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1) A system walkthrough is primarily used to:
A) test balances
B) test details of transactions
C) gain an understanding of internal controls
D) determine acceptance of the client
2) Which of the following is not a general control?
A) sSeparation of IT duties
B) systems development
C) processing controls
D) hardware controls
3) When controls are deemed ineffective and assessed control risk is at the maximum
for a private company, which of the following would normally be true?
A) no emphasis placed on the controls
B) relatively little emphasis placed on the controls
C) moderate emphasis placed on the controls
D) heavy emphasis placed on the controls
4) Output controls need to be designed for which of the following data integrity
objectives?
A) detecting errors after the processing is completed
B) preventing errors before the processing is completed
C) detecting errors in the general ledger adjustment process
D) preventing errors in separation of duties for IT personnel
5) When using monetary-unit sampling, evaluating the likelihood of unrecorded items
in the population is:
A) unnecessary
B) impossible
C) possible but difficult
D) an automatic outcome of the process
6) The detail tie-in is part of the ________ assertion for account balances.
A) classification
B) valuation and allocation
C) rights and obligations
D) completeness
7) If the client refuses to prepare and sign a letter of representation, the auditor would
be required to issue either a qualified opinion or a disclaimer of opinion.
A) True
B) False
8) The purpose of tests of controls is to provide reasonable assurance that the:
A) accounting treatment of transactions and balances is valid and proper
B) internal control procedures are functioning as intended
C) entity has complied with GAAP disclosure requirements
D) entity has complied with requirements of quality control
9) The Foreign Corrupt Practices Act (FCPA) of 1977:
A) requires auditors to review and evaluate systems of internal control as a part of an
audit
B) requires SEC registrants to maintain a reasonably complete and accurate set of
records and an adequate system of internal control
C) requires auditors to review client's internal control system in a manner which is
thorough enough to judge whether client meets the requirements of the FCPA
D) requires auditors to file a report with the SEC if client's internal control system is
inadequate
10) The objective of the audit of financial statements by an independent auditor is to
verify that the financial statements are free of misstatements and accurately represent
the company's financial position and results of operations.
A) True
B) False
11) You are auditing the acquisition and payment cycle and the presence of excessive
recurring losses on retired assets. You may conclude that:
A) insured values are greater than book values
B) there are a large number of fully depreciated assets
C) depreciation charges may by insuffient
D) company has a policy of selling relatively new assets
12) Auditors of public companies must obtain certain representations from management
regarding internal control over financial reporting.
A) True
B) False
13) Which of the following are changes that affect the comparability of financial
statements but not the consistency and therefore, do not have to be included in the
auditor's report?
A) Error corrections not involving principles
B) Changes in accounting estimates
C) Variations in the format and presentation of financial information
D) All of the above
14) 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
15) Which of the following is not true for audit firms who audit publically traded
companies?
A) They must undergo a PCAOB inspection on an annual basis if they audit more than
100 issuers
B) They must have an
C) They must have an
D) The audit firm can choose which CPA firm they wish to conduct their
16) Parallel simulation is used primarily to test internal controls over the client's IT
systems, whereas the test data approach is used primarily for substantive testing.
A) True
B) False
17) The Sarbanes-Oxley Act does not require audit committee approval of all non-audit
services prior to their performance by the company's external auditor.
A) True
B) False
18) Which of the following statements is a valid criticism of non-statistical sampling?
A) Many audit tests, such as footing of journals, must be performed outside a statistical
sampling context
B) The cost of performing random selection or testing often exceeds the benefits
C) Non-statistical sampling does not differ substantially from statistical sampling
methods
D) Conclusions may be drawn in more precise ways when using statistical sampling
methods
19) Which of the following is an illustration of liability to clients under common law?
A) Client sues auditor for not discovering a theft of assets by an employee
B) Bank sues auditor for not discovering that borrower's financial statements are
misstated
C) Combined group of stockholders sue auditor for not discovering materially misstated
financial statements
D) Federal government prosecutes auditor for knowingly issuing an incorrect audit
report
20) An example of a document the auditor receives from the client, but which was
prepared by someone outside the client's organization, is a:
A) confirmation
B) sales invoice
C) vendor invoice
D) bank reconciliation
21) A modified unqualified auditor report arises when the auditor believes the financials
are fairly stated but also believes additional information should be provided.
A) True
B) False
22) Which one of the following would the auditor consider to be an incompatible
operation if the cashier receives remittances from the mailroom?
A) The cashier prepares the daily deposit
B) The cashier makes the daily deposit at a local bank
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards
D) The cashier endorses the checks
23) The auditor needs to gain reasonable assurance that the equipment accounts in the
fixed asset master file are not understated. Which of the following accounts would most
likely be reviewed in making that determination?
A) Depreciation expense
B) Repairs and maintenance expense
C) Gains/losses on sales and retirements
D) Cash
24) The most important component of internal control is risk assessment.
A) True
B) False
25) 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
26) Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping
and auditing for the same client if three criteria are met. Which of the following is not
one of those criteria?
A) The client must accept full responsibility for the financial statements
B) The client is required to file an annual report, including audited financial statements,
with the Securities and Exchange Commission
C) The CPA must not assume the role of employee or of manager
D) The CPA must follow applicable auditing standards
27) 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
D) It assumes that management is dishonest in only rare instances
28) The deduction authorization form authorizes the rate of pay and the deductions for
taxes, dues, etc.
A) True
B) False
29) The sample exception rate equals:
A) the number of exceptions in the population divided by the sample size
B) the number of items in the population multiplied by the number of exceptions in the
sample
C) the number of exceptions in the sample divided by the sample size
D) the number of exceptions in the population divided by the population size
30) Which of the following is the risk that an auditor will reach an incorrect conclusion
because a sample is not representative of the population?
A) Sampling risk
B) Nonsampling risk
C) Audit risk
D) Detection risk
31) Auditors of private companies may rely on prior periods' tests of controls.
A) True
B) False
32) 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
33) The exclusion of a single equity transaction is often highly material.
A) True
B) False
34) Auditors are allowed to have an indirect financial interest in an audit client, such as
ownership of stock in a client's company by the auditor's brother, as long as the amount
of the financial interest is immaterial to the brother.
A) True
B) False
