Term
1. Which of the following is not a financial statement assertion made by management?
A. existence of recorded assets and liabilities
B. completeness of recorded assets and liabilities
C. valuation of assets and liabilities
D. effectiveness of internal control |
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Definition
| D. effectiveness of internal control |
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Term
2. Which of the following business characteristics is not indicative of high inherent risk?
a. operating results that are highly sensitive to economic factors.
b. large likely misstatements detected in prior audits
c. substantial turnover of management.
d. a large amount of assets |
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Definition
| d. a large amount of assets |
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Term
3. As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter?
a. To increase the efficiency of the audit by eliminating the need for other audit procedures.
b. to remind the client’s management of its primary responsibility for the financial statements
c. to document in the audit working papers the clients responses to certain verbal inquiries made by the auditors during the engagement.
d. to provide evidence in those areas dependent upon management’s failure intentions |
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Definition
| a. To increase the efficiency of the audit by eliminating the need for other audit procedures. |
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Term
4. Which of the following statements best describes why auditors investigate related party transactions?
a. related party transactions generally are illegal acts
b. The substance of related party transactions may differ from their form.
c. all related party transactions must be eliminated as a step in preparing consolidated financial statements.
d. related party transactions are a form of management fraud |
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Definition
| b. The substance of related party transactions may differ from their form. |
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Term
5. Of the following, which is the least reliable type of audit evidence?
a. confirmations mailed by outsiders to the auditors
b. correspondence between the auditors and suppliers
c. copies of sales invoice inspected by the auditors.
d. canceled checks returned in the year-end-bank statement directly to the client |
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Definition
| c. copies of sales invoice inspected by the auditors. |
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Term
6. Analytical procedures are most likely to detect:
a. weaknesses of a material nature in internal control
b. unusual transaction
c. noncompliance with prescribed control activities
d. improper separation of accounting and other financial statements |
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Definition
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Term
7. Which of the following is not a primary approach for developing the estimate?
a. review and test management’s process for developing the estimate
b. review subsequent transactions.
c. confirm the amounts
d. develop and independent estimate |
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Definition
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Term
8. A primary purpose of the audit working papers is to:
a. aid the auditors by providing a list of required procedures
b. provide a point of reference for future audit engagements
c. support the underlying concepts included in the preparation of the basic financial statements.
d. support the auditor’s opinion |
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Definition
| d. support the auditor’s opinion |
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Term
9. In what section of the audit working papers would a long-term lease agreement be filed?
a. current working paper file
b. permanent working paper file
c. lead schedule time
d. corroborating documents file |
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Definition
| b. permanent working paper file |
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Term
10. Which of the following is not a function of audit working papers?
a. assist management in illustrating that the financial statements are in accordance with GAAP
b. assist audit team members responsible for supervision in reviewing the work
c. assist auditors in planning future engagements
d. assist peer reviewers and inspectors in performing their roles. |
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Definition
| b. assist audit team members responsible for supervision in reviewing the work |
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Term
11. In using the working papers of a specialist, the auditors referred to the specialist’s findings in their report. This would be an appropriate reporting practice if the:
a. client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.
b. auditors as a result of the specialist’s findings give a qualified opinion on the financial statements.
c. clients understands the auditor’s corroborative use of the specialist’s findings in relation to the representations in the financial statements.
d. auditors as a result of the specialist’s findings decide to indicated a division of responsibility with the specialist. |
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Definition
| b. auditors as a result of the specialist’s findings give a qualified opinion on the financial statements. |
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Term
12. A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably:
a. remain silent on the matter since it is an internal matter of the auditing firm.
b. note that the assistant auditor is completely dissociated from responsibility for the auditors’ opinion
c. document the additional work required since all disagreements of this type will require expanded substantive procedures.
d. document the assistant auditor’s position and how the difference of opinion was resolved. |
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Definition
| d. document the assistant auditor’s position and how the difference of opinion was resolved. |
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Term
1. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets?
a. Generous performance based compensation systems
b. Management preoccupation with increased financial performance
c. an unreliable accounting system
d. strained relationships between management and the auditors. |
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Definition
| c. an unreliable accounting system |
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Term
2. The audit committee of a company must be made up of:
a. representatives from the client’s management investors suppliers and customers.
b. The audit partner the chief financial officer the legal counsel and at least one outsider
c. Representatives of the major equity interest such as preferred and common stockholders
e. members of the board of directors who are not officers or employees. |
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Definition
| e. members of the board of directors who are not officers or employees. |
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Term
3. Which of the following should not normally be included in the engagement letter for an audit?
a. a description of the responsibilities of client personnel to provide assistance
b. an indication of the amount of the audit fees.
c. a description of the limitations of an audit
d. a listing of the client’s branch offices selected for testing |
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Definition
| d. a listing of the client’s branch offices selected for testing |
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Term
4. Which portion of an audit is least likely to be completed before the balance sheet date?
a. test of controls
b. issuance of an engagement letter
c. substantive procedures
d. assessment of control risk |
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Definition
| c. substantive procedures |
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Term
5. Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?
a. analysis of balance sheet accounts
b. analysis of income statement accounts
c. all matters of continuing accounts significance.
d. facts that might bear on the integrity of management |
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Definition
| d. facts that might bear on the integrity of management |
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Term
6. As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:
a. each recorded sale represents a bona fide transaction
b. all sales have been recorded in the sales journal
c. all debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries.
d. recorded sales have been properly posted to customer accounts |
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Definition
| d. recorded sales have been properly posted to customer accounts |
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Term
7. The primary objective of test of details of transactions performed as substantive procedures is to:
a. comply with GAAS
b. attain assurance about the reliability of the accounting system
c. detect material misstatements in the financial statements
d. evaluate whether managements policies and procedures are operating effectively |
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Definition
| c. detect material misstatements in the financial statements |
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Term
8. the risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when in fact such misstatement does exist is referred to as:
a. business risk
b. engagement risk
c. control risk
d. detection risk |
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Definition
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Term
9. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
a. adequate disclosure
b. quality control
c. materiality and audit risk
d. client acceptance |
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Definition
| c. materiality and audit risk |
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Term
10. Which of the following best describes what is meant by the term “fraud risk factor”?
a. factors that when present indicate that risk exists
b. factors often observed in circumstances where fraud have occurred.
c. factors that when present require modification of planned audit procedures
d. weakness in internal control identified during an audit |
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Definition
| b. factors often observed in circumstances where fraud have occurred. |
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Term
11. Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions.
a. incentive or pressure
b. opportunity
c. supervisory position
d. attitude |
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Definition
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Term
12. Which of the following is most likely to be an overall response to fraud risk identified in an audit?
a. use less predictable audit procedures
b. use less predictable audit procedures
c. use only certified public accountants on the engagement
d. place increased emphasis on the audit of objective transactions rather than subjective transactions |
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Definition
| b. use less predictable audit procedures |
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Term
1. Which of the following would be least likely to be considered an objective of internal control?
a. checking the accuracy and reliability of accounting data.
b. detecting management fraud
c. encouraging adherence to managerial policies
d. safeguarding assets |
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Definition
| b. detecting management fraud |
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Term
2. An entity’s ongoing monitoring activities often include:
a. periodic audits by internal auditors
b. the audit of the annual financial statements
c. approval of cash disbursements
d. management review of weekly performance. |
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Definition
| d. management review of weekly performance. |
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Term
3. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:
a. knowledge necessary to determine the nature, timing, and extent of audit procedures.
b. audit evidence to use in reducing detection risk
c. a basis for modifying test of controls
d. an evaluation of the consistency of application of management policies |
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Definition
| a. knowledge necessary to determine the nature, timing, and extent of audit procedures. |
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Term
4. An auditor may compensate for a weakness in internal control by increasing the extent of:
a. test of controls
b. detection risk
c. substantive test of details
d. inherent risk |
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Definition
| c. substantive test of details |
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Term
5. Controls over financial reporting are often classified as preventative, detective, or corrective
a. Segregation of duties over cash disbursements.
b. requiring approval of purchase transactions
c. preparing bank reconciliations
d. maintaining backup copies of key transactions |
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Definition
| c. preparing bank reconciliations |
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Term
7. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPAs procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:
a. consider the organizational level to which the internal auditors report the results of their work
b. review the internal auditors’ work
c. consider the qualifications of the internal audit staff
d. review the training program in effect for the internal audit staff. |
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Definition
| a. consider the organizational level to which the internal auditors report the results of their work |
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Term
8. Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibility can be improved by:
a. employment of temporary personnel to aid in the separation of duties
b. direct participation by the owner in key record keeping and control activities of the business.
c. engaging a CPA to perform monthly write-up work
d. delegation of full clear cut responsibility for a separate major transaction cycle to each employee |
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Definition
| b. direct participation by the owner in key record keeping and control activities of the business. |
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Term
9. Of the following statements about internal control which one is not valid?
a. no one person should be responsible for the custody and the recording of an asset
b. transactions should be properly authorized before such transactions are processed
c. because of the cost/benefit relationship, a client may apply controls on a test basis
d. controls reasonably ensure that collusion among employees cannot occur |
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Definition
| d. controls reasonably ensure that collusion among employees cannot occur |
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Term
10. Proper segregation of functional responsibilities calls for separation of the:
a. authorization record keeping and custodial functions
b. authorization execution and payment functions
c. receiving, shipping, and custodial functions
d. authorization approval and execution functions |
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Definition
| a. authorization record keeping and custodial functions |
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Term
11. To have an adequate basis to issue a management report on internal control under section 404(a) of the Sarbanes-Oxley act, management must do all of the following except:
a. establish internal control with no material weakness
b. accept responsibility for the effectiveness of internal control.
c. evaluate the effectiveness of internal control using suitable control criteria.
d. support the evaluation with sufficient evidence |
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Definition
| a. establish internal control with no material weakness |
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Term
12. When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley act and PCAOB standards, they must:
a. modify their report for any significant deficiencies identified
b. use a “bottom up” approach to identify controls to test
c. test controls for all significant accounts
d. perform a separate assessment of controls over operations |
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Definition
| c. test controls for all significant accounts |
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Term
1. Which of the following is an element of sample risk?
a. choosing an audit procedure that is inconsistent with the audit objective.
b. concluding that no material misstatement exists in a materially misstated population based on taking a sample that include no misstatement.
c. failing to detect an error on a document that has been inspected by an auditor.
d. failing to perform audit procedures that are required by the sampling plan |
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Definition
| b. concluding that no material misstatement exists in a materially misstated population based on taking a sample that include no misstatement. |
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Term
2. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk to high relate to the:
a. efficiency of the audit
b. effectiveness of the audit
c. selection of the sample
d. audit quality controls |
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Definition
| a. efficiency of the audit |
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Term
3. Which of the following statistical sampling techniques is least desirable for use by the auditors?
a. random number table selection
b. block selection
c. systematic selection
d. random number generator selection |
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Definition
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Term
4. The auditors’ primary objective in selecting a sample of items from an audit population is to obtain:
a. a random sample
b. a stratified sample
c. a representative sample
d. a large sample |
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Definition
| c. a representative sample |
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Term
5. Discovery sampling is particularly effective when:
a. there are a large number of errors in the population
b. the auditors are looking for critical deviations that are not expected to be frequent in number
c. the auditors know where deviations are likely to occur
d. the population in large in size. |
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Definition
| b. the auditors are looking for critical deviations that are not expected to be frequent in number |
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Term
6. The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year?
a. large variance in the dollar value of accounts
b. smaller population size
c. larger tolerable misstatement
d. higher risk of incorrect acceptance. |
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Definition
| a. large variance in the dollar value of accounts |
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Term
7. Which of the following sampling techniques is typically used for test of controls?
a. mean-per-unit sampling
b. difference sampling
c. attribute sampling
d. probability proportional to size sampling |
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Definition
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Term
8. Which of the following is accurate regarding tolerable misstatement?
a. tolerable misstatement is directly related to materiality.
b. tolerable misstatement cannot be determined until the sample results are evaluated
c. tolerable misstatement does not affect sample size
d. tolerable misstatement is a measure of reliability of the sample. |
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Definition
| a. tolerable misstatement is directly related to materiality. |
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Term
9. In which of the following circumstances is it least likely that test of controls will be performed?
a. the expected deviation rate exceeds the tolerable deviation rate
b. the planned assessed level of control risk is at a level slightly below the maximum
c. the risk of assessing control risk too low is less than the expected deviation rate
d. the tolerable deviation rate exceeds the risk of assessing control risk too low |
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Definition
| a. the expected deviation rate exceeds the tolerable deviation rate |
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Term
10. An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state’s highway system. Which estimation method is most appropriate?
a. mean per unit
b. difference
c. ratio
d. probability proportional to size |
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Definition
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Term
1. Which of the following is least likely to be considered a substantive procedure relating to payroll?
a. investigate fluctuations in salaries, wages and commissions
b. test computations of compensation under profit sharing for bonus plans
c. test commission earnings
d. test whether employee time reports are approved by supervisors |
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Definition
| d. test whether employee time reports are approved by supervisors |
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Term
2. Which of the following is the best way for auditors to determine that every name on a company’s payroll is that of a bona fide employee presently on the job?
a. Examine human resources records for accuracy and completeness
b. Examine employees’ names listed on payroll tax returns for agreement with payroll accounting records
c. Make a surprise observation of the company’s regular distribution of paychecks on a test basis
d. Visit the working areas and verify that employees exist by examining their badge or identification number. |
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Definition
| c. Make a surprise observation of the company’s regular distribution of paychecks on a test basis |
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Term
3. As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditors 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 not disclosure
d. Consider the possibility of misstatement in the financial statements |
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Definition
| d. Consider the possibility of misstatement in the financial statements |
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Term
4. When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
a. Capitalization
b. Financing
c. Investing
d. Operations |
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Definition
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Term
5. The search for unrecorded liabilities for a public company includes procedures usually performed through the
a. Day the audit report is issued
b. End of the client’s year
c. Date of the auditors’ report
d. Date report is filed with the SED |
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Definition
| c. Date of the auditors’ report |
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Term
6. The aggregated misstatement in the financial statements is made up of:
a. Known misstatements, projected misstatements, and other misstatements
b. Known misstatements, and projected misstatements
c. Projected misstatements
d. Projected misstatements and other misstatements |
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Definition
| a. Known misstatements, projected misstatements, and other misstatements |
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Term
7. A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n)
a. Analytical process
b. Loss contingency
c. Probable loss
d. Unassertive claim |
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Definition
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Term
8. Which of the following is most likely to be considered a type 1 subsequent event?
a. A business combination completed after year-end but for which negotiations began prior to year end
b. A strike subsequent to year end due to employee complaints about working conditions which originated two years ago
c. Customer checks deposited prior to year end but determined to be uncollectible after year end
d. Introduction of a new line of products after year end for which major research had been completed prior to year end |
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Definition
| c. Customer checks deposited prior to year end but determined to be uncollectible after year end |
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Term
9. An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9 and delivered the report on February 16, 20X9. The client’s representation letter normally would be dated:
a. December, 31 20X8
b. January 17, 20X9
c. February 10, 20X9
d. February 16, 20X9 |
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Definition
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Term
10. Which of the following procedures is most likely to be included in the financial review stage of an audit?
a. Obtain an understanding of internal control
b. Confirmation of receivables
c. Observation of inventory
d. Perform analytical procedures |
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Definition
| d. Perform analytical procedures |
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Term
11. Subsequent to the issuance of the auditor’s report the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
a. Notify the board of directors that the auditor’s report must no longer be associated with the financial statements
b. Determine whether there are person relying or likely to rely on the financial statements who would attached importance to the information
c. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements
d. Issue revised pro forma financial statements taking into consideration the newly discovered information |
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Definition
| b. Determine whether there are person relying or likely to rely on the financial statements who would attached importance to the information |
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Term
12. Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
a. A business combination
b. Early retirement of bonds payable
c. Settlement of litigation
d. Plant closure due to a strike |
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Definition
| c. Settlement of litigation |
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