AUDITING THEORY

1. Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?A. Reading the minutes of the board of directors’ meetings for the year under

audit.B. Obtaining a letter concerning potential liabilities from the client’s attorney.C. Comparing the current year’s financial statements with those of the prior

year.D. Ensuring that a representation letter signed by management is in the file.

2. An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?A. Observation and inspection of records.B. Confirmation and reperformance.C. Inquiry and inspection of records.D. Analytical procedures and reperformance.

3. Which of the following is a definition of control risk?A. The risk that a material misstatement will not be prevented or detected on

a timely basis by the client’s internal controls.B. The risk that the auditor will not detect a material misstatement.C. The risk that the auditor’s assessment of internal controls will be at less

than the maximum level.D. The susceptibility of material misstatement assuming there are no related

internal control policies or procedures.

4. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?A. Presumptive C. CriticizingB. Judgmental D. Questioning

5. Which of the following statements is correct regarding internal control?A. A well-designed internal control environment ensures the achievement of

an entity’s control objectives.B. An inherent limitation to internal control is the fact that controls can be

circumvented by management override.C. A well-designed and operated internal control environment should detect

collusion perpetrated by two people.D. Internal control is a necessary business function and should be designed

and operated to detect all errors and fraud.6. When assessing internal auditors’ objectivity, an independent auditor should

A. Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

B. Review the internal auditors’ reports to determine that their conclusions are consistent with the work performed.

C. Verify that the internal auditors’ assessment of control risk is comparable to the independent auditor’s assessment.

D. Evaluate the quality of the internal auditors’ working paper documentation and their recent audit recommendations.

7. A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?A. Observation C. CalculationB. Confirmation D. Inspection

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8. Which of the following should an auditor do when control risk is assessed at the maximum level?A. Perform fewer substantive tests of details.B. Perform more tests of controls.C. Document the assessment.D. Document the internal control system more extensively.

9. Which of the following is least likely to be a test of a control?A. Inquiries of appropriate personnel.B. Inspection of management’s engagement letter.C. Observation of the application of a policy.D. Reperformance of the application of a policy.

10. Which of the following controls may prevent the failure to bill customers for some shipments?A. Each shipment should be supported by a prenumbered sales invoice that is

accounted for.B. Each sales order should be approved by authorized personnel.C. Sales journal entries should be reconciled to daily sales summaries.D. Each sales invoice should be supported by a shipping document.

11. If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from theA. Cash receipts journal to the sales journal.B. Sales journal to the cash receipts journal.C. Source documents to the accounting records.D. Accounting records to the source documents.

12. Which of the following is least likely to be considered when assessing inherent risk?A. Nonroutine transactions.B. Estimation transactions.C. Susceptibility to theft.D. Expected effectiveness of controls.

13. The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to asA. Audit riskB. Inherent riskC. Control riskD. Detection risk

14. Evidential matter concerning proper segregation of duties ordinarily is best obtained byA. Preparation of a flowchart of duties performed by available personnel.B. Inquiring whether control activities operated consistently throughout the

period.C. Reviewing job descriptions prepared by the personnel department.D. Direct personal observation of the employees who apply control activities.

15. According to the Code of Professional Ethics for CPAs, which of the following fee arrangements is prohibited?A. A fee for a review of financial statements that is based on time spent on the

engagement.B. A fee for a review of financial statements that is based on time spent and a

premium for the risk involved.C. A fee for a review engagement that is based on a fixed fee of P15,000.D. A fee for a review engagement that varies depending on the amount of

financing that the company may obtain.

16. Which of the following is not ordinarily performed in response to the risk of management override?A. Evaluating the rationale for significant unusual transactions.B. Observe counts of inventory at all locations.C. Review accounting estimates for bias.D. Test appropriateness of journal entries and adjustments.

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17. Which of the following procedures is not included in a review engagement?A. Inquiries of management.B. Inquiries regarding events subsequent to the balance sheet date.C. Any procedures designed to identify relationships among data that appear

to be unusual.D. Tests of internal control.

18. In considering internal control, the auditor is basically concerned that it provides reasonable assurance thatA. Operational efficiency has been achieved in accordance with management

plans.B. Material misstatements due to errors and fraud have been prevented or

detected.C. Controls have not been circumvented by collusion.D. Management cannot override the system.

19. Which of the following is a general principle relating to the reliability of audit evidence?A. Audit evidence obtained from indirect sources rather than directly is more

reliable than evidence obtained directly by the auditor.B. Audit evidence provided by copies is more reliable than that provided by

facsimiles.C. Audit evidence obtained from knowledgeable independent sources outside

the client company is more reliable than audit evidence obtained from nonindependent sources.

D. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls.

20. Which of the following statements relating to the appropriateness of audit evidence is always true?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. Evidence gathered by auditors must be both valid and relevant to be

considered appropriate.

21. An auditor may achieve audit objectives related to particular assertions byA. Performing analytical procedures.B. Adhering to a system of quality control.C. Preparing auditor working papers.D. Increasing the level of detection risk.

22. Which of the following is the best example of a substantive test?A. Examining a sample of cash disbursements to test whether expenses have

been properly approved.B. Confirmation of balances of accounts receivable.C. Comparison of signatures on checks to a list of authorized signers.D. Flowcharting of the client’s cash receipts system.

23. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely wouldA. Examine the shipping documents that provide evidence for the existence

assertion.B. Verify the sources and contents of the faxes in telephone calls to the

senders.C. Consider the faxes to be nonresponses and evaluate them as unadjusted

differences.D. Inspect the faxes for forgeries or alterations and consider them to be

acceptable if none are noted.

24. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes thatA. Internal control may be ineffective due to mistakes in judgment and

personal carelessness.

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B. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.

C. Establishing and maintaining internal control is an important responsibility of management.

D. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

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25. When obtaining an understanding of an entity’s internal control, an auditor should concentrate on the substance of controls rather than their form becauseA. The controls may be operating effectively but may not be documented.B. Management may establish appropriate controls but not enforce

compliance with them.C. The controls may be so inappropriate that no reliance is contemplated by

the auditor.D. Management may implement controls whose costs exceed their benefits.

26. Which of the following is not a step in an auditor’s assessment of control risk?A. Evaluate the effectiveness of internal control with tests of controls.B. Obtain an understanding of the entity’s information system and control

environment.C. Perform tests of details of transactions to detect material misstatements in

the financial statements.D. Consider whether controls can have a pervasive effect on financial

statement assertions.

27. The “test data approach”A. Involves reprocessing actual entity data using the entity’s computer

software.B. Involves reprocessing actual entity data using the auditor’s computer

software.C. Is where dummy transactions are prepared by the auditor and processed

under the auditor’s control using the entity’s computer software.D. Is where actual transactions are prepared by the auditor.

28. Audit sampling involves theA. Selection of all items over a certain amount.B. Application of audit procedures to less than 100% of items within a class of

transactions or an account balance such that all items have a chance of selection.

C. Application of audit procedures to all items that comprise a class of transactions or an account balance.

D. Application of audit procedures to all items over a certain amount and those that are unusual or have a history of error.

29. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate thatA. The communication with the audit committee should be revised.B. Irregularities exist among the relevant account balances.C. Additional substantive tests of details are required.D. Internal control activities are not operating effectively.

30. Which of the following events most likely indicates the existence of related parties?A. Making a loan without scheduled terms for repayment of the funds.B. Discussing merger terms with a company that is a major competitor.C. Selling real estate at a price that differs significantly from its book value.D. Borrowing a large sum of money at a variable rate of interest.

31. If a company’s external auditor expresses an unmodified opinion as a result of the audit of the company’s financial statements, readers of the audit report can assume thatA. The external auditor found no fraud.B. The company is financially sound and the financial statements are accurate.C. Internal control is effective.

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D. The auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

32. A CPA engaged to audit financial statements observes that the accounting for a certain material item is not in accordance with the applicable financial reporting framework, although the departure is prominently disclosed in a note to the financial statements. The CPA shouldA. Express an unmodified opinion but insert an Emphasis of Matter paragraph

emphasizing the matter by reference to the note.B. Disclaim an opinion.C. Not allow the accounting treatment for this item to affect the type of

opinion because the departure from the requirement of the applicable financial reporting framework was disclosed.

D. Modify the opinion because of the departure from the requirement of the applicable financial reporting framework.

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33. Which of the following statements best describes assurance services?A. Independent professional services that are intended to enhance the

credibility of information to meet the needs of an intended user.B. Services designed to express an opinion on the fairness of historical

financial statements based on the results of an audit.C. The preparation of financial statements or the collection, classification, and

summarization of other financial information.D. Services designed for the improvement of operations, resulting in better

outcomes.

34. Which of the following professional services would be considered an assurance engagement?A. A management consulting engagement to provide IT advice to a client.B. An engagement to report on compliance with statutory requirements.C. An income tax engagement to prepare tax returns.D. A compilation of financial statements from a client’s accounting records.

35. What type of assurance engagement is involved when the practitioner expresses a positive form of conclusion?A. Limited assurance engagementB. Positive assurance engagementC. Reasonable assurance engagementD. Absolute assurance engagement

36. The following statements relate to the performance of an assurance engagement other than an audit or review of historical financial information covered by PSAs and PSREs. Which is incorrect?A. Those persons who are to perform the engagement should collectively

possess the necessary professional competence.B. The practitioner is not allowed to use the work of persons from other

professional disciplines.C. The practitioner should consider materiality and assurance engagement risk

when planning and performing an assurance engagement.D. The assurance report should be in writing and should contain a clear

expression of the practitioner’s conclusion about the subject matter information.

37. Which of the following fundamental ethical principles prohibits association of professional accountants with reports, returns, communications or other information that is believed to contain a materially false or misleading statement?A. IntegrityB. ObjectivityC. Professional competence and due careD. Confidentiality

38. Who should take responsibility for the overall quality on each audit engagement?A. Engagement quality control reviewerB. Engagement partnerC. Engagement teamD. CPA firm

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39. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users. It may be accomplished in a number of ways, includingA. Embezzling receipts.B. Stealing physical assets or intellectual property.C. Using an entity’s assets for personal use.D. Manipulation, falsification, or alteration of accounting records or supporting

documentation from which the financial statements are prepared

40. A classification of fraud where the perpetrator causes a company to pay too much for ordered goods, or to pay for goods never ordered is calledA. Payroll fraudB. Disbursement fraudC. Cash receipts fraudD. Inventory fraud

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41. Operational auditing is primarily oriented towardA. 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.

42. Professional skepticism requires that an auditor assume that management isA. Honest, in the absence of fraud risk factors.B. Dishonest until completion of audit tests.C. Neither honest nor dishonest.D. Offering reasonable assurance of honesty.

43. Which of the following best describes what is meant by the term “fraud risk factor?”A. Factors whose presence indicates that the risk of fraud is high.B. Factors whose presence often have been observed in circumstances where

frauds have occurred.C. Factors whose presence requires modification of planned audit procedures.D. Material weaknesses identified during an audit.

44. Which of the following is most likely to be an example of fraud?A. Defalcations occurring due to invalid electronic approvals.B. Mistakes in the application of accounting principles.C. Mistakes in processing data.D. Unreasonable accounting estimates arising from oversight.

45. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regardingA. Disagreements the predecessor had with the client concerning auditing

procedures and accounting principles.B. The predecessor’s evaluation of matters of continuing accounting

significance.C. The degree of cooperation the predecessor received concerning the inquiry

of the client’s lawyer.D. The predecessor’s assessments of inherent risk and judgments about

materiality.

46. An auditor should design the written audit program so thatA. All material transactions will be selected for substantive testing.B. Substantive tests prior to the balance sheet date will be minimized.C. The audit procedures selected will achieve specific audit objectives.D. Each account balance will be tested under either tests of controls or tests of

transactions.

47. The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:A. Observe physical counts of the inventory items.

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B. Trace the total on the inventory listing to the general ledger inventory account.

C. Obtain a confirmation from the client indicating inventory ownership.D. Analytically compare the current-year inventory balance to the prior-year

balance.

48. After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely wouldA. Issue a disclaimer of opinion about the internal controls as part of the

auditor's report.B. Increase the assessment of control risk and increase the extent of

substantive tests.C. Issue a qualified opinion of this finding as part of the auditor's report.D. Withdraw from the audit because the internal controls are ineffective.

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49. Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?A. The auditor is unable to obtain the audited financial statements of a

consolidated investee.B. Management does not provide reasonable justification for a change in

accounting principles.C. The company failed to make a count of its physical inventory during the

year and the auditor was unable to apply alternative procedures to verify inventory quantities.

D. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements.

50. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?A. Completeness.B. Existence or occurrence.C. Valuation or allocation.D. Rights and obligations.

51. CPAs may provide bookkeeping and accounting services to audit clients that are not listed entities, but there are a number of conditions that must be met if the auditor is to maintain independence. Which of the following conditions is not necessary?A. The CPA must not assume a management role or function.B. The audit client must hire an external CPA to approve all of the journal

entries prepared by the auditor.C. The client must accept responsibility for the financial statements.D. The auditor must comply with PSAs when auditing work prepared by his/her

firm.

52. Which of the following statements is not correct?A. It is possible to vary the sample size from one unit to 100% of the items in

the population.B. The decision of how many items to test should not be influenced by the

increased costs of performing the additional tests.C. The decision of how many items to test must be made by the auditor for

each audit procedure.D. The sample size for any given procedure is likely to vary from audit to audit.

53. Which of the following is the most objective type of evidence?A. A letter written by the client’s attorney discussing the likely outcome of

outstanding lawsuits.B. The physical count of securities and cash.

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C. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable.

D. Observation of cobwebs on some inventory bins.

54. Which of the following statements regarding analytical procedures is not correct?A. Analytical tests emphasize a comparison of client internal controls to PFRS.B. Analytical procedures are required on all audits.C. Analytical procedures can be used as substantive tests.D. For certain accounts with small balances, analytical procedures alone may

be sufficient evidence.

55. When discussing control risk (CR) and the audit risk model, which of the following is false?A. CR is a measure of the auditor’s assessment of the likelihood that

misstatements will not be prevented or detected by internal control.B. If the auditor concludes that internal control is completely ineffective to

prevent or detect errors, he/she would assign a low value (e.g., 0%) to CR.C. The relationship between control risk and detection risk is inverse.D. The relationship between control risk and evidence needed to support

account balances is direct.

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56. Which of the following is an example of the concept of inherent risk?A. Humans make more errors than computers; therefore, a manual accounting

system is riskier than a computerized system.B. Accounting systems with vouchers have many more controls built in, so the

risk that there will be errors on the financial statements is reduced.C. Loans receivable for a finance company are less likely to be collectible than

those of a bank.D. Audits with larger sample sizes are less risky than those with smaller

sample sizes.

57. Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following is not a condition which should alert an auditor that the initial assessment should be changed?A. The auditor’s lack of independenceB. Discrepancies in the accounting recordsC. Unusual relationships between the auditor and managementD. Missing or conflicting evidence

58. Companies with non-complex IT environments often rely on microcomputers to perform accounting system functions. Which of the following is not an audit consideration in such an environment?A. Limited reliance on automated controls.B. Unauthorized access to master files.C. Vulnerability to viruses and other risks.D. Excess reliance on automated controls.

59. Which of the following is not a valid basis for omitting an audit test?A. The difficulty and expense involved in testing a particular item.B. The relative risk involved.C. The degree of reliance on the relevant internal controls.D. The relationship between the cost of obtaining evidence and its usefulness.

60. Which of the following statements is true?A. Audit procedures on the sample item will vary as a result of using either

statistical or nonstatistical sampling.B. The audit procedures will be the same for either statistical or nonstatistical

sampling but they must be performed differently for each.C. Statistical sampling requires quantitative audit procedures whereas

nonstatistical sampling requires judgmental audit procedures.

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D. Audit procedures on the sample item will not vary as a result of using either statistical or nonstatistical sampling.

61. Which of the following is likely to be determined first when performing tests of details for accounts receivable?A. Recorded accounts receivable exist.B. Accounts receivable in the aged trial balance agree with related master file

amounts, and the total is correctly added and agrees with the general ledger.

C. Accounts receivable are owned.D. Existing accounts receivable are included.

62. 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 ofA. Accuracy C. ControlB. Existence D. Completeness

63. There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly correspond to “quantities” and “error rate,” respectively, areA attributes and variablesB. variables and attributesC. constants and attributesD. constants and variables

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64. The purpose of the audit procedure to “examine underlying documentation for subsequent cash disbursements” is toA. Uncover liabilities on the balance sheet which should not have been

recorded until a subsequent period.B. Find the documentation relating to a cash disbursement.C. Uncover payments made in a subsequent accounting period for liabilities

that existed at the balance sheet date.D. Uncover cash disbursements recorded in a subsequent accounting period

which should be recorded in this period.

65. A weak internal control system allows a department supervisor to “clock in” for a fictitious employee and then approve the employee’s time card at the end of the pay period. This fraud would be detected if other controls were in place, such as having an independent partyA. Distribute paychecks.B. Recompute hours worked from time cards.C. Foot the payroll journal and trace postings to the general ledger and the

payroll master file.D. Compare the date of the recorded check in the payroll journal with the date

on the canceled checks and time cards.

66. Which of the following misstatements is most likely to be uncovered during an audit of a client’s bank reconciliation?A. Duplicate payment of a vendor’s invoice.B. Billing a customer at a lower price than indicated by company policy.C. Failure to record a collection of a note receivable by the bank on the client’s

behalf.D. Payment to an employee for more than the hours actually worked.

67. Prospective financial statements are for general use or for limited use. General use refers to use by any third party, whereas limited use refers to use by third parties with which the responsible party is negotiating directly. Which of the following statements is not correct?A. Forecasts can be provided for general use.B. Forecasts can be provided for limited use.C. Projections can be provided for general use.D. Projections can be provided for limited use.

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68. Which of the following is not one of the major differences between financial and operational auditing?A. The financial audit is oriented to the past, but an operational audit concerns

performance for the future.B. The financial audit report is distributed to many readers, but the operational

audit report goes to a few managers.C. Financial audits deal with the information on the financial statements, but

operational audits are concerned with the information in the ledgers.D. Financial audits are limited to matters that directly affect the financial

statements, but operational audits cover any aspect of efficiency and effectiveness.

69. Which of the following is not a purpose of a program audit as performed by government auditors?A. Determination of the extent to which the desired results established by the

legislature are being achieved.B. Determination of the causes of inefficiencies in sponsored programs.C. Determination of the effectiveness of organizations, programs and

activities.D. Determination as to whether the entity has complied with laws and

regulations applicable to the program.

70. In “auditing” financial accounting data, the primary concern is withA. Determining whether recorded information properly reflects the economic

events that occurred during the accounting period.B. Determining if fraud has occurred.C. Determining if taxable income has been calculated correctly.D. Analyzing the financial information to be sure that it complies with

government requirements.

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71. An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore shouldA. Plan and perform the engagement with an attitude of professional

skepticism.B. Not rely on internal controls that are designed to prevent or detect errors or

fraud.C. Design audit tests to detect unrecorded transactions.D. Extend the work to audit most recorded transactions and records of an

entity.

72. Evidence is usually more persuasive for balance sheet accounts when it is obtainedA. As close to the balance sheet date as possible.B. Only from transactions occurring on the balance sheet date.C. From various times throughout the client’s year.D. From the time period when transactions in that account were most

numerous during the fiscal period.

73. Tolerable misstatement as set by the auditorA. Decreases acceptable audit risk.B. Increases inherent risk and control risk.C. Affects planned detection risk.D. Does not affect any of the four risks.

74. Application controls vary across the IT system. To gain an understanding of internal control for a private company, the auditor must evaluate the application controls for everyA. Audit areaB. Material audit areaC. Audit area in which the client uses the computerD. Audit area where the auditor plans to reduce assessed control risk

75. Proper separation of duties is useful to prevent various types of misstatements. Which of the following is not an essential separation of duties?

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A. Persons having access to cash should not have access to marketable securities.

B. Separate the credit-granting function from the sales function.C. Personnel doing internal comparisons should be independent of those

entering the original data.D. Anyone responsible for inputting sales and cash receipts transactions

information into the computer should be denied access to cash.

76. When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. In such a situation, which of the following would not be classified as an alternative procedure?A. Send a second confirmation request.B. Examine subsequent cash receipts to determine if the receivable has been

paid.C. Examine shipping documents to verify that the merchandise was shipped.D. Examine customer’s purchase order and the duplicate sales invoice to

determine that the merchandise was ordered.

77. The positive (as opposed to the negative) form of receivables confirmation is preferred whenA. Internal control surrounding accounts receivable is considered to be

effective.B. There is reason to believe that a substantial number of accounts may be in

dispute.C. A large number of small balances are involved.D. There is reason to believe a significant portion of the requests will be made.

78. The most important controls over cash disbursements include all but which of the following?A. Signing of checks by an authorized employee.B. Random examination of the supporting documents by the authorized check

signer before signing checks.C. Separation of responsibilities for signing the checks and performing the

accounts payable function.D. Prenumbering of checks and investigations of missing checks.

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79. The auditor’s objective during an observation of a client’s physical inventory count is toA. Discover whether a client has counted a particular inventory item or group

of items.B. Obtain direct knowledge that the inventory exists and has been properly

counted.C. Provide an appraisal of the quality of the merchandise on hand on the day

of the physical count.D. Allow the auditor to supervise the conduct of the count so as to obtain

assurance that inventory quantities are reasonably accurate.

80. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor shouldA. Confirm the existence of the bondholders.B. Review the minutes for authorization.C. Trace the net cash received from the issuance to the bond payable account.D. Inspect the records maintained by the bond trustee.

81. A proof of cash is not an effective procedure for identifying which of the following types of misstatements?A. All recorded disbursements were paid by the bank.B. All recorded cash receipts were deposited.C. All amounts that were paid by the bank were recorded.

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D. Some checks were written for incorrect amounts.

82. Which of the following is not an element of examining a forecast?A. Evaluating the preparation of the prospective financial statements.B. Understanding internal controls.C. Evaluating the support underlying the assumptions.D. Issuing an examination report.

83. Assurance provided by a review is substantially less than an audit. Which of the following statements is true regarding these services?A. A review requires more substantive evidence than an audit.B. An audit requires less evidence related to internal control than a review.C. A review requires less evidence than an audit.D. None of the above statements is true.

84. The statement that “Nothing came to our attention which would indicate that these statements are not fairly presented” expresses which of the following?A. Disclaimer of an opinion.B. Negative assurance.C. Negative confirmation.D. Shared opinion.

85. Which of the following statements is true when the CPA has been engaged to perform an audit of financial statements?A. The CPA firm is engaged and paid by the client; therefore, the firm has

primary responsibility to be an advocate for the client.B. The CPA firm is engaged and paid by the client, but the primary

beneficiaries of the audit are those who rely on the financial statements.C. Should a situation arise where there is no convincing authoritative standard

available, and there is a choice of actions which could impact a client’s financial statements, the CPA is free to endorse the choice which is in the investors’ interests.

D. The CPA firm has primary responsibility to the FRSC.

86. According to the Code of Ethics, all CPAsA. Should be independent in fact and in appearance at all times.B. In public practice should be independent in fact and in appearance at all

times.C. In public practice should be independent in fact and in appearance when

providing auditing and other assurance services.D. In public practice should be independent in fact and in appearance when

providing auditing, tax, and MAS services.

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87. It is not a violation of the Code of Professional Ethics for a CPA toA. Charge fees as an expert witness determined by the amount awarded to

the plaintiff, even though the CPA also performs a compilation for client use .

B. Base consulting fees on a percentage of a bond issue, even though the CPA performs a review of the client’s financial statements.

C. Base fees for a tax service on the amount of the refund that the client will receive.

D. Base consulting fees on a percentage of a bond issue, even though CPA performs an audit of the client’s financial statements.

88. Management assertions areA. implied or expressed representations about accounts, transactions, and

disclosures in the financial statements.B. stated in the footnotes to the financial statements.C. explicitly expressed representations about the financial statements.D. provided to the auditor in the assertions letter, but are not disclosed on the

financial statements.

89. Which of the following statements about the existence and completeness assertions is not true?

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A. The existence and completeness assertions emphasize different audit concerns.

B. Existence deals with overstatements and completeness deals with understatements.

C. Existence deals with understatements and completeness deals with overstatements.

D. The completeness assertion deals with unrecorded transactions.

90. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily onA. PFRSB. The Code of Professional EthicsC. AASCD. The auditor’s professional judgment

91. Which of the following statements about confirmations is true?A. Confirmations are expensive and so are often not used.B. Confirmations may inconvenience those asked to supply them, but they are

widely used.C. Confirmations are sometimes not reliable and so auditors use them only as

necessary.D. Confirmations are required for several balance sheet accounts but no

income statement accounts.

92. When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normallyA. Reduce acceptable audit risk and increase inherent risk.B. Reduce inherent risk and control risk.C. Increase inherent risk and control risk.D. Increase acceptable audit risk and reduce inherent risk.

93. When planning an audit, the auditor’s assessed level of control risk isA. Determined by using actuarial tables.B. Calculated by using the audit risk model.C. An economic issue, trading off the costs of testing controls against the cost

of testing balances.D. Calculated by using the formulas provided in the AICPA’s auditing

standards.

94. Which of the following is least likely to uncover fraud?A. External auditorsB. Internal auditorsC. Internal controlsD. Management

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95. Which of the following statements about general controls is not correct?A. Disaster recovery plans should identify alternative hardware to process

company data.B. Successful IT development efforts require the involvement of IT and non-IT

personnel.C. The chief information officer should report to senior management and the

board.D. Programmers should have access to computer operations to aid users in

resolving problems.

96. The reliance placed on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarilyA. ParallelB. InverseC. Direct

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D. Equal

97. The tolerable rate of exceptions for tests of controls is generallyA. Lower than the expected rate of errors in the related accounting records.B. Higher than the expected rate of errors in the related accounting records.C. Identical to the expected rate of errors in the related accounting records.D. Unrelated to the expected rate of errors in the related accounting records.

98. When performing tests of controls and tests of transactions for sales, the auditor generally defines the population asA. All accounts receivable transactions for the year.B. All sales invoices for the year.C. All cash receipts transactions for the year.D. All sales invoices less sales return credit memos.

99. Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to useA. Block sampling.B. Variables sampling.C. Attributes sampling.D. Probability proportional to size sampling.

100. The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods becauseA. They are rarely material to the audit.B. They rarely contain misstatements.C. They are verified in previous audits.D. They don’t affect the balance sheet.

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ANSWER

1. C 21. A 41. A 61. B 81. D

2. C 22. B 42. C 62. D 82. B

3. A 23. B 43. B 63. B 83. C

4. D 24. D 44. A 64. C 84. B

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5. B 25. B 45. A 65. A 85. B

6. A 26. C 46. C 66. C 86. C

7. B 27. C 47. A 67. C 87. A

8. C 28. B 48. B 68. C 88. A

9. B 29. C 49. B 69. B 89. C

10.A 30. A 50. B 70. A 90. D

11. D 31. D 51. B 71. A 91. B

12. D 32. D 52. B 72. C 92. A

13. D 33. A 53. B 73. D 93. C

14. D 34. B 54. A 74. D 94. A

15. D 35. C 55. B 75. A 95. D

16. B 36. B 56. C 76. A 96. B

17. D 37. A 57. A 77. B 97. B

18. B 38. B 58. D 78. B 98. B

19. C 39. D 59. A 79. B 99. C

20. D 40. B 60. D 80. B 100. C

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