Auditing Final

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A. Occurence

"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion? A) Occurrence B) Completeness C) Cutoff D) Classification

B. Occurence

"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion? A) Classification B) Occurrence C) Completeness D) Cutoff

C. performance audit of program goal achievement.

A GAO audit report entitled Aviation Safety: Safer Skies Initiative Has Taken Initial Steps to Reduce Accident Rates by 2007 is most likely a report based on work the auditors performed during a: A) financial statement audit. B) compliance audit of air safety regulations. C) performance audit of program goal achievement. D) performance audit of air control regulation effectiveness.

B. division of responsibility.

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n) A) qualification. B) division of responsibility. C) expansion of scope. D) scope limitations.

B. haphazard selection.

A sample selection method in which items are selected in a nonsystematic manner is referred to as: A) block selection. B) haphazard selection. C) systematic random selection. 5 D) unrestricted random selection.

A. a purchase requisition, purchase order, vendor invoice, receiving report, and check copy.

A voucher would typically contain A) a purchase requisition, purchase order, vendor invoice, receiving report, and check copy. B) a purchase requisition, purchase order, sales invoice, receiving report, and check copy. C) a purchase requisition, sales order, sales invoice, receiving report, and check copy. D) a purchase requisition, sales order, vendor invoice, receiving report, and check copy.

C. the auditor is providing negative assurance.

An accountant's report includes the phrase "We are not aware". This phrase indicates: A) an attestation was not performed. B) management had not established sufficient criteria for an opinion to be issued. C) the auditor is providing negative assurance. D) a disclaimer of opinion is presented.

C. refers to the note to the financial statements that describes the special purpose framework.

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that: A) justifies the reasons for departing from generally accepted principles. B) states whether the financial statements are fairly presented in conformity with a special purpose framework. C) refers to the note to the financial statements that describes the special purpose framework. D) explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

A. the efficiency of an audit engagement.

An erroneous decision to assess control risk at excessively high levels can have an adverse effect on: A) the efficiency of an audit engagement. B) the effectiveness of an audit engagement. C) the validity of an audit. D) the type of report the auditor decides to render.

C. obtaining responses to an attorney letter.

An important method used by auditors to learn of material contingencies is A) examining documents in the client's possession concerning contingencies. B) inquiring and discussing them with management. C) obtaining responses to an attorney letter. D) confirming accounts receivable with the client's customers.

B. more than the deviation rate in the auditor's sample.

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive procedures. This assessment occurred because the true deviation rate in the 7 population was: A) more than the risk of overreliance based on the auditor's sample. B) more than the deviation rate in the auditor's sample. C) less than the risk of overreliance based on the auditor's sample. D) less than the deviation rate in the auditor's sample.

D. Define the deviation conditions.

As part of the assessment of control risk, the auditor decided to use audit sampling. After specifying the audit objectives, what would the auditor most likely do next? A) Determine the sample size. 6 B) Select the sample. C) Perform tests of control procedures. D) Define the deviation conditions.

C. examinations, reviews, and agreed-upon procedures.

Attestation engagements include: A) only examinations. B) examinations and assurance services. C) examinations, reviews, and agreed-upon procedures. D) examinations, reviews, compilations, agreed-upon procedures, and assurance services

C. reviewing a report on internal controls provided by the service organization's auditors.

Auditors can gain sufficient understanding of the internal controls at a service organization by: A) reviewing the contract with the service organization. B) inquiry with management of the service organization. C) reviewing a report on internal controls provided by the service organization's auditors. D) sending a confirmation concerning internal controls to the service organization's auditors.

C. audit report release date

Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the: A) date of the financial statements. B) date of the auditors' report. C) audit report release date. D) subsequent year's date of the financial statements.

B. Interest expense

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A) Accounts receivable B) Interest expense C) Accounts payable D) Travel and entertainment expense

A. express a qualified or adverse opinion.

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and A) express a qualified or adverse opinion. B) not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote. C) disclaim an opinion on the financial statements. D) express a qualified opinion or disclaimer of opinion.

True

Bill of ladings for goods shipped from a vendor to the purchasing company should always include the company's purchase order number.

D. a complete voucher package

Cash disbursements are authorized by A) purchase orders. B) invoices. C) receiving reports. D) a complete voucher package.

True

Changes to the payroll master file should be approved by human resources department.

C. Completeness

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of A) valuation or allocation. B) existence or occurrence. C) completeness. D) rights and obligations.

B. leave off the quantity of the goods ordered.

For the copy of the purchase order that goes to the receiving department, it is best to A) leave off the description of the goods ordered. B) leave off the quantity of the goods ordered. C) leave off the name of the vendor. D) have the receiving department forward all copies of the purchase order to accounts payable.

A. Inspecting purchase orders for proper approval by supervisors.

For which of the following audit tests would an auditor most likely use attributes sampling? A) Inspecting purchase orders for proper approval by supervisors. B) Making an independent estimate of recorded payroll expense. C) Determining that all payables are recorded at year end. D) Selecting accounts receivable for confirmation of account balances.

C. MUS defines the sampling unit as an individual dollar within an account balance or class of transactions.

How does monetary unit sampling (MUS) ensure that larger dollar components are selected 8 for examination? A) MUS requires the auditor to identify all items having a balance greater than performance materiality prior to beginning the sample selection process. B) MUS requires the auditor to stratify the sample into larger and smaller dollar components prior to beginning the sample selection process. C) MUS defines the sampling unit as an individual dollar within an account balance or class of transactions. D) MUS selects components having larger balances in the prior audit.

B. Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals.

How does the auditor establish the level of tolerable misstatement in a variables sampling application? A) Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk. B) Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals. C) Based on the findings in prior audits or based on a small sample taken during the current year. 9 D) Based on the anticipated cost of conducting additional substantive procedures.

True

If internal controls over the expenditure cycle are weak, auditors will need to design substantive procedures to try to detect whether control failures have produced misleading financial statement account balances.

D. Shipping documents

If the auditor were interested in ensuring that all sales have been recorded, the population would be defined as: A) entries in the cash receipts journal. B) entries in the general journal. C) remittance advices. D) shipping documents.

B. restricts the report to specified users.

In an agreed-upon procedures engagement, an accountant: A) follows all of the fundamental principles of GAAS. B) restricts the report to specified users. C) includes negative assurance in the report. D) gives a qualified audit report.

B. upper limit rate of deviation; tolerable rate of deviation

In performing attributes sampling, the auditor will conclude that the control is functioning as intended if the ________ is less than or equal to ________. A) expected population deviation rate; tolerable rate of deviation B) upper limit rate of deviation; tolerable rate of deviation C) tolerable rate of deviation; expected population deviation rate D) tolerable rate of deviation; upper limit rate of deviation

D. Attributes

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate? A) Variables. B) Stratified. C) Ratio. D) Attributes.

C. population; sample.

In sampling, an individual makes a statement about a ________ of interest by examining a ________ (or subset) of items. A) sample; population. B) sampling unit; population. C) population; sample. D) population; sampling unit.

C. adjusted estimate of the deviation rate; tolerable rate of deviation.

In the study of internal control, the auditor uses sampling to compare the ________ to the ________. A) adjusted estimate of misstatement; overall materiality. B) sampling risk; precision. C) adjusted estimate of the deviation rate; tolerable rate of deviation. D) precision interval; upper limit on misstatement.

B. There is substantial doubt about the entity's ability to continue as a going concern.

In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph to the standard (unmodified) report without modifying the opinion on the entity's financial statements? A) The auditors are asked to report on the balance sheet, but not on the other basic financial statements. B) There is substantial doubt about the entity's ability to continue as a going concern. C) Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable. D) Certain transactions cannot be tested because of management's records retention policy.

D. organizational status and individual objectivity.

Independence permits internal auditors to render impartial and unbiased judgments. The best way for internal audit departments to achieve independence is through: A) individual knowledge and skills. B) organizational knowledge and skills. C) supervision within the organization. D) organizational status and individual objectivity.

False

Internal auditors are responsible for providing a report on internal controls that is included in the 10K.

True

Internal auditors perform audits and consulting engagements.

C. satisfying professional requirements to communicate matters related to the client's internal control.

Management letters are not a means of A) reporting recommendations to the client. B) assisting the client in improving its operations. C) satisfying professional requirements to communicate matters related to the client's internal control. D) developing rapport with the client.

A. the control procedures are operating effectively.

Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whether: A) the control procedures are operating effectively. B) the financial statements are materially misstated. C) the risk of incorrect acceptance is too high. D) overall materiality for planning purposes is at a sufficiently low level.

B. an attestation engagement.

Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor invoices in order to determine the value of inventory is not misstated. This service would be: A) an assurance service engagement. B) an attestation engagement. C) a review engagement. D) a compilation engagement.

A. The US congress

The U.S. Government Accountability Office is an agency of: A) the U.S. Congress. B) the Executive Office of Management and Budget. C) the U.S. Supreme Court. D) the Federal Accounting Standards Board.

C. compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data.

The accountant's standard report for a compilation service would not include a statement that: A) a compilation service has been performed in accordance with standards established by the AICPA. B) financial statement information is the representation of the owners of the business. C) compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data. D) financial statements have not been audited or reviewed and the accountant does not express an opinion or any other form of assurance.

True

The accounts payable department reconciles the vendor invoice, purchase order, and receiving report prior to approving the payment to the vendor.

B. need to understand the internal controls over the transaction regardless of the location of the control.

When a company uses a service organization to prepare its payroll, the company's auditors: A) have no obligation concerning the internal controls at the service organization. B) need to understand the internal controls over the transaction regardless of the location of the control. C) must audit the internal controls at the service organization. D) should include the audit report of the service company's auditors with their auditors' report.

D. is appropriate and would not otherwise affect the unmodified opinion.

The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A) is considered a qualification of the opinion. B) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C) necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D) is appropriate and would not otherwise affect the unmodified opinion.

True

The auditors' "search for unrecorded liabilities" should emphasize payments made shortly after the end of the year.

C. determination of efficient and effective performance.

The definition of internal audit includes all of the following except: A) independence and objectivity. B) provision of assurance and consulting activity. C) determination of efficient and effective performance. D) additional value and improved operations.

True

The emphasis is on the completeness assertion because financial statement users tend to be more concerned about understated expenses and liabilities than overstated.

False

The payroll department approves payroll hours prior to processing the payroll.

False

The principal goal of the physical inspection of property, plant, and equipment is to determine actual valuation of property.

D. Sampling risk

The probability that an auditor's conclusion based on a sample might be different from the conclusion based on the entire population identifies the concept of: A) confidence levels. B) nonsampling risk. C) nonstatistical sampling. D) sampling risk.

C. analytical procedures, inquiry, and obtaining a management representation letter.

The procedures used in a review engagement are: A) physical examination, reperformance, and obtaining a management representation letter. B) analytical procedures, reperformance, and obtaining a management representation letter. C) analytical procedures, inquiry, and obtaining a management representation letter. D) physical examination, inquiry, and obtaining a management representation letter.

A. internal control policies and procedures are functioning as prescribed.

The purpose of tests of controls is to determine that: A) internal control policies and procedures are functioning as prescribed. B) the extent of further audit procedures can be reduced. C) errors and irregularities are prevented or detected in a timely manner. D) the auditor has an understanding of internal control.

B. more expertise and improved control over audit costs.

The reasons for outsourcing an internal audit include: A) more expertise only. B) more expertise and improved control over audit costs. C) improved control over audit costs and improved alignment with company goals. D) All of the answer choices are correct.

False

The receiving department receives a "blind" copy of the purchase order which does not include the vendor's name and address.

D. variables sampling

The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value) of the population is: A) attributes sampling. B) balance sampling. C) discovery sampling. D) variables sampling

B. decide the nature, timing, and extent of further audit procedures.

The ultimate purpose of control risk assessment is to: A) estimate the overall risk of failing to detect material misstatements. B) decide the nature, timing, and extent of further audit procedures. C) determine the risk of incorrect acceptance. D) determine the probability that errors entered the accounts.

True

To ensure an internal auditor's independence it is preferable for the internal auditor to report directly to the audit committee.

C. enter invalid identification numbers or passwords to ascertain whether the system rejects them.

To obtain evidence that controls over access to computer programs are properly functioning, audit teams most likely would A) create checkpoints at periodic intervals after data processing to test for unauthorized use of the system. B) examine the transaction log to discover whether any transactions were lost or entered twice due to a system malfunction. C) enter invalid identification numbers or passwords to ascertain whether the system rejects them. D) vouch a random sample of processed transactions to assure proper authorization.

A. Auditors

To whom should written representations be addressed? A) Auditors B) Board of directors C) Client 10 D) Stockholders

B. Receiving reports and purchase orders

What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices? A) Purchase requisitions and accounts payable entries B) Receiving reports and purchase orders C) Purchase requisitions and purchases orders D) Purchase orders and bid quotes

C. The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined.

What is the primary drawback with respect to the use of sampling? A) Individuals may fail to obtain a true understanding of the question they are examining. B) The time spent in planning and selecting the sample may exceed the time savings from examining only a subset of the items. C) The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined. D) Sampling cannot be used to examine account balances that are material to the financial statements.

B. To impress upon management its primary responsibility for the financial statements

What is the primary purpose of obtaining written representations? A) To provide auditors with substantive evidence of important assertions B) To impress upon management its primary responsibility for the financial statements C) To allow auditors to communicate important internal control deficiencies to management D) To allow auditors to communicate important suggestions for improvement to management

A. educational and experience qualifications of the internal auditors.

When considering the competence of internal auditors, external auditors should obtain evidence about the: A) educational and experience qualifications of the internal auditors. B) organizational status of the internal auditors. C) lines of communication within the entity of the internal auditors. D) the size of the internal audit department.

D. Repairs and maintenance expense

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated? A) Depreciation expense B) Gain on disposal of equipment C) Accounts payable D) Repairs and maintenance expense

C. Evaluating the reasonableness of management's estimates

Which of the following best describes the auditors' responsibility with respect to management's estimates? A) Verifying the mathematical accuracy of management estimates B) Assessing the likelihood that actual results will be consistent with management's estimates C) Evaluating the reasonableness of management's estimates D) Identifying how the failure of the entity to achieve management's estimates will influence users' decisions

B. Control risk.

Which of the following components of the audit risk model is most closely associated with attributes sampling? A) Audit risk. B) Control risk. C) Detection risk. D) Inherent risk.

B. Failure to meet forecasted earnings per share

Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern: A) Violation of debt covenants B) Failure to meet forecasted earnings per share C) Legal proceedings that may have a significant negative impact on the entity D) Negative cash flow from operations for each of the last three years

B. Separation of duties for computer programming and computer operations.

Which of the following control procedures most likely could prevent computer personnel from modifying programs to bypass computer controls? A) Periodic management review of computer utilization reports and systems documentation. B) Separation of duties for computer programming and computer operations. C) Participation of user department personnel in designing and approving new systems. D) Physical security of computer facilities in limiting access to computer equipment.

B. Backup files are stored in a location separate from original copies.

Which of the following controls most likely would ensure that an organization can reconstruct its financial records? A) Hardware controls are built into the computer by the computer manufacturer. B) Backup files are stored in a location separate from original copies. C) Personnel who are independent of data input perform parallel simulations. D) System flowcharts provide accurate descriptions of computer operations.

C. New information is discovered concerning undisclosed lease transactions during the period under audit.

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

D. Program change controls.

Which of the following is a category of general controls? A) Detective controls. B) Input controls. C) Processing controls. D) Program change controls.

C. Systems documentation.

Which of the following is a general control that would most likely assist an organization whose systems analyst resigned during the development of a major project? A) Grandfather-father-son file retention. B) Input and output validation routines. C) Systems documentation. D) Check digit verification.

C. File backup and retention.

Which of the following is an example of a computer operations control? A) Control totals. 13 B) Balancing input to output. C) File backup and retention. D) Transaction logs.

D. Statistical sampling deploys audit procedures that allow auditors to more effectively evaluate evidence.

Which of the following is not an advantage of statistical sampling? A) Statistical sampling provides auditors with a sufficient sample size that controls exposure to sampling risk. B) Statistical sampling uses selection methods that expose all items in the population to selection. C) Statistical sampling evaluates the sample evidence in such a manner that controls exposure to sampling risk. D) Statistical sampling deploys audit procedures that allow auditors to more effectively evaluate evidence.

D. All of these are considered.

Which of the following is not considered in establishing the sample size in a monetary unit sampling application? A) Expected misstatement. B) Population size. C) Risk of incorrect acceptance. D) All of these are considered.

D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? A) Reconcile receiving reports with related cash payments made just prior to year-end. B) Contrast the ratio of accounts payable to purchases with the prior year's ratio. C) Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders. D) Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

C. Obtain an attorney's letter regarding litigation and unasserted claims.

Which of the following procedures would not be performed in a review of financial statements of a nonpublic company? A) Inquire about the accounting system and bookkeeping procedures. B) Perform analytical procedures to identify relationships and individual items that appear to be unusual. C) Obtain an attorney's letter regarding litigation and unasserted claims. D) Study the financial statements for indications that they conform to generally accepted accounting principles.

C. Qualified opinion or disclaimer of opinion

Which of the following reporting options is available if the client refuses to provide auditors with written representations? A) Unmodified or qualified opinion B) Qualified or adverse opinion C) Qualified opinion or disclaimer of opinion D) Disclaimer of opinion or adverse opinion

B. The same person authorizes voucher packages and signs checks.

Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure? A) Purchase orders are not prepared for services acquired directly under authorization of department heads. B) The same person authorizes voucher packages and signs checks. C) Unacceptable goods are not scheduled on receiving reports. D) The same person signs checks and stamps vouchers PAID.

C. The effectiveness of computer controls implemented by the client over its computerized 14 processing may need to be evaluated by audit teams.

Which of the following statements best describes the impact on an audit when a client uses computerized processing of transactions? A) The objective of the audit examination focuses on detection of fraud and theft through the computer. B) The type of substantive procedures performed by the audit team change because of the use of computerized processing. C) The effectiveness of computer controls implemented by the client over its computerized 14 processing may need to be evaluated by audit teams. D) Different independence standards are introduced for audit teams when clients utilize computerized processing.

A. "We have audited the accompanying financial statements..."

Which of the following statements is not included in the Auditor's responsibility section of the standard (unmodified) report on the entity's financial statements? A) "We have audited the accompanying financial statements..." B) "Those standards require that we plan and perform the audit..." C) "The procedures selected depend upon the auditor's judgment..." D) "An audit involves performing procedures to obtain audit evidence about the amounts and disclosures..."

B. Sampling is typically more efficient than examining the entire population.

Which of the following statements is true with regard to sampling? A) Sampling can only be used in situations in which the population is relatively homogenous in nature. B) Sampling is typically more efficient than examining the entire population. C) Sampling is typically more effective than examining the entire population. D) Sampling should be used when the need for more precise information is important.

A. External auditors must consider the internal audit function as part of obtaining an understanding of a company's internal control structure.

Which of the following statements is true? A) External auditors must consider the internal audit function as part of obtaining an understanding of a company's internal control structure. B) External auditors must review all work performed by internal auditors. C) External auditors must investigate the competence and objectivity of internal auditors. D) External auditors must share responsibility for the work of internal auditors if it is used for evidence for the financial statement audit.

A. Statistical sampling: Yes; Nonstatistical sampling: Yes

Which of the following types of sampling applications can appropriately be used under generally accepted auditing standards? A) Statistical sampling: Yes; Nonstatistical sampling: Yes B) Statistical sampling: Yes; Nonstatistical sampling: No C) Statistical sampling: No; Nonstatistical sampling: Yes D) Statistical sampling: No; Nonstatistical sampling: No

B. The extent to which an internal control procedure is not functioning as intended.

Which of the following would not be estimated using variables sampling? A) The balance in the client's accounts receivable. B) The extent to which an internal control procedure is not functioning as intended. C) The amount of misstatement in a client's inventory. D) All of these would be estimated using variables sampling.

C. Client

Which party should request a letter regarding litigation, claims, and assessments from the client's attorney? A) Attorney B) Auditors C) Client D) Securities and Exchange Commission or other regulatory body

B. To ensure that the results appropriately represent the entire population.

Why is defining the population so important in a sampling application? A) To permit the auditor to select the appropriate type of substantive procedure. B) To ensure that the results appropriately represent the entire population. C) To reduce sampling risk to the appropriate level. D) To allow the auditor to appropriately measure sample items.

D. The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements.

Why is the auditor more concerned with controlling the exposure to the risk of incorrect acceptance than with the risk of incorrect rejection? A) Only the risk of incorrect acceptance results in an incorrect decision by the auditor. B) The risk of incorrect rejection is not related to the auditor's substantive procedures. C) The risk of incorrect rejection can be controlled by performing substantive procedures during the interim period. D) The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements.

C. These accounts may represent attempts of earnings management.

Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses? A) These accounts are likely to relate to going-concern matters. B) These accounts are often more difficult to audit using normal substantive procedures. C) These accounts may represent attempts of earnings management. D) These accounts are likely to require the assistance of a specialist.


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