1) When do most companies record sales returns and allowances?
A) During the month in which the sale occurs
B) During the accounting period in which the return occurs
C) Whenever the customer contacts the company regarding the credit
D) During the month after the sale occurs
2) The auditor’s best defense when existing material misstatements in the financial
statements are not uncovered in the audit is:
A) the audit was conducted in accordance with auditing standards
B) the financial statements are the client’s responsibility
C) the client is guilty of contributory negligence
D) the client is guilty of fraudulent misrepresentation
3) The formal name of the Yellow Book is Government Auditing Standards.
A) True
B) False
4) An approved purchase requisition form authorizes shipment of goods to customers.
A) True
B) False
5) Which of the following statements is true?
A) Auditors have generally found that the most effective and efficient way to conduct
an audit is to obtain some assurance for each class of transaction and for the ending
balance of the related account
B) Management’s assertions follow and are closely related to the audit objectives
C) The auditor’s primary responsibility is to find and disclose fraudulent management
assertions
D) Assertions about presentation and disclosure deal with whether the accounts have
been included in the financial statements at appropriate amounts
6) An agreed-upon procedures engagement is one in which:
A) the auditor and management agree that procedures will be applied to all accounts
and circumstances
B) the auditor and management agree that procedures will not be applied to all accounts
and circumstances
C) the auditor and management or a third party agree that the engagement will be
limited to certain specific procedures
D) the auditor and management or a 3rd party agree that the auditor will apply his or
her judgment to determine procedures to be performed
7) Which of the following deal with ongoing or periodic assessment of the quality of
internal control by management?
A) Quality monitoring activities
B) Monitoring activities
C) Oversight activities
D) Management activities
8) To determine if a sample is truly representative of the population, an auditor would
be required to:
A) conduct multiple samples of the same population
B) never use sampling because of the expense involved
C) audit the entire population
D) use systematic sample selection
9) Notes payable are generally for short periods of time.
A) True
B) False
10) An auditor is determining whether an issuance of notes payable for cash was
correctly recorded. Her best course of action would be to:
A) confirm with the bond trustee as to the amount of bonds issued
B) confirm with the underwriter as to the appropriate market yield on the bonds
C) trace the cash received from the proceeds to the accounting records
D) verify that the amount was included in a footnote disclosure
11) To achieve effective internal accounting control over fixed asset additions, a
company should establish procedures that require:
A) authorization and approval of major fixed asset additions
B) capitalization of the cost of fixed asset additions in excess of a specific dollar
amount
C) classification, as investments, of those fixed asset additions that are not used in the
business
D) performance of recurring fixed asset maintenance work solely by maintenance
department employees
12) Firewalls can protect company data and software programs.
A) True
B) False
13) When audit procedures have been completed for an attributes sampling application,
the auditor must generalize from the sample to the population. Which of the following
statements would be incorrect regarding this process?
A) The auditor would use an attributes sampling table to determine the computed upper
exception rate
B) The computed upper exception rate is the highest exception rate in the population
that the auditor is willing to accept
C) It would be wrong for the auditor to conclude that the population exception rate is
exactly the same as the sample exception rate
D) In selecting the table corresponding to the risk of overreliance, it should be the same
as the ARACR used for determining the initial sample size
14) Capital stock represents a legal obligation to a shareholder and ensures a certain
return to the shareholder.
A) True
B) False
15) Shown below (1 through 5) are the five types of tests which auditors use to
determine whether financial statements are fairly stated. Which three are substantive
tests?
1>risk assessment procedures
2>tests of controls
3>tests of transactions
4>analytical procedures
5>tests of details of balances
A) 1, 2, and 3
B) 3, 4, and 5
C) 2, 3, and 5
D) 2, 3, and 4
16) The auditor’s objective in determining whether the client’s automated controls can
correctly handle valid and invalid transactions as they arise is accomplished through
the:
A) test data approach
B) generalized audit software approach
C) microcomputer-aided auditing approach
D) generally accepted auditing standards
17) A company failed to record an acquisition of merchandise and its related liability,
but the merchandise was included in ending inventory. The effect on the financial
statements was to:
A) understate both assets and liabilities
B) understate net income and owners’ equity
C) understate assets and owners’ equity
D) understate liabilities, and overstate both net income and owners’ equity
18) In IT systems, if general controls are effective, it increases the auditor’s ability to
rely on application controls to reduce control risk.
A) True
B) False
19) Tests of controls should never be performed using the client’s computer system; that
is, all tests of control should be performed either using the auditor’s computers or
performed manually by the auditor.
A) True
B) False
20) In performing the audit of internal control over financial reporting the auditor
emphasizes internal control over class of transactions because:
A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs
and processing
B) the class of transaction is where most fraud schemes occur
C) account balances are less important to the auditor then the changes in the account
balances
D) classes of transactions tests are the most efficient manner to compensate for inherent
risk
21) Determine which of the following is most correct regarding the reliability of audit
evidence.
A) Information that is indirectly obtained from external sources is the most reliable
audit evidence
B) Reliability of audit evidence is dependent upon the evidence being convincing
C) Reliability of evidence refers to the amount of evidence obtained
D) An effective internal control system provides more reliable audit evidence
22) The confidence limits in variables sampling are similar to the monetary-unit
sampling’s:
A) point estimate
B) misstatement bounds
C) standard deviation
D) standard error of the mean
23) Which is usually included in an engagement letter?
A)
B)
C)
D)
24) McKesson & Robbins Company is a well-known audit case involving auditor
responsibility. What occurred at the McKesson & Robbins Company to change the way
in which auditors audit inventory?
A) The company recorded nonexistent inventory
B) The auditor did not perform any audit tests of the inventory
C) The auditor and company colluded to overstate inventory balances
D) The company counted inventory three months prior to year-end
25) Narratives, flowcharts, and internal control questionnaires are three common
methods of:
A) testing the internal controls
B) documenting the auditor’s understanding of internal controls
C) designing the audit manual and procedures
D) documenting the auditor’s understanding of a client’s organizational structure
26) Any service that requires a CPA firm to issue a report about the reliability of an
assertion that is made by another party is a(n):
A) accounting and bookkeeping service
B) attestation service
C) assurance service
D) tax service
27) One of the
A)
B)
C)
D)
28) Changes in an estimate, such as a change in the estimated useful life of an asset for
depreciation purposes, affect consistency but not comparability, and therefore require an
explanatory paragraph in the audit report.
A) True
B) False
29) Which of the following statements is true as it relates to limited liability
partnerships?
A) Only senior partners are liable for the partnership’s debts
B) Partners have no liability in a limited liability partnership arrangement
C) Partners are personally liable for the acts of those under their supervision
D) All partners must be
30) Distinguish between “joint and several liability” and ‘separate and proportionate
liability.”
31) Discuss the alternative procedures an auditor can perform to test the existence
objective for accounts receivable when customers do not respond to confirmation
requests.
32) Due to qualitative factors, certain types of misstatements are likely to be more
important to users than others, even if the dollar amounts are the same. Identify two
qualitative factors that might significantly affect an auditor’s materiality judgment, and
give an example of each.
33) Operational auditing is the review of an organization for efficiency and
effectiveness. Discuss what is meant by the terms “effectiveness” and “efficiency.”
34) Explain what is meant by a cutoff bank statement, and discuss the purpose of the
cutoff bank statement in the audit of cash.
35) State the six functions that make up the inventory and warehousing cycle and, for
each function, identify the related documents and/or records that would be used by a
manufacturing company.