1.A Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent
risk during the planning phase?
A) Obtaining client's agreement on the engagement letter. B) Obtaining knowledge about the client's business and industry. C) Touring the client's plant and offices.
D) Identifying related parties.
2.A As the acceptable level of detection risk increases, an auditor may change the:
A) timing of substantive tests by performing them at an interim date rather than year end. B) timing of the tests on controls by performing them throughout the year rather than at one time. C) assess the level of inherent risk to a lower amount.
D) increase the sample size to achieve a more effective test.
3.A 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 normally:
A) 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.
4.A If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor,
acceptable audit risk would likely: A) be reduced.
B) be increased. C) remain the same.
D) be calculated using a computerized statistical package.
5.A Which of the following statements is not true?
A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.
B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required. C) Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls.
D) Inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit.
6.A Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes Oxley Act?
A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements. B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.
7.A Internal controls are not designed to provide reasonable assurance that:
A) all frauds will be detected.
B) transactions are executed in accordance with management's authorization. C) access to assets is permitted only in accordance with management's authorization. D) company personnel comply with applicable rules and regulations.
8.A Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one
of these two requirements?
A) A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
B) A statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
C) A statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
9.A In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions
because:
A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. B) the class of transaction is where most fraud schemes occur.
C) account balances are less important to the auditor then the changes in the account balances. D) classes of transactions tests are the most efficient manner to compensate for inherent risk.
Audit Ex 3
10.A An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
A) collusion.
B) a material weakness. C) a control deficiency. D) a significant deficiency.
11.A Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public
companies? (Management/Financial Statement Auditors) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
12.A Which of the following is responsible for establishing a private company's internal control?
A) Senior Management B) Internal Auditors
C) Senior Management and auditors D) Audit committee
13.A Auditors may assess inherent risk and control risk: (Jointly to determine the risk of material misstatement / Separately and combine
their effects in the audit risk model) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
14.A Acceptable audit risk is ordinarily set by the auditor during planning and:
A) held constant for each major cycle and account. B) held constant for each major cycle but varies by account. C) varies by each major cycle and by each account.
D) varies by each major cycle but is constant by account.
15.A When setting a preliminary judgment about materiality:
A) more evidence is required for a low dollar amount than for a high dollar amount. B) less evidence is required for a low dollar amount than for a high dollar amount. C) the same amount of evidence is required for either low or high dollar amounts. D) there is no relationship between it and the dollar amount of evidence needed.
16.A Lewis Corporation has a few large accounts receivable that total one million dollars whereas
Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of:
A) Materiality. B) Audit risk.
C) Reasonable assurance. D) Comparative analysis.
17.A Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same.
Which of the following demonstrates this? (Amounts involving frauds are considered more important than
errors of equal amount/ Misstatements that are otherwise immaterial may be material if they affect a trend in earnings) A. Yes/Yes
B. No/No C. Yes/No D.No/Yes
18.A If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of
information, then that information is, by definition of FASB Statement No. 2: A) material.
B) insignificant. C) significant. D) relevant.
19.A Whenever an auditor compares client data to client-prepared budgets, there are two special concerns. Indicate if the two items below
are concerns. (Assessing whether the budgets were realistic plans /Client data may have been altered to conform to the budget) A. A concern/A concern
B. Not a concern/ Not a concern C. A concern/Not a concern D. Not a concern/A concern
20.A Auditors generally allocate the preliminary judgment about materiality to the:
A) balance sheet only. B) income statement only.
C) income statement and balance sheet. D) statement of cash flows.
21.A Which of the following underlies the application of generally accepted auditing standards?
A) the elements of materiality and relative risk B) the element of internal control
C) the element of corroborating evidence D) the element of reasonable assurance
22.A To what extent do auditors typically rely on internal controls of their public company clients?
A) extensively B) only very little C) infrequently D) never
23.A Inherent risk is often high for an account such as:
A) inventory. B) land. C) cash.
D) notes payable.
24.A Planned detection risk
I. determines the amount of substantive evidence the auditor plans to accumulate. II. is dependent on inherent risk and control risk.
A) I only B) II only C) I and II
D) None of the above
25.A If planned detection risk is reduced, the amount of evidence the auditor accumulates will:
A) increase. B) decrease.
C) remain unchanged. D) be indeterminate.
26.A The Sarbanes-Oxley Act requires:
A) all public companies to issue reports on internal controls. B) all public companies to define adequate internal controls. C) the auditor of public companies to design effective ICFR.
D) the auditor of public companies to provide recommendations to correct material weaknesses.
27.A The financial statements may not correctly reflect accounting frameworks such as AAP or IFRS if the:
A) controls affecting the reliability of financial reporting are inadequate. B) company's controls do not promote efficiency.
C) company's controls do not promote effectiveness.
D) company's controls do not promote compliance with applicable rules and regulations.
28.A Fraud is more prevalent in smaller businesses and not-for-organizations because it is more difficult for them to maintain:
A) adequate separation of duties. B) adequate compensation.
C) adequate financial reporting standards. D) adequate supervisory boards.
29.A Auditor's need to exhibit professional skepticism when auditing a client. This auditing standard is best expressed by which of the
following?
A) the auditor neither assumes dishonesty or honesty of management B) the auditor assumes dishonesty of management
C) the auditor assumes honesty of management D) the auditor assumes management lacks integrity
30.A Which of the following is one of the conditions for fraud described in SAS No. 99? (Attitudes-rationalization/risk
factors/opportunities) A. Yes/No/Yes B. No/ Yes/Yes C. Yes/No/No D.No/Yes/No
31.A Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement?
A) senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period
B) senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report
C) senior management emphasizes that job rotation is a worthwhile corporate objective D) senior management emphasizes that job evaluations are based on performance
32.A What is of the following is a category of fraud? (Fraudulent financial report/Misappropriation of assets)
A. Yes/Yes B. No/No C. Yes/No D. No/Yes
33.A As part of the brainstorming sessions, auditors are directed to emphasize: (need for profesional skepticism/the audit team's response
to potential fraud risks) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
34.A Which of the following is the best reason for management to emphasize fraud prevention and deterrence?
A) collusion and false documentation make fraud detection difficult to detect B) collusion is impossible to detect
C) false Documentation is impossible to detect D) all of the above are equally valid reasons
35.A Which of the following is least likely to uncover fraud?
A) External auditors B) Internal auditors C) Internal controls D) Management
36.A ________ inquiry is used to ascertain whether information already obtained is correct, factual or truthful.
A) Assessment B) Declarative C) Interrogative D) Informational
37.A 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) preliminary assessment of control risk has been modified
B) discrepancies in the accounting records
C) unusual relationships between the auditor and management D) missing or conflicting evidence
38.A Management is responsible for (Identifying and measuring fraud risks/Taking steps to mitigate identified risks)
A. Yes/Yes B. No/No C. Yes/No D. No/Yes
39.A Research indicates that the most effective way to prevent and deter fraud is to:
A) implement programs and controls that are based on core values embraced by the company. B) hire highly ethical employees.
C) communicate expectations to all employees on an annual basis. D) terminate employees who are suspected of committing fraud.
40.A When a compensating control exists, the absence of a key control:
A) is no longer a concern because there is no longer a significant deficiency or material weakness. B) is still a major concern to the auditor.
C) could cause a material loss, so it must be tested using substantive procedures.
D) is magnified and must be removed from the sampling process and examined in its entirety.
41.A Before making the final assessment of internal control at the end of an integrated audit, the auditor must: (Test controls/perform
substantive tests of details) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
42.A To obtain an understanding of an entity's control environment, an auditor should concentrate on the substance of management's
policies and procedures rather than their form because:
A) management may establish appropriate policies and procedures but not act on them.
B) the board of directors may not be aware of management's attitude toward the control environment. C) the auditor may believe that the policies and procedures are inappropriate for that particular entity. D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.
43.A The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to:
A) design, perform and evaluate tests of controls.
B) obtain and document an understanding of internal control design an operation. C) assess control risk.
D) decide planned detection risk and substantive tests.
44.A What of the following factors may increase risks to an organization? (Geographic dispersion of company operations/Presence of new
information technologies) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
45.A Which of the following components of the control environment define the existing lines of responsibility and authority?
A) Organizational Structure
B) Management philosophy and operating style C) Human resource policies and practices D) Management integrity and ethical values
46.A The primary emphasis by auditors is on controls over:
A) classes of transactions. B) account balances.
C) both A and B, because they are equally important. D) both A and B, because they vary from client to client.
47.A Audit evidence concerning proper segregation of duties normally is best obtained by:
A) direct personal observation of the employee who applies control procedures. B) making inquiries of co-workers about the employee who applies control procedures. C) preparation of a flowchart of duties performed and available personnel.
48.A The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack
of knowledge would constitute:
A) a deficiency in operation of internal controls. B) a deficiency in design of internal controls. C) a deficiency of management.
D) not constitute a deficiency.
49.A To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their:
(Likelihood/Significance) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
50.A Which of the following is the correct definition of "control deficiency"?
A) A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.
B) A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably.
C) A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements.
D) A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect misstatements.
51.A Once auditors determine that entity level controls are designed and placed in the operation they:
A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction. B) make a preliminary assessment of control risk.
C) obtain an understanding of the design and implementation of internal control.
D) prepare audit documentation in order to opine on the company's internal control system.
52.A Section 404 requires auditors to evaluate the effectiveness of the audit committee's oversight of the company's: (External financial
reporting/efficiency of operations/internal control over financial reporting) A. Yes/No/Yes
B. No/No/Yes C. Yes/Yes/No D. No/Yes/No
53.A The major concern when using nonfinancial data in analytical procedures is the:
A) accuracy of the nonfinancial data. B) source of the nonfinancial data. C) type of nonfinancial data.
D) presence of multiple sources of nonfinancial data.
54.A A company frequently sells products at a price below inventory cost. Essential controls in the risk assessment process would include:
A) adequate controls that address the risk of overstating inventory.
B) adequate controls that address the risk of not including a purchased item in inventory. C) adequate controls that address the risk of understatement of inventory.
D) adequate controls that address the risk of overstatement of cost of goods sold.
55.A Which is usually included in an engagement letter? (A reference to GAAP/A reference to GAAS)
A. Yes/Yes B. No/No C. Yes/No D. No/Yes
56.A Related party transactions may be indicated when another company:
A) Subsidizes certain operating expenses of the company B) Purchases its securities at their fair value
C) Loans to company at market rates
57.A A successor auditor may perform which of the following for a new audit client? (Speak to local attorneys, banks and other businesses
regarding the company's reputation/Speak to the predecessor auditors about disagreements they had with management) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
58.A Which of the following would not likely be classified as a related-party transaction?
A) an advance of one week's salary to an employee B) sales of merchandise between affiliated companies
C) loans or credit sales to the principal owner of the client company
D) exchanges of equipment between two companies owned by the same person
59.A Which of the following best describes the coporate minutes of an entity?
A) official record of the meetings of the board of directors and the stockholders B) unofficial record of the meeting of the board of directors
C) official record of management meeting with investors and creditors of the company D) unofficial record of the board of directors meetings
60.A An auditor has accessed client business risk and the risk to material misstatements to the clients financial statements. These are done
in order to:
A) apply the audit risk model in determining the appropriate audit procedures to perform. B) determine the reliance on the company's internal control systems for financial reporting. C) determine the test of balances to be performed by the audit team.
D) assure the CPA firm that they can perform the audit effectively and efficiently,
61.A One of the purposes of an engagement letter is to avoid misunderstandings with the client. This is important for (Good Client
Relations/Faciliating High Quality work at a reasonable price) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
62.A The auditor is likely to accumulate more evidence when the audit is for a company: (Which has large amounts of debt/Which is to be
solid in the near future) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
63.A Which of the following normally signs the engagement letter for an audit of a private company?
A) Management.
B) Board of directors representative C) Audit committee representative D) Corporate treasurer
64.A When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50%
from the previous year to the year currently under audit. The auditor should:
A) investgate the possibility the client may have made an error in their cost of goods sold computation. B) assist management in developing greater cost efficiencies in their product line.
C) prepare a going concern opinion for the client.
D) advise the client to have extensive disclosure to alleviate investor concerns.
65.A The first standard of field work, which states that the work is to be adequately planned and that assistants, if any, are to be properly
supervised, recognizes that:
A) early appointment of the auditor is advantageous to the auditor and the client.
B) acceptance of an audit engagement after the close of the client's fiscal year is generally not permissible. C) appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion. D) performance of substantial parts of the examination is necessary at interim dates.
66.A Written communication that the auditor will provide reasonable assurance for the detection of fraud is found in:
A) engagement letter. B) representation letter. C) responsibility letter. D) client letter.
67.A The auditor uses knowledge gained from the understanding of the client's business and industry to assess:
A) client business risk. B) control risk. C) inherent risk. D) audit risk.
68.A Jennings and Company has repositioned the firm's business strategy from the basis of competing on costs to competing on product
differentiation. All the following will increase, except: A) Audit risk.
B) Business Risk. C) Financial risk.
D) Risk of Material Misstatements.
69.B Internal controls normally include procedures designed to provide reasonable assurance that:
A) employees act with integrity when performing their assigned tasks. B) transactions are executed in accordance with management's authorization.
C) decision processes leading to management's authorization of transactions are sound. D) collusive activities would be detected by segregation of employee duties.
70.B An audit procedure that would most likely be used by an auditor in performing tests of control procedures in which the segregation of
functions and that leaves no "audit" trail is: A) inspection.
B) observation. C) reperformance. D) reconciliation.
71.B The purpose of the requirement in having communication between the predecessor and successor auditors is to:
A) allow the predecessor to disclose information which would otherwise be confidential. B) help the successor auditor to evaluate whether to accept the engagement.
C) help the client by facilitating the change of auditors.
D) ensure the predecessor collects all unpaid fees prior to a change in auditor.
72.B Narratives, flowcharts, and internal control questionnaires are three common methods of:
A) testing the internal controls.
B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures.
D) documenting the auditor's understanding of a client's organizational structure
73.B It is important for the CPA to consider the competence of the clients' personnel because their competence bears directly and importantly
upon the:
A) cost/benefit relationship of the system of internal control. B) achievement of the objectives of internal control.
C) comparison of recorded accountability with assets. D) timing of the tests to be performed.
74.B Proper segregation of functional responsibilities calls for separation of:
A) authorization, execution, and payment. B) authorization, recording, and custody. C) custody, execution, and reporting. D) authorization, payment, and recording
75.B 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.
76.B Most auditors assess inherent risk as high for related parties and related-party transactions because:
A) of the unique classification of related-party transactions required on the balance sheet. B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income statement. D) it is required by generally accepted accounting principles.
77.B A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed
and an unqualified opinion has been issued is the: A) inherent risk.
B) acceptable audit risk. C) statistical risk. D) financial risk
78.B Which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?
A) efficiency of operations B) reliability of financial reporting C) effectiveness of operations
D) compliance with applicable laws and regulations
79.B The audit team gathers information about a new client's business and industry in order to obtain:
A) an understanding of the clients internal control system for financial reporting.
B) an understanding of how economic events and transactions have an effect on the company's financial statements. C) information about engagement risk.
D) information regarding whether the company is engaging in financial statement fraud.
80.B Which is usually included in the engagement letter? (List of audit procedures to be used
in inventory observation/The auditors' assessment of Audit Risk) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
81.B Which is usually included in the engagement letter? (The projected type of opinion on the financials statement to be audited/Name(s)
of the client personnel responsible for supplying the auditor with information) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
82.B Which of the following statements is most correct with respect to separation of duties?
A) Employees should not have temporary and permanent custody of assets.
B) Employees who authorize transactions should not have custody of related assets. C) It is permissible to allow an employee to open cash receipts and record those receipts.
D) Employees who authorize transactions should have recording responsibility for these transactions.
83.B Which of the following activities would be least likely to strengthen a company's internal control?
A) separating accounting from other financial operations B) maintaining insurance for fire and theft
C) fixing responsibility for the performance of employee duties D) carefully selecting and training employees
84.B The person responsible for reconciling sales invoices to customer orders does not access to the company's master price list in order to
correctly compute sales. This is an example of a(n): A) operating deficiency.
B) design deficiency. C) training deficiency. D) management deficiency.
85.B The auditors primary purpose in auditing the client's system of internal control over financial reporting is:
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.
86.B Authorizations can be either general or specific. Which of the following is not an example of a general authorization?
A) Automatic reorder points for raw materials inventory. B) A sales manager's authorization for a sales return. C) Credit limits for various classes of customers. D) A sales price list for merchandise.
87.B The purpose of an engagement letter is to:
A) document the CPA firm's responsibility to external users of the audited financial statements. B) document the terms of the engagement.
C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. D) emphasize management's responsibility for approving the audit program.
88.B Which of the following is a factor that relates to incentives to misappropriate assets?
A) Significant accounting estimates involving subjective judgments. B) Significant personal financial obligations.
C) Management's practice of making overly aggressive forecasts.
D) High turnover of accounting, internal audit and information technology staff.
89.B Initial audit planning involves four matters. Which of the following is not one of these?
A) Develop an overall audit strategy. B) Request that bank balances be confirmed. C) Schedule engagement staff and audit specialists. D) Identify the client's reason for the audit.
90.B Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?
A) Significant accounting estimates involving subjective judgments. B) Excessive pressure for management to meet debt repayment requirements. C) Management's practice of making overly aggressive forecasts.
D) High turnover of accounting, internal audit, and information technology staff.
91.B Misappropriation of assets is normally perpetrated by:
A) members of the board of directors.
B) employees at lower levels of the organization. C) management of the company.
D) the internal auditors.
92.B Which of the following is not correct regarding an auditor's decision that a lower acceptable audit risk is appropriate?
A) More evidence is accumulated. B) Less evidence is accumulated.
C) Special care is required in assigning experienced staff.
D) Review of audit documentation is performed by personnel not assigned to the engagement.
93.B SAS No. 99 requires auditors to document which of the following matters related to the auditor's consideration of material
misstatements due to fraud?
A) Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition. B) Procedures performed to obtain information necessary to identify and assess the risks of material fraud. C) Results of the internal auditor's procedures performed to address the risk of management override of controls. D) Discussions with management regarding separation of duties.
94.B Which of the following most accurately defines professional skepticism as it is used in auditing standards?
A) It either assumes management is honest or slightly dishonest, but neither all the time. B) It neither assumes that management is dishonest nor assumes unquestioned honesty. C) It assumes management is honest most of the time.
95. B With whom should the auditor communicate whenever he or she determines that senior management fraud may be present, even if the
matter might be considered inconsequential? A) PCAOB
B) audit committee
C) an appropriate level of management that is at least one level above those involved D) the internal auditors
96. B Which of the following is not a category of inquiry used by auditors?
A) Assessment inquiry B) Declarative inquiry C) Interrogative inquiry D) Informational inquiry
97. B In what order should the following steps occur?
A. assess client business risk
B. understand the client's business and industry C. perform preliminary analytical procedures D. assess acceptable audit risk
A) D, B, C, A B) B, A, D, C C) B, D, A, C D) D, C, B, A
98. B Which party has the primary responsibility to oversee an organization's financial reporting and internal control process?
A) the board of directors B) the audit committee
C) management of the company D) the financial statement auditors
99. B A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the
company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the: A) management letter requested by the auditor.
B) engagement letter. C) Audit Plan.
D) Audit Strategy for the client.
100.B Companies may intentionally understate earnings when income is high to create a reserve of "earnings" that may be used in future
years to increase earnings. This practice is known as: A) performance-based management.
B) earnings management. C) asset management. D) expense management.
101.B Significant deficiencies are matters that come to an auditor's attention and should be communicated to an entity's audit committee
because they represent:
A) material frauds perpetrated by high-level management.
B) internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably.
C) flagrant violations of the entity's documented conflict-of-interest policies.
D) intentional attempts by client personnel to limit the scope of the auditor's field work.
102.B Which of the following statements is true regarding communications between predecessor and successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor's response can be limited to stating that no information will be provided. C) The predecessor should communicate with the successor only if the client is public.
D) There must be communication between the predecessor and successor if the successor is to accept the engagement.
103.B Significant deficiencies need to be communicated to the company's audit committee because:
A) they represent material weaknesses that allow fraud to be perpetrated. B) they represent significant design flaws in internal controls.
C) they represent falsification of accounting records.
104.B The Public Company Accounting Oversight Board states that reasonable assurance allows a:
A) small likelihood of ineffective internal controls.
B) remote likelihood that material misstatements will not be prevented or detected by internal control. C) likelihood that material misstatements will not be prevented or detected by internal control. D) high likelihood that material misstatements will not be prevented or detected by internal control.
105.B If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as
the preliminary assessment. A) a lower
B) the same C) a higher
D) either a lower or higher
106.B In performing an audit of internal control over financial reporting which of the following is the auditor required to do?
A) Test routine and nonroutine transactions equally.
B) Form an opinion on the effectiveness of internal for financial reporting. C) Rely on the work on internal auditors in order to promote audit efficiency. D) Use the audit conclusions before starting the audit of financial statements.
107.B Which of the following best defines fraud in a financial statement auditing context?
A) Fraud is an unintentional misstatement of the financial statements. B) Fraud is an intentional misstatement of the financial statements.
C) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality. D) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.
108.B Which of the following is most correct for audits of non-public companies?
A) an audit of internal control is required B) an audit of internal control is not required
C) an audit of the design of internal controls is required
D) an audit of the operational effectiveness of internal controls is required
109.B The auditor's consideration of a private company's internal control is:
A) required by GAAP. B) required by GAAS. C) required by the IRS. D) recommended by the SEC.
110.B When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:
A) provide reasonable protection against client fraud and defalcations by client employees. B) assess control risk.
C) provide a basis for suggestions to the client for improving the accounting system.
D) provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.
111.B You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in
internal control?
A) The company's audit committee has experienced unusual turnover of members. B) The company's CFO was indicted for embezzling from the company.
C) Bank reconciliations are done monthly.
D) The CEO was forced to resign due to an inappropriate relationship with an outside vendor.
112.B Which of the following deal with ongoing or periodic assessment of the quality of internal control by management?
A) Quality monitoring activities B) Monitoring activities C) Oversight activities D) Management activities
113.B An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity
because:
A) the business structure may be deliberately designed to obscure related party transactions. B) this may reveal whether transactions would have taken place if the parties had been unrelated. C) transactions may have been consummated on terms equivalent to arm's-length transactions. D) this may permit the audit of intercompany account balances to be performed as of concurrent dates.
114.B Inherent risk and control risk:
A) are inversely related to each other. B) are inversely related to detection risk. C) are directly related to detection risk. D) are directly related to audit risk.
115.B Auditors typically rely on internal controls of their private company clients:
A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. B) only if the controls are determined to be effective.
C) only if the client asks an auditor to test controls.
D) only if the controls are sufficient to increase Control Risk to an acceptable level.
116.B Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally
planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) increase materiality levels.
B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk.
117.B The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment. 3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be:
A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4
118.B Which of the following statements is not correct?
A) Materiality is a relative rather than an absolute concept.
B) The most important base used as the criterion for deciding materiality is total assets. C) Qualitative factors as well as quantitative factors affect materiality.
D) Given equal dollar amounts, frauds are usually considered more important than errors.
119.B Which of the following statements is not correct?
A) Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client's business and directing the auditor's attention to areas that may contain possible misstatements.
B) Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor's attention to areas that may contain possible misstatements.
C) Analytical procedures must be used in the planning and completion phases of the audit, and are optional in the testing phase. D) Analytical procedures used in the completion phase are primarily aimed at directing the auditor's attention to areas that may contain possible misstatements and secondarily aimed at assessing going concern.
120.B Which of the following statements is most correct concerning audit risk?
A) Audit risk can be quantified with a reasonable degree of certainty. B) Audit risk cannot be quantified with certainty.
C) Audit risk is the same for all audit client in the same industry. D) Audit risk can be eliminated by having the correct audit procedures.
121.B When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the:
A) amount of known misstatement is documented in the management representation letter. B) estimate of the total known and likely misstatements is less than a material amount. C) estimate of the total likely misstatement includes sample error.
122.B The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment
before considering the effectiveness of internal controls is defined as: A) Audit risk.
B) Inherent risk. C) Sampling risk. D) Detection risk.
123.B As the risk of material misstatement increases, detection risk should:
A) medium increase. B) decrease.
C) stay the same. D) Is indeterminate.
124.B Auditors are ________ to document the known and likely misstatements in the financial statements under audit.
A) permitted B) required C) not allowed
D) strongly encouraged
125.B Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance
sheet accounts?
A) Auditors expect certain accounts to have more misstatements than others.
B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. C) Auditors expect to identify overstatements as well as understatements in the accounts.
D) Relative audit costs affect the allocation.
126.B When allocating materiality, most practitioners choose to allocate to:
A) the income statement accounts because they are more important. B) the balance sheet accounts because there are fewer.
C) both balance sheet and income statement accounts because there could be errors on either. D) all of the financial statements because it is required by GAAS.
127.B An auditor should examine minutes of the board of directors' meetings:
A) through the date of the financial statements. B) through the date of the audit report.
C) only at the beginning of the audit. D) on a test basis.
128.B Which of the following statements is not correct with respect to analytical procedures?
A) Auditing standards emphasize the need for auditors to develop and use expectations. B) Analytical procedures must be performed throughout the audit.
C) Analytical procedures may be performed at any time during the audit.
D) Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable.
129.B If an auditor establishes a relatively high level for materiality, then the auditor will:
A) accumulate more evidence than if a lower level had been set. B) accumulate less evidence than if a lower level had been set.
C) accumulate approximately the same evidence as would be the case were materiality lower. D) accumulate an undetermined amount of evidence.
130.B Which is a liquidity activity ratio?
A) Profit margin B) Inventory turnover C) Return on assets D) Times interest earned
131.C After considering a client's internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under
these circumstances the auditor would most likely:
A) perform tests of controls to the extent outlined in the audit program.
B) determine the control procedures that should prevent or detect errors and irregularities. C) not increase the extent of predetermined substantive tests.
D) determine whether transactions are recorded to permit preparation of financial statements in conformity with generally accepted accounting principles.
132.C A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a
process called "lapping". Which of the following best describes lapping? A) reduce the customer's account by recording a sales return
B) write off the customer's account
C) apply the payment from another customer to the customer's account D) reduce the customer's account by recording a sales allowance
133.C When tolerable misstatement is exceeded by ________ the auditor should request the client to adjust their account balance.
I. Known misstatements II. Projected misstatement A) I only
B) II only C) I and II
D) None of the above
134.C In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at:
(Low/Moderate/High) A. Yes/No/Yes B. No/No/Yes C. Yes/Yes/No D. No/ Yes/No
135.C Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold"
arrangement. This is an example of which of the following? A) adjustments to revenue accounts
B) fictitious revenue recorded C) premature revenue recognized D) alteration of cutoff documents
136.C Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?
A) a lack of expertise B) reduced importance C) limited resources
D) limited available guidance
137.C When planning an audit, the auditor's assessed level of control risk is:
A) determined by using actuarial tables. B) calculated by using the audit risk model. C) a judgment issue, based on auditor knowledge.
D) calculated by using the formulas provided in the AICPA's auditing standards.
138.C Which of the following statements is false?
A) Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement.
B) A misclassification in the balance sheet will have no effect on operating income.
C) Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.
D) Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.
139.C How must significant deficiencies and material weaknesses be communicated to those charged with governance?
A) Either oral or written communication is acceptable. B) Oral communication is required.
C) Written communication is required.
D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.
140.C Which of the following deficiency exists if a necessary control is missing or not properly formulated?
A) control B) significant C) design D) operating
141.C An auditor who audits a business cycle that has low inherent risk should:
A) increase the amount of audit evidence gathered. B) assign more experienced staff to that area. C) increase the tolerable misstatement for the area. D) expand planning procedures.
142.C When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to:
A) terminate the engagement with sufficient notice given to the client. B) issue an adverse opinion or a disclaimer of opinion.
C) obtain additional evidence to determine whether material fraud has occurred. D) re-issue the engagement letter.
143.C ________ inquiry is used when the auditor seeks responses from the interviewee about his or her knowledge of an event or
circumstance. A) Assessment B) Declarative C) Interrogative D) Informational
144.C The scope paragraph of the standard unqualified auditor's report states that "... the standards require that we plan and perform the
audit to obtain ________ assurance about whether the financial statements are free of material misstatement". What type of assurance is given?
145.C ________ misstatements are those where the auditor can determine the amount of the misstatement in the account.
A) Potential B) Likely C) Known D) Projected
146.C According to SAS No. 99, auditors are required to assume that which of the following has significant risk of fraud?
A) overstated assets B) understated liabilities C) improper revenue recognition D) overstated expenses
147.C Why do auditors establish a preliminary judgment about materiality?
A) To determine the appropriate level of staff to assign to the audit.
B) So that the client can know what records to make available to the auditor.
C) To plan the appropriate audit evidence to accumulate and develop an overall audit strategy. D) To finalize the control risk assessment.
148.C Rodgers CPA has requested permission to communicate with predecessor auditor in order to review certain workpapers for high risk
accounts for a new audit client. The new audit clients refusal to allow this communication to occur would impact Rodgers decision concerning:
A) the auditor's ability to design audit tests. B) possible scope exception due to lack of access.
C) integrity of management concerning possible accounting misstatements.
D) violation of the GAAP rules concerning consistency and comparability of financial information.
149.C Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting?
A) Lack of controls related to the calculation and approval of accounting estimates. B) Ineffective oversight of financial reporting by the board of directors.
C) Management's practice of making overly aggressive forecasts.
D) High turnover of accounting, internal audit, and information technology staff.
150.C Financial statement manipulation risk is arguably present for all companies' financial statements. However, the risk is elevated for
companies that: A) are heavily regulated. B) have foreign subsidiaries.
C) have to make significant judgments for accounting estimates. D) operate in stable economic environments.
151.C Which of the following is the primary basis used to decide materiality for a for-profit entity?
A) net sales B) net assets
C) net income before tax D) all of the above
152.C Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit
files. A) permit B) do not allow C) require
D) strongly encourage
153.C Qualitative factors can affect an auditor's assessment of materiality. Which of the following qualitative factors could influence the
assessment of materiality?
I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Minor misstatements resulting from the consequences of contractual obligations. A) I only
B) II only C) I and II D) neither I nor II
154.C Which of the following is a factor that relates to attitudes or rationalization to commit fraudulent financial reporting?
A) Significant accounting estimates involving subjective judgments. B) Excessive pressure for management to meet debt repayment requirements. C) Management's practice of making overly aggressive forecasts.
D) High turnover of accounting, internal audit and information technology staff.
155.C While performing their audit, the audit team uncovers fraud that is likely to have an immaterial affect on the financial statements
taken as whole. In this case the auditors should:
A) plan on additional audit procedures to determine the exact amount of the fraud. B) communicate with legal authorities as to the identity of the fraudsters.
C) disclose the fraud to the appropriate level of management or to the audit committee. D) call the whistleblower hotline and name the suspected individuals.
156.C Who is most likely to perpetrate fraudulent financial reporting?
A) members of the board of directors B) production employees
C) management of the company D) the internal auditors
157.C Which of the following best describes the first standard of field work?
A) The auditor must adequately plan the work and properly supervise any assistants. B) The auditor must have adequate technical training and proficiency to perform the audit. C) The auditor must maintain independence in mental attitude in all matters relating to the audit.
D) The auditor must exercise due professional care in the performance of the audit and the preparation of the report.
158.C Fraud awareness training should be:
A) broad and all-encompassing.
B) extensive and include details for all functional areas. C) specifically related to the employee's job responsibility. D) focused on employees understanding the importance of ethics.
159.C In the fraud triangle, fraudulent financial reporting and misappropriation of assets:
A) share little in common.
B) share most of the same risk factors. C) share the same three conditions. D) share most of the same conditions.
160.C With respect to misappropriation of assets, most frauds involve: (Inventory or liquid asset theft/intentional misstatements of amounts) A. Yes/Yes B. No/No C. Yes/No D. No/Yes
161.C ________ is fraud that involves theft of an entity's assets.
A) Fraudulent financial reporting B) A "cookie jar" reserve
C) Misappropriation of assets D) Income smoothing
162.C Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud?
A) External auditors B) Audit committee members C) Management
D) Committee of Sponsoring Organizations
163.C Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce
fluctuations in earnings? A) fraudulent financial reporting B) expense smoothing
C) income smoothing D) each of the above is correct
164.C Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality
are true?
I. Preliminary materiality may change during the engagement.
II. Preliminary materiality is the maximum amount the auditor by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users.
A) I only B) II only C) both I and II D) neither are true
165.C Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to which of the
following?
A) the Public Company Accounting Oversight Board
B) members of management who are responsible for the related area of the company C) audit committee of the company's board of directors
D) the AICPA
166.C When may the auditor refer to a specialist in the audit report? (Only if the specialist's report
results in a modification of the audit
opinion/Only if the specialist assisted in the audit of an account material to the financial statements) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
167.C Which of the following best describes the purpose of control activities?
A) the actions, policies and procedures that reflect the overall attitudes of management B) the identification and analysis of risks relevant to the preparation of financial statements
C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives
168.C When management is evaluating the design of internal control, management evaluates whether the control can do which of the
following? (Detect material misstatements /Correct material misstatement) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
169.C Which of the following is not one of the subcomponents of the control environment?
A) management's philosophy and operating style B) organizational structure
C) adequate separation of duties D) commitment to competence
170.C Which of the following is correct regarding management's documentation of internal controls?
A) inadequate documentation is not a control deficiency B) documentation needs to focus on interim controls
C) documentation needs to have some focus on controls designed to detect fraud D) documentation should only focus on system design
171.C The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study
and evaluation of internal control because the:
A) audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff.
B) procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control.
C) work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.
D) understanding of the internal audit function is an important substantive test to be performed by the independent auditor.
172.C Which of the following groups establishes and maintains the company's internal controls?
A) Internal auditors B) Board of Directors C) Management D) Audit committee
173.C When one material weakness is present at the end of the year, management of a public company must conclude that internal control
over financial reporting is: A) insufficient.
B) inadequate. C) ineffective. D) inefficient.
174.C The risk of material misstatement refers to:
A) control risk and acceptable audit risk. B) inherent risk.
C) the combination of inherent risk and control risk. D) inherent risk and audit risk.
175.C Which is usually included in an engagement letter? (The financial statements are
the responsibility of the
company's management / Ratios to be used by the auditor in the planning phase) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
176.C Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every:
A) transaction.
B) financial statement account.
C) material financial statement account.
177.C Management must disclose material weaknesses in internal control in its audit report:
A) whenever the weakness is deemed significant to a single class of transactions. B) whenever the weakness is significant to overall financial reporting objectives. C) if the weakness exists at the end of the year.
D) only if the auditor identifies the weakness as significant.
178.C An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:
A) the effectiveness and efficiency of the controls. B) the frequency and effectiveness of the controls. C) the design and implementation of the controls. D) the implementation and efficiency of the controls.
179.C Which of the following best expresses the requirement to establish with the client an understanding of the responsibilities the auditor
and company is taking for the audit engagement?
A) Management asserts there are no material misstatements in the financials. B) Auditors assert that the primary audit goal is audit efficiency.
C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud.
D) Management's assertion that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.
180.C Which one of the following is not an inherent risk factor in the financial statements?
A) The company made 3 acquistions during the year in different lines of business.
B) The company's industry is experiencing downward pricing pressure for its goods and services. C) The company's inventory, because of multiple locations, is difficult to count.
D) The company has hired 3 different chief accounting officers for the year.
181.C The PCAOB places responsibility for the reliability of internal controls over the financial reporting process to:
A) the company's board of directors.
B) the audit committee of the board of directors. C) the CEO and the CFO.
D) the CFO and the Independent Auditors.
182.C Which of the following statements regarding inherent risk is correct?
A) Inherent risk is unaffected by the auditor's experience with client's organization.
B) Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk.
D) Inherent risk is dependent upon the strengths in client's internal control system.
183.C Which of the following is not a primary consideration when assessing inherent risk?
A) nature of client's business B) existence of related parties C) degree of separation of duties D) susceptibility to defalcation
184.C Two key concepts that underlie management's design and implementation of internal control are:
A) costs and materiality. B) absolute assurance and costs.
C) inherent limitations and reasonable assurance. D) collusion and materiality.
185.C An official record of meetings of the board of directors and stockholders is included in the corporate:
A) bylaws. B) charter. C) minutes. D) license.
186.C Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________.
A) detection risk B) audit report risk C) acceptable audit risk D) inherent risk
187.C To issue a report on internal control over financial reporting for a public company, an auditor must:
A) evaluate management's assessment process.
B) independently assess the design and operating effectiveness of internal control.
C) evaluate management's assessment process and independently assess the design and operating effectiveness of internal control. D) test controls over significant account balances.
188.C An engagement letter sent to a publicly held audit client usually would not include a:
A) reference to the auditor's responsibility for the detection of errors or irregularities. B) estimation of the time to be spent on the audit work by audit staff and management. C) statement that management advisory services would be made available upon request. D) reference to management's responsibility for the financial statements.
189.C The auditor determines that Mathews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely
explanation is:
A) they got lucky the landlord hasn't noticed the lack of payments. B) landlord has weak internal controls over billings.
C) related party transaction in which a major shareholder owns the office tower. D) Matthews Company is engaging in fraudulent activities.
190.C Audit evidence regarding the separation of duties is normally best obtained by:
A) preparing flowcharts of operational processes. B) preparing narratives of operational processes. C) observation of employees applying control activities. D) inquiries of employees applying control activities.
191.C The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited
to stating that no information will be provided when:
A) the predecessor auditor has poor relations with the successor auditor. B) the client is dissatisfied with the predecessor's work.
C) there are actual or potential legal problems between the client and the predecessor. D) the predecessor believes that the client lacks integrity.
192.C When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting
system, the auditor is said to be: A) tracing.
B) vouching.
C) performing a walk-through. D) testing controls.
193.C In making client acceptance decisions the audit firm will consider:
A) inherent and control risk of the client. B) audit risk to the CPA Firm.
C) the client's business risk and the CPA Firm's engagement risk. D) CPA Firm's potential ongoing revenue from the audit client.
194.D Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would NOT be
useful in detecting fraud? A) Gross margin percentage B) Inventory Turnover C) Cost of sales percentage D) Accounts payable turnover
195.D Which of the following does NOT represent an increased opportunity to commit fraud?
A) Related Party Transactions
B) the company founder is the CEO and Chairman of the Board C) the financial statements involve accounting estimates D) the company is a new audit client for the CPA firm
196.D Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its
effectiveness depends on the: A) adequacy of the computer system. B) proper implementation by management. C) ability of the internal audit staff to maintain it. D) competency and dependability of the people using it.
197.D As part of designing and performing procedures to address management override of controls, auditors must perform which of the
following procedures? (Examine all journal entries above the level of materiality/Review accounting estimates for biases) A. Yes/Yes
B. No/No C. Yes/No D. No/Yes
198.D Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts.
A) less B) no less C) no more D) more
199.D The audit team has identified and documented fraud risk. Their next step should be to:
A) evaluate factors that should reduce risk. B) develop programs to test for fraud. C) proceed with performing tests of controls.
D) proceed with performing substantive tests of balances
200.D When the auditor is attempting to determine the extent to which external users rely on a client's financial statements, they may
consider several factors except for: A) client size.
B) concentration of ownership. C) types and amounts of liabilities. D) assessment of detection risk.
201.D Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material
misstatement they must bring it to the attention of: A) regulators.
B) the audit firm's managing partner. C) the client shareholders.
D) the client's management.
202.D A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the
effectiveness of the client's internal control is called: A) control risk.
B) acceptable audit risk. C) statistical risk. D) inherent risk.
203.D Which of the following is not a likely source of information to assess fraud risks?
A) Communications among audit team members. B) Inquiries of management.
C) Analytical procedures.
D) Consideration of fraud risks discovered during recent audits of other clients.
204.D The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related.
A) directly B) indirectly C) not D) inversely
205.D When inherent risk is high, there will need to be (A lower assessment of audit risk/more evidence accumulated by the auditor)
A. Yes/Yes B. No/No C. Yes/No D. No/Yes
206.D The risk of material misstatement differs from detection risk in that it:
A) arises because audit procedures have been misapplied. B) can be controlled and changed by the auditor.
C) can be assessed in quantitative and non-quantitative terms. D) is controllable by the client.
207.D Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the
internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:
A) eliminate tests of controls.
B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff.
D) place limited reliance on the work performed by the internal audit staff.
208.D An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following
would generally NOT be used?
A) make inquiries of appropriate client personnel B) examine documents, records, and reports C) reperform client procedures
D) inspect design documents
209.D ) To promote operational efficiency, the internal audit department would ideally report to:
A) line management. B) senior management. C) Chief Accounting Officer. D) audit committee.
210.D A control available in a small company, which may be necessitated because of lack of competent personnel, is:
A) a wider segregation of duties. B) a voucher system.
C) fewer transactions to process.
D) the owner-manager's direct involvement in the control process.
211.D Which of the following statements is true concerning the allocation of preliminary materiality?
A) It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. B) Preliminary materiality should be allocated to income statement accounts only.
C) It is required by the SEC.
D) When preliminary materiality is allocated to segments it is termed tolerable misstatement.
212.D External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the
external auditors intend to rely on IA's work? A) Integrity
B) Objectivity C) Competence D) All of the above
213.D If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those
services with the audit firm? A) the client's management B) the client's chief executive officer C) the client's chief financial officer D) the client's audit committee
