Exam 2 ACG4651

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

C. The audit firm.

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.

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.

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

A. Accounting records belong to the auditee.

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 fieldwork. D. Management consults with other accountants about significant accounting matters.

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

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.

61. 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.

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 achieved 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 achieved 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 high, an auditor is required to document the basis for that assessment. C. Control risk may be assessed sufficiently low to eliminate substantive procedures for significant accounts. 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.

A customer intended to order 100 units of product Z96014, but incorrectly ordered 100 units of a 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.

16. Evaluating a prospective client requires which of the following steps? A. Communicate with the predecessor auditor. B. Preplan the audit. C. Establish the terms of the engagement. D. None of these.

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 entity'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.

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.

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 shar

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. Overall materiality. D. Risk of failing to discover material misstatements.

A. Extent of the substantive procedures.

69. 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 entity. 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.

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 overall 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.

32. 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.

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.

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

A. Quality of the work of the internal audit function.

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.

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.

57. 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 these.

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 entity. 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 entity.

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.

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 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.

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 entity'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 entity's processing was accurate for the entire year. D. Several transactions of each type must be tested.

A. Test data are processed by the entity'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.

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.

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.

Which of the following is not a misstatement of the financial statements? A. The entity 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 entity uses different inventory accounting methods for internal and external reporting.

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 the competence of the internal audit function except: A. The party in the entity to which the internal audit function 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 audit function reports.

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.

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.

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.

17. 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.

Audit committee of the board of directors.

The control environment component of internal control 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.

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."

Which of the following is a factual 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.

42. 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 entity'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 entity'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.

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.

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 such trusts. 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.

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 entities is the property of the A. Shareholders. B. Auditor. C. Management of the entity being audited. D. SEC.

B. Auditor.

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.

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

Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Observation.

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 at a lower level 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 entity 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 entity's controller and reviewed by the entity's treasurer.

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

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

B. Organizational chart.

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 is determined by the legal statutes of the state where the auditor practices. D. Preparation is 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. Controls over financial reporting are effective if they provide reasonable assurance that asset losses will not occur and that losses are properly reflected in the financial statements. D. There is no way to create controls that will 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.

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 function.

B. Creates a commitment to competence.

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.

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.

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 recordkeeping 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 recordkeeping activities of the business.

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 are 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 and corrected. C. Controls have not been circumvented by collusion. D. Management cannot override the system.

B. Errors and fraud have been prevented, or detected and corrected.

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

B. Review of the entity's internal controls.

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.

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

B. For nonrecurring, unusual transactions.

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 a lower level 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.

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 confirmations. D. Listing of unusually large inventory balances.

B. Investigating inventory balances for possible damaged goods.

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 audit personnel.

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

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when A. The internal audit function 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 audit personnel 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.

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.

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.

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 but which leave no transaction trail is A. Inspection. B. Observation. C. Reperformance. D. Reconciliation.

B. Observation.

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 the entity's activities. C. Indicate whether controls are operating effectively. D. Reduce the need to observe the entity's employees performing routine tasks.

B. Provide a visual depiction of the entity's activities.

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.

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.

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.

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 "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 include highly subjective estimates.

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

29. 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 entity's financial failure.

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

46. Which of the following would an auditor most likely use in determining the auditor's overall 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.

48. 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.

10. 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 entity's financial failure.

B. The overall risk of material misstatement.

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 entity'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.

An independent auditor might consider the procedures performed by the internal audit function 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 entities 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 entities that use differing IT equipment and file formats.

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.

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. $10,000,000 × 98% = $9,800,000 Net Sales × 6% commission percentage = $588,000 estimated accrued commissions payable.

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.

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 nonrepresentative sample. D. Inherent risk assessed too high.

C. A nonrepresentative 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.

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.

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 these.

C. Assertions about presentation and disclosure.

To provide for the greatest degree of independence in performing internal audit activities, the internal audit function 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.

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

C. Bank statements obtained from the auditee.

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 audit function. 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.

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 engagements.

C. Can never be known with certainty.

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.

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 high 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 company sales invoices inspected by the auditor. D. Computations made by the auditor.

C. Copies of company sales invoices inspected by the 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.

23. Evaluating a prospective client requires which of the following steps? 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

28. 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 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 financial 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.

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

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

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 included as part of the audit opinion.

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. Evaluating whether the accounting policies selected may be indicative of fraudulent financial reporting through earnings management. 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.

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.

Increased fraud risk could 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 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.

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.

43. 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.

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.

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.

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.

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.

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 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.

60. 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 it has 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.

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 entity systems. D. A type of networking.

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

The risk assessment component of internal control 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 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.

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 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 audit personnel 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 audit personnel may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.

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 a lower level to a higher 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

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.

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.

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 these are examples of entity-level controls.

D. All of these are examples of entity-level controls.

A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2013. The number of subscribers increased steadily throughout the year and at December 31, 2013, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2013 and was increased to $12 for new members on April 1, 2013. 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, 2013, would be approximately A. $179,400. B. $171,600. C. $164,400. D. $163,800.

D. $163,800.

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

D. A company'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.

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

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

D. All of these are required.

15. 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 these should be considered.

D. All of these should be considered.

All audit documentation should have a heading, which includes A. Name of the company under audit. B. Title of the working paper. C. Company's year-end date. D. All of these.

D. All of these.

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 these.

D. All of these.

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 entity will not have any misstatements in areas related to the service organization's activities. C. Ensure that the auditee 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.

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

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

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 company'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.

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 decrease. 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.

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.

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.

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.

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 all alphabetic characters.

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

52. 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.

72. 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 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 audit function. B. Keypunch operator. C. Cashier. D. Controller.

D. Controller.

An auditor learns that a client's 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.

50. 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 audit function.

D. Determining the extent of involvement of the client's internal audit function.

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 the control activities.

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

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 entity's internal control is less than effective. B. Statements suggesting only negative assurance. C. A conclusion that the entity'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.

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.

An organizational structure is important for all of the following reasons except: A. Ensuring proper accountability. 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.

19. 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.

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.

The primary purpose of a generalized computer audit program is to allow the auditor to A. Use the entity'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 entity's electronic data processing systems. C. Select larger samples from the entity's electronic data processing records than would otherwise be selected without the generalized program. D. Independently process electronic data processing records.

D. Independently process 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 audit staff 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 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.

53. 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 entity'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.

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.

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.

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.

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.

36. 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.

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.

Which of the following is not an element of management's assessment process for the effectiveness of internal control? A. Evaluating 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.

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.

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

In obtaining an understanding of an entity's internal control in a financial statement audit of a nonpublic 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.

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 documenting an entity'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 an entity'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.

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.

An auditor's analytical procedures performed during the overall review stage indicated that the entity'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 explanations most likely would satisfy the auditor? A. The entity 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 entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

D. The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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 may include all of the following except: A. An external auditor. B. An effective audit committee. C. An internal audit function. 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 function. 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.

26. 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.

D. The prospective client's consent to make inquiries of the predecessor auditor.

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.

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 entity'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.

54. 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.

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.

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.

18. 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.