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audit1asdf

STUDY
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T/F: Independent audits of today place more emphasis on sampling than did the audits of the 19th century.
True
T/F: The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice.
False
T/F: A company is either audited by the GAO or internal auditors, but not both.
False
T/F: The SEC does not pass on the merits of the securities that are registered with the agency.
True
T/F: The American Institute of Certified Public Accountants has the primary authority to establish accounting standards.
False
T/F: An annual peer review is a requirement of the AICPA.
False
T/F: Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit.
True
T/F: Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements.
False
T/F: The Sarbanes-Oxley Act requires that auditors of certain publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations.
False
T/F: Auditing is frequently only a small part of the practice of local CPA firms.
False
A summary of findings rather than assurance is most likely to be included in a(n):
A) Agreed-upon procedures report.
B) Compilation report.
C) Examination report.
D) Review report.
Agreed-upon procedures report.
The Statements on Auditing Standards have been issued by the:
A) Auditing Standards Board.
B) Financial Accounting Standards Board.
C) Securities and Exchange Commission.
D) Federal Bureau of Investigation.
Auditing Standards Board.
The risk associated with a company's survival and profitability is referred to as:
A) Business Risk.
B) Information Risk.
C) Detection Risk.
D) Control Risk.
Business Risk.
Historically, which of the following has the AICPA been most concerned with providing?
A) Professional standards for CPAs.
B) Professional guidance for regulating financial markets.
C) Standards guiding the conduct of internal auditors.
D) Staff support to Congress.
Professional standards for CPAs.
The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:
A) Auditing Standards Board.
B) Financial Accounting Standards Board.
C) Government Accounting Standards Boards.
D) Securities and Exchange Commission.
Securities and Exchange Commission.
An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):
A) Peer Review Engagement.
B) Quality Control Engagement.
C) Quality Assurance Engagement.
D) Attestation Engagement.
Peer Review Engagement.
The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as:
A) Auditing Statements of Position (ASPs).
B) Accounting Series Releases (ASRs).
C) Statements on Auditing Standards (SASs).
D) Statements on Auditing Principles (SAPs).
Statements on Auditing Standards (SASs).
The Government Accountability Office (GAO):
A) Is primarily concerned with rapid processing of all accounts payable incurred by the federal government.
B) Conducts operational audits and reports the results to Congress.
C) Is a multinational organization of professional accountants.
D) Is primarily concerned with budgets and forecasts approved by the SEC.
Conducts operational audits and reports the results to Congress.
The risk that information is misstated is referred to as:
A) Information risk.
B) Inherent risk.
C) Relative risk.
D) Business risk.
Information risk.
The risk that a company will not be able to meet its obligations when they become due is an aspect of:
A) Information risk.
B) Inherent risk.
C) Relative risk.
D) Business risk.
Business risk.
Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management?
A) Integrity.
B) Competence.
C) Independence.
D) Keeping informed on current professional developments.
Independence.
The attest function:
A) Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services.
B) Includes the preparation of a report of the CPA's findings.
C) Requires a consideration of internal control.
D) Requires a complete review of all transactions during the period under examination.
Includes the preparation of a report of the CPA's findings.
Attestation risk is limited to a low level in which of the following engagement(s)?
A) Both examinations and reviews.
B) Examinations, but not reviews.
C) Reviews, but not examinations.
D) Neither examinations nor reviews.
B) Examinations, but not reviews.
When compared to an audit performed prior to 1900, an audit today:
A) Is more likely to include tests of compliance with laws and regulations.
B) Is less likely to include consideration of the effectiveness of internal control.
C) Has bank loan officers as the primary financial statement user group.
D) Includes a more detailed examination of all individual transactions.
Is more likely to include tests of compliance with laws and regulations.
Which of the following are issued by the Securities and Exchange Commission?
A) Accounting Research Studies.
B) Accounting Trends and Techniques.
C) Industry Audit Guides.
D) Financial Reporting Releases.
Financial Reporting Releases.
Which of the following is not correct relating to the Sarbanes-Oxley Act?
A) It toughens penalties for corporate fraud.
B) It restricts the types of consulting CPAs may perform for audit clients.
C) It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.
D) It eliminates a significant portion of the accounting profession's system of self-regulation.
It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.
An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?
A) The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement.
B) The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.
C) Operational audits do not ordinarily result in the preparation of a report.
D) The operational audit deals with pre-tax income.
The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.
The review of a company's financial statements by a CPA firm:
A) Is substantially less in scope of procedures than an audit.
B) Requires detailed analysis of the major accounts.
C) Is of similar scope as an audit and adds similar credibility to the statements.
D) Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.
Is substantially less in scope of procedures than an audit.
Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA?
A) Only members employed by the AICPA are required to take such courses.
B) Only members in public practice are required to take such courses.
C) Members, regardless of whether they are in public practice, are required to meet such requirements.
D) There is no requirement for members to participate in CPE.
Members, regardless of whether they are in public practice, are required to meet such requirements.
The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over:
A) Compliance with laws and regulations.
B) Financial reporting.
C) Effectiveness of operations.
D) Efficiency of operations.
Financial reporting.
Passage of the Sarbanes-Oxley Act led to the establishment of the:
A) Auditing Standards Board.
B) Accounting Enforcement Releases Board.
C) Public Company Accounting Oversight Board.
D) Securities and Exchange Commission.
Public Company Accounting Oversight Board.
Which of the following professionals has primary responsibility for the performance of an audit?
A) The managing partner of the firm.
B) The senior assigned to the engagement.
C) The manager assigned to the engagement.
D) The partner in charge of the engagement.
The partner in charge of the engagement.
Which of the following types of services is generally provided only by CPA firms?
A) Tax audits.
B) Financial statement audits.
C) Compliance audits.
D) Operational audits.
Financial statement audits.
The right to practice as a CPA is given by which of the following organizations?
A) State Boards of Accountancy.
B) The AICPA.
C) The SEC.
D) The General Accounting Office.
State Boards of Accountancy.
Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?
A) Operational audit.
B) Internal audit.
C) Compliance audit.
D) Government audit.
Compliance audit.
Inquiries and analytical procedures ordinarily form the basis for which type of engagement?
A) Agreed-upon procedures.
B) Audit.
C) Examination.
D) Review.
D) Review.
Which of the following best describes the reason why independent auditors report on financial statements?
A) A management fraud may exist and it is more likely to be detected by independent auditors.
B) Different interests may exist between the company preparing the statements and the persons using the statements.
C) A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.
D) Poorly designed internal control may be in existence.
Different interests may exist between the company preparing the statements and the persons using the statements.
Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also:
A) Accuracy.
B) Evaluation.
C) Compliance.
D) Internal control.
Compliance.
Operational auditing is primarily oriented toward:
A) Future improvements to accomplish the goals of management.
B) The accuracy of data reflected in management's financial records.
C) The verification that a company's financial statements are fairly presented.
D) Past protection provided by existing internal control.
Future improvements to accomplish the goals of management.
A typical objective of an operational audit is for the auditor to:
A) Determine whether the financial statements fairly present 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.
Make recommendations for improving performance.
An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on:

Financial Statements Internal Control
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Yes Yes
T/F: To express an opinion on financial statements, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
T
T/F: The auditors' report on a corporation's financial statements usually is addressed to the president of the company.
F
T/F: The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards.
F
T/F: Partners in CPA firms usually have the responsibility for signing the audit report.
T
T/F: An audit is more likely to detect tax evasion than violations of antitrust laws.
T
T/F: The attestation standards do not supersede generally accepted auditing standards.
T
T/F: A peer review is generally performed by employees of the AICPA.
F
T/F: If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement.
F
T/F: An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws.
F
T/F: The pronouncements of the International Auditing and Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company.
T
Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to:

Fraudulent Financial Reporting /Misappropriation of Assets
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Yes Yes
Financial statements are prepared following a(an)
A) Applicable financial reporting framework.
B) Appropriate subject matter.
C) Generally accepted auditing standards.
D) Set of quality control standards.
Applicable financial reporting framework
An attestation engagement:
A) Has as its primary source of standards the assurance standards.
B) Includes a report on subject matter, or on an assertion about subject matter.
C) Includes search and verification procedures for all major accounts.
D) Is ordinarily an examination, review or compilation engagement.
Includes a report on subject matter, or on an assertion about subject matter.
An audit provides reasonable assurance of detecting which of the following types of material illegal acts?

Direct Effect/ Without a Direct Effect
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y, N
Which of the following is not a type of auditors' opinion?
A) Adverse.
B) Ordinary.
C) Qualified.
D) Unmodified.
Ordinary
Which of the following is one of the elements of AICPA quality control?
A) Assurance of proper levels of association.
B) Due professional care.
C) Engagement performance.
D) Supervision.
Engagement performance.
A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element?
A) Engagement performance.
B) Human resources.
C) Leadership responsibilities for quality with the firm.
D) Monitoring
Monitoring
Requirements for training, independence and due professional care are included in which group of the generally accepted auditing standards of the PCAOB?
A) Fieldwork.
B) General.
C) Reporting.
D) Quality control.
General
Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards?
A) The audit provides reasonable assurance the client will remain in business for at least one year.
B) The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement.
C) Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation.
D) An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.
An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.
A set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing the in the financial statements is referred to as a(n)
A) Financial reporting framework.
C) Public Company Accounting Oversight Board Criteria.
B) Quality control presentation standard.
D) Special purpose audit standard.
Financial reporting framework.
An audit should be designed to obtain reasonable assurance of detecting material misstatements due to:
A) Errors.
B) Errors and fraud.
C) Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts.
D) Errors, fraud and noncompliance with all laws.
Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts.
Which of the following is accurate, as indicated in the principles underlying an audit?
A) Management is expected to provide the auditors with all needed evidence prior to the beginning of audit work.
B) An auditor is unable to obtain absolute assurance that he financial statements are free from material misstatement.
C) Auditors are responsible for having appropriate competence to perform the audit without the assistance of outside specialists.
D) Management is responsible for preparing accurate financial statement amounts, while auditors are responsible for auditing those amounts and for preparing note disclosures related to those amounts.
An auditor is unable to obtain absolute assurance that he financial statements are free from material misstatement.
Which of the following is not an underlying premise of an audit?
A) Management must provide the auditor with all information relevant to the preparation and fair presentation of the financial statements.
B) Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework.
C) Where appropriate, the auditor may obtain information from those charged with governance.
D) The auditors should be provided unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.
Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework.
By definition, proper professional skepticism on an audit requires

Questioning mind/Subjective assessment of audit evidence
A) No No
B) No Yes
C) Yes No
D) Yes Yes
Y/N
When a Statement Auditing Standards uses the word "should" relating to a requirement, it means that the auditor:
Must comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards.
An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s)
Must Should
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y/N
Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients?
A) The auditors have a responsibility to discover all material noncompliance.
B) If audit procedures reveal noncompliance, the auditors should take appropriate actions.
C) If the auditors suspect noncompliance, they should conduct a legal audit of the company.
D) The auditors' responsibility for the detection of all noncompliance is the same as their responsibility regarding material misstatements due to errors and fraud.
If audit procedures reveal noncompliance, the auditors should take appropriate actions.
The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:
A) Management fails to take appropriate corrective action.
B) Illegal act has material financial statement implications.
C) Illegal act has received widespread publicity.
D) Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.
Management fails to take appropriate corrective action.
Which of the following is not included as a part of the description of the auditor's responsibility in a nonpublic company unmodified report?
A) The audit was performed in accordance with generally accepted accounting principles.
B) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
C) The procedures selected depend on the auditor's judgment.
D) An audit includes evaluating the appropriateness of accounting policies used.
The audit was performed in accordance with generally accepted accounting principles.
Primary responsibility for the financial statements lies with:

Auditors Management
A) Yes Yes
B) Yes No
C) No Yes
D) No No
N/Y
Which of the following is explicitly included as a part of the description of management's responsibility in an unmodified audit report?
A) Management is responsible for making a judgment on which misstatements are material vs. immaterial.
B) Management is responsible for providing auditors with all relevant evidence.
C) Management is responsible for the design, implementation, and maintenance of internal control.
D) Management is responsible for listing all illegal acts with a direct effect on financial statement amounts and disclosures.
Management is responsible for the design, implementation, and maintenance of internal control.
The auditors' report for a nonpublic company should indicate:
A) That the audit was made in accordance with auditing standards generally accepted in the United States of America.
B) Any weakness in internal control observed by the auditors.
C) That accounting principles have been consistently applied.
D) That no illegal acts have been identified.
That the audit was made in accordance with auditing standards generally accepted in the United States of America.
The Auditing Standards Board's guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in:
A) The 10 Generally Accepted Auditing Standards.
B) The Code of Professional Conduct.
C) Accounting Series Releases.
D) Principles Underlying an Audit Conducted in Accordance with GAAS.
Principles Underlying an Audit Conducted in Accordance with GAAS.
A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of:
A) Acceptance and continuance of client relationships and specific engagements.
B) Engagement performance.
C) Human resources.
D) Relevant ethical requirements.
Engagement performance.
A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of:
A) Acceptance and continuance of client relationships and specific engagements.
B) Engagement performance.
C) Human resources.
D) Relevant ethical requirements.
Human resources.
The body that issues international pronouncements providing auditing procedural and reporting guidance is the:
A) International Federation of Auditors.
B) Multinational Reporting Commission.
C) International Auditing and Assurance Standards Board.
D) AICPA Auditing Standards Board.
International Auditing and Assurance Standards Board.
To present fairly in conformity with generally accepted accounting principles the financial statements must:
A) Be consistently applied.
B) Inform users of all matters that could materially affect a decision.
C) Reflect transactions and events within a range of reasonable limits.
D) Be considered preferable to the users of those financial statements.
Reflect transactions and events within a range of reasonable limits.
Which of the following is not included in the auditors' standard unmodified audit report?
A) The procedures selected by the auditor depend on the auditor's judgment.
B) An audit includes evaluating the appropriateness of accounting policies used.
C) An audit includes evaluating the overall presentation of the financial statements.
D) Accounting principles have been consistently applied.
Accounting principles have been consistently applied.
An audit performed in accordance with generally accepted auditing standards generally should:
A) Be expected to provide absolute assurance that noncompliance with all laws will be detected where internal control is effective.
B) Be relied upon to disclose violations of truth in lending laws.
C) Encompass a plan to actively search for all illegalities which relate to operating aspects.
D) Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.
Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.
When the auditors express an opinion on financial statements their responsibilities extend to:
A) The underlying wisdom of their client's management decisions.
B) Whether the results of their client's operating decisions are fairly presented in the financial statements.
C) Active participation in the implementation of the advice given to their client.
D) An ongoing responsibility for their client's solvency.
Whether the results of their client's operating decisions are fairly presented in the financial statements.
Authoritative GAAP sources include:
FASB Concepts Statements/ FASB Codification
A) Yes Yes
B) Yes No
C) No Yes
D) No No
n/y
An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unmodified auditors' report. From this the investor may conclude that:
A) Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
B) The auditors are satisfied that Sundby is operationally efficient.
C) The auditors have ascertained that Sundby's financial statements have been prepared accurately.
D) Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate.
Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
The auditors' report may be addressed to the company whose financial statements are being examined or to that company's:
A) Chief operating officer.
B) President.
C) Board of Directors.
D) Chief financial officer.
Board of Directors.
Which of the following best describes what is meant by generally accepted auditing standards?
A) Acts to be performed by the auditors.
B) Measures of the quality of the auditors' performance.
C) Procedures to be used to gather evidence to support financial statements.
D) Audit objectives generally determined on audit engagements.
Measures of the quality of the auditors' performance.
If noncompliance with a law is discovered during the audit of a publicly held company, the auditors should first:
A) Notify the regulatory authorities.
B) Determine who was responsible for the noncompliance.
C) Intensify the examination to identify noncompliance with any laws.
D) Report the act to high level personnel within the client's organization and to the audit committee.
Report the act to high level personnel within the client's organization and to the audit committee.
Which of the following is the name used to describe financial reporting frameworks other than GAAP which include: cash basis, tax basis, regulatory basis, or contractual basis.
A) Applicable.
B) PCAOB.
C) Special reports.
D) Special purpose.
Special purpose.
Which of the following statements best describes the primary purpose of Statements on Auditing Standards?
A) They are guides intended to set forth auditing procedures which are applicable to a variety of situations.
B) They are procedural outlines which are intended to narrow the areas of inconsistency and divergence of auditor opinion.
C) They are authoritative statements, enforced through the Code of Professional Conduct.
D) They are interpretations which may be useful guidance to auditors.
They are authoritative statements, enforced through the Code of Professional Conduct.
The primary responsibility for the adequacy of disclosure 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.
Management of the company.
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 assures proficiency as an auditor.
B) Professional education that is required in order to perform with due professional care.
C) Knowledge required to fulfill assigned responsibilities and to progress within the firm.
D) Knowledge required in order to perform a peer review.
Knowledge required to fulfill assigned responsibilities and to progress within the firm.
In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy?
A) Acceptance and continuance of clients and engagements.
B) Engagement performance.
C) Personnel management.
D) Relevant ethical requirements.
Relevant ethical requirements.
A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is:
A) To enable the auditor to attest to the integrity or reliability of a client.
B) To comply with the quality control standards established by regulatory bodies.
C) To minimize the likelihood of association with clients whose managements lack integrity.
D) To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.
To minimize the likelihood of association with clients whose managements lack integrity.
Which of the following is not an element of quality control?
A) Documentation.
B) Engagement performance.
C) Monitoring.
D) Relevant ethical requirements.
Documentation.
Generally accepted auditing standards established by the AICPA through April of 2003:
A) Have been accepted as interim standards by the Public Company Accounting
Oversight Board.
B) Provide accounting guidance for nonpublic companies.
C) Have all been superseded by Public Company Accounting Oversight Board
standards.
D) Are now developed by the Securities and Exchange Commission.
Have been accepted as interim standards by the Public Company Accounting Oversight Board.
The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies?

Attestation Standards Ethics Standards
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y/Y
Which of the following is least likely to be directly examined in an inspection performed by the PCAOB?
A) Audit engagements.
B) Review engagements.
C) Compilation engagements.
D) CPA firm quality control system.
Compilation engagements.
As compared with the US public company audit report, the international audit report:
A) Is shorter in length.
B) Includes enhanced explanation of the audit process.
C) Includes the name of the partner and managers on the audit, while the US report includes only the CPA firm name.
D) Is dated as of year-end, whereas the US report is dated as of the last date of significant field work.
Includes enhanced explanation of the audit process.
A peer review in which the peer reviewers study and appraise a CPA firm's system of quality control to perform accounting and auditing work is referred to as a(n):
A) Engagement review.
B) Inspection review.
C) Supervision review.
D) System review.
System review.
An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of:
A) Compilation reports.
B) Documentation of procedures followed on a review
C) Overall system of quality control.
D) Review reports.
Overall system of quality control.
Of the following, which are current types of peer review?

System Review Engagement Review
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y/Y
T/F: The professional standards consider calculating depreciation expense a "routine" transaction.
F
T/F: The most reliable form of documentary evidence generally is considered to be documents created by the client.
F
T/F: A vendor's invoice is an example of documentary evidence created by a third party and held by the client.
T
T/F: In performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages.
T
T/F: The primary purpose of a letter of representations is to obtain additional evidence about specific accounts.
F
T/F: The auditors should propose an adjusting journal entry for all material related-party transactions.
F
T/F: When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level.
T
T/F: Working papers of continuing audit interest usually are filed with the administrative working papers.
F
T/F: The use of lead schedules is designed to increase the detail of the working trial balance.
F
T/F: Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded.
T
To be effective, analytical procedures performed near the end of the audit should be performed by
A) The partner performing the quality review of the audit.
B) A beginning staff accountant who has had no other work related to the engagement.
C) A manager or partner who has a comprehensive knowledge of the client's business and industry.
D) The CPA firm's quality control manager.
Overall system of quality control.
The components of the risk of misstatement are:

Inherent Risk /Control Risk /Detection Risk
A) Yes Yes Yes
B) Yes Yes No
C) Yes No No
D) No Yes Yes
Yes Yes No
Financial statement assertions are established for classes of transactions,
Account Balances / Disclosures
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y Y
Further audit procedures include:
Risk assessment procedures/ Tests of controls
A) Yes Yes
B) Yes No
C) No Yes
D) No No
N Y
Assertions that have a meaningful bearing on whether an account balance, transaction class or disclosure is fairly stated are referred to as:
A) Appropriate assertions.
B) Sufficient assertions.
C) Relevant assertions.
D) Reliable assertions.
Relevant assertions.
Which of the following is not an assertion relating to classes of transactions?
A) Accuracy.
B) Sufficiency.
C) Cutoff.
D) Classification.
Sufficiency.
Which of the following is required documentation in an audit?
A) A list of major accounts.
B) A flowchart of the client's organization.
C) A written audit program.
D) A memo setting forth the scope of the audit.
A written audit program.
Which of the following is not considered to be an analytical procedure?
A) Comparisons of financial statement amounts with source documents.
B) Comparisons of financial statement amounts with nonfinancial data.
C) Comparisons of financial statement amounts with budgeted amounts.
D) Comparisons of financial statement amounts with comparable prior year amounts.
Comparisons of financial statement amounts with source documents.
An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice
A) Eliminates the use of certain statistical sampling methods that would otherwise be available.
B) Presumes that the auditor will reperform the tests as of the balance sheet date.
C) Should be especially considered when there are rapidly changing economic conditions.
D) Potentially increases the risk that errors that exist at the balance sheet date will not be detected.
Potentially increases the risk that errors that exist at the balance sheet date will not be detected.
An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?
A) Test of transactions.
B) Analytical procedures.
C) Test of controls.
D) Test of details.
Analytical procedures.
The inspection of a vendor's invoice by the auditors is:
A) Direct evidence about occurrence of a transaction.
B) Physical evidence about occurrence of a transaction.
C) Documentary evidence about occurrence of a transaction.
D) Part of the client's accounting system.
Documentary evidence about occurrence of a transaction.
The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable?
A) 5%.
B) 12.5%.
C) 42.7%.
D) 60%.
12.5%.
Analytical procedures are required at the risk assessment stage and as:
A) Tests of internal control.
B) Substantive procedures.
C) A part of the final overall review.
D) Computer generated procedures.
A part of the final overall review.
During financial statement audits, auditors seek to restrict which type of risk?
A) Control risk.
B) Detection risk.
C) Inherent risk.
D) Account risk.
Detection risk.
Which of the following groups are not considered a specialist by AICPA Professional Standards:
A) Appraisers.
B) Internal auditors.
C) Engineers.
D) Geologists.
Internal auditors
CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so:
A) Violates professional standards.
B) Is acceptable, but should only be done when cost justified.
C) Is acceptable, but only for non-public clients.
D) Is acceptable and desirable under all conditions.
Violates professional standards.
Which of the following best describes the problem with the use of published industry averages for analytical procedures?
A) Lack of comparability.
B) Lack of sufficiency.
C) Lack of accuracy.
D) Lack of availability.
Lack of comparability.
In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?
A) A price for a similar asset obtained from an active market.
B) An appraisal obtained discounting future cash flows.
C) Management's judgment of the cost to purchase an equivalent asset.
D) The historical cost of the asset.
A price for a similar asset obtained from an active market.
An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the:
A) Acquisition date of the asset.
B) Audit report date.
C) Expected replacement date of the asset.
D) Measurement date (ordinarily the date of the financial statements).
Measurement date (ordinarily the date of the financial statements).
Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?
A) The financial statements must often be adjusted for the effects of material related party transactions.
B) Material related party transactions must be disclosed in the notes to the financial statements.
C) The substance of related party transactions will differ from their form.
D) In a related party transaction one party has the ability to exercise significant influence over the other party.
Material related party transactions must be disclosed in the notes to the financial statements.
Which of the following is not a basic procedure used in an audit?
A) Risk assessment procedures.
B) Substantive procedures.
C) Tests of controls.
D) Tests of direct evidence.
Tests of direct evidence.
Which of the following is not a financial statement assertion relating to account balances?
A) Completeness
B) Existence.
C) Rights and obligations.
D) Recorded value and discounts.
Recorded value and discounts.
Which of the following is generally true about the sufficiency of audit evidence?
A) The amount of evidence that is sufficient varies inversely with the acceptable risk of material misstatement.
B) The amount of evidence concerning a particular account varies inversely with the materiality of the account.
C) The amount of evidence concerning a particular account varies inversely with the inherent risk of the account.
D) When evidence is appropriate with respect to an account it is also sufficient.
The amount of evidence that is sufficient varies inversely with the acceptable risk of material misstatement.
Which of the following is true about analytical procedures?
A) Performing analytical procedures results in the most reliable form of evidence.
B) Analytical procedures are tests of controls used to evaluate the quality of a client's internal control.
C) Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances.
D) Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.
Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.
Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?
A) Confirmation.
B) Observation.
C) Reviewing subsequent events or transactions.
D) Analyzing corporate organizational structure.
Reviewing subsequent events or transactions.
An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as:
A) Vertical analysis.
B) Horizontal analysis.
C) Cross-sectional analysis.
D) Comparison analysis.
Horizontal analysis.
An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as:
A) Vertical analysis.
B) Horizontal analysis.
C) Cross-sectional analysis.
D) Comparison analysis.
Cross-sectional analysis.
An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as:
A) Vertical analysis.
B) Horizontal analysis.
C) Cross-sectional analysis.
D) Comparison analysis.
Vertical analysis.
Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?
A) Confirmation of amounts.
B) Review of management's process of development.
C) Independent development of an estimate.
D) Review of subsequent events.
Confirmation of amounts.
The audit time budget is an example of:
A) A supporting schedule.
B) An administrative working paper.
C) A lead schedule.
D) A corroborative working paper.
An administrative working paper
A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a:
A) Supporting schedule.
B) Lead schedule.
C) Corroborating schedule.
D) Reconciling schedule.
Lead schedule.
Which of the following is not a function of working papers?
A) Provide support for the auditors' report.
B) Provide support for the accounting records.
C) Aid partners in planning and conducting future audits.
D) Document staff compliance with generally accepted auditing standards.
Provide support for the accounting records.
A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a:
A) Working trial balance.
B) Lead schedule.
C) Summarizing schedule.
D) Supporting schedule.
Working trial balance.
The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the:
A) Vouching of all data supporting various ratios.
B) Investigation of significant variations and unusual relationships.
C) Comparison of client-computed statistics with industry data on a quarterly and full-year basis.
D) Recalculation of industry date.
Investigation of significant variations and unusual relationships.
The auditors must obtain written client representations that normally should be signed by:
A) The president and the chairperson of the board.
B) The treasurer and the internal auditor.
C) The chief executive officer and the chief financial officer.
D) The corporate counsel and the audit committee chairperson.
The chief executive officer and the chief financial officer.
Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion?
A) The audit time budget.
B) The auditors' judgment.
C) Generally accepted accounting quality standards.
D) The auditors' working papers.
The auditors' judgment.
Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by:
A) Performing substantive procedures.
B) Performing tests of controls.
C) Assessing control risk.
D) Obtaining a client representation letter.
Performing substantive procedures.
An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of:
A) Management fraud.
B) Related party transactions.
C) Window dressing.
D) Weak internal control.
Related party transactions.
Which of the following would not necessarily be considered a related party transaction?
A) Payment of a bonus to the president.
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.
Payment of a bonus to the president.
The date of the management representation letter should coincide with the:
A) Date of the auditor's report.
B) Balance sheet date.
C) Date of the latest subsequent event referred to in the notes to the financial statements.
D) Date of the engagement agreement.
Date of the auditor's report.
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.
Financial information with similar information regarding the industry in which the entity operates.
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 a moderate assessed level of control risk.
C) Are generally sufficient audit evidence to support the assertion regardless of the assessed level of control risk.
D) Replace the assessed level of control risk as evidence to support the assertions.
Complement, but do not replace, substantive procedures designed to support the assertion.
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 employees.
D) Management has made available all financial statements, including notes.
Management acknowledges responsibility for illegal actions committed by employees.
Which of the following statements is generally correct about audit evidence?
A) The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
B) To be appropriate, audit evidence must be sufficient.
C) Accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on financial statements.
D) Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
Which of the following statements relating to audit evidence is the most accurate statement?
A) Audit evidence gathered by an auditor from outside an enterprise is reliable.
B) Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.
C) Oral representations made by management are not valid evidence.
D) The auditor must obtain sufficient appropriate audit evidence.
The auditor must obtain sufficient appropriate audit evidence.
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.
Comparison of recorded amounts of major disbursements with appropriate invoices.
Which of the following is not a primary purpose of audit working papers?
A) To coordinate the examination.
B) To assist in preparation of the audit report.
C) To support the financial statements.
D) To provide evidence of the audit work performed.
To support the financial statements.
Concerning retention of working papers, the Sarbanes-Oxley Act:
A) Has no provisions.
B) Requires permanent retention.
C) Requires retention for at least 7 years.
D) Requires retention for a period of 4 or less years.
Requires retention for at least 7 years.
During an audit engagement pertinent data are prepared and included in the audit working papers. The working papers primarily are considered to be:
A) A client-owned record of conclusions reached by the auditors who performed the engagement.
B) Evidence supporting financial statements.
C) Support for the auditors' representations as to compliance with generally accepted auditing standards.
D) A record to be used as a basis for the following year's engagement
Support for the auditors' representations as to compliance with generally accepted auditing standards.
Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include the:
A) Copies of those client records examined by the auditor during the course of the engagement.
B) Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit.
C) Auditor's comments concerning the efficiency and competence of client management personnel.
D) Auditing procedures followed and the testing performed in obtaining audit evidence.
Auditing procedures followed and the testing performed in obtaining audit evidence.
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 procedures and controls.
Narrative descriptions of the client's accounting procedures and controls.
Working papers 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 books of account and the financial statements.
C) Designed to meet the circumstances of the particular engagement.
D) Destroyed when the audited entity ceases to be a client.
Designed to meet the circumstances of the particular engagement.
In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit?
A) The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
B) The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers.
C) The working papers are the property of the client after the client pays the fee.
D) The working papers must be retained by the CPA firm for a period of ten years.
The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
Confirmation would be most effective in addressing the existence assertion for the:
A) Addition of a milling machine to a machine shop.
B) Payment of payroll during regular course of business.
C) Inventory held on consignment.
D) Granting of a patent for a special process developed by the organization.
Inventory held on consignment.
T/F: Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company.
F
T/F: Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.
F
T/F: Preliminary arrangements with clients should be set forth in the management letter.
F
T/F: An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements.
F
T/F: The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts.
F
T/F: At least a portion of the auditors' consideration of internal control usually is performed at an interim date rather than at the balance sheet date.
T
T/F: The substantive approach to an audit is appropriate for many small businesses.
T
T/F: Confirming a bank account establishes existence but not rights to the cash balance.
F
T/F: The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.
T
T/F: Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.
T
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A) The prospective client has fired its prior auditor.
B) The CPA lacks a thorough understanding of the prospective client's operations and industry.
C) The CPA is unable to review the predecessor auditor's working papers due to a major fire that destroyed both hard and soft copy documentation.
D) The prospective client is unwilling to make financial records available to the CPA.
The prospective client is unwilling to make financial records available to the CPA.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A) Large amounts of liquid assets that are easily convertible into cash.
B) Low growth and profitability as compared to other entity's in the same industry.
C) Financial management's participation in the initial selection of accounting principles.
D) An overly complex organizational structure involving unusual lines of authority.
An overly complex organizational structure involving unusual lines of authority.
Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
A) Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques.
B) Management's disregard for internal control.
C) The existence of related party transactions.
D) Management's attempt to meet earnings per share growth rate goals.
Management's disregard for internal control.
Which of the following matters is generally included in an auditor's engagement letter?
A) Limitations of the engagement.
B) Factors to be considered in establishing preliminary judgments about materiality.
C) Management's liability for all illegal acts committed by its employees.
D) The auditor's responsibility to obtain negative assurance relating to non-compliance with laws and regulations.
Limitations of the engagement.
Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?
A) Inability to generate positive cash flows from operations, while reporting large increases in earnings.
B) Management's lack of interest in increasing the dividend paid on common stock.
C) Large amounts of liquid assets that are easily convertible into cash.
D) Inability to borrow necessary capital without obtaining waivers on debt covenants.
Inability to generate positive cash flows from operations, while reporting large increases in earnings.
To best test existence, an auditor would sample from the:
A) General ledger to source documents.
B) General ledger to the financial statements.
C) Source documents to the general ledger.
D) Source documents to journals.
General ledger to source documents.
The auditors' understanding established with a client should be established through a (an):
A) Oral communication with the client.
B) Written communication with the client.
C) Written or oral communication with the client.
D) Completely detailed audit plan.
Written communication with the client.
Which of the following would be least likely to be considered an audit planning procedure?
A) Use an engagement letter.
B) Develop the overall audit strategy
C) Perform the risk assessment.
D) Develop the audit plan.
Perform the risk assessment.
While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and:
A) Assess the risk of misstatements due to illegal acts.
B) Consider the complexity of the transactions involved.
C) Consider the likelihood that the risks could result in material misstatements.
D) Determine materiality levels.
Consider the likelihood that the risks could result in material misstatements.
Which of the following is correct concerning requirements about auditor communications about fraud?
A) Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
B) All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C) Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report.
D) The auditor has no responsibility to disclose fraud outside the entity under any circumstances.
Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
A predecessor auditor will ordinarily initiate communication with the successor auditor:


Prior to the Successor's Acceptance of the Engagement/ Subsequent to the Successor's
Acceptance of the Engagement
A) Yes Yes
B) Yes No
C) No Yes
D) No No
N/N
Which measure of materiality (or both) considers quantitative considerations?

Planning/ Evaluation
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y/Y
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
A) There are significant related party transactions that management claims occurred in the ordinary course of business.
B) Internal control activities requiring the segregation of duties are subject to management override.
C) Management continues to employ an inefficient system of information technology to record financial transactions.
D) It is unlikely that sufficient evidence is available to support an opinion on the financial statements.
D) It is unlikely that sufficient evidence is available to support an opinion on the financial statements.
In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?
A) Decreases in accounts payable.
B) Decreases in accounts receivable.
C) Negative cash flows from investing.
D) Negative operating cash flows.
C) Negative cash flows from investing.
Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to:

Errors/ Misappropriation of Assets
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y/Y
Which of the following is not one of the assertions made by management about an account balance?
A) Relevance.
B) Existence.
C) Valuation.
D) Rights and obligations.
Relevance.
When a company has changed auditors, according to the Professional Standards:
A) The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.
B) The predecessor must always respond fully to all inquiries made by the successor auditor.
C) The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement.
D) The successor may choose not to attempt any communication with the predecessor auditor.
The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.
Which of the following procedures is not performed as a part of planning an audit engagement?
A) Reviewing the working papers of the prior year.
B) Developing an overall audit strategy.
C) Confirmation of all major accounts.
D) Designing an audit program.
Confirmation of all major accounts.
The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:
A) Account risk.
B) Control risk.
C) Detection risk.
D) Inherent risk.
Inherent risk.
Which of the following is least likely to be considered a financial statement audit risk factor?
A) Management operating and financing decisions are dominated by top management.
B) A new client with no prior audit history.
C) Rate of change in the entity's industry is rapid.
D) Profitability of the entity relative to its industry is inconsistent.
Management operating and financing decisions are dominated by top management.
Which of the following is an example of fraudulent financial reporting?
A) Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
B) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses.
C) An employee steals inventor and the "shrinkage" is recorded in cost of goods sold.
D) An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.
Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?
A) Low turnover of senior management.
B) Extreme degree of competition within the industry.
C) Capital structure including various operating subsidiaries.
D) Sales goals in excess of any of the preceding three years.
Extreme degree of competition within the industry.
Which of the following conditions identified during the audit increases the risk of employee fraud?
A) Large amounts of cash in the bank.
B) Existence of a mandatory vacation policy for employees performing key functions.
C) Inventory items of small size, but high value.
D) Presence of reconciling items on a client prepared year-end proof of cash.
Inventory items of small size, but high value
Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit?
A) Factors whose presence indicates that fraud exists.
B) Factors whose presence often have been observed in circumstances where frauds have occurred.
C) Factors whose presence will require modification to planned audit procedures.
D) Factors obtained during the audit which lead to required communications with the
audit committee.
Factors whose presence often have been observed in circumstances where frauds have occurred.
Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist?
A) Apply increased professional skepticism about material transactions.
B) Increase the assessed level of detection risk.
C) Assign personnel with particular skill to areas of high risk.
D) Obtain increased evidence about the appropriateness of management's selection of accounting principles.
Increase the assessed level of detection risk.
Which of the following is least likely to be required on an audit?
A) Evaluate the business rationale for significant, unusual transactions.
B) Make a legal determination of whether fraud has occurred.
C) Review accounting estimates for biases.
D) Test appropriateness of journal entries and adjustments
Make a legal determination of whether fraud has occurred.
Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement?

Substantive Tests of Details/ Substantive Analytical Procedures
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y/y
Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
A) Several members of management have recently purchased additional shares of the entity's stock.
B) Several members of the board of directors have recently sold shares of the entity's stock.
C) The entity distributes financial forecasts to financial analysts that predict conservative operating results.
D) Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.
D) Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.
A successor auditor is required to attempt communication with the predecessor auditor prior to:
A) Performing test of controls.
B) Testing beginning balances for the current year.
C) Making a proposal for the audit engagement.
D) Accepting the engagement.
D) Accepting the engagement.
If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
A) Purchase returns and allowances.
B) Allowance for doubtful accounts.
C) Common stock.
D) Noncontrolling interest of a subsidiary purchased during the year.
B) Allowance for doubtful accounts.
The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:
A) Account risk.
B) Control risk.
C) Detection risk.
D) Inherent risk.
Detection risk.
Which of the following statements is correct regarding the auditor's determination of materiality?
A) The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement.
B) The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.
C) Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality.
D) The amount used for the planning should equal that used for evaluation.
The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.
The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:
A) The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the client's financial statements.
B) The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.
C) The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance sheet.
D) An amount that cannot be quantitatively stated since it depends on the nature of the item.
The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.
Which of the following topics is not normally included in an engagement letter?
A) The auditors' preliminary assessment of internal control.
B) The auditors' estimate of the fee for the engagement.
C) Limitations on the scope of the engagement.
D) A description of responsibility for the detection of fraud.
The auditors' preliminary assessment of internal control.
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
A) Only use certified public accountants on the engagement.
B) Place increased emphasis on the audit of objective transactions rather than subjective transactions.
C) Supervise members of the audit team less closely and rely more upon judgment.
D) Use less predictable audit procedures.
Use less predictable audit procedures.
Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?
A) Completeness.
B) Rights and obligations.
C) Legality.
D) Valuation.
Legality.
Tests for unrecorded assets typically involve tracing from:
A) Source documents to recorded journal entries.
B) Source documents to observations.
C) Recorded journal entries to documents.
D) Recorded journal entries to observations.
Source documents to recorded journal entries.
Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries:
A) Completeness.
B) Existence.
C) Rights.
D) Valuation.
Completeness.
Determining that receivables are presented at net-realizable value is most directly related to which management assertion?
A) Existence.
B) Rights.
C) Valuation.
D) Presentation and disclosure.
Valuation
Which of the following is not a general objective for the audit of asset accounts?
A) Establishing existence of assets.
B) Establishing proper valuation of assets.
C) Establishing proper liabilities relating to assets.
D) Establishing the completeness of assets.
) Establishing proper liabilities relating to assets.
Which of the following is not used by auditors to establish the completeness of recorded assets?
A) Assessing control risk.
B) Tracing from source documents to entries in the accounting records.
C) Performing analytical procedures.
D) Vouching transactions.
Vouching transactions.
To test for unsupported entries in the journals, the direction of audit testing should be to the:
A) Ledger entries.
B) Journal entries.
C) Original source documents.
D) Financial statements.
Original source documents.
A form filed with the SEC when a company changes auditors is a:
A) Form 8-K.
B) Form 10-K.
C) Form S-1.
D) Form B-1.
Form 8-K.
Which of the following is least likely to render material a quantitatively small misstatement material?
A) Affects the registrant's compliance with regulatory requirements.
B) Masks a change in earnings or other trends.
C) Arises from an item not capable of precise measurement.
D) The transaction involves a related party.
Arises from an item not capable of precise measurement.
Which of the following is not a required source of information for the auditors' assessment of fraud risk?
A) Discussion among audit team members.
B) Fraud risk factors.
C) Results of tests of controls.
D) Inquiry of management and others.
Results of tests of controls.
Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control?
A) Reviewing accounting estimates for biases.
B) Examining physical controls over assets.
C) Evaluating the business rationale for significant unusual transactions.
D) Examining journal entries and other adjustments for evidence of fraud.
Examining physical controls over assets.
Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in:
A) A memorandum to be placed in the permanent section of the auditing working papers.
B) An engagement letter.
C) A client representation letter.
D) A confirmation letter attached to the constructive services letter.
An engagement letter.
The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered?
A) Client manuals of accounts and charts of accounts.
B) AICPA Industry Audit Guides.
C) Prior-year working papers of the predecessor auditors.
D) Latest annual and interim financial statements issued by the client.
Prior-year working papers of the predecessor auditors.
The auditors will not ordinarily initiate discussion with the audit committee concerning the:
A) Extent to which the work of internal auditors will influence the scope of the examination.
B) Extent to which change in the company's organization will influence the scope of the examination.
C) Details of potential problems which the auditors believe might cause a qualified opinion.
D) Details of the procedures which the auditors intend to apply.
Details of the procedures which the auditors intend to apply.
Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?
A) The successor auditors have no responsibility to contact the predecessor auditors.
B) The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.
C) The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact.
D) The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.
The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.
Which of the following situations would most likely require special audit planning by
the auditors?
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.
) Inventory is comprised of precious stones.
When planning an audit, an auditor should:
A) Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.
B) Make preliminary judgments about materiality levels for audit purposes.
C) Conclude whether changes in compliance with prescribed control procedures justifies reliance on them.
D) Prepare a preliminary draft of the management representation letter.
Make preliminary judgments about materiality levels for audit purposes.
An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, 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.
Obtain a knowledge of matters that relate to the nature of the entity's business.
With respect to the auditor's planning of a year-end audit, which of the following statements is always true?
A) An engagement should not be accepted after the fiscal year-end.
B) An inventory count must be observed at the balance sheet date.
C) The client's audit committee should not be told of any specific audit procedures which will be performed.
D) It is an acceptable practice to carry out parts of the examination at interim dates.
It is an acceptable practice to carry out parts of the examination at interim dates.
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.
Integrity of management.
The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on:
A) Substantive procedures.
B) Tests of controls.
C) Internal control.
D) Statistical analysis.
Substantive procedures.
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 risk assessment phase of the audit by the use of:
A) Tests of transactions and balances.
B) An assessment of internal control.
C) Specialized audit programs.
D) Analytical procedures.
Analytical procedures.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
A) Awareness of the consistency in the application of generally accepted accounting principles between accounting periods.
B) Evaluation of all matters of continuing accounting significance.
C) Opinion of any subsequent events occurring since the predecessor's audit report was issued.
D) Understanding as to the reasons for the change of auditors.
Understanding as to the reasons for the change of auditors.
Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
A) Are all financial reporting operations at one location?
B) Does it have knowledge of fraud or suspect fraud?
C) Does it have programs to mitigate fraud risks?
D) Has it reported to the audit committee the nature of the company's internal control?
Are all financial reporting operations at one location?
An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:
A) Accuracy.
B) Completeness.
C) Control.
D) Existence.
Completeness
Individuals who commit fraud are ordinarily able to rationalize the act and also have an:
Incentive Opportunity
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Y.Y
PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?
A) A material amount would significantly alter the "total mix" of information made available to an investor.
B) Materiality cannot be used as a basis for interpreting federal securities laws.
C) A material amount is that at which an individual's decision would be changed.
D) Materiality is composed of quantitative and not qualitative aspects.
A material amount would significantly alter the "total mix" of information made available to an investor.
Which of the following is correct concerning the PCAOB's concept of a significant account?
A) It is the same as a relevant assertion.
B) The auditor need only consider significant accounts when controls do not operate effectively.
C) In deciding whether an account is a significant account one does not consider the effect of internal control.
D) It is an account for which qualitative materiality considerations are particularly important.
In deciding whether an account is a significant account one does not consider the effect of internal control.