Auditing Unit 1

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

To test for unsupported entries in the ledger, the direction of audit testing should start from the: A) ledger entries. B) sales invoices or shipping documents. C) externally generated documents. D) original source documents.

A) ledger entries.

Before accepting an engagement to audit a new entity, an auditor is required to: A) make inquiries of the predecessor auditor. B) tell the company whether or not the auditor is willing to issue a "clean" opinion. C) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D) become a member of the entity's board of directors.

A) make inquiries of the predecessor auditor.

The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that for auditors to obtain reasonable assurance, they need to do all of the following except: A) make sure all audit team members have adequate training. B) obtain sufficient appropriate audit evidence. C) identify and assesses risks of material misstatement. D) determine and applies appropriate materiality levels.

A) make sure all audit team members have adequate training.

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) organizational charts

A) narratives

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

A substantive strategy is used when control risk has been set at high

True

Audit procedures are designed to test management assertions

True

Auditing is a type of attest service

True

Conflicts of interest often occur between absentee owners (principals) and managers (agents)

True

Decision makers demand reliable information that is provided by accountants and accounting information systems

True

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited

True

Generally, the financial statements of U.S. companies must be prepared in accordance with GAAP

True

The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period

True

The extent of an entity's use of IT can affect internal control

True

The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement

True

The primary audit context with which an auditor is concerned is the auditee's industry or business

True

The relevance of audit evidence or specific audit procedures depends on the assertion being tested

True

When the prospective client has previously been audited, auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement

True

With few exceptions, the Code of Professional Conduct does not allow an auditor to disclose confidential client information without the client's consent

True

The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any accounting firm employed by a public company

True

The auditor gathers audit evidence to test management's assertions

True

The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered

True

The combination of inherent risk and control risk is referred to as client risk

True

To obtain evidential matter about control risk, an auditor selects from a variety of audit procedures including: A) inquiry. B) analytical procedures. C) calculation. D) confirmation.

A) inquiry.

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 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

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.

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.

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.

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 is not a concept that is included in the audit report in the paragraph on the auditor's responsibilities? A) The conformance of the financial statements with generally accepted accounting principles. B) The audit was conducted in accordance with applicable auditing standards. C) The audit was planned and performed to obtain reasonable, rather than absolute, assurance. D) A description of when misstatements are considered material.

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

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.

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.

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

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

An entity's internal controls are most relevant to the auditor when the policies and procedures: A) affect the financial statement assertions. B) relate to management's planning decisions. C) address management's operating decisions. D) reflect management's philosophy and operating style.

A) affect the financial statement assertions.

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

An example of an audit procedure that results in evidence with a medium level of reliability is: A) analytical procedures. B) recalculation. C) observation. D) All of these choices are correct.

A) analytical procedures.

An investor is reading the financial statements of the Peres Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that: A) any disputes over whether Peres' financial statements are fairly stated in accordance with GAAP have been settled to the auditor's satisfaction. B) the auditor is satisfied that Peres will be highly profitable in the future. C) the auditor is certain that Peres' financial statements have been prepared accurately and that all account balances are precisely correct. D) the auditor has determined that Peres' management is not qualified to lead the company.

A) any disputes over whether Peres' financial statements are fairly stated in accordance with GAAP have been settled to the auditor's satisfaction.

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.

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

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

Due professional care requires: A) auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence. B) the examination of all available corroborating evidence. C) the exercise of error-free judgment. D) a study and review of internal controls that includes tests of controls.

A) auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence.

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

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should: A) consider the ability of the auditor to perform appropriate substantive procedures to cover the remaining 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) consider the ability of the auditor to perform appropriate substantive procedures to cover the remaining period.

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) high quality of the evidence gathered.

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.

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 cash flow

A) earnings per share

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 account balances, and specifically, which assertion? A) existence B) rights and obligations C) completeness D) classification

A) existence

74) 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) existence (validity) test B) limit test C) field test D) sign test

A) existence (validity) test

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.

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.

An entity's IT infrastructure refers to: A) hardware components. B) programmers. C) software. D) data provided by the system.

A) hardware components.

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to: A) identify areas of relatively high risk of misstatement and plan the audit accordingly. B) provide suggestions for improvement to the company. C) serve as a basis for setting audit risk and materiality. D) decide whether to perform an audit for the company.

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

The Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) an audit opinion in accordance with the auditor's findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirement, appropriate competence and maintaining professional skepticism.

A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence.

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

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.

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 an independent appraiser's 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

Evidence is reliable if it: A) signals the true state of a management assertion. B) applies to the period being audited. C) relates to the audit assertion being tested. D) is sufficient to justify a conclusion.

A) signals the true state of a management assertion.

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.

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 element(s) is/are pervasive to the application of the Principles Underlying an Audit Conducted in Accordance with GAAS particularly the Performance and Reporting sections? 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

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 certifications held by the internal auditors. D) supervision and review of internal audit activities.

A) the party in the entity to which the internal audit function reports.

The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that the auditor is unable to obtain absolute assurance that the financials are free of material misstatements because of inherent limitations which arise from all of the following except: A) the presentation of the financial statements based on GAAS. B) the nature of financial reporting. C) the nature of audit procedures. D) the need for the audit to be conducted within a reasonable period of time and so as to achieve a balance between benefit and cost.

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

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

A) the prospective client's unwillingness to permit inquiry of its legal counsel

The permanent (continuing) file of an auditor's working papers most likely would include copies of the A) bank statements. B) organizational chart. C) lead schedules. D) audit plan.

B) organizational chart.

Information Risk is defined as: A) the risk that information conveyed by a company's management will be false, inaccurate, or misleading. B) the risk that an assertion contains a misstatement, before considering internal controls. C) the risk that the auditor has followed appropriate auditing standards and issued a standard unqualified opinion, and the financial statements contain a material misstatement. D) the risk that the internal controls will not prevent or detect a misstatement in the financial statements.

A) the risk that information conveyed by a company's management will be false, inaccurate, or misleading.

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

A) they are the same except that SAS are organized chronologically and the AU-C are organized by topical area.

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.

After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system of internal control to reduce the risk of material misstatement. 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.

The current audit file usually includes: A) working trial balance. B) organizational chart. C) documentation of internal control (e.g., flowcharts). D) copies of important contracts.

A) working trial balance.

The permanent audit file usually includes: A) working trial balance. B) organizational chart. C) audit plan. D) audit programs.

B) organizational chart.

The control environment component of internal control includes all of the following except: A) management's philosophy and operating style. B) access to computer programs. C) organizational structure. D) human resource policies and practices.

B) access to computer programs.

The Audit Committee consists of: A) members of management. B) a subcommittee of the AICPA who establish the SAS. C) members of the Board of Directors. D) appointed government overseers.

C) members of the Board of Directors.

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.

If the internal audit function is competent and objective, the auditor may generally rely on the work of an internal audit function in certain areas to reduce the amount of external audit work in these areas

True

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.

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

B) Auditors must balance the cost of the audit with the need for precision and for some types of evidence, computer data analytic approaches can't be used

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

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

The auditor generally finds more predictability in the 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.

Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except: 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.

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.

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

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

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

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

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, if any, 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.

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.

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.

The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS requires that the report, "states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework." This passage requires: A) a statement of fact by the auditor. B) an opinion by the auditor. C) an implied measure of fairness. D) an objective measure of compliance.

B) an opinion by the auditor.

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.

Which is not an attribute of an external auditor? A) independence B) auditee advocacy C) objectivity D) concern for the public interest

B) auditee advocacy

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) securities and exchange commission.

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.

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 assertion related to classes of transactions are you most concerned with for transactions within the purchasing process? A) existence or occurrence B) completeness C) accuracy D) presentation

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

A CEO requires the internal audit function report to them and not communicate directly with the Audit Committee. Which component of internal control does this most closely relate to? A) information and communication B) control environment C) authorization D) risk assessment

B) control environment

An effective control environment: A) identifies and responds to all business risks. B) creates a commitment to competence. C) guarantees that all controls are followed as prescribed. D) does not need an effective board of directors or internal audit function.

B) creates a commitment to competence.

General controls include all of the following except: A) data center and network operations controls. B) data validation controls. C) access security controls. D) application system acquisition controls.

B) data validation controls.

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

B) decrease detection risk.

What is the general character of the work conducted in performing a fraud audit for a company? A) providing assurance that the financial statements are not materially misstated B) detecting or deterring fraudulent activity C) offering an opinion on the reliability of the specific assertions made by management D) identifying the causes of an entity's financial difficulties

B) detecting or deterring fraudulent activity

The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as: A) materiality risk. B) detection risk. C) control risk. D) inherent risk.

B) detection risk.

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) eliminate human errors or mistakes. C) consistent application of predefined business rules. D) more timely information.

B) eliminate human errors or mistakes.

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.

Due professional care requires auditors to: A) obtain independent, third party (non-auditee) documentation as evidence for all information presented in the financial statements. B) exercise professional skepticism during the audit. C) disregard any evidence generated by the auditee during the audit. D) find every error contained in the financial statements prepared by management.

B) exercise professional skepticism during the audit.

Which assertions may be tested for the "account balances, and related disclosures" category of management assertions? A) existence, cutoff, rights and obligations, completeness B) existence, rights and obligations, completeness, accuracy, valuation and allocation, classification, and presentation C) occurrence, rights and obligations, completeness, valuation and allocation D) occurrence, accuracy, rights and obligations, completeness

B) existence, rights and obligations, completeness, accuracy, valuation and allocation, classification, and presentation

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.

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.

Auditors are most likely to gather audit evidence solely using substantive procedures: A) if transactions are recurring. B) if the implemented controls are assessed as ineffective. C) if control risk is very low. D) if the entity has a well-designed automated system.

B) if the implemented controls are assessed as ineffective.

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.

The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the: A) partner assigned to the audit engagement. B) management of the company. C) auditor in charge of the fieldwork. D) securities and exchange commission.

B) management of the company.

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

B) management's disregard of its responsibility to maintain an adequate control environment

Fraud audits include all of the following except: A) criminal investigations. B) manufacturers' assertions about product quality. C) employee fraud. D) management fraud.

B) manufacturers' assertions about product quality.

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) material misstatements have been prevented, or detected and corrected. C) controls have not been circumvented by collusion. D) management cannot override the system.

B) material misstatements have been prevented, or detected and corrected.

Under 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

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.

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.

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry at that point, should: A) engage financial experts familiar with the nature of the business entity. B) obtain a knowledge of matters that relate to the nature of the entity's business and the industry in which it operates. C) refer a substantial portion of the audit to another CPA, who will act as the principal auditor. D) first inform management that an unqualified opinion cannot be issued.

B) obtain a knowledge of matters that relate to the nature of the entity's business and the industry in which it operates.

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

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

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.

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.

The auditor should consider all of the following when deciding whether substantive procedures will be performed at an interim date except: A) the control environment and other relevant controls. B) scheduling conflicts in the audit firm that make interim testing more convenient. C) the purpose of the substantive procedure. D) the assessed risk of material misstatement.

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

Typically, an external auditor first gets supervisory experience at what level of authority? A) associate B) senior C) manager D) partner

B) senior

An "in-charge" auditor typically holds the rank of: A) associate. B) senior. C) manager. D) partner.

B) senior.

As opposed to a manual control, an automated control: A) can never be circumvented. B) should function consistently in the absence of program changes. C) need not be tested by the auditor. D) must be tested using the same techniques as a manual control.

B) should function consistently in the absence of program changes.

Analytical procedures may be classified as being primarily which of the following? A) tests of controls B) substantive procedures C) tests of ratios D) detailed tests of balances

B) substantive procedures

Audit documentation is the principal record of the audit and provides the principal support for the representations in the auditor's report. Because of this, audit documentation should do all of the following except for: A) demonstrate how the audit complied with auditing and related professional practice standards. B) support the audit firm's human resource department in employee retention decisions. C) support the basis for the auditor's conclusions concerning each material financial statement assertion. D) demonstrate that the underlying accounting records agreed or reconciled with the financial statements.

B) support the audit firm's human resource department in employee retention decisions.

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 type of audit procedure? A) fee assessment procedures B) tests of controls C) preparation of corporate tax returns D) active testing procedures

B) tests of controls

For publicly-held companies, which of the following is integrated with the audit of financial statements? A) budgetary information audit B) the audit of internal controls C) audit of management forecasts D) audit of interim financial statements

B) the audit of internal controls

The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) the auditor expressing an audit opinion in accordance with the auditor's findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirements, appropriate competence and maintaining professional skepticism.

B) the auditor expressing an audit opinion in accordance with the auditor's findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework.

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.

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.

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when: A) internal audit personnel have direct access to the board of directors and the entity's management. B) the entity does not have sound personnel policies for hiring, training, and evaluating competent individuals. C) accurate management job descriptions delineate specific duties. D) the audit committee actively oversees the financial reporting process.

B) the entity does not have sound personnel policies for hiring, training, and evaluating competent individuals.

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

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 best describes why publicly-traded companies follow the practice of having the external auditor appointed by the audit committee and ratified by the stockholders? A) to promote an adversarial relationship between the auditor and the corporation's management B) to comply with requirements set forth by the Sarbanes-Oxley Act of 2002 and to enhance auditor independence from the management of the corporation C) to encourage a policy of rotation of the independent auditors D) to give management more leverage over the auditor's decisions

B) to comply with requirements set forth by the Sarbanes-Oxley Act of 2002 and to enhance auditor independence from the management of the corporation

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

B) tracing vendor invoices to accounting records

An auditor is least likely to test the internal controls that provide for: A) approval of the purchase and sale of marketable securities. B) vouching a sample of sales transactions to make sure each one has an accompanying shipping document. 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) vouching a sample of sales transactions to make sure each one has an accompanying shipping document.

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

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

The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded

True

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.

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

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

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.

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

C) Management is accountable to shareholders and other constituents for the utilization of the entity's resources.

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.

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.

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

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

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

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

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

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

Auditing can be defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process" in this definition? A) All audits involve obtaining the same evidence. B) All audits involve evaluating evidence in the same manner. C) There should be a well-planned approach for obtaining and evaluating evidence that is relevant and reliable for each particular audit engagement. D) All assertions are equally important for all audits.

C) There should be a well-planned approach for obtaining and evaluating evidence that is relevant and reliable for each particular audit engagement.

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

Which of the following is not included in the broad category of assurance services? A) operational audit B) reporting on internal control C) accounting or review services D) evaluation of the auditee's risk management framework

C) accounting or review services

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

C) additional tests of details are required.

Of the following, which is the least reliable type of audit evidence? A) documents mailed by knowledgeable persons outside the entity to the auditor B) correspondence between the auditor and third party vendors C) asking the controller about an end of period adjustment D) computations made by the auditor

C) asking the controller about an end of period adjustment

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.

An auditor uses data visualization software to discover anomalies that may represent risk and require further testing. Which of the following best describes the procedure being performed by the auditor? A) tests of controls B) inspection of client data C) audit data analytics D) review of client data with auditor reperformance

C) audit data analytics

Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS? A) the purpose and value of a financial statement audit and lays out the responsibilities of management for an effective audit to be possible B) the fundamental responsibilities and characteristics of an auditor C) auditors' responsibilities in performing an effective audit D) auditors provide a written report that expresses their opinion about the financial statements

C) auditors' responsibilities in performing an effective audit

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

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.

The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS states that auditors are responsible for having appropriate competence and: A) independence with respect to the financial statements and supplementary disclosures. B) exercising professional care as judged by peer reviewers. C) capabilities to perform the audit. D) objectivity as an auditor as verified by proper supervision.

C) capabilities to perform the audit.

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.

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

The Responsibilities section of Principles Underlying an Audit Conducted in Accordance with GAAS recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper: A) business and finance courses. B) quality control and peer review. C) competence in auditing and ability to exercise professional skepticism. D) supervision and review skills.

C) competence in auditing and ability to exercise professional skepticism.

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 subsequent procedures after year-end. 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 subsequent procedures after year-end.

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) deficiencies in the design of controls or failures in the operation of internal controls that merit the attention of those charged with governance. D) manipulation or falsification of accounting records or documents from which financial statements are prepared.

C) deficiencies in the design of controls or failures in the operation of internal controls that merit the attention of those charged with governance.

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.

If the prospective client refuses to allow the predecessor auditor to communicate with the successor auditor, the successor auditor should have reservations about accepting the client

True

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.

During the first phase of an audit, a CPA most likely would: A) identify specific internal control activities that are likely to prevent fraud. B) evaluate the reasonableness of the company's accounting estimates. C) evaluate the integrity of management. D) inquire of the company's attorney as to whether any unrecorded claims are probable or asserted.

C) evaluate the integrity of 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.

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.

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

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 most likely to presume that a high risk of a fraud relating to the misappropriation of assets 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 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

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.

The largest public accounting firms typically are structured as: A) subchapter S corporations. B) professional corporations. C) limited liability partnerships or limited liability companies. D) limited liability corporations.

C) limited liability partnerships or limited liability companies.

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 typical objective of an operational audit is for the auditor to: A) determine whether the financial statements present fairly the entity's operations. B) evaluate the feasibility of attaining the entity's operational objectives. C) make recommendations for improving performance. D) report on the entity's relative success in attaining profit maximization.

C) make recommendations for improving performance.

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

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

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

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

The basic definition of auditing essentially indicates that, overall, auditing is a process to: A) detect fraud. B) examine individual transactions so that the auditor may certify as to their validity. C) objectively obtain and evaluate evidence regarding assertions made by another party. D) assure the consistent application of correct accounting procedures.

C) objectively obtain and evaluate evidence regarding assertions made by another party.

Which assertions may be tested for the "transactions and events, and related disclosures" category of management assertions? A) existence, completeness, rights and obligations, accuracy, cutoff, classification, and presentation B) occurrence, completeness, rights and obligations, accuracy, cutoff, and classification C) occurrence, completeness, accuracy, cutoff, classification, and presentation D) existence, rights and obligations, accuracy, authorization, and completeness

C) occurrence, completeness, accuracy, cutoff, classification, and presentation

Which of the following would best be described as an assurance service? A) preparing a report representing a client's position during an IRS audit B) working with a company to develop a more efficient method of processing financial transactions C) offering an opinion concerning the validity of statements made on an entity's website relating to its online privacy policies D) assisting a company in identifying potential sources of capital for potential acquisitions

C) offering an opinion concerning the validity of statements made on an entity's website relating to its online privacy policies

In determining whether transactions have been recorded, the direction of the audit testing should start from the: A) general ledger balances. B) adjusted trial balance. C) original source documents. D) general journal entries.

C) original source documents.

A well-prepared flowchart should make it easier for the auditor to: A) prepare audit procedure manuals. B) prepare detailed job descriptions. C) perform walkthroughs. D) assess the degree of accuracy of financial data.

C) perform walkthroughs.

Assurance services may improve all of the following except: A) relevance. B) credibility. C) periodicity. D) reliability.

C) periodicity.

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of: A) objective cynicism. B) independent differentialism. C) professional skepticism. D) impartial conservatism.

C) professional skepticism.

The 'Purpose of an Audit and Premise upon which an Audit is Conducted' section of Principles Underlying an Audit Conducted in Accordance with GAAS states that management is responsible for all the following except for: A) the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. B) the design, implementation, and maintenance of internal control. C) providing financial statement users with an opinion on whether the financial statements present fairly. D) ensuring that the financial statements are free from material misstatement, whether due to error or fraud.

C) providing financial statement users with an opinion on whether the financial statements present fairly.

The authoritative body empowered to promulgate standards concerning a CPA's association with audited financial statements of an entity that is required to file financial statements with the SEC is the: A) financial accounting standards board. B) government accountability office. C) public company accounting oversight board. D) auditing standards board.

C) public company accounting oversight board.

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.

The auditor's communication of material weaknesses in internal control to management and those charged with governance 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) required even though the financial statement audit for private companies does not require an audit of the entity's system of internal control. D) required to be included as part of the audit opinion.

C) required even though the financial statement audit for private companies does not require an audit of the entity's system of internal control.

You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A) existence B) completeness C) rights and obligations D) accuracy, valuation, and allocation

C) rights and obligations

You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? A) existence B) completeness C) rights and obligations D) accuracy, valuation, and allocation

C) rights and obligations

Which of the following arranges the general types of audit procedures 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

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

In order to properly preplan the audit, the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm

True

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

C) standards of quality for the auditor's performance

The auditor's report is generally addressed to the: A) chief operating officer. B) securities and exchange commission. C) stockholders of the company. D) chief financial officer.

C) stockholders of the company.

Which of the following is an IT general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project? A) processing controls B) input and output validation routines C) systems documentation D) error controls

C) systems documentation

The AICPA's Statements on Auditing Standards can be described as: A) providing very specific guidance about the specific activities an auditor must perform on each engagement. B) similar to financial accounting standards in that they are developed by the government. C) tend to be general in nature and require a great deal of professional judgment. D) providing assurance that an auditor will not issue an incorrect opinion.

C) tend to be general in nature and require a great deal of professional judgment.

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 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.

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

C) the company's management.

An internal auditor is likely to be more concerned with ________________ than the external auditor. A) internal administrative procedures affecting the control environment B) financial accounting procedures C) the efficiency of operations D) internal control effectiveness

C) the efficiency of operations

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.

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.

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

C) they are not employees of the entity being audited.

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.

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

C) verify a representation using information from a third party.

Which of the following procedures would not be used to obtain an understanding of the entity and its environment? A) observe entity operations B) reperform entity processes C) verify proper valuation of inventory subject to technological obsolescence D) review prior year's audit documentation

C) verify proper valuation of inventory subject to technological obsolescence

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

C) whether management has systems in place to identify, evaluate, and effectively manage the entity's business risks

Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related controls

True

Internal control includes monitoring of controls

True

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

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

Which of the following 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.

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 choices are correct.

D) All of these choices are correct.

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 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 knowledgeable outside sources is the most reliable audit evidence. B) Sufficiency and appropriateness of audit evidence are interrelated and they affect the persuasiveness of audit evidence. C) Reliability of audit evidence refers to the amount of corroborative evidence obtained. D) An effective internal control system provides more reliable audit evidence than a system with ineffective controls.

D) An effective internal control system provides more reliable audit evidence than a system with ineffective controls.

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.

Which of the following is not explicitly a part of the IIA's definition of internal auditing? A) Internal auditing is an objective assurance activity. B) Internal auditing is a consulting activity. C) Internal auditing should help an organization accomplish its objectives. D) Internal auditors should help external auditors complete the annual financial statement audit.

D) Internal auditors should help external auditors complete the annual financial statement audit.

Which of the following situations would most likely require special audit planning? A) Some items of factory and office equipment do not bear identification numbers. B) Depreciation methods used on the client's tax return differ from those used on the books. C) Assets costing less than $500 are expensed even though the expected life exceeds one year. D) Inventory is comprised of precious stones.

D) Inventory is comprised of precious stones.

Which of the following statements regarding the PCAOB is incorrect? A) It is a public-sector, nonprofit corporation. B) It is overseen by the SEC. C) It sets standards for public company audits. D) It has delegated all of its standard-setting authority to the AICPA.

D) It has delegated all of its standard-setting authority to the AICPA.

Which one of the following statements best describes the concept of materiality? A) Materiality is determined by reference to specific quantitative guidelines established by the AICPA. B) Materiality depends only on the dollar amount of an item relative to other items in the financial statements. C) Materiality depends on the nature of an item but not on the dollar amount of the item. D) Materiality is largely a matter of professional judgment and reflects both quantitative and qualitative considerations.

D) Materiality is largely a matter of professional judgment and reflects both quantitative and qualitative considerations.

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.

What organization is responsible for setting auditing standards for audits of publicly traded companies in the U.S.? A) AICPA B) FASB C) GASB D) PCAOB

D) PCAOB

Materiality significantly impacts the auditor's decisions about how much and what kind of evidence to gather

True

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.

Which of the following statements concerning audit evidence is correct? A) appropriate evidence supporting management's assertions is never 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

If auditors conduct substantive procedures as of 10/31 for a nonpublic 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.

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.

The objectives of the Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS are to provide assurance and include all of the following except for: A) an opinion statement of whether the financial statements present fairly. B) an opinion statement of whether the financials are free of material misstatements. C) an opinion statement of whether the financials are in accordance with an applicable financial reporting framework. D) an opinion statement of whether internal controls over financial reporting are effective.

D) an opinion statement of whether internal controls over financial reporting are effective.

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.

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.

An audit strategy that sets the allowable detection risk as "high" likely 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 audit risk components may be assessed in qualitative terms? A) risk of material misstatement B) detection risk C) neither risk of material misstatement nor detection risk D) both risk of material misstatement and detection risk

D) both risk of material misstatement and detection risk

The documentation of an auditor's understanding of internal controls: A) is optional. B) must be exclusively in 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.

Which of the following data validation 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

One of the risks associated with internal control from IT is potential loss of data

True

PCAOB auditing standards must be followed on all audits of public companies' financial statements

True

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.

Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and: A) monetary stimulus. B) evaluation. C) accuracy. D) compliance.

D) compliance.

The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) an audit opinion in accordance with the auditor's findings, whether the financial statements are presented fairly, and whether the financial statements are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirements, possessing appropriate competence to perform the audit, and maintaining professional skepticism.

D) complying with ethical requirements, possessing appropriate competence to perform the audit, and maintaining professional skepticism.

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

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.

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.

An auditor inspects a document for proper authorization of a transaction and verifies a transaction amount that is stated within the document. The auditor has performed a(n) A) test of details. B) substantive analytical procedure. C) test of controls. D) dual-purpose test

D) dual-purpose test

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.

Professional judgment must be used when evaluating business risk

True

Testing all transactions that occurred during the period is cost prohibitive in the absence of computer data analytic approaches

True

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

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.

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.

All of the following are significant deficiencies except: A) inadequate design of internal control over a significant account or process. B) management override of controls. C) inadequate provisions for safeguarding assets. D) inventory is highly subject to obsolescence.

D) inventory is highly subject to obsolescence.

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.

Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A) account analyses B) supporting schedules C) control accounts D) lead schedules

D) lead schedules

Auditors are most likely to use the most rigorous audit procedures to examine: A) routine transactions. B) management assertions that are deemed to be of low risk in a particular engagement. C) only the rights and obligations assertion. D) management assertions that are deemed to be of high risk in a particular engagement

D) management assertions that are deemed to be of high risk in a particular engagement

In designing written audit programs, an auditor should plan specific audit procedures to test: A) timing of audit procedures. B) cost-benefit of gathering evidence. C) selected audit techniques. D) management assertions.

D) management assertions.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if: A) the payments violated the client's policies regarding the prevention of illegal acts. B) the client receives financial assistance from a federal government agency. C) documentation that is necessary to prove that the bribes were paid does not exist. D) management fails to take the appropriate remedial action.

D) management fails to take the appropriate remedial action.

Who bears ultimate responsibility for the financial statements? A) management of the organization, equally with the external auditor that audits the statements B) management and the shareholders of the organization C) the external auditor that audits the statements D) management of the organization

D) management of the organization

Tolerable misstatement (also referred to as performance materiality) 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 medium.

D) may be in paper, electronic, or some other medium.

As generally conceived, the audit committee of a publicly held company should be made up of: A) representatives of the major equity interests (preferred stock, common stock). B) the audit partner, the chief financial officer, the legal counsel, and at least one outsider. C) representatives from the client's management, investors, suppliers, and customers. D) members of the board of directors who are not officers or employees.

D) members of the board of directors who are not officers or employees.

The Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of this requirement is to prevent: A) an auditor from reporting on one basic financial statement and not the others. B) an auditor from expressing different opinions on each of the basic financial statements. C) management from reducing its final responsibility for the basic financial statements. D) misinterpretations regarding the degree of responsibility the auditor is assuming.

D) misinterpretations regarding the degree of responsibility the auditor is assuming.

The auditor must be independent of the auditee unless: A) the lack of independence does not influence his or her professional judgment. B) both parties agree that the independence issue is not a problem. C) the lack of independence is insignificant. D) none of the above—the auditor cannot lack independence.

D) none of the above—the auditor cannot lack independence.

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.

Preliminary engagement activities include: A) evaluating internal controls. B) assessing audit risk at the account balance level. C) setting materiality. D) performing background checks on top management.

D) performing background checks on top management.

Which of the following is not a benefit of emerging audit technologies? A) automate much of the more tedious work that auditors perform B) the potential to dramatically enhance the effectiveness and the value of the external audit C) leave more time for auditors to better understand the businesses they are auditing and the underlying risks related to financial reporting D) remove the challenge of junior auditor work and make that work less interesting

D) remove the challenge of junior auditor work and make that work less interesting

Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants? A) purpose of an Audit and Premise upon which an Audit is Conducted B) performance C) reporting D) responsibilities

D) responsibilities

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.

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 that represents the flow of documents and the processing steps among departments in the entity.

D) symbolic representation that represents the flow of documents and the processing steps among departments in the entity.

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 would issue an adverse opinion if: A) the auditor encounters adverse attitudes toward the auditor on the part of company management. B) a qualified opinion cannot be given because the auditor is not qualified to do so. C) an immaterial misstatement is present. D) the financial statements taken as a whole do not fairly present the financial condition and results of operations of the company.

D) the financial statements taken as a whole do not fairly present the financial condition and results of operations of the company.

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.

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.

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.

Tests of controls must be performed if control risk is set at a lower level

True

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 stockholders' equity

D) total debt divided by stockholders' equity

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.

Which of the following best describes audit data analytics? A) use of the financial statements as the primary source of data B) use of financial data to analyze reliability of audit evidence C) use of evidence to support the audit opinion in the audit report D) use of data visualization to identify patterns and anomalies

D) use of data visualization to identify patterns and anomalies

A CPA is most likely to refer to one or more of the items listed in the Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS in determining: A) the nature of the CPA's report qualification. B) the scope of the CPA's auditing procedures. C) requirements for the review of the entity and its environment. D) whether the CPA should undertake an audit engagement.

D) whether the CPA should undertake an audit engagement.

The ASB's auditing standards contain a preface that includes Principles Underlying an Audit Conducted in Accordance with GAAS

True

A financial statement audit must be conducted in accordance with GAAP

False

A reliance strategy is used when control risk has been set at high

False

All companies must have an audit committee

False

Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements

False

Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited

False

Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information

False

Auditing services and attestation services are exactly the same thing

False

COSO's Internal Control - Integrated Framework identifies six components of an effective system of internal control

False

Information asymmetry seldom occurs

False

Inherent risk includes sampling risk and detection risk

False

Management assertions fall into four main categories

False

Materiality is based only on a quantitative analysis of the financial statements

False

Once a level of control risk has been established, it cannot be changed

False

One of the five basic business processes is the warehousing cycle

False

PCAOB auditing standards must be followed on all financial statement audits performed in the U.S.

False

The audit committee generally includes senior executives of the organization

False

The auditor must understand internal control before assessing inherent risk

False

The classification assertion refers to transactions and events being recorded in the correct accounting period

False

The engagement partner is typically responsible for doing the detailed audit testing

False

The first phase of audit planning is risk assessment

False

The risk of a material misstatement includes inherent risk and sampling risk

False

The sufficiency of evidence refers to the quality of audit evidence

False

There are five general types of audit procedures

False

The components of the audit risk model include inherent risk, control risk, and detection risk

True

The concept of internal control includes IT systems and manual systems

True

A financial statement audit is generally organized based on the five basic business processes or cycles

True

A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002)

True