Entire Audit Set

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

TRUE

An auditor must disclaim an opinion when the auditor lacks independence.

TRUE

As per the Conceptual Framework for AICPA Independence Standards made effective in 2006, a CPA is required to identify and assess the extent to which a threat to independence exists.

TRUE

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

TRUE

If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work.

TRUE

PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.

TRUE

Principles are stated at a conceptual level, not a detailed level.

TRUE

Professionalism refers to the conduct, aims, or qualities that characterize or mark a given profession.

TRUE

Rules of Conduct are enforceable.

TRUE

The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual auditors.

TRUE

The choice of which audit report to issue depends on the condition and the materiality of any departure.

TRUE

The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.

TRUE

When auditing a public company, a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB.

TRUE

An assurance report on information can provide assurance about the information's: a. Reliability b. Relevance c. Timeliness d. All of the above

d. All of the above

Unlike GAAS, the attestation standards do not contain a requirement that auditors obtain A) Independence in fact and in mental attitude. B) Sufficient evidence to support the conclusion expressed in their report. C) Adequate background and knowledge in the subject matter being examined. D) An understanding of the entity's internal control structure.

d. An understanding of the clients internal control structure

The general accreditation granted by the Institute of Internal Auditors is known as the: a. CFE b. CGAP c. CFSA d. CIA

d. CIA

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

A

24. 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

26. 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

28. 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

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

A

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

A

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

A. Hardware components.

Audit sampling is not used for which type of audit evidence? A. Inquiry. B. Inspection of tangible assets. C. Reperformance. D. Confirmation.

A. Inquiry.

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

C

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

C

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

C

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

C

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

Adverse

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

C. Date of the auditor's report.

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

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

Ethical rulings are enforceable.

FALSE

18. The main goal of auditing internal control is A. To allow the auditor to fix any internal control deficiencies. B. To form an opinion on the ability of internal controls to prevent fraud. C. To assure management that internal control is preventing all material misstatements on the financial statements. D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.

D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.

27. The management letter is used A. To allow management to corroborate oral representations to the auditor. B. To confirm the terms of the audit engagement. C. To list all reportable conditions with respect to internal controls. D. To make recommendations to the client based on observations made during the audit.

D. To make recommendations to the client based on observations made during the audit.

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

TRUE

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

TRUE

Which of the following is not a service typically provided by internal auditors A) Audit of financial statements for SEC filing. B) Operational auditing. C) Compliance reviews. D) Evaluation of risks and controls.

a. Audit of Financial statements for SEC filing

When a CPA firm examines projected financial statements, the firm's report should include a separate paragraph that A) Limits distribution of the projections to specified users. B) States that the CPA firm is responsible for the opinion presented for only a specified amount of time. C) Provides an explanation of the difference between an audit and an examination. D) Disclaims an opinion on whether the assumptions listed provide a reasonable basis for the projection.

a. Limits distribution of the projections to specified users

When engaged to compile the financial statements of a nonpublic entity, the CPA is required to possess a general knowledge of the entity's accounting priniciples and practices. This requirement will most likely include obtaining an understanding of the A) Qualifications of the accounting department personnel. B) Risk factors associated with potential illegal acts. C) Internal control structure in place. D) None of the above are required for a compilation.

a. Qualifications of the accounting department personnel

Which of the following is not considered one of the six general categories of assurance services provided by CPA firms? A) Tax planning. B) Information system reliability. C) Health care performance measurement. D) Risk assessment.

a. Tax Planning

Which of the following statements concerning prospective financial statements is correct? a. only a financial forecast would normally be appropriate for limited use b. only a financial projection would normally be appropriate for general use c. any type of prospective financial statement would normally be appropriate for limited use d. any type of prospective financial statement would normally be appropriate for general use

c. Any type of prospective financial statement would normally be appropriate for limited use.

Compilation reports can be in any of the following forms except A) Compilation with full disclosure. B) Compilation that omits substantially all disclosures. C) Compilation with partial assurance. D) Compilation when the accountant is not independent.

c. Compilation with partial assurance

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements, provided that: a. the prospective financial statements are also examined b. responsibility for the adequacy of the procedures performed is taken by the accountant c. negative assurance is expressed on the prospective financial statements taken as a whole d. distribution of the report is restricted to the specified users

d. Distribution of the report is restricted to the specified users

Which of the following is a performance standard from the International Standards for the Professional Practice of Internal Auditing? A) Purpose, authority, and responsibility. B) Proficiency and due professional care. C) Independence and objectivity. D) Managing the internal audit function.

d. Managing the internal audit activity

The accountant provides absolute assurance to the user in the performance of: A) A compilation. B) A review. C) An audit. D) None of the above.

d. None of the above; compilation, review, and audit

When conducting a review, the accountants work would generally not include which of the following procedures? A) Performing analytical procedures. B) Obtaining a general understanding of the entity's methods and policies related to the capitalization of assets. C) Obtaining a representation letter from management. D) Observing the year-end inventory count and subsequent testing of inventory counts.

d. Observing the year-end inventory count and subsequent testing of inventory counts

Which of the following is not a type of Prime Plus service? a. assurance services b. consulting/facilitating services c. direct services d. system design services

d. Systems design services

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

A

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

A

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

A

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

A

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A) A bank lockbox system B) Prenumbered remittance advice C) monthly bank reconciliations D) daily deposit of cash receipts

A) A bank lockbox system

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

A) Accounting records belong to the client.

Which of the following 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.

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

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

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

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

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

A) Earnings per share.

Which of the following most likely would be the result of ineffective internal control in the revenue cycle? A) Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme B) fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables. C) fraud in recording transactions in the subsidiary accounts could result in a delay in goods shipped D) omission of shipping documents could go undetected, causing an understatement of inventory.

A) Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme

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 audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) A) Lead schedule. B) Audit control account. C) Working trial balance. D) Supporting schedule.

A) Lead schedule.

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

A) Ledger entries.

The negative request form of accounts receivable confirmation is useful particularly when the assessed level of control risk relating to receivables is ______, the number of small balances is ______, and the consideration by the recipient is _______.

A) Low, High, Likely

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

A) Occurrence.

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

A) Occurrence.

Which of the following types of audit evidence is the least reliable? A) Prenumbered purchase order forms prepared by the client. B) Correspondence from the client's attorney about litigation. C) Test counts of inventory performed by the auditor. D) Bank statements obtained from the client.

A) Prenumbered purchase order forms prepared by the client.

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

A) Recalculation.

An auditor would be least likely to use confirmations in connection with the examination of A) Refundable income taxes. B) Inventory held in a third-party warehouse. C) Stockholders' equity. D) Long-term debt.

A) Refundable income taxes.

An entity's financial statements were misstated over a period of years because large amounts of revenue were 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 years end

A) Scanning the general journal for unusual entries

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

A) Scanning.

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

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

The assurance bucket is filled with all of the following types of evidence except A) The audit report. B) Tests of details. C) Test of controls. D) Substantive analytical procedures.

A) The audit report.

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.

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.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of: A) Valuation B) completeness C) occurence D) rights and obligations

A) Valuation

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

A) Working trial balance.

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

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

Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts? A) current year sales to current year budgeted sales B) current year ending accounts receivable to prior year ending accounts receivable C) current year bad debts expense as a percentage of accounts receivable to the same value for the prior year D) current year gross profit to prior year gross profit

A) current year sales to current year budgeted sales

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the A) dates checks are deposited per bank statements with the dates remittance credits are recorded B) daily cash summaries with the sums of the cash receipts journal entries C) individual bank deposit slips with the details of the monthly bank statements D) dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded

A) dates checks are deposited per bank statements with the dates remittance credits are recorded

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

A) incorrect rejection

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when A) no reply to a positive confirmation request is received B) no reply to a negative confirmation request is received C) the collectibility of the receivables is in doubt D) pledging of the receivables is probable.

A) no reply to a positive confirmation request is received

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A) observe the consistency of the employee's use of cash registers and tapes B) inquire about employee's access to recorded but undeposited cash C) trace the deposits in the cash receipt journal to the cash balance in the general ledger D) compare the cash balance in the general ledger with the bank confirmation request

A) observe the consistency of the employee's use of cash registers and tapes

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

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

In the confirmation of accounts receivables, the auditor most likely A) randomly select a representative sample of accounts for confirmation B) seek to obtain positive confirmation for at least 50% of the total dollar amount of the receivables C) require confirmation of all receivables from agencies of the federal government D) require that confirmation requests be sent within one month of the fiscal year-end

A) randomly select a representative sample of accounts for confirmation

Mill Co uses a batch processing method to process its sales transactions. Data on Mill's sales transaction file are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer accounts balances. One of the direct outputs of the creation of this file most likely would be a: A) report showing exceptions and control totals B) printout of the updated inventory records C) report showing overdue accounts receivable D) printout of the sales price master file

A) report showing exceptions and control totals

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would A) request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response B) examine subsequent cash receipts for the accounts in question C) consider the e-mail responses to the confirmations to be exceptions D) mail second request to the e-mail respondents

A) request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response

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

A) send positive confirmation requests

Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue? A) shipping documents B) customer sales orders C) customer account receivables balances D) the record of sales returns

A) shipping documents

Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with sales transactions? A) the nature of the credit authorization process B) billings are made using the percentage-of-completion method of revenue recognition C) each sales transaction is individually negotiated with the customer D) the conditions of the sale allow for a right of return or the right to modify the purchase agreement

A) the nature of the credit authorization process

A CPA is gaining an understanding of the internal controls for a client that sells garden products using an internet site. Which of the following is not likely to be found on the client's organization chart? A) the sales order department B) the shipping department C) the warehouse D) computer processing

A) the sales order department

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

A) the two sample are expected to have the same sample mean

Cash receipts from sales on account have been misappropriated. Which of the following acts conceal this defalcation and be least likely to be detected by an auditor? A) understanding the sales journal B) overstating the accounts receivable control account C) overstating the accounts receivable subsidiary ledger D) understanding the cash receipts journal.

A) understanding the sales journal

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? A) understating the sales journal B) overstating the accounts receivable control account C) overstating the accounts receivable subsidiary ledger D) understating the cash receipts journal

A) understating the sales journal

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? A) unrecorded sales for the year B) lapping of year-end accounts receivable C) excessive sales discounts D) unauthorized goods returned for credit

A) unrecorded sales for the year

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of managements financial statement assertion of A) valuation or allocation B) completeness C) existence or occurence D) rights and obligations

A) valuation or allocation

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to A) valuation or allocation B) presentation and disclosure C) existence or occurence D) rights and obligations

A) valuation or allocation

For a large population of cash disbursement transactions, Smith, CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a tolerable deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith anticipated an expected deviation rate of only 2 percent but wanted to maintain the same tolerable deviation rate and confidence level, the sample size would be closest to A. 200. B. 400. C. 533. D. 800

A. 200.

In attributes sampling, population size has little or no effect on sample size once the population exceeds approximately A. 500. B. 5,000. C. 100,000. D. 1,000,000.

A. 500.

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

A. A change in accounting estimate.

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee? A. A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan. B. A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience. C. A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement. D. A fee based on the fee charged by the prior auditor.

A. A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.

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

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

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

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

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

A. A scope limitation or an unjustified accounting change.

56. 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.

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

A. A summary of specific audit procedures used.

Which of the following is allowable for a CPA? A. A used car loan from a banking client where the client has a lien on the car. B. An uncollateralized signature loan from a client. C. Owning more than five percent of the outstanding shares of client stock in a retirement account. D. The audit engagement partner serves on the client's audit committee.

A. A used car loan from a banking client where the client has a lien on the car.

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.

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

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

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

A. Affect the financial statement assertions.

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

A. An adjustment to the financial statements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A. Auditor's report.

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

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

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

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

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

A. Both years.

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

A. Cash flows from operating activities are negative.

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

A. Change expected to have a material future effect.

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

A. Check digit verification.

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

A. Chief executive officer and the chief financial officer.

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

A. Communicate with the predecessor auditor.

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

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

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

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

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

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

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

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

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.

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

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

The likelihood of assessing control risk too high is the risk that the sample selected to test controls A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment. B. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. C. Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole. D. Does not support the tolerable misstatement for some or all of management's assertions.

A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

The risk of incorrect acceptance relates to the A. Effectiveness of the audit. B. Efficiency of the audit. C. Preliminary estimates of materiality levels. D. Tolerable misstatement.

A. Effectiveness of the audit.

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

A. Entity's management.

Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code? A. Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate. B. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. C. A requirement of most state laws calls for the profession to establish a code of conduct. D. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

A. Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the A. Expected population deviation rate. B. Computed upper precision limit. C. Risk of assessing control risk too high. D. Risk of incorrect rejection.

A. Expected population deviation rate.

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

A. Extend auditing procedures.

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

A. Extent of tests of details.

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

A. Extent of the substantive procedures.

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

A. First standard.

41. 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.

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

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

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

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

Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit? A. He need make no reference. B. He must refer to the qualification of the other auditor and qualify his report likewise. C. He must include the other auditor's report with his report but need not qualify his report. D. He must include the other auditor's report with his report and give an explanation of its significance.

A. He need make no reference.

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

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

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

A. Incompatible duties.

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

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

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

A. Influence the design of internal controls.

What is meant by the Code of Professional Conduct's definition of "holding out"? A. Informing a client about one's status as a CPA. B. Withholding an audit report until the fee is paid. C. Not sharing audit documentation with a successor auditor. D. Not suggesting that management make an adjusting entry that is deemed immaterial.

A. Informing a client about one's status as a CPA.

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

A. Inquiry.

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

A. Inspection.

Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling? A. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data. B. It eliminates the use of judgment required of Jones because the AICPA has established numerical criteria for this type of testing. C. It increases Jones' knowledge of the client's prescribed procedures and their limitations. D. It is required by generally accepted auditing standards.

A. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data.

In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances A. Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement. B. Jackson may accept a referral fee from the other CPA firm. C. Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance. D. Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.

A. Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.

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

A. Limited to the specific event referenced.

32. Which of the following matters generally is included in an auditor's engagement letter? A. Management's responsibility for the entity's compliance with laws and regulations. B. The factors to be considered in setting preliminary judgments about materiality. C. Management's liability for illegal acts committed by its employees. D. The auditor's responsibility to guarantee accuracy of the financial statements.

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

Auditors who prefer statistical sampling to nonstatistical sampling may do so because statistical sampling helps the auditor A. Measure the sufficiency of the evidential matter obtained. B. Eliminate subjectivity in the evaluation of sampling results. C. Reduce the level of tolerable misstatement to a relatively low amount. D. Minimize the failure to detect a material misstatement due to nonsampling risk.

A. Measure the sufficiency of the evidential matter obtained.

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

A. Narratives.

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

A. Net income.

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

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

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

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

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should 1. Concur explicitly with the change 2. Issue an "except for" qualified opinion 3. Refer to the change in an explanatory paragraph A. No, No, Yes B. Yes, No, Yes C. Yes, Yes, No D. No, Yes, No

A. No, No, Yes Choice "a" is correct. No - No - Yes. When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an explanatory paragraph following the unqualified opinion paragraph. Choices "b" and "c" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit. Choice "d" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.

In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample? A. Population size. B. Tolerable deviation rate. C. Expected population deviation rate. D. Standard deviation.

A. Population size.

A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of A. Quality control. B. Due professional care. C. Supervision and review. D. Fieldwork.

A. Quality control

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

A. Quality of the internal auditor's work.

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

A. Reasonable assurance.

Audit sampling is commonly used for which type of audit evidence? A. Reperformance. B. Analytical procedures. C. Inquiry. D. Observation.

A. Reperformance.

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

A. Reperformance.

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

A. Revising the audit plan.

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

B

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

A. Scanning the general journal for unusual entries.

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

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

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

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

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

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

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

A. Substantive procedures should increase.

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

A. Susceptible to bias.

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

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

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

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

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

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

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

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

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

A. The elements of materiality and audit risk.

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

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

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

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

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

B

Which of the following statements is correct concerning statistical sampling in compliance testing? A. The population size has little or no effect on determining sample size except for very small populations. B. The expected population deviation rate has little or no effect on determining sample size except for very small populations. C. As the population size doubles, the sample size also should double. D. For a given tolerable deviation rate, a larger sample size should be selected as the expected population deviation rate decreases.

A. The population size has little or no effect on determining sample size except for very small populations.

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

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

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

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

Which of the following risks is related to efficiency of testing? A. The risk of incorrect rejection. B. Inherent risk. C. The risk of incorrect acceptance. D. None of the above.

A. The risk of incorrect rejection.

For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control? A. Tolerable deviation rate and confidence level. B. Expected deviation rate and confidence level. C. Population size and tolerable deviation rate. D. Tolerable deviation rate and expected deviation rate.

A. Tolerable deviation rate and confidence level.

In determining the sample size for a test of controls, an auditor should consider the expected deviation rate, desired confidence level, and the A. Tolerable deviation rate. B. Risk of incorrect acceptance. C. Nature and cause of deviations. D. Population size.

A. Tolerable deviation rate.

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.

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

A. Understanding of the internal control.

A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice A. Used a records-retention agency to store the CPA's working papers and client records. B. Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff. C. Referred life insurance assignments to the CPA's spouse, who is a life insurance agent. D. Failed to file his personal tax return.

A. Used a records-retention agency to store the CPA's working papers and client records.

Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same client? A. When the CPA, as legal agent, consummates a business acquisition for the client. B. When the CPA's audit fees and legal fees are not billed separately. C. When the CPA uses legal expertise to research a question of income tax law. D. When the legal services consist of an analysis of the terms of an existing lease agreement.

A. When the CPA, as legal agent, consummates a business acquisition for the client.

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

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

The SEC has issued independence rules that differ from the AICPA's in all of the following areas except: A. Working paper documentation. B. Provision of other professional services. C. Human resource and compensation-related issues. D. Required communication.

A. Working paper documentation.

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

B

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

B

14. 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 unqualified opinion on financial statements that are, in fact, materially misstated. C. The overall risk that a material misstatement exists in the financial statements. D. The risk that auditors use audit procedures that are inappropriate.

B

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

B

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

B

20. 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

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

B

33. 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

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

B

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

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

B

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

B

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

Why do auditors generally use a sampling approach to evidence gathering? A. Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. B. Auditors must balance the cost of the audit with the need for precision. C. Auditors must limit their exposure to their 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

With regard to detecting fraud, auditing standards require auditors to A. Perform procedures designed to detect all instances of fraud that might affect the financial statements B. Provide reasonable assurance that the financial statements are not materially misstated because of fraud C. Issue an unqualified opinion only when the auditor is satisfied that no instances of fraud have occurred D. Design the audit program to meet financial statement users' expectations concerning fraud

B

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

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

The current file of the auditor's working papers should generally include A) Copies of bond and note indentures. B) A copy of the financial statements. C) Organization charts. D) A flowchart of the accounting system.

B) A copy of the financial statements.

In testing the existence assertion for an asset, an auditor ordinarily works from the A) Financial statements to the potentially unrecorded items. B) Accounting records to the supporting documents. C) Potentially unrecorded items to the financial statements. D) Supporting documents to the accounting records.

B) Accounting records to the supporting documents. (Vouching)

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions drawn? A) Accounts receivable turnovers are 10.0 and 6.7 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible overstatement of the allowance. B) Accounts receivable turnovers are 10.0 and 6.7 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance. C) Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance. D) Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.

B) Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivables to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance This answer is correct because it includes the proper quantitative amounts and conclusion. Turnover ratios are: $1,000,000/$100,000 = 10 and $2,000,000/$300,000 = 6.67; ratios of uncollectible accounts to gross accounts receivable are: $30,000/$100,000 = .30 and $50,000/ $300,000 = .167. Also, this answer correctly suggests a possible understatement of the allowance—it is lower than the preceding year.

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

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

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

B) Analytical procedures.

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

B) Auditor.

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

B) Completeness.

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

B) Completeness.

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? A) Vendors' invoices included in the client's files. B) Computations made by the auditor. C) Bank statements obtained from the client. D) Prenumbered client sales invoices.

B) Computations made by the auditor.

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

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

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and A) protect employees who make unintentional errors from possible monetary damages resulting from their errors B) deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts C) facilitate an independent monitoring of the receiving and depositing of cash receipts D) force employees in positions of trust to take periodic vacations and rotate their assigned duties

B) deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts

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

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

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

B) Debt agreements.

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

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

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

B) Income Statement.

Which of the following procedures would provide the most reliable audit evidence? A) Inquiries of the client's internal accounting staff. B) Inspection of bank statements obtained directly from the client's financial institution. C) Observation of procedures performed by the client's personnel on the entity's trial balance. D) Inspection of prenumbered client purchase orders filed in the vouchers payable department.

B) Inspection of bank statements obtained directly from the client's financial institution.

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

B) Organizational chart.

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 auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by A) Availability of data aggregated at a high level. B) Relative effectiveness and efficiency of the tests. C) Timing of tests performed after the balance sheet date. D) Auditor's familiarity with industry trends.

B) Relative effectiveness and efficiency of the tests.

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.

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

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

Which of the following statements concerning audit evidence is correct? A) The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test. B) The measure of the reliability of audit evidence lies in the auditor's judgment. C) To be appropriate, audit evidence should be either persuasive or relevant but need not be both. D) A client's general ledger may be sufficient audit evidence to support the financial statements.

B) The measure of the reliability of audit evidence lies in the auditor's judgment.

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.

According to SAB 101, which of the following is not a criterion for revenue recognition? A) delivery has occurred or services have been rendered B) cash is received C) the seller's price to the buyer is determinable D) persuasive evidence of an arrangement exists

B) cash is received

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting A) opening and closing inventory balances B) cash receipts and accounts receivable C) shipping and receiving activities D) cutoffs of sales and purchases

B) cash receipts and accounts receivable

Customers are more likely to complain to the entity if which of the following assertions for cash receipts is violated? A) existence B) completeness C) authorization D) rights and obligations

B) completeness

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? A) existence or occurence B) completeness C) rights and obligations D) classification

B) completeness

Smith corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to A) develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations B) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit C) request a printout of all account balances so that they can be manually checked against the credit limits D) Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits

B) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit

An online sales order processing system most likely would have an advantage over a batch sales order processing system by: A) detecting errors in the data entry process more easily by the use of edit programs B) enabling shipment of customers orders to be initiated as soon as the orders are received C) recording more secure backup copies of the database on magnetic tape files D) maintaining more accurate records of customer accounts and finished goods inventory

B) enabling shipment of customers orders to be initiated as soon as the orders are received

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by: A) completing an internal control questionnaire that describes the control activities B) observing the employees who are performing the control activities C) performing substantive procedures to verify the details of the bank balance D) preparing a flowchart of the duties performed and the entity's available personnel.

B) observing the employees who are performing the control activities

When evaluating internal control of an entity that processes sales transactions on the internet, an auditor would be most concerned about the: A) lack of sales invoice documents as an audit B) potential for computer disruptions in recording sales C) inability to establish an integrated test facility D) frequency of archiving and data retention

B) potential for computer disruptions in recording sales

Sound internal control activities dictate that defective merchandise returned by customers be presented initially to the: A) accounts receivable supervisor B) receiving clerk C) shipping department supervisor D) sales clerk

B) receiving clerk

In a retail cash sales environment, which of the following controls is often absent? A) competent personnel B) separation of functions C) supervision D) asset access limited to authorized personnel

B) separation of functions

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

B) shipments to customers were properly invoiced

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 4 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? A) the auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management B) the auditor should inspect transactions occurring in the last month of the fiscal year and review the related sales contracts to determine that revenue was posted in the prior period. C) the auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales D) the auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals

B) the auditor should inspect transactions occurring in the last month of the fiscal year and review the related sales contracts to determine that revenue was posted in the prior period.

Which of the following actions would best conceal the theft of cash collections from sales on account? A) understating the cash receipts journal amounts B) understating the sales journal amounts C) overstating the accounts receivable control [G/L] account D) overstating the accounts receivable subsidiary ledger

B) understating the sales journal amounts

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of A) existence B) valuation and allocation C) completeness D) rights and obligations

B) valuation and allocation

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would: A) examine the shipping documents that provide evidence for the existence assertion B) verify the sources and contents of the faxes in telephone calls to the senders C) consider the faxes to be nonresponse and evaluate them as unadjusted differences. D) inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

B) verify the sources and contents of the faxes in telephone calls to the senders

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

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

Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations? A. 10 days. B. 30 days. C. 50 days. D. 90 days.

B. 30 days.

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

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

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

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

The quality control standards are concerned primarily with A. Actions of individual auditors. B. A firm's monitoring of its practice. C. Disciplinary actions against individual auditors. D. Preventing legal action.

B. A firm's monitoring of its practice.

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.

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

B. A list of adjusting journal entries.

In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? A. The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information. B. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. C. Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA. D. An inquiry by a disciplinary body of a state CPA society requests confidential client information.

B. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.

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

B. A significant deficiency.

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

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

A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through A. Compliance with generally accepted reporting standards. B. A system of quality control. C. A system of peer review. D. Continuing professional education.

B. A system of quality control.

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

B. Absorbs expenses of the corporation under audit.

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

B. Acceptable audit risk.

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

B. Access to computer programs.

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.

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.

64. 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.

9. 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

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

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

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

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

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

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

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

B. Attributes sampling.

22. 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.

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.

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

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

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

B. Cash/total assets.

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

B. Change in accounting principle.

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

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

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

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

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

B. Consider the refusal to be a scope limitation.

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

B. Considered to be a scope limitation.

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

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

A CPA's license to practice will ordinarily be suspended or revoked automatically for A. Controlling the bookkeeping for a compilation client. B. Conviction of willful failure to file personal income tax return. C. Refusing to respond to an inquiry by the AICPA practice review committee. D. Accepting compensation while honoring a subpoena to appear as an expert witness.

B. Conviction of willful failure to file personal income tax return.

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

B. Creates a commitment to competence.

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

B. Data validation controls.

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

B. Decrease detection risk.

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

B. Detection risk.

Which of the following statements is correct concerning statistical sampling in tests of controls? A. As the population size increases, the sample size should increase proportionately. B. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate. C. There is an inverse relationship between the expected population deviation rate and the sample size. D. In determining tolerable deviation rate, an auditor considers detection risk and the sample size.

B. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.

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

B. Direct participation by the owner of the business in the recordkeeping activities of the business.

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

B. Disclaimer of opinion

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

B. Effective purchasing systems.

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

B. Embezzlement will be eliminated.

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

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

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

B. For nonrecurring, unusual transactions.

An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher A. Constitutes a deviation. B. Has been properly voided. C. Cannot be located. D. Represents an immaterial dollar amount.

B. Has been properly voided.

An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee A. Was unusually large. B. Has not been paid and will not be paid for at least twelve months. C. Has not been paid and the client has filed a voluntary petition for bankruptcy. D. Was renegotiated during the prior year audit based on the need for expanded testing.

B. Has not been paid and will not be paid for at least twelve months.

The tolerable deviation rate for a test of controls is generally A. Lower than the expected rate of deviations in the related accounting records. B. Higher than the expected rate of deviations in the related accounting records. C. Identical to the expected rate of deviations in the related accounting records. D. Unrelated to the expected rate of deviations in the related accounting records.

B. Higher than the expected rate of deviations in the related accounting records.

51. 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.

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

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

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

B. Identifying specific internal controls relevant to specific assertions.

A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by A. Adhering to generally accepted accounting principles. B. Implementing an appropriate system of quality control. C. Joining professional societies that enforce ethical conduct. D. Maintaining an attitude of independence in its engagements.

B. Implementing an appropriate system of quality control.

When testing automated IT controls, the auditor is most likely to do all of the following except: A. Examine the IT software. B. Increase sample size because the tolerable deviation rate tends to be higher for automated IT controls. C. Test one or a few of each type of transaction. D. Test general controls over system and program changes.

B. Increase sample size because the tolerable deviation rate tends to be higher for automated IT controls.

Which of the following combinations guarantees a larger sample size? A. Decrease the desired confidence level and decrease the tolerable deviation rate. B. Increase the desired confidence level and decrease the tolerable deviation rate. C. Decrease the desired confidence level and increase the expected deviation rate. D. Increase the tolerable deviation rate and increase the expected deviation rate.

B. Increase the desired confidence level and decrease the tolerable deviation rate.

Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8? A. Monitoring. B. Independence. C. Human resources. D. Relevant ethical requirements.

B. Independence.

With respect to ethics, the justice-based approach A. Suggests that auditors should always verify ownership of a client's material tangible assets. B. Is primarily concerned with equity and impartiality. C. Suggests that an individual's actions should not violate the rights of any individual. D. Recognizes that decisions involve trade-offs between costs and benefits.

B. Is primarily concerned with equity and impartiality.

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

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

Which of the following best describes the distinguishing feature of statistical sampling? A. It requires the examination of a smaller number of supporting documents. B. It provides a means for measuring mathematically the degree of uncertainty that results from examining only part of a population. C. It reduces the problems associated with the auditor's judgment concerning materiality. D. It is evaluated in terms of two parameters: statistical mean and random selection.

B. It provides a means for measuring mathematically the degree of uncertainty that results from examining only part of a population.

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

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

Management'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.

25. 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.

Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to A. Define the precision required to provide audit satisfaction. B. Mathematically measure uncertainty. C. Establish conclusive audit evidence with decreased audit effort. D. Promote a more legally defensible procedural approach.

B. Mathematically measure uncertainty.

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

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

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

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

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

B. More accurate accounting estimates.

As a result of tests of controls, an auditor incorrectly assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was A. More than the risk of assessing control risk too low based on the auditor's sample. B. More than the deviation rate in the auditor's sample. C. Less than the risk of assessing control risk too low based on the auditor's sample. D. Less than the deviation rate in the auditor's sample.

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

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.

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

B. Negative assurance.

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

B. Non-GAAP methods used for internal reporting.

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

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

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

B. Observation and inquiry.

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

B. Observation.

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

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

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 advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods A. Afford greater assurance than a nonstatistical sample of equal size. B. Provide an objective basis for quantitatively evaluating sample risks. C. Can more easily convert the sample into a dual-purpose test useful for substantive testing. D. Eliminate the need to use judgment in determining appropriate sample sizes.

B. Provide an objective basis for quantitatively evaluating sample risks.

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

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

What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control? A. Guarantee that firms do not associate with clients whose management lacks integrity. B. Provide reasonable assurance that firms do not associate with clients whose management lacks integrity. C. Guarantee that firms will not be sued as a result of association with a client. D. Provide reasonable assurance that firms will not be sued as a result of association with a client.

B. Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.

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

B. Qualified opinion or an adverse opinion.

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

B. Qualified opinion.

40. 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.

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

B. Reliance placed on the report of another auditor.

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

B. Review client minutes and obtain a representation letter.

A flowchart is most frequently used by an auditor in connection with the A. Preparation of generalized computer audit programs. B. Review of the 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 level of control risk. B. Scheduling conflicts in the audit firm that make interim testing more convenient. C. Whether business conditions will change after the interim date. D. The ability to examine the remaining period.

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

If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to A. Have a large sample size. B. Set control risk at the maximum without sampling. C. Set control risk at the minimum without sampling. D. Pick a lower risk of assessing control risk too low to increase sample size.

B. Set control risk at the maximum without sampling.

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.

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.

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

B. Tests of controls.

In which of the following circumstances would a CPA who audits XM Corporation lack independence? A. The CPA and XM's president are both on the board of directors of COD Corporation. B. The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company. C. The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile. D. The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.

B. The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.

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

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

31. 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

25. Auditors are most likely to use the most rigorous audit procedures to examine A. Routine transactions. B. Management assertions that are deemed to be of low risk. C. Only the rights and obligations assertion. D. Management assertions that are deemed to be of high risk.

D

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because A. Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. B. The records may be accurate even though they are maintained by persons having incompatible functions. C. Substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the 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.

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

B. The segregation of duties.

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

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

In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? A. Tolerable deviation is large and expected deviation is low. B. Tolerable deviation is small and expected deviation is high. C. Tolerable deviation is large and expected deviation is high. D. Tolerable deviation is small and expected deviation is low.

B. Tolerable deviation is small and expected deviation is high.

An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and A. Evaluate the results as if the sample size had been 19. B. Treat the missing check as a deviation for the purpose of evaluating the sample. C. Treat the missing check in the same manner as the majority of the other 19 checks (i.e., countersigned or not). D. Choose another check to replace the missing check in the sample.

B. Treat the missing check as a deviation for the purpose of evaluating the sample.

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

B. Usual trade credit from suppliers is denied.

17. 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

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

C

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

C

22. Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"? A. All audits involve obtaining the same evidence. B. All audits involve evaluating evidence in the same manner. C. There should be a well-planned approach for obtaining and evaluating evidence. D. All assertions are equally important for all audits.

C

23. 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 accuracy 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

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

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

C

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

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

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

C

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

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

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.

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

C) Rights and obligations.

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the A) internal auditor to investigate the listing for unusual transactions B) CFO to compare the listing with the monthly bank statement C) Accounts receivable bookkeeper to update the subsidiary accounts receivable records D) entity's bank to compare the listing with the cashier's deposit slip

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

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.

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

C) Assertions about presentation and disclosure.

The primary objective of final analytical procedures is to A) Identify areas that represent specific risks relevant to the audit. B) Satisfy doubts when questions arise about a client's ability to continue in existence. C) Assist the auditor in assessing the validity of the conclusions reached. D) Obtain evidence from details tested to corroborate particular assertions.

C) Assist the auditor in assessing the validity of the conclusions reached.

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

C) Bank statements obtained from the client.

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.

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.

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

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

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.

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

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

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

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

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

C) Original source documents.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures? A) Relationships involving balance sheet accounts. B) Transactions subject to management discretion. C) Relationships involving income statement accounts. D) Data subject to audit testing in the prior year.

C) Relationships involving income statement accounts.

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

C) Reperformance.

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

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

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

C) Rights and obligations.

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 auditor is determining whether internal control over the revenue cycle of a wholesaler is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely will select a sample of transactions from the population represented by the A) Sales order file B) Customer order file C) Shipping document file D) sales invoice file

C) Shipping document file

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.

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

C) The audit firm.

The substantive analytical procedure known as trend analysis is best described by A)The comparison of common-size financial statements over time. B) Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. C) The examination of changes in an account over time. D) The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data.

C) The examination of changes in an account over time.

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

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

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

C) Verify a representation from a third party.

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

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

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

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

To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the A) accounts receivable subsidiary ledger B) customer order file C) bill of lading (shipping report) file D) sales invoice file

C) bill of lading (shipping report) file

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations? A) prior-year accounts payable to current-year accounts payable B) prior year payroll expense to budgeted current-year payroll expense C) current-year revenue to budgeted current-year revenue D) current-year warranty expense to current-year contingent liabilities

C) current-year revenue to budgeted current-year revenue

Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that A) shipments to customers were recorded in the sales journal B) recorded sales were actually shipped C) customers were billed for goods shipped to them D) customers were billed for the correct amounts

C) customers were billed for goods shipped to them

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the A) prelist of individual checks B) monthly bank reconciliations C) daily deposit slip D) remittance advices

C) daily deposit slip

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

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

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

C) evaluate the allowance for doubtful accounts

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

C) next year's revenue is recorded this year

For an attributes sampling plan, the tolerable deviation rate is 4.5%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the desired confidence level is 95%. What is the allowance for sampling risk included in the computed upper deviation rate? A. 1.5%. B. 3%. C. 4%. D. 5%.

C. 4%.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end? A) send confirmation requests for all new customer balances incurred from the interim date to year end B) resend confirmation requests for any significant customer balances remaining at year end C) review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end D) review cash collections subsequent to the interim date and the year end

C) review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end

AU-C 505, External confirmations, defines external confirmation as " a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium". The assertions for which confirmation of accounts receivable balances provides primary evidence are: A) completeness and valuation B) valuation and rights and obligations C) rights and obligations and existence D) existence and completeness

C) rights and obligations and existence

Which of the following internal controls would be most likely to deter the lapping of collections from customers? A) independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries B) Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function C) segregation of duties between receiving cash and posting the accounts receivable ledger D) supervisory comparison of the daily cash summary with the sum of the cash receipts journal entry

C) segregation of duties between receiving cash and posting the accounts receivable ledger

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would A) inspect the allowance account to verify whether the accounts were subsequently written off B) increase the assessed risks of material misstatement for the valuation and completeness assertions C) send the customer a second confirmation request D) increase the assessed risks of material misstatement for the revenue cycle

C) send the customer a second confirmation request

Which of the following internal control activities most likely would deter lapping of collections from customers? A) independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries B) authorization of write-off's of uncollectible accounts by a supervisor independent of credit approval C) separation of duties between receiving cash and posting the accounts receivable ledger D) supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries

C) separation of duties between receiving cash and posting the accounts receivable ledger

Which of the following is not a key segregation of duties in the revenue process? A) the credit function should be segregated from the billing function B) the shipping function should be segregated from the billing function C) the accounts receivable function should be segregated from the invoice preparation function D) the cash receipts function should be segregated from the accounts receivable function

C) the accounts receivable function should be segregated from the invoice preparation function

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A) a majority of recipients usually lack the willingness to respond objectively B) some recipients may report incorrect balances that require extensive follow up C) the auditor cannot infer that all nonrespondents have verified their account information D) negative confirmations do not produce evidence that is statistically quantifiable

C) the auditor cannot infer that all nonrespondents have verified their account information

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

C) the owner reviews credit memos after they are recorded

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

C) the owner reviews credit memos before they are recorded

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? A) evaluate proper segregation of duties B) confirm accounts receivable directly with customers C) trace the record of shipping to inclusion in the accounts receivable subsidiary ledger D) review receipt of cash from customers in the period subsequent to the balance sheet date

C) trace the record of shipping to inclusion in the accounts receivable subsidiary ledger

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve A) employee overtime wages B) credit granted to customers C) write-offs of customer accounts D) cash disbursement

C) write-offs of customer accounts

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

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

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

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

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

C. A deficiency in operation.

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

C. A nonrepresentative sample.

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

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

According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Purchasing a product from a third party and reselling it to a client. B. Writing a financial management newsletter promoted and sold by a publishing company. C. Accepting a commission for recommending a product to an audit client. D. Accepting engagements obtained through the efforts of third parties.

C. Accepting a commission for recommending a product to an audit client.

The profession's ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the A. CPA would not be independent. B. Fee was a competitive bid. C. Actual fee would be substantially higher. D. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

C. Actual fee would be substantially higher.

Which of the following is required for a firm to designate itself as a "Member of the American Institute of Certified Public Accountants" on its letterhead? A. At least one of the partners must be a member. B. The partners whose names appear in the firm name must be members. C. All partners must be members. D. The firm must be a dues-paying member.

C. All partners must be members.

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

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

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

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

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

C. Application.

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures? A. Using the audit risk model. B. Using statistical sampling techniques. C. Assigning personnel to engagements. D. Considering audit risk and materiality.

C. Assigning personnel to engagements.

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

C. Audit committee of the board of directors.

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

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

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

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

28. During the initial planning phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud. B. Evaluate the reasonableness of the client's accounting estimates. C. Discuss the timing of the audit procedures with the client's management. D. Inquire of the client's attorney as to any unrecorded claims.

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

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

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

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

C. Can never be known with certainty.

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

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

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

C. Communicating price changes to customers.

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

C. Confirming.

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

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

A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is A. Considered acceptable by the AICPA Code of Professional Conduct. B. Ill-advised because it would impair the CPA's independence with respect to the client. C. Considered discreditable to the profession. D. A violation of generally accepted auditing standards.

C. Considered discreditable to the profession.

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

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

In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for A. Determining the minimum procedures necessary for unaudited financial statements. B. Setting the scope of audit work. C. Deciding whether to accept or continue a client. D. Setting the scope of internal control study and evaluation.

C. Deciding whether to accept or continue a client.

A control is deemed to be more important than thought at the time that attributes sampling parameters were set. The auditor is most likely to respond by A. Decreasing the risk of assessing control risk too high. B. Increasing population size. C. Decreasing the tolerable deviation rate. D. Decreasing the expected deviation rate.

C. Decreasing the tolerable deviation rate.

If the size of the sample to be used in a particular test of controls has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection procedures A. No inferences can be drawn from the sample. B. The auditor has committed a nonsampling error. C. Depending on the size of the sample chosen, the auditor may actually achieve desired precision. D. The auditor will have to evaluate the results by reference to the principles of discovery sampling.

C. Depending on the size of the sample chosen, the auditor may actually achieve desired precision.

Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls? A. Number of items in the population. B. Total dollar amount of the items to be sampled. C. Desired confidence level. D. Risk of assessing control risk too high.

C. Desired confidence level.

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

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

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

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

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

C. Disclosure in the footnotes.

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

C. Examining customer confirmation replies.

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

C. Exists independently of the actions of the auditor.

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

C. Extent of substantive tests.

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.

47. 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.

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

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

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

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

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

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

The auditor can respond to an increased risk of fraud by doing all of the following except: A. Evaluating whether the accounting policies selected may be indicative of fraudulent financial reporting through earnings management. B. Assigning more experienced personnel to the audit. C. Increasing detection risk. D. Taking steps to obtain more reliable evidence.

C. Increasing detection risk.

Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis should A. Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated. B. Perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay. C. Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence. D. Inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.

C. Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.

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.

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

C. Issue a disclaimer of opinion

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

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

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

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

An underlying feature of random-based selection of items is that each A. Stratum of the accounting population be given equal representation in the sample. B. Item in the accounting population be randomly ordered. C. Item in the accounting population should have an opportunity to be selected. D. Item must be systematically selected using replacement.

C. Item in the accounting population should have an opportunity to be selected.

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

C. Jurisdiction in which the matter will be resolved.

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with A. Technical training that ensures proficiency as an auditor. B. Opportunities for career advancement outside the accounting firm. C. Knowledge required to fulfill assigned responsibilities. D. Knowledge required to perform a peer review.

C. Knowledge required to fulfill assigned responsibilities.

In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a A. Higher tolerable deviation rate. B. Lower expected deviation rate. C. Larger sample size. D. Smaller sample size.

C. Larger sample size.

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.

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

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

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

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

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

C. Management places substantial emphasis on meeting earnings projections.

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

C. Management representation letter.

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

C. Management representation letter.

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

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

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

C. Marketability of assets that management plans to sell.

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

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

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to A. Enable the CPA firm to attest to the reliability of the client. B. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients. C. Minimize the likelihood of association with clients whose management lacks integrity. D. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

C. Minimize the likelihood of association with clients whose management lacks integrity.

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

C. Systems documentation.

In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include A. Net Income. B. Stockholders' Equity. C. Net Income and Stockholders' Equity. D. Assets.

C. Net Income and Stockholders' Equity.

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

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

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

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

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.

Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct? A. Integrity. B. Due care. C. Reporting. D. Scope and nature of services.

C. Reporting.

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a A. Charitable organization in which an employee of the CPA serves as treasurer. B. Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality. C. Restaurant where the CPA dines frequently. D. Company in which the CPA's private investment club owns a one-tenth interest.

C. Restaurant where the CPA dines frequently.

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

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

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

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

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

C. Scanning.

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

C. Should not be disclosed in the footnotes.

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

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

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

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

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

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

With respect to ethics, the rights-based approach A. Suggests that auditors should always verify ownership of a client's material tangible assets. B. Is primarily concerned with equity and impartiality. C. Suggests that an individual's actions should not violate the rights of any individual. D. Recognizes that decisions involve trade-offs between costs and benefits.

C. Suggests that an individual's actions should not violate the rights of any individual.

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

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

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

C. That the auditor plans to rely on.

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

C. The CEO of the entity being audited.

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

C. The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements.

The term precision relates to A. The difference between confidence level and estimated error. B. The difference between confidence level and tolerable error. C. The difference between expected and tolerable deviation rate. D. The difference between expected and sample deviation rate.

C. The difference between expected and tolerable deviation rate.

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.

62. 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.

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

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

According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)? A. The office's managing partner who determines the compensation of the attest engagement partner. B. The office's IT expert, who consulted with the engagement partner regarding the client's IT system. C. The partner in another office in a nearby city who regularly plays golf with the engagement partner. D. The office's partner who monitors quality control over the attest engagement.

C. The partner in another office in a nearby city who regularly plays golf with the engagement partner.

Which of the following risks is related to effectiveness of testing? A. The risk of incorrect rejection. B. Inherent risk. C. The risk of incorrect acceptance. D. None of the above.

C. The risk of incorrect acceptance.

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

C. The role of the auditor in internal control.

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

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

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

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

Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%? A. The auditor is willing to accept a deviation rate of 7% before deciding not to rely on the control. B. There is a 5% chance that the deviation rate in the population is less than 7%. C. There is a 5% chance that the deviation rate in the population exceeds 7%. D. There is a 95% chance that the deviation rate in the population equals 7%.

C. There is a 5% chance that the deviation rate in the population exceeds 7%.

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.

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

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

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

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

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

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

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

C. Unqualified/unmodified opinion.

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

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

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.

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

D

30. 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

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

D

A CPA is most likely to refer to one or more of the three general auditing standards in determining A. The nature of the CPA's report qualification B. The scope of the CPA's auditing procedures C. Requirements for the review of the entity and its environment D. Whether the CPA should undertake an audit engagement

D

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

The auditor must be independent of the audit client unless: A. The lack of independence does not influence his or her professional judgment. B. Both parties agree that the independence issue is not a problem. C. The lack of independence is insignificant. D. None of the above--the auditor cannot lack independence.

D

The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others B. An auditor from expressing different opinions on each of the basic financial statements C. Management from reducing its final responsibility for the basic financial statements D. Misinterpretations regarding the degree of responsibility the auditor is assuming

D

The objective of the second Standard of Reporting is to provide assurance that A. There are no variations in the format and presentation of financial statements B. Substantially different transactions and events are not accounted for on an identical basis C. The auditor is consulted before material changes are made in the application of accounting principles D . The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed

D

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

D

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

Which assertions may be tested for the "presentation and disclosure" category of management assertions? A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification C. Occurrence, completeness, classification and understandability, cutoff and classification D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation

D

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

D

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

D

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

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

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

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

D) $163,800.

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.

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

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

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

D) All of the above.

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

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

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

D) Analytical procedures.

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

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

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

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

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

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

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? A) Observing the client's distribution of payroll checks. B) Reviewing standard bank confirmations for indications of cash manipulations. C) Confirming a sample of recorded receivables by direct communication with the debtors. D) Comparing a sample of shipping documents to related sales invoices.

D) Comparing a sample of shipping documents to related sales invoices.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of A) occurence B) rights and obligations C) valuation and allocation D) Completeness

D) Completeness

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

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

Procedures specifically outlined in an audit program are designed primarily to A) Assess risk for planning purposes. B) Detect all errors or fraudulent activities. C) Test internal control systems. D) Gather evidence about management's assertions.

D) Gather evidence about management's assertions.

Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A) Account analyses. B) Supporting schedules. C) Control accounts. D) Lead schedules.

D) Lead schedules.

In designing written audit programs, an auditor should plan specific audit procedures to test A) Timing of audit procedures. B) Cost-benefit of gathering evidence. C) Selected audit techniques D) Management assertions.

D) Management assertions.

The negative request form of an accounts receivable confirmation is particularly useful when the number of small account balances is _____ , assessed level of CR related to receivables is _____, and consideration by the recipient is ______

D) Many, Low, Likely

Audit documentation A) Must be in electronic form only. B) Must be in paper form only. C) Is not required, but is strongly recommended. D) May be in paper, electronic, or some other form.

D) May be in paper, electronic, or some other form.

Which assertions may be tested for the "presentation and disclosure" category of management assertions? A) Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation. B) Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification. C) Occurrence, completeness, classification and understandability, cutoff and classification. D) Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

D) Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A) The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. B) Twice as many accounts receivable were written off in the prior year than in the current year. C) A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year. D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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

Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit? A) Quick assets divided by accounts payable. B) Accounts receivable divided by inventory. C) Interest payable divided by interest receivable. D) Total debt divided by total assets.

D) Total debt divided by total assets.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about: A) Classification and understandability B) Existence C) Rights and obligations D) Valuation and allocation

D) Valuation and allocation

Which of the following is not a typical procedure performed related to other non-trade receivables? A) confirmation of the amount with the other party B) evaluation of the collectability of other receivables C) examination of the note for repayment terms and interest arrangements D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate

D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate

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

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

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the A) cash receipts journal with the sales journal B) sales journal with the cash receipts journal C) source documents with the accounting records D) accounting records with the source documents

D) accounting records with the source documents

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

D) assessing the allowance for uncollectible accounts for reasonableness

An aged trial balance of accounts receivable is normally used by the auditor to A) verify the existence of recorded receivables B) ensure that all accounts are promptly credited C) evaluate the results of test of controls D) evaluate the provision for bad debts

D) evaluate the provision for bad debts.

If accounts receivable turnover (credit sales/ receivables) was 7.1 times in 2013 compared to only 5.6 times in 2014, is it possible that there were A) unrecorded credit sales in 2014 B) unrecorded cash receipts in 2013 C) more thorough credit investigations made by the company late in 2013 D) fictitious sales in 2014

D) fictitious sales in 2014

Which of the following might be detected by an auditor's review of the client's sales cutoff? A) Excessive goods returned for credit B) unrecorded sales discounts C) lapping of year-end accounts receivable D) inflated sales for the year

D) inflated sales for the year

Which of the procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to a second requests? A) review the cash receipts journal for the month prior to year end B) intensify the study of internal control concerning the revenue cycle C) increase the accessed level of detection risk for the existence assertion D) inspect the shipping records documenting the merchandise sold to the debtors

D) inspect the shipping records documenting the merchandise sold to the debtors

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

D) misstatement rates must be small and the misstatements must be overstatements.

An auditor who has confirmed accounts receivables may discover that the sales journal was held open past year end if: A) positive confirmation requests sent to debtors are not returned B) negative confirmation requests sent to debtors are not returned C) most of the returned negative confirmation requests indicate that the debtor owes a larger balance than the amount being confirmed D) most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed.

D) most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed.

Which of the following might be detected by an auditor's review of the entity's sales cutoff? A) excessive goods returned for credit B) unrecorded sales discounts C) lapping of year-end accounts receivable D) overstated sales for the year

D) overstated sales for the year

Which of the following activities most likely would not be an internal control activity designed to reduce the risk of errors in the billing process? A) comparing control tables for shipping documents with corresponding totals for sales invoices B) using computer programmed controls over the pricing and accuracy of sales invoices C)Matching shipping documents with approved sales orders before invoice preparation D) reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

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

If tolerable misstatement for those accounts receivable balance is $75,000 and the aggregate factual misstatement found by the auditor is $82,000 the auditor is most likely to A) resign from the engagement B) issue a qualified opinion C) request that the entity adjust its account receivables balance by $7000 D) request that the entity adjusts its accounts receivable balance by $82,000

D) request that the entity adjusts its accounts receivable balance by $82,000

At which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least concern to the auditor in the conduct of an audit? A) granting of credit B) shipment of goods C) determination of discounts D) selling of goods for cash

D) selling of goods for cash

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? A) the billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance B) the accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month C) the accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers D) the billing department supervisor matches prenumbered shipping documents with entries in the sales journal

D) the billing department supervisor matches prenumbered shipping documents with entries in the sales journal

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? A) the billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances B) the accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly C) the accounting department supervisors controls the mailing of monthly statements to customers and investigates any differences they report D) the billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

D) the billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

During the process of confirming receivables as of December 31, year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, year 2" The auditor would most likely A) determine whether any changes in the accounts occurred between january 1 and january 9, year 2 B) determine whether a customary trade discount was taken by the customer C) reconfirm the zero balance as of January 10, year 2 D) verify that the amount was received.

D) verify that the amount was received.

An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Controls accounts and subsidiary ledgers are balanced monthly. Similarily, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual circumstances are involved. credit memoranda are prenumbered and must correlate with receiving reports. Which of the following areas could be viewed as an internal control deficiency of the above organization? A) handling of credit memos B) monthly aging of receivables C) credit approvals D) write-offs of delinquent accounts

D) write-offs of delinquent accounts

The permanent file section of the working papers that is kept for each audit client most likely contains A) Review notes pertaining to questions and comments regarding the audit work performed. B) A schedule of time spent on the engagement by each individual auditor. C) Correspondence with the client's legal counsel concerning pending litigation. D)Narrative descriptions of the client's accounting system and control procedures.

D)Narrative descriptions of the client's accounting system and control procedures.

39. 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.

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A. The SEC. B. The AICPA. C. A state CPA society. D. A state board of accountancy.

D. A state board of accountancy

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

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

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

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

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

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

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

D. All of the above are required.

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

D. All of the above should be considered.

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

D. All of the above.

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

D. All of these.

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.

In determining estimates of fees, an auditor may take into account each of the following, except the: A. Value of the service to the client. B. Degree of responsibility assumed by undertaking the engagement. C. Skills required to perform the service. D. Attainment of specific findings.

D. Attainment of specific findings.

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

D. Audit committee of the board of directors.

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

D. Audit risk should increase.

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

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

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

D. Audit work only completed at year-end.

Which of the following 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.

Proper authorization of write-off's of uncollectible accounts should be approved in which of the following departments? A. Accounts receivable B. Credit C. Accounts payable D. CFO

D. CFO

The documentation of an auditor's understanding of internal controls A. Is optional. B. Must be exclusively in either 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 input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission? A. Hash total. B. Parity check. C. Encryption. D. Check digit.

D. Check digit.

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

D. Detection risk increases.

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

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

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.

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

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

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

D. Disclosure of material weaknesses corrected during the period.

In an audit of financial statements of a private company in accordance with generally accepted auditing standards, an auditor is required to A. Identify specific internal control activities relevant to management's financial statement assertions. B. Perform tests of controls to evaluate the effectiveness of the entity's accounting system. C. Determine whether procedures are suitably designed to prevent or detect material misstatements. D. Document the auditor's understanding of the entity's internal control.

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

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.

30. 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.

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

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

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

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

19. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? A. Analysis of balance sheet accounts. B. Analysis of income statement accounts. C. All matters of continuing accounting significance. D. Facts that might bear on management integrity.

D. Facts that might bear on management integrity.

37. To emphasize auditor independence from management, publicly traded corporations are required to A. Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee. B. Establish a policy of discouraging social contact between employees of the corporation and the independent auditors. C. Request that a representative of the independent auditor be on hand at the annual stockholders' meeting. D. Have the independent auditor report to an audit committee of independent members of the board of directors.

D. Have the independent auditor report to an audit committee of independent members of the board of directors.

15. An auditor will ordinarily examine invoices from lawyers primarily in order to A. Substantiate accruals. B. Assess the legal ramifications of litigation in progress. C. Estimate the dollar amount of contingent liabilities. D. Identify possible unasserted litigation, claims, and assessments.

D. Identify possible unasserted litigation, claims, and assessments.

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was A. The only deviation discovered in the sample. B. Identical to a deviation discovered during the prior year's audit. C. Caused by an employee's oversight. D. Initially concealed by a forged document.

D. Initially concealed by a forged document.

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.

For which of the following audit tests would an auditor most likely use attributes sampling? A. Making an independent estimate of the amount of LIFO inventory. B. Examining invoices in support of the valuation of fixed asset additions. C. Selecting accounts receivable balances for confirmation. D. Inspecting employee time cards for proper approval by supervisors.

D. Inspecting employee time cards for proper approval by supervisors.

14. 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.

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

D. Inventory is comprised of precious stones.

All of the following are significant deficiencies except: A. Absence of appropriate reviews of transactions. B. Evidence of willful wrongdoing by lower-level employees. C. Inadequate provisions for safeguarding assets. D. Inventory is highly subject to obsolescence.

D. Inventory is highly subject to obsolescence.

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A. Is considered an "except for" qualification of the opinion. B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D. Is appropriate and would not negate the unqualified/unmodified opinion.

D. Is appropriate and would not negate the unqualified/unmodified opinion.

53. A dual-purpose test A. Simultaneously tests debits and credits. B. Is a procedure completed by both the internal and external auditors. C. Is useful to both the entity and the auditor. D. Is both a substantive test of transactions and a test of controls.

D. Is both a substantive test of transactions and a test of controls.

27. An "integrated audit" A. Will, in most cases, lead to a substantive audit strategy. B. Denies the auditor access to information about the client's controls. C. May be performed by two separate audit firms. D. Is comprised of audits of internal control over financial reporting and of financial statements.

D. Is comprised of audits of internal control over financial reporting and of financial statements.

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor A. Issues an unqualified/unmodified opinion on the consolidated financial statements. B. Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements. C. Is unable to review the other CPA's audit programs and working papers. D. Is satisfied as to the other CPA's independence and professional reputation.

D. Is satisfied as to the other CPA's independence and professional reputation.

A violation of the profession's ethical standards would most likely have occurred when a CPA A. Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period. B. Made arrangements with a bank to collect notes issued by a client in payment of fees due. C. Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name. D. Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

D. Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

A CPA, while performing an audit, strives to achieve independence in appearance in order to A. Reduce risk and liability. B. Comply with the generally accepted standards of fieldwork. C. Become independent in fact. D. Maintain public confidence in the profession.

D. Maintain public confidence in the profession.

21. 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.

35. Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? A. Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date. B. Culmination of events affecting the realization of inventories owned as of the balance sheet date. C. Material changes in the settlement of liabilities that were estimated as of the balance sheet date. D. Material changes in the quoted market prices of listed investment securities since the balance sheet date.

D. Material changes in the quoted market prices of listed investment securities since the balance sheet date.

45. Tolerable misstatement is A. Materiality allocated to an assertion. B. Materiality for the balance sheet as a whole. C. Materiality for the income statement as a whole. D. Materiality allocated to a specific account.

D. Materiality allocated to a specific account.

When performing a test of controls with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population A. Must be systematically replaced in the population after sampling. B. May systematically occur more than once in the sample. C. Must be recorded in a systematic pattern before the sample can be drawn. D. May occur in a systematic pattern, thus destroying the sample randomness.

D. May occur in a systematic pattern, thus destroying the sample randomness.

Statistical sampling provides a technique for A. Exactly defining materiality. B. Greatly reducing the amount of substantive testing. C. Eliminating judgment in testing. D. Measuring the sufficiency of evidential matter.

D. Measuring the sufficiency of evidential matter.

A primary purpose of internal controls is to A. Form a basis for evaluating employees. B. Monitor production quality. C. Avoid clerical errors. D. Meet objectives of maintaining reliable documents and records and accurate financial reporting.

D. Meet objectives of maintaining reliable documents and records and accurate financial reporting.

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

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

As a result of tests of controls, an auditor over relied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was A. Less than the risk of assessing control risk too low on the auditor's sample. B. Less than the deviation rate in the auditor's sample. C. More than the risk of assessing control risk too low on the auditor's sample. D. More than the deviation rate in the auditor's sample.

D. More than the deviation rate in the auditor's sample.

70. After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless A. A final resolution of a contingency that had resulted in a qualification of the auditor's report is made. B. A development occurs that may affect the client's ability to continue as a going concern. C. An investigation of the auditor's practice by a peer review committee ensues. D. New information is discovered concerning undisclosed related party transactions of the previously audited period.

D. New information is discovered concerning undisclosed related party transactions of the previously audited period.

For private companies, accounting firms are prohibited from providing A. Outsourced internal audit services. B. Audit services. C. Review services. D. None of these.

D. None of these.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements? A. Scanning the journals produced by the internal control system. B. Performing analytical procedures using data aggregated at a high level. C. Vouching a sample of transactions directly related to the controls. D. Observing the entity's personnel applying the controls.

D. Observing the entity's personnel applying the controls

As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except: A. Consider factors that affect the risk of material misstatement. B. Ascertain whether internal control policies and procedures have been placed in operation. C. Identify the types of potential misstatements that can occur. D. Obtain knowledge about the operating effectiveness of the internal control.

D. Obtain knowledge about the operating effectiveness of the internal control.

24. Which of the following auditing procedures is ordinarily performed last? A. Confirming accounts payable. B. Testing the purchasing function. C. Reading the minutes of directors' meetings. D. Obtaining a management representation letter.

D. Obtaining a management representation letter

35. Which of the following is not an element of management's assessment process for the effectiveness of internal control? A. Evaluate the likelihood that failure of a control could result in a misstatement. B. Determining the locations and business units to include in the evaluation. C. Determining significant deficiencies and material weaknesses in controls. D. Obtaining the auditor's assessment of the internal control effectiveness.

D. Obtaining the auditor's assessment of the internal control effectiveness.

Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include A. Approximately 1,000 test items. B. A number of test items determined by the auditor to be sufficient under the circumstances. C. A number of test items determined by the auditor's reference to the appropriate sampling tables. D. One transaction.

D. One transaction.

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report? A. Additional emphasis. B. Lack of consistency in the financial statements due to accounting changes. C. Going concern. D. Opinion based in part on the report of another auditor.

D. Opinion based in part on the report of another auditor

9. In order for an external auditor to complete an audit of a public company, the entity's management must comply with all of the following except: A. Accept responsibility for the effectiveness of the entity's internal control over financial reporting. B. Evaluate the effectiveness of the entity's internal control over financial reporting using suitable control criteria. C. Support its evaluation with sufficient evidence, including documentation. D. Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.

D. Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose? A. Adverse and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. B. Disclaimer and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. C. Qualified and adverse. D. Qualified and disclaimer.

D. Qualified and disclaimer.

A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards? A. Professional ethics. B. Supervision and review. C. Accounting and review services. D. Quality control.

D. Quality control.

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to A. Indicate in the auditor's report that the "other financial information" is unaudited. B. Consider whether the "other financial information" is accurate by performing a limited review. C. Obtain written representations from management as to the material accuracy of the "other financial information." D. Read and consider the manner of presentation of the "other financial information."

D. Read and consider the manner of presentation of the "other financial information."

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

D. Read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

When audited financial statements are presented in an entity's document containing other information, the auditor should A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements. C. Perform the appropriate substantive auditing procedures to corroborate the other information. D. Read the other information to determine that it is consistent with the audited financial statements.

D. Read the other information to determine that it is consistent with the audited financial statements.

11. Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following: A. Reasonable assurance on the financial statements, absolute assurance on internal control. B. Reasonable assurance on internal control, absolute assurance on the financial statements. C. Absolute assurance on both the financial statements and internal control. D. Reasonable assurance on both the financial statements and internal control.

D. Reasonable assurance on both the financial statements and internal control.

With respect to ethics, the utilitarian theory A. Suggests that auditors should always verify ownership of a client's material tangible assets. B. Is primarily concerned with equity and impartiality. C. Suggests that an individual's actions should not violate the rights of any individual. D. Recognizes that decisions involve trade-offs between costs and benefits.

D. Recognizes that decisions involve trade-offs between costs and benefits.

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 reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make A. No reference to the predecessor auditor. B. Reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. C. Reference to the predecessor auditor only if the predecessor auditor expressed an unqualified/ unmodified opinion. D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

A violation of the profession's ethical standards would most likely occur when a CPA who A. Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA. B. Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail. C. Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications. D. Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

D. Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

A scope limitation sufficient to preclude an unqualified opinion always will result when management A. Prevents the auditor from reviewing the working papers of the predecessor auditor. B. Engages the auditor after the year-end physical inventory is completed. C. Requests that certain material accounts receivable not be confirmed. D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client. B. Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society. C. Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent. D. Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

D. Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditor may A. Issue an "except for" qualified opinion after discussing the matter with the entity's board of directors. B. Consider the matter closed since the other information is not in the audited financial statements. C. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory/emphasis-of-matter paragraph. D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the A. Sample deviation rate plus the allowance for sampling risk equals the tolerable deviation rate. B. Sample deviation rate is less than the expected population deviation rate used in planning the sample. C. Tolerable deviation rate less the allowance for sampling risk exceeds the sample deviation rate. D. Sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

D. Sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

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

18. Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A. Sale of long-term debt or capital stock. B. Loss of a plant as a result of a flood. C. Major purchase of a business that is expected to double sales volume. D. Settlement of litigation, in excess of the previously recorded liability.

D. Settlement of litigation, in excess of the previously recorded liability.

In a properly designed internal control system, the same employee may be permitted to A. Receive and deposit checks and also approve write-offs of customer accounts. B. Approve vouchers for payment and also sign checks. C. Reconcile the bank statements and also receive and deposit cash. D. Sign checks and also cancel supporting documents.

D. Sign checks and also cancel supporting documents.

39. Management's written representations concerning internal control are A. Addressed to the users of the financial statements. B. Normally drafted by management. C. Included in the auditor's final report. D. Signed by the CEO and CFO.

D. Signed by the CEO and CFO.

In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the A. Auditor's acquiescence in use of this defense. B. Common law. C. AICPA Code of Professional Conduct. D. State law.

D. State law.

If auditors conducting attributes sampling found that the client deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to A. Increase sample size. B. Increase the computed upper deviation rate. C. Decrease the tolerable deviation rate. D. Stop the test and increase control risk.

D. Stop the test and increase control risk.

When documenting an entity's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a A. Pictorial presentation of the flow of instructions in an entity's internal computer system. B. Diagram which clearly indicates an organization's internal reporting structure. C. Graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire. D. Symbolic representation of a system or series of sequential processes.

D. Symbolic representation of a system or series of sequential processes

55. After an audit report containing an unqualified opinion on a nonpublic client's financial statements is issued, the auditor learns that the client has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should A. Determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued. B. Notify the entity that the auditor's report may no longer be associated with the financial statements. C. Describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements. D. Take no action because the auditor has no obligation to make any further inquiries.

D. Take no action because the auditor has no obligation to make any further inquiries.

According to the profession's ethical standards, a CPA would be considered independent in which of the following instances? A. A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA. B. The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust. C. The CPA owns an office building and the mortgage on the building is guaranteed by a client. D. The CPA belongs to a country club client in which membership requires an annual fee.

D. The CPA belongs to a country club client in which membership requires an annual fee.

In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except: A. The AICPA's Auditing Standards Board. B. The Professional Code of Conduct. C. The Independence Standards Board. D. The PCAOB.

D. The PCAOB.

When auditing a public company, which of the following impairs an auditor's independence? A. Offering audit services as well as preparing the tax return for the same client. B. The auditor's spouse works in the assembly line of an audit client. C. Lack of fee disclosure in the client's annual report. D. The auditor has been a partner on the engagement for ten years.

D. The auditor has been a partner on the engagement for ten years

For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true? A. The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate. B. The auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate. C. The auditor must increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate. D. The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate.

D. The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate.

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except: A. The auditor is under no obligation to perform audit procedures on this other information. B. The auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C. The auditor must request that material inconsistencies be corrected. D. The auditor must perform audit procedures on this other information.

D. The auditor must perform audit procedures on this other information.

19. Which of the following situations would require adjustment to or disclosure in the financial statements? A. A merger discussion. B. The application for a patent on a new production process. C. Discussions with a customer that could lead to a 40 percent increase in the client's sales if agreement is successful. D. The bankruptcy of a customer who regularly purchased 30 percent of the company's output.

D. The bankruptcy of a customer who regularly purchased 30 percent of the company's output.

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.

55. The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning A. Adequate financial statement disclosures. B. Compliance with the statutory laws and regulations. C. Scope limitations resulting from their inaction. D. The integrity of management.

D. The integrity of management.

Proper monitoring within an internal control framework may include all of the following except: A. An external auditor. B. An effective audit committee. C. An internal audit function. D. The internal revenue service.

D. The internal revenue service.

The primary responsibility for preventing fraud in an organization lies with A. The audit committee of the board of directors. B. The internal audit function. C. The external auditor. D. The organization's management.

D. The organization's management.

Which of the following is not a characteristic of a batch processed computer system? A. The collection of like transactions which are sorted and processed sequentially against a master file. B. Keypunching of transactions, followed by machine processing. C. The production of numerous printouts. D. The posting of a transaction, as it occurs, to several files, without intermediate printouts.

D. The posting of a transaction, as it occurs, to several files, without intermediate printouts.

26. Before accepting an engagement to audit a new client, a CPA is required to obtain A. An understanding of the prospective client's industry and business. B. The prospective client's signature on the engagement letter. C. A preliminary understanding of the prospective client's control environment. D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

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

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that A. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system. B. The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action. C. The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. D. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

D. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

An auditor would issue an adverse opinion if A. The audit was begun by other independent auditors who withdrew from the engagement. B. A qualified opinion cannot be given because the auditor lacks independence. C. A restriction on the scope of the audit was significant. D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

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

The computed upper deviation rate is A. The maximum rate of deviations that the auditor is willing to accept before deciding not to rely on the control. B. The rate of deviations that the auditor expects to occur in the population. C. A point estimate of the population deviation rate. D. The sum of the sample deviation rate and an appropriate allowance for sampling risk.

D. The sum of the sample deviation rate and an appropriate allowance for sampling risk.

54. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the A. Methods of statistical sampling to be used in confirming accounts receivable. B. Pending legal matters to be included in the inquiry of the client's attorney. C. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. D. Timing of the audit.

D. Timing of the audit.

38. An auditor obtains knowledge about a new client's business and its industry in order to A. Make constructive suggestions concerning improvements to the client's internal control. B. Develop an attitude of professional skepticism concerning management's financial statement assertions. C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Understand the events and transactions that may have an effect on the client's financial statements.

D. Understand the events and transactions that may have an effect on the client's financial statements.

18. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining A. Whether the predecessor's work should be utilized. B. Whether, in the predecessor's opinion, the financial statements are materially correct. C. Whether, in the predecessor's opinion, the company's internal controls have been satisfactory. D. Whether the engagement should be accepted.

D. Whether the engagement should be accepted.

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firm A. Which owes the CPA audit fees for more than one year. B. In which the CPA has a large active margin account. C. In which the CPA's brother is the controller. D. Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

D. Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

FALSE

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

FALSE

An indirect financial interest is defined as a financial interest that is owned or is under the control of an individual or entity.

FALSE

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

FALSE

If a CPA owns an insurance policy issued by an attest client, independence would be considered impaired, even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.

FALSE

The Principles of Professional Conduct set forth the minimum standards.

FALSE

The rules contained in Section 100 cover issues relating to independence, integrity, and auditing standards.

FALSE

The term "ethics" refers to a person's propensity to follow the laws of the land.

FALSE

A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner of the interest but has a right to some or all of the underlying benefits of ownership.

TRUE

A going concern issue requires a modification of the three-paragraph standard unqualified audit report (public company).

TRUE

The objectivity of an internal audit department will most likely be enhanced if its reports to the client's A) Audit committee. B) Chief Financial Officer [CFO]. C) Controller. D) Senior Management Team [as a group].

a. Audit Committee

The four principles of the IIA Code of Ethics are: a. confidentiality, competency, objectivity, and integrity b. objectivity, independence, compliance, and due diligence c. honesty, integrity, independence, and competency d. integrity, confidentiality, independence, and compliance

a. Confidentiality, competency, objectivity, and integrity

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity's financial statements? a. the accountant is not required to obtain an understanding of internal control b. the accountant must be independent in fact and appearance c. the accountant expresses no assurance on the financial statements d. the accountant should obtain a written management representation letter

a. The accountant is not required to obtain an understanding of internal control.

Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests? A) review the cash receipts journal for the month prior to year-end b) inspect related shipping records and sales invoices documenting the merchandise sold to customers C) intensify the study of internal control concerning the revenue and collection cycle D) increase assessed detection risk related to existence assertion in this area

b) inspect related shipping records and sales invoices documenting the merchandise sold to customers

Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that: a. the scope of the inquiry and the analytical procedures performed by the accountant have not been restricted b. all information included in the financial statements is the representation of the management of the entity c. a review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements d. a review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements

b. All information included in the financial statements is the representation of the management of the entity.

Which of the following professional services would be considered an attest engagement? a. a management consulting engagement to provide IT advice to a client b. an engagement to report on compliance with statutory requirements c. an income tax engagement to prepare federal and state tax returns d. compilation of financial statements from a client's accounting records

b. An engagement to report on compliance with statutory requirements.

For nonpublic companies not subject to the standards of the PCAOB, reports on internal control are an example of which of the following types of engagements? A) Audit engagement. B) Attest engagement. C) Assurance engagement. D) Special reports engagement.

b. Attest Engagement

Which of the following is not considered a principle on which TRUST services were established? A) Security. B) Authentication. C) Processing integrity. D) Confidentiality.

b. Authentication

Which of the following assurances is not provided by compliance with Trust Services principles? a. there are procedures to protect the system against unauthorized physical access b. the financial statements created by the system are free of material misstatements c. the documented system availability objectives, policies, and standards have been communicated to authorized users and controls are functioning as documented d. documented system processing integrity objectives, policies, and standards have been communicated to authorized users and controls are functioning as documented

b. The financial statements created by the system are free of material misstatements

When compiling the financial statements of a nonpublic entity, an accountant should: a. review agreements with financial institutions for restrictions on cash balances b. understand the accounting principles and practices of the entity's industry c. inquire of key personnel concerning related parties and subsequent events d. perform ratio analyses of the financial data of comparable prior periods

b. Understand the accounting principles and practices of the entity's industry

A review engagement will typically A) Require the accountant to obtain an understanding of internal control. B) Result in a statement of limited assurance about the fair presentation of the financial statements. C) Result in an explicit opinion about whether the financial statements are presented fairly. D) Include only the gathering of financial data for the primary purpose of preparing the financial statements with the related footnotes.

b. result in a statement of limited assurance about the fair presentation of the financial statements

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

b.Management is dominated by one individual.

Prime Plus engagements are mainly designed to: a. provide guidance to assisted-living care facilities to enhance quality of life for the elderly b. provide guidance to health care providers in giving high-quality health care c. assist the elderly to maintain their financial independence and desired lifestyle as their age d. assist the elderly in perfecting their shuffleboard techniques

c. Assist the elderly to maintain their financial independence and desired lifestyle as they age.

Which of the following is not a Trust Services principle? a. processing integrity b. online privacy c. digital certificate authorization d. availability

c. Digital certificate authorization

Which of the following is not one of the Principles in the IIA Code of Ethics? A) Integrity. B) Objectivity. C) Due Professional Care. D) Competency.

c. Due Professional Care

Which of the following is not one of the general areas of the IIA's International Standards for the Professional Practice of Internal Accounting? a. performance standards b. implementation standards c. ethical standards d. attribute standards

c. Ethical standards

Which of the following services would be considered an attest engagement? A) Compilation of financial statements from an entity's accounting records. B) Providing information systems advice to a former audit client. C) Reporting on compliance with a university's accreditation requirements. D) Providing advice on the structure of the internal audit function for an entity whose external audit is performed by another firm.

c. Reporting on compliance with a university's accreditation requirements

The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity states that: a. a review includes assessing the accounting principles used and significant estimates made by management b. a review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements c. the accountant is not away of any material modifications that should be made to the financial statements d. the accountant does not express an opinion or any other form of assurance on the financial statements

c. The accountant is not aware of any material modifications that should be made to the financial statements.