AUDITING QUIZZER

1. Alexion Corp. has engaged a public accounting firm to issue a report on the accuracy of product quality specifications included in trade sales agreements. This is an example of a/an:a. Financial statement audit.b. Attestation service.c. Compliance audit.d. Operational audit.

2. Unlike consulting services, assurance services:a. Make recommendations to management.b. Report on how to use information.c. Report on the quality of information.d. Are two-party contracts.

3. A financial statement audit:a. Confirms that financial statement assertions are

accurate.b. Lends credibility to the financial statements.c. Confirms that financial statements are presented

fairly.d. Assures that fraud has been detected.

4. Which of the best following best describes why an independent auditor reports on financial statements?a. Independent auditors are likely to detect fraud.b. Competing interests may exist between

management and the users of the statements.c. Misstated account balances are generally corrected

by an independent audit.d. Ineffective internal controls may exist.

5. Financial statement audits:a. Reduce the cost of capital.b. Report on compliance with laws and regulations.c. Assess management's efficiency and effectiveness.d. Overlook information risk.

6. Primary responsibility for the assertions in financial statements rests with the:a. Audit partner assigned to the engagement.b. Senior auditor in charge of field work.c. Staff auditor who drafts the statements.d. Client's management.

7. A public accounting firm's primary role in performing nonattest services is to:a. Hedge against declines in the firm's audit practice.b. Establish the firm as a consultant.c. Provide advice valuable to a client's effectiveness.d. Acclimate staff members to the client's business

and industry.

8. Which of the following types of audits is designed to determine whether a governmental entity's procurement practices are sound?a. A financial statement audit.b. An operational audit.c. A program audit.d. A compliance audit.

9. Which of the following authoritative bodies issues pronouncements relevant to attestation service engagements?a. Accounting and Review Services Committee.b. Auditing Standards Board.c. Public Oversight Board.d. PICPA.

10. Assurance service engagements:a. Do not require independence.b. Required application of all attestation standards and

GAAS.c. Are performed currently without professional

standards.d. Do not require evidence.

11. A practitioner should comply with applicable attestation standards:a. On every attestation engagement, without

exception.b. On every attestation engagement except financial

statement audits.c. On consulting engagements.d. On all engagements that involved financial

statements.12. Which of the following best describes the purpose of

attestation standards and GAAS?a. Measures of quality for attestation and audit

engagements.b. Methods to discharge professional responsibilities in

attestation and audit engagements.c. Rules that represent the public's expectations on

attestation and audit engagements.d. Objectives used to select evidence for attestation

and audit engagements.

13. What is the focus of the standards of field work for attestation and audit engagements?a. Guidelines for training, proficiency, and due care.b. Guidelines for the content of the practitioner's

report.c. Guidelines for planning and for gathering evidence.d. Guidelines for maintaining an independence in

mental attitude.

14. Which of the following best describes due care?a. Tact in avoiding legal liability.b. Requisite skill and diligence.c. Reasonable infallibility.d. Freedom from undue influence.

15. The validity of evidence depends ultimately on the :a. Attestation standard and GAAS.b. Availability of subordinate evidence.

c. Relevance of the evidence.d. Practitioner's professional judgment.

16. Practitioner independence:a. Minimizes risk.b. Helps achieve public confidence.c. Defends against liability.d. Achieves compliance with the standards of field

work.

17. Which of the following may be assessed nonquantitatively?

Inherent Control Detection Risk Risk Risk

a. Yes Yes Nob. Yes No Yesc. No Yes Yesd. Yes Yes Yes

18. Materiality is:a. Addressed within a practitioner's attestation and

audit reports.b. Expressed in terms of dollars.c. Measured using guidelines established by the PICPA.d. Not applicable to attestation engagements.

19. A report issued by a public accounting firm uses the language: In our opinion…the schedule presents…in all material respects…The firm's report is likely:a. A standard audit report.b. A qualified audit report.c. An attestation report.d. A qualified attestation report.

20. Does an attester make the following representations explicitly or implicitly in an unqualified attestation report?

Assertion is Capable of Assertion are Evaluation Against Management's Reasonable Criteria Responsibilitya. Explicitly Explicitlyb. Implicitly Implicitlyc. Implicitly Explicitlyd. Explicitly Implicitly

21. Does an auditor make the following representations explicitly or implicitly in an unqualified audit report?

Consistent Application of Examined Evidence Accounting Principles on a Test Basisa. Implicitly Explicitlyb. Implicitly Implicitlyc. Explicitly Explicitlyd. Explicitly Implicitly

22. Which of the following is likely a scope limitation?a. The auditor is reporting on the balance sheet only.b. A subsidiary's financial statements are audited by

another auditor.c. Sufficient evidence is not available.d. The auditor is engaged after the balance sheet date.

23. A departure from GAAP is disclosed in a note to the financial statements. The auditor should:a. Issue an unqualified opinion, but emphasized the

matter in an explanatory paragraph.b. Issue an unqualified opinion, with no explanatory

paragraph, since the departure from GAAP is disclosed.

c. Issue a qualified opinion.d. Disclaim an opinion.

24. Management's financial statements disclose uncertainties about future events that are not susceptible to reasonable estimation. The auditor should issue:a. An unqualified opinion.b. A qualified opinion.c. An adverse opinion.d. A disclaimer of opinion.

25. The opinion paragraph of a qualified opinion should include language such as:a. Except for.b. When read in conjunction with the notes.c. With the foregoing explanation.d. Subject to the explanation above.

26. An attestation or audit report should be dated as of:a. The date of the assertion or financial statements.b. The date the report is delivered.c. The last date on which a subsequent event occurs.d. The last day of field work.

27. An explanatory paragraph read as follows: The Company has adopted the first-in, first-out method of determining inventory costs, whereas it previously used the last-in, first-out method. Although use of the first-in, first-out method is in conformity with generally accepted accounting principles, in our opinion the Company has not provided reasonable justification for seeking a change as required by Opinion No. 20 of the Accounting Principle Board.The paragraph likely appears in:a. An unqualified opinion.b. An unqualified opinion that emphasized the matter.c. A qualified opinion.d. A disclaimer of opinion.

28. An audit report reads in part as follows: The financial statements do not include any adjustments that might result from the outcome of this uncertainty.The sentence likely appears in:a. An unqualified opinion.b. An unqualified opinion that emphasized the matter.c. A qualified opinion.d. A disclaimer of opinion.

29. General ethics is the study of:a. Ideal method in thought.b. Ultimate reality.c. Ideal conduct.d. Ideal social organization.

30. Professional codes of ethics:a. Are uncommon in profession other than public

accounting.b. Mandate ideal standards of behavior.c. Are enforceable if based in standards of ideal

behavior.d. Mandate minimum standards of behavior.

31. A practitioner can perform accounting and auditing services for a privately owned client assuming that:a. The practitioner takes responsibility for

management's assertions.b. The practitioner has a financial interest in

management's assertions.c. The practitioner is independent of assertions about

management's information system.d. The practitioner is certain the conflict of interest is

immaterial to the firm and to the client.

32. According to the profession's Rules of Conduct, an auditor would be considered independent in which of the following instances?a. The auditor's checking account is held at a client

financial institution.

b. The auditor, an attorney, serves as the client's general counsel.

c. An employee of the auditor serves as the unpaid treasurer of a charitable organization that is an audit client.

d. The client owes the auditor fees for two consecutive years.

33. The Rules of Conduct would most likely be violated if an auditor:a. Owns a building and leases floor space to an

attestation client.b. Has an insured account with a brokerage firm audit

client.c. Is engaged by an audit client to identify potential

acquisitions.d. Screens candidates for an audit client's vacant

controllership.

34. Objectivity refers to a practitioner's ability:a. To remain impartial.b. To identify assertions that are appropriate.c. To be unyielding in all disputes.d. To choose independently between accounting

principles and auditing standards.

35. Absent a client's consent, a practitioner is precluded from disclosing confidential client information to:a. The Joint National Trial Board.b. A state board of accountancy.c. The board of directors of an audit client's investee.d. A PICPA ethics committee.

36. Which of the following fee arrangements would violate the PICPA Code of Professional Conduct?a. A fee based on the approval of a bank loanb. A fee based on the outcome of a bankruptcy

proceeding.c. A per hour fee that includes out-of-pocket expenses.

d. A fee based on the complexity of the engagement.

37. Which of the following published in a promotional brochure would likely violate the AICPA Rules of conduct?a. Names and addresses, telephone numbers,

numbers of partners, office hours, foreign language competence, and date the firm was established.

b. Services offered and fees for such services, including hourly rates and fixed fees.

c. Educational and professional attainments, including date and place of certification, schools attended, date of graduations, degrees received, and memberships in professional associations.

d. Names, addresses, and telephone numbers of the firm's clients, including the number of years served.

38. Which of the following acts by a CPA who is not in public practice would most likely be considered a violation of the profession's Code of Professional Conduct?a. Using the designation "CPA" on a report

accompanying financial statements intended for external use without disclosing that the CPA is employed by the company issuing the statements.

b. Distributing business cards indicating "CPA" and the CPA's title and employer.

c. Corresponding on the CPA's employer's letterhead, which contains the CPA's designation and employment status.

d. Compiling the CPA's employer's financial statements and making reference to the CPA's lack of independence.

39. Quality control policies for the acceptance and continuance of clients are established to:a. Enable the auditor to report on management's

integrity.b. Comply with standards established by regulatory

bodies.

c. Minimize the likelihood of associating with managements that lack integrity.

d. Reduce exposure to litigation from falling to detect fraud.

40. The arguments offered by third parties in litigation against a practitioner for an assurance services are likely to involve:a. Joint-and-several liability.b. Privity of contract.c. Reliance on advice.d. Due diligence.

41. A 1940 case, Maryland Casualty Co. v. Jonathan Cook, illustrates that:a. Auditors are responsible to detect material

embezzlements.b. Auditors are culpable to clients who carry surety

bonds on employees.c. Auditors are liable to parties who acquire a client's

rights by subrogation.d. Auditors' liability under common law is dependent

on the terms of the audit services contract.

42. Reaffirmed in the 1980s and 1990s, the privity doctrine, first established in Ultramares Corp. v. Touche (1931), now requires a three-point linkage test established in a New York Court of Appeals case, Credit Alliance v. Arthur Andersen & Co. Among other things, the linkage test requires that:a. The accountant knew a specific third party would

rely on the statements.b. Evidence links the accountant with the client.c. The accountant knew why the client required an

opinion.d. The accountant provided an oral assurance of the

client's solvency.

Questions 4 and 5 each relate to the following:

Gilmore, Inc, a privately owned manufacturer of jewelry, was audited by Balch & Ferris, CPAs. Relying on Gilmore's financial statements, the Evergreen Commercial Credit Corp., a lending institution, granted Gilmore a long-term loan. Gilmore's statements were materially misstated, and Gilmore then went bankrupt. Evergreen Commercial Credit is suing Balch & Ferris for negligence in the audit.

43. Among other things, Evergreen must show:a. Misstated financial statements.b. Scienter.c. Compliance with truth-in-lending laws.d. Gross negligence.

44. In this case, Evergreen is most likely a:a. Foreseeable third party.b. Foreseen beneficiary.c. Primary beneficiary.d. Client.

45. Alsap Corporation's April 1999, P35 million initial public offering included Singer & Revine's unqualified opinion on Alsap's December 31, 1998 audited financial statements. Owing to material misstatements related to inventory and receivables securities purchasers sued Singer & Revine, who likely can avoid liability if:a. Singer & Revine can demonstrate due diligence.b. Singer & Revine's engagement letter called for

mediation and arbitration.c. Alsap management caused the misstatements.d. Some of the purchasers did not rely on the audited

financial statements.

46. An auditor may be held liable under the Securities Act of 1933 for materially false or misleading financial statements if the security purchasers:a. Can establish reliance on the registration statement.b. Can establish gross negligence.

c. Brings suit within four years after the security is offered to the public.

d. Can establish that the financial statements were misstated.

47. Which of the following correctly portrays the scope of Section 10(b) of the Securities Exchange Act of 1934?a. Section 10(b) protects shareholders of securities

listed on a national stock exchange.b. Section 10(b) applies exclusively to securities

registered under the Securities Exchange Act of 1934.

c. Securities registered under the Securities Act of 1933 are exempt from Section 10(b).

d. Section 10(b) applies to purchases as well as sales of registered securities.

48. A client sues Jane Corning, an independent accountant, for negligence, alleging that, because she failed to apply generally accepted auditing standards, she failed to discover large thefts of marketable securities. Under these circumstances:a. Corning is not bound by generally accepted auditing

standards unless she is a member of the PICPA.b. Corning is negligent if she failed to apply generally

accepted auditing standards.c. Generally accepted auditing standards apply to

financial statements taken as a whole, not to audits of individual accounts.

d. If Corning failed to apply generally accepted auditing standards, she would likely have committed a fraud.

49. Accountant's liability to third parties under common law:a. Has not changed substantially over the years.b. Is identical to accountant's liability under the

Securities Act of 1933.

c. Is identical to accountant's liability under the Securities Exchange Act of 1934.

d. Is not uniform across all jurisdictions.

50. Columbus, Inc, a publicly traded corporation, is audited by Corrente & Corrente, CPAs. Because of inaccurate disclosures and serious losses from trading Columbus' securities, Columbus shareholders are suing Corrente & Corrente. In this case, the auditor's defense is:a. The financial statements were not misleading

despite the inaccurate disclosures.b. Their conduct was not deficient under generally

accepted auditing standards.c. Lack of privity.d. Lack of reliance.

51. Lincoln purchased Tally Corporation securities in a public offering subject to the Securities Act of 1933. Rosemore & Co., CPAs, issued an unqualified opinion on Tally Corporation's most recent financial statements (which were included in Tally's registration statement) and a comfort letter that revealed no material exceptions. Rosemore & Co. is being sued by Lincoln for alleged misstatements within in the registration statement. To prevail, Lincoln must prove:a. Damages, reliance, and scienter.b. Damages, material misstatements, and reliance.c. Damages and material misstatements.d. Material misstatements and reliance.

52. Which of the following, if material, would be a fraud?a. Errors in the application of accounting principles.b. Clerical errors in accounting data underlying the

financial statements.c. Misinterpretation of facts that existed when the

financial statements were prepared.d. Misappropriation of an asset or groups of assets.

53. Which of the following is an inappropriate reaction to a material fraud detected in a publicly traded company?a. Report the matter to the SEC.b. Discuss the matter with at least one level of

management above the perpetrator.c. Obtain further evidence.d. Suggest that the client consult with legal counsel

about questions of law.

54. Which of the following statements best describes an auditor's responsibility to detect fraud?a. The auditor is responsible for failing to detect fraud

when the failure clearly results from not performing audit procedures described in the engagement letter.

b. The auditor must extend auditing procedures to search actively for fraud.

c. The auditor must assess the risk that material fraud may exist.

d. The auditor is responsible for failing to detect fraud only when an unqualified opinion is issued.

55. If an auditor is certain a fraud has a material effect on financial statements and the client agrees to adjust the statements accordingly, the auditor should:a. Withdraw from the engagement.b. Disclaim an opinion on the financial statements

taken as a whole.c. Issue a qualified opinion.d. Issue an unqualified opinion.

56. An auditor's responsibility for illegal acts by clients:a. Depends on any contingent monetary effects and

loss contingencies resulting form the act.b. Requires that he or she assess the risk of material

misstatement of the financial statements due to illegal acts.

c. Does not relate to direct, material illegal acts.

d. Is unrelated to the proximity of the act of the financial statements.

57. Which of the following statements about the competence of evidence is always true?a. Evidence gathered by an auditor from third parties

is reliable.b. Accounting data developed when control risk is low

is more relevant than data developed when control risk is high.

c. Oral representations made by management are not valid evidence.

d. To be competent, evidence must be both valid and relevant.

58. Tests of controls:a. Are intended to detect material misstatements in

financial statement accounts.b. Are concerned with how internal control policies or

procedures are applied.c. Are evaluations of financial information made by a

study of plausible relationships among both financial and nonfinancial data.

d. Are procedures that lend hindsight o amounts and information disclosed in financial statements as of the balance sheet date.

59. Substantive tests of details:a. Are intended to detect material misstatements in

financial statement accountsb. Are concerned with how internal control policies or

procedures are applied.c. Are evaluations of financial information made by a

study of plausible relationships among both financial and nonfinancial data.

d. Are procedures that lend hindsight to amounts and information disclosed in financial statements as of the balance sheet date.

60. Analytical procedures:a. Are intended to detect material misstatements in

financial statement accounts.b. Are concerned with how internal control policies or

procedures are applied.c. Are evaluations of financial information made by a

study of plausible relationships among both financial and nonfinancial data.

d. Are procedures that lend hindsight to amounts and information disclosed in financial statements as of the balance sheet date.

61. A public company's audit committee should consist of:a. Representatives of management, shareholders,

suppliers, and customers.b. The audit partner, chief financial officer, legal

counsel, and at least one outsider.c. Representatives of the major equity interests

(bonds, preferred stock, common stock).d. Board members who are not officer or employees.

62. An independent auditor has been approached to perform an audit. Research suggests that the auditor may fail to:a. Distinguish between a regulated and nonregulated

industry.b. Coordinate audit dates with the client.c. Initiate discussion with the predecessor auditor.d. Establish investigation thresholds for analytical

procedures.

63. To avoid misunderstandings between a practitioner and client, engagement arrangements are written in:a. A legal letter.b. An engagement letter.c. A client representation letter.d. A letter on reportable conditions.

64. Which of the following procedures would an auditor most likely perform when planning an audit?a. Review prior year audit working papers.b. Inquire about potential litigation, claims, and

assessments.c. Obtain a representation letter from management.d. Determine whether internal controls are being

applied as prescribed.

65. A purpose of reviewing first quarter financial results during audit planning is to:a. Identify unexpected fluctuations occurring in

account balances since the prior year financial statements.

b. Become familiar with accounts likely to appear in the financial statements.

c. Plan evidence to be gathered in auditing accounts that are new to the first quarter financial statements.

d. Assess first quarter financial position, results or operations, and cash flows.

66. An integrated services digital network is a high-speed phone line that can be used to:a. Access software from a service bureau.b. Access software from the Internet.c. Enhance the processing capability of local area

networks (LANs).d. Encourage end user computing.

67. Information system that access software from file servers and direct print jobs from print servers are called:a. Local area networks (LANs).b. Telecommunications channels.c. Intranets.d. Service bureaus.

68. A public accounting firm has issued a report that refers to criteria established in Internal Control: Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. The report likely relates to:a. An consulting engagement.b. An assurance engagement.c. An attestation engagement.d. An audit engagement.

69. As part of a periodic planning exercise, a company discovers that an eastern European political dispute may interfere with supply sources. This is an example of:a. Control environment.b. Risk assessment.c. Control activities.d. Monitoring.

70. Internal control should provide reasonable (but not necessarily absolute) assurance, which means that :a. Internal control is management's, not the auditor's,

responsibility.b. An attestation engagement about management's

internal control assertions may not necessarily detect all reportable conditions.

c. The cost of control activities should not exceed the benefits.

d. There is always a risk that reportable conditions may result in material misstatements.

71. Which of the following statements is an example of an inherent limitation of internal control?a. The effectiveness of control procedures depends on

segregation of duties.b. Procedures are designed to assure that transactions

are executed as management authorizes.c. Errors may arise from mistakes in judgment.d. Computers process large numbers of transactions.

72. An auditor considers internal control to:a. Determine whether assets are safeguarded.b. Suggest improvements in internal control.c. Plan audit procedures.d. Express an opinion.

73. After obtaining an understanding of an entity's internal controls, an auditor may assess control risk at the maximum for some assertions because the auditor:a. Believes internal control activities are unlikely to be

effective.b. Determines that internal control is not well-

documented.c. Performs tests of controls to restrict detection risk

to an acceptable level.d. Identifies control activities that are likely to prevent

material misstatements.

74. After obtaining an understanding of an entity's internal control and assessing control risk, and auditor may next:a. Perform tests of controls to verify management's

assertions that are embodied in the financial statements.

b. Consider whether to reduce the assessed level of control risk further.

c. Discontinue searching for reportable conditions.d. Evaluate whether control activities can detect

material misstatements.

75. The primary purpose of performing tests of controls is to provide reasonable assurance that:a. Internal control is effective.b. The accounting system is documented accurately.c. Transactions are recorded at the amounts executed.d. All control activities leave visible evidence.

76. After obtaining an understanding of a client's controls, an auditor may decide to omit tests of the controls. Which of the following is not an appropriate reason to omit tests of controls?a. The controls appear adequate.b. The controls duplicate other controls.c. Reportable conditions preclude assessing control

risk below the maximum.d. The effort to test controls exceeds the effort saved

by not performing substantive tests.

77. Which of the following statements is not true about test date?a. Test data should consist only of conditions that

interest the auditor.b. Only one transaction of each type need be tested.c. Test data must consist of all possible valid and

invalid conditions.d. Test data are processed by the client's software

under the auditor's control.

78. Processing data through the use of simulated files provides an auditor with information about the effectiveness of control procedures. One of the computer assisted audit techniques that uses this approach is:a. Test data.b. Parallel simulation.c. Base case system evaluation (BCSE).d. Audit books.

79. General controls relate to all computer activities and application controls relate to specific tasks. General controls include:a. Controls designated to assure that all data

submitted for processing has been properly authorized.

b. Controls that relate to the correction and resubmission of data that were initially incorrect.

c. Controls for documenting and approving software and changes to software.

d. Controls designed to assure the accuracy of the processing results.

80. Which of the following computer assisted audit techniques allows fictitious and real transactions to be processed together without client personnel being aware of the testing process?a. Parallel simulation.b. Integrated test data.c. Audit books.d. Audit modules.

81. When using statistical sampling for tests of controls, and auditor's evaluation would include a statistical conclusion about whether:a. Deviations in the population are within an

acceptable range.b. Monetary precision exceeds a predetermined

amount.c. The population's total monetary value is not in error

by more than a predetermined amount.d. Population characteristics occur at least once in the

population.

82. Tests of controls provide reasonable assurance that controls are applied as prescribed. A sampling method that is useful when testing control is:a. Nonstatistical sampling.b. Attribute sampling.c. Discovery sampling.d. Stratified random sampling.

83. Statistical sampling:a. Measures quantitatively the risk from testing only

part of an audit population.

b. Allows the same degree of confidence as nonstatistical sampling but with substantially less work.

c. Allows the auditor to replace some judgments with quantitative measures.

d. Measures the reliability of misstatements.

84. Assessing control risk too high is the risk that the sample:a. Does not support tolerable error for some or all of

management's assertions.b. Contains proportionately more deviations from

prescribed control procedures than actually exist in the population as a whole.

c. Contains monetary misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or classes of transactions.

d. Contains proportionately fewer deviations from prescribed control procedures than actually exist in the population as a whole.

85. Assessing control risk too low relates to:a. The efficiency of the audit.b. The effectiveness of the audit.c. The preliminary estimate of materiality.d. Tolerable error.

86. Statistical sampling may be applied to test controls when a client's control procedures:a. Depend primarily on segregation of duties.b. Are carefully reduced to writing and are included in

client accounting manuals.c. Leave an audit trail as evidence of compliance.d. Enable the detection of fraud.

87. Which of the following statements is correct?a. The expected population deviation rate has little or

no effect on sample size.

b. As the population size doubles, the sample size also should double.

c. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

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

88. When sampling for attributes, which of the following would decrease sample size?

Risk of Assessing Tolerable RateExpected Population

Control Risk Too Low of Deviation Deviation Ratea. Increase Decrease Increaseb. Decrease Increase Decreasec. Increase Increase Decreased. Increase Increase

Increase

89. Which of the following sampling plans varies sample size?a. Attribute estimation sampling.b. Sequential sampling.c. Discovery sampling.d. Stratified sampling.

90. When in using statistical sampling for attributes, and auditor should asses control risk at the maximum assuming:a. The sample rate of deviation plus the allowances for

sampling risk is less than the tolerable rate.b. The sample rate of deviation plus the allowance for

sampling risk is equal to the tolerable rate.

c. The sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

d. The sample rate of deviation is roughly proportional to the sample rate from the prior year.

91. Which of the following statements is true about nonstatistical sampling in tests of controls?a. Nonstatistical sampling plans provide a quantitative

measure of sampling risk.b. The auditor's judgment in nonstatistical sampling is

guided by classical statistical sampling concepts.c. The calculated nonstatistical sample should never

be altered by the auditor.d. The auditor considers the same parameters when

determining a nonstatistical sample size as when determining a statistical sample size.

92. Tolerable error, a measure of the maximum monetary error that may exist in an account balance without causing materially misstated financial statements, is directly related to:a. Precision.b. Audit risk.c. Materiality.d. Confidence level.

93. Which of the following is necessary to determine sample size?a. Population size.b. Expected population deviation rate.c. Estimated population monetary error. d. Risk.

94. Which of the following statements is an advantage of classical variables sampling?a. If no errors are expected, classical variables

sampling will result in a smaller sample size than probability-proportional-to-size sampling.

b. A classical variables sampling plan can begin before the completed population is available.

c. Classical variables sampling may result in a smaller sample size than probability-proportional-to-size sampling if there are many differences between recorded and audited amounts.

d. Classical variables sampling does not require recorded values for individual sampling units.

95. Which of the following situations would increase sample size? A decrease in:a. Risk of incorrect rejection.b. Estimated population standard deviation.c. Expected frequency of errors. d. Tolerable error.

96. The risk of incorrect acceptance relates to the:a. Effectiveness of the audit.b. Efficiency of the audit.c. Preliminary estimate of materiality.d. Allowable risk of tolerable error.

97. Sample results support the conclusion that a recorded account balance is materially misstated but, unknown to the auditor, the account is not misstated, suggesting the risk of:a. Incorrect rejection.b. Incorrect acceptance.c. Assessing control risk too high.d. Assessing control risk too low.

98. Calculate an acceptable risk of incorrect acceptance assuming: (1) audit risk is 5 percent, (2) the risk that the internal controls fail to detect material errors is 40 percent, and (3) the risk that analytical procedures fail to detect material errors not detected by the internal controls is 50 percent.a. .04.b. .16.c. .25.

d. Indeterminate.

99. Assume the acceptable risk of incorrect rejection is .10, the acceptable risk of incorrect acceptance is .075, and tolerable error is P100,000. What is the desired allowance for sampling risk?a. P50,000.b. P47,800c. P53,200d. Indeterminate.

100. In a difference estimation sampling plan for a population of 1,500 items, an auditor found total recorded and audited values for a sample of 100 items to be P120,000 and P126,000, respectively. What is the total projected monetary difference for the population?a. P6,000.b. P90,000c. P126,000d. Indeterminate.

101. Ratio estimation is inappropriate when:a. The total population book value is known and

corresponds to the sum of all population items.b. These are some observed differences between

audited and recorded book values.c. Differences between recorded and audited values

are nearly proportional to the recorded values.d. There are no recorded values for some items in the

population.

102. Probability-proportional-to-size sampling will likely result in selecting a sample with characteristics roughly equivalent to:a. A classical variables sampling plan stratified by peso

amount.b. Difference estimation.c. Ratio estimation.d. Nonstatistical sampling.

103. In probability-proportional-to-size sampling, each invoice:a. Has an equal probability of being selected.b. Can be represented by no more than one peso unit.c. Has an unknown probability of being selected.d. Has a probability proportional to its peso value of

being selected.

104. Which of the following is improper when using probability-proportional-to-size sampling?a. Combining negative and positive peso error items.b. Using a sample selection technique in which the

same account balance could be selected more than once.

c. Selecting a random starting point and then sampling every nth peso unit.

d. Defining the sampling unit as an individual peso and not as an individual account balance.

105. In a probability-proportional-to-size sampling plan with a P10,000 sampling interval, an auditor discovered that a selected account receivable with a recorded amount of P5,000 has an audited amount of P2,000. The projected error for the sample is:a. P3,000.b. P4,000.c. P6,000d. P8,000.

106. A nonstatistical sampling plan can:a. Overstate the estimate of sampling risk.b. Misdirect an auditor to unreliable sampling units. c. Replicate the results of a statistical sampling plan.d. Understate the degree of audit assurance desired.

107. Which of the following business functions is associated with the revenue/receipt cycle?a. Obligations are paid to vendors and employees.

b. Resources are distributed to outsiders in exchange for promises of future payments.

c. Resources are used, held, or transformed.d. Capital funds are received from investors and

creditors.

108. To test whether sales have been recorded, a sample should be drawn from a file of:a. Purchase orders.b. Sales orders.c. Sales invoices.d. Bills of lading.

109. Tracing copies of sales invoices to shipping documents provides evidence that:a. Shipments were recorded as receivables.b. Billed sales were shipped.c. Debits to the accounts receivable were for sales

shipped.d. Shipments were billed.

110. Tracing shipping documents to sales invoices provides evidence that:a. Shipments were billed.b. Shipments were recorded as sales.c. Recorded sales were shipped.d. Invoiced sales were shipped.

111. Which of the following control procedures could prevent or detect errors of frauds arising from shipments made to unauthorized parties?a. Document policies and procedures for scheduling

shipments.]b. Establish procedures for reviewing and approving

prices and sales terms before sale.c. Prenumber bills of lading and assure that related

billings are made on a periodic basis.d. Prepare and periodically update lists of authorized

customers.

112. Which of the following control procedures would most likely assure that access to shipping, billing, inventory controls, and accounting records is restricted to personnel authorized by management?a. Segregate responsibilities for authorization,

execution, and recording, and prenumber and control custody of documents.

b. Establish the cash receipts function in a centralized location and require daily reconciliation of cash receipts records with deposit slips.

c. Establish policy and procedures manuals, organization charts, and supporting documentation.

d. Periodically substantive and evaluate recorded account balances.

113. An entity has implemented a control procedure which requires that authorized personnel reconcile the total of individual customer accounts receivable with control totals. This control relates to which of the following control objectives?a. Sales, cash receipts, and related transactions should

be recorded at the correct amounts, in the proper period, and should be properly classified.

b. Recorded accounts receivable balances should reflect underlying transactions and events.

c. Billings, collections, and related adjustments transactions should be posted accurately to individual customer accounts.

d. Access to cash and cash-related records should be restricted to personnel authorized by management.

114. A purpose of tests of controls over shipping is to determine whether:a. Billed goods are shipped.b. Shipments are made in accordance with approved

sales and orders.c. Sales orders are properly recorded.d. Shipping personnel route goods to related parties.

115. A purpose of tests of controls over billing is to determine whether:a. Billed goods have been shipped.b. Sales orders agree to shipping documents.c. Sales orders have been approved by Credit

Department personnel.d. Billing personnel process returned goods properly.

116. What sequence of steps does an auditor undertake when identifying control procedures that are potentially reliable in assessing control risk below the maximum?a. Consider the errors of frauds that might occur,

determine control procedures, identify control objectives, and design tests of controls.

b. Determine control procedures, design tests of controls, consider the errors of frauds that might occur, and identify control objectives.

c. Identify control objectives, consider the errors of frauds that might occur, determine control procedures, and design tests of controls.

d. Design tests of controls, determine control procedures, consider the errors of frauds that might occur, and identify control objectives.

117. Which of the following might be detected by sales cutoff tests?a. Overstated receivables.b. Overstated sales.c. Kiting.d. Misappropriate inventory.

118. To test whether all sales transactions have been recorded, and auditor should test a sample drawn from an entity's file of:a. Receiving reports.b. Bills of lading.c. Sales orders.d. Sales invoices.

119. Positive accounts receivable confirmations are appropriate when:a. There is reason to believe that a substantial number

of accounts may be in dispute.b. Control risk is low.c. Accounts receivable consists of many small

balances.d. Confirmations are mailed during an interim period.

120. An auditor requests a cutoff bank statement primarily to:a. Verify the cash balance reported on the bank

confirmation.b. Verify reconciling items on the client's bank

reconciliation.c. Detect lapping.d. Detect kiting.

121. Which of the following procedures could reveal unrecorded sales at the balance sheet date?a. Comparing shipping documents with sales records.b. Applying gross profit percentages to inventory

shipped during the period.c. Tracing payments received after the balance sheet

date to accounts receivable records.d. Sending accounts receivable confirmations.

122. Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to conceal the misappropriation and unlikely to be detected?a. Understating the sales journal.b. Overstating the accounts receivable control

account.c. Overstating the accounts receivable subsidiary

ledger.d. Overstating the cash receipts journal.

123. Which of the following accounting issues is most likely to raise an auditor's professional skepticism about earnings manipulation?a. Progress payments.b. Allowance for doubtful accounts.c. Sales returns.d. Cash receipts.

124. Which of the following is most likely to provide management with incentives to overstate earnings?a. Projected quarterly dividends.b. Issuance of preferred stock.c. Unbudgeted increases in materials prices.d. A projected stock split.

125. Under which of the following circumstances does managements have some discretion in timing the recognition of revenue?a. The timing of revenue is not reasonably

determinable and the earnings process is not complete.

b. The amount and timing of revenue is reasonably determinable.

c. The earnings process is complete or reasonably complete.

d. The transaction is at arm's length.