1) For proper internal control, there should be adequate separation of duties. However,
the extent of separation of duties considered “adequate” does not depend on the size of
the organization.
A) True
B) False
2) For sales, the occurrence transaction-related audit objective affects which of the
following balance-related audit objective?
A) Existence
B) Completeness
C) Rights
D) Detail tie-in
3) Given the economic and time constraints in which auditors can collect evidence
about management assertions about the financial statements, the auditor normally
gathers evidence that is:
A) irrefutable
B) conclusive
C) persuasive
D) completely convincing
4) The use of an imprest payroll account prevents losses from payment of unauthorized
payroll to no more than the balance in the imprest account.
A) True
B) False
5) Income statement accounts resulting from allocations are typically verified as a part
of:
A) tests of controls
B) substantive tests of transactions
C) analytical procedures
D) planning
6) The objective of the ordinary audit of financial statements is the expression of an
opinion on:
A) the fairness of the financial statements in all material respects
B) the accuracy of the financial statements
C) the accuracy of the annual report
D) the accuracy of the balance sheet and income statement
7) The following are definitions of terms that are listed on the right. Match the
definition with its associated term. Each term can be used once, more than once or not
at all.
Definition 1> An organizational structure where professional services are provided by
one or more shareholders. 2> The grantor of the right to practice public accounting. 3>
A report filed to indicate a significant event. 4> Sets professional standards and rules
for auditors. 5> Oversees accounting firms who audit public companies. 6> An
organizational structure where the owners are taxed like a partnership and have limited
personal liability. 7> A report that is filed when a company wishes to issue new
securities. 8> The methods used to ensure the firm meets its professional
responsibilities to clients and others. 9> Assists in providing investors with reliable
information. 10> Requires annual inspections of accounting firms auditing > 100
issuers. 11> Practice monitoring by a CPA firm for another CPA firm. 12> Fulfilling
duties diligently and carefully. 13> Requires a registration statement. Audit Term a.
8) An auditor uses monetary unit sampling with a sampling interval of $20,000 and
detects an item with a recorded amount of $10,000 with an audited value of $4,000. The
projected misstatement of the sample is:
A) $12,000
B) $6,000
C) $10,000
D) $3,000
9) An item with a “psychic” effect (e.g., where the item maintains an increasing
earnings trend) is a qualitative factor that may affect the auditors decision regarding
materiality.
A) True
B) False
10) Which of the following is not an enhancement to internal control that will occur as a
consequence of increased reliance on IT?
A) computer controls replace manual controls
B) higher quality information is available
C) computer-based controls provide opportunities to improve separation of duties
D) manual controls replace automated controls
11) While performing a substantive test of details during an audit, the auditor
determined that the sample results supported the conclusion that the recorded account
balance was materially misstated. Which of the following is the least likely auditor
reaction to this discovery?
A) Perform expanded audit tests in the relevant areas
B) Increase detection risk in the relevant areas
C) Increase the sample size
D) Take no action until tests of other audit areas are completed
12) Even when nonsampling risk is zero, there is always a possibility that a sample is
not representative of the population.
A) True
B) False
13) An imprest payroll account that has a significant balance may indicate the presence
of:
A) employees have not yet deposited or cashed payroll checks
B) fraudulent transfer of funds by the company
C) lack of controls over payroll distribution
D) the company is overpaying its employees
14) A document indicating a reduction in the amount owed to a vendor because of
returned goods is:
A) a debit memo
B) a credit memo
C) a receiving report
D) a contractual adjustment form
15) For which of the following accounts is cutoff least important?
A) Sales
B) Sales returns and allowances
C) Cash collections
D) Inventory
16) Tort actions against CPAs are more common than breach of contract actions
because:
A) there are more torts than contracts
B) the burden of proof is on the auditor rather than on the person suing
C) the person suing need prove only negligence
D) the amounts recoverable are normally larger
17) Prenumbered documents will only be useful for control purposes if:
A) a different numerical sequence is used for each company
B) the sequence is accounted for periodically
C) employees are allowed to use documents out of numerical sequence
D) the same numerical sequence is used each accounting period
18) The audit risk model that must be used for planning audit procedures and evaluating
audit results is:
DR
IR CR = AAR.
A) True
B) False
19) The auditor’s results of evidence gathering procedures are contained in audit
documentation for the audit. When preparing the requisite audit, documentation should
be cognizant of:
A) Documents are kept by the client for easy reference for their accounting staff
B) Audit documents should be considered as a substitute for the clients accounting
records
C) Audit documents are designed to facilitate the review and supervision of the work
performed by the audit team by a reviewing partner
D) Audit documents are the sole source of evidence that an auditor uses in forming an
opinion about the client’s financial statements
20) When a company designs and implements internal controls, cost of the controls is
not a valid consideration.
A) True
B) False
21) Which of the following most accurately describes fraud?
A) Absence of reasonable care
B) Lack of slight care
C) Knowledge and intent to deceive
D) Extreme or unusual negligence without the intent to deceive
22) According to SAS No. 99, auditors are required to assume that which of the
following has significant risk of fraud?
A) overstated assets
B) understated liabilities
C) improper revenue recognition
D) overstated expenses
23) Interpretations of the
A) independence
B) compliance with standards
C) accounting
D) acts discreditable to the profession
24) Whenever an auditor issues an audit report for a public company, the auditor can
choose to issue a report in which of the following forms?
I.A combined report on financial statements and internal control over financial
reporting.
II.Separate reports on financial statements and internal control over financial reporting.
A) I only
B) II only
C) Either I or II
D) Neither I nor II
25) A company guarantees the debt of an affiliate. Which of the following best
describes the audit procedure that would make the auditor aware of the guarantee?
A) Review minutes and resolutions of the board of directors
B) Review prior year’s audit files with respect to such guarantees
C) Review the possibility of such guarantees with the chief accountant
D) Review the legal letter returned by the company’s outside legal counsel
26) Independence is required of a CPA when performing:
A) external audits
B) all attestation services
C) all attestation and tax services
D) all professional services
27) If an unusually large portion of the checks listed as outstanding on the year-end
bank reconciliation have not cleared the bank by the cutoff date, one possible cause
could be that kiting is occurring.
A) True
B) False
28) Discuss some of the steps individual practicing auditors can take to minimize their
legal liability.
29) There are three conditions necessitating a departure from an unqualified audit
report. Name, discuss and state the appropriate audit report for each of these three
conditions.
30) There are several key internal controls over the timekeeping and payroll preparation
function that should be present. For example, adequate control over the time on
employees’ time cards includes the use of a time clock or other method of making
certain that employees are paid for the number of hours they worked. Discuss other key
internal controls over the timekeeping and payroll preparation function.
31) One type of audit procedure the auditor uses to test accounts payable is a
substantive analytical procedure. Describe why the auditor uses substantive analytical
procedures for accounts payable and provide an example.
32) There are three main reasons why an auditor should properly plan audit
engagements. Discuss each of these reasons.
33) Briefly explain why auditors utilize audit sampling.
34) Discuss the circumstances in which it is desirable to send confirmation requests to
the client’s vendors.