1) Which of the following is the primary basis used to decide materiality for a for-profit
entity?
A) net sales
B) net assets
C) net income before tax
D) all of the above
2) During the course of an audit, a CPA observes that the recorded interest expense
seems to be excessive in relation to the balance in the long-term debt account. This
observation could lead the auditor to suspect that:
A) long-term debt is understated
B) discount on bonds payable is overstated
C) long-term debt is overstated
D) premium on bonds payable is understated
3) An auditor uses statistical sampling for attributes in internal control testing. She
would most likely reduce the planned reliable on the control tested when:
A) the sample deviation rate plus the adjustment for sampling risk exceeded the
tolerable deviation rate
B) the sample deviation rate plus the adjustment for sampling risk equaled the tolerable
deviation rate
C) the tolerable deviation rate less the adjustment for sampling risk exceeded the
expected population deviation rate
D) the tolerable deviation rate plus the adjustment for sampling risk was less than the
expected population deviation rate
4) When selecting a stratified sample, the sample size is:
A) determined for the unstratified population and then apportioned to each stratum
B) determined for each stratum and selected from that stratum
C) determined for each stratum and selected randomly from the entire unstratified
population
D) always larger than if unstratified sampling had been used
5) Which of the following requires recognition in the auditor’s opinion as to
consistency?
A) The correction of an error in the prior year’s financial statements resulting from a
mathematical mistake in capitalizing interest
B) A change in the estimate of provisions for warranty costs
C) The change from the cost method to the equity method of accounting for investments
in common stock
D) A change in depreciation method which has no effect on current year’s financial
statements but is certain to affect future years
6) The most important element of the audit risk model is control risk.
A) True
B) False
7) All CPA firms registered with the PCAOB are required to undergo a peer review
annually.
A) True
B) False
8) A document sent to each customer showing his or her beginning accounts receivable
balance and the amount and date of each sale, cash payment received, any debit or
credit memo issued, and the ending balance is the:
A) accounts receivable subsidiary ledger
B) monthly statement
C) remittance advice
D) sales invoice
9) You have been assigned to the accounts payable transaction cycle as part of your
auditing responsibilities. You have decided to vouch a sample of entries in the accounts
payable master file to supporting documents. Which assertion is this test of controls
most likely to support?
A) Accuracy
B) Classification
C) Completeness
D) Occurrence
10) Which of the following is most correct with regard to the comparison of the
financial auditing standards of the Yellow Book with the 10 General Auditing Standards
for financial audits?
A) the same as
B) quite different from
C) incompatible with
D) consistent with
11) The receipt of a customer order from a customer is the starting point for the entire
sales and collection cycle.
A) True
B) False
12) The auditor would expect that an account receivable from a customer would be
written off by the client when which of the following occurs:
A) the customer files for bankruptcy
B) the account is at least six months old
C) a collection agency cannot inspire customer to pay the debt
D) the client company concludes that an amount is no longer collectible
13) When the auditor decides to select less than 100 percent of the population for
testing, the auditor is said to use:
A) audit sampling
B) representative sampling
C) poor judgment
D) estimation sampling
14) If the auditor lacks independence, a disclaimer of opinion must be issued:
A) if the client requests it
B) only if it is highly material
C) only if it is material but not pervasive
D) in all cases
15) The Audit Standards Board of the
I.The “General” standards of GAAS will be termed “Responsibilities”.
II.The “Fieldwork” standards will be termed “Performance”.
III.The “Reporting” standards will be termed “Communications”.
A) I and II
B) I and III
C) II and III
D) I, II and III
16) Matthews & Co., CPAs, issued an unqualified opinion on Dodgers Corporation.
Millennium Bank, which relied on the audited financial statements, granted a loan of
$200,00,000 to Dodgers Corporation. Dodgers subsequently defaulted on the loan. To
succeed in an action against Matthews & Co., Millennium Bank must prove that the
bank was:
A) in privity of contract with Dodgers
B) in privity of contract with Millennium
C) free from contributory negligence
D) justified in relying on the financial statements in granting the loan
17) Place the following steps in their proper order:
1>Analyze exceptions
2>Select the sample
3>Define attributes and exception conditions
4>State the objectives of the audit test
5>Specify the tolerable exception rate
A) 1, 3, 2, 4, 5
B) 4, 3, 1, 2, 5
C) 4, 3, 5, 2, 1
D) 1, 2, 3, 4, 5
18) Relevance of evidence can only be considered in terms of specific audit objectives.
A) True
B) False
19) Which of the following would not be considered further audit procedures?
A) tests of controls
B) substantive analytical procedures
C) tests of details of balances
D) risk assessment procedures
20) Objective evidence is more reliable, and hence more persuasive, than subjective
evidence.
A) True
B) False
21) The file for recording each payroll transaction for each employee and maintaining
total employee wages paid for the year to date is the:
A) payroll master file
B) summary payroll report
C) payroll journal
D) job time ticket
22) Auditors may extend their tests of payroll in which of the following circumstances?
A)
B)
C)
D)
23) When auditing the general cash account, receipt of a standard bank confirmation is
the starting point for verifying the company’s general cash account balance.
A) True
B) False
24) What type of audit test will auditors use when testing to see if existing capital stock
transactions are recorded?
A)
B)
C)
D)
25) The type of receivables confirmation is a major factor affecting sample size, with
negative confirmations normally requiring a larger sample than positive confirmations.
A) True
B) False
26) Which of the following is not a similarity between external and internal auditors?
A) Both must be independent of the company
B) Both must be competent
C) Both follow a similar methodology in performing their audits
D) Both consider risk and materiality deciding the extent of their tests and evaluating
results
27) How do auditors commonly verify sales commission expense?
28) When an auditor uses negative confirmations, several factors must be considered.
What are those factors?
29) In addition to an opinion on whether the financial statements are in accordance with
GAAP, identify four other reports required by the OMB Circular A-133.
30) Describe the sources of information gathered to assess fraud risks.
31) Discuss the sanctions the Securities and Exchange Commission can impose on
auditors.
32) When assessing planned control risk for sales, the auditor is concerned about proper
authorization at three key points. Discuss each of these three points.
33) What are the auditor’s primary concerns in verifying the transfer of inventory from
one location to another?
34) Discuss the relationship of each of the following to the extent of planned tests of
details of balances: (1) tolerable misstatement, (2) inherent risk, (3) control risk, and (4)
acceptable audit risk.