1) In a leading securities law and CPA liabilities case, the U.S. Supreme Court ruled in
1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held liable for Rule
10b-5 of the Securities Exchange Act of 1934, what would be required to be shown to
the court was the auditor’s:
A) ordinary negligence
B) gross negligence
C) knowledge and intent to deceive
D) financial gain at the expense of the plaintiff
2) The auditor is performing substantive tests of balances for accounts payable. What
documentation would provide the best evidence for the ending balance?
A) Vendor Invoices
B) Vendor Statements
C) Receiving reports
D) Purchase orders
3) A major consideration in verifying the ending balance in fixed assets is the
possibility of existing legal encumbrances. Tests to identify possible legal
encumbrances would satisfy the audit objective of:
A) existence
B) presentation and disclosure
C) detail tie-in
D) classification
4) The auditor’s best defense when material misstatements are not uncovered is to have
conducted the audit:
A) in accordance with generally accepted auditing standards
B) as effectively as reasonably possible
C) in a timely manner
D) only after an adequate investigation of the management team
5) Substantive tests of transactions focus on the changes in the beginning and ending of
the year balances, particularly for the balance sheet.
A) True
B) False
6) The purpose of stratification is to permit auditors to emphasize certain aspects of a
population and deemphasize others.
A) True
B) False
7) The auditor is examining the accounting entries made to the accumulated
depreciation account during the year and notices a significant amount of debits to the
account. Which of the following provides the most logical explanation?
A) Large number of asset retirements
B) Salvage values were revised downward
C) Useful lives were revised downward
D) Allocation of fixed overhead were revised
8) Which of the following results in a conclusion that represents positive assurance?
A) review
B) compilation
C) examination
D) agreed upon procedure engagement
9) Fraudulent financial reporting is most likely to be committed by whom?
A) line employees of the company
B) outside members of the company’s board of directors
C) company management
D) the company’s auditors
10) A principal advantage of statistical methods of attributes sampling over
nonstatistical methods is that they provide a scientific basis for establishing the:
A) risk of assessing control risk too low
B) tolerable exception rate
C) expected population exception rate
D) sample size
11) Ethical Rulings are:
I.Explanations relating to broad hypothetical circumstances.
II.Not enforceable, but one must justify departure.
III.Explanations relating to specific factual circumstances.
A) I and II
B) I and III
C) II and III
D) I, II, and III
12) 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
13) Which of the following is a component of general controls?
A) processing controls
B) output controls
C) back-up and contingency planning
D) input controls
14) Preliminary judgments about materiality are often changed during the course of the
engagement.
A) True
B) False
15) Tests of controls provide evidence about the likelihood for misstatements in a
client’s financial statements.
A) True
B) False
16) In the
A) True
B) False
17) Parallel testing is used when old and new systems are operated simultaneously in all
locations.
A) True
B) False
18) Confirmations would almost always be used, assuming all the accounts below are
material, for:
A) individual transactions between organizations, such as sales transactions
B) bank balances and accounts receivable
C) fixed asset additions
D) payroll expenses
19) The risk the auditor is willing to take of accepting a balance as correct when the
true misstatement in the balance under audit is greater than the tolerable misstatement
is:
A) the upper bound
B) the tolerable risk
C) the acceptable risk of incorrect acceptance
D) the lower bound
20) The auditor must consider the possibility that the true population misstatement is
greater than the amount of misstatement that is tolerable when the auditor is
performing:
A)
B)
C)
D)
21) Statements on Auditing Standards (SASs) are issued by the Public Company
Accounting Oversight Board.
A) True
B) False
22) Items that materially affect the comparability of the financial statements generally
require disclosure in the footnotes.
A) True
B) False
23) Which audit tests involve physical examination and confirmation?
A) tests of controls
B) tests of transactions
C) tests of balances
D) analytical procedures
24) Which of the following types of audit tests is usually emphasized due to a lack of
independent third-party evidence related to payroll transactions?
A) Analytical procedures
B) Tests of details of balances
C) Tests of controls
D) Each of the above is emphasized
25) Which of the following would be a violation of the rule requiring “objectivity” by
the CPA?
I.The auditor accepts management’s opinion regarding the collection of accounts
receivable without an independent evaluation.
II.In preparing a client’s tax return, the CPA encourages a client to take a deduction
which the CPA believes is risky.
A) I only
B) II only
C) I and II
D) Neither I nor II
26) Insert risk and control risk are normally assessed for the each segment but sets audit
risk at the financial statement level.
A) True
B) False
27) For effective internal control purposes, the vouchers payable department generally
should:
A) obliterate the quantity ordered on the receiving department copy of the purchase
order
B) stamp, perforate, or otherwise cancel supporting documentation after payment is
mailed
C) establish the agreement of the vendor’s invoice with the receiving report and
purchase order
D) ascertain that each requisition is approved as to price, quantity, and quality by an
authorized employee
28) Before performing a review of a nonpublic entity’s financial statements, an
accountant should:
A) complete a series of inquiries concerning the entity’s procedures for recording,
classifying, and summarizing transactions
B) obtain a sufficient level of knowledge of the accounting principles and practices of
the industry in which the entity operates
C) inquire whether management has omitted substantially all of the disclosures required
by generally accepted accounting principles
D) apply analytical procedures to provide limited assurance that no material
modifications should be made to the financial statements
29) Client representation letters are required by professional auditing standards,
whereas management letters are optional.
A) True
B) False
30) Which of the following is not a SysTrust Services principle as defined by the
A) Online privacy
B) Availability
C) Processing integrity
D) Operational integrity
31) The audit procedure that provides the auditor with the most appropriate evidence
when performing test of details of balances for accounts receivable is:
A) confirmations
B) recalculation of the aged receivables and uncollectible accounts
C) tracing credit memos for returned merchandise to receiving room reports
D) tracing from shipping documents to journals to the accounts receivable ledger
32) Control risk may be reduced for a company with a complex IT system when
compared to a company that relies primarily on manual controls.
A) True
B) False
33) The use of statistical sampling is less common for the audit of accounts payable
than for accounts receivable because it is more difficult to define the population and
determine the population size in accounts payable.
A) True
B) False
34) The exception rate the auditor will permit in the population and still be willing to
reduce the assessed level of control risk is called the:
A) tolerable exception rate
B) estimated population exception rate
C) acceptable risk of overreliance
D) sample exception rate
35) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a
violation during its inspection of a registered accounting firm. The PCAOB:
A)
B)
C)
D)
36) Evidence for a review engagement consists primarily of:
A)
B)
C)
D)
37) Describe the methods used by the
38) Describe each of the major types of cash accounts maintained by business entities.
39) What are several similarities between internal and external auditors?
40) Describe each of the four types of sample selection methods commonly associated
with statistical audit sampling.
41) Discuss the relationship between quality control and generally accepted auditing
standards.
42) What is an engagement to attest on internal control over financial reporting?
43) Discuss the procedures involved in, and the purpose of, a surprise payroll payoff.