1) Cost is never an adequate justification for omitting a necessary procedure or not
gathering an adequate sample size.
A) True
B) False
2) Auditors follow a four step approach to reduce assessed control risk. Which of the
following is not one of the four?
A) Apply transaction related audit objectives to a class of transactions
B) Indentify accounts that have high inherent risk
C) Identify key controls that reduce control risk
D) For potential misstatements, design appropriate substantive tests of transactions
3) Which of the following cycles does not affect cash in bank?
A) Capital acquisitions cycle
B) Inventory and warehousing
C) Payroll and personnel cycle
D) Acquisitions and disbursements
4) Internal auditing standards are included in the Red Book.
A) True
B) False
5) Tests of controls and substantive tests of transactions are normally conducted
simultaneously on the same transactions.
A) True
B) False
6) All owners of a CPA firm must be CPAs who are qualified to practice.
A) True
B) False
7) At the completion of the audit, management is asked to make a written statement that
it is not aware of any undisclosed contingent liabilities. This statement would appear in
the:
A) management letter
B) letter of inquiry
C) letters testamentary
D) management letter of representation
8) When performing a review of interim information for a public company, the
accountant ordinarily does not perform tests of the accounting records, independent
confirmations, or physical examinations.
A) True
B) False
9) Responsibility for the fair presentation of financial statements rests equally with
management and the auditor.
A) True
B) False
10) Attestation standards allow a CPA to perform all but which of the following services
for a forecast or projection?
A) compilation
B) review
C) examination
D) agreed-upon procedures
11) Which of the following would offer the best evidence of owning real estate as of the
balance sheet date?
A) Property insurance policies
B) Paid real estate tax bills
C) Acquisition documents
D) Cash disbursements register
12) A canceled check written by the client, made payable to a local supplier and drawn
on the client’s bank account is one type of internal document.
A) True
B) False
13) External financial statement auditors must obtain evidence regarding what attributes
of an internal audit (IA) department if the external auditors intend to rely on IA’s work?
A) Integrity
B) Objectivity
C) Competence
D) All of the above
14) In an audit of a non-public company, the auditor’s assessment of control risk and the
extent of tests of controls are inversely related.
A) True
B) False
15) Rule 502, Advertising and Other Forms of Solicitation, prohibits members of the
A) True
B) False
16) Internal auditors are responsible to:
A) the board of directors
B) management
C) both A and B
D) neither A nor B
17) Despite the large dollar amounts involved in the payroll and personnel cycle,
auditors typically spend less time auditing this cycle than others.
A) True
B) False
18) A major difficulty in the verification of inventory cost records for the purpose of
inventory valuation is in determining the reasonableness of:
A) direct labor’s hourly rate
B) raw materials per unit cost
C) cost allocations
D) number of direct labor hours applied
19) Production personnel should ordinarily be responsible for maintaining perpetual
inventory records.
A) True
B) False
20) The two main categories of fraud are fraudulent financial reporting and
misappropriation of assets.
A) True
B) False
21) In the audit of the transactions and amounts in the capital acquisitions and
repayments cycle, the auditor must take great care in making sure that the significant
legal requirements affecting the financial statements have been properly fulfilled and:
A) any violations are reported to the SEC
B) are adequately disclosed in the financial statements
C) must issue a disclaimer if they haven’t been fulfilled
D) any departures from the agreements are made with management’s knowledge and
consent
22) Which of the following is not a direct result of performing analytical procedures?
A) identify areas of potential misstatements
B) reduce detailed audit tests
C) understand the client’s business
D) identify specific errors in the accounts
23) In performing your audit for a privately-held firm your inquiries have yielded that
one of the company’s owner’s primary motivations is to pay the least amount of income
tax that is possible. Based on this observation which audit objective for ending
inventory would the auditor be most concerned about ascertaining?
A) Completeness
B) Accuracy
C) Rights and obligations
D) Existence
24) Which one of the following is of the least concern to the auditor when designing
substantive tests of transactions for the sales/collection cycle?
A) Sales being included in the journal for which no shipment was made
B) Sales to related parties, such as officers and subsidiaries
C) Sales recorded more than once
D) Shipments being made to nonexistent customers and recorded as sales
25) The scope paragraph of the standard unqualified auditor’s report states that ” the
standards require that we plan and perform the audit to obtain ________ assurance
about whether the financial statements are free of material misstatement”. What type of
assurance is given?
A) immediate
B) limited
C) reasonable
D) absolute
26) The following situations involve a possible violation of the
a. In 20×4, Freeman and Johnson, both CPAs, decided to form a CPA practice. In 20×7,
Freeman and Johnson approached Bill Delaney, a physician and medical expert, and
asked him to assist them with their growing medical consulting practice. Delaney
agreed, but only after he was given an ownership interest in the firm. Delaney does not
intend to quit his private medical practice.
Rule: ________ Violation? Yes No
Explanation:
b. Brian DePalie has a successful dentistry practice in Charleston. Brian has
recommended one of his patients to Katie Walton, CPA. To show gratitude for the
referral, Katie has agreed to pay Brian a token gift of $50. Katie discloses the payment
arrangement to her new clients.
Rule: ________ Violation? Yes No
Explanation:
c. The accounting firm of Bayer & Peng, CPAs, is negotiating a fee with a new audit
client. They agree the client will pay $50,000 if Bayer & Peng issues a clean,
unqualified opinion, $40,000 if a qualified opinion is issued, and only $20,000 if an
adverse opinion is issued.
Rule: ________ Violation? Yes No
Explanation:
d. Don Smith, CPA, is a member of the engagement team that performs the audit of
Shaw Corporation. Don’s five-year-old daughter, Precious, received ten shares of Shaw
Corporation’s common stock for her fifth birthday. The stock was a gift from Precious’s
grandmother.
Rule: ________ Violation? Yes No
Explanation:
e. Jennifer Harris, CPA, is a partner in the CPA firm that audits Alltech, Inc., a closely
held corporation. Jennifer’s sister-in-law is the chief financial officer at Alltech, Inc.
Rule: ________ Violation? Yes No
Explanation:
27) SAS No. 99 does not specifically indicate which members of an audit engagement
team must attend a brainstorming session.
A) True
B) False
28) Which of the following is incorrect concerning scope limitations?
A) If client imposed the auditor should be concerned about client trying to prevent
discovery of a material misstatement
B) An unqualified opinion can result if auditors can perform alternative procedures and
are satisfied that the information is fairly stated
C) The most common circumstance imposed scope restriction is due to the client
changing their auditors
D) The most common circumstance imposed scope limitation is when the auditor is
appointed after the balance sheet date
29) What is the difference between an independent registrar and a stock transfer agent?
30) Distinguish between contingent liabilities and commitments.
31) Define the term “related party” and discuss why an auditor should identify the
client’s related parties early in the audit.
32) Discuss the advantages and disadvantages of using negative accounts receivable
confirmations rather than positive confirmations.
33) Evidence is paramount to audit and attestation engagements. List the four basic
types of audit evidence.
34) Identify three analytical procedures commonly performed for notes payable.
35) What do auditing standards require when a company outsources some of their IT
requirements to an Application Service Provider?
36) Discuss the key internal controls that should be present in the receiving goods and
services function in the acquisitions and payment cycle.