MC- AUDITING APP- PRELIMS

11. No employee should be able to visit the corporate safe deposit box containing investment securities without being accompanied by another corporate employee. What consequence might follow if this rule were not enforced? a. An employee could pledge corporate investments as security for a short-term personal bank loan.term-23 b. An employee could steal securities and the theft would never be discovered.term-20 c. It would be impossible to get a fidelity bond on the employee. d. There would be no record of when company personnel visited the safe deposit box. 12. In establishing the existence and ownership of a long-term investment in the form of publicly traded shares, 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 d. determine that the investment is carried at the lower of cost or market. 13. Long-lived assets include which of the following? a. Tangible assets such as equipment b. Intangible assets such as patents c. Natural resources d. All of the above 14. Which of the following statements is true? a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions. b. A concern regarding the existence of long-lived assets relates to whether management has properly recorded depreciation. c. Depletion expense is not an account that would be included wher auditing long-lived assets. d. All of the above statements are true. 15. Which of the following is not an inherent risk related to long-lived asset accounts? a. Failing to record asset disposals. b.. Capitalizing repairs and maintenance expense. c. Changing depreciation estimates to manage earnings. d. All of the above.

a. An employee could pledge corporate investments as security for a short-term personal bank loan. c confirm the number of shares owned that are held by an independent d. All of the above a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions. d. All of the above

3.Which of the following elements ultimately detemines the specific reasonable basis for an opinion? a. Auditor judgment b. Materiality c. Inherent risk d. Reasonable assurance

a. Auditor judgment

16. Which of the following risks is an inherent risk related to asset impairment? a. Determining asset impairment is based on management judgment. b. It is difficult to identify the costs associated with the discovery of natural resources. c. Management might have incentives to not record all asset disposals. d. All of the above are inherent risks related to asset impairment. 17: Which of the following statements is false regarding fraud risk factors related to long-lived assets, tangible and intangible? a. A potential fraud scheme involves not removing sold assets from the books. b. Because long-lived assets are typically an audit area of law risk, auditors do not need to perform brainstorming activities related to long-lived assets. c. Management might use unreasonably long depreciable lives in an effort to reduce expenses. d. None of the above statements is false. 18. Which of the following controls would be most useful in providing reasonable assurance about the valuation of tangible assets? a. A policy requiring the reconciliation of the physical asset count with the property ledger. b. A policy requiring that depreciation categories and lives be periodically assessed. c. A formal budgeting process. d. Written policies requiring authorization for the acquisition of long-lived assets. 19. Which of the following controls should management have in place to provide reasonable assurance about asset impairment judgments? a. A policy requiring the reconciliation of the physical asset count with the property ledger. b. Limits to physical access of long-lived assets. c. A systematic process to identify assets that are not currently in use. d.A formal budgeting process. 20. An auditor performing preliminary analytical procedures scans the repairs and maintenance accounts. Which of the following statements is consistent with the auditor is most likely focused on? a. Expenditures for long-lived assets have not been changed to expense. b. Expenditures for long-lived assets have been properly approved. c. Expenditures for long-lived assets have been recorded in the correct period. d. The auditor would not be performing scanning as a preliminary analytical procedure.

a. Determining asset impairment is based on management judgment. b. Because long-lived assets are typically an audit area of law risk, auditors do not need to perform brainstorming activities related to long-lived assets. b. A policy requiring that depreciation categories and lives be periodically assessed. c. A systematic process to identify assets that are not currently in use. a. Expenditures for long-lived assets have not been changed to expense.

Edison Comportion has a few large accounts receivable that total P1,40,000. Victor Corporation has a great number of small accounts receivable that also total P1,400,000.The importance of a misstatement in any one accountis therefore greater for Edison than for Victor. This is an example of the concept of auditors concept. a. Materiality b.Comparative analysis c.Reasonable assurance d.Relative risk

a. Materiality

Chapter 7 An auditor usually examines receiving reports to support entries in the a. Voucher register and sales retums joumal. b. Sales jourmal and sales returns joumal. c. Voucherregister and sales joumal. d. Check register and sales joumal. 2. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise.Which of the tollowing procedures provides the greatest assurance that this control is operating effectively? a. Select and examine canceled checks, and ascertain that the related receiving reports are dated no earlier than the checks. b.Select and examine canceled checks, and ascertain that the related receiving reports are dated no later than the checks. Select and examine receiving reports, and ascertain that the related canceled checks are dated no earlier than the receiving reports. d.Select and examine receiving reports, and ascertain that the related canceled checks are dated no later than the receiving reports.. 3.The accounts payable department receives the purchase order to accomplish all the following except a. Comparing the invoice price to the purchase order price. b. Ensuring that the purchase had been properly authorized. c. Ensuring that the goods had been received by the party requesting them. d. Comparing the quantity ordered to the quantity purchased. 4. For effective intemal control.which of the following individuaIs should be responsible for mailing signed checks? a. Receptionist b. Treasurer c. Accounts payable clerk d. Payroll clerk 5.if internal control is properly designed.the same employee should notbe permitted to a.Sign checks and cancel supporting documents. b. Receive merchandise and prepare a receiving report. c. Prepare disbursement vouchers and sign checks. d. Initiate a request to order merchandise and approve merchandise ordered. 6. In a properly designed accounts payable system,a voucher is prepared after the invoice,purchase order, requisition,and receiving report have been verified.The next step in the system is to a. Cancel the supporting documents. b. Enter the check amount in the check register. c. Approve the voucher for payment. Post the voucher amount to the expense ledger.

a. Voucher register and sales retums joumal. b.Select and examine canceled checks, and ascertain that the related receiving reports are dated no later than the checks c. Ensuring that the goods had been received by the party requesting them. b. Treasurer c. Prepare disbursement vouchers and sign checks. c. Approve the voucher for payment.

Chapter 6 1.To determine whether an entity's internal control operated effectively to minimize error of failure to post invoices to the customers' accounts ledger.the auditor would select a sample of transactions from the population represented by the a.Customer order file. b. Bill of lading file. c. Subsidiary customers'accounts ledger. d. Sales invoice file. 2. To gather audit evidence that uncollected items in customers' accounts represented valid trade receivables, the auditor would select a sample of items from the population represented by the a.Customer order file b. Bill of lading file c. Subsidiary customers' accounts ledger d. Sales invoice file 3. Tracing copies of sales invoices to sbipping documents will provide cvidence that all a. Recorded sales were shipped. b. Invoiced sales were shipped c. Shipments to customers were invoiced. d.Shipments to customers were recorded as sales. 4. Tracing copies of sales invoices to shippingdocuments will provide evidence that al a. Shipments to customers-were recorded ns receivnbles. b. Billed sales ere shipped. c. Debitto subsidiary accounts receivable ledger are for sales shippedl. d. Shipments to customers were billed. 5. To achieve good internal control, which department should perform the activities of matching shipping documents with sales order and preparing daily sales summaries? a. Billing b. Shipping c. Credit d. Sales order 6. Which of the following would the auditor consider to be an incomplete operation for a cashier if the cashier reccives remittances from the malroom? a. Posting the receipts to the accounts receivable subsidiary ledger cards. b. Making the daily deposit at the local bank. c. Preparing the daily deposit d. Endorsing the checks 7. 7. The most likely result of ineffective internal controls in the sales cycle is that a. Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables. b. Irregularities in recording transactions in the subsidiary accounts could delay the shipment of goods. c. Omission of shipping documents could go undetected, causing an understanding of inventory. d. Final authorizationn of credit memos by personnel in the sales department could permit an employee defaleation scheme. 8. For the most effective internal controk monthly bank statements should be received directly fromn the banks and reviewed by the a. Controller b. Cash receipts accountant c. Cash disbursements accountant d.Internal auditor 9. Which of the following which of the following describes the most effective preventive control to ensure proper handling of cash receipt transactions? a. Have bank reconciliations prepared by an employee not involved with ash collections and then have them reviewed by a supervisor. b. Have one employee issue a pre-numbered receipt for all cash collections; have another employee match daily totals of pre-numbered receipts to bank deposits. c. Use predetermined totals (hash totals) of cash receipts to control posting routines. d. Have the employee who receives customer mail prepare the daily bank deposit have another employee actually make the deposit. 10.As payments are received,one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts,the deposit slip, and the remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the deposit slip. stamp a restrictive endorsement on the back of each check, and then forward the receipts and the deposit slip to the treasury department. Which of the following is a reasonable assessment of internal control in this process? a. Intenal control is adequate. b. Internal control is inadequate because mailroom employees should not have access to cash. c.Internal control is inadequate because treasury employees should prepare the deposit slip. d. Internal control is inadequate because of a lack of segregation of duties. 11.For effective intemal control, employees maintaining the accounts receivable subsidiary ledger should not also approve a. Employeeovertime wages b. Credit granted to customers c.Write-offs of customer accounts d. Cash disbursements 12.During an audit of the accounts receivable function,you found that the accounts receivable tumover rate had fallen from 7.3 to 4.3 over the last three years.What is the most likely cause of thedecrease? a. An increase in the discount offered for early payment b. A more liberal credit policy c. A change form net 30 to net 25 d. Greater cash sales 13.Shipping documents should be traced to and compared with sales records or invoices to. a. Determine whether payments are properly applied to customer accounts. b. Ensure that shipments are billed to customers. c. Determine whether unit prices billed are in accordance with sales contracts. d.Ascertain whether all sales are supported by shipping documents. 14.An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly. Similarly,accounts are aged monthly.The accounts receivable manager writes off delinquent accounts after one year or sooner, if a bankruptcy or other unusual circumstance is involved.Credit memoranda are pre-numbered and must correlate with receiving reports.Which of the following areas could be viewed as an internal control weakness of the above organization? a. Write-offs of delinquent accounts b. Credit approvals c. Monthly aging of receivables d. Handling of credit memos 15.Checks from customers are received in the company mailroom each day. Which of the following controls should be in place to safeguard them? a. Establish a separate post office box for customer payments. b. Forward all checks to the cashier upon receipt. c. Require a specific mail clerk to list and restrictively endorse each check. d. Provide bonding protection for mail clerks.

a.Customer order file. c. Subsidiary customers' accounts ledger c. Shipments to customers were invoiced. b. Billed sales ere shipped. a. Billing a. Posting the receipts to the accounts receivable subsidiary ledger cards. d. Final authorizationn of credit memos by personnel in the sales department could permit an employee defaleation scheme. d.Internal auditor b. Have one employee issue a pre-numbered receipt for all cash collections; have another employee match daily totals of pre-numbered receipts to bank deposits. d. Internal control is inadequate because of a lack of segregation of duties. c.Write-offs of customer accounts b. A more liberal credit policy b. Ensure that shipments are billed to customers. a. Write-offs of delinquent accounts c. Require a specific mail clerk to list and restrictively endorse each check.

In considering materiality for planning purposes,an auditor believes that misstatements aggregating P10,000 would have a material effect on an entity's income statement but that misstatements would have 1o aggregate P20,000 to materiallyaffect-the balance sheet. Ordinarily,it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate. a.P10,000 b.P15,000 c.P20,000 d.P30,000

a.P10,000

11.Which of the following statements is true concerning the concept performance materiality? a.Performance materiality is set les than overall materiality mdbtp the auditor determine the extent of auditevidence. b. If performance materiality is set too low, the audiar miptr perform sufficient procedures to detect material mistatematsin te financial statements. c. If performance materiality is set too high, the auxdtior migu pertana more substantive procedures than necessary. d.Performance materiality is essentially the same posting maenilhy. 12.Which of the following statements represent the appropriate dimdicnl relationships between the concepts of inherent nisk,comtol r. risk, and detection risk? a. As inherent risk goes up, audit risk goes up. b. As inherent risk goes up, audit risk goes down.. c. As control risk goes up,detection risk goes up. d. As control risk goes up,inherent risk goes down.] 13.Which of the following statements is true regarding the cmp of control risk? a. When control risk is high, the auditor is concemed ts misstatement may not be prevented, or that is a misstatement cvis in the organization's financial statements that it wilortbedenmd and therefore corrected by management. b.Some organizations have zero control risk becausethey banemate significant commitment to the effective design and cperain d controls. assertion o c. Control risk relates to the susceptibilityof misstatement,due to either emor of fraud, before considtrniand any related controls. d. All of the above are true. 14.Which of the following statements is true regarding analytical tecliniales Inmtysis takes advantage of economic relationships between two or more accounts. b. Ratio and trend analysis are generally carried out through a client budgets, and so on. c. developing expectations is the first step in performing analytical d.All of the above are true. procedures. 15. Which of the following statements is false regarding brainstorming? a. a. Brainstorming is a group discussion designed to encourage auditors to creatively assess client risks,,particularly those relevant to the possible existence of fraud in an organization. phases of the audit. b.Brainstorming predominantly occurs during the early planning c. To facilitate the generation and evaluation of quality ideas during the brainstorming session, a typical practice during brainstorming is to invite criticism and value judgments about ideas generated. d. Participants are encouraged to provide more ideas rather than fewer, with the intent to generate a variety of possible risk assessment scenarios that can be explored during the conduct of the audit. 16.Which of the following statements is false regarding the nature,timing, and extent of risk responses? a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance. b. The timing of risk response refers to when audit procedures are or predictable times. conducted and.whether those procedures are conducted at announced c. When the risk of material misstatement is low,the auditor conducts d. the audit procedures closer to year end, on an unannounced basis, procedures. d. The extent of riskb and includes some element of unpredictability in the timing of acceptable level of audit risk. is necessary given the client's assessed risks,materiality,and the

a.Performance materiality is set les than overall materiality mdbtp the auditor determine the extent of auditevidence. b. As inherent risk goes up, audit risk goes down.. a. When control risk is high, the auditor is concemed ts misstatement may not be prevented, or that is a misstatement cvis in the organization's financial statements that it wilortbedenmd and therefore corrected by management. d.All of the above are true. procedures. c. To facilitate the generation and evaluation of quality ideas during the brainstorming session, a typical practice during brainstorming is to invite criticism and value judgments about ideas generated. c. When the risk of material misstatement is low,the auditor conducts d. the audit procedures closer to year end, on an unannounced basis, procedures.

1. One control obiective of the investing and financing cycle is the proper authorization Of company transactions dealing with debt and equity instruments. Which of the following controls would best meet this objective? a. Separating responsibility for custody of funds from responsibility for recording the transactions b Maintaining written company policies that require the board of: directors to review major funding or repayment proposals c. Using an underwriter in all cases of new issue of debt or equity instrument d. Requiring two signatures on all organization checks of a material amount 2. During the year under audit, a company has completed a private placement of substantial amount of bonds. Which of the following is the most important step in the auditor's program for the examination of bonds payable? a. Confirming the amount issued with the bond trustee. b Tracing the cash received from the issue to the accounting records. C.Examining the bond records maintained by the transfer agent. d. Recomputing the annual interest cost and the effective yield. 3. Several years ago, Conway Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would be least likely to be performed by an auditor examining the mortgage balance? a. Examine the current years' canceled checks. b. Review the mortgage amortization schedule. c. Inspect public records of lien balances. d. Recomputed mortgage interest expense. 4. Which of the following can be used by organizations for obtaining financing? a. Notes b. Mortgages c. Bonds d. All of the above 5. Which of the following accounts would not typically be included in the audit of debt obligations? a. Interest income b. Interest expense c. Bonds payable d. Notes payable

b Maintaining written company policies that require the board of: directors to review major funding or repayment proposals b Tracing the cash received from the issue to the accounting records. c. Inspect public records of lien balances. d. All of the above a. Interest income

4.Which of the following statements is nor correct about materiality? a.The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with PFRS,whereas other matters are not important. b. An auditor considers materiality for planningpurposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. 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 planningpurposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

6.The physical count of a retailer's inventory was higher than that shown by the perpetual records. Which of the following could explain the difference? a. Inventory items had been counted, but the tags placed on the items had not been taken off items and added to the inventory accumulation sheets. b. Credit memos for several items returns by customers had not been recorded. c. No journal entry had been made on the retailer's books for several items returned to suppliers. d. An item purchased FOB shipping point had not arrived at the date of inventory count and not had been reflected in the perpetual records. 7. An auditor's tests of controls over the issuance of raw materials to production would probably include a. Reconciling raw materials and work-in-process perpetual inventory. b. Inquiring of the inventory custodian about the procedures followed when defective materials are received from vendors. c. Observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible person. d. Examining materials requisitions and reperforming client controls designed to process and record issuances. 8. Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire? a. A vendors' invoices for raw materials approve for payment by an employee who is independent of the cash disbursements function? b. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authórized the invoice processing? c. Are all releases by custodians of raw materials from storage based on approved requisition documents? d. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account? C. Distributing paychccks to the production workers d.Returning any unclaimed payroll checks to the payroll clerk

b. Credit memos for several items returns by customers had not been recorded. d. Examining materials requisitions and reperforming client controls designed to process and record issuances c. Are all releases by custodians of raw materials from storage based on approved requisition documents?

7. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud:fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? a. Generous performance-based compensation systems. b. Management preoccupation with increased financial performance. c. An unreliable accounting system. d. Strained relationships between management and the auditors. 8. Which portion of an audit is least likely to be completed before the balance sheet date? a. Test of controls b. Issuance of an engagement letter c. Substantive procedures d. Assessment of control risk

b. Management preoccupation with increased financial performance. b. Issuance of an engagement letter

1. Which of the following statements about tests of controls is most a. Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests. b. Tests of controls include observations of the proper segregation of the duties. c. Tests of controls provide direct evidence about monetary misstaements in transactions. d. Tests of controls ordinarily should be performed as of the statement of financial position date or during the period subsequent to that date. 2Which of the following would be least likely to be included in an 2uditor's tests of controls? a. Documentation b. Observation c. .Inquiry d. Confirmation 3.The two phases of the auditor's involvement with internal control are sometimes called understanding and assessment" and "tests of controls". a. In the tests of controls phase, the auditor attempts to obtain: a. A reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year. b. Sufficient competent evidential matter to afford a reasonable basis for the auditor's opinion. c. Assurances that informative disclosure in FS are responsibly adequate. d. Knowledge and understanding of the clients prescribed procedures and methods. 4. Which of the following is ordinarity considertd a tea d crle procedure? a. Send confirmation letters to banks. b. Count and list cash on hand. c. Examine signatures on check. d. Prepare reconciliations of bank accounts as of the r financial position date. 5. Analytical procedures may be classified as being primurhy a. Tests of controls. b. Substantive test. c.Tests of ratios d.Tests of details of balances

b. Tests of controls include observations of the proper segregation of the duties. a. Documentation a. A reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year. b. Substantive test.

1. The auditor can observe the distribution of paychecks to ascertain whether a. pay rate authorization is properly separated from the operating function. b. deductions from gross pay are calculated correctly and are properly authorized. c. employees of record actually exist and are employed by the client. d. paychecks agree with the payroll register and the time cards. 2.Mary Corp.has changed from a system in which time worked is recorded on cards to a computerized payroll system in which employees record time in and out with magnetic cards.The system automatically updates all payroll records.because of this change, a.the auditor must use a generalized computer audit program. b part of the audit trail is altered. c. the potential for payroll-related fraud is diminished. d.Transactions must be processed in batches. 3. In a manufacturing company,which one of the following audit procedures would give the least assurance of the valuation of inventory at the audit date? a. Testing the computation of standard overhead rates b. Examining paid vendors' invoices c. Reviewing direct labor rates d.Obtaining information of inventories pledged under loan agreements 4.When auditing merchandise inventory at year end,the auditor performs a purchase cutoff test to obtain evidence conceming whether a. all goods purchased before year-end are received before the physical inventory unit. b. All goods held on consignment for customers are included in the inventory balance. c. Any goods observed during the physical count are pledged or sold. d. all goods owned at year-end are included in the inventory balance. 5. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets.The purpose of this procedure is to obtain assurance that á. the final inventory is valued at cost. b.all inventory represented by an inventory tag is listed on the inventory sheets. c. all inventory represented by an inventory tag is bona fide. d. inventory sheets do not include untagged inventory items.

c. employees of record actually exist and are employed by the client. b part of the audit trail is altered. d.Obtaining information of inventories pledged under loan agreements d. all goods owned at year-end are included in the inventory balance. b.all inventory represented by an inventory tag is listed on the inventory sheets

Inherent risk and control risk differ from planned detection risk in that they a. arise from the misapplication of auditing procedures. b. may be assessed in wither quantitative or nonquantitative terms. c. exist independently of the financial statement audit. d. can be changed at the auditor's discretion.

c. exist independently of the financial statement audit.

1. The audit procedure of analyzing the repairs and maintenance accounts is designed primarily to provide evidence in support of the audit proposition that all a. expenditures for fixed assets have been recorded in the proper period. b. capital expenditures have been properly authorized. c. noncapitalizable expenditures have been properly expensed. d. expenditures for fixed assets have been capitalized. 2. When an entity has few property and equipment transactions during the year, the continuing auditor usually carries out a. a complete review of the related internal controls and performs tests of the controls on which the entity relies. b. a complete review of the related internal controls and performs analytical review tests to verify current-year additions to property and equipment. c. a preliminary review of the related internal controls and performs a thorough examination of the balances at the.beginning of the year. d. a preliminary review of the related internal controls and performs extensive tests of current-year property and equipment transactions. 3. A company holds bearer bonds as a short-term investment. Responsibility for the custody of these bonds and for the submission of coupons for periodic interest collections probably should be delegated to the a. chief accountant b. internal auditor C. cashier d. treasurer 4. A company has temporarily excess funds to invest. The board of directors decided to purchase marketable securities, and it assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity would be the a: investment committee of the board of directors. b. treasurer c. corporate controller d. chief operating officer 5. if an auditor is unable to inspect and count a client's investment securities until afler the balance sheet date, the bank in which the securities are held in a safe deposit box should 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 to 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 the auditor will have an independent direct verification.

c. noncapitalizable expenditures have been properly expensed. d. a preliminary review of the related internal controls and performs extensive tests of current-year property and equipment transactions. d. treasurer a: investment committee of the board of directors. c. confirm that there has been no access to the box between the balance sheet date and the security count date.

6.To support the auditor's initial assessment of control risk below maximum, the auditor performs procedures to determine te l controls are operating effectively. Which of the following procedures is the auditor performing a. Tests of details of balances. b. Substantive test of transactions. c.Tests of controls. d. Tests of trends and ratios. 7. The auditor faces risk that the audit will not detect misstatements that occur in the accounting process To minimizes risk, the auditor relies primarily on a. Substantive test. b. Tests of controls. c. Internal control. d. Statistical analysis. 8. A conceptually logical approach to the auditors evaluation of internal control consists of the following four steps: I. DETERMINE THE INTERNAL CONTROL THAT SHOULD PREVENT OR DETECT ERRORS AND FRAUD. II. IDENTIFY weaknesses to detemine their ertect on the natures timine made to the client. III.Determine whether the necessary procedures are prescribed and art being followed satisfactorily. IV.Consider the types of errors and fraud that could occur. What should be the order in which these four steps are performed? a.1,II,III,and IV. b. L,III, IV, and Il. c.IIl,IV,I,and II. d IV,I,III,and II. 9.The sequence of steps in gathering evidence as the basis of the auditor's opinion is: a Substantive tests, initial assessment of control risk, and test of controls. b. Initial assessment of control risk, substantive tests, and tests of controls. c. Initial assessment of control risk ,tests of controls, and substantive tests. d.Tests of controls, initial assessment of control risk, and substantive tests. 10.Which of the following statements is true regarding the concept of materiality? a. Materiality is the magnitude of an omission or misstatement of accounting information that ,in light of surrounding circumstances makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. misstatement of b. Materiality is the magnitude of an .or accounting information that, in fight of isionnding cirounstance omission or misstatement. the informationsstatement ave been changod or miead c. A fact is material if there is a substantial significantly altered the total mix of information made d. Both.(a)and(c) are correct.

c.Tests of controls. a. Substantive test. d IV,I,III,and II. c. Initial assessment of control risk ,tests of controls, and substantive tests. d. Both.(a)and(c) are correct.

6. Inherent risks related to debt obligations primarily include which of the following? a. Debt is not properly authorized b. Interest expense is not properly accrued C. Debt covenants are not properly disclosed d. All of the above are inherent risks related to debt obligations 7. Which of the following is not an inherent risk typically associated with the existence of dividends? a. Dividends are recorded before being declared b. Dividends are not properly amortized c. Dividends have not been approved before being declared d. Dividends are recorded in the wrong period 8. Which of the following would an auditor typically not perform as part of gaining an understanding of the client's controls related to debt obligations? a. Review the client's documentation of controls b. Recalculate interest expense c. Inquire of management about the process of reviewing compliance with debt covenants d. Review policies related to approval required for new debt 9. Which of the following is a control the auditor would expect a client to have related to shareholders' equity transactions? a. A policy requiring approval by the board of directors for all stock transactions b. Reconciliation of equity accounts to the general ledger C. CFO and CEO authorization of all stock transaction approved by the board of directors. d. The auditor would typically expect all of the above controls to be in place

d. All of the above are inherent risks related to debt obligations b. Dividends are not properly amortized b. Recalculate interest expense d. The auditor would typically expect all of the above controls to be in place

9 . The auditor examining inventory out on consignment t faced with the following situation. Goods are localed in small quantities at a variety of location throughout the country and cannot be observed. An attempt at obtaining positive confirmations from consignees drew an 80 percent nonresponse rate; the other 20 percent confirmed the statement balance. Given these constraints, what is the best evidence the auditor can use to support the balance sheet'value for inventory out on consignment? a. Bills of lading adjusted for payments received b. Analytical evidence comparing previous years' figures with those for the current year c. Copies of memorandum invoices sent to consignees d. Analytical evidence comparing consignments-out to consignments-in 10. Which of the following is the most important internal control relating to the raw materials inventory of a manufacturing company? a. The physical inventory couny should be made by personnel independent of the inventory custodians. b. Materials from vendors should be received directly by theproduction department that will be using the materials. c. Shortages in shipments from vendors should immediately be reported to the production department that will be using the materials. d. Issues from inventory should be supported by sales invoices. 11.An audit of the payroll function showed that on several occasions a payroll clerk had added bogus employees to the payroll and deposited the checks in accounts of friends and relatives. What controls should have prevented the occurrence of such irregularities? a. Using time cards and attendance records in the computation of employee gross earnings b. Requiring the preparation of a voucher for the payment of payroll c. Having the treasurer's office sign and distribute payroll checks d. Allowing changes to the payroll to be authorized only by the personnel department 12.Which of the fojlowing activities performed by a facto supervisor is n control strength rather than a control weakness? a. Setting the pay rate for production-workers b. Preparing a job time report that summarizes regular and overtime hours C.Distributing paychecks to the production workers d.Returning any unclaimed payroll checks to the payroll clerk

d. Analytical evidence comparing consignments-out to consignments-in a. The physical inventory couny should be made by personnel independent of the inventory custodians. d. Allowing changes to the payroll to be authorized only by the personnel department d.Returning any unclaimed payroll checks to the payroll clerk

6. Which of the following would provide the best for of evidence pertaining to the annual valuation of a long-term investment in which the independent auditor's client owns a 30 percent voting interest? a. Market quotations of the investee company's shares b. Current fair value of the investee company's assets c. Historical cost of the investee company's assets d. Audited financial statements of the investee company 7. Which of the following controls is most likely to prevent the improper disposition of equipment? a. Separating duties between those authorized to dispose of equipment and those authorized to approve removal work orders b. Using serial numbers to identify equipment that could be sold c. Periodically comparing removal work orders with authorizing documentation d. Periodically analyzing scrap sales and the repairs and maintenance accounts 8. The most significant audit step in substantiating additions to office furniture is a. examining vendor's invoices and receiving reports for current year acquisitions. b. reviewing transactions near balance sheet date for proper period cutoff. c. calculating ratio of depreciation expense to gross office equipment cost. d. computing current-year acquisitions to prior-year acquisitions. 9. A company makes a practice of investing excess short-term cash in marketable securities. A reliable lost of the valuation of those securities a. comparing cost data with current market quotations. b. confirming securities held by the broker. c. recalculating investment carrying value using the equity method. d. calculating premium or discount amortization. 10. A company invests material amounts of idle cash in marketable securities. The auditor has reason to believe that suboptimal use is being made of the idle cash. Which of the following procedures would provide the most reliable evidence relative to this concern? a. Computing rate of return earned on investments and comparing it with alternative investments b. Reviewing minutes of the meetings of the company's investment committee c. Confirming the security transactions and income received by contacting the company's independent share brokers d. Comparing actual with budgeted investment income earned

d. Audited financial statements of the investee company a. Separating duties between those authorized to dispose of equipment and those authorized to approve removal work orders a. examining vendor's invoices and receiving reports for current year acquisitions. a. comparing cost data with current market quotations. d. Comparing actual with budgeted investment income earned

9. Which of the following should the auditors obtain from the predecessor auditors before 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 in the integrity of management. 10. Which of the following items would typically not be included in an audit program? a. A list of audit procedures to be performed. b. An indication of who performed the procedure. c. A workpaper heading. d. All of the above would typically be included in an audit program. 11.Which of the following statements describes a purpose of an audi program? a. An audit program is used to specific the procedures to be performed in obtaining audit evidence. b. An audit program is used to record the completion of each audit step. c. An audit program is useful for monitoring the progress of the audit. d. All f the above statements describe the purpose of an audit program.

d. Facts that might bear in the integrity of management. d. All of the above would typically be included in an audit program. b. An audit program is used to record the completion of each audit step.

13. One payroll audit objective is to determine whether there is proper segregation of duties. Which of the following activities are incompatible? a. Hiring employees and authorizing changes to pay rates b. Preparing the payroll and filing payroll tax forms c. Signing and distributing payroll checks d. Preparing attendance data and preparing the payroll 14.Management is concerned with the potential for unauthorized changes to the payroll. Which of the following is the proper organizational structure to prevent such unauthorized changes? a. The payroll department maintains and authorizes all changes to the personnel records. b. The payroll department is supervised by the management of the human resources division. c. The payroll department's functions are limited to maintaining the payroll records, distributing paychecks, and posting the payroll entries to the general ledger. d. The personnel department authorizes the hiring and pay levels of all employees. 15. Which of the following controls would be the most appropriate means to ensure that terminated employees have been removed from the payroll? a. Mailing checks to employees' residences b. Establishing direct-deposit procedures with employees' banks c. Reconciling payroll and timekeeping records d. Establishing computerized limit checks on payroll rates 16.A means of ensuring that payroll checks are drawn for properly authorized amounts is to a. conduct periodic floor verification of employees on the payroll. b. require that undelivered checks be returned to the cashier. c. require supervisory approval of employee time cards. d. Witness the distribution of payroll checks.

d. Preparing attendance data and preparing the payroll d. The personnel department authorizes the hiring and pay levels of all employees. c. Reconciling payroll and timekeeping records c. require supervisory approval of employee time cards.

The scope of materiality will be least important to the CPA in a. scope of the audit of specific accounts. b. specifc transactions that should be reviewed. c. effects of audit exceptions upon the opinion. d. effects of the CPA's direct financial interest in a client upon his or her independence.

d. effects of the CPA's direct financial interest in a client upon his or her independence.