1) An auditor needs to determine whether all customers of an electric utility company
are being billed. The auditor should test from the:
A) sales register to the accounts receivable ledger
B) sales register to the meter department records
C) accounts receivable ledger to the sales register
D) meter department records to the sales register
2) Required sample size increases as the auditor’s tolerable misstatement for an account
balance or class of transactions decreases.
A) True
B) False
3) In evaluating sample results for tests of details, auditors must evaluate exceptions
identified by the performance of audit procedures.
A) True
B) False
4) In performing a review of a client’s cash disbursements, an auditor uses systematic
sample selection with a random start. The primary disadvantage of this technique is
population items:
A) may occur twice in the sample
B) must be reordered in a systematic pattern before the sample can be drawn
C) may occur in a systematic pattern, thus negating the randomness of the sample
D) must be replaced in the population after sampling to permit valid statistical inference
5) Collectively, procedures performed to obtain an understanding of the entity and its
environment, including internal controls, represent the auditor’s:
A) audit strategy
B) tests of controls
C) risk assessment procedures
D) tests of transactions
6) The audit procedure “Account for unused tag numbers shown in the auditor’s
working papers to make sure no tags have been added” provides assurance mainly for
the existence objective for inventory pricing and compilation.
A) True
B) False
7) 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
8) 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
every:
A) audit area
B) material audit area
C) audit area in which the client uses the computer
D) audit area where the auditor plans to reduce assessed control risk
9) The assessment against a defendant of that portion of the damage caused by the
defendant’s negligence is called:
A) separate and proportionate liability
B) joint and several liability
C) shared liability
D) unitary liability
10) Assume that the client’s valuation of an inventory item is $10 per unit for 1,000
units, using first-in, first-out (FIFO). If the most recent acquisition of inventory was for
600 units at $10 per unit and the immediately preceding acquisition was for 700 units at
$9 per unit, the inventory item is in error and it is:
A) understated $400
B) understated $300
C) overstated $400
D) overstated $700
11) An independent review must be performed of all audits.
A) True
B) False
12) When an auditor issues a qualified report due to a scope limitation an explanatory
paragraph is normally added. Which, if any, of the following paragraphs are also
modified?
A)
B)
C)
D)
13) The balance-related audit objective realizable value is not applicable when auditing
Accounts payable.
A) True
B) False
14) A third-party beneficiary is one which:
A) has failed to establish legal standing before the court
B) does not have privity of contract and is unknown to the contracting parties
C) does not have privity of contract, but is known to the contracting parties and
intended to benefit under the contract
D) may establish legal standing before the court after a contract has been consummated
15) Recording, classifying, and summarizing economic events in a logical manner for
the purpose of providing financial information for decision making is commonly called:
A) finance
B) auditing
C) accounting
D) economics
16) Auditors will generally send a standard inquiry letter to:
A) only those attorneys who have devoted substantial time to client matters during the
year
B) every attorney that the client has been involved with in the current or preceding year,
plus any attorney the client engages on occasion
C) those attorneys whom the client relies on for advice related to substantial legal
matters
D) only the attorney who represents the client in proceeding where the client is
defendant
17) Handling the receipt of ordered goods is a part of the ________ cycle.
A) purchasing
B) acquisition and payment
C) inventory
D) inventory and warehousing
18) To be considered reliable evidence, confirmations must be controlled by:
A) a client employee responsible for accounts receivable
B) a financial statement auditor
C) a client’s internal audit department
D) a client’s controller or CFO
19) Risk assessment procedures are performed by auditors during an audit in order to:
A) determine the risk of material misstatement in the financial statements
B) determine the amount of testing of internal control
C) determine the extent of testing of details of balances
D) determine the extent of testing of transactions
20) The record of the outstanding shares at any given time is maintained in the:
A) corporate directory
B) stock certificate books
C) schedule of stock owners
D) shareholders’ capital stock master file
21) Rule 505, Form of Organization and Name, prohibits CPA firms from practicing as
limited liability partnerships.
A) True
B) False
22) Which of the following is not a reason why the auditor requests that the client
provide a letter of representation?
A) Professional auditing standards require the auditor to obtain a letter of representation
B) It impresses upon management its responsibility for the accuracy of the information
in the financial statements
C) It provides written documentation of the oral responses already received to inquiries
of management
D) It provides written documentation, which is a higher quality of evidence than
management’s oral responses to inquiries
23) Tolerable misstatement is often set at a(n) ________ level for notes payable.
A) high
B) moderate
C) low
D) unknown
24) Which of the following would you normally characterize as a difficult and complex
account to audit?
A) property, plant and equipment
B) cash
C) inventory
D) prepaid insurance
25) The primary emphasis by auditors when evaluating and testing internal control is on
controls over classes of transactions rather than controls over account balances.
A) True
B) False
26) If the auditor concludes that there are contingent liabilities, he or she must evaluate
the significance of the potential liability and the nature of the disclosure needed in the
financial statements. Which of the following statements is not true?
A) The potential liability is sufficiently well known in some instances to be included in
the financial statements as an actual liability
B) Disclosure may be unnecessary if the contingency is highly remote or immaterial
C) Frequently, the CPA firm obtains a separate evaluation of the potential liability from
its own legal counsel rather than relying on management or management’s attorneys
D) Answers B and C are correct, but answer A is not
27) For effective internal control, it is important that sales be recorded as soon after the
customer order is received as possible to prevent the unintentional omission of
transactions from the records and to make sure that sales are recorded in the proper
period.
A) True
B) False
28) Before the population can be considered acceptable based on the acceptable risk of
assessing control risk too low, the computed upper exception rate must be:
A) greater than or equal to the tolerable exception rate
B) greater than the tolerable exception rate
C) less than or equal to the tolerable exception rate
D) less than the tolerable exception rate
29) External auditors would consider internal auditors effective if they are:
A) independent of the operating units being evaluated
B) competent and well trained
C) have performed relevant audit tests of the internal controls and financial statements
D) all of the above
30) 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
31) Discuss the four characteristics of the capital acquisition and repayment cycle that
make it unique from other cycles.
32) Many auditors prove the subsequent period bank statement if a cutoff statement is
not received directly from the bank. Discuss the purpose of proving the subsequent
period statement, and explain the audit procedures performed during the proof.
33) There are several internal controls in the personnel and employment function that
are important from an audit perspective. For example, there should be an adequate
investigation of the competence and trustworthiness of new employees. Discuss other
internal controls in the personnel and employment function that are important from an
audit perspective.
34) State the four most important audit objectives for capital stock and describe how the
auditor typically verifies each of the four objectives.
35) The most important difference among tests of controls, substantive tests of
transactions, and tests of details of balances lies in what the auditor wants to measure.
Explain what each type of test attempts to measure.
36) How do the risk and materiality thresholds change in a government audit compared
to a financial statement audit of a public company?
37) The Institute of Internal Auditors has established Ethical Principles for its members.
List each of the principles.
38) Discuss each of the five steps in applying materiality in an audit, and identify the
audit phase(s) in which each step is performed. List these steps in the order in which
they occur.
39) Discuss the four areas of responsibility under the IT function that should be
segregated in large companies.
40) For each of the following potential misstatements, provide one potential audit test
that could be used to detect the misstatement.
Sales included in the journals for which there was no shipment
Sale recorded more than once
Shipments made to nonexistent customers and recorded as sales