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Chapter 1

Which one of the following organizations is recognized for


providing guidance on a framework for internal control?
a. AICPA
b. PCAOB
c. IAASB
d. COSO
d. COSO
Which phase of the audit opinion formulation process is most
commonly thought of as auditing by the general public?
a. Performing risk assessment.
b. Obtaining evidence about internal controls.
c. Obtaining substantive evidence about accounts.
d. Making reporting decisions.
c. Obtaining substantive evidence about accounts.
Which one of the following is not a management expectation for
independent auditors?
a. An outside source of expertise on accounting matters.
b. Individuals who perform tests and draw conclusions on
assertions.
c. A participant in management decision making.
d. A provider of a written communication.
c. A participant in management decision making.
Why is auditing important in a free market society?
a. The public requires auditors to function as divisions of
regulatory bodies.
b. Auditors detect all errors and fraud perpetrated by company
employees.
c. It provides reliable information upon which to judge economic
performance.
d. The auditor is an amiable insurance policy for investors.
e. All of the above are true.
c. It provides reliable information upon which to judge economic
performance.
Which governing board performs quality reviews on registered
audit firms that audit public companies?
a. PCAOB.
b. GAO.
c. AICPA.
d. FASB.
a. PCAOB.
What is the primary objective of the independent auditor's report
on financial statements?
a. To report on all instances of fraud.
b. To assist the board in evaluating management's effectiveness.
c. To attest to the credit-worthiness of the client.
d. To give credibility to management's prepared financial
statements.

d. To give credibility to management's prepared financial


statements.
What is the first phase in an audit?
a. Client acceptance or client continuance.
b. Understanding the client.
c. Understanding internal controls.
d. Testing of account balances.
a. Client acceptance or client continuance.
What is the management of a company responsible for?
a. Hiring the auditor.
b. Preparing the financial statements.
c. The audit workpapers.
d. Ensuring auditor independence.
b. Preparing the financial statements.
The Center for Audit Quality is dedicated to enhancing investor
confidence in what?
a. The financial markets.
b. Management.
c. Auditors.
d. Both B and C.
e. All of the above.
a. The financial markets.
Which of the following is a driver of audit quality?
a. Audit firm culture.
b. Engagement team skills and attributes.
c. Factors outside control of auditors.
d. Investor requirements.
e. A, B, and C only.
e. A, B, and C only.
An Integrated Audit Report provides opinion(s) on which of the
following?
a. The financial statements.
b. Internal controls.
c. Both financial statements and internal controls.
d. Neither financial statements or internal controls.
c. Both financial statements and internal controls.
Which organization issued the Internal Control, Integrated
Framework which serves as the primary criterion for evaluating
the quality of a company's internal audit?
a. PCAOB
b. COSO
c. AICPA
d. GAO
b. COSO

How is the audit report referred to when the auditor has no


reservations about management's financial statements?
a. An unqualified report
b. A qualified report
c. An adverse report
d. An integrated report
a. An unqualified report

What must audit firms do to perform financial statement audits for


public companies?
a. Register with the American Institute of Certified Public
Accountants.
b. Register with the Institute of Internal Auditors.
c. Register with the U.S. General Accounting Office.
d. Register with the Public Company Accounting Oversight Board.
d. Register with the Public Company Accounting Oversight Board.

In the United States, what is the most common criteria against


which the auditor measures the fairness of financial statement
presentation?
a. Auditing standards
b. Generally accepted accounting principles
c. Generally accepted accounting standards
d. Governmental accounting standards
b. Generally accepted accounting principles

Who is responsible for internal controls within an organization?


a. The internal auditor
b. The external auditor
c. Management
d. PCAOB
c. Management

Which of the following groups is not typically considered to be a


user of the audited financial statements?
a. Management
b. Vendors
c. Retired employees
d. Competitors
d. Competitors

Congress authorized which of the following organizations to


establish generally accepted accounting principles?
a. SEC
b. APB
c. AICPA
d. FASB

a. SEC

Who licenses CPAs?


a. The PCAOB
b. The AICPA
c. The State Boards of Accountancy
d. The SEC
c. The State Boards of Accountancy

As it relates to an audit, which of the following statement about


professional skepticism is true?
a. Professional skepticism is not taken into consideration.
b. Professional skepticism relates only to the nature of
procedures performed.
c. Professional skepticism is an attitude.
d. Professional skepticism is determined based upon the
importance to a user of the financial statements.
c. Professional skepticism is an attitude.
Chapter 2

One of the primary goals of the PCAOB is to restore confidence in


which group?
a. SEC
b. Board of Directors
c. Internal Auditors
d. Independent Auditors
d. Independent Auditors

Which of the following is a specific corporate governance


responsibility of Executive Management?
a. Approving major changes, such as mergers
b. Approving non-audit work performed by the audit firm
c. Reviewing the budget of the internal audit function
d. Implementing an effective ethical environment
d. Implementing an effective ethical environment

The fraud triangle says three conditions are generally present in


the client's organization when fraud occurs. Which one the
following is not one of those conditions?
a. Incentives
b. Professional skepticism
c. Opportunity
d. Ability to rationalize fraud
b. Professional skepticism

Which of the following is an example of fraud?


a. A mistake in processing accounting data
b. An innocent accounting estimate arising from misinterpretation
of facts
c. Misappropriation of an asset
d. A mistake in the application of accounting principles
c. Misappropriation of an asset

Protection Transparency, Inc. is being audited by Messer and


Bromely, LLP. During the assessment of fraud, Messer and
Bromely discover that the controller has been creating sales and
posting them to the general ledger. Who should the auditors make
award of this issue?
a. Protection Transparency's legal counsel
b. The police
c. The chairman of Protection Transparency's audit committee
d. The predecessor auditor of Protection Transparency
c. The chairman of Protection Transparency's audit committee

How did the Sarbanes-Oxley Act strengthen auditor


independence?
a. By requiring auditors to provide reports in accordance with the
Foreign Corrupt Practices Act
b. By requiring auditors to report the nature of any auditor-client
disagreements to the SEC
c. By requiring the lead partner to rotate off the audit engagement
at least every five years
d. By requiring a different audit firm from the one that performs
the audit to prepare the client's tax return
c. By requiring the lead partner to rotate off the audit engagement at
least every five years

The PCAOB has how many board members?


a. Three
b. Five
c. Seven
d. Nine
b. Five

Under the Sarbanes-Oxley Act, which of the following services


performed by registered accounting firms for their audit clients
would not impair their independence?
a. Systems design
b. Tax services
c. Appraisal services
d. Internal audit services
b. Tax services

Which of the following is a NYSE mandated guideline for


corporate governance?
a. Boards need to consist entirely of independent auditors
b. Boards must have an audit committee with a minimum of three
independent directors
c. Boards must have a compensation committee with a minimum
of three independent directors
d. CFOs must provide annual certification of compliance with
corporate governance standards
b. Boards must have an audit committee with a minimum of three
independent directors
Incorrect:
a. Boards need to consist of a majority of independent auditors
d. CEOs must provide annual certification of compliance with
corporate governance standards

Which of the following is not one of management's


responsibilities?
a. Ensuring accounting principles are being followed in preparing
financial statements
b. Engaging a qualified auditor
c. Implementing effective internal controls
d. Ensuring financial statements and disclosures are accurate
b. Engaging a qualified auditor
How must an auditor address fraud in the planning stage?
a. The auditor must test for fraud in the planning stage.
b. The auditor must consider the likelihood of fraud existing in the
company in the planning stage.
c. The auditor must realize that most people are honest and not
automatically assume that fraud exists when planning the audit.
d. The auditor must not be aggressive in its initial approach to
fraud as trust may be lost by the client
b. The auditor must consider the likelihood of fraud existing in the
company in the planning stage.

Which of the following best represents actions that may indicate


fraud is pervasive throughout the company under audit?
a. The company's management negotiates deals with vendors in
such a manner as to pay lower prices.
b. The company's management drives luxury vehicles and takes
vacations to exotic places.
c. The company's management takes an overly aggressive
approach to revenue recognition.
d. The company's management estimates bad debts using an

aged accounts receivable ledger rather than as a percent of


sales.
c. The company's management takes an overly aggressive
approach to revenue recognition.

What should an audit team do when it discovers that fraud risk


factors are present on an audit engagement?
a. Retract from the client and inform regulatory bodies.
b. Modify procedures to actively search for the existence of fraud.
c. Reduce the amount of evidence required and resort to
management inquiry.
d. Turn the audit over to forensic accountants.
b. Modify procedures to actively search for the existence of fraud.

Which of the following best describes professional skepticism?


a. An intent to deceive
b. An attitude of intrusion and obstinacy
c. A character that does not waver
d. A questioning mind
d. A questioning mind

Management of Premium Discovery Company is compensated


through large salaries, stock options, and bonuses tied to the
company's working capital growth. The CEO is constantly holding
meetings to ensure that management is on target for increased
operating income each month. Based on the above information
only, what type of probable motivation is there to commit fraud at
Premium Discovery Company?
a. Incentive
b. Opportunity
c. Rationalization
d. Expectation
a. Incentive

Which of the following creates an opportunity for fraud to be


committed in an organization?
a. Management demands financial success
b. Poor internal controls
c. Commitments tied to debt covenants
d. Management is aggressive in its application of accounting rules
b. Poor internal controls

Which of the following statements about fraud or fraud detection


is true?
a. Management may physically alter evidence to perpetrate and
conceal the fraud.
b. Fraudulent financial reporting is generally not material enough

to consider.
c. Journal entries will supply evidence necessary to detect fraud.
d. The advent of new technology prevents fraud, thereby leading
to less fraud over time.
a. Management may physically alter evidence to perpetrate and
conceal the fraud.

Which of the following factors should an auditor consider in


evaluating the effect of fraud upon the planned audit procedures?
a. The type of fraud that may occur.
b. The potential materiality of fraud.
c. The likelihood of fraud occurring.
d. All of the above.
d. All of the above.

How often does the PCAOB inspect registered accounting firms


that audit fewer than 100 issuers?
a. Annually
b. Every two years
c. Every three years
d. Every five years
c. Every three years

Which of the following items are registered audit firms not required to report to
the audit committee?
a. Critical accounting policies and practices.
b. Alternative treatments of financial information within generally accepted
accounting principles that have been considered by management, as well as the
preferred treatment of the audit firm.
c. A list of all audit procedures performed.
d. Significant written communications between the audit firm and management.
c. A list of all audit procedures performed.
Chapter 3
The quality of an organization's internal controls affect which of
the following?
a. The reliability of financial data.
b. The ability of management to make good decisions.
c. The ability to remain in business.
d. All of the above.
d. All of the above.

With whom does the tone of internal control typically originate?


a. Auditors.
b. Employees.
c. Management.
d. Stockholders.

c. Management.

Which one of the following COSO components of internal controls


influences the tone for the organization?
a. Control risk assessment.
b. Control environment.
c. Information and communication.
d. Monitoring.
b. Control environment.

Which of the following services does the PCAOB require auditors


of public companies to perform?
a. A financial statement audit and an attest audit.
b. A financial statement audit and an assurance audit.
c. A financial statement audit and agreed upon procedures.
d. A financial statement audit and an examination of the
effectiveness of internal controls.
d. A financial statement audit and an examination of the
effectiveness of internal controls.

Which one of the following represents a control deficiency?


a. A missing control that is required for achievement objectives.
b. A control that operates as designed.
c. A control that ensures the reliability of financial reporting.
d. A control that does not prevent immaterial errors.
a. A missing control that is required for achievement objectives.

The COSO principle that an organization should identify and


assess changes that significantly impact the system of internal
control is related to which COSO component?
a. Control Environment
b. Risk Assessment
c. Control Activities
d. Monitoring
b. Risk Assessment

Requiring the mail clerk to prepare a listing of all checks received,


with copies of the list going to the cashier and to accounting, is an
example of which type of control?
a. Preventive.
b. Corrective.
c. Detective.
d. Directive.
a. Preventive.

Which of the following is another name for transaction controls?


a. Entity-wide controls.
b. Application controls.
c. Supporting controls.
d. Detail controls.
b. Application controls.

Internal control is a process affected by the organization's board


of directors, management, and other personnel to provide
reasonable assurance of achieving certain objectives. Which of
the following does not fit into one of these categories of
objectives?
a. Reliability of financial reporting.
b. Compliance with laws and regulations.
c. Continuing existence.
d. Effectiveness and efficiency of operations.
c. Continuing existence.

In a large company, who usually monitors the internal control?


a. External auditors.
b. PCAOB.
c. CFO.
d. Internal auditors.
d. Internal auditors.
Internal control is a process designed to achieve objectives in
which one of the following categories?
a. Reliability of financial reporting.
b. Compliance with applicable laws.
c. Operational effectiveness.
d. All of the above.
d. All of the above.

Which of the following is not included as a component of an


organization's internal control structure in the COSO Framework?
a. Control risk
b. Control enviroment
c. Risk assessment
d. Control activities
a. Control risk

The information and communication component of internal control


includes which of the following?
a. The organization deploys control activities through policies that
establish what is expected an in procedures that put policies into
action.
b. The organization obtains or generates and uses relevant,
quality information to support the functioning of other components

of internal control.
c. The organization identifies and assesses changes that could
significantly impact the system of internal control.
d. All of the above.
b. The organization obtains or generates and uses relevant, quality
information to support the functioning of other components of
internal control.

In an Integrated Audit, what is the independent external auditor


primarily concerned with?
a. Detecting all errors.
b. Controls over management override.
c. Determining whether the internal controls are effective.
d. Determining whether the controls promote efficiency.
c. Determining whether the internal controls are effective.

Which of the following is considered to be an entity-wide control?


a. Segregation of duties.
b. Controls over management override.
c. Determining whether internal controls are effective.
d. Determining whether the controls promote efficiency.
b. Controls over management override.

Which one of the following is an example of an internal risk for an


organization?
a. Changes in internal information technology.
b. Increases in substitute services or products.
c. Changes in reliability of source goods.
d. Changes in regulation that make the business model
unsustainable.
a. Changes in internal information technology.

Which one of the following is not a control activity implemented in


most accounting systems?
a. Segregation of duties.
b. Competent, trustworthy employees.
c. Authorization procedures.
d. All of these activities are normally implemented.
d. All of these activities are normally implemented.

Which of the following is not a way management obtains evidence


regarding the effectiveness of internal control over the accounting
system?
a. Performing a walkthrough of the accounting system.
b. Making inquiries of banks and attorneys.
c. Reviewing system flowcharts.
d. Taking plan and operational tours.

b. Making inquiries of banks and attorneys.

Which of the following is an example of a control environment


deficiency?
a. A low level of control consciousness withing the organization.
b. An audit committee that does not have independent members.
c. An audit committee that is not viewed as the client of the
external auditor.
d. All of the above.
d. All of the above.

Which statement is true concerning the documentation of internal


control?
a. Documentation should be sufficient to support the design and
operating effectiveness of internal controls.
b. Documentation requirements are standardized by the PCOAB.
c. Documentation of disbursements require paper and electronic
documentation.
d. Documentation of all transaction controls should be tested on
an annual basis.
a. Documentation should be sufficient to support the design and
operating effectiveness of internal controls.
Chapter 4

Under common law, which standard may a client sue an auditor


for failure to demonstrate due care?
a. Negligence
b. Gross negligence
c. Fraud
d. All of the above.
d. All of the above.

Which of the following may an auditor use as a defense under the


Securities Act of 1933?
a. Contributory Negligence
b. Scienter
c. Due Care
d. Immaterial loss
c. Due Care

Which of the following is not one of the reasons for increased


litigation related to audits?
a. Class action lawsuit.
b. Increased complexity of accounting standards.

c. Contingent-fee-based compensation for law firms.


d. Joint and several liability doctrines.
b. Increased complexity of accounting standards.

Liability based on federal securities law is known as which type of


law?
a. Common Law
b. Contract Law
c. Commercial Law
d. Statutory Law
d. Statutory Law

Which of the following is a principle of the Code of Ethics of the


International Ethics Standards Board for Accountants but not a
principle found in the AICPA Professional Code of Conduct?
a. Integrity
b. Professional Behavior
c. Confidentiality
d. Objectivity
b. Professional Behavior

What is information about a client that cannot be subpoenaed by


a court of law called?
a. Confidential information.
b. Privileged communication.
c. Contingent information.
d. Audit communication.
b. Privileged communication.

Which term best describes a situation in which an individual is


morally or ethically required to do something that conflicts with his
or her immediate self-interest?
a. An ethical dilemma.
b. An ethical problem.
c. An ethical theory.
d. None of the above.
a. An ethical dilemma.

In which of the following situations would a CPA be considered


independent?
a. A CPA has obtained an interest-free loan from a banking client.
b. A CPA has obtained a 90-day signature loan from a client.
c. A CPA has obtained a loan for investment purposes from a
client.
d. A CPA has obtained an auto loan from a banking client.
d. A CPA has obtained an auto loan from a banking client.

The concept of the Third-Party Beneficiary Test was established


by which court case?
a. Credit Alliance Corp. v. Touche
b. Ultramares Corp. v. Touche
c. Citizens State Bank v. Timm, Schmidt, & Co.
d. Rosenblum v. Adler
b. Ultramares Corp. v. Touche

For which of the following engagements are members of the


AICPA required to act with integrity and objectivity?
a. Tax preparation.
b. Financial statement review services.
c. Financial statement audits.
d. All engagements.
d. All engagements.

Which of the following concepts represents the most expansive


aspect of liability for auditors?
a. Foreseeable Party.
b. Identified User.
c. Foreseen Party.
d. Third-Party Beneficiary.
a. Foreseeable Party.

Which of the following is not an action required by Utilitarian


Theory?
a. Identify the potential problem.
b. Identify the potential impact of actions on each affected party.
c. Identify the rights of the affected parties.
d. Identify the desirability of each action.
c. Identify the rights of the affected parties.

Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's fiveyear-old daughter owns shares of stock in McBurgers
Corporation, then what is Pulley considered to have?
a. An immaterial indirect interest in McBurgers Corporation.
b. A material indirect interest in McBurgers Corporation.
c. A loophole for claiming independence from McBurgers
Corporation.
d. A direct financial interest in McBurgers Corporation.
d. A direct financial interest in McBurgers Corporation.

A member of the AICPA must safeguard the confidentiality of


client information. Which of the following is not a valid reason to
disclose information to non-clients?
a. To discuss information relating to inadequate disclosure in an
audit report.
b. To comply with a validly issued and enforceable subpoena or
summons.
c. To accommodate the review of client audit work papers under
AICPA, PCAOB, or State Board of Accountancy authority.
d. To explain the members of the press whether a client is likely to
miss payroll in the forthcoming periods.
d. To explain the members of the press whether a client is likely to
miss payroll in the forthcoming periods.

Julie Webb, CPA takes out an automobile loan with First National
Bank of Wellville (FNBW) while attending the University of
Wellville. Julie graduates one year later and is hired as an auditor
by Best and Driftwood, LLP. Her first assigned audit is with First
National Bank of Wellville, a client of Best and Driftwood. As a
new audit assistant, Julie continues to pay her automobile loan
payments each month. Which of the following best describes
Julie's independence status?
a. Impaired because Julie has a direct financial interest in FNBW.
b. Impaired because Julie has a material indirect financial interest
in FNBW.
c. Not impaired because Julie has a immaterial indirect financial
interest in FNBW.
d. Not impaired because Julie is permitted to take normal loans
from FNBW.
d. Not impaired because Julie is permitted to take normal loans
from FNBW.

Which of the following represents a situation in which an auditor is


independent of its client?
a. The audit fee paid by the client represents 10% of the auditor's
annual gross revenue.
b. The auditor takes a personal loan from the president of the
company.
c. The auditor's dependent son holds 25 shares of the client's
common stock.
d. The auditor has not received payment for the previous audit
services.
a. The audit fee paid by the client represents 10% of the auditor's
annual gross revenue.

From whom should a CPA not accept a commission for


recommending a product or service?
a. A tax client.
b. An audit client.
c. A financial-planning client.
d. A management-service client.
e. any of the above.
b. An audit client.

What is the purpose of an ethical framework?


a. To provide a defined methodology to solve the ethical problem.
b. To provide a defined methodology to aid the user in making
complex ethical decisions.
c. To provide a defined program to solve ethical dilemmas.
d. To provide all of the above.
b. To provide a defined methodology to aid the user in making
complex ethical decisions.
Chapter 5

The first general standard of the PCAOB requires that an audit be


performed by which type of person?
a. Au auditor with seasoned judgment in varying degrees of
supervision and review.
b. An auditor with appropriate technical training and proficiency.
c. An auditor with adequate knowledge of the standards of
fieldwork and reporting.
d. An auditor satisfying the independence standards.
b. An auditor with appropriate technical training and proficiency.

To satisfy the fieldwork standards, what must an auditor do?


a. Act with due care.
b. Gather sufficient appropriate evidence.
c. Be independent in mental attitude.
d. Have adequate knowledge about the client's industry.
e. All of the above.
b. Gather sufficient appropriate evidence.
a. Act with due care.--General Standard
c. Be independent in mental attitude.--General Standard
d. Have adequate knowledge about the client's industry.--Not a
standard

Which one of the following has the most affect on the reliability of
financial statements?
a. The size of the client.
b. The industry of the client.
c. The client's internal control structure.
d. The client's trend of earnings.
c. The client's internal control structure.

The standards of competence, independence, and due


professional care are covered by which of the generally accepted
auditing standards?
a. General standards.
b. Standards of fieldwork.
c. Reporting standards.
d. None of the above.
a. General standards.

Which of the following is the primary assertion related to testing


inventory on hand to see if it includes consignment goods?
a. Existence.
b. Completeness.
c. Valuation.
d. Rights and Obligations.
d. Rights and Obligations.

Which of the following groups are committed to the convergence


of the auditing standards?
a. IAASB.
b. PCAOB.
c. AICPA.
d. Both A and C.
e. All of the above.
d. Both A (IAASB) and C (AICPA).

Which of the following is a procedure that requests a direct written


response to the auditor from a third party?
a. Inquiry.
b. Confirmation.
c. Inspection.
d. Observation.
b. Confirmation.

What does the quality of the evidence an auditor collects depend


upon?
a. The nature of the procedures.
b. The extent of the procedures.
c. The timing of the procedures.
d. Both A and C.
e. All of the above.
e. All of the above.

Which one of the following is a requirement of the reporting


standards included in the generally accepted auditing standards?
a. The auditor will state explicitly whether the financial statements
are fairly presented in accordance with the applicable financial
reporting framework.
b. The auditor will identify in the auditor's report, those
circumstances in which auditing principles have not been
consistently observed in the current period in comparison to the
preceding period.
c. The auditor will review adjusting journal entries for accuracy,
and if the auditor concludes those entries are not reasonably
accurate, the auditor must so state in the auditor's report.
d. The auditor will express an unqualified opinion on the financial
statements, or will conduct additional audit procedures until such
an opinion can be expressed.
a. The auditor will state explicitly whether the financial statements
are fairly presented in accordance with the applicable financial
reporting framework.

Which type of audit documentation is required by PCAOB


standards?
a. Flowcharts.
b. Narratives.
c. Questionnaires.
d. A specific form of documentation is not required.
d. A specific form of documentation is not required.
Which of the following is a reason that the auditor uses an
accounting approach when performing an audit?
a. The accounting cycle approach allows the auditor to focus
exclusively on either the balance sheet or the income statement.
b. COSO internal control components are based on the
accounting cycles.
c. The accounting cycles provide a convenient way to break the

audit up into manageable pieces.


d. The auditor needs to be able to provide an opinion related to
each accounting cycle.
c. The accounting cycles provide a convenient way to break the
audit up into manageable pieces.

The AICPA Princples Governing an Audit include which of the


following categories that guide the conduct of an audit?
a. Purpose of an audit and premise upon which an audit is
conducted.
b. Responsibilities.
c. Performance.
d. All of the above.
d. All of the above.

What are the PCAOB standards that present guidance in testing


assertions and planning for the audit known as?
a. General standards.
b. Fieldwork standards.
c. Reporting standards.
d. None of the above.
b. Fieldwork standards.

Which assertion is most closely related to the determination of the


adequacy of the allowance for doubtful accounts?
a. Existence.
b. Valuation.
c. Rights and Obligations.
d. Presentation and Disclosure.
b. Valuation.

Which of the following is a procedure which analyzes plausible


relationships among financial and nonfinancial data?
a. Analytical procedures.
b. Scanning
c. Reviewing.
d. Observation.
a. Analytical procedures.

Which of the following statements about the auditing standards


issued by the AICPA is true?
a. The auditing standards issued by the AICPA are no longer

recognized by the PCAOB.


b. The auditing standards issued by the AICPA are no longer
recognized by the profession because the AICPA voted itself out
of existence.
c. The auditing standards issued by the AICPA continue to be
issued by that organization for audits of public companies.
d. The auditing standards issued by the AICPA were used by the
PCAOB as a starting point.
d. The auditing standards issued by the AICPA were used by the
PCAOB as a starting point.

Which of the following is not a typical accounting cycle?


a. Revenue.
b. Inventory.
c. Cash.
d. Internal Controls.
d. Internal Controls.

Which statement is true concerning materiality?


a. Misstatements are material if they could reasonably be
expected to influence the decisions of users of the financial
statements.
b. Materiality guidelines are specifically prescribed by the
PCAOB.
c. Materiality is not a useful concept in assessing internal control
effectiveness.
d. Materiality is a concept applied to financial statement
presentation but not to disclosures.
a. Misstatements are material if they could reasonably be expected
to influence the decisions of users of the financial statements.

With a substantive audit strategy, what is an auditor likely to do?


a. Extensively test internal controls.
b. Limit the testing of internal controls.
c. Not access the control risk.
d. Issue an adverse opinion on the financial statements.
b. Limit the testing of internal controls.

With a dual purpose test, what is an auditor likely to do?


a. Perform a substantive procedure concurrently with a test of
control.
b. Perform a substantive procedure concurrently with a risk
assessment test.

c. Perform a risk assessment test concurrently with a test of


control.
d. None of the above.
a. Perform a substantive procedure concurrently with a test of
control.
Chapter 6

Two determinants of the persuasiveness of evidence include


which of the following?
a. Competence and Sufficiency.
b. Relevance and Reliability.
c. Appropriate and Sufficiency.
d. Independence and Effectiveness
c. Appropriate and Sufficiency.
Appropriateness of evidence refers to relevance and reliability.

Directional testing involves testing transactions or balances


primarily for which type of error?
a. Overstatement.
b. Understatement.
c. Either overstatement or understatement.
d. Neither overstatement nor understatement.
c. Either overstatement or understatement.

Which one of the following would be considered the most reliable


type of audit evidence?
a. Purchase orders from vendors.
b. Customer accounts receivable files.
c. Computerized general ledger.
d. Confirmations from banks.
d. Confirmations from banks.

Which of the following is an example of inspection of


documentation?
a. Review shipping documents.
b. Estimate the expected amount of interest income.
c. Observe controls.
d. Recalculate the total amount included on a sales invoice.
a. Review shipping documents.

An audit program provides an effective means for which of the


following?
a. Reviewing the completeness and persuasiveness of
procedures performed.
b. Recording the audit work performed and those responsible for
performing the work.
c. Organizing and distributing the work.
d. All the above.
d. All the above.

External documentation may lack reliability. Which of the following


is the most probable reason for that?
a. The external party may be competent in performing duties.
b. The documentation may be properly understood by the client in
the response.
c. The auditor may decide not to use the documentation and
replace it with other documents.
d. The documentation may have been altered if the process is not
controlled from inception.
d. The documentation may have been altered if the process is not
controlled from inception.

When the auditor uses the audit procedure vouching she is


primarily concerned with which of the following assertions?
a. Completeness.
b. Existence.
c. Authorization.
d. Classification.
b. Existence.

Which one of the following is the primary reason for documenting


audit work?
a. To prevent litigation by other parties that question the audit
performance.
b. To provide a stand-alone medium that gives audit conclusions
and supports the opinion.
c. To give the client a full reporting of all work performed on their
behalf.
d. To supply a point of reference for all auditors performing the
work subsequently.
b. To provide a stand-alone medium that gives audit conclusions
and supports the opinion.

The processes used by management in developing estimates


include which of the following?
a. Controls over the process.
b. The reliability of underlying data in developing the estimate.
c. Use of outside experts by management (for example, how they
were used and their expertise).
d. All of the above.
d. All of the above.

In evaluating cost of evidence, which of the following evidence


qualities of the audit usually has the lowest cost?
a. High quality.
b. Medium quality.
c. Low quality.
d. All cost the same.
c. Low quality.
Which of the following audit judgements would an auditor be least
likely to use an audit specialist?
a. Existence of cash.
b. Valuation of works of art.
c. Valuation of oil and gas reserves.
d. Interpretation of laws and regulations.
a. Existence of cash.

Recalculations of the client's computations would not include


which of the following types of evidence?
a. Cutoff.
b. Footing.
c. Extension.
d. Cross-footing.
a. Cutoff.

Vouching of transactions deals with which of the following?


a. Testing forward.
b. Testing backward.
c. Testing at a point in time.
d. Directional testing either forward or backward.
b. Testing backward.

A date at which audit evidence is collected earlier than the


balance sheet date is referred to as what?

a. Subsequent date.
b. Cutoff period.
c. Significant date.
d. Interim date.
d. Interim date.

An auditor selects a sample of items recorded and traces them


back (vouches) to the supporting documentation. This is an
example of which of the following?
a. Directional testing for existence.
b. Directional testing for completeness.
c. Direct test for valuation.
d. Direct testing for rights.
a. Directional testing for existence.

Which of the following assertions is the primary assertion that is


satisfied by physically observing the client's count of inventory?
a. Rights.
b. Valuation.
c. Completeness.
d. Existence.
d. Existence.

An audit program is created to specify which of the following?


a. The type of audit opinion to be rendered based upon
procedures formed.
b. The audit procedures that will be performed every year for the
client.
c. How an auditor should think while performing audit procedures.
d. Audit objectives and procedures to be followed during the audit
process.
d. Audit objectives and procedures to be followed during the audit
process.

To be reliable evidence, confirmations must be controlled by


which of the following individuals?
a. A client employee responsible for accounts receivable.
b. An external auditor.
c. A client's internal audit department.
d. A client's controller or CFO.
b. An external auditor.

Which of the following is not a type of internal documentation?


a. Legal documents.
b. Business documents.
c. Third-party documents.
d. Accounting documents.
c. Third-party documents.

Which of the following types of audit evidence is the most


reliable?
a. Evidence from the client's organization.
b. Evidence from a poorly controlled system.
c. Directly observable evidence.
d. Facsimiles of documents.
c. Directly observable evidence.

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