1) When auditors evaluate sales returns and allowances, a primary emphasis is on the
objective of occurrence.
A) True
B) False
2) The underlying reason for a code of professional conduct for any profession is:
A) the need for public confidence in the quality of service of the profession
B) that it provides a safeguard to keep unscrupulous people out
C) that it is required by federal legislation
D) that it allows licensing agencies to have a yardstick to measure deficient behavior
3) Several states have statutes that permit privileged communication between the client
and auditor, allowing a CPA to refuse to testify in state and federal courts.
A) True
B) False
4) A benefit obtained from comparing the client’s data with industry averages is that it
provides a(n):
A) benchmark to compare the company against industry averages
B) indication where errors exist in the statements
C) benchmark to be used in evaluating a client’s budgets
D) comparison of “what is” with “what should be”
5) Responsibility for the issuance of new notes payable would normally be vested in
the:
A) board of directors
B) purchasing department
C) accounting department
D) accounts payable department
6) Which of the following errors gives the auditor the least concern in auditing payroll
transactions?
A) An error that indicates possible fraud
B) Computational errors in formulas when a computerized system is used
C) Classification errors in charging labor to inventory and job cost accounts
D) Each of the above gives the auditor significant concern
7) An auditor can increase the likelihood that a sample is representative by using care
in:
A)
B)
C)
D)
8) You are auditing Nelson and Company and determined that the sample results
support a conclusion that the account is materially misstated, when in fact it was not
misstated. This illustrates the risk of:
A) incorrect acceptance
B) incorrect rejection
C) control risk too low
D) control risk too high
9) The major considerations in evaluating the reasonableness of cost allocations are
compliance with GAAP and consistency with prior years.
A) True
B) False
10) Which one of the following analytical procedures would be most useful in alerting
the auditor to the possibility of obsolete inventory?
A) Compare gross margin percentage with previous years’
B) Compare unit costs of inventory with previous years’
C) Compare inventory turnover ratio with previous years’
D) Compare current year manufacturing costs with previous years’
11) The primary purpose of performing analytical procedures in the planning phase of
an audit is to:
A) help the auditor obtain an understanding of the client’s industry and business
B) assess the going concern assumption
C) indicate possible misstatements
D) reduce detailed tests
12) When planning an audit, the auditor’s assessed level of control risk is:
A) determined by using actuarial tables
B) calculated by using the audit risk model
C) a judgment issue, based on auditor knowledge
D) calculated by using the formulas provided in the
13) The failure to capitalize a permanent asset, or the recording of an asset acquisition
at the improper amount, affects the balance sheet:
A) forever
B) for the current period
C) for the depreciable life of the asset
D) until the firm disposes of the asset
14) The auditor, in auditing payroll, wants to determine that the individuals included in
her sample were employees of the company for the period under review. What is the
auditor’s best source of evidence?
A) Examination of Human Resource Records
B) Examination of the Payroll Master File
C) Examination of the Payroll Transaction File
D) Examination of the Payroll Tax Records
15) In the
A) True
B) False
16) An accounts receivable population contains a total of four customers. The accounts,
the amounts, and the cumulative total are shown below. Monetary-unit sampling is to be
used.
Based on the information above, the population size is:
A) 4
B) 574
C) 1,272
D) $2,684
17) Which of the following activities would be least likely to strengthen a company’s
internal control?
A) separating accounting from other financial operations
B) maintaining insurance for fire and theft
C) fixing responsibility for the performance of employee duties
D) carefully selecting and training employees
18) Which of the following normally signs the engagement letter for an audit of a
private company?
A) Management
B) Board of directors representative
C) Audit committee representative
D) Corporate treasurer
19) Which of the following statements related to application controls is correct?
A) Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions
B) Application controls relate to various aspects of the IT function including physical
security and the processing of transactions in various cycles
C) Application controls relate to all aspects of the IT function
D) Application controls relate to the processing of individual transactions
20) In any company involved in manufacturing, an adequate cost accounting internal
control system is necessary to indicate the relative profitability of the various products
for management planning and control and to:
A) determine variances from standards
B) determine variances from budgets
C) value inventories for financial statement purposes
D) value inventories for audit verification
21) Match six of the terms (a-i) used in the capital acquisitions and repayment cycle
with the descriptions provided below (1-6):
a.Capital acquisition and repayment cycle
b.Capital stock certificate book
c.Closely held corporation
d.Independent registrar
e.Note payable
f.Publicly held corporation
g.Stock transfer agent
h.Schedule of notes payable and accrued interest
i.Stock maintenance agent
________ 1> An outside person engaged by a corporation to make sure that its stock is
issued in accordance with capital stock provisions in the corporate charter and
authorizations by the board of directors.
________ 2> The normal starting point for the audit of notes payable; includes detailed
information of all transactions related to notes payable that took place during the year.
________ 3> A record of the issuance and repurchase of capital stock for the life of the
corporation.
________ 4> An outside person engaged by a corporation to maintain the stockholder
records, and often to disburse cash dividends.
________ 5> An entity that is required to engage an independent registrar.
________ 6> The cycle that concerns the acquisition of capital resources through
interest-bearing debt and owners’ equity and repayment of the capital.
22) Audit fraud occurs when:
A) a misstatement is made and there is both knowledge of its falsity and the intent to
deceive
B) a misstatement is made and there is knowledge of its falsity but no intent to deceive
C) the auditor lacks even slight care in the performance in performing the audit
D) the auditor has an absence of reasonable care in the performance of the audit
23) A company has changed its method of inventory valuation from an unacceptable
one to one in conformity with generally accepted accounting principles. The auditor’s
report on the financial statements of the year of the change should include:
A) no reference to consistency
B) a reference to a prior period adjustment in the opinion paragraph
C) an explanatory paragraph that justifies the change and explains the impact of the
change on reported net income
D) an explanatory paragraph explaining the change
24) Whenever practical and reasonable, the confirmation of accounts receivable is
required of CPAs.
A) True
B) False
25) In which of the following situations would the auditor most likely issue an
unqualified report?
A) The client valued ending inventory by using the replacement cost method
B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method
C) The client valued ending inventory at selling price rather than historical cost
D) The client valued ending inventory by using the First-In-First-Out (FIFO) method,
but showed the replacement cost of inventory in the Notes to the Financial Statements
26) If planned detection risk is reduced, the amount of evidence the auditor accumulates
will:
A) increase
B) decrease
C) remain unchanged
D) be indeterminate
27) Internal Auditors are expected to add value to the organization through improved
operational effectiveness. In addition, their responsibilities include all the following
except:
A) reviewing the reliability and integrity of information
B) ensuring compliance with the company’s accounting policies
C) verifying accounting information for external users
D) ensuring compliance with applicable governmental regulations
28) Which of the following statements is correct?
A) The overhead charged to inventory at the balance sheet date can be understated if the
salaries of administrative personnel are inadvertently or intentionally charged to indirect
manufacturing overhead
B) When jobs are billed on a cost-plus basis, revenue and total expenses are both
affected by charging labor to incorrect jobs
C) Payroll is a significant portion of inventory for retail and service industry companies
D) The valuation of inventory is affected if the direct labor cost of individual employees
is improperly charged to the wrong job or process
29) The standard of due care to which the auditor is expected to adhere to in the
performance of the audit is referred to as the:
A) prudent person concept
B) common law doctrine
C) due care concept
D) vigilant person concept
30) When a company prepares multi-copy, prenumbered sales invoices at the time
customer orders are received, there is a higher likelihood of failure to bill the customers
than when sales invoices are prepared only after goods have been shipped.
A) True
B) False
31) There are seven types of audit evidence: physical examination, confirmation,
documentation, observation, inquiries of the client, reperformance, and analytical
procedures. For each of the following types of audit tests, indicate the type(s) of
evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests
of transactions, (3) analytical procedures, and (4) tests of details of balances.
32) List and describe the six elements of quality control. Who establishes the standards
for quality control?
33) Describe the audit procedures typically used to test for out-of-period liabilities (also
referred to as the search for unrecorded accounts payable).
34) Discuss the required communications between predecessor and successor auditors.
35) Explain acceptable risk of incorrect acceptance and acceptable risk of incorrect
rejection within the context of variables sampling.
36) You are the audit manager for a new audit client. Your staff auditors are unsure of
what constitutes a control deficiency. Discuss the definition of control deficiency. In
your response include at least two examples of control deficiencies.
37) Briefly explain each management assertion related to account balances at period
end.
38) The auditing standards of the Yellow Book are consistent with the ten generally
accepted auditing standards of the
39) In accumulating final evidence upon which to base an audit opinion, the auditor
should perform four activities. List the activities below.