depreciation expense.

The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of A. A management deficiency. B. A design deficiency. C. A deficiency in operation. D. This is not an internal control deficiency.

C. A deficiency in operation.

Which of the following is a source of detection risk? A. Unstable business environment. B. Poor client controls. C. A non-representative sample. D. Inherent risk assessed too high.

C. A non-representative sample.

Section 404 of the Sarbanes-Oxley Act includes which of the following? A. A requirement that management of a publicly traded company issues an assessment of internal control that covers the entire year. B. Specific guidance on what constitutes adequate internal control. C. A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls. D. A requirement that management of a publicly traded company issues an assessment regarding the efficiency of internal control for the year.

C. A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls.

Which of the following is not included in the broad category of assurance services? A. Operational audit. B. Reporting on internal control. C. Accounting or review services. D. Evaluation of the client's risk management framework.

C. Accounting or review services.

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that A. Fraud exists within the relevant accounts. B. Internal control activities are not operating effectively. C. Additional tests of details are required. D. The communication with the audit committee should be revised.

C. Additional tests of details are required.

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

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

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

C. An inquiry of the client's legal counsel concerning litigation.

Where computer processing is used in significant accounting applications, internal control activities may be defined by classifying control activities into two types: general and A. Administrative. B. Specific. C. Application. D. Authorization.

C. Application.

Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and events. B. Assertions about account balances at the period end. C. Assertions about presentation and disclosure. D. None of the above.

C. Assertions about presentation and disclosure.

To provide for the greatest degree of independence in performing internal audit functions, an internal auditor most likely should report to the A. Vice-President - Finance. B. Corporate controller. C. Audit committee of the board of directors. D. Corporate stockholders.

C. Audit committee of the board of directors.

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

C. Balance sheet date but prior to the date of the auditor's report.

Which of the following types of audit evidence is the most persuasive? A. Prenumbered client purchase order forms. B. Client worksheets supporting cost allocations. C. Bank statements obtained from the client. D. Client responses to auditor inquiries.

C. Bank statements obtained from the client.

12. The least crucial element of internal control over cash is A. Separation of cash record-keeping from custody of cash. B. Preparation of the monthly bank reconciliation. C. Batch processing of checks. D. Separation of cash receipts from cash disbursements.

C. Batch processing of checks.

60. An engagement to express an opinion on a system of internal control will generally A. Only require those procedures already applied in assessing control risk during a financial statement audit. B. Increase the reliability of the financial statements that have already been audited. C. Be more extensive in scope than the assessment of control risk made during a financial statement audit. D. Be more limited in scope than the assessment of control risk made during a financial statement audit.

C. Be more extensive in scope than the assessment of control risk made during a financial statement audit.

Of the following statements about an internal control system, which one is correct? A. The maintenance of the system of internal control is an important responsibility of the internal auditor. B. Administrative controls relate directly to the safeguarding of assets. C. Because of the cost/benefit relationship, tests of controls may be applied on a test basis in some circumstances. D. Well designed internal control activities always prevent collusion among employees.

C. Because of the cost/benefit relationship, tests of controls may be applied on a test basis in some circumstances.

69. In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include A. Net Income. B. Stockholders' Equity. C. Both A & B. D. None of the above.

C. Both A & B.

The achieved (actual) level of audit risk A. Can always be accurately assessed by the auditor. B. Should be greater than or equal to acceptable audit risk. C. Can never be known with certainty. D. Is the same for all audit clients.

C. Can never be known with certainty.

32. An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether A. The cash receipts journal was held open for a few days after the year-end. B. The last checks recorded before the year end were actually mailed by the year-end. C. Cash balances were overstated because of kiting. D. Any unusual payments to or receipts from related parties occurred.

C. Cash balances were overstated because of kiting.

All of the following are typically in the current file except: A. Adjusting journal entries. B. Copies of the audit report. C. Chart of accounts. D. Lead schedules.

C. Chart of accounts.

Prior to issuing a report on internal controls over financial reporting, an auditor is required to A. Perform procedures sufficient to identify all control deficiencies. B. Communicate to management, in writing, all control deficiencies previously included in written communication from the internal auditors. C. Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made. D. Represent that no significant deficiencies were noted during the audit of internal control.

C. Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made.

Information and communication includes all of the following except: A. Identifying and recording all valid transactions. B. Determining the time period in which transactions occurred. C. Communicating price changes to customers. D. Properly presenting transactions and related disclosures in the financial statements.

C. Communicating price changes to customers.

Which of the following is not a typical analytical procedure? A. Study of relationships of the financial information with relevant nonfinancial information. B. Comparison of the financial information with similar information regarding the industry in which the entity operates. C. Comparison of recorded amounts of major disbursements with appropriate invoices. D. Comparison of the financial information with budgeted amounts.

C. Comparison of recorded amounts of major disbursements with appropriate invoices.

19. An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the A. Valuation of marketable equity securities. B. Classification of gains and losses on the disposal of securities. C. Completeness of recorded investment income. D. Existence and ownership of investments.

C. Completeness of recorded investment income.

54. When an auditor is unable to inspect and count a client's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to A. Verify any differences between the contents of the box and the balances in the client's subsidiary ledger. B. Provide a list of securities added and removed from the box between the balance sheet date and the security-count date. C. Confirm that there has been no access to the box between the balance sheet date and the security-count date. D. Count the securities in the box so that the auditor will have an independent direct verification.

C. Confirm that there has been no access to the box between the balance sheet date and the security-count date.

46. In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or A. Correspond with the investee company to verify the number of shares owned. B. Inspect the audited financial statements of the investee company. C. Confirm the number of shares owned that are held by an independent custodian. D. Determine that the investment is carried at the lower-of-cost-or-market.

C. Confirm the number of shares owned that are held by an independent custodian.

Which of the following is not an audit procedure that is commonly used in performing tests of controls? A. Inquiring. B. Observing. C. Confirming. D. Inspecting.

C. Confirming.

Before applying substantive procedures to the details of accounts at an interim date (a date prior to the balance sheet date), an auditor should A. Assess control risk at the maximum for the assertions embodied in the accounts selected for interim testing. B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. C. Consider the availability of information at a later date that will be necessary for the auditor's procedures (e.g., electronic data). D. Obtain written representations from management that all financial records and related data will be made available.

C. Consider the availability of information at a later date that will be necessary for the auditor's procedures (e.g., electronic data).

Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditor. B. Correspondence between the auditor and third party vendors. C. Copies of client sales invoices inspected by the auditor. D. Computations made by the auditor.

C. Copies of client sales invoices inspected by the auditor.

17. When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the A. Periods presented plus the one preceding period. B. Current period only. C. Current period and those of the other periods presented. D. Current and immediately preceding period only.

C. Current period and those of the other periods presented.

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

C. Date of the auditor's report.

The AICPA's Statements on Auditing Standards can be described as A. Providing very specific guidance about the specific activities an auditor must perform on each engagement. B. Similar to financial accounting standards in that they are developed by the government. C. Defining the minimum standards of performance for an auditor. D. Providing assurance that an auditor will not issue an incorrect opinion.

C. Defining the minimum standards of performance for an auditor.

Audit documents that record the procedures used by the auditor to gather evidence should be A. Considered the primary support for the financial statements being examined. B. Viewed as the connecting link between the accounting records and the financial statements. C. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement. D. Retained until the audited entity ceases to be a client.

C. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement.

Evaluating a prospective client requires the following step(s): A. Communicate with the SEC. B. Preplan the audit. C. Determine if the firm is independent of the client. D. Communicate with the AICPA.

C. Determine if the firm is independent of the client.

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

C. Disclose the situation in the auditor's report.

41. A Type II subsequent event usually requires A. An adjustment to the financial statements and the footnotes. B. An adjustment to the financial statements but no special disclosure is required. C. Disclosure in the footnotes. D. Neither an adjustment to the financial statements nor disclosure in the footnotes.

C. Disclosure in the footnotes.

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 any unrecorded claims.

C. Discuss the timing of the audit procedures with the client's management.

The first PCAOB general standard recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper A. Business and finance courses. B. Quality control and peer review. C. Education and experience in auditing. D. Supervision and review skills.

C. Education and experience in auditing.

During the first 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. Evaluate the integrity of management. D. Inquire of the client's attorney as to whether any unrecorded claims are probable or asserted.

C. Evaluate the integrity of management.

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

C. Examining customer confirmation replies.

The risk of material misstatement differs from detection risk in that it A. Arises from the misapplication of auditing procedures. B. May be assessed in either quantitative or qualitative terms. C. Exists independently of the actions of the auditor. D. Can be changed at the auditor's discretion.

C. Exists independently of the actions of the auditor.

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the A. Extent of tests of controls. B. Level of detection risk. C. Extent of substantive tests. D. Level of inherent risk.

C. Extent of substantive tests.

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality? A. Potential for fraud. B. The company is close to violating loan covenants. C. Firm policy sets materiality at 4% of pretax income. D. A small misstatement would interrupt an earnings trend.

C. Firm policy sets materiality at 4% of pretax income.

An auditor performing an audit of internal control over financial reporting would be required to A. Rely on the work of internal auditors. B. Test all of the entity's internal controls. C. Form an opinion on the effectiveness of internal control. D. Randomly identify accounts for an audit of internal control.

C. Form an opinion on the effectiveness of internal control.

In creating lead schedules for an audit engagement, what client information is needed to begin? A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balances. B. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year. C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information. D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries.

C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.

Which of the following best describes the role of corporate governance? A. Management decides which accounting principles are the most appropriate. B. Shareholders vote to decide who should be members of the board of directors. C. Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources. D. Management often is compensated based on the company's profitability.

C. Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.

The auditor is least likely to use generalized audit software to A. Perform analytical procedures on the client's data. B. Access information stored on the client's IT files. C. Identify material weaknesses in the client's IT controls. D. Test the accuracy of the client's computations.

C. Identify material weaknesses in the client's IT controls.

Which of the following statements best describes a relationship between sample size and other elements of auditing? A. If materiality increases, so will the sample size. B. If the desired level of assurance increases, sample sizes can be smaller. C. If materiality decreases, sample size will need to increase. D. There is no relationship between sample size and materiality or the desired level of assurance.

C. If materiality decreases, sample size will need to increase.

The auditor is most likely to presume that a high risk of a fraud exists if A. The entity is a multinational company that does business in numerous foreign countries. B. The entity does business with several related parties. C. Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft. D. Inadequate employee training results in lengthy EDP exception reports each month.

C. Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.

The auditor's communication of material weaknesses in internal control for a nonpublic company is A. Required to enable the auditor to state that the examination has been made in accordance with generally accepted auditing standards. B. The principle reason for studying and evaluating the system of internal controls. C. Incidental to the auditor's objective of forming an opinion as to the fair presentation of the financial statements. D. Required to be documented in a formal written report to the board of directors or the board's audit committee.

C. Incidental to the auditor's objective of forming an opinion as to the fair presentation of the financial statements.

The auditor can respond to an increased risk of fraud by doing all of the following except: A. Heavily emphasizing the importance of professional skepticism. B. Assigning more experienced personnel to the audit. C. Increasing detection risk. D. Taking steps to obtain more reliable evidence.

C. Increasing detection risk.

The risk of material misstatement includes which of the following? A. Detection risk. B. Audit risk. C. Inherent risk. D. Nonsampling risk.

C. Inherent risk.

64. Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Cravens will probably A. Decline the engagement. B. Express an unqualified/unmodified opinion on the balance sheet and income statement except for inventory. C. Issue a disclaimer of opinion. D. Issue an adverse opinion.

C. Issue a disclaimer of opinion.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. The details of most recorded transactions are not available after a specified period of time. B. Internal control activities requiring segregation of duties are subject to management override. C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues.

C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that A. The available evidential matter obtained through tests of controls would not support an increased level of control risk. B. A reduction in the assessed level of control risk is justified for certain financial statement assertions. C. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures. D. The assessed level of inherent risk exceeded the assessed level of control risk.

C. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.

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

C. Jurisdiction in which the matter will be resolved.

The largest public accounting firms typically are structured as A. Subchapter S corporations. B. Professional corporations. C. Limited liability partnerships. D. Limited liability corporations.

C. Limited liability partnerships.

Increased fraud risk could also result in all of the following except: A. Lower detection risk. B. Higher inherent risk. C. Lower control risk. D. Higher client risk.

C. Lower control risk.

A typical objective of an operational audit is for the auditor to A. Determine whether the financial statements present fairly the entity's operations. B. Evaluate the feasibility of attaining the entity's operational objectives. C. Make recommendations for improving performance. D. Report on the entity's relative success in attaining profit maximization.

C. Make recommendations for improving performance.

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

C. Management acknowledges responsibility for illegal actions committed by its employees.

A modification of the standard report is required for all of the following conditions except: A. There is a restriction on the scope of the engagement. B. There is other information contained in management's report on internal control. C. Management has concluded that internal controls are not effective. D. A significant subsequent event has occurred since the date being reported on.

C. Management has concluded that internal controls are not effective.

In the context of agency theory, information asymmetry refers to the idea that A. Information can vary in its reliability. B. Information can vary in its relevance. C. Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders). D. Management likely will not act in the best interests of the absentee owners.

C. Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? A. Turnover of senior accounting personnel is low. B. Insiders recently purchased additional shares of the entity's stock. C. Management places substantial emphasis on meeting earnings projections. D. The rate of change in the entity's industry is slow.

C. Management places substantial emphasis on meeting earnings projections.

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

C. Management representation letter.

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

C. Management representation letter.

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

C. Management's compliance with contractual agreements that may affect the financial statements.

22. The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the A. Ability to expand operations into new product lines in the future. B. Feasibility of plans to purchase leased equipment at less than market value. C. Marketability of assets that management plans to sell. D. Committed arrangements to convert preferred stock to long-term debt.

C. Marketability of assets that management plans to sell.

In the context of an audit of financial statements, substantive procedures are audit procedures that A. May be eliminated under certain conditions. B. Are primarily designed to discover significant subsequent events. C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures. D. Will increase proportionately with an increase in the auditor's reliance on internal control.

C. May be either tests of details of transactions, tests of details of account balances, or analytical procedures.

The Audit Committee consists of A. Members of management. B. A subcommittee of the AICPA who establish the SAS. C. Members of the Board of Directors. D. Appointed government overseers.

C. Members of the Board of Directors.

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

C. New information is discovered concerning undisclosed lease transactions in the audited period.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures? 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. Relationships involving income statement accounts.

50. A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should A. Clearly state the specific reasons for lack of independence. B. Not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards. C. Not describe the reason for lack of independence but should state specifically that the CPA is not independent. D. Include a middle paragraph clearly describing the CPA's association with the client and explaining why the CPA was unable to gather sufficient appropriate evidential matter to warrant the expression of an opinion.

C. Not describe the reason for lack of independence but should state specifically that the CPA is not independent.

Which assertions may be tested for the "transactions and events" category of management assertions? A. Existence, completeness, rights and obligations, accuracy, cutoff and classification. B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification. C. Occurrence, completeness, authorization, accuracy, cutoff and classification. D. Existence, rights and obligations, accuracy, authorization, and completeness.

C. Occurrence, completeness, authorization, accuracy, cutoff and classification.

Which of the following would best be described as an assurance service? A. Preparing a report representing a client's position during an IRS audit. B. Working with a client to develop a more efficient method of processing financial transactions. C. Offering an opinion concerning the accuracy of statements made on a client's website relating to the client's online privacy policies. D. Assisting a client in identifying potential sources of capital for potential acquisitions.

C. Offering an opinion concerning the accuracy of statements made on a client's website relating to the client's online privacy policies.

25. An imprest cash account is A. Used for investing in marketable securities. B. The principal cash account for an entity. C. One that contains a stipulated amount of money and is used for limited purposes. D. The principal checking account for a branch of an entity.

C. One that contains a stipulated amount of money and is used for limited purposes.

In determining whether transactions have been recorded, the direction of the audit testing should start from the A. General ledger balances. B. Adjusted trial balance. C. Original source documents. D. General journal entries.

C. Original source documents.

A well-prepared flowchart should make it easier for the auditor to A. Prepare audit procedure manuals. B. Prepare detailed job descriptions. C. Perform walkthroughs. D. Assess the degree of accuracy of financial data.

C. Perform walkthroughs.

Assurance services may improve all of the following except A. Relevance. B. Credibility. C. Periodicity. D. Reliability.

C. Periodicity.

15. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Review the composition of authenticated deposit slips. B. Review subsequent bank statements received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.

C. Prepare a schedule of bank transfers.

An auditor will use the IT test data method in order to gain certain assurances with respect to the A. Input data. B. Machine capacity. C. Procedures contained within the program. D. Degree of keypunching accuracy.

C. Procedures contained within the program.

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of A. Objective cynicism. B. Independent differentialism. C. Professional skepticism. D. Impartial conservatism.

C. Professional skepticism.

The first PCAOB general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and A. Independence with respect to the financial statements and supplementary disclosures. B. Exercising professional care as judged by peer reviewers. C. Proficiency as an auditor which likely has been acquired from previous experience. D. Objectivity as an auditor as verified by proper supervision.

C. Proficiency as an auditor which likely has been acquired from previous experience.

The basic purpose of a financial statement audit is to A. Detect fraud. B. Examine individual transactions so that the auditor may certify as to their validity. C. Provide assurance regarding whether the client's financial statements are fairly stated. D. Assure the consistent application of correct accounting procedures.

C. Provide assurance regarding whether the client's financial statements are fairly stated.

The authoritative body designed to promulgate standards concerning an accountant's association with audited financial statements of an entity that is required to file financial statements with the SEC is the A. Financial Accounting Standards Board. B. General Accounting Office. C. Public Company Accounting Oversight Board. D. Auditing Standards Board.

C. Public Company Accounting Oversight Board.

Of the following, the most reliable type of evidence typically is: A. Confirmation. B. Inspection of records and documents. C. Reperformance. D. Observation.

C. Reperformance.

Analytical procedures are A. Never required. B. Required for planning, substantive testing, and overall review of the financial statements. C. Required for planning and overall review of the financial statements. D. Required during planning only.

C. Required for planning and overall review of the financial statements.

You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Accuracy.

C. Rights and obligations.

You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Valuation or allocation.

C. Rights and obligations.

Which of the following arranges the general types of audit tests in the order they are normally performed in an audit? A. Substantive procedures, tests of controls, and risk assessment procedures. B. Substantive procedures, risk assessment procedures, and tests of controls. C. Risk assessment procedures, tests of controls, and substantive procedures. D. Risk assessment procedures, substantive procedures, and tests of controls.

C. Risk assessment procedures, tests of controls, and substantive procedures.

S&H Associates has just performed an audit of Bob's Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true? A. S&H must still assume that management has assessed the effectiveness of internal control. B. Depending on other factors in the audit, S&H can still issue an unqualified opinion. C. S&H should consider this situation a limitation on the scope of the audit. D. Management does not need to give S&H a letter if they have disclosed all known internal control deficiencies.

C. S&H should consider this situation a limitation on the scope of the audit.

To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques? A. Reviewing management documentation. B. Inquiry. C. Scanning. D. Transaction walkthroughs.

C. Scanning.

26. An auditor ordinarily should send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance, because this procedure A. Provides for confirmation regarding compensating balance arrangements. B. Detects kiting activities that may not otherwise be discovered. C. Seeks information about indebtedness to the bank. D. Verifies securities held by the bank in safekeeping.

C. Seeks information about indebtedness to the bank.

29. Generally, loss contingencies that are judged to be remote A. Should be disclosed in the footnotes. B. Should be recorded in the financial statements. C. Should not be disclosed in the footnotes. D. Should be recorded in the financial statements and the footnotes.

C. Should not be disclosed in the footnotes.

53. When audited financial statements are presented in a document containing other information, the auditor A. Has an obligation to perform auditing procedures to corroborate the other information. B. Is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact. C. Should read the other information to consider whether it is inconsistent with the audited financial statements. D. Has no responsibility for the other information because it is not part of the basic financial statements.

C. Should read the other information to consider whether it is inconsistent with the audited financial statements.

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent A. Disclosures of information that significantly contradict the auditor's going concern assumption. B. Material fraud or illegal acts perpetrated by high-level management. C. Significant design flaws in internal controls or poor implementation of internal controls. D. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

C. Significant design flaws in internal controls or poor implementation of internal controls.

ACL is an example of A. An EDI software package. B. An IT software package. C. Software that allows auditors to retrieve and evaluate data from client systems. D. A type of networking.

C. Software that allows auditors to retrieve and evaluate data from client systems.

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. Square footage of selling space.

Which of the following best describes what is meant by generally accepted auditing standards? A. Audit assertions generally determined on audit engagements. B. Acts to be performed by the auditor. C. Standards of quality for the auditor's performance. D. Procedures to be used to gather evidence to support financial statements.

C. Standards of quality for the auditor's performance.

The auditor's report is generally addressed to the A. Chief operating officer. B. Securities and Exchange Commission. C. Stockholders of the company. D. Chief financial officer.

C. Stockholders of the company.

53. When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against A. Unauthorized negotiation of the securities before they are counted. B. Unrecorded sales of securities after they are counted. C. Substitution of securities already counted at one location for other securities that should be on hand at a different location but are not. D. Substitution of authentic securities with counterfeit securities.

C. Substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.

Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project? A. Grandfather-father-son record retention. B. Input and output validation routines. C. Systems documentation. D. Check digit verification.

C. Systems documentation.

Which of the following audit tests would be regarded as a test of controls? A. Tests of the specific items making up the balance in a given general ledger account. B. Tests comparing inventory pricing to vendors' invoices. C. Tests of the signatures on canceled checks to the board of directors' authorizations. D. Tests of the additions to property, plant, and equipment by physical inspections.

C. Tests of the signatures on canceled checks to the board of directors' authorizations.

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities A. Documented in the flowchart. B. Considered to be weaknesses that might allow errors to enter the accounting system. C. That the auditor plans to rely on. D. That would aid in preventing fraud.

C. That the auditor plans to rely on.

71. Who generally signs the legal letter? A. The board of directors. B. The audit partner. C. The CEO of the entity being audited. D. The entity's attorneys.

C. The CEO of the entity being audited.

The audit working papers belong to A. The client. B. The government. C. The audit firm. D. They are public record documents.

C. The audit firm.

55. What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB? A. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. B. The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information. C. The auditor should apply certain limited procedures to the required supplementary information and report deficiencies in or omissions of, such information. D. The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.

C. The auditor should apply certain limited procedures to the required supplementary information and report deficiencies in or omissions of, such information.

The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of A. The stock exchange officials. B. The independent auditor. C. The company's management. D. The Securities and Exchange Commission.

C. The company's management.

Which of the following best describes the general character of the three PCAOB generally accepted auditing standards that are classified as standards of fieldwork? A. The competence, independence, and professional care of persons performing the audit. B. Criteria for the content of the auditor's report on financial statements and related footnote disclosures. C. The criteria of audit planning and evidence-gathering. D. The need to maintain independence in mental attitude in all matters relating to the audit.

C. The criteria of audit planning and evidence-gathering.

An internal auditor is likely to be more concerned with _________________ than the external auditor. A. Internal administrative procedures. B. Cost accounting procedures. C. The efficiency of operations. D. Internal control.

C. The efficiency of operations.

The risk assessment component of internal controls refers to A. The auditor's assessment of control risk. B. The auditor's assessment of client risk. C. The entity's identification and analysis of risks relevant to achievement of its objectives. D. The entity's monitoring of the potential for material misstatements.

C. The entity's identification and analysis of risks relevant to achievement of its objectives.

Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments? A. A misstatement exceeded five percent of net income. B. The auditor also provides consulting services to the audit client. C. The misstatement will cause the client to fail to meet an earnings forecast. D. The audit committee is not well-educated about the accounting principle in question.

C. The misstatement will cause the client to fail to meet an earnings forecast.

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A. It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor. B. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. D. It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

C. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.

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

C. The outcome of the event is judged to be reasonably possible but the loss cannot be reasonably estimated.

49. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year-end. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.

C. The request was mailed by the assistant treasurer.

Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control? A. Multiple locations and business units. B. Service organizations. C. The role of the auditor in internal control. D. Safeguarding assets.

C. The role of the auditor in internal control.

Which of the following statements about the study of auditing is NOT true? A. The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors. B. The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information. C. The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements. D. The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions.

C. The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.

An IT specialist is least likely to be necessary when A. Data are shared extensively among systems. B. The entity participates heavily in electronic commerce. C. The system has not changed from the prior year. D. Significant audit evidence is in electronic form.

C. The system has not changed from the prior year.

The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because A. Internal auditors' audit programs, audit documents, and reports can eliminate the need for the independent auditor's staff. B. The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. C. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. D. The understanding of the internal audit function is an important substantive procedure to be performed by the independent auditor.

C. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.

The definition of auditing refers to auditing as a "systematic process of objectively obtaining and evaluating evidence regarding assertions 1⁄4" What is meant by "systematic process"? A. All audits involve obtaining the same evidence. B. All audits involve evaluating evidence in the same manner. C. There should be a well-planned approach for obtaining and evaluating evidence. D. All assertions are equally important for all audits.

C. There should be a well-planned approach for obtaining and evaluating evidence.

External auditors are referred to as "external" because A. They report to users outside of the audited entity. B. They are paid by parties outside of the audited entity. C. They are not employees of the entity being audited. D. Their offices are not at the entity's place of business.

C. They are not employees of the entity being audited.

Which of the following is true of generalized audit software packages? A. They can be used only in auditing online computer systems. B. They can be used on any computer without modification. C. They each have their own characteristics that the auditor must carefully consider before using in a given audit situation. D. They enable the auditor to perform all manual test procedures less expensively.

C. They each have their own characteristics that the auditor must carefully consider before using in a given audit situation.

As the acceptable level of detection risk increases, an auditor may change the A. Assessed level of control risk from below the maximum to the maximum level. B. Assurance provided by tests of controls by using a larger sample size than planned. C. Timing of substantive procedures from year-end to an interim date. D. Nature of substantive procedures from less effective to more effective procedures.

C. Timing of substantive procedures from year-end to an interim date.

Which of the following best describes the primary purpose of audit procedures? A. To detect all errors or fraudulent activities. B. To comply with generally accepted accounting principles. C. To gather corroborative evidence about management's assertions. D. To verify the accuracy of the balance sheet account balances.

C. To gather corroborative evidence about management's assertions.

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

C. To identify the potential financial statement effects of errors or disputed items that were considered immaterial when discovered.

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

C. To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed.

In the context of an audit of internal controls, the auditor must document all of the following except: A. The extent to which he or she relied upon work performed by others. B. The auditor's understanding and evaluation of the design of each of the components of the entity's internal control over financial reporting. C. Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur. D. The evaluation of any deficiencies discovered that could result in a modification of the auditor's report.

C. Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur.

16. If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n) A. "Except for" opinion. B. Adverse opinion. C. Unqualified/unmodified opinion. D. Disclaimer of opinion.

C. Unqualified/unmodified opinion.

14. Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an) A. Qualified report due to a scope limitation. B. Qualified report due to a departure from GAAP. C. Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph. D. Unqualified/unmodified report in a standard auditor's report.

C. Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph.

A confirmation is used to A. Verify the inventory count is correct. B. Verify that a control is being observed. C. Verify a representation from a third party. D. Verify that a specific trend is correct.

C. Verify a representation from a third party.

Which of the following procedures would not be used to obtain an understanding of the entity and its environment? A. Observe entity operations. B. Reperform entity processes. C. Verify proper valuation of inventory subject to technological obsolescence. D. Review prior year's audit documentation.

C. Verify proper valuation of inventory subject to technological obsolescence.

Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance? A. The risk that financial statements are misstated because of fraud. B. The risk that financial statements are misstated because of error or fraud. C. Whether management has systems in place to evaluate and effectively manage the entity's business risks. D. Developing client acceptance and continuance practices that minimize the likelihood of lawsuits against the auditor.

C. Whether management has systems in place to evaluate and effectively manage the entity's business risks.

An accounts receivable account balance is $500,000 and the auditor determines a sample size of 30 would provide adequate assurance. The auditor plans to use a monetary-unit sampling plan with systematic sample selection. The auditor notices that there are six customer accounts of at least $15,000 and would like the systematic selection technique to select all items that are at least $15,000, even if that means the sample size is slightly larger than 30. To achieve the auditor's objectives, the sampling interval should be: A) 6. B) 20. C) 16,666. D) 15,000

D) 15,000

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the entity's confirmation letter? A) An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct. B) A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent. C) An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor. D) A client-prepared statement of account showing the details of the customer's account balance.

D) A client-prepared statement of account showing the details of the customer's account balance.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? A) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. B) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. C) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. D) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances

D) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances

Which of the following is not an issue related to the valuation of accounts receivable? A) The credit granting function. B) A proper allowance for doubtful accounts. C) The net realizable value of accounts receivable. D) Proper cutoff

D) Proper cutoff

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable? A) Tracing amounts in the subsidiary ledger to details on shipping documents. B) Comparing receivable turnover ratios to industry statistics for reasonableness. C) Inquiring about receivables pledged under loan agreements. D) Assessing the allowance for uncollectible accounts for reasonableness

D) Assessing the allowance for uncollectible accounts for reasonableness

An auditor is performing substantive procedures of pricing and extension of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate? A) Unstratified mean-per-unit. B) Monetary-unit sampling. C) Stop or go. D) Difference projection

D) Difference projection

Which of the following statements best describes an inherent limitation of the monetary-unit sampling method? A) It can only be used for substantive testing of asset accounts. B) It requires the use of a computer system to perform the required calculations. C) Misstatement rates must be large and the misstatements must be overstatements. D) Misstatement rates must be small and the misstatements must be overstatements

D) Misstatement rates must be small and the misstatements must be overstatements

Which of the following might be detected by an auditor's review of the entity's sales cutoff? A) Excessive goods returned for credit. B) Unrecorded sales discounts. C) Lapping of year-end accounts receivable. D) Overstated sales for the year

D) Overstated sales for the year

Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process? A) Comparing control totals for shipping documents with corresponding totals for sales invoices. B) Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. C) Matching shipping documents with approved sales orders before invoice preparation. D) Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

D) Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program? A) Tracing audited cash receipts to accounts receivable credits. B) Selecting accounts to be confirmed on a random basis. C) Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts. D) Resolving differences reported by customers on confirmation requests

D) Resolving differences reported by customers on confirmation requests

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor? A) Granting of credit. B) Shipment of goods. C) Determination of discounts. D) Selling of goods for cash

D) Selling of goods for cash

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? A) Greater reliance on internal controls. B) Greater reliance on analytical procedures. C) Smaller expected frequency of misstatements. D) Smaller measure of tolerable misstatements.

D) Smaller measure of tolerable misstatements.

Which of the following is not an inherent risk factor for the revenue process? A) Complexity of revenue recognition issues. B) Difficulty of auditing transactions. C) Special industry practices. D) The entity does not follow its stated policies for sales order approvals

D) The entity does not follow its stated policies for sales order approvals

Which of the following is the best argument against the use of negative accounts receivable confirmations? A) The cost-per-response is excessively high. B) There is no way of knowing if the intended recipients received them. C) Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment. D) The inference drawn from receiving no reply may not be correct

D) The inference drawn from receiving no reply may not be correct

The accounting department reports that the balance of accounts receivable is $210,000. You are willing to accept that balance if audit sampling suggests it is within $15,000 of the actual balance. Using a classical variables sampling plan, you compute a 95% confidence interval of $208,000 to $225,000. You would therefore: A) not be able to determine the acceptability of the receivable balance. B) accept the balance but with a lower level of confidence. C) take a larger sample before totally rejecting the balance and requiring adjustments. D) accept the $210,000 balance because the confidence interval is within the materiality limits

D) accept the $210,000 balance because the confidence interval is within the materiality limits

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the: A) cash receipts journal to the sales journal. B) sales journal to the cash receipts journal. C) shipping documents to the accounting records. D) accounting records to the shipping documents

D) accounting records to the shipping documents

For monetary-unit sampling, the number of items tested is: A) always equal to sample size. B) always greater than sample size. C) always greater than or equal to sample size. D) always less than or equal to sample size

D) always less than or equal to sample size

When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the ________ assertion. A) classification B) cutoff C) existence D) completeness

D) completeness

The risk of incorrect acceptance and the risk of overreliance (Type II Errors) relate to the: A) preliminary estimates of materiality levels. B) allowable risk of tolerable error. C) efficiency of the audit. D) effectiveness of the audit.

D) effectiveness of the audit.

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to: A) increase the balance in the allowance for bad debts account. B) review the going concern ramifications. C) require the entity to tighten its credit policy. D) expand tests regarding the collectability of receivables

D) expand tests regarding the collectability of receivables

If the upper limit on misstatements exceeds tolerable misstatement, the auditor is least likely to: A) increase sample size. B) conduct other substantive procedures. C) adjust the account balance. D) increase the risk of incorrect rejection

D) increase the risk of incorrect rejection

When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ________ assertion. A) cutoff B) authorization and accuracy C) completeness D) occurrence

D) occurrence

In applying classical variables sampling, an auditor attempts to: A) estimate a qualitative characteristic of interest. B) determine various rates of occurrence for specified attributes. C) discover at least one instance of a critical deviation. D) predict a monetary population value within a range of precision

D) predict a monetary population value within a range of precision

In the confirmation of accounts receivable, the auditor would most likely: A) send negative confirmations when the assessed risk of material misstatement is high. B) seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables. C) require confirmation of all receivables from agencies of the federal government. D) require that confirmation requests be sent as soon as possible after fiscal year-end

D) require that confirmation requests be sent as soon as possible after fiscal year-end

In a monetary-unit sampling plan, the upper misstatement limit is $11,200 and the risk of incorrect acceptance is 5%. This means that: A) tolerable misstatement is $11,200. B) there is a 95% chance that the actual misstatement in the account is $11,200 or more. C) there is a 95% chance that the actual misstatement in the account is $11,200. D) there is a 95% chance that the actual misstatement in the account is $11,200 or less

D) there is a 95% chance that the actual misstatement in the account is $11,200 or less

A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2011. The number of subscribers increased steadily throughout the year and at December 31, 2011, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2011 and was increased to $12 for new members on April 1, 2011. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2011, would be approximately A. $179,400. B. $171,600. C. $164,400. D. $163,800.

D. $163,800.

Which of the following is NOT a requirement of the Sarbanes-Oxley Act? A. Audit firms cannot provide most types of nonaudit services to their public company audit clients. B. Audit firms are required to rotate audit partners off audit engagements every five years for public company audits. C. Firms that audit public companies are subject to inspection by the PCAOB. D. A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.

D. A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.

Which of the following statements concerning audit evidence is correct? A. Appropriate evidence supporting management's assertions should be convincing rather than persuasive. B. Effective internal controls contribute little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.

D. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.

Which of the following is an example of a related party transaction? A. An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A. B. A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor. C. A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A. D. A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.

D. A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.

38. Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? A. There is no access to securities between the year-end and the date of the auditor's security count. B. Proceeds from the sale of investments are received by an employee who does not have access to securities. C. Investment acquisitions are authorized by a member of the Board of Directors before execution. D. Access to securities requires the presence of two designated officials.

D. Access to securities requires the presence of two designated officials.

42. The auditor should insist that a representative of the client be present during the physical examination of securities in order to A. Lend authority to the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned.

D. Acknowledge the receipt of securities returned.

If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end A. Additional tests are seldom conducted for the remaining period. B. Additional control tests are required in the remaining period. C. The client's controls likely are ineffective. D. Additional tests likely will be performed in the remaining period.

D. Additional tests likely will be performed in the remaining period.

Which of the following statements is false? A. The PCAOB focuses on the financial reporting objective of internal controls. B. Management is required to base internal controls on a recognized control framework. C. Most U.S. companies use the internal control framework developed by COSO in the early 1990s. D. All controls relevant to financial reporting are accounting controls.

D. All controls relevant to financial reporting are accounting controls.

Examples of entity-level controls include A. Management's risk assessment process. B. Controls to monitor results of operations. C. The period-end financial reporting process. D. All of the above are examples of entity-level controls.

D. All of the above are examples of entity-level controls.

In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except: A. Test some of the work performed by others to evaluate the quality and effectiveness of their work. B. Evaluate the nature of the controls subjected to the work of others. C. Evaluate the competence and objectivity of the individuals who performed the work. D. All of the above are required.

D. All of the above are required.

In assessing whether to accept a client for an audit engagement, a CPA should consider A. The current financial health of the prospective client. B. The integrity of management. C. The CPA's overall engagement risk. D. All of the above should be considered.

D. All of the above should be considered.

23. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding A. Existence. B. Rights and obligations. C. Completeness. D. All of the above.

D. All of the above.

46. Auditing standards define special purpose financial statements as including those prepared under the following base(s) A. Regulatory basis. B. Tax basis. C. Contractual basis. D. All of the above.

D. All of the above.

All audit documentation should have a heading, which includes A. Name of the client. B. Title of the working paper. C. Client's year-end date. D. All of the above.

D. All of the above.

Under the Sarbanes-Oxley Act, the audit committee of a public company has the following requirement(s): A. Each member of the committee must be a board member and shall be independent. B. The audit committee must preapprove all audit and nonaudit services. C. The audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing. D. All of the above.

D. All of the above.

Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective internal control system provides more reliable audit evidence.

D. An effective internal control system provides more reliable audit evidence.

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of A. Tests of transactions and balances. B. A preliminary review of internal controls. C. Specialized audit programs. D. Analytical procedures.

D. Analytical procedures.

Analytical procedures used in planning an audit should focus on identifying A. Material weaknesses in internal control. B. The predictability of financial data from individual transactions. C. The various assertions that are embodied in the financial statements. D. Areas that may represent specific risks relevant to the audit.

D. Areas that may represent specific risks relevant to the audit.

Reports on service organizations typically A. Provide reasonable assurance that their financial statements are free of material misstatements. B. Ensure that the client will not have any misstatements in areas related to the service organization's activities. C. Ensure that the client is billed correctly. D. Assess whether the service organization's controls are suitably designed to achieve internal control objectives.

D. Assess whether the service organization's controls are suitably designed to achieve internal control objectives.

An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the A. Securities and Exchange Commission. B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Audit committee of the board of directors.

D. Audit committee of the board of directors.

Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that A. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposes. B. Audit documents should be the primary support for the financial statements being examined. C. Audit documents should be considered as a substitute for the client's accounting records. D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.

D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.

Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission? A. Hash total. B. Parity check. C. Encryption. D. Check digit.

D. Check digit.

An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except: A. Materiality should be reduced. B. Risk of material misstatement should increase. C. Detection risk should increase. D. Audit risk should increase.

D. Audit risk should increase.

Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk? A. The specific business risks an entity faces that may result in financial statement errors and fraud. B. Business risk factors that impact the ability of the entity to be profitable and survive. C. Audit standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements. D. Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability.

D. Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability.

A high detection risk strategy includes all of the following except: A. Interim testing. B. Reduced testing of transactions. C. Heavy reliance on analytical procedures as substantive procedures. D. Audit work only completed at year-end.

D. Audit work only completed at year-end.

55. Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the independent auditor's client owns a 45 percent voting interest? A. Market quotations of the investee company's stock. B. The current fair value of the investee company's assets. C. Historical costs of the investee company's assets. D. Audited financial statements of the investee company.

D. Audited financial statements of the investee company.

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be well documented and cross-referenced in the audit documents. B. Be based on sources that are considered reliable. C. Bear a direct relationship to the audit assertion. D. Be persuasive enough to enable the auditor to form an opinion.

D. Be persuasive enough to enable the auditor to form an opinion.

18. A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis: A. Read the financial statements of the current period. B. Read the financial statements of the past five years. C. Obtain a letter of representations from the current-year, successor auditor. D. Both a and c.

D. Both a and c.

The three PCAOB general standards are concerned with A. Adequate training and proficiency of the auditor, proper planning and supervision, and due professional care. B. Adequate training and independence. C. Due professional care. D. Both b and c.

D. Both b and c.

Which of the following audit risk components may be assessed in qualitative terms? A. Risk of material misstatement. B. Detection risk. C. Neither risk of material misstatement nor detection risk. D. Both risk of material misstatement and detection risk.

D. Both risk of material misstatement and detection risk.

The documentation of an auditor's understanding of internal controls A. Is optional. B. Must be exclusively in either narrative, questionnaire, or flowchart form. C. Must include flowcharts. D. Can include any combination of narratives, questionnaire, or flowcharts.

D. Can include any combination of narratives, questionnaire, or flowcharts.

A field test is a A. Test to ensure that a numerical value in a field does not exceed some predetermined value. B. Check to ensure that the value in a field falls within an allowable range of values. C. Check to ensure that the data in a field have the proper arithmetic sign. D. Check on a field to ensure that it contains either all numeric or alphabetic characters.

D. Check on a field to ensure that it contains either all numeric or alphabetic characters.

44. Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical procedures and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information forms 1099. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and A. Monetary stimulus. B. Evaluation. C. Accuracy. D. Compliance.

D. Compliance.

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

D. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

Which of the following audit procedures would be least likely to disclose the existence of related party transactions of a client during the period under audit? A. Reading "conflict-of-interest" statements obtained by the client from its management. B. Scanning accounting records for large transactions at or just prior to the end of the period under audit. C. Reading minutes of the Board of Directors meetings for authorization or discussion of material transactions. D. Confirming purchases and sales transactions with the vendors and/or customers involved.

D. Confirming purchases and sales transactions with the vendors and/or customers involved.

44. When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Prepare prospective financial information to verify whether management's plans can be effectively implemented. B. Project future conditions and events for a period of time not to exceed one year following the date of the financial statements. C. Issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements. D. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

D. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should A. Express an opinion that is qualified due to the inability of the client company to continue as a going concern. B. Evaluate management's performance in causing this decline. C. Require footnote disclosure. D. Consider the possibility of an error in the financial statements.

D. Consider the possibility of an error in the financial statements.

In general, material frauds perpetrated by which of the following are most difficult to detect? A. Internal auditor. B. Keypunch operator. C. Cashier. D. Controller.

D. Controller.

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

D. Corroboration of the information furnished by management concerning litigation, claims, and assessments.

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

D. Corroborative inquiries made of the client by the auditor.

An auditor learns that a client employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except: A. Fraud risk increases. B. The risk of misappropriation of assets increases. C. Risk of material misstatement increases. D. Detection risk increases.

D. Detection risk increases.

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? A. Perform detailed testing of the individual balance sheet accounts. B. Examining documents to detect illegal acts having a material effect on the financial statements. C. Considering whether the client's accounting estimates are reasonable in the circumstances. D. Determining the extent of involvement of the client's internal auditors.

D. Determining the extent of involvement of the client's internal auditors.

56. Which of the following procedures would be most important in the audit of an investment valued at fair value? A. Compare the balance in the investment account to the prior year. B. Read the footnote disclosure related to the investment. C. Inquire of management's regarding the accuracy and reliability of the underlying data. D. Develop an independent estimate of the fair value measurement.

D. Develop an independent estimate of the fair value measurement.

The program flowcharting symbol representing a decision is a A. Triangle. B. Circle. C. Rectangle. D. Diamond.

D. Diamond.

Audit evidence concerning proper segregation of duties ordinarily is best obtained by A. Preparation of a flowchart of duties performed by available personnel. B. Inquiring whether control activities operated consistently throughout the period. C. Reviewing job descriptions prepared by the Personnel Department. D. Direct personal observation of the employees who apply control activities.

D. Direct personal observation of the employees who apply control activities.

43. Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must A. Obtain written approval from the predecessor auditor to include the prior year's financial statements. B. Issue a standard comparative audit report indicating the division of responsibility. C. Express an opinion on the current year statements alone and make no reference to the prior year statements. D. Disclose the reasons for any qualification in the predecessor auditor's opinion.

D. Disclose the reasons for any qualification in the predecessor auditor's opinion.

Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion? A. Nothing has come to management's attention to suggest that the company's internal control is less than effective. B. Statements suggesting only negative assurance. C. A conclusion that the company's internal control over financial reporting is effective when a material weakness exists at the end of the reporting period. D. Disclosure of material weaknesses corrected during the period.

D. Disclosure of material weaknesses corrected during the period.

In an audit of financial statements of a private company in accordance with generally accepted auditing standards, an auditor is required to A. Identify specific internal control activities relevant to management's financial statement 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 misstatements. D. Document the auditor's understanding of the entity's internal control.

D. Document the auditor's understanding of the entity's internal control.

Which of the following describes the PCAOB generally accepted auditing standard requiring a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision? A. Proficiency. B. Audit risk. C. Inspection. D. Due care.

D. Due care.

The objectives of the engagement partner's communication with the audit team include A. Maintaining an adversarial atmosphere between the auditor and management. B. Complying with SEC rules. C. Complying with FASB rules. D. Emphasizing the importance of professional skepticism.

D. Emphasizing the importance of professional skepticism.

A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n) A. Client representation letter. B. Letter of audit inquiry. C. Management letter. D. Engagement letter.

D. Engagement letter.

Engagement risk can be eliminated by A. Establishing policies for client acceptance and continuance. B. Lowering audit risk. C. Lowering materiality. D. Engagement risk cannot be eliminated.

D. Engagement risk cannot be eliminated.

34. A primary purpose of the proof of cash is to A. Prevent fraud. B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements. C. Investigate variances from expected cash balances. D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

An organizational structure is important for all of the following reasons except: A. Ensuring proper monitoring. B. Defining areas of authority. C. Creating clear lines of reporting. D. Ensuring a proper commitment to controls.

D. Ensuring a proper commitment to controls.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the A. Efficiency of management's decision-making process. B. Appropriate prices that the entity should charge for its products. C. Methods of assigning production tasks to employees. D. Entity's ability to accurately process and summarize financial data.

D. Entity's ability to accurately process and summarize financial data.

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

D. Evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.

41. In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker. B. Inspection and count of stocks and bonds. C. Vouching all changes during the year to brokers' advices and statements. D. Examination of canceled checks issued in payment of securities purchased.

D. Examination of canceled checks issued in payment of securities purchased.

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? A. Analysis of balance sheet accounts. B. Analysis of income statement accounts. C. All matters of continuing accounting significance. D. Facts that might bear on management integrity.

D. Facts that might bear on management integrity.

Procedures specifically outlined in an audit program are designed primarily to A. Assess risk for planning purposes. B. Detect all errors or fraudulent activities. C. Test internal control systems. D. Gather evidence about management's assertions.

D. Gather evidence about management's assertions.

33. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

D. General ledger.

To emphasize auditor independence from management, publicly traded corporations are required to A. Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee. B. Establish a policy of discouraging social contact between employees of the corporation and the independent auditors. C. Request that a representative of the independent auditor be on hand at the annual stockholders' meeting. D. Have the independent auditor report to an audit committee of independent members of the board of directors.

D. Have the independent auditor report to an audit committee of independent members of the board of directors.

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

D. Identify possible unasserted litigation, claims, and assessments.

The primary purpose of a generalized computer audit program is to allow the auditor to A. Use the client's employees to perform routine audit checks of the electronic data processing records that otherwise would be done by the auditor's staff accountants. B. Test the logic of computer programs used in the client's electronic data processing systems. C. Select larger samples from the client's electronic data processing records than would otherwise be selected without the generalized program. D. Independently process client electronic data processing records.

D. Independently process client electronic data processing records.

Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if A. Compliance tests were not performed by the internal auditor during the remaining period. B. The internal control system provides a basis for reliance in reducing the extent of substantive procedures. C. The auditor used nonstatistical sampling during interim compliance testing. D. Inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.

D. Inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the A. Adequacy of the preplanned audit program. B. Ability to establish consistency in application of accounting principles between years. C. Apparent scope limitation. D. Integrity of management.

D. Integrity of management.

Which of the following is not explicitly a part of the IIA's definition of internal auditing? A. Internal auditing is an objective assurance activity. B. Internal auditing is a consulting activity. C. Internal auditing should help an organization accomplish its objectives. D. Internal auditors should help external auditors complete the annual financial statement audit.

D. Internal auditors should help external auditors complete the annual financial statement audit.

Which of the following situations would most likely require special audit planning? A. Some items of factory and office equipment do not bear identification numbers. B. Depreciation methods used on the client's tax return differ from those used on the books. C. Assets costing less than $500 are expensed even though the expected life exceeds one year. D. Inventory is comprised of precious stones.

D. Inventory is comprised of precious stones.

All of the following are significant deficiencies except: A. Absence of appropriate reviews of transactions. B. Evidence of willful wrongdoing by lower-level employees. C. Inadequate provisions for safeguarding assets. D. Inventory is highly subject to obsolescence.

D. Inventory is highly subject to obsolescence.

28. An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A. Is considered an "except for" qualification of the opinion. B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D. Is appropriate and would not negate the unqualified/unmodified opinion.

D. Is appropriate and would not negate the unqualified/unmodified opinion.

A dual-purpose test A. Simultaneously tests debits and credits. B. Is a procedure completed by both the internal and external auditors. C. Is useful to both the entity and the auditor. D. Is both a substantive test of transactions and a test of controls.

D. Is both a substantive test of transactions and a test of controls.

An "integrated audit" A. Will, in most cases, lead to a substantive audit strategy. B. Denies the auditor access to information about the client's controls. C. May be performed by two separate audit firms. D. Is comprised of audits of internal control over financial reporting and of financial statements.

D. Is comprised of audits of internal control over financial reporting and of financial statements.

41. In the auditor's report, the principal auditor decides not to make reference to another CPA who audited a client's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor A. Issues an unqualified/unmodified opinion on the consolidated financial statements. B. Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements. C. Is unable to review the other CPA's audit programs and working papers. D. Is satisfied as to the other CPA's independence and professional reputation.

D. Is satisfied as to the other CPA's independence and professional reputation.

Which of the following statements regarding the PCAOB is incorrect? A. It is a public-sector, nonprofit corporation. B. It is overseen by the SEC. C. It sets standards for public company audits. D. It has delegated all of its standard-setting authority to the AICPA.

D. It has delegated all of its standard-setting authority to the AICPA.

Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A. Account analyses. B. Supporting schedules. C. Control accounts. D. Lead schedules.

D. Lead schedules.

Auditors are most likely to use the most rigorous audit procedures to examine A. Routine transactions. B. Management assertions that are deemed to be of low risk. C. Only the rights and obligations assertion. D. Management assertions that are deemed to be of high risk.

D. Management assertions that are deemed to be of high risk.

In designing written audit programs, an auditor should plan specific audit procedures to test A. Timing of audit procedures. B. Cost-benefit of gathering evidence. C. Selected audit techniques. D. Management assertions.

D. Management assertions.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if A. The payments violated the client's policies regarding the prevention of illegal acts. B. The client receives financial assistance from a federal government agency. C. Documentation that is necessary to prove that the bribes were paid does not exist. D. Management fails to take the appropriate remedial action.

D. Management fails to take the appropriate remedial action.

Who bears ultimate responsibility for the financial statements? A. Management of the organization, equally with the external auditor that audits the statements. B. Management and the shareholders of the organization. C. The external auditor that audits the statements. D. Management of the organization.

D. Management of the organization.

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

D. Material changes in the quoted market prices of listed investment securities since the balance sheet date.

Tolerable misstatement is A. Materiality allocated to an assertion. B. Materiality for the balance sheet as a whole. C. Materiality for the income statement as a whole. D. Materiality allocated to a specific account.

D. Materiality allocated to a specific account.

Which one of the following statements best describes the concept of materiality? A. Materiality is determined by reference to specific quantitative guidelines established by the AICPA. B. Materiality depends only on the dollar amount of an item relative to other items in the financial statements. C. Materiality depends on the nature of an item but not on the dollar amount of the item. D. Materiality is largely a matter of professional judgment.

D. Materiality is largely a matter of professional judgment.

Audit documentation A. Must be in electronic form. B. Must be in paper form only. C. Is not required, but is strongly recommended. D. May be in paper, electronic, or some other form.

D. May be in paper, electronic, or some other form.

A primary purpose of internal controls is to A. Form a basis for evaluating employees. B. Monitor production quality. C. Avoid clerical errors. D. Meet objectives of maintaining reliable documents and records and accurate financial reporting.

D. Meet objectives of maintaining reliable documents and records and accurate financial reporting.

As generally conceived, the audit committee of a publicly held company should be made up of A. Representatives of the major equity interests (preferred stock, common stock). B. The audit partner, the chief financial officer, the legal counsel, and at least one outsider. C. Representatives from the client's management, investors, suppliers, and customers. D. Members of the board of directors who are not officers or employees.

D. Members of the board of directors who are not officers or employees.

The fourth PCAOB reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others. B. An auditor from expressing different opinions on each of the basic financial statements. C. Management from reducing its final responsibility for the basic financial statements. D. Misinterpretations regarding the degree of responsibility the auditor is assuming.

D. Misinterpretations regarding the degree of responsibility the auditor is assuming.

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

D. New information is discovered concerning undisclosed related party transactions of the previously audited period.

The auditor must be independent of the audit client unless A. The lack of independence does not influence his or her professional judgment. B. Both parties agree that the independence issue is not a problem. C. The lack of independence is insignificant. D. None of the above—the auditor cannot lack independence.

D. None of the above—the auditor cannot lack independence.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements? A. Scanning the journals produced by the internal control system. B. Performing analytical procedures using data aggregated at a high level. C. Vouching a sample of transactions directly related to the controls. D. Observing the entity's personnel applying the controls.

D. Observing the entity's personnel applying the controls.

As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except: A. Consider factors that affect the risk of material misstatement. B. Ascertain whether internal control policies and procedures have been placed in operation. C. Identify the types of potential misstatements that can occur. D. Obtain knowledge about the operating effectiveness of the internal control.

D. Obtain knowledge about the operating effectiveness of the internal control.

24. Which of the following auditing procedures is ordinarily performed last? A. Confirming accounts payable. B. Testing the purchasing function. C. Reading the minutes of directors' meetings. D. Obtaining a management representation letter.

D. Obtaining a management representation letter.

Which of the following is not an element of management's assessment process for the effectiveness of internal control? A. Evaluate the likelihood that failure of a control could result in a misstatement. B. Determining the locations and business units to include in the evaluation. C. Determining significant deficiencies and material weaknesses in controls. D. Obtaining the auditor's assessment of the internal control effectiveness.

D. Obtaining the auditor's assessment of the internal control effectiveness.

Which assertions may be tested for the "presentation and disclosure" category of management assertions? A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation. B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification. C. Occurrence, completeness, classification and understandability, cutoff and classification. D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include A. Approximately 1,000 test items. B. A number of test items determined by the auditor to be sufficient under the circumstances. C. A number of test items determined by the auditor's reference to the appropriate sampling tables. D. One transaction.

D. One transaction.

48. Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report? A. Additional emphasis. B. Lack of consistency in the financial statements due to accounting changes. C. Going concern. D. Opinion based in part on the report of another auditor.

D. Opinion based in part on the report of another auditor.

What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.? A. AICPA. B. FASB. C. GASB. D. PCAOB.

D. PCAOB.

Preliminary engagement activities include A. Evaluating internal controls. B. Assessing audit risk at the account balance level. C. Setting materiality. D. Performing background checks on top management.

D. Performing background checks on top management.

29. The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of- town bank. How would the auditor discover this manipulation? A. Confirming all December 31 bank balances. B. Counting the cash working fund at the close of business on December 31. C. Preparing independent bank reconciliations as of December 31. D. Preparing and detail testing a bank transfer schedule.

D. Preparing and detail testing a bank transfer schedule.

In order for an external auditor to complete an audit of a public company, the entity's management must comply with all of the following except: A. Accept responsibility for the effectiveness of the entity's internal control over financial reporting. B. Evaluate the effectiveness of the entity's internal control over financial reporting using suitable control criteria. C. Support its evaluation with sufficient evidence, including documentation. D. Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.

D. Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.

27. An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose? A. Adverse and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. B. Disclaimer and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. C. Qualified and adverse. D. Qualified and disclaimer.

D. Qualified and disclaimer.

52. The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to A. Indicate in the auditor's report that the "other financial information" is unaudited. B. Consider whether the "other financial information" is accurate by performing a limited review. C. Obtain written representations from management as to the material accuracy of the "other financial information." D. Read and consider the manner of presentation of the "other financial information."

D. Read and consider the manner of presentation of the "other financial information."

54. When audited financial statements are presented in a client's document containing other information, the auditor should A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements. C. Perform the appropriate substantive auditing procedures to corroborate the other information. D. Read the other information to determine that it is consistent with the audited financial statements.

D. Read the other information to determine that it is consistent with the audited financial statements.

Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following: A. Reasonable assurance on the financial statements, absolute assurance on internal control. B. Reasonable assurance on internal control, absolute assurance on the financial statements. C. Absolute assurance on both the financial statements and internal control. D. Reasonable assurance on both the financial statements and internal control.

D. Reasonable assurance on both the financial statements and internal control.

47. When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make A. No reference to the predecessor auditor. B. Reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. C. Reference to the predecessor auditor only if the predecessor auditor expressed an unqualified/unmodified opinion. D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

67. A scope limitation sufficient to preclude an unqualified opinion always will result when management A. Prevents the auditor from reviewing the working papers of the predecessor auditor. B. Engages the auditor after the year-end physical inventory is completed. C. Requests that certain material accounts receivable not be confirmed. D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

45. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will A. Request that the bank confirm to the auditor the contents of the safe-deposit box at the balance sheet date. B. Examine supporting evidence for transactions occurring during the year. C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date. D. Request that the client have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.

D. Request that the client have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.

63. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may A. Issue an "except for" qualified opinion after discussing the matter with the client's board of directors. B. Consider the matter closed since the other information is not in the audited financial statements. C. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory/emphasis-of-matter paragraph. D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

47. Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of A. Completeness. B. Disclosure. C. Valuation and allocation. D. Rights and obligations.

D. Rights and obligations.

In obtaining an understanding of an entity's internal control in a financial statement audit of a non-public company, an auditor is not obligated to A. Determine whether the control activities have been placed in operation. B. Perform procedures to understand the design of the internal control policies. C. Document the understanding of the entity's internal control components. D. Search for significant deficiencies in the operation of the internal control.

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

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

D. Settlement of litigation, in excess of the previously recorded liability.

In a properly designed internal control system, the same employee may be permitted to A. Receive and deposit checks and also approve write-offs of customer accounts. B. Approve vouchers for payment and also sign checks. C. Reconcile the bank statements and also receive and deposit cash. D. Sign checks and also cancel supporting documents.

D. Sign checks and also cancel supporting documents.

Management's written representations concerning internal control are A. Addressed to the users of the financial statements. B. Normally drafted by management. C. Included in the auditor's final report. D. Signed by the CEO and CFO.

D. Signed by the CEO and CFO.

All of the following are inherent risk factors that are pervasive to the financial statements except: A. Highly complex significant transactions. B. Non-routine transactions. C. Classes of transactions are not processed systematically. D. Supplies inventory is difficult to count.

D. Supplies inventory is difficult to count.

When preparing a record of a client's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a A. Pictorial presentation of the flow of instructions in a client's internal computer system. B. Diagram which clearly indicates an organization's internal reporting structure. C. Graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire. D. Symbolic representation of a system or series of sequential processes.

D. Symbolic representation of a system or series of sequential processes.

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

D. Take no action because the auditor has no obligation to make any further inquiries.

37. An accountant has been engaged to report on an entity's internal controls without performing an audit of the financial statements. What restrictions, if any, should the accountant place on the use of this report? A. This report should be restricted for use by management. B. This report should be restricted for use by the audit committee. C. This report should be restricted for use by a specified regulatory agency. D. The accountant does not need to place any restrictions on the use of this report.

D. The accountant does not need to place any restrictions on the use of this report.

Which of the following statements is correct concerning an auditor's communication of internal control related matters (significant deficiencies) noted in an audit? A. The auditor may issue a written report to the audit committee representing that no significant deficiencies were noted during the audit. B. Significant deficiencies should be recommunicated each year, even if the audit committee has acknowledged its understanding of such deficiencies. C. Significant deficiencies that are material weaknesses should be reported separately from other significant deficiencies. D. The auditor may choose to communicate significant internal control-related matters either during the course of the audit or after the audit is concluded.

D. The auditor may choose to communicate significant internal control-related matters either during the course of the audit or after the audit is concluded.

56. All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in a client's annual report except: A. The auditor is under no obligation to perform audit procedures on this other information. B. The auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C. The auditor must request that material inconsistencies be corrected. D. The auditor must perform audit procedures on this other information.

D. The auditor must perform audit procedures on this other information.

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

D. The bankruptcy of a customer who regularly purchased 30 percent of the company's output.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations 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 accounts receivable were written off in the prior year than in the current year. C. A greater percentage of accounts receivable 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 equaled the older, established outlet.

D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

The objective of the second PCAOB Standard of Reporting is to provide assurance that A. There are no variations in the format and presentation of financial statements. B. Substantially different transactions and events are not accounted for on an identical basis. C. The auditor is consulted before material changes are made in the application of accounting principles. D. The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed.

D. The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed.

The concept of reasonable assurance in the context of an entity's internal controls recognizes that A. Auditors may fail to detect material misstatements. B. Proper internal controls guarantee that material misstatements will not occur. C. Proper internal controls preclude fraud. D. The costs of some controls may be too high to implement in relation to potential benefits.

D. The costs of some controls may be too high to implement in relation to potential benefits.

The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning A. Adequate financial statement disclosures. B. Compliance with the statutory laws and regulations. C. Scope limitations resulting from their inaction. D. The integrity of management.

D. The integrity of management.

Proper monitoring within an internal control framework includes all of the following except: A. An external auditor. B. An effective audit committee. C. An internal audit department. D. The internal revenue service.

D. The internal revenue service.

The primary responsibility for preventing fraud in an organization lies with A. The audit committee of the board of directors. B. The internal audit staff. C. The external auditor. D. The organization's management.

D. The organization's management.

Which of the following is not a characteristic of a batch processed computer system? A. The collection of like transactions which are sorted and processed sequentially against a master file. B. Keypunching of transactions, followed by machine processing. C. The production of numerous printouts. D. The posting of a transaction, as it occurs, to several files, without intermediate printouts.

D. The posting of a transaction, as it occurs, to several files, without intermediate printouts.

Before accepting an engagement to audit a new client, a CPA is required to obtain A. An understanding of the prospective client's industry and business. B. The prospective client's signature on the engagement letter. C. A preliminary understanding of the prospective client's control environment. D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that A. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system. B. The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action. C. The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. D. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

D. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

34. An auditor would issue an adverse opinion if A. The audit was begun by other independent auditors who withdrew from the engagement. B. A qualified opinion cannot be given because the auditor lacks independence. C. A restriction on the scope of the audit was significant. D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

An auditor would issue an adverse opinion if A. The auditor encounters adverse attitudes toward the auditor on the part of client management. B. A qualified opinion cannot be given because the auditor is not qualified to do so. C. An immaterial misstatement is present. D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

When testing a computerized accounting system, which of the following is false regarding the test data approach? A. The test data need to consist of only those valid and invalid conditions in which the auditor is interested. B. Only one transaction of each type needs be tested. C. Test data are processed by the client's computer programs under the auditor's control. D. The test data must consist of all possible valid and invalid conditions.

D. The test data must consist of all possible valid and invalid conditions.

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. Methods of statistical sampling to be used in confirming accounts receivable. B. Pending legal matters to be included in the inquiry of the client's attorney. C. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. D. Timing of the audit.

D. Timing of the audit.

The main goal of auditing internal control is A. To allow the auditor to fix any internal control deficiencies. B. To form an opinion on the ability of internal controls to prevent fraud. C. To assure management that internal control is preventing all material misstatements on the financial statements. D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.

D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.

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

D. To make recommendations to the client based on observations made during the audit.

Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit? A. Quick assets divided by accounts payable. B. Accounts receivable divided by inventory. C. Interest payable divided by interest receivable. D. Total debt divided by total assets.

D. Total debt divided by total assets.

36. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the A. Chief Accountant. B. Internal Auditor. C. Cashier. D. Treasurer.

D. Treasurer.

An auditor obtains knowledge about a new client's business and its industry in order to A. Make constructive suggestions concerning improvements to the client's internal control. B. Develop an attitude of professional skepticism concerning management's financial statement assertions. C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Understand the events and transactions that may have an effect on the client's financial statements.

D. Understand the events and transactions that may have an effect on the client's financial statements.

A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in determining A. The nature of the CPA's report qualification. B. The scope of the CPA's auditing procedures. C. Requirements for the review of the entity and its environment. D. Whether the CPA should undertake an audit engagement.

D. Whether the CPA should undertake an audit engagement.

When a CPA is 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 A. Whether the predecessor's work should be utilized. B. Whether, in the predecessor's opinion, the financial statements are materially correct. C. Whether, in the predecessor's opinion, the company's internal controls have been satisfactory. D. Whether the engagement should be accepted.

D. Whether the engagement should be accepted.