Which of the following situations most likely represents the highest risk of a
misstatement arising from misappropriation of assets?
A. A large number of bearer bonds on hand
B. A large number of inventory items with low sales prices
C. A large number of transactions processed in a short period of time
D. A large number of fixed assets with easily identifiable serial numbers
When an entity will not permit inquiry of outside legal counsel, the auditors’ report on
the entity’s financial statements will ordinarily contain a(n)
A. disclaimer of opinion.
B. qualified opinion referencing a departure from generally accepted accounting
principles.
C. unmodified opinion with an additional paragraph.
D. adverse opinion.
When auditing liabilities account balances, auditors are most concerned with
management’ assertion about
A. existence.
B. rights and obligations.
C. completeness.
D. valuation and allocation.
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit
team members should discuss the potential for material misstatement due to fraud.
Which of the following best characterizes the mindset that the audit team should
maintain during this discussion?
A. Presumptive
B. Judgmental
C. Criticizing
D. Questioning
Which of the following best describes the auditors’ responsibility when financial
statements are presented in comparative format?
A. The auditors’ report must only refer to the current year’s financial statements.
B. The auditors’ report must only refer to the prior years’ financial statements if they
were audited by the current auditor.
C. The auditors’ report must only refer to the prior years’ financial statements if they
were audited by either the current auditors or predecessor auditors.
D. The auditors’ report must refer to all financial statements presented in comparative
form, regardless of whether they have been audited by the current auditors or
predecessor auditors.
Generally accepted auditing standards states that analytical procedures
A. should be applied in the planning and final review stages of the audit and as a
substantive test during the audit.
B. should be applied in the planning and final review stages of the audit and can be
used as a substantive test during the audit.
C. should be applied in the planning stage and can be applied as a substantive test and
in the final review stage.
D. should be applied in the final review stage, and can be applied as a substantive test
and in the planning stage.
After considering management’s plans, an auditor concludes that there is substantial
doubt about a client’s ability to continue as a going concern for a reasonable period of
time. The auditor’s responsibility includes
A. disclaiming an opinion on the financial statements due to the indications of possible
financial difficulties.
B. indicating to the client’s audit committee whether management’s plans for dealing
with the adverse effects of the financial difficulties can be effectively implemented.
C. considering the adequacy of disclosure about the client’s possible inability to
continue as a going concern.
D. issuing a qualified or adverse opinion, depending upon materiality, due to the
possible effects on the financial statements.
According to Sarbanes-Oxley, the audit committee must pre-approve all audit and
non-audit services. This can be done
A. Case-by-case basis: Yes; Through established policies: No; Delegating the
responsibility: Yes
B. Case-by-case basis: Yes; Through established policies: Yes; Delegating the
responsibility: No
C. Case-by-case basis: No; Through established policies: Yes; Delegating the
responsibility: No
D. Case-by-case basis: No; Through established policies: No; Delegating the
responsibility: Yes
In an audit of financial statements of a non-public company in accordance with
generally accepted auditing standards, an auditor is required to
A. document the auditor’s understanding of the entity’s internal control.
B. search for significant deficiencies in the operation of the internal controls.
C. perform tests of controls to evaluate the effectiveness of the entity’s accounting
system.
D. determine whether control activities are operating effectively to prevent or detect
material misstatements.
Which of the following is not an appropriate reporting option when component auditors
are involved in the audit of group financial statements, assuming that the component
auditors’ work did not identify any issues affecting the group auditors’ report?
A. Issue a standard (unmodified) report that does not reference any involvement by the
component auditors.
B. Identify the component auditors by name and present their report along with the
group auditors’ report.
C. Refer to the component auditors’ work and disclose the extent of their work in the
group auditors’ report.
D. Disclaim an opinion on the portion of the financial statements examined by the
component auditors.
Which of the following accounts does not appear in the acquisition and expenditure
cycle?
A. Cash.
B. Purchases Returns.
C. Sales Returns.
D. Prepaid Insurance.
Holding other factors constant in a classical variables sampling application, an increase
in which of these factors will cause sample size to increase?
A. Risk of incorrect rejection: Yes; Risk of incorrect acceptance: No
B. Risk of incorrect rejection: No; Risk of incorrect acceptance: Yes
C. Risk of incorrect rejection: Yes; Risk of incorrect acceptance: Yes
D. Risk of incorrect rejection: No; Risk of incorrect acceptance: No
Which of the following is not an ASB assertion about inventory related to presentation
and disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in
notes.
D. All of these are ASB presentation and disclosure assertions about inventory.
The upper limit rate of deviation in attributes sampling is
A. the actual deviation rate in the population.
B. always less than the tolerable rate of deviation.
C. always greater than the tolerable rate of deviation.
D. a statistical calculation that considers sampling risk.
Which of the following is not considered a type of audit evidence?
A. The entity’s trial balance
B. Auditors’ calculations
C. Physical observation
D. Verbal statements made by client personnel
When reporting on financial statements that include only summarized totals of account
balances, the auditors’ conclusion should state whether the information in the summary
financial statements
A. is complete with respect to disclosures required by the SEC.
B. is fairly stated, in all material respects, in accordance with generally accepted
accounting principles.
C. is consistent, in all material respects, with the prior-years’ summary financial
statements.
D. is fairly stated, in all material respects, in relation to the complete financial
statements.
Audit evidence is usually considered sufficient when
A. it is reliable.
B. there is enough quantity to afford a reasonable basis for an opinion on financial
statements.
C. it has the qualities of being relevant, objective, and free from unknown bias.
D. it has been obtained through random selection methods.
Which of the following most likely would give the most assurance concerning the
valuation assertion of accounts receivable?
A. Tracing amounts in the subsidiary ledger to details on shipping documents
B. Comparing receivable turnover rates to industry statistics for reasonableness
C. Inquiring about receivables pledged under loan agreements
D. Assessing the allowance for uncollectible accounts for reasonableness
If control risk increases, and all other risks in the audit risk model stay constant except
the one referred to below, which of the following statements is correct?
A. Detection risk will decrease.
B. Inherent risk will increase.
C. Audit risk will decrease.
D. Detection risk will increase.
On which of the following matters would it not be appropriate for the auditors to report
using an other-matter paragraph?
A. A material inconsistency between other information and the financial statements
B. Procedures performed related to supplementary mineral reserve information required
by the Financial Accounting Standards Board
C. The consistency of summary financial statements with the audited financial
statements from which they were derived
D. An updated opinion on comparative financial statements that differs from the
opinion originally issued by the auditors
Which of the following would most likely be classified as a material weakness?
A. Absence of appropriate separation of duties
B. Absence of appropriate reviews and approvals of transactions
C. Evidence of failure of control activities
D. Ineffective oversight of the financial reporting process by the company’s audit
committee
When a sample of customer accounts receivable is selected for vouching debits,
auditors will vouch them to
A. sales invoices with shipping documents.
B. records of accounts receivable write-offs.
C. cash remittance lists and bank deposit slips.
D. credit files and reports.
When an audit team traces a sample of shipping documents to the related sales invoice
copies, they are trying to find relevant evidence that
A. shipments to customers were invoiced.
B. shipments to customers were recorded as sales.
C. recorded sales were shipped.
D. invoiced sales were shipped.
Which of the following situations provides the greatest threat to an internal auditor’s
objectivity?
A. An auditor reviews the procedures for a new electronic data interchange (EDI)
connection to a major customer before it is implemented.
B. A former purchasing assistant performs a review of bidding procedures in the
purchasing department four months after being transferred to the internal auditing
department.
C. An auditor recommends controls and performance measures for inclusion in a new
contract with an outside service organization for the processing of payroll and employee
benefits.
D. A warehouse employee assists an auditor in verifying the physical inventory of small
motors.
Which of the following philosophical principles in ethics places emphasis on the
consequences of action, rather than on following the rules?
A. Imperative principle
B. Utilitarianism principle
C. Generalization principle
D. Moral principle
An audit team most likely would assess control risk at the maximum if the payroll
department supervisor is responsible for
A. examining authorization forms for new employees.
B. comparing payroll registers with original batch transmittal data.
C. authorizing payroll rate changes for all employees.
D. hiring all subordinate payroll department employees.
Which of the following controls most likely would ensure that an organization can
reconstruct its financial records?
A. Hardware controls are built into the computer by the computer manufacturer.
B. Backup files are stored in a location separate from original copies.
C. Personnel who are independent of data input perform parallel simulations.
D. System flowcharts provide accurate descriptions of computer operations.
Zag Co. issues financial statements that present financial position and results of
operations, but Zag omits the related statement of cash flows. Zag would like to engage
Brown, CPA, to audits its financial statements without the statement of cash flows
although Brown’s access to all of the information underlying the basic financial
statements would not be limited. Under the circumstances, Brown most likely would
A. add an other-matter paragraph to the standard (unmodified) report that justifies the
omission.
B. refuse to accept the engagement as proposed because of the client-imposed scope
limitation.
C. explain to Zag that the omission requires a qualification of the auditors’ opinion.
D. prepare the statement of cash flows as an accommodation to Zag and express an
unmodified opinion.
An audit team testing long-term investments would ordinarily use analytical procedures
to ascertain the reasonableness of the
A. existence of unrealized gains or losses.
B. completeness of recorded investment income.
C. classification as available-for-sale or trading securities.
D. valuation of trading securities.
If tests of controls induce the auditor to change the assessed level of control risk for
Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk
remain constant, the acceptable level of detection risk
A. would most likely change from 10% to 5%.
B. would most likely change from 20% to 40%.
C. would most likely change from 30% to 15%.
D. would be unchanged, because the auditor has control over detection risk.
E. cannot be determined because inherent risk is not given.
The preparation of an audit plan prior to the beginning of fieldwork is appropriately
considered documentation of
A. planning.
B. supervision.
C. information evaluation.
D. quality assurance.
Which of the following is a step in an auditor’s decision to assess control risk at below
the maximum?
A. Apply analytical procedures to both financial data and nonfinancial information to
detect conditions that may indicate weak controls.
B. Perform tests of details of transactions and account balances to identify potential
errors and fraud.
C. Identify specific internal control policies and activities that are likely to detect or
prevent material misstatements.
D. Document that the additional audit effort to perform tests of controls exceeds the
potential reduction in substantive testing.
The pre-engagement activities of an audit engagement for a public accounting firm do
not include
A. evaluating the public accounting firm’s independence with regard to the audit
engagement.
B. obtaining predecessor audit documentation.
C. obtaining an engagement letter.
D. ensuring that there are sufficient firm resources to complete the engagement on a
timely basis.
If a control total were to be computed on each of the following data items, which would
best be identified as a hash total for a payroll IT application?
A. Hours worked
B. Total debits and total credits
C. Net pay
D. Department numbers
The independent auditors’ audit design prepared prior to the start of fieldwork is
appropriately considered documentation of
A. planning.
B. supervision.
C. information evaluation.
D. quality assurance.