1) What event initiates a transaction in the sales and collection cycle?
A) receipt of cash
B) delivery of product to a customer
C) identification of a new customer
D) customer request for goods
2) Because of the importance of tests of controls and substantive tests of transactions
for acquisitions and cash disbursements, attributes sampling is commonly used when
testing the acquisitions and cash disbursements cycle.
A) True
B) False
3) If an auditor, planning to use statistical sampling, is concerned with the number of a
client’s sales invoices that contain mathematical errors, the auditor would most likely
utilize which sampling technique?
A) Random sampling with replacement
B) Sampling for attributes
C) Ssampling for variables
D) Stratified random sampling
4) 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
5) 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
6) Which of the following journals would be included most often in the various audit
cycles?
A) cash receipts journal
B) cash disbursements journal
C) general journal
D) sales journal
7) An advantage of specific rules in the Code of Professional Conduct is the
enforceability of minimum behavior and performance standards.
A) True
B) False
8) ________ risk reflects the possibility that the information upon which the business
decision was made was inaccurate.
A) Client acceptance
B) Information
C) Business
D) Control
9) Which of the following control procedures would most likely be used to maintain
accurate perpetual inventory records?
A) independent storeroom count of goods received
B) periodic independent comparison of records with goods on hand
C) periodic independent reconciliation of control and subsidiary records
D) independent matching of purchase orders, receiving reports, and vendors’ invoices
10) 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
11) Which of the following statements regarding block sampling is least likely to be
true?
A) Block sampling is the selection of several items in sequence
B) It is acceptable to use block sampling for tests of transactions only if a reasonable
number of blocks is used
C) Only one block should be selected to increase the probability of a representative
sample
D) Once the first item in the block is selected, the remainder of the block is chosen
automatically
12) The most reliable evidence from confirmations is obtained when they are sent:
A) as close to the balance sheet date as possible
B) at various times throughout the year to different segments of the sample, so that the
entire sample is representative of account balances scattered throughout the year
C) several months before the year-end, so the auditor will have adequate time to
perform alternate procedures if they are required
D) at various times throughout the year to the same group in the sample, so that the
sample will not have a time bias
13) Cash receipts from sales on account have been misappropriated. Which of the
following acts would conceal this fraud and be least likely to be detected by an auditor?
A) Understating the sales journal by not recording cash sales
B) Overstating the accounts receivable control account by intentionally misstating
prices charged for goods sold
C) Overstating the accounts receivable subsidiary ledger by not recording payments
made by customers
D) Understating the cash receipts journal by purposely recording incorrect amounts
14) The auditor has decided to use accounts payables confirmations when testing
substantive testing for balances. Which two management assertions is she testing?
A) Existence and Completeness
B) Existence and Occurrence
C) Existence Only
D) Completeness Only
15) You are reviewing sales to discover cutoff problems. If the client’s policy is to
record sales when title to the merchandise passes to the buyer, then the books and
records would contain errors if the December 31 entries were for sales recorded:
A) before the merchandise was shipped
B) at the time the merchandise was shipped
C) several days subsequent to shipment
D) at a time after the point at which title passed
16) A(n) ________ failure occurs when an auditor issues an erroneous opinion because
it failed to comply with requirements of auditing standards.
A) business
B) audit
C) ethics
D) process
17) If, during the completion phase of the audit, the auditor determines that he or she
has not obtained sufficient evidence to draw a conclusion about the fairness of the
client’s financial statements, there are two choices: accumulate additional evidence or
issue either a qualified or an adverse opinion.
A) True
B) False
18) It is frequently possible to test the physical inventory prior to the balance sheet date
when:
A) there are accurate perpetual inventory master files
B) year-end sales are small
C) the internal control system is no better at year-end than at an earlier point in time
D) the client counts inventory at interim dates
19) Audit evidence obtained directly by the auditor will not be reliable if:
A) the auditor lacks the competence to evaluate the evidence
B) it is provided by the client’s attorney
C) the client denies its veracity
D) it is impossible for the auditor to obtain additional corroboratory evidence
20) The primary factor affecting the auditor’s decision about acceptable risk of incorrect
acceptance (ARIA) is assessed inherent risk.
A) True
B) False
21) Which of the following forms of evidence would be least persuasive in forming the
auditor’s opinion about marketable securities and other investments held by the
company?
A) Responses to auditor’s questions by the president and controller regarding the
investments account
B) Correspondence with a stockbroker regarding the quantity of client’s investments
held in street name by the broker
C) Minutes of the board of directors authorizing the purchase of stock as an investment
D) The auditor’s count of marketable securities
22) Below are listed possible misstatements that could occur in the sales and collections
cycle. Provide the analytical procedure that would be most useful in detecting the
possible misstatement.
a.Overstatement of sales and accounts receivable
b.Uncollectible accounts receivable that have not been provided for
c.Overstatement of sales returns and allowances
23) If an auditor judgmentally selects a sample of one hundred items from a population
and finds two exceptions, the auditor:
A) can conclude that the sample exception rate is 2%
B) can conclude that the population exception rate is 2%
C) can calculate the highest exception rate expected in the population
D) cannot make any conclusions about either the sample or the population
24) Current professional auditing standards make it clear that management, not the
auditor, is responsible for identifying and deciding the appropriate accounting treatment
for contingent liabilities.
A) True
B) False
25) The positive (as opposed to the negative) form of receivables confirmation may be
preferred when:
A) 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
26) One unique characteristic of the capital acquisition and repayment cycle is that
relatively few transactions affect the account balances, but each transaction is often
highly material in amount.
A) True
B) False
27) Calculating the gross margin for the current year under audit as a percent of sales
and comparing it with previous years is what type of evidence?
A) physical examination
B) analytical procedures
C) observation
D) inquiry
28) What are two factors affecting the complexity of the audit of inventory?
29) Briefly discuss the brainstorming session required by SAS No. 99. Be sure to
include a list of ideas that should be addressed in the session.
30) The Sarbanes-Oxley Act established the Public Company Accounting Oversight
Board (PCAOB). What are the PCAOB’s primary functions? Who performed these
functions prior to the PCAOB?
31) Your CPA firm has completed the fieldwork for the 2012 audit of Sharp
Corporation, a private company with an October year-end. You were preparing to draft
a standard, unqualified audit report when you discovered that the audit manager on the
Sharp engagement owns 10 shares of Sharp’s common stock. Prepare the appropriate
report.
32) What types of audit procedures are typically emphasized during the audit of the
payroll cycle?
33) Discuss the key control procedures relating to the client’s physical count of
inventory.
34) Given the following information about your audit client, perform analytical
procedures and comment on your findings.
35) You are employing tests of details of balances for notes payable and interest
expense. Describe below specific audit procedures you would perform for the
balance-related audit objectives of detail tie-in and existence. List at least two for each
objective.
36) Describe the methodology for designing tests of details of balances for accounts
payable.
37) Auditing standards require that auditors satisfy themselves about the effectiveness
of the client’s method’s of counting inventory and the reliance they can place on the
client’s representations about the quantities and physical condition of the inventories. To
meet this requirement auditors must perform 4 activities. List below.