1) To succeed in an action against the auditor, the client must be able to show that:
A) the auditor was fraudulent
B) the auditor was grossly negligent
C) there was a written contract
D) there is a close causal connection between the auditor’s behavior and the damages
suffered by the client
2) Examining the minutes of the board of directors’ meetings for proper authorization
ordinarily tests the existence objective for capital stock transactions.
A) True
B) False
3) An audit conducted in accordance with the Yellow Book must include an audit report
that states the audit was performed in accordance with:
A) GAAS
B) GAGAS
C) GASA
D) SAS
4) The auditor would design which of the following audit tests to detect possible
monetary errors in the financial statements?
A) Control tests
B) Analytical procedures
C) Risk assessment procedures
D) Tests of operating effectives of controls over revenue and cash
5) Current professional auditing standards prohibit external auditors from using internal
auditors for direct assistance on external audits.
A) True
B) False
6) For which of the following functions is the use of prenumbered documents least
important?
A) Use of prenumbered time cards in the payroll function
B) Use of prenumbered sales invoices in the sales function
C) Use of prenumbered receiving reports in the acquisitions function
D) Use of prenumbered deposit slips in the cash receipts function
7) For sales, the completeness transaction-related audit objective affects the existence
balance-related audit objective.
A) True
B) False
8) All known related parties must be identified and included in the auditor’s permanent
files related to the client.
A) True
B) False
9) If the auditor has obtained a reasonable level of assurance about the fair presentation
of the financial statements through understanding internal control, assessing control
risk, testing controls, and analytical procedures, then the auditor:
A) can issue an unqualified opinion
B) can significantly reduce other substantive tests
C) can write the engagement letter
D) needs to perform additional tests of controls so that the assurance level can be
increased
10) Which of the following best describes tests of details of balances?
A) audit procedures designed to test for monetary misstatements in the accounts
summarized in the financial statements
B) audit procedures designed to test for the monetary amounts of transactions
C) audit procedures designed to test for reasonableness of account balances
D) audit procedures designed to test for effectiveness in recording accounting
information
11) Interpretations of the rules regarding independence allow an auditor to serve as:
A) a director or officer of an audit client
B) an underwriter for the sale of a client’s securities
C) a trustee of a client’s pension fund
D) an honorary director for a not-for-profit charitable or religious organization
12) Audit assurance is the complement of planned detection risk, that is, one minus
planned detection risk.
A) True
B) False
13) Which of the following is most correct with respect to the use of analytical
procedures?
A) Analytical procedures may be used in evaluating balances in the testing phase as
long as the auditor also uses them in assessing the going concern assumption
B) Analytical procedures must be used throughout the audit
C) Analytical procedures used in the testing phase of the audit are primarily used to
direct an auditor’s attention so that the auditor’s understanding of the business is
improved
D) Analytical procedures are performed by studying plausible relationships between
financial and nonfinancial data
14) In an IT-intensive environment, most processing controls are:
A) input controls
B) operator controls
C) programmed controls
D) documentation controls
15) The cr code of ethics typically establishes the company’s fiscal year and frequency
of stockholder meetings.
A) True
B) False
16) Sales transactions are the result of the following five functions in the sales and
collection cycle: processing customer orders, granting credit, shipping goods, billing
customers, and recording sales.
A) True
B) False
17) A CPA firm should decline an offer to perform consulting services engagement if:
A) the proposed engagement is not accounting-related
B) recommendations made by the CPA firm are to be subject to review by the client
C) acceptance would require the CPA firm to make management decisions for an audit
client
D) any of the above is true
18) A vendor’s statement is unreliable and auditors rarely use it.
A) True
B) False
19) If an auditor establishes a relatively high level for materiality, then the auditor will:
A) accumulate more evidence than if a lower level had been set
B) accumulate less evidence than if a lower level had been set
C) accumulate approximately the same evidence as would be the case were materiality
lower
D) accumulate an undetermined amount of evidence
20) Cost accounting controls are those related to the physical inventory and the
consequent costs from the point at which:
A) materials are ordered for purchase until the finished product is sold
B) the customer’s order is received until the finished product is shipped
C) raw materials are requisitioned until the finished product is sent to storage
D) raw materials are requisitioned until the finished product is completely
manufactured
21) General transaction-related audit objectives vary from audit to audit, depending on
the nature and characteristics of the client’s business and industry.
A) True
B) False
22) Which of the following statements is correct?
A) Auditors must obtain bank confirmations on every audit
B) Auditors obtain bank confirmations at their discretion
C) Auditing standards do not address specific requirements regarding bank
confirmations
D) Auditing standards do not require bank confirmations except when there is an
unusually large number of inactive bank accounts
23) Tests of controls are normally performed only if the auditor believes the client’s
internal control may be effective.
A) True
B) False
24) To what extent do auditors typically rely on internal controls of their public
company clients?
A) extensively
B) only very little
C) infrequently
D) never
25) Which of the following statements most accurately captures the intent of the
standards of field work?
A) Field work standards are primarily concerned with personal attributes necessary
during the conduct of the audit
B) Field work standards provide extensive guidance regarding the conduct of an audit
C) Field work standards are primarily directed at the auditor’s planning, understanding
of internal control, and evidence accumulation
D) Field work standards are primarily concerned with the conduct of substantive testing
as opposed to testing of internal controls
26) To determine that user ID and password controls are functioning, an auditor would
most likely:
A) test the system by attempting to sign on using invalid user identifications and
passwords
B) write a computer program that simulates the logic of the client’s access control
software
C) extract a random sample of processed transactions and ensure that the transactions
were appropriately authorized
D) examine statements signed by employees stating that they have not divulged their
user identifications and passwords to any other person
27) You are preparing to issue a report on the compilation of financial statements for a
non-public company. Prior to issuing the report you should:
A) read the financial statements to determine if they are free from obvious material
errors
B) perform analytical procedures to determine if they are free from material
misstatements
C) perform tests of balances on selected accounts to determine if they are free from
material misstatements
D) perform limited control tests to determine if there are any material misstatements
28) The letter of representation obtained from an audit client should be:
A) dated as of the end of the period under audit
B) dated as of the audit report date
C) dated as of any date decided upon by the client and auditor
D) dated as of the issuance of the financial statement
29) Auditors usually design bank confirmations that address the client’s specific
circumstances.
A) True
B) False
30) Which of the following is not one of the four parts of the
A) Principles
B) Rules of Conduct
C) Interpretations
D) Definitions
31) Which of the following is not a characteristic associated with converting from a
manual to an IT system?
A) It usually centralizes data
B) It permits higher quality and more consistent controls over operations
C) It may eliminate the control provided by division of duties of independent persons
who perform related functions and compare results
D) It may take the recordkeeping function and the document preparation function away
from those who have custody of assets and put those functions into the IT center
32) One of the purposes of an engagement letter is to avoid misunderstandings with the
client. This is important for:
A)
B)
C)
D)
33) When auditing the acquisitions and cash disbursements cycle, it is usually more
efficient for the auditor to reduce the extent of tests of controls and rely primarily on
substantive tests of transactions and on tests of details of balances, provided the auditor
has determined control risk low.
A) True
B) False
34) Controls which are designed to assure that the information processed by the
computer is authorized, complete, and accurate are called:
A) input controls
B) processing controls
C) output controls
D) general controls
35) The statistical methods used to evaluate monetary-unit samples:
A) neither exclude nor include units twice
B) may permit the inclusion of a unit in the sample more than once
C) do not permit a unit to be included in the sample more than once
D) ignore the possibility that a unit may be included in a sample more than once
36) Which of the following is not required to be communicated to the audit committee
or similarly designated body under auditing standards?
A) Disagreements with the company over two acceptable accounting treatments for a
significant transaction
B) Disagreements with management about the scope of the audit, applicability of
accounting principles, or wording of the audit report
C) Difficulties encountered in performing the audit, such as lack of availability of client
personnel and failure to provide necessary information
D) Auditor’s responsibilities under generally accepted auditing standards, including
responsibility for evaluating internal control and the concept of reasonable rather than
absolute assurance
37) Standards issued by the Public Company Accounting Oversight Board must be
followed by CPAs who audit:
A) both private and public companies
B) public companies only
C) private companies, public companies, and nonprofit entities
D) private companies only
38) Dracule Industries is a privately owned business that sells medical product and
devices to hospitals, clinics and the public. Certain changes have occurred in Dracule
Industries during the year undergoing the audit. Harker needs to evaluate the effect
these changes have on audit risk. Audit risk at the financial statement level is influenced
by the risk of material misstatement; which include factors related to management, the
industry and the entity or a combination thereof. For each of the following changes that
have occurred during the year under audit identify the appropriate audit response for the
list of responses. Each response can be used once, more than once or not at all.
Client changes: 1> An internal audit department has been established. 2> A new
inventory control system has been installed that reduces the access of unauthorized
parties. 3> Inexperienced accounting personnel were hired in the accounting
department. 4> Excess cash was used to purchase complex derivatives. 5> Controls
over the sales credit approval process have laxed. 6> New government regulations now
apply to Dracule Industries. 7> Management has become overly aggressive in reaching
target goals. 8> An expert was hired to help determine the value of the ore content in
ending materials inventory. Possible effect on the audit: a. Increase the acceptable level
of detection risk. b. Decrease the acceptable level of detection risk. c. Change has no
effect on the acceptable level of detection risk.
39) When the auditor used the audit procedure vouching she is primarily concerned
with which of the following audit objectives when testing classes of transactions?
A) Occurrence
B) Completeness
C) Authorization
D) Classification
40) Which of the following business functions is not considered to be part of the
acquisitions class of transactions?
A) Processing purchase orders
B) Recognizing liabilities
C) Receiving goods and services
D) Processing cash disbursements
41) A major challenge of operational auditing is in selecting the specific criteria for
evaluation whether efficiency and effectiveness have occurred in the client’s
organization. For example, in financial statement auditing the criteria for consideration
is US GAAP or Other Comprehensive Basis of Accounting. There are no such
“overriding” objectives in internal auditing.
Discuss below sources of specific criteria that could be used by the internal auditor in
planning the engagement.
42) Discuss four of the matters that should be specified in an engagement letter.
43) Draft a report that would be appropriate when an accountant has performed a
compilation of financial statements with disclosures in accordance with GAAP, but the
accountant is not independent with respect to the client.
44) Discuss each of the three types of compilation reports and the circumstances in
which each should be used.
45) Discuss the key internal controls that should be present in the processing purchase
orders function in the acquisitions and payment cycle.