TB 67890

Chapter 6
Multiple-Choice Questions
1. The objective of the ordinary audit of financial statements is the expression of

an opinion on:
easy a. the fairness of the financial statements.
a b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the balance sheet and income statement.
2. If the auditor believes that the financial statements are not fairly stated or is
easy unable to reach an conclusion because of insufficient evidence, the auditor:
c a. should withdraw from the engagement.
b. should request an increase in audit fees so that more resources can be used
to conduct the audit.
c. has the responsibility of notifying financial statement users through the
auditor’s report.
d. should notify regulators of the circumstances.
3. Auditors accumulate evidence to:

easy a. defend themselves in the event of a lawsuit.
d b. justify the conclusions they have otherwise reached.
c. satisfy the requirements of the Securities Acts of 1933 and 1934.
d. enable them to reach conclusions about the fairness of the financial
statements.
4. The responsibility for adopting sound accounting policies and maintaining

easy adequate internal control rests with the:
b a. board of directors.
b. company management.
c. financial statement auditor.
d. company’s internal audit department.
5. The auditor’s best defense when material misstatements are not uncovered is to
easy have conducted the audit:
a a. in accordance with auditing standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the management team.
6. If management insists on financial statement disclosures that the auditor finds

easy unacceptable, the auditor can:
a Issue an adverse audit Issue a qualified audit report
report
a. Yes Yes
b. No No
c. Yes No
d. No Yes
7. If management insists on financial statement disclosures that the auditor finds

easy unacceptable, the auditor can do all but which of the following?
b a. Issue an adverse audit report.
b. Issue a disclaimer of opinion.
c. Withdraw from the engagement.
d. Issue a qualified audit report.
8. Which of the following is not one of the reasons that auditors provide only
easy reasonable assurance on the financial statements?
d a. The auditor commonly examines a sample, rather than the entire population
of transactions.
b. Accounting presentations contain complex estimates which involve
uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority
of cases.
9. (Public) In certifying their annual financial statements, the CEO and CFO of a public
challenging company certify that the financial statements comply with the requirements of:
c a. GAAP.
b. the Sarbanes-Oxley Act.
c. the Securities Exchange Act of 1934.
d. GAAS.
10. Which of the following statements is most correct regarding errors and fraud?
easy a. An error is unintentional, whereas fraud is intentional.
a b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.
11. (SOX) Which of the following statements is true of a public company’s financial
statements?
easy a. Sarbanes-Oxley requires the CEO only to certify the financial statements.
c b. Sarbanes-Oxley requires the CFO only to certify the financial statements.
c. Sarbanes-Oxley requires the CEO and CFO to certify the financial
statements.
d. Sarbanes-Oxley neither requires the CEO nor the CFO to certify the
financial statements.
12. Which of the following is not one of the three categories of assertions?
easy a. Assertions about classes of transactions and events for the period under
audit
b b. Assertions about financial statements and correspondence to GAAP
c. Assertions about account balances at period end
d. Assertions about presentation and disclosure
13. If a short-term note payable is included in the accounts payable balance on the
easy financial statement, there is a violation of the:
d a. completeness assertion.
b. existence assertion.
c. cutoff assertion.
d. classification and understandability assertion.
14. Professional skepticism requires auditors to possess a(n) ______ mind.

easy a. introspective
b b. questioning
c. intelligent
d. unbelieving
15. The auditor has no responsibility to plan and perform the audit to obtain
easy reasonable assurance that misstatements, whether caused by errors or fraud, that
c are not ________ are detected.
a. important to the financial statements
b. statistically significant to the financial statements
c. material to the financial statements
d. identified by the client
16. Fraudulent financial reporting is most likely to be committed by whom?

easy a. Line employees of the company.
c b. Outside members of the company’s board of directors.
c. Company management.
d. The company’s auditors.
17. Which of the following would most likely be deemed a direct-effect illegal act?
easy a. Violation of federal employment laws.
c b. Violation of federal environmental regulations.
c. Violation of federal income tax laws.
d. Violation of civil rights laws.
18. The concept of reasonable assurance indicates that the auditor is:
easy a. not an insurer of the correctness of the financial statements.
a b. not responsible for the fairness of the financial statements.
c. responsible only for issuing an opinion on the financial statements.
d. responsible for finding all misstatements.
19. Tests of details of balances are specific procedures intended to:

easy a. test for monetary errors in the financial statements.
a b. prove that the accounts with material balances are classified correctly.
c. prove that the trial balance is in balance.
d. identify the details of the internal control system.
20. Which of the following is the auditor least likely to do when aware of an illegal
act?
easy a. Discuss the matter with the client’s legal counsel.
c b. Obtain evidence about the potential effect of the illegal act on the financial
statements.
c. Contact the local law enforcement officials regarding potential criminal
wrongdoing.
d. Consider the impact of the illegal act on the relationship with the
company’s management.
21. The auditor gives an audit opinion on the fair presentation of the financial
medium statements and associates his or her name with it when, on the basis of adequate
c evidence, the auditor concludes that the financial statements are unlikely to
mislead:
a. investors.
b. management.
c. a prudent user.
d. the reader.
22. The responsibility for the preparation of the financial statements and the
medium accompanying footnotes belongs to:
b a. the auditor.
b. management.
c. both management and the auditor equally.
d. management for the statements and the auditor for the notes.
23. When engaged to audit the financial statements, it is acceptable for the auditor
to draft:
medium
a The client’s financial The footnotes to the client’s financial
statements statements
a. Yes Yes
b. No No
c. Yes No
d. No Yes
24. The auditor has considerable responsibility for notifying users as to whether or
medium not the statements are properly stated. This imposes upon the auditor a duty to:
a a. provide reasonable assurance that material misstatements will be detected.
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial
statements.
d. be an insurer of the fairness in the statements.
25. “The auditor should not assume that management is dishonest, but the
easy possibility of dishonesty must be considered.” This is an example of:
b a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. a rule in the AICPA’s Code of Professional Conduct.
26. If the auditor were responsible for making certain that all of management’s
medium assertions in the financial statements were absolutely correct:
d a. bankruptcies could no longer occur.
b. bankruptcies would be reduced to a very small number.
c. audits would be much easier to complete.
d. audits would not be economically feasible.
27. The auditor’s best defense when existing material misstatements in the financial
medium statements are not uncovered in the audit is:
d a. the audit was conducted in accordance with generally accepted accounting
principles.
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.
28. Fraudulent financial reporting is often called:

medium a. management fraud.
a b. theft of assets.
c. defalcation.
d. embezzlement.
29. Which of the following statements is usually true?

challenging a. It is easier for the auditor to uncover fraud than errors.
c b. It is easier for the auditor to uncover indirect-effect illegal acts than fraud.
c. The auditor’s responsibility for detecting direct-effect illegal acts is similar
to the responsibility to detect fraud.
d. The auditor’s responsibility for detecting indirect-effect illegal acts is
similar to the responsibility to detect fraud.
30. Auditing standards make _____ distinction(s) between the auditor’s

medium responsibilities for searching for errors and fraud.
c a. little
b. a significant
c. no
d. various
31. In comparing management fraud with employee fraud, the auditor’s risk of
medium failing to discover the fraud is:
b a. greater for management fraud because managers are inherently more
deceptive than employees.
b. greater for management fraud because of management’s ability to override
existing internal controls.
c. greater for employee fraud because of the higher crime rate among blue
collar workers.
d. greater for employee fraud because of the larger number of employees in
the organization.
32. Which of the following statements is correct with respect to the auditor’s
medium responsibilities relative to the detection of indirect-effect illegal acts?
a a. The auditor has no responsibility for searching for indirect-effect illegal
acts.
b. The auditor has the same responsibility for searching for indirect-effect
illegal acts as any other potential misstatement that may occur.
c. Auditors have responsibility for searching for any illegal act, whether
direct-effect or indirect-effect.
d. Discovery of indirect-effect illegal acts is usually easier than discovery of
fraud.
33. When comparing the auditor’s responsibility for detecting employee fraud and
medium for detecting errors, the profession has placed the responsibility:
c a. more on discovering errors than employee fraud.
b. more on discovering employee fraud than errors.
c. equally on discovering either one.
d. on the senior auditor for detecting errors and on the manager for detecting
employee fraud.
34. If several employees collude to falsify documents, the chance a normal audit
medium would uncover such acts is:
a a. very low.
b. very high.
c. zero.
d. none of the above.
35. When planning the audit, if the auditor has no reason to believe that illegal acts
medium exist, the auditor should:
d a. include audit procedures which have a strong probability of detecting
illegal acts.
b. still include some audit procedures designed specifically to uncover
illegalities.
c. ignore the issue.
d. make inquiries of management regarding their policies for detecting and
preventing illegal acts and regarding their knowledge of violations, and
then rely on normal audit procedures to detect errors, irregularities, and
illegalities.
36. When the auditor has reason to believe an illegal act has occurred, the auditor
should:
medium a. inquire of management only at one level below those likely to be involved
with the illegality.
c b. begin communication with the FASB in accordance with PCAOB
regulations.
c. consider accumulating additional evidence to determine if there is actually
an illegal act.
d. withdraw from the engagement.
37. When the auditor knows that an illegal act has occurred, the auditor must:
medium a. report it to the proper governmental authorities.
b b. consider the effects on the financial statements, including the adequacy of
disclosure.
c. withdraw from the engagement.
d. issue an adverse opinion.
38. (Public) If an auditor uncovers an illegal act at a public company, the auditor must
notify:
medium a. local law enforcement officials.
c b. the Public Company Accounting Oversight Board.
c. the Securities and Exchange Commission.
d. all of the above.
39. Why does the auditor divide the financial statements into smaller segments?
medium a. Using the cycle approach makes the audit more manageable.
a b. Most accounts have few relationships with others and so it is more efficient
to break the financial statements into smaller pieces.
c. The cycle approach is used because auditing standards require it.
d. All of the above are correct.
40. Why does the auditor divide the financial statements into segments around the
medium financial statement cycles?
b a. Most auditors are trained to audit cycles as opposed to entire financial
statements.
b. The approach aids in the assignment of tasks to different members of the
audit team.
c. The cycle approach is required by auditing standards.
d. The cycle approach allows the auditor to detect indirect-effect illegal acts.
41. The most important general ledger account included in and affecting several
cycles is the:
medium a. cash account.
a b. inventory account.
c. income tax expense and liability accounts.
d. retained earnings account.
42. Management assertions are:

medium a. implied or expressed representations about accounts, transactions, and
a disclosures in the financial statements.
b. stated in the footnotes to the financial statements.
c. explicitly expressed representations about the financial statements.
d. provided to the auditor in the assertions letter, but are not disclosed on the
43. Which of the following statements is true?

medium a. Audit objectives follow and are closely related to management assertions.
a 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.
44. Which of the following statements is true regarding the distinction between
medium general audit objectives and specific audit objectives for each account balance?
b a. The specific audit objectives are applicable to every account balance on the
b. The general audit objectives are applicable to every account balance on the
c. The general audit objectives are stated in terms tailored to the engagement.
d. For any given class of transactions, usually only one audit objective must
be met to conclude the transactions are properly recorded..
45. Which of the following statements about the existence and completeness
assertions is not true?
medium a. The existence and completeness assertions emphasize different audit
concerns.
c b. Existence deals with overstatements and completeness deals with
understatements.
c. Existence deals with understatements and completeness deals with
overstatements.
d. The completeness assertion deals with unrecorded transactions.
46. The occurrence assertion applies to _______.

medium a. presentation and disclosure matters
b b. classes of transactions and events during the period
c. account balances
d. proper classification of income statement accounts
47. Which of the following management assertions is not associated with

medium transaction-related audit objectives?
b a. Occurrence
b. Classification and understandability
c. Accuracy
d. Completeness
48. Which of the following statements is not true?

medium a. Balance-related audit objectives are applied to account balances.
d b. Transaction-related audit objectives are applied to classes of transactions.
c. Balance-related audit objectives are applied to the ending balance in
balance sheet accounts.
d. Balance-related audit objectives are applied to both beginning and ending
balances in balance sheet accounts.
49. In testing for cutoff, the objective is to determine:

medium a. whether all of the current period’s transactions are recorded.
b b. whether transactions are recorded in the correct accounting period.
c. the proper cutoff between capitalizing and expensing expenditures.
d. the proper cutoff between disclosing items in footnotes or in account
balances.
50. The detail tie-in objective is not concerned that the details in the account
balance:
medium a. agree with related subsidiary ledger amounts.
b b. are properly disclosed in accordance with GAAP.
c. foot to the total in the account balance.
d. agree with the total in the general ledger.
51. The detail tie-in is part of the_______ assertion for account balances.
medium a. classification
b b. valuation and allocation
c. rights and obligations
d. completeness
52. Which of the following is not a proper match of a transaction-related audit

medium objective and management assertion?
a a. Accuracy and cutoff.
b. Classification and classification.
c. Posting and summarization with accuracy.
d. Occurrence and occurrence.
53. Which of the following statements is not correct?

medium a. There are many ways an auditor can accumulate evidence to meet overall
audit objectives.
d b. Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility.
c. It is appropriate to minimize the cost of accumulating evidence.
d. Gathering evidence and minimizing costs are equally important
considerations that affect the approach the auditor selects.
54. Two overriding considerations affect the many ways an auditor can accumulate
evidence:
medium 1. Sufficient appropriate evidence must be accumulated to meet the auditor’s
a professional responsibility.
2. Cost of accumulating evidence should be minimized.
In evaluating these considerations:
a. the first is more important than the second.
b. the second is more important than the first.
c. they are equally important.
d. it is impossible to prioritize them.
55. If the auditor has obtained a reasonable level of assurance about the fair
medium presentation of the financial statements through understanding internal control,
b assessing control risk, testing controls, and analytical procedures, then the
auditor:
a. can issue an unqualified opinion.
b. can significantly reduce other substantive tests.
c. can write the engagement letter.
d. needs to perform additional tests of controls so that the assurance level can
be increased.
56. After the auditor has completed all audit procedures, it is necessary to combine
medium the information obtained to reach an overall conclusion as to whether the
d financial statements are fairly presented. This is a highly subjective process that
relies heavily on:
a. generally accepted auditing standards.
b. the AICPA’s Code of Professional Conduct.
c. generally accepted accounting principles.
d. the auditor’s professional judgment.
57. Which of the following combinations is correct?

medium a. Existence relates to whether the amounts in accounts are understated.
c b. Occurrence relates to whether balances exist.
c. Existence relates to whether amounts included exist.
d. Occurrence relates to whether the amounts in accounts occurred in the
proper year.
58. If an auditor conducted an audit in accordance with auditing standards, which of

medium the following would the auditor likely detect?
b a. Unrecorded transactions.
b. Incorrect postings of recorded transactions.
c. Counterfeit signatures on paid checks.
d. Fraud involving collusion.
59. Which of the following statements best describes the auditor’s responsibility
medium with respect to illegal acts that do not have a material effect on the client’s
financial statements?
a a. Generally, the auditor is under no obligation to notify parties other than
personnel within the client’s organization.
b. Generally, the auditor is under an obligation to inform the PCAOB.
c. Generally, the auditor is obligated to disclose the relevant facts in the
auditor’s report.
d. Generally, the auditor is expected to compel the client to adhere to
requirements of the Foreign Corrupt Practices Act.
60. Which of the following statements best describes the auditor’s responsibility
medium regarding the detection of fraud?
c a. The auditor is responsible for the failure to detect fraud only when such
failure clearly results from nonperformance of audit procedures specifically
described in the engagement letter.
b. The auditor must extend auditing procedures to actively search for
evidence of fraud in all situations.
c. The auditor must extend auditing procedures to actively search for
evidence of fraud where the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an
unqualified opinion is issued.
61. The essence of the attest function is to:

medium a. assure the consistent application of correct accounting procedures.
b b. determine whether the client’s financial statements are fairly stated.
c. examine individual transactions so that the auditor may certify as to their
validity.
d. detect collusion and fraud.
62. The primary difference between an audit of the balance sheet and an audit of the
medium income statement is that the audit of the income statement deals with the
verification of:
a a. transactions.
b. authorizations.
c. costs.
d. cutoffs.
63. The auditor’s evaluation of the likelihood of material employee fraud is

challenging normally done initially as a part of:
c a. tests of controls.
b. tests of transactions.
c. understanding the entity’s internal control.
d. the assessment of whether to accept the audit engagement.
64. When using the cycle approach to segmenting the audit, the reason for treating
challenging capital acquisition and repayment separately from the acquisition of goods and
services is that:
c a. the transactions are related to financing a company rather than to its
operations.
b. most capital acquisition and repayment cycle accounts involve few
transactions, but each is often highly material and therefore should be
audited extensively.
c. both a and b are correct.
d. neither a nor b is correct.
65. Illegal acts are defined in SAS 54 (AU217) as:

challenging a. violations of laws or government regulations.
c b. violations of laws or government regulations other than errors.
c. violations of laws or government regulations other than fraud.
d. violations of law which would result in the arrest of the perpetrator.
66. Most illegal acts affect the financial statements:

challenging a. directly.
b b. only indirectly.
c. both directly and indirectly.
d. materially if direct; immaterially if indirect.
67. With respect to the detection of illegal acts, auditing standards state that the
auditor provides:
challenging a. no assurance that they will be detected.
a b. the same reasonable assurance provided for other items.
c. assurance that they will be detected, if material.
d. assurance that they will be detected, if highly material.
68. In describing the cycle approach to segmenting an audit, which of the following
challenging statements is not true?
d a. All general ledger accounts and journals are included at least once.
b. Some journals and general ledger accounts are included in more than one
cycle.
c. The “capital acquisition and repayment” cycle is closely related to the
“acquisition of goods and services and payment” cycle.
d. The “inventory and warehousing” cycle may be audited at any time during
the engagement since it is unrelated to the other cycles.
69. Which of the following journals would be included most often in the various
audit cycles?
challenging a. Cash receipts journal.
c b. Cash disbursements journal.
c. General journal.
d. Sales journal.
70. Transaction cycles begin and end:
challenging a. at the beginning and end of the fiscal period.
d b. each start of the annual audit.
c. at January 1 and December 31.
d. at the origin and final disposition of the company.
71. After general audit objectives are understood, specific audit objectives for each
challenging account balance on the financial statements can be developed. Which of the
following statements is true?
a a. There should be at least one specific objective for each relevant general
objective.
b. There will be only one specific objective for each relevant general
objective.
c. There will be many specific objectives developed for each relevant general
objective.
d. There must be one specific objective for each general objective.
72. An auditor should recognize that the application of auditing procedures may
challenging produce evidence indicating the possibility of errors or fraud and therefore
should:
a a. plan and perform the engagement with an attitude of professional
skepticism.
b. not rely on internal controls that are designed to prevent or detect errors or
fraud.
c. design audit tests to detect unrecorded transactions.
d. extend the work to audit most recorded transactions and records of an
entity.
Other Objective Answer Format Questions
85. Match seven of the terms (a-k) with the definitions provided below (1-7):
medium
a. Tests of details of balances
b. Tests of controls
c. Substantive tests of transactions
d. Analytical procedures
e. Transaction-related audit objectives
f. Management assertions
g. Balance-related audit objectives
h. Fraud
i. Illegal act
j. Error
k. Management fraud
h 1. An intentional misstatement of the financial statements.
e 2. A set of six audit objectives the auditor must meet, including

timing, posting and summarization, and accuracy.
f 3. Implied or expressed representations made by the client about

classes of transactions, account balances and disclosures in the
a 4. Audit procedures testing for monetary misstatements to determine

whether the balance-related audit objectives have been satisfied for
each significant account balance.
g 5. A set of nine audit objectives the auditor must meet, including

completeness, detail tie-in, and rights and obligations.
b 6. Audit procedures designed to test the effectiveness of control

policies and procedures.
d 7. Use of comparisons and relationships to assess whether account
balances or other data appears reasonable.
86. Below are five audit procedures, all of which are tests of transactions associated
challenging with the audit of the sales and collection cycle. Also below are the six general
transaction-related audit objectives and the five management assertions. For
each audit procedure, indicate (1) its audit objective, and (2) the management
assertion being tested.
Audit Objectives Assertions

A. Occurrence V. Occurrence
B. Completeness W. Completeness
C. Accuracy X. Accuracy
D. Posting and summarization Y. Classification
E. Classification Z. Cutoff
F. Timing
1. Vouch recorded sales from the sales journal to the file of bills of lading.
A (1) .
V (2) .
2. Compare dates on the bill of lading, sales invoices, and sales journal to test
for delays in recording sales transactions.
F (1) .
Z (2) .
3. Account for the sequence of prenumbered bills of lading and sales invoices.
B (1) .
W (2) .
4. Trace from a sample of prelistings of cash receipts to the cash receipts

journal, testing for names, amounts, and dates.
B, C (1) .
W, X (2) .
5. Examine customer order forms for credit approval by the credit manager.
A (1) .
V (2) .
87. Below are five audit procedures, all of which are tests of transactions associated
challenging with the audit of the acquisition and payment cycle. Also below are the six general
transaction-related audit objectives and the five management assertions. For each
audit procedure, indicate (1) its audit objective, and (2) the management assertion
being tested.

A. Occurrence V. Occurrence
C. Accuracy X. Accuracy
D. Posting and summarization Y. Classification
E. Classification Z. Cutoff
F. Timing
1. Foot the purchases journal and trace the totals to the related general ledger
accounts.
D (1) .
X (2) .
2. Recompute the cash discounts taken by the client.
C (1) .
X (2) .
3. Compare dates on cancelled checks with the bank cancellation date.

F (1) .
Z (2) .
4. Trace from a sample of cancelled checks to the cash disbursements journal.

B (1) .
W (2) .
5. Examine supporting documentation for a sample of transactions for

authorized payee and amount and to determine services or goods were received.
A (1) .
V (2) .
88. Below are five audit procedures, all of which are tests of balances associated with
challenging the audit of accounts receivable. Also below are the eight general balance-related
audit objectives and the four management assertions. For each audit procedure,
indicate (1) its audit objective, and (2) the management assertion being tested.

A. Existence V. Existence
C. Accuracy X. Valuation and
allocation
D. Classification Y. Rights and
obligations
E. Cutoff
F. Detail tie-in
G. Realizable value
H. Rights and obligations
1. Obtain an aged listing of accounts receivable. For a sample of individual

customers on the listing, agree the customer’s name, amount, and other
information with the corresponding information in the accounts receivable master
file.
F (1) .
X (2) .
2. Examine details of sales for five days before and five days after year-end to
determine whether sales have been recorded in the proper period.
E (1) .
X (2) .
3. Assess the reasonableness of the balance in the allowance for doubtful

accounts.
G (1) .
X (2) .
4. Inquire as to whether any accounts receivable have been factored or sold

during the period.
H (1) .
Y (2) .
5. Inquire as to whether there are any receivables from related parties.

D (1) .
X (2) .
89. Responsibility for the fair presentation of financial statements rests equally with
easy management and the auditor.
b a. True
b. False
90. Errors are usually more difficult for an auditor to detect than frauds.
easy a. True
b b. False
91. Auditors have found that the most efficient way to conduct audits is to focus
easy primarily on testing classes of transactions and performing minimal or no tests of
b ending account balances.
a. True
b. False
92. When an auditor has reduced assessed control risk based on tests of controls, he or
easy she may then reduce the extent to which the accuracy of the financial statement
a information directly related to those controls must be supported through the
accumulation of evidence using substantive tests.
a. True
b. False
93. Tests of details of balances typically involve the use of comparisons and
easy relationships to assess the overall reasonableness of account balances.
b a. True
b. False
94. Other than inquiring of management about policies they have established to
easy prevent illegal acts and whether management knows of any laws or regulations
a that the company has violated, the auditor should not search for indirect-effect
illegal acts unless there is reason to believe they may exist.
a. True
b. False
95. When an auditor believes that an illegal act may have occurred, the first step he or
easy she should take is to inquire of management at a level above those likely to be
a involved in the potential illegal act.
a. True
b. False
96. Audits are expected to provide a higher degree of assurance for the detection of
medium material frauds than is provided for an equally material error.
b a. True
b. False
97. Auditors have a higher degree of responsibility for detecting direct-effect illegal
medium acts than indirect-effect illegal acts.
a a. True
b. False
98. The auditor’s first course of action when an illegal act is uncovered should be to
medium immediately notify the appropriate authorities, including but not limited to the
b police, and for publicly held companies, the Securities and Exchange
Commission.
a. True
b. False
99. Under the cycle approach to segmenting an audit, transactions recorded in

medium different journals should never be combined with the general ledger balances that
b result from those transactions.
a. True
b. False
100. General transaction-related audit objectives vary from audit to audit, depending on
medium the nature and characteristics of the client’s business and industry.
b a. True
b. False
101. The audit objective of posting and summarization is associated with the
medium management assertion of accuracy.
a a. True
b. False
102. Balance-related audit objectives are usually applied to the ending balance in
medium income statement accounts; transaction-related audit objectives are usually applied
b to transactions reflected in balance sheet accounts.
a. True
b. False
103. The transaction-related audit objective of timing is related to the assertion of

medium cutoff.
a a. True
b. False
104. The effect of a violation of the existence transaction-related audit objective for the
medium sales account would be an overstatement of that account.
a a. True
b. False
105. The effect of a violation of the completeness transaction-related audit objective for
medium cash disbursements transactions would be an overstatement of cash disbursements.
b a. True
b. False
106. The transaction-related audit objective that deals with whether recorded
medium transactions have actually occurred is the completeness objective.
b a. True
b. False
107. The general balance-related audit objective that deals with determining that details
medium in the account balance agree with related master file amounts, foot to the total in
a the account balance, and agree with the total in the general ledger is the detail tie-
in objective.
a. True
b. False
108. The cutoff objective, “transactions near the balance sheet date are recorded in the
medium proper period,” is a balance-related audit objective.
a a. True
b. False
109. For a private company audit, tests of controls are normally performed only on
medium those internal controls the auditor believes have not been operating effectively
b during the period under audit.
a. True
b. False
110. An audit generally provides no assurance that indirect-effect illegal acts will be
medium detected.
a a. True
b. False
111. When an auditor believes there is a moderate or high risk of management fraud,
medium the auditor will normally do less audit work at interim dates instead of at year-end.
a a. True
b. False
112. An auditor must inform a client’s audit committee of an illegal act discovered
challenging during an audit in writing.
b a. True
b. False
113. The objective of the audit of financial statements by an independent auditor is to

challenging verify that the financial statements are free of misstatements and accurately
b represent the company’s financial position and results of operations.
a. True
b. False
114. The auditor’s responsibility for uncovering direct-effect illegal acts is the same as
challenging for fraud.
a a. True
b. False
Chapter 7
1. Auditors must make decisions regarding what evidence to gather and how much
Easy to accumulate. Which of the following is a decision that must be made by
c auditors related to evidence?
Sample size Timing of audit procedures

a. Yes Yes
b. No No
c. Yes No
d. No Yes
2. Audit procedures may be performed:

Easy
a Prior to the fiscal year-end of Subsequent to the fiscal year-end of
the client the client
a. Yes Yes
b. No No
c. Yes No
d. No Yes
3. Which of the following forms of evidence is most reliable?

easy a. General ledger account balances.
b b. Confirmation of accounts receivable balance received from a customer.
c. Internal memo explaining the issuance of a credit memo.
d. Copy of month-end adjusting entries.
4. Which of the following is not a characteristic of the reliability of evidence?

easy a. Effectiveness of client internal controls.
b b. Education of auditor.
c. Independence of information provider.
d. Timeliness.
5. Which of the following is not a characteristic of the reliability of evidence?

easy a. Qualification of individual providing information.
c b. Auditor’s direct knowledge.
c. Degree of subjectivity.
d. Degree of objectivity.
6. Calculating the gross margin as a percent of sales and comparing it with
easy previous periods is what type of evidence?
b a. Physical examination.
b. Analytical procedures.
c. Observation.
d. Inquiry
7. Audit evidence obtained directly by the auditor will not be reliable if:
easy a. the auditor lacks the qualifications to evaluate the evidence.
a b. it is provided by the client’s attorney.
c. the client denies its veracity.
d. it is impossible for the auditor to obtain additional corroboratory evidence.
8. Appropriateness of evidence is a measure of the:

easy a. quantity of evidence.
b b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.
9. Which of the following statements regarding the relevance of evidence is

correct?
easy a. To be relevant, evidence must pertain to the audit objective of the evidence.
a b. To be relevant, evidence must be persuasive.
c. To be relevant, evidence must relate to multiple audit objectives.
d. To be relevant, evidence must be derived from a system including effective
internal controls.
10. Two determinants of the persuasiveness of evidence are:

easy a. competence and sufficiency.
c b. relevance and reliability.
c. appropriateness and sufficiency.
d. independence and effectiveness.
11. Three common types of confirmations used by auditors are (1) negative
easy confirmations, (2) blank form positive confirmations, and (3) positive
c confirmations with information included. Place the confirmations in order of
reliability from highest to lowest.
a. 1, 2, 3.
b. 3, 2, 1.
c. 2, 3, 1.
d. 3, 1, 2.
12. When auditors use documents to support recorded transactions, the process is
often called:
easy a. inquiry.
c b. confirmation.
c. vouching.
d. physical examination.
13. An example of an external document is:

easy a. employees’ time reports.
b b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.
14. An example of a document the auditor receives from the client, but which was
easy prepared by someone outside the client’s organization, is a(n):
c a. confirmation.
b. sales invoice.
c. vendor invoice.
d. bank reconciliation.
15. “Evaluations of financial information made by a study of plausible relationships
easy among financial and nonfinancial data involving comparisons of recorded
a amounts to expectations developed by the auditor” is a definition of:
a. analytical procedures.
b. tests of transactions.
c. tests of balances.
d. auditing.
16. Often, auditor procedures result in significant differences being discovered by

the auditor. The auditor should investigate further if:
Easy
a Significant differences are not Significant differences are
expected but do exist expected but do not exist
a. Yes Yes
b. No No
c. Yes No
d. No Yes
17. Which of the following is not a purpose of analytical procedures?

easy a. Understand the client’s industry.
c b. Assess the client’s ability to continue as a going concern.
c. Evaluate internal controls.
d. Reduce detailed audit tests.
18. Which of the following forms of evidence would be least persuasive in forming
medium the auditor’s opinion?
a a. Responses to auditor’s questions by the president and controller regarding
the investments account.
b. Correspondence with a stockbroker regarding the quantity of client’s
investments held in street name by the broker.
c. Minutes of the board of directors authorizing the purchase of stock as an
investment.
d. The auditor’s count of marketable securities.
19. Which of the following statements is not true? “The evidence-gathering

technique of inquiry:
medium a. cannot be regarded as conclusive.”
c b. requires the gathering of corroborative evidence.”
c. is the auditor’s principal method of evaluating the client’s internal control.”
d. does not provide evidence from an independent source.”
20. (SOX) Sarbanes-Oxley requires auditors of public companies to maintain audit

medium documentation for what period of time?
c a. Not less than 3 years.
b. Not less than 5 years.
c. Not less than 7 years.
d. Through the issuance of the financial statements.
21. Analytical procedures must be used during which phase(s) of the audit?
medium
Test of Controls Planning Completion
b a. Yes Yes Yes
b. No Yes Yes
c. Yes No No
d. No No No

medium a. It is possible to vary the sample size from one unit to 100% of the items in
the population.
b b. The decision of how many items to test should not be influenced by the
increased costs of performing the additional tests.
c. The decision of how many items to test must be made by the auditor for
each audit procedure.
d. The sample size for any given procedure is likely to vary from audit to
audit.
23. Auditors will replace tests of details with analytical procedures when possible
because the:
medium a. analytical procedures are more reliable.
b b. tests of details are more expensive.
c. analytical procedures are more persuasive.
d. tests of details are more difficult to interpret.

medium a. Persuasiveness of evidence is partially determined by the reliability of
evidence.
c b. The quantity of evidence obtained determines its sufficiency.
c. The auditor need not consider the independence of an information source
when obtaining evidence.
d. Evidence obtained directly by the auditor is ordinarily more reliable than
evidence obtained from other sources.
25. Which one of the following is not one of the primary purposes of audit
documentation?
medium a. A basis for planning the audit.
d b. A record of the evidence accumulated and the results of the tests.
c. A basis for review by supervisors and partners.
d. A basis for determining work deficiencies by peer review teams.
26. Which of the following is the most objective type of evidence?

medium a. A letter written by the client’s attorney discussing the likely outcome of
outstanding lawsuits.
b b. The physical count of securities and cash.
c. Inquiries of the credit manager about the collectibility of noncurrent
accounts receivable.
d. Observation of cobwebs on some inventory bins.
27. Which of the following statements regarding documentation is not correct?

medium a. Documentation includes examining client records such as general ledgers
b and supporting journals.
b. Internal documents are documents that are generated within the company
and used to communicate with external parties.
c. External documents are documents that are generated outside of the
company and are used to communicate the results of a transaction.
d. External documents are considered more reliable than internal documents.
28. When making decisions about evidence for a given audit, the auditor’s goal is to
medium obtain a sufficient amount of timely, reliable evidence that is relevant to the
c information being verified, and to do so:
a. no matter the cost involved in obtaining such evidence.
b. at any cost because the costs are billed to the client.
c. at the lowest possible total cost.
d. at the cost suggested in the engagement letter.
29. “Physical examination” is the inspection or count by the auditor of items such
as:
medium a. cash, inventory, and payroll timecards.
d b. cash, inventory, canceled checks, and sales documents.
c. cash, inventory, canceled checks, and tangible fixed assets.
d. cash, inventory, securities, notes receivable, and tangible fixed assets.
30. Which items affect the sufficiency of evidence when choosing a sample?
medium
c Selecting items with a high likelihood The randomness of the items
of misstatement selected
a. Yes Yes
b. No No
c. Yes No
d. No Yes
31. Which of the following is an example of vouching?

medium a. Trace inventory purchases from the acquisitions journal to supporting
invoices.
a b. Trace selected sales invoices to the sales journal.
c. Trace details of employee paychecks to the payroll journal.
d. All of the above are examples of vouching.
32. Which of the following statements about confirmations is true?

medium a. Confirmations are expensive and so are often not used.
b b. Confirmations may inconvenience those asked to supply them, but they are
widely used.
c. Confirmations are sometimes not reliable and so auditors use them only as
necessary.
d. Confirmations are required for several balance sheet accounts but no
income statement accounts.
33. Traditionally, confirmations are used to verify:

medium a. individual transactions between organizations, such as sales transactions.
b b. bank balances and accounts receivable.
c. fixed asset additions.
d. payroll expenses.
34. To be considered reliable evidence, confirmations must be controlled by:

medium a. a client employee responsible for accounts receivable.
b b. a financial statement auditor.
c. a client’s internal audit department.
d. a client’s controller or CFO.
35. Indicate whether confirmation of accounts receivable and accounts payable is

medium required or optional:
b
Accounts Receivable Accounts Payable
a. Required Required
b. Required Optional
c. Optional Required
d. Optional Optional
36. The Auditing Standards Board has concluded that analytical procedures are so
medium important that they are required during: Planning and completion phase
b a. planning and test of control phases.
b. planning and completion phases.
c. test of control and completion phases.
d. planning, test of control, and completion phases.
37. Which of the following statements regarding analytical procedures is not

correct?
medium a. Analytical tests emphasize a comparison of client internal controls to
GAAP.
a b. Analytical procedures are required on all audits.
c. Analytical procedures can be used as substantive tests.
d. For certain accounts with small balances, analytical procedures alone may
be sufficient evidence.
38. A benefit obtained from comparing the client’s data with industry averages is
medium that it provides a(n):
a a. indication of the likelihood of financial problems.
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.”
39. The primary purpose of performing analytical procedures in the planning phase
medium of an audit is to:
a 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.
40. Which of the following is not a correct combination of terms and related type of
audit evidence?
medium a. Foot – reperformance.
d b. Compare – documentation.
c. Vouch – documentation.
d. Trace – analytical procedures. -documentation
41. Which of the following is not a correct combination of terms and related type of
audit evidence?
medium a. Inquire – inquiries of client.
c b. Count – physical examination.
c. Recompute – documentation. calculate
d. Read – documentation.
42. Which of the following is not one of the major types of analytical procedures?
medium a. Compare client with industry averages.
d b. Compare client with prior year.
c. Compare client with budget.
d. Compare client with SEC averages.
43. What is the overall objective of audit documentation?

medium a. Defend against claims of a deficient audit.
c b. Provide a basis for reviewing the work of subordinates.
c. Provide reasonable assurance that the audit was conducted in accordance
with standards.
d. Provide additional support of recorded amounts to the client.
44. An important benefit of industry comparisons is as:

medium a. an aid to understanding the client’s business.
a b. an indicator of errors.
c. an indicator of fraud.
d. a least-cost indicator for audit procedures.
45. The permanent files included as part of audit documentation do not normally
include:
medium a. a copy of the current and prior years’ audit programs.
a b. copies of articles of incorporation, bylaws and contracts.
c. information related to the understanding of internal control.
d. results of analytical procedures from prior years.
46. Those procedures specifically outlined in an audit program are primarily

designed to
medium a. prevent litigation.
d b. detect errors or irregularities.
c. test internal systems.
d. gather evidence.
47. Evidence is generally considered appropriate when:

medium a. it has been obtained by random selection.
c b. there is enough of it to afford a reasonable basis for an opinion on financial
statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it consists of written statements made by managers of the enterprise under
audit.
48. Given the economic constraints in which auditors collect evidence, the auditor
challenging normally gathers evidence that is:
c a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.
49. The auditor is concerned that a client is failing to bill customers for shipments.
challenging An audit procedure that would gather relevant evidence would be to:
b a. select a sample of duplicate sales invoices and trace each to related
shipping documents.
b. trace a sample of shipping documents to related duplicate sales invoices.
c. trace a sample of Sales Journal entries to the Accounts Receivable
subsidiary ledger.
d. compare the total of the Schedule of Accounts Receivable with the balance
of the Accounts Receivable account in the general ledger.
50. Relevance – specific - can be considered only in terms of:

challenging a. general audit objectives.
b b. specific audit objectives.
c. transaction audit objectives.
d. balance audit objectives.
51. Audit documentation should possess certain characteristics. Which of the

challenging following is one of the characteristics?
c
Audit documentation should be Audit documentation should be
indexed and cross-referenced organized to benefit the client’s
staff
a. Yes Yes
b. No No
c. Yes No
d. No Yes
52. Which of the following statements is not a correct use of the terminology?
medium a. Evidence obtained from an independent source outside the client
b organization is more reliable than that obtained from within.
b. Documentary evidence is more reliable when it is received by the auditor
indirectly rather than directly.
c. Documents that originate outside the company are considered more reliable
than those that originate within the client’s organization.
d. External evidence, such as communications from banks, is generally
regarded as more reliable than answers obtained from inquiries of the
client.
53. Evidence is usually more persuasive for balance sheet accounts when it is
obtained:
challenging a. as close to the balance sheet date as possible.
a b. only from transactions occurring on the balance sheet date.
c. from various times throughout the client’s year.
d. from the time period when transactions in that account were most
numerous during the fiscal period.
54. Audit documentation should provide support for:

medium
c The audit report The financial statementsx
a. Yes Yes
b. No No
c. Yes No
d. No Yes

75. Below are 12 audit procedures. Classify each procedure according to
medium the following types of audit evidence: (1) physical examination, (2)
confirmation, (3) documentation, (4) observation, (5) inquiry of the
client, (6) reperformance, and (7) analytical procedure.
Type of Audit Procedures

Evidence
4 1. Watch client employees count inventory to determine whether
company procedures are being followed.
1 2. Count inventory items and record the amount in the audit files.
6 3. Trace postings from the sales journal to the general ledger
accounts.
7 4. Calculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of gross margin relative to the preceding year.
5 5. Obtain information about the client’s internal controls by asking
questions of client personnel.
6 6. Trace column totals from the cash disbursements journal to the
general ledger.
1 7. Examine a piece of equipment to make sure a recent purchase of
equipment was actually received and is in operation.
7 8. Review the total of repairs and maintenance for each month to
determine whether any month’s total was unusually large.
3 9. Compare vendor names and amounts on purchases invoices with
entries in the purchases journal.
6 10. Foot entries in the sales journal to determine whether they were
correctly totaled by the client.
1 11. Make a surprise count of petty cash to verify that the amount of
the petty cash fund is intact.
2 12. Obtain a written statement from the client’s bank stating the
client’s year-end balance on deposit.
76. Match nine of the terms (a-k) with the definitions provided below (1-
medium
9):
a. Foot
b. Compute
c. Scan
d. Inquire
e. Count
f. Trace
g. Recompute
h. Read
i. Examine
j. Observe
k. Compare
b b 1. A calculation done by the auditor independent of the
client.
a a 2. Addition of a column of numbers to determine if the total

is the same as the client’s.
k k 3. A comparison of information in two different locations.
j j4. A use of the senses to assess certain activities.
f f 5. Following details of transactions from original documents

to journals.
c c 6. A less detailed examination of a document or record to

determine if there is something unusual warranting
further investigation.
d i 7. Obtaining information from the client in response to

specific questions.
e e 8. A determination of assets on hand at a given time.
h h 9. An examination of written information to determine facts

pertinent to the audit.
77. Match five of the terms (a-h) with the definitions provided below (1-5):
medium
a. Audit documentation
b. Audit procedures
c. Audit objectives
d. Analytical procedures
e. Budgets
f. Reliability of evidence
g. Sufficiency of evidence
h. Persuasiveness of evidence
d 1. Use of comparisons and relationships to assess the reasonableness

of account balances.
b 2. Detailed instructions for the collection of a type of audit evidence.
f 3. The degree to which evidence can be considered believable or

trustworthy.
a 4. Contains all the information that the auditor considers necessary to

conduct an adequate audit and to provide support for the audit
report.
g 5. This is determined by the amount of evidence obtained.
78. Below are 10 documents typically examined during an audit. Classify each
medium document as either internal or external.
Type of Documents
Document
1. Canceled checks for payments of accounts payable.
2. Payroll time cards.
3. Duplicate sales invoices.
4. Vendors’ invoices.
5. Bank statements.
6. Minutes of the board of directors’ meetings.
7. Signed lease agreements.
8. Notes receivable.
9. Subsidiary accounts receivable records.
10. Remittance advices.
Answer:
1. External 6. Internal
2. Internal 7. External
3. Internal 8. External
4. External 9. Internal
5. External 10. External
79. Cost should never be a consideration when making decisions about evidence for
easy a given audit.
b a. True
b. False
80. Confirmations are among the most expensive type of evidence to obtain.
easy a. True
a b. False
81. Observation is normally more reliable than physical examination.
easy a. True
b b. False
82. Inquiries of the client are usually sufficient to provide appropriate evidence to
easy satisfy an audit objective.
b a. True
b. False
83. A canceled check written by the client, made payable to a local supplier and
easy drawn on the client’s bank account is one type of internal document.
b a. True
b. False
84. Whenever practical and reasonable, the confirmation of accounts receivable is
easy required of CPAs.
a a. True
b. False
85. Inquiries of clients and reperformance normally have a low cost associated with
easy them.
a a. True
b. False
86. When analytical procedures reveal unusual fluctuations in an account balance,
easy the auditor will probably perform fewer tests of details for that account and
b increase the tests of controls related to the account.
a. True
b. False
87. The type of audit evidence known as inquiry requires the auditor to obtain oral
easy information from the client in response to questions.
a a. True
b. False
88. One of the primary determinants of the reliability of audit evidence is the
medium
b quantity of evidence.
a. True
b. False
89. Audit documentation is the joint property of the auditor and the audit client.
medium a. True
b b. False
90. Objective evidence is more reliable, and hence more persuasive, than subjective
medium evidence.
a a. True
b. False
91. Ordinarily, audit documentation can be provided to someone else only with the
medium express permission of the client.
a a. True
b. False
92. Analytical procedures must be used in the planning and completion phases of
medium the audit.
a a. True
b. False
93. Confirmations are ordinarily used to verify account balances, but may be used
medium to verify transactions.
a a. True
b. False
94. Of the three common types of confirmations used by auditors, the least reliable
medium type is the negative confirmation.
a a. True
b. False
95. Accounts receivable confirmations must be controlled by the client from the
medium time they are prepared until the time they are returned to the auditor.
b a. True
b. False
96. Cost is never an adequate justification for omitting a necessary procedure or not
medium gathering an adequate sample size.
a a. True
b. False
97. Analytical procedures can be used to provide reliable substantive evidence for
medium all balance-related audit objectives.
b a. True
b. False
98. One advantage of using statistical techniques when performing analytical
medium procedures is that they eliminate the need for auditor judgment.
b a. True
b. False
99. Relevance of evidence can only be considered in terms of specific audit
medium objectives.
a a. True
b. False
Chapter 8
1. Which of the following is not one of the three main reasons why the auditor
easy should properly plan engagements?
a a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.
2. Avoiding misunderstandings with the client is important for:

easy
a Good client relations Facilitating high-quality work at a
reasonable cost
a. Yes Yes
b. No No
c. Yes No
d. No Yes
3. A measure of how willing the auditor is to accept that the financial statements
easy may be materially misstated after the audit is completed and an unqualified
opinion has been issued is the:
b a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.
4. A measure of the auditor’s assessment of the likelihood that there are material
easy misstatements in an account before considering the effectiveness of the client’s
internal control is called:
d a. control risk.
d. inherent risk.
5. When inherent risk is high, there will need to be:

Easy
d A lower assessment of audit More evidence accumulated by the
risk auditor
a. Yes Yes
b. No No
c. Yes No
d. No Yes
6. The auditor is likely to accumulate more evidence when the audit is for a
company:
easy
a Which has large amounts Which is to be sold in the near
of debt future
a. Yes Yes
b. No No
c. Yes No
d. No Yes
7. Which of the following is not typically included in initial audit planning?

easy a. Client acceptance/continuation decisions.
d b. Determination of the purpose of the audit.
c. Obtain an understanding with the client.
d. Perform analytical procedures as substantive tests.
8. Initial audit planning involves four matters. Which of the following is not one
of these?
easy a. Develop an overall audit strategy.
b b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the client’s reason for the audit.
9. Most auditors assess inherent risk as high for related parties and related-party
easy transactions because:
b a. of the unique classification of related-party transactions required on the
balance sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the
income statement.
d. it is required by generally accepted accounting principles.
10. Which of the following is not correct regarding the communications between
easy successor and predecessor auditors?
a a. The burden of initiating the communication rests with the predecessor
auditor.
b. The burden of initiating the communication rests with the successor
auditor.
c. The predecessor auditor must receive their former client’s permission prior
to divulging information to the successor auditor
d. The predecessor auditor may choose to provide a limited response to a
successor auditor.
11. A successor auditor may perform which of the following for a new audit client?
easy
a Speak to local attorneys,
banks and other Speak to the predecessor auditors about
businesses regarding the disagreements they had with management
company’s reputation
a. Yes Yes
b. No No
c. Yes No
d. No Yes
12. Which of the following is not a potential effect of an auditor’s decision that a
medium lower acceptable audit risk is appropriate?
b a. More evidence is accumulated.
b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to
the engagement.
13. It is easier and more common to implement increased evidence accumulation

medium for inherent risk than for acceptable audit risk because:
a a. inherent risk can usually be isolated to specific accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which
must be accumulated.
14. (SOX) If an auditor is requested to perform nonaudit services for a public company
medium audit client, who is responsible for agreeing to those services with the audit
firm?
d a. The client’s management.
b. The client’s chief executive officer.
c. The client’s chief financial officer.
d. The client’s audit committee.
15. Which of the following statements is true regarding communications between

medium predecessor and successor auditors?
b a. The burden of initiating the communication rests with the predecessor.
b. The predecessor’s response can be limited to stating that no information
will be provided.
c. The predecessor should communicate with the successor only if the client
is public.
d. There must be communication between the predecessor and successor if the
successor is to accept the engagement.
16. Investigating new clients with a focus on assessing the auditor’s potential
medium relationship with that new client is a critical element in determining:
b a. inherent risk.
d. financial risk.
17. The purpose of an engagement letter is to:

medium a. document the CPA firm’s responsibility to external users of the audited
b financial statements.
b. document the terms of the engagement in writing to minimize
misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel
scheduling can be facilitated.
d. emphasize management’s responsibility for approving the audit program.
18. One means of informing the client that the auditor is not responsible for the
medium discovery of all acts of fraud is the:
a a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.
19. Which of the following normally signs the engagement letter for an audit of a
public company?
medium a. Corporate treasurer.
d b. Chief financial officer.
c. Chairman of the board of directors.
d. Audit committee.
20. Which of the following normally signs the engagement letter for an audit of a
private company?
medium a. Management.
a b. Board of directors representative.
c. Audit committee representative.
d. Corporate treasurer.
21. An understanding of a client’s business and industry and knowledge about

medium operations are essential for performing an adequate audit. For a new client, most
d of this information is obtained:
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the client’s premises.
22. The least effective method of identifying related parties for a public company
would be a(n):
medium a. inquiry of management.
c b. review of SEC filings.
c. distribution of the engagement letter to all stockholders.
d. examination of stockholders’ listings to identify principal stockholders.
23. An official record of meetings of the board of directors and stockholders is

medium included in the corporate:
c a. bylaws.
b. charter.
c. minutes.
d. license.
24. Which of the following is not likely to be a related party?

medium a. Affiliated companies.
c b. A major stockholder of the company.
c. A warehouse employee.
d. The chief executive officer.
25. Which of the following is most likely to occur at the beginning of an initial
audit engagement?
medium a. Prepare a rough draft of the financial statements and of the auditor’s report.
c b. Study and evaluate the system of internal administrative control.
c. Determine the client’s reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to
discussing the engagement with the client management.
26. An auditor should examine minutes of the board of directors’ meetings:

medium a. through the date of the financial statements.
b b. through the date of the audit report.
c. only at the beginning of the audit.
d. on a test basis.
27. The first standard of field work, which states that the work is to be adequately
medium planned and that assistants, if any, are to be properly supervised, recognizes
that:
a a. early appointment of the auditor is advantageous to the auditor and the
client.
b. acceptance of an audit engagement after the close of the client’s fiscal year
is generally not permissible.
c. appointment of the auditor subsequent to the physical count of inventories
requires a disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim
dates.
28. The corporate minutes are the official record of the meetings of the board of
medium directors and stockholders. The minutes typically include authorizations related
to:
d
The CPA’s use of outside Management compensation
specialists
a. Yes Yes
b. No No
c. Yes No
d. No Yes
29. An engagement letter sent to an audit client usually would not include a(n):
medium a. reference to the auditor’s responsibility for the detection of errors or
irregularities.
c b. estimation of the time to be spent on the audit work by audit staff and
management.
c. statement that management advisory services would be made available
upon request.
d. reference to management’s responsibility for the financial statements.
30. Which of the following is correct with respect to a company’s corporate

charter?
medium a. The corporate charter is granted by the federal government and is required
c to recognize the corporation as a separate entity.
b. The corporate charter includes the rules and procedures used to operate a
corporation.
c. The corporate charter includes the exact name of the corporation, the date
of incorporation, and the types of business the corporation is authorized to
conduct.
d. The corporate charter must be annually reviewed by the PCAOB.
31. Corporate bylaws include:

Medium
d The types and amounts of capital The rules and procedures used
stock the corporation is to operate the corporation
authorized to issue
a. Yes Yes
b. No No
c. Yes No
d. No Yes
32. In what order should the following steps occur?

medium 2A. Assess client business risk
b 1B. Understand the client’s business and industry
4C. Perform preliminary analytical procedures
3D. Assess acceptable audit risk
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A.
33. Which of the following statements is not correct with respect to analytical
procedures?
medium a. Auditing standards emphasize the need for auditors to develop and use
expectations.
b b. Analytical procedures must be performed throughout the audit.
c. Analytical procedures may be performed at any time during the audit.
d. Analytical procedures use comparisons and relationships to assess whether
account balances appear reasonable.
34. The most widely used profitability ratio is the:

medium a. quick ratio.
d b. profit margin.
c. return on assets.
d. earnings per share.
35. The purpose of the requirement in SAS No. 84 of having communication

challenging between the predecessor and successor auditor is to:
b a. allow the predecessor to disclose information which would otherwise be
confidential.
b. help the successor auditor to evaluate whether to accept the engagement.
c. help the client by facilitating the change of auditors.
d. ensure the predecessor collects all unpaid fees prior to a change in auditor.
36. The predecessor auditor is required to respond to the request of the successor
challenging auditor for information, but the response can be limited to stating that no
information will be provided when:
c a. the predecessor auditor has poor relations with the successor auditor.
b. the client is dissatisfied with the predecessor’s work.
c. there are actual or potential legal problems between the client and the
predecessor.
d. the predecessor believes that the client lacks integrity.
37. Which of the following is correct with respect to the use of analytical
procedures?
challenging a. Analytical procedures may be used in evaluating balances in the testing
d phase as long as the auditor also uses them in assessing the going concern
assumption.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily
used to direct an auditor’s attention so that the auditor’s understanding of
the business is improved.
d. Analytical procedures are performed by studying plausible relationships
between financial and nonfinancial data.
38. Which of the following ratios is best used to assess a company’s ability to meet
challenging its long-term debt obligations?
c a. Quick ratio.
b. Return on common equity.
c. Debt to equity.
d. Current ratio.

challenging a. Analytical procedures used in the planning phase of the audit are primarily
b directed at understanding the client’s business and directing the auditor’s
attention to areas that may contain possible misstatements.
b. Analytical procedures used in the completion phase are primarily aimed at
assessing going concern and secondarily aimed at directing the auditor’s
attention to areas that may contain possible misstatements.
c. Analytical procedures must be used in the planning and completion phases
of the audit, and are optional in the testing phase.
d. Analytical procedures used in the completion phase are primarily aimed at
directing the auditor’s attention to areas that may contain possible
misstatements and secondarily aimed at assessing going concern.
40. Which of the following would not likely be classified as a related-party

transaction?
medium a. An advance of one week’s salary to an employee.
a b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner of the client company.
d. Exchanges of equipment between two companies owned by the same
person.
41. Which of the following would not be found in the corporate charter?
challenging a. The kinds and amount of capital stock authorized.
d b. The date of incorporation.
c. The types of business activity that the corporation is allowed to conduct.
d. The rules and procedures adopted by the stockholders.
42. Which of the following would not usually be included in the minutes of the
board of directors?
challenging a. The duties and powers of the corporate officers.
a b. Declaration of dividends.
c. Authorization of long-term loans.
d. Approval of executive bonuses.
43. When are auditors likely to encounter judgment problems in the use of
analytical procedures?
challenging a. Whenever the auditor places reliance on management’s explanations for
d unusual fluctuations in account balances without first developing
independent expectations.
b. Whenever the auditor allows unaudited balances to unduly influence
his/her expectations of current balances.
c. Whenever the auditor fails to consider the pattern reflected by several
unusual fluctuations when trying to explain what caused them.
d. The auditor is likely to encounter judgment problems in each of the above
instances.
44. The major concern when using nonfinancial data in analytical procedures is the:
challenging a. accuracy of the nonfinancial data.
a b. source of the nonfinancial data.
c. type of nonfinancial data.
d. presence of multiple sources of nonfinancial data.
45. An auditor searching for related party transactions should obtain an

challenging understanding of each subsidiary’s relationship to the total entity because:
b a. the business structure may be deliberately designed to obscure related party
transactions.
b. this may reveal whether transactions would have taken place if the parties
had been unrelated.
c. transactions may have been consummated on terms equivalent to arm’s-
length transactions.
d. this may permit the audit of intercompany account balances to be
performed as of concurrent dates.
46. The first standard of fieldwork requires, in part, that audit work be properly
challenging planned. Proper planning as intended by the first standard of fieldwork would
occur when the auditor:
a a. physically observes the movement of securities already counted to guard
against the substitution of such securities for others that are not actually on
hand.
b. uses negative accounts receivable confirmations instead of positive
confirmations because the latter require mailing of second requests and
review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-
consuming cash cutoff procedures.
d. eliminates the possibility of counting inventory items more than once by
arranging to make extensive test counts.
47. Early appointment of the independent auditor will enable:

challenging a. a more thorough examination to be performed.
d b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.
48. Whenever an auditor compares client data to client-prepared budgets, there are
medium two special concerns. Indicate if the two items below are concerns.
a
Assessing whether the budgets Client data may have been altered to
were realistic plans conform to the budget
a. A concern A concern
b. Not a concern Not a concern
c. A concern Not a concern
d. Not a concern A concern
49. An auditor who accepts an audit engagement and does not possess the industry
challenging expertise of the business entity should:
b a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entity’s
business.
c. refer a substantial portion of the audit to another CPA who will act as the
principal auditor.
d. first inform management that an unqualified opinion cannot be issued.
50. Which is a liquidity activity ratio?

medium a. Profit margin
b b. Inventory turnover
c. Return on assets
d. Times interest earned
51. Which is usually included in an engagement letter?
Estimate of hours Dollar estimate of fees to be

medium required to complete billed to the client
audit
d a. Yes Yes
b. No No
c. Yes No
d. No Yes

medium
a A reference to A reference to GAAS
GAAP
a. Yes Yes
b. No No
c. Yes No
d. No Yes

medium
c The financial
statements are the Ratios to be used by the auditor in the
responsibility of the planning phase
company’s
management
a. Yes Yes
b. No No
c. Yes No
d No Yes
54. When may the auditor refer to a specialist in the audit report?
medium
c
Only if the specialist’s report
results in a modification of Only if the specialist assisted in the
the audit opinion audit of an account material to the
financial statements
a. Yes Yes
b. No No
c. Yes No
d No Yes
55. Which is usually included in the engagement letter?

medium
b The projected type of opinion
on the financials statement to Name(s) of the client personnel
be audited responsible for supplying the auditor
with information
a. Yes Yes
b. No No
c. Yes No
d No Yes
56. Which is usually included in the engagement letter?

medium
b List of audit procedures to be
used in inventory observation The auditors’ assessment of Audit Risk
a. Yes Yes
b. No No
c. Yes No
d No Yes
72. When an auditor decides there is higher inherent risk for an account, one
easy potential effect is that more audit evidence will be required for that account.
a a. True
b. False
73. As acceptable audit risk is decreased, the likely cost of conducting an audit
easy increases.
a a. True
b. False
74. Before accepting a new client, most CPA firms investigate the company to
easy determine its acceptability. However, AICPA confidentiality requirements
b prohibit CPA firms from contacting certain parties—namely the company’s
attorneys and bankers—during this investigation.
a. True
b. False
75. For prospective clients that have previously been audited by another CPA firm,
easy the predecessor auditor is required to communicate with the successor auditor.
b a. True
b. False
76. When a successor auditor contacts a company’s previous auditor, the

easy predecessor auditor is required to respond fully and without limit to the request
b for information.
a. True
b. False
77. A predecessor auditor who has been contacted by a successor auditor for
easy information about the client does not have to obtain permission from the former
b client before providing any confidential information to the successor auditor
because the confidentiality requirement does not extend to former clients.
a. True
b. False
78. Auditors should obtain copies of the client’s articles of incorporation, bylaws,
easy and minutes of the meetings of the board of directors to aid in their
a understanding of the company’s management and governance structure.
a. True
b. False
79. An auditor must evaluate a specialist’s professional qualifications and

easy understand the objectives of the specialist’s work.
a a. True
b. False
80. To evaluate a specialist’s work the auditor must himself/herself be considered a

medium specialist.
b a. True
b. False
81. An engagement letter establishes a clear understanding of the terms of the

medium engagement between the client and the auditor, but it is optional for private
a companies.
a. True
b. False
82. Because of the requirements of Rule 201 of the AICPA’s Code of Professional
easy Conduct which state that auditors should “undertake only those professional
b services that the member or the member’s firm can reasonably expect to be
completed with professional competence,” auditors are not normally permitted
to consult with, or rely on the work of, outside specialists during an audit
engagement.
a. True
b. False
83. Acceptable audit risk is a measure of the auditor’s willingness to accept that the
medium financial statements do not contain material misstatements after the audit is
b completed and a qualified audit report has been issued.
a. True
b. False
84. If a prospective client has been audited in the past, the successor auditor will
medium typically rely solely on the representations about the client by the predecessor
b auditor.
a. True
b. False
85. Two major factors that affect acceptable audit risk are the likely users of the
medium financial statements and the likelihood of issuing an unqualified audit opinion.
b a. True
b. False
86. A major consideration in assigning staff to an audit engagement is the

medium experience levels required for the work, while a less important consideration is
b maintaining staff continuity on the engagement.
a. True
b. False
87. Inherent risks typically vary across industries.

medium a. True
b b. False
88. Transactions with related parties must be disclosed in the financial statements if
medium they are deemed to be material.
a a. True
b. False
89. All known related parties must be identified and included in the auditor’s
medium permanent files related to the client.
a a. True
b. False
90. Generally, auditors assess inherent risk as moderate for related party
medium transactions because they expect clients to be aware of their scrutiny of such
b transactions.
a. True
b. False
91. The corporate charter typically establishes the company’s fiscal year and
medium frequency of stockholder meetings.
b a. True
b. False
92. Ordinarily, the auditor should review and abstract copies of contracts during the
medium later stages of an audit.
b a. True
b. False
93. When a successor auditor requests information from a company’s previous

medium auditor, and there are legal problems or disputes between the client and the
a predecessor auditor, the predecessor auditor’s response to the new auditor may
be limited to stating that no information will be provided.
a. True
b. False
94. One purpose of performing preliminary analytical procedures in the planning

medium phase of an audit is to help the auditor make a preliminary assessment of control
b risk.
a. True
b. False
95. Material transactions between the client and the client’s related parties must be
medium disclosed in the auditor’s report.
b a. True
b. False
96. An engagement letter can affect the CPA firm’s legal responsibilities to the
challenging client, but does not affect responsibility to external users of audited financial
a statements.
a. True
b. False
97. Two categories of audit-relevant information found in corporate charters and
challenging bylaws are authorizations and discussions of matters affecting inherent risk.
b a. True
b. False
Chapter 9
1. If it is probable that the judgment of a reasonable person would have been

easy changed or influenced by the omission or misstatement of information, then that
a information is, by definition of FASB Statement No. 2:
a. material.
b. insignificant.
c. significant.
d. relevant.
2. The preliminary judgment about materiality is the amount by

easy which the auditor believes the statements could be misstated and still not affect
the decisions of reasonable users.
b a. minimum
b. maximum
c. mean average
d. median average
3. Auditors are responsible for determining whether financial statements are

easy materially misstated, so upon discovering a material misstatement they must
bring it to the attention of:
d a. regulators.
b. the audit firm’s managing partner.
c. no one in particular.
d. the client’s management. –who makes d FS
4. The FASB definition of materiality emphasizes what class of financial

statement users?
easy a. Regulators.
c b. Informed investors.
c. Reasonable persons.
d. Potential investors.
5. When auditors allocate the preliminary judgment about materiality to account

easy balances, the materiality allocated to any given account balance is referred to
as:
d a. the materiality range.
b. the error range.
c. tolerable materiality.
d. tolerable misstatement.
6. Why do auditors establish a preliminary judgment about materiality?

easy a. To determine the appropriate level of audit experience required for the
work.
c b. So that the client can know what records to make available to the auditor.
c. To plan the appropriate audit evidence to accumulate and develop an
overall audit strategy.
d. To finalize the assessment of control risk.
7. Auditors are _____ to decide on the combined amount of misstatements in the

easy financial statements that they would consider material early in the audit.
b a. permitted
b. required
c. not allowed
d. strongly encouraged
8. If an auditor establishes a relatively high level for materiality, then the auditor
will:
easy a. accumulate more evidence than if a lower level had been set.
b b. accumulate less evidence than if a lower level had been set.
c. accumulate approximately the same evidence as would be the case were
materiality lower.
d. accumulate an undetermined amount of evidence.
9. The preliminary judgment about materiality and the amount of audit evidence
easy accumulated are _____ related.
d a. directly
b. indirectly
c. not
d. inversely
10. After the preliminary judgment about materiality has been established, auditors
may:
easy a. not adjust it.
d b. adjust it downward only.
c. adjust it upward only.
d. adjust it either downward or upward.
11. In an audit area that has a lower inherent risk, it would be prudent to:
easy a. increase the amount of audit evidence gathered.
c b. assign more experienced staff to that area.
c. increase the tolerable misstatement for the area.
d. expand planning procedures.
12. Which of the following is least likely to be appropriate as the basis for
easy determining the preliminary judgment about materiality in the audit of financial
statements?
d a. Net income before taxes.
b. Current assets.
c. Owners’ equity.
d. Inventory.
13. Auditing standards _____ that the basis used to determine the preliminary
easy judgment about materiality be documented in the audit files.
c a. permit
b. do not allow
c. require
d. strongly encourage
14. Amounts involving fraud are usually considered _____ important than
easy unintentional errors of equal dollar amounts.
d a. less
b. no less
c. no more
d. more
15. Which of the following qualitative factors may significantly influence whether
easy an item is deemed to be material?
a
Misstatements that are
otherwise minor may be Misstatements that are otherwise
material if there are possible immaterial may be material if they
consequences arising from affect a trend in earnings
contractual obligations.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
16. Auditors generally allocate the preliminary judgment about materiality to the:
easy a. balance sheet only.
a b. income statement only.
c. income statement and balance sheet.
d. statement of cash flows.
17. Which of the following statements regarding inherent risk is correct?

easy a. The inherent risk assigned in the audit risk model is unaffected by the
c auditor’s experience with client’s organization.
b. Most auditors set a low inherent risk in the first year of an audit and
increase it if experience shows that it was incorrect.
c. Most auditors set a high inherent risk in the first year of an audit and reduce
it in subsequent years as they gain experience, even when there is inherent
risk.
d. The inherent risk assigned in the audit risk model is dependent upon the
strengths in client’s internal control system.
18. Auditors begin their assessments of inherent risk during audit planning. Which
easy of the following would not help in assessing inherent risk during the planning
phase?
a a. Obtaining client’s agreement on the engagement letter.
b. Obtaining knowledge about the client’s business and industry.
c. Touring the client’s plant and offices.
d. Identifying related parties.
19. Auditors commonly allocate materiality to balance sheet accounts rather than
medium income statement accounts because most income statement misstatements have
b a(n) _____ effect on the balance sheet.
a. reduced
b. equal
c. undetermined
d. increased
20. Which of the following is not a correct statement regarding the allocation of the
medium preliminary judgment about materiality to balance sheet accounts?
b a. Auditors expect certain accounts to have more misstatements than others.
b. The allocation has virtually no effect on audit costs because the auditor
must collect sufficient appropriate audit evidence.
c. Auditors expect to identify overstatements as well as understatements in
the accounts.
d. Relative audit costs affect the allocation.
21. What is the primary means of dealing with risk in planning decisions related to
audit evidence?
medium a. Selection of more effective tests of details of balances.
b b. Application of the audit risk model.
c. Establishing a lower preliminary judgment about materiality.
d. Allocating materiality judgment to segments.
22. The phrase “in our opinion” in the auditor’s report is intended to inform users
that auditors:
medium a. guarantee fair presentation of the financial statements.
d b. act as insurers of the accuracy of the statements.
c. certify the material presented in the statements by management.
d. base their conclusions about the statements on professional judgment.
23. Inherent risk is _______ related to detection risk and _______ related to the
medium amount of audit evidence.
d a. directly, inversely
b. directly, directly
c. inversely, inversely
d. inversely, directly
24. The five steps in applying materiality are listed below in random order.
medium 1. Estimate the combined misstatement.
b 2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality.
The correct sequence from start to finish would be:
a. 1 2 5 4 3.
b. 3 4 2 1 5.
c. 4 3 1 5 2.
d. 5 1 3 2 4.

medium a. Materiality is a relative rather than an absolute concept.
b b. The most important base used as the criterion for deciding materiality is
total assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal dollar amounts, frauds are usually considered more important
than errors.
26. Since materiality is relative, it is necessary to have bases for establishing

medium whether misstatements are material. Normally, the most common base for
deciding materiality is:
a a. net income before taxes.
b. net working capital.
c. net income after taxes.
d. total assets.
27. Certain types of misstatements are likely to be more important than other types
medium to users, even if the dollar amounts are the same. Which of the following
demonstrates this?
a
Amounts involving frauds are Misstatements that are otherwise
considered more important immaterial may be material if they
than errors of equal amount affect a trend in earnings.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
28. Allocating the preliminary judgment about materiality to financial statements

medium segments is necessary because:
b a. evidence is accumulated for the financial statements as a whole so
materiality does not apply to them.
b. evidence is accumulated by segments rather than for the financial
statements as a whole.
c. it is required by the AICPA’s Code of Professional Conduct.
d. it is required by the SEC.

medium a. Either an overstatement of an asset account or an understatement of a
c liability account would have the same effect on the income statement.
b. A misclassification in the balance sheet will have no effect on operating
income.
c. Either an overstatement of an asset account or an overstatement of a
liability account would have the same effect on the income statement.
d. Either an understatement of an asset account or an overstatement of a
liability account would have the same effect on the income statement.
30. Regardless of how the preliminary judgment about materiality is allocated, the
medium auditor must be confident that total combined misstatements in all accounts are:
d a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
d. less than or equal to the preliminary judgment.
31. Auditors frequently refer to the terms audit assurance, overall assurance, and
medium level of assurance to refer to ________.
c a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk
32. _____ misstatements are those where the auditor can determine the amount of
medium the misstatement in the account.
c a. Potential
b. Likely
c. Known
d. Projected
33. When a different extent of evidence is needed for the various cycles, the
difference is caused by:
medium a. errors in the client’s accounting system.
d b. a client’s need to achieve an unqualified opinion.
c. an auditor’s need to follow auditing standards.
d. an auditor’s expectations of errors and assessment of internal control.
34. If planned detection risk is reduced, the amount of evidence the auditor
accumulates will:
medium a. increase.
a b. decrease.
c. remain unchanged.
d. be indeterminate.
35. Likely misstatements can result from:

Medium
a Projections of
Differences between misstatements based
Computation of the management’s and an on an auditor’s tests
sampling error for auditor’s judgment of a sample from a
the cash account about account balances population
a. No Yes Yes
b. Yes Yes No
c. No No Yes
d. Yes No No
36. When discussing control risk (CR) and the audit risk model, which of the
following is false?
medium a. CR is a measure of the auditor’s assessment of the likelihood that
b misstatements will not be prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to
prevent or detect errors, he/she would assign a low value (e.g., 0%) to CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence needed to support
account balances is direct.
37. Which of the following is not a good indicator of the degree to which
medium statements are relied on by external users?
d a. Client’s size, as measured by total assets or total revenue.
b. Distribution of ownership among the public.
c. Nature and amount of liabilities.
d. Amount of net income or loss after taxes.
38. If an auditor believes the chance of financial failure is high and there is a
medium corresponding increase in business risk for the auditor, acceptable audit risk
would likely:
a a. be reduced.
b. be increased.
c. remain the same.
d. be calculated using a computerized statistical package.
39. When management has an adequate level of integrity for the auditor to accept
medium the engagement but cannot be regarded as completely honest in all dealings,
auditors normally:
a a. reduce acceptable audit risk and increase inherent risk.
b. reduce inherent risk and control risk.
c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.
40. One accounting issue that does not require management to use significant
judgments is:
medium a. the allowance for doubtful accounts.
b b. the useful life of equipment for tax purposes.
c. obsolete inventory.
d. the liability for warranty payments.
41. Inherent risk is often low for an account such as:

medium a. inventory.
d b. marketable securities.
c. cash.
d. accounts receivable.
42. The auditor typically does not assess control risk and inherent risk for:
medium a. each audit objective.
d b. each cycle.
c. each account.
d. the overall audit.
43. (Public) To what extent do auditors typically rely on internal controls of their public
company clients?
medium a. Extensively
a b. Only very little
c. Infrequently
d. Never
44. Auditors typically rely on internal controls of their private company clients:
medium a. Only as needed to complete the audit and satisfy Sarbanes-Oxley
requirements.
b b. Only if the controls are determined to be effective.
c. Only if the client asks an auditor to test controls.
d. Only if the controls are sufficient to increase Control Risk to an acceptable
level.
45. Acceptable audit risk is ordinarily set by the auditor during planning and:
medium a. held constant for each major cycle and account.
a b. held constant for each major cycle but varies by account.
c. varies by each major cycle and by each account.
d. varies by each major cycle but is constant by account.
46. When the auditor is attempting to determine the extent to which external users
medium rely on a client’s financial statements, they may consider several factors except
for:
d a. client size.
b. concentration of ownership.
c. types and amounts of liabilities.
d. assessment of detection risk.
47. A major difficulty in the application of the audit risk model is:
medium a. defining the terms of the model.
b b. measuring the components of the model.
c. understanding the effect on other factors in the model when one factor is
changed.
d. the failure of the Audit Standards Board to accept it and incorporate it into
standards.
48. When setting a preliminary judgment about materiality:

medium a. more evidence is required for a low dollar amount than for a high dollar
amount.
a b. less evidence is required for a low dollar amount than for a high dollar
amount.
c. the same amount of evidence is required for either low or high dollar
amounts.
d. there is no relationship between it and the dollar amount of evidence
needed.
49. When allocating materiality, most practitioners choose to allocate to:

challenging a. the income statement accounts because they are more important.
b b. the balance sheet accounts because there are fewer.
c. both balance sheet and income statement accounts because there could be
errors on either.
d. all of the financial statements because there could be errors on other
statements besides the income statement and balance sheet.
50. The risk of material misstatement refers to:

challenging a. control risk and acceptable audit risk.
c b. inherent risk.
c. the combination of inherent risk and control risk.
d. inherent risk and audit risk.
51. Auditors may assess inherent risk and control risk:
medium Jointly to determine the Separately and combine their effects in

a risk of material the audit risk model
misstatement
a. Yes Yes
b. No No
c. Yes No
d. No Yes
52. Which one of the following statements about the cycle approach to auditing is
not correct?
challenging a. There are differences among cycles in the frequency and size of expected
errors.
c b. There are differences among cycles in the effectiveness of internal controls.
c. There are differences among cycles on the auditor’s willingness to accept
risk that material errors exist after the auditing is complete.
d. It is common for auditors to want an equally low likelihood of errors for
each cycle after the auditor is finished.
53. When the auditor has the same level of willingness to risk that material
challenging misstatements will exist after the audit is finished for all financial statement
cycles:
a a. a different extent of evidence will likely be needed for various cycles.
b. the same amount of evidence will be gathered for each cycle.
c. the auditor has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire audit
does not exceed 10%.
54. Which of the following statements is not true?

challenging a. Inherent risk is inversely related to detection risk.
b b. Inherent risk is inversely related to evidence.
c. Inherent risk is the susceptibility of the financial statements to material
error, assuming no internal controls.
d. Inherent risk is the auditor’s assessment of the likelihood that errors
exceeding a tolerable amount exist in a segment before considering the
effectiveness of internal controls.
55. Which of the following is not a primary consideration when assessing inherent
risk?
challenging a. Nature of client’s business.
c b. Existence of related parties.
c. Frequency and intensity of management’s review of accounting
transactions and records.
d. Susceptibility to defalcation.
56. Which of the following is an example of the concept of inherent risk?

challenging a. Humans make more errors than computers; therefore, a manual accounting
c system is riskier than a computerized system.
b. Accounting systems with vouchers have many more controls built in, so the
risk that there will be errors on the financial statements is reduced.
c. Loans receivable for a finance company are less likely to be collectible
than those of a bank.
d. Audits with larger sample sizes are less risky than those with smaller
sample sizes.
57. Tolerable misstatement as set by the auditor:

challenging a. decreases acceptable audit risk.
d b. increases inherent risk and control risk.
c. affects planned detection risk.
d. does not affect any of the four risks.
58. Which of the following underlies the application of generally accepted auditing
challenging standards, particularly the standards of fieldwork and reporting?
a a. The elements of materiality and relative risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.
67. Below are four situations that involve the audit risk model as it is used for
easy planning audit evidence requirements in the audit of inventory. For each
situation, calculate planned detection risk.
SITUATION
1 2 3 4
Acceptable audit risk 1% 10% 10% 5%
Inherent risk 100% 100% 50% 20%
Control risk 100% 100% 40% 30%
Planned detection risk ______ ______ ______

______
Answer: 1. 1%; 2. 10%; 3. 50%; 4. 83.3%
68. Using your knowledge of the relationships among acceptable audit risk,
easy inherent risk, control risk, planned detection risk, tolerable misstatement, and
planned evidence, state the effect on planned evidence (increase or decrease) of
changing each of the following factors, while the other factors remain
unchanged.
decrease 1. An increase in acceptable audit risk. .

increase 2. An increase in inherent risk. .
decrease 3. A decrease in control risk. .
decrease 4. An increase in planned detection risk. .
decrease 5. An increase in tolerable misstatement. .
69. Match nine of the terms (a-i) with the definitions provided below (1-9):
medium
a. Business risk
b. Preliminary judgment about materiality
c. Inherent risk
d. Planned detection risk
e. Audit assurance
f. Acceptable audit risk
g. Tolerable misstatement
h. Control risk
i. Materiality
d 1. A measure of the risk that audit evidence for a segment will fail to
detect misstatements exceeding a tolerable amount, should such
misstatements exist.
a 2. The risk that the auditor or audit firm will suffer harm because of a
client relationship, even though the audit report rendered for the
client was correct.
h 3. A measure of the auditor’s assessment of the likelihood that

misstatements exceeding a tolerable amount in a segment will not
be prevented or detected by the client’s internal controls.
f 4. A measure of how much risk the auditor is willing to take that the
financial statements may be materially misstated after the audit is
completed and an unqualified audit opinion has been issued.
g 5. The materiality allocated to any given account balance.
b 6. The maximum amount by which the auditor believes that the

statements could be misstated and still not affect the decisions of
reasonable users.
e 7. This term is synonymous with acceptable audit risk.
i 8. The magnitude of an omission or misstatement of accounting

information that makes it probable that the judgment of a
reasonable person would have been changed.
c 9. A measure of the auditor’s assessment of the likelihood that there

are material misstatements before considering the effectiveness of
internal control.
70. In practice, auditors rarely assign numerical probabilities to inherent risk,
medium control risk, or acceptable audit risk. It is more common to assess these risks as
high, medium, or low. For each of the four situations below, fill in the blanks
for planned detection risk and the amount of evidence you would plan to gather
(“planned evidence”) using the terms high, medium, or low.
SITUATION
1 2 3 4
Acceptable audit risk Low Low High High
Inherent risk High Low Low Low
Control risk High Low Medium Low
Planned detection risk ______ ______ ______

______
Planned evidence ______ ______

______ ______
Answer: 1. low, high

2. medium, medium
3. medium, medium
4. high, low
71. The auditor’s preliminary judgment about materiality is the maximum amount
easy by which the auditor believes the financial statements could be misstated and
a still not affect the decisions of reasonable users.
a. True
b. False
72. There is no precise definition of materiality in the professional literature.

easy a. True
a b. False
73. The FASB definition of materiality focuses on potential users of financial

easy statements.
b a. True
b. False
74. Net income before taxes is normally the most important base for deciding
easy materiality.
a a. True
b. False
75. Most practitioners allocate the preliminary judgment about materiality to

easy income statement accounts.
b a. True
b. False
76. The primary purpose of allocating the preliminary judgment about materiality to
easy financial statement accounts is to help the auditor decide the appropriate
a evidence to accumulate.
a. True
b. False
77. Auditors cannot use prior year financial statement balances to establish their
easy preliminary judgment about materiality in planning the current year’s audit.
b a. True
b. False
78. If acceptable audit risk is low, and inherent risk and control risk are both high,
easy then planned detection risk should be high.
b a. True
b. False
79. Inherent risk and planned detection risk are inversely related; i.e., as inherent
easy risk increases, planned detection risk should decrease, ceteris paribus.
a a. True
b. False
80. Acceptable audit risk and planned detection risk are inversely related; i.e., as
easy acceptable audit risk increases, planned detection risk should decrease, ceteris
b paribus.
a. True
b. False
81. The most important element of the audit risk model is control risk.
easy a. True
b b. False
82. For a private company client, auditors are required to test any internal controls
easy they believe have not been operating effectively during the period under audit.
b a. True
b. False
83. If an auditor believes the client will have financial difficulties after the audit
easy report is issued, and external users will be relying heavily on the financial
a statements, the auditor will probably set acceptable audit risk as low.
a. True
b. False
84. Achieved detection risk can be reduced only by accumulating more audit
medium evidence.
b a. True
b. False
85. Auditors have difficulty applying the concept of materiality in practice because
medium they often do not know who the users of the financial statements are or what
a decisions will be made.
a. True
b. False
86. The audit risk model that must be used for planning audit procedures and
medium evaluating audit results is: AcAR = IR x CR x AcDR.
b a. True
b. False
87. Statements on Auditing Standards provide detailed, objective guidance on how

medium auditors are to establish a preliminary materiality level, thus eliminating the
b need for subjective auditor judgment in this task.
a. True
b. False
88. If the preliminary judgment of materiality increases, the amount of audit

medium evidence required will also increase.
b a. True
b. False
89. Insert risk and control risk are normally assessed for the overall audit.
medium a. True
b b. False
90. Tolerable misstatement is the maximum combined total of all misstatements in

medium the financial statements that the auditor is willing to allow, or tolerate, when
b issuing a standard unqualified opinion.
a. True
b. False
91. If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he

medium or she would need to obtain more audit evidence for that account than if
a $100,000 had been assigned.
a. True
b. False
92. To maximize audit efficiency, the auditor should allocate less tolerable
medium misstatement to accounts that can be verified by using low-cost audit
a procedures, such as analytical procedures, than to accounts that are more costly
to audit.
a. True
b. False
93. To maximize audit effectiveness, the auditor should establish a high preliminary
medium judgment about materiality and allocate most of the amount to balance sheet
b accounts.
a. True
b. False
94. Acceptable audit risk and the amount of substantive evidence required are
medium inversely related.
a a. True
b. False
95. As control risk increases, the amount of substantive evidence the auditor plans
medium to accumulate should increase.
a a. True
b. False
96. Inherent risk and control risk are directly related.

medium a. True
b b. False
97. An acceptable audit risk assessment of low indicates a risky client requiring
medium more extensive evidence, assignment of more experienced personnel, and/or a
a more extensive review of audit files.
a. True
b. False
98. Engagement risk is effectively the audit firm’s business risk.

medium a. True
a b. False
99. Audit assurance is the complement of planned detection risk, that is, one minus
medium planned detection risk.
b a. True
b. False
Chapter 10
1. Which of the following is responsible for establishing a private company’s

internal control?
easy a. Management.
a b. Auditors.
c. Management and auditors.
d. Committee of Sponsoring Organizations.
2. Which of the following is not one of the three primary objectives of effective
internal control?
easy a. Reliability of financial reporting
d b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.
3. (Public) The Public Company Accounting Oversight Board states that reasonable
assurance allows a:
easy a. small likelihood of ineffective internal controls.
b b. remote likelihood that material misstatements will not be prevented or
detected by internal control.
c. likelihood that material misstatements will not be prevented or detected by
internal control.
d. high likelihood that material misstatements will not be prevented or
detected by internal control.
4. Two key concepts that underlie management’s design and implementation of

easy internal control are:
c a. costs and materiality.
b. absolute assurance and costs.
c. inherent limitations and reasonable assurance.
d. collusion and materiality.
5. Internal controls can never be considered as absolutely effective because:

easy a. their effectiveness is limited by the competency and dependability of
employees.
a b. not all organizations have internal audit departments.
c. controls are designed to prevent and detect only material misstatements.
d. internal controls prevent separation of duties.
6. A major control available in a small company, which might not be feasible in a

big company, is:
easy a. a wider segregation of duties.
d b. a voucher system.
c. fewer transactions to process.
d. the owner-manager’s personal interest and close relationship with
personnel.
7. (Public) Which of the following is responsible for establishing internal controls for a
public company?
easy a. Management.
a b. The PCAOB.
c. Management and auditors.
d. Committee of Sponsoring Organizations.
8. Which of the following parties provides an assessment of the effectiveness of

medium internal control over financial reporting for public companies?
a
Management Financial statement

auditors
a. Yes Yes
b. No No
c. Yes Yes
d. No No
9. An act of two or more employees to steal assets or misstate records is frequently

referred to as:
easy a. collusion.
a b. a material weakness.
c. a control deficiency.
d. a significant deficiency.
10. When the auditor attempts to understand the operation of the accounting system
easy by tracing a few transactions through the accounting system, the auditor is said
to be:
c a. tracing.
b. vouching.
c. performing a walk-through.
d. testing controls.
11. (SOX) Which section of the Sarbanes-Oxley Act requires management to issue an
easy internal control report?
c a. 202
b. 203
c. 404
d. 408
12. (SOX) Sarbanes-Oxley requires management to issue an internal control report that
easy includes two specific items. Which of the following is one of these two
requirements?
a a. A statement that management is responsible for establishing and
maintaining an adequate internal control structure and procedures for
financial reporting.
b. A statement that management and the board of directors are jointly
responsible for establishing and maintaining an adequate internal control
structure and procedures for financial reporting.
c. A statement that management, the board of directors, and the external
auditors are jointly responsible for establishing and maintaining an adequate
internal control structure and procedures for financial reporting.
d. A statement that the external auditors are solely responsible.
13. (SOX) When management is evaluating the design of internal control, management
easy evaluates whether the control can do which of the following?
c
Detect material Correct material misstatements
misstatements
a. Yes Yes
b. No No
c. Yes No
d. No Yes
14. (SOX) Internal control reports issued by public companies must identify the framework
easy used to evaluate the effectiveness of internal control. Which of the following is
b the most common framework in the U.S.?
a. Effective Internal Control Framework - AICPA
b. Internal Control - Integrated Framework - COSO
c. Enterprise Internal Control - COSO
d. Enterprise Internal Control - AICPA
15. (Public) When one material weakness is present at the end of the year, management of a
easy public company must conclude that internal control over financial reporting is:
c a. insufficient.
b. inadequate.
c. ineffective.
d. inefficient.
16. (Public) The auditor’s tests to understand the client’s internal controls might include
easy which of the following types of procedures?
a
Observation of Inquiries of
employees personnel
a. Yes Yes
b. No No
c. Yes No
d. No Yes
17. Which of management’s concerns with respect to implementing internal

easy controls is the auditor primarily concerned?
b a. Efficiency of operations.
b. Reliability of financial reporting.
c. Effectiveness of operations.
d. Compliance with applicable laws and regulations.
18. Which of the following activities would be least likely to strengthen a

easy company’s internal control?
b 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.
19. (Public) Management must disclose material weaknesses in internal control:

medium a. whenever the weakness is deemed significant to a single class of
transactions.
c b. whenever the weakness is significant to overall financial reporting
objectives.
c. if the weakness exists at the end of the year.
d. only if the auditor identifies the weakness as significant.
20. When auditing a private company, the auditor should obtain an understanding
easy of internal control sufficient to:
b a. provide reasonable protection against client fraud and defalcations by client
employees.
b. assess control risk.
c. provide a basis for suggestions to the client for improving the accounting
system.
d. provide a method for safeguarding assets, checking the accuracy and
reliability of accounting data, promoting operational efficiency, and
encouraging adherence to prescribed managerial policies.
21. (Public) The initial presumption in the audit of a public company is that control risk is:
medium a. low.
a b. moderate.
c. high.
d. low or moderate, but not high.
22. In the audit of a private company, the auditor will test controls when control
risk is initially assessed at:
medium
c Low Moderate High
a. Yes No Yes
b. No No Yes
c. Yes Yes No
d. No Yes No
23. (Public) The auditor’s study of a public company’s internal control is:
medium a. required by GAAS.
c b. required by the AICPA.
c. required by the Sarbanes-Oxley Act.
d. recommended by the AICPA.
24. The auditor’s consideration of a private company’s internal control is:

medium a. required by GAAP.
b b. required by GAAS.
c. required by the IRS.
d. recommended by the SEC.
25. Internal controls can never be regarded as completely effective. Even if

medium company personnel could design an ideal system, its effectiveness depends on
the:
d a. adequacy of the computer system.
b. proper implementation by management.
c. ability of the internal audit staff to maintain it.
d. competency and dependability of the people using it.
26. Even with the most effectively designed internal control, the auditor must
medium obtain audit evidence, beyond testing the controls, for every:
c a. transaction.
b. financial statement account.
c. material financial statement account.
d. financial statement account that will be relied upon by third parties.
27. The essence of an effectively controlled organization lies in the:

medium a. effectiveness of its independent auditor.
d b. effectiveness of its internal auditor.
c. attitude of its employees.
d. attitude of its management.
28. (Public) To issue a report on internal control over financial reporting for a public
medium company, an auditor must:
c a. evaluate management’s assessment process.
b. independently assess the design and operating effectiveness of internal
control.
c. evaluate management’s assessment process and independently assess the
design and operating effectiveness of internal control.
d. test controls over significant account balances.
29. (Public) Which of the stock exchanges require listed companies to have an audit
medium committee composed entirely of independent directors?
a
NYSE NASDAQ
a. Yes Yes
b. No No
c. Yes No
d. No Yes
30. Which of the following factors may increase risks to an organization?

Medium
a Geographic dispersion of
company operations Presence of new information
technologies
a. Yes Yes
b. No No
c. Yes No
d. No Yes
31. Which of the following statements is correct with respect to separation of

duties?
medium a. Employees should not have temporary and permanent custody of assets.
b b. Employees who authorize transactions should not have custody of related
assets.
c. It is permissible to allow an employee to open cash receipts and record
those receipts.
d. Employees who authorize transactions should have recording
responsibility for these transactions.
32. Authorizations can be either general or specific. Which of the following is not
medium an example of a general authorization?
b a. Automatic reorder points for raw materials inventory.
b. A sales manager’s authorization for a sales return.
c. Credit limits for various classes of customers.
d. A sales price list for merchandise.
33. The most important type of protective measure for safeguarding assets is:
medium a. adequate separation of duties among personnel.
c b. proper authorization of transactions.
c. the use of physical precautions.
d. adequate documentation.
34. Which of the following is correct with respect to the design and use of business
documents?
medium a. Not all documents used for internal purposes need to be prenumbered.
a b. Documents should be designed for single purposes only to avoid confusion
in their use.
c. Documents should be designed to be understandable only by those who use
them.
d. Documents designed for external use must be prenumbered.
35. (Public) PCAOB Standard 2 requires auditors to evaluate the effectiveness of the audit
medium committee’s oversight of the company’s:
a
External Efficiency of Internal control over
financial operations financial reporting
reporting
a. Yes No Yes
b. No No Yes
c. Yes Yes No
d. No Yes No
36. Which of the following is correct?

medium a. Approval is a policy decision implemented by employees.
c b. Approval occurs as a matter of general policy and includes significant
transactions only.
c. Authorization is a policy decision for either a general class of transactions
or specific transactions.
d. Approval should be given by the employee responsible for recording the
transaction.
37. Which of the following principles is not necessary for the proper design and use
medium of documents and records?
a a. Designed for a single use to increase efficiency of operations.
b. Constructed in a manner that encourages correct preparation.
c. Prepared at the time a transaction takes place.
d. Designed for multiple uses to increase efficiency of operations.
38. Narratives, flowcharts, and internal control questionnaires are three common
methods of:
medium a. testing the internal controls.
b 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.
39. _____ deal with ongoing or periodic assessment of the quality of internal
medium control by management.
b a. Quality monitoring activities
b. Monitoring activities
c. Oversight activities
d. Management activities
40. (Public) Smaller public companies face challenges implementing effective internal
medium control due to ______.
c a. a lack of expertise
b. reduced importance
c. limited resources
d. limited available guidance
41. Which of the following is not one of the levels of an absence of internal
controls?
medium a. Major deficiency.
a b. Material weakness.
c. Significant deficiency.
d. Control deficiency.
42. Which of the following is the correct definition of “control deficiency?”

medium a. A control deficiency exists if the design or operation of controls does not
a permit company personnel to prevent or detect misstatements on a timely
basis.
b. A control deficiency exists if one or more deficiencies exist that adversely
affect a company’s ability to prepare external financial statements
reliably.
c. A control deficiency exists if the design or operation of controls results in a
more than remote likelihood that controls will not prevent or detect
misstatements.
d. A control deficiency exists if the design or operation of controls results in a
more than probable likelihood that controls will prevent or detect
misstatements.
43. A(n) _______ deficiency exists if a necessary control is missing or not properly
formulated.
medium a. control
c b. significant
c. design
d. operating
44. To determine if significant internal control deficiencies are material

medium weaknesses, they must be evaluated on their:
a
Likelihood Significance
a. Yes Yes
b. No No
c. Yes No
d. No Yes
45. The purpose of an entity’s accounting information and communication system

is to ______.
medium
d Record and
Monitor process
transactions transactions Initiate transactions
a. Yes Yes Yes
b. No No No
c. Yes No No
d. No Yes Yes
46. A procedure that would most likely be used by an auditor in performing tests of
medium control procedures that involve segregation of functions and that leave no
transaction trail is:
b a. inspection.
b. observation.
c. reperformance.
d. reconciliation.
47. If the results of tests of controls support the design and operations of controls as
medium expected, the auditor uses ____ control risk as the preliminary assessment.
b a. a lower
b. the same
c. a higher
d. either a lower or higher
48. Internal controls normally include procedures designed to provide reasonable

assurance that:
medium a. employees act with integrity when performing their assigned tasks.
b b. transactions are executed in accordance with management’s authorization.
c. decision processes leading to management’s authorization of transactions
are sound.
d. collusive activities would be detected by segregation of employee duties.
49. Which of the following is correct?

medium a. A significant deficiency is always a material weakness.
d b. A control deficiency is always a material weakness.
c. A material weakness is less significant that a control deficiency.
d. A material weakness is always a significant deficiency.
50. Which of the following is not a likely procedure to support the operating
medium effectiveness of internal controls?
d a. Inquiry of client personnel.
b. Observation of control-related activities.
c. Reperformance of client procedures.
d. Completing an internal control questionnaire.
51. (Public) Before making the final assessment of internal control at the end of an integrated
medium audit, the auditor must:
a
Test controls Perform substantive tests of details
a. Yes Yes
b. No No
c. Yes No
d. No Yes
52. (Public) Significant deficiencies and material weaknesses in internal control of a public
medium company must be reported to which of the following?
c a. The Public Company Accounting Oversight Board.
b. Members of management who are responsible for the related area of the
company.
c. Audit committee of the company’s board of directors.
d. The AICPA.
53. Of the following statements about internal controls, which one is not valid?
medium a. No one person should be responsible for the custodial responsibility and the
d recording responsibility for an asset.
b. Transactions must be properly authorized before such transactions are
processed.
c. Because of the cost-benefit relationship, a client may apply controls on a
test basis.
d. Control procedures reasonably ensure that collusion among employees
cannot occur.
54. Which of the following best describes the inherent limitations that should be
medium recognized by an auditor when considering the potential effectiveness of
internal control?
a a. Procedures that depend on segregation of duties can be circumvented by
collusion.
b. Competent and honest client personnel provide an environment conducive
to accounting control and provide absolute assurance that effective control will
be achieved.
c. Procedures designed to assure the execution and recording of transactions
in accordance with proper authorizations are effective against irregularities
perpetrated by management.
d. The benefits expected to be derived from effective internal accounting
control usually do not exceed the costs of such control.
55. Which of the following is not one of the subcomponents of the control
environment?
medium a. Management’s philosophy and operating style.
c b. Organizational structure.
c. Adequate separation of duties.
d. Commitment to competence.
56. It is important for the CPA to consider the competence of the clients’ personnel
medium because their competence bears directly and importantly upon the:
b a. cost/benefit relationship of the system of internal control.
b. achievement of the objectives of internal control.
c. comparison of recorded accountability with assets.
d. timing of the tests to be performed.
57. Audit evidence concerning proper segregation of duties normally is best

obtained by:
medium a. direct personal observation of the employee who applies control
procedures.
a b. making inquiries of co-workers about the employee who applies control
procedures.
c. preparation of a flowchart of duties performed and available personnel.
d. inspection of third-party documents containing the initials of who applied
control procedures.
58. Proper segregation of functional responsibilities calls for separation of:

medium a. authorization, execution, and payment.
b b. authorization, recording, and custody.
c. custody, execution, and reporting.
d. authorization, payment, and recording.
59. Internal controls are not designed to provide reasonable assurance that:
medium a. all frauds will be eliminated.
a b. transactions are executed in accordance with management’s authorization.
c. access to assets is permitted only in accordance with management’s
authorization.
d. company personnel comply with applicable rules and regulations.
60. Which of the following statements about auditor documentation of the client’s
medium internal controls is correct?
d a. Documentation must include flow charts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary.
61. Significant deficiencies are matters that come to an auditor’s attention and
medium should be communicated to an entity’s audit committee because they represent:
b a. material frauds perpetrated by high-level management.
b. internal control deficiencies that could adversely affect a company’s ability
to initiate, record, process, or report external financial statements reliably.
c. flagrant violations of the entity’s documented conflict-of-interest policies.
d. intentional attempts by client personnel to limit the scope of the auditor’s
field work.
62. How must significant deficiencies and material weaknesses be communicated to

medium those charged with governance?
c a. Either oral or written communication is acceptable.
b. Oral communication is required.
c. Written communication is required.
d. Written communication is required for material weaknesses, but oral
communication is allowed for significant deficiencies.
63. Which of the following statements, if any, is correct?

challenging a. The NASDAQ market requires listed companies to have audit committees
a that have only independent directors.
b. The NASDAQ market requires listed companies to have audit committees
that have a minority of the positions held by independent directors.
c. The NASDAQ market recommends, but does not require, listed companies
to have audit committees.
d. The NASDAQ market recommends, but does not require, listed companies
to have audit committees that have a minority of the positions held by
independent directors.
64. (SOX) The Sarbanes-Oxley Act requires:

challenging a. all public companies to issue reports on internal controls.
a b. all public companies to define adequate internal controls.
c. the auditor of public companies to design effective ICFR.
d. the auditor of public companies to provide recommendations to correct
material weaknesses.
65. When considering internal control, an auditor should be aware of the concept of
challenging reasonable assurance, which recognizes that the:
d a. segregation of incompatible functions is necessary to ascertain that internal
control is effective.
b. employment of competent personnel provides assurance that the objectives
of internal control will be achieved.
c. establishment and maintenance of internal control is an important
responsibility of the management and not of the auditor.
d. costs of internal control should not exceed the benefits expected to be
derived from internal control.
66. The financial statements are not likely to correctly reflect GAAP if the:
challenging a. controls affecting the reliability of financial reporting are inadequate.
a b. company’s controls do not promote efficiency.
c. company’s controls do not promote effectiveness.
d. company’s control do not promote compliance with applicable rules and
regulations.
67. The primary emphasis by auditors is on controls over:

challenging a. classes of transactions.
a b. account balances.
c. both a and b, because they are equally important.
d. both a and b, because they vary from client to client.
68. Compared to a public company, the most important difference in a nonpublic

challenging company in assessing control risk is the ability to assess control risk at _______
for any or all control-related objectives.
d a. low
b. moderately low
c. medium
d. high
69. An auditor should consider two key issues when obtaining an understanding of
challenging a client’s internal controls. These issues are:
c a. the effectiveness and efficiency of the controls.
b. the frequency and effectiveness of the controls.
c. the design and utilization of the controls.
d. The implementation and efficiency of the controls.
70. The independent auditor should acquire an understanding of the internal audit
challenging function as it relates to the independent auditor’s study and evaluation of
internal control because the:
c a. audit programs, working papers, and reports of internal auditors can often
be used as a substitute for the work of the independent auditor’s staff.
b. procedures performed by the internal audit staff may eliminate the
independent auditor’s need for an extensive study and evaluation of internal
control.
c. work performed by internal auditors may be a factor in determining the
nature, timing, and extent of the independent auditor’s procedures.
d. understanding of the internal audit function is an important substantive test
to be performed by the independent auditor.
71. To be effective, an internal audit department must be independent of:

challenging a. operating departments.
c b. the accounting department.
c. both a and b.
d. either a or b, but not both.
72. Hanlon Corp. maintains a large internal audit staff that reports directly to the
challenging chief financial officer. Audit reports prepared by the internal auditors indicate
d that the system is functioning as it should and that the accounting records are
reliable. An independent auditor will probably:
a. eliminate tests of controls.
b. increase the depth of the study and evaluation of administrative controls.
c. avoid duplicating the work performed by the internal audit staff.
d. place limited reliance on the work performed by the internal audit staff.
73. External financial statement auditors must obtain evidence regarding what
challenging attributes of an internal audit (IA) department if the external auditors intend to
rely on IA’s work?
d a. Integrity
b. Objectivity
c. Competence
d. All of the above
74. When planning an audit, the auditor’s assessed level of control risk is:
challenging a. determined by using actuarial tables.
c b. calculated by using the audit risk model.
c. an economic issue, trading off the costs of testing controls against the cost
of testing balances.
d. calculated by using the formulas provided in the AICPA’s auditing
standards.
75. When a compensating control exists, the absence of a key control:

challenging a. is no longer a concern because there is no longer a significant deficiency or
a material weakness.
b. is still a major concern to the auditor.
c. could cause a material loss, so it must be tested using substantive
procedures.
d. is magnified and must be removed from the sampling process and
examined in its entirety.
76. After considering a client’s internal controls, an auditor has concluded that it is
challenging well designed and is functioning as intended. Under these circumstances the
auditor would most likely:
c a. perform tests of controls to the extent outlined in the audit program.
b. determine the control procedures that should prevent or detect errors and
irregularities.
c. not increase the extent of predetermined substantive tests.
d. determine whether transactions are recorded to permit preparation of
financial statements in conformity with generally accepted accounting
principles.
77. To obtain an understanding of an entity’s control environment, an auditor

challenging should concentrate on the substance of management’s policies and procedures
a rather than their form because:
a. management may establish appropriate policies and procedures but not act
on them.
b. the board of directors may not be aware of management’s attitude toward
the control environment.
c. the auditor may believe that the policies and procedures are inappropriate
for that particular entity.
d. the policies and procedures may be so weak that no reliance is
contemplated by the auditor.
93. Match seven of the terms (a-i) with the definitions provided below (1-7):
medium a. Control environment
b. Control activities
c. Independent checks on performance
d. Internal control
e. Monitoring
f. Separation of duties
g. General authorization
h. Specific authorization
i. Risk assessment
e 1. Management’s ongoing and periodic assessment of the quality of

internal control performance to determine that controls are
operating as intended and modified when needed.
g 2. Company-wide policies for the approval of all transactions

within stated limits.
a 3. The actions, policies, and procedures that reflect the overall

attitudes of top management, directors, and owners of an entity
about control and its importance to the entity.
f 4. Segregation of the following activities in an organization:

custody of assets, accounting, authorization, and operational
responsibility.
i 5. Management’s identification and analysis of risks relevant to the

preparation of financial statements in accordance with generally
accepted accounting principles.
b 6. Policies and procedures that help ensure necessary actions are

taken to address risks in the achievement of the entity’s
objectives.
d 7. A process designed to provide reasonable assurance regarding

the achievement of management’s objectives in the following
categories: (1) reliability of financial reporting, (2) effectiveness
and efficiency of operations, and (3) compliance with applicable
laws and regulations.
94. If, when obtaining an understanding of control activities of a relatively small

easy client, the auditor identified no control activities, the auditor would probably set
a a high assessment of control risk.
a. True
b. False
95. If, when obtaining an understanding of control activities of a relatively small
easy client, the auditor identified no control activities, the auditor would probably
a determine the client were unauditable.
a. True
b. False
96. When internal controls are effective, then substantive audit tests are more
easy reliable; thus, the extent of substantive tests should be reduced.
b a. True
b. False
97. Auditors of private companies may rely on prior periods’ tests of controls for a
easy period not to exceed four years.
b a. True
b. False
98. In an audit of a non-public company, the less control risk there is, the smaller
easy the amount of planned substantive evidence that is required.
a a. True
b. False
99. As a client’s information system becomes more complex, it is likely that an

easy auditor will decrease reliance on controls and increase substantive tests to
b support a control risk assessment.
a. True
b. False
100. When a company designs and implements internal controls, cost of the controls
easy is not a valid consideration.
b a. True
b. False
101. (Public) PCAOB Standard 2 requires auditors to perform walkthroughs to assist in

easy understanding internal control.
a a. True
b. False
102. Adequate documents and records is a subcomponent of the control

easy environment.
b a. True
b. False
103. For proper internal control, there should be adequate separation of duties.
easy However, the extent of separation of duties considered “adequate” depends
a heavily on the size of the organization.
a. True
b. False
104. In an audit of a non-public company, the auditor’s assessment of control risk

medium and the extent of tests of controls are inversely related.
a a. True
b. False
105. Smaller companies usually have more extensive internal controls than larger
medium companies which result in fewer frauds being committed at small companies.
b a. True
b. False
106. (Public) To issue an unqualified opinion on internal control over financial reporting,
medium there must be no identified material weaknesses and no restrictions on the scope
a of the audit.
a. True
b. False
107. (SOX) The Sarbanes-Oxley Act of 2002 requires that public companies issue an
medium internal control report.
a a. True
b. False
108. The most important component of internal control is risk assessment.

medium a. True
b b. False
109. The primary emphasis by auditors when evaluating and testing internal control
medium is on controls over classes of transactions rather than controls over account
a balances.
a. True
b. False
110. When internal controls over a given financial statement account are assessed as
medium highly effective, the auditor need not obtain audit evidence for that account
b beyond testing the controls.
a. True
b. False
111. The chart of accounts is a control and is closely related to the controls related to
medium adequate documents and records.
a a. True
b. False
112. Auditing standards prohibit reliance on the work of internal auditors due to the
medium lack of independence of the internal auditors.
b a. True
b. False
113. If an auditor wishes to rely on the work of internal auditors (IA), the auditor
medium must obtain satisfactory evidence related to the IA’s competence, integrity, and
a objectivity.
a. True
b. False
114. Procedures used to obtain an understanding of internal control are normally

medium performed on fewer transactions than procedures used to test controls.
a a. True
b. False
115. For most uses, flowcharts are superior to narratives as a method of

medium communicating the characteristics of internal control.
a a. True
b. False
116. When documenting their understanding of a client’s internal controls, auditors
medium are required to use narratives.
b a. True
b. False
Chapter 11
1. Which of the following best defines fraud in a financial statement auditing

context?
easy a. Fraud is an unintentional misstatement of the financial statements.
b b. Fraud is an intentional misstatement of the financial statements.
c. Fraud is either an intentional or unintentional misstatement of the financial
statements, depending on materiality.
d. Fraud is either an intentional or unintentional misstatement of the financial
statements, depending on consistency.
2. One of the earliest frauds occurred at McKesson-Robbins. This company

easy committed fraud by doing which of the following?
b a. Reporting fictitious contributed capital.
b. Reporting fictitious sales and nonexistent inventory.
c. Reporting fictitious fixed assets and underreporting expenses.
d. Reporting expenses as capitalized items.
3. Which of the following is a category of fraud?

easy
a Fraudulent financial reporting Misappropriation of assets
a. Yes Yes
b. No No
c. Yes No
d. No Yes
4. With respect to fraudulent financial reporting, most frauds involve:

easy
d Inventory or liquid asset theft Intentional misstatements of
amounts
a. Yes Yes
b. No No
c. Yes No
d. No Yes
5. ________ is fraud that involves theft of an entity’s assets.

easy a. Fraudulent financial reporting
c b. A “cookie jar” reserve
c. Misappropriation of assets
d. Income smoothing
6. ________ involves deliberate actions taken by management to meet earnings

objectives.
easy a. Expenditure management
b b. Earnings management
c. Top-line management
d. Management-by-objective
7. ________ is a form of earnings management in which revenues and expenses

easy are shifted between periods to reduce fluctuations in earnings.
c a. Fraudulent financial reporting
b. Expense smoothing
c. Income smoothing
d. Each of the above is correct
8. Which of the following is one of the conditions for fraud described in SAS No.
99?
easy
a Attitudes/rationalization Risk Factors Opportunities
a. Yes No Yes
b. No Yes Yes
c. Yes No No
d. No Yes No
9. Fraudulent financial reporting may be accomplished through the manipulation

of:
easy a. assets.
d b. revenues.
c. liabilities.
d. all of the above
10. Who is most likely to perpetrate fraudulent financial reporting?

easy a. Members of the board of directors
c b. Production employees
c. Management of the company
d. The internal auditors
11. Misappropriation of assets is normally perpetrated by:

easy a. members of the board of directors.
b b. employees at lower levels of the organization.
c. management of the company.
d. the internal auditors.
12. Which of the following is not a factor that relates to opportunities to commit
medium fraudulent financial reporting?
c a. Lack of controls related to the calculation and approval of accounting
estimates.
b. Ineffective oversight of financial reporting by the board of directors.
c. Management’s practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit, and information technology
staff.
13. The most common technique used by management to misstate financial

information is:
medium a. overstatement of expenses.
b b. improper revenue recognition.
c. understatement of liabilities.
d. understatement of assets.
14. Which of the following is a factor that relates to incentives or pressures to

medium commit fraudulent financial reporting?
b a. Significant accounting estimates involving subjective judgments.
b. Excessive pressure for management to meet debt repayment requirements.
d. High turnover of accounting, internal audit, and information technology
staff.
15. Which of the following is a factor that relates to attitudes or rationalization to

medium commit fraudulent financial reporting?
c a. Significant accounting estimates involving subjective judgments.
b. Excessive pressure for management to meet debt repayment requirements.
d. High turnover of accounting, internal audit and information technology
staff.
16. Which of the following statements describes circumstances that underlie

medium employee incentives to misappropriate assets?
a a. Dissatisfied employees may steal from a sense of entitlement.
b. Weak internal controls encourage employees to take chances.
c. If management cheats customers and gets away with it, then employees
believe they can do the same to the company.
d. Employees have a vested interest in making the company’s financial
statements erroneous.
17. Which of the following is not a factor that relates to opportunities to

misappropriate assets?
medium a. Inadequate internal controls over assets.
d b. Presence of large amounts of cash on hand.
c. Inappropriate segregation of duties or independent checks on performance.
d. Adverse relationships between management and employees.
18. Which of the following is a factor that relates to incentives to misappropriate

assets?
medium a. Significant accounting estimates involving subjective judgments.
b b. Significant personal financial obligations.
d. High turnover of accounting, internal audit and information technology
staff.
19. Which of the following issues is normally part of the “brainstorming” session
medium required by SAS No. 99?
a
How assets could Where the entity’s financial statements are
be susceptible to material misstatements due to fraud
misappropriated
a. Yes Yes
b. No No
c. Yes No
d. No Yes
20. In the fraud triangle, fraudulent financial reporting and misappropriation of

assets:
medium a. share little in common.
c b. share most of the same risk factors.
c. share the same three conditions.
d. share most of the same conditions.
21. Sources of information gathered to assess fraud risks usually do not include:
medium a. analytical procedures.
d b. inquiries of management.
c. communication among audit team members.
d. review of corporate charter and bylaws.
22. SAS No. 99 requires auditors to document which of the following matters
medium related to the auditor’s consideration of material misstatements due to fraud?
b a. Reasons supporting a conclusion that there is not a significant risk of
material improper expense recognition.
b. Procedures performed to obtain information necessary to identify and
assess the risks of material fraud.
c. Results of the internal auditor’s procedures performed to address the risk of
management override of controls.
d. Discussions with management regarding separation of duties.
23. Under SAS No. 99, auditors are to presume that there is a significant risk of:
medium a. overstated assets.
c b. understated liabilities.
c. improper revenue recognition.
d. overstated expenses.
24. After fraud risks are identified and documented, the auditor should evaluate
medium factors that ______ fraud risk before developing an appropriate response to the
risk of fraud.
b a. enhance
b. reduce
c. increase
d. increase or decrease
25. Which of the following parties is responsible for implementing internal controls
medium to minimize the likelihood of fraud?
c a. External auditors
b. Audit committee members
c. Management
d. Committee of Sponsoring Organizations
26. The most effective way to prevent and deter fraud is to:
medium a. implement programs and controls that are based on core values embraced
by the company.
a b. hire highly ethical employees.
c. communicate expectations to all employees on an annual basis.
d. terminate employees who are suspected of committing fraud.
27. Fraud awareness training should be:

medium a. broad and all-encompassing
c b. extensive and include details for all functional areas
c. specifically related to the employee’s job responsibility
d. focused on employees understanding the importance of ethics
28. As part of the brainstorming sessions, auditors are directed to emphasize:

medium
a The need for professional The audit team’s response to potential
skepticism fraud risks
a. Yes Yes
b. No No
c. Yes No
d. No Yes
29. Auditor responses to fraud risks include which of the following?

medium
d Perform procedures to result in Perform procedures to address the
the issuance of a qualified risk of management override of
opinion controls
a. Yes Yes
b. No No
c. Yes No
d. No Yes
30. As part of designing and performing procedures to address management

medium override of controls, auditors must perform which of the following procedures?
d
Examine all journal entries
above the level of materiality Review accounting estimates for
biases
a. Yes Yes
b. No No
c. Yes No
d. No Yes
31. Which of the following most accurately defines professional skepticism as it is

medium used in auditing standards?
b a. It either assumes management is honest or slightly dishonest, but neither all
the time.
b. It neither assumes that management is dishonest nor assumes unquestioned
honesty.
c. It assumes management is honest most of the time.
d. It assumes that management is dishonest in only rare instances.
32. Auditors may identify conditions during fieldwork that change or support a
medium judgment about the initial assessment of fraud risks. Which of the following is
a not a condition which should alert an auditor that the initial assessment should
be changed?
a. The auditor’s lack of independence
b. Discrepancies in the accounting records
c. Unusual relationships between the auditor and management
d. Missing or conflicting evidence
33. Which of the following is least likely to uncover fraud?

medium a. External auditors
a b. Internal auditors
c. Internal controls
d. Management
34. For inquiry to be effective, auditors need to be skilled at listening and _______
medium an interviewee’s response to questions.
a a. evaluating
b. recording
c. transcribing
d. remembering
35. Which of the following is not a likely source of information to assess fraud
risks?
challenging a. Communications among audit team members.
d b. Inquiries of management.
c. Analytical procedures.
d. Consideration of fraud risks discovered during recent audits of other
clients.
36. Which of the following is not a category of inquiry used by auditors?

challenging a. Assessment inquiry
b b. Declarative inquiry
c. Interrogative inquiry
d. Informational inquiry
37. ___________ inquiry is used when the auditor seeks responses from the
challenging interviewee about his or her knowledge of an event or circumstance.
c a. Assessment
b. Declarative
c. Interrogative
d. Informational
38. ___________ inquiry is used to obtain details about facts that the auditor does
not have.
challenging a. Assessment
c b. Declarative
c. Interrogative
d. Informational
39. ___________ inquiry is used to ascertain whether information already obtained

challenging is correct, factual or truthful.
a a. Assessment
b. Declarative
c. Interrogative
d. Informational
40. This type of inquiry often elicits “yes” or “no” responses to the auditor’s
questions.
challenging a. Assessment
c b. Declarative
c. Interrogative
d. Informational
41. Which of the following non-verbal cues is a sign of stress?

challenging a. Leaning away from the auditor, usually toward the door or window
b b. Avoiding eye contact
c. Crossing one’s arms or legs
d. Each of the above is a sign of stress
42. Which party has the primary responsibility to oversee an organization’s

challenging financial reporting and internal control processes?
b a. The board of directors
b. The audit committee
c. Management of the company
d. The financial statement auditors
43. When the auditor suspects that fraud may be present, SAS No. 99 requires the
auditor to:
challenging a. terminate the engagement with sufficient notice given to the client.
c b. issue an adverse opinion or a disclaimer of opinion.
c. obtain additional evidence to determine whether material fraud has
occurred.
d. re-issue the engagement letter.
44. With whom should the auditor communicate whenever he or she determines
challenging that senior management fraud may be present, even if the matter might be
considered inconsequential?
b a. PCAOB
b. Audit committee
c. An appropriate level of management that is at least one level above those
involved
d. The internal auditors
45. Management is responsible for:

medium
a Identifying and measuring fraud Taking steps to mitigate identified
risks risks
a. Yes Yes
b. No No
c. Yes No
d. No Yes
59. In the context of financial statement auditing, fraud is defined as an intentional

easy misstatement of the financial statements.
a a. True
b. False
60. The two main categories of fraud are fraudulent financial reporting and
easy misappropriation of assets.
a a. True
b. False
61. “Cookie jar reserves” are often created by companies whenever their earnings
easy are high to create reserves for future periods when earnings are at or above
b current levels.
a. True
b. False
62. Management and the board of directors are responsible for setting the “tone at
easy the top.”
a a. True
b. False
63. Two conditions are generally present when material misstatements due to fraud
easy occur – incentives and opportunities.
b a. True
b. False
64. Financial statements of all companies are potentially subject to manipulation.

easy a. True
a b. False
65. Fraud is more prevalent in large businesses than small businesses and not-for-
easy profit organizations.
b a. True
b. False
66. The audit committee is responsible for overseeing an organization’s financial

medium reporting and internal control processes.
a a. True
b. False
67. The same three fraud triangle risk conditions apply to fraudulent financial
medium reporting and misappropriation of assets.
a a. True
b. False
68. “An attitude, character, or set of ethical values exist that allow management or
medium employees to commit a dishonest act ….” describes the opportunities condition
b included in the fraud triangle.
a. True
b. False
69. Misappropriation of assets is normally perpetrated at the highest levels of the

medium organization hierarchy.
b a. True
b. False
70. Fraudulent financial reporting usually involves manipulation of amounts rather

medium than disclosures.
a a. True
b. False
71. An example of a fraud risk factor describing incentives/pressures is “ineffective

medium board of director oversight over financial reporting.”
b a. True
b. False
72. An example of a fraud risk factor describing opportunities is “ineffective board

medium of director oversight over financial reporting.”
a a. True
b. False
73. (Public) PCAOB Standard 2 indicates that material fraud by senior management is a
medium material weakness.
a a. True
b. False
74. Information and idea exchange sessions are required by SAS No. 99.
medium a. True
a b. False
75. SAS No. 99 does not specifically indicate which members of an audit
medium engagement team must attend a brainstorming session.
a a. True
b. False
76. The presence of fraud risk factors increases the likelihood of fraud and usually
medium suggests that fraud is present.
b a. True
b. False
77. Professional skepticism requires auditors to “either assume that management is

medium dishonest or they have questionable honesty.”
b a. True
b. False
78. Auditors should consider risk factors related to incentives, opportunities, and
medium attitudes whenever they assess the likelihood of material misstatements due to
a fraud.
a. True
b. False
79. (Public) Auditors must issue a qualified opinion on internal control whenever senior
challenging management commits fraud that is considered a material weakness.
b a. True
b. False
80. The board of directors has the primary responsibility to assess fraud risks and
challenging establish corporate governance programs and controls to prevent, deter, and
b detect fraud.
a. True
b. False
81. One of the strongest internal corporate governance mechanisms over senior
challenging management is the audit committee of the board of directors.
a a. True
b. False
82. Because fraud perpetrators are often knowledgeable about audit procedures,
challenging SAS No. 99 requires auditors to incorporate unpredictability into the audit plan.
a a. True
b. False
83. All misstatements the auditor finds during the audit should be evaluated for any
challenging indication of fraud.
a a. True
b. False
Chapter 12
1. IT has several significant effects on an organization. Which of the following

easy would not be important from an auditing perspective?
d a. Organizational changes.
b. The visibility of information.
c. The potential for material misstatement.
d. None of the above; i.e., they are all important.
2. The audit procedure which is least useful in gathering evidence on significant

easy computer processes is:
b a. documentation.
b. observation.
c. test decks.
d. generalized audit software.
3. Which of the following is not a benefit of using IT-based controls?

easy a. Ability to process large volumes of transactions.
d b. Ability to replace manual controls with computer-based controls.
c. Reduction in misstatements due to consistent processing of transactions.
d. Over-reliance on computer-generated reports.
4. One significant risk related to an automated environment is that auditors may

easy ____ information provided by an information system.
b a. not place enough reliance on
b. place too much reliance on
c. reveal
d. not understand
5. Which of the following is not a risk specific to IT environments?

easy a. Reliance on the functioning capabilities of hardware and software.
b b. Increased human involvement.
c. Loss of data due to insufficient backup.
d. Reduced segregation of duties.
6. Which of the following is not an enhancement to internal control that will occur
easy as a consequence of increased reliance on IT?
d a. Computer controls replace manual controls.
b. Higher quality information is available.
c. Computer-based controls provide opportunities to enhance separation of
duties.
d. Manual controls replace automated controls.
7. Which of the following is not a risk to IT systems?

easy a. Need for IT experienced staff
c b. Separation of IT duties from accounting functions
c. Improved audit trail
d. Hardware and data vulnerability
8. Which of the following is not a category of an application control?

easy a. Processing controls.
c b. Output controls.
c. Hardware controls.
d. Input controls.
9. Old and new systems operating simultaneously in all locations is a test approach
known as:
easy a. pilot testing.
d b. horizontal testing.
c. integrative testing.
d. parallel testing.
10. When the client uses a computer but the auditor chooses to use only the non-IT
easy segment of internal control to assess control risk, it is referred to as auditing
a around the computer. Which one of the following conditions need not be
present to audit around the computer?
a. Computer programs must be available in English.
b. The source documents must be available in a non-machine language.
c. The documents must be filed in a manner that makes it possible to locate
them.
d. The output must be listed in sufficient detail to enable the auditor to trace
individual transactions.
11. Which of the following is a category of general controls?
easy a. Processing controls.
c b. Output controls.
c. Physical and online security.
d. Input controls.
12. Which of the following statements related to application controls is correct?

easy a. Application controls relate to various aspects of the IT function including
d 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.
13. General controls include all of the following except:

easy a. systems development.
c b. online security.
c. processing controls.
d. hardware controls.
14. Predesigned formats, such as those used for audit documentation, can be created
easy and saved using electronic spreadsheets and word processors. These are called:
b a. desktop publishing.
b. templates.
c. macros.
d. work files.
15. ______ involves implementing a new system in one part of the organization,
easy while other locations continue to use the current system.
c a. Parallel testing
b. Online testing
c. Pilot testing
d. Control testing
16. To determine that user ID and password controls are functioning, an auditor
would most likely:
easy a. attempt to sign on to the system using invalid user identifications and
passwords.
a b. write a computer program that simulates the logic of the client’s access
control software.
c. extract a random sample of processed transactions and ensure that the
transactions were appropriately authorized.
d. examine statements signed by employees stating that they have not
divulged their user identifications and passwords to any other person.
17. When IT programs or files can be accessed from terminals, users should be
easy required to enter a(n):
d a. echo check.
b. parity check.
c. self-diagnosis test.
d. authorized password.
18. An auditor’s flowchart of a client’s system is a graphical representation that

depicts the auditor’s:
easy a. program for tests of controls.
b b. understanding of the system.
c. understanding of the types of errors that are probable given the present
system.
d. documentation of the study and evaluation of the system.
19. Which of the following is not a characteristic of an online processing system?

medium a. Output of the data files is available on request.
d b. Master files are updated at the time the entry is made.
c. Display terminals are used for both input and output purposes.
d. Programming is not allowed online and must be done separately.
20. Typical controls developed for manual systems which are still important in IT
systems include:
medium a. proper authorization of transactions.
d b. competent and honest personnel.
c. careful and complete preparation of source documents.
21. ______ controls prevent and detect errors while transaction data are processed.
medium a. Software
c b. Application
c. Processing
d. Transaction
22. A database management system:

medium a. physically stores each element of data only once.
a b. stores data on different files for different purposes, but always knows
where they are and how to retrieve them.
c. allows quick retrieval of data but at a cost of inefficient use of file space.
d. allows quick retrieval of data, but it needs to update files continually.
23. Which of the following is not associated with converting from a manual to an
IT system?
medium a. It usually centralizes data.
d b. It permits higher quality and more consistent controls over operations.
c. It may eliminate the control provided by division of duties of independent
persons who perform related functions and compare results.
d. It may take the recordkeeping function and the document preparation
function away from those who have custody of assets and put those functions
into the IT center.
24. Which of the following statements about general controls is not correct?
medium a. Disaster recovery plans should identify alternative hardware to process
company data.
d b. Successful IT development efforts require the involvement of IT and non-
IT personnel.
c. The chief information officer should report to senior management and the
board.
d. Programmers should have access to computer operations to aid users in
resolving problems.
25. Which of the following statements is correct?

medium a. Auditors should evaluate application controls before evaluating general
controls.
c b. Auditors should evaluate application controls and general controls
simultaneously.
c. Auditors should evaluate general controls before evaluating application
controls.
d. None of these statements is correct.
26. An important characteristic of IT is uniformity of processing. Therefore, a risk

exists that:
medium a. auditors will not be able to access data quickly.
c b. auditors will not be able to determine if data is processed consistently.
c. erroneous processing can result in the accumulation of a great number of
misstatements in a short period of time.
27. Auditors should evaluate the ________ before evaluating application controls
medium because of the potential for pervasive effects.
d a. input controls
b. control environment
c. processing controls
d. general controls
28. A control that relates to all parts of the IT system is called a(n):
medium a. general control.
a b. systems control.
c. universal control.
d. applications control.
29. Controls which apply to a specific element of the system are called:
medium a. user controls.
d b. general controls.
c. systems controls.
d. applications controls.
30. Which of the following is not an example of an applications control?

medium a. An equipment failure causes system downtime.
a b. There is a preprocessing authorization of the sales transactions.
c. There are reasonableness tests for the unit selling price of a sale.
d. After processing, all sales transactions are reviewed by the sales
department.
31. Which of the following is least likely to be used in obtaining an understanding

medium of client general controls?
c a. Examination of system documentation
b. Inquiry of client personnel (e.g., key users)
c. Observation of transaction processing
d. Reviews of questionnaires completed by client IT personnel
32. Which of the following is not a general control?

medium a. Reasonableness test for unit selling price of a sale.
a b. Equipment failure causes error messages on monitor.
c. Separation of duties between programmer and operators.
d. Adequate program run instructions for operating the computer.
33. Controls which are built in by the manufacturer to detect equipment failure are
called:
medium a. input controls.
c b. fail-safe controls.
c. hardware controls.
d. manufacturer’s controls.
34. Auditors usually evaluate the effectiveness of:

medium a. hardware controls before general controls.
c b. sales-cycle controls before application controls.
c. general controls before applications controls.
d. applications controls before the control environment.
35. Controls which are designed to assure that the information processed by the
medium computer is authorized, complete, and accurate are called:
a a. input controls.
b. processing controls.
c. output controls.
d. general controls.
36. Programmers should be allowed access to:

medium a. user controls.
d b. general controls.
c. systems controls.
d. applications controls.
37. Programmers should do all but which of the following?
medium a. Test programs for proper performance.
b b. Evaluate legitimacy of transaction data input.
c. Develop flowcharts for new applications.
d. Programmers should perform each of the above.
38. ______ tests determines that every field in a record has been completed.
medium a. Validation
c b. Sequence
c. Completeness
d. Programming
39. In an IT-intensive environment, most processing controls are:

medium a. input controls.
c b. operator controls.
c. programmed controls.
d. documentation controls.
40. Which of the following is not a processing control?

medium a. Control totals.
c b. Logic tests.
c. Check digits.
d. Computations tests.
41. Output controls are not designed to assure that data generated by the computer
are:
medium a. accurate.
d b. distributed only to authorized people.
c. complete.
d. used appropriately by employees in making decisions.
42. Auditors usually obtain information about general and application controls
through:
medium a. interviews with IT personnel.
d b. examination of systems documentation.
c. reading program change requests.
d. all of the above methods.
43. When auditors consider only non-IT controls in assessing control risk, it is
known as:
medium a. the single-stage audit.
c b. the test deck approach.
c. auditing around the computer.
d. generalized audit software (GAS).
44. The auditor’s objective to determine whether the client’s computer programs
medium can correctly handle valid and invalid transactions as they arise is accomplished
through the:
a a. test data approach.
b. generalized audit software approach.
c. microcomputer-aided auditing approach.
d. generally accepted auditing standards.
45. The audit approach in which the auditor runs his or her own program on a
medium controlled basis to verify the client’s data recorded in a machine language is:
c a. the test data approach.
b. called auditing around the computer.
c. the generalized audit software approach.
d. the microcomputer-aided auditing approach.
46. Which of the following is not one of the three categories of testing strategies
medium when auditing through the computer?
a a. Pilot simulation.
b. Test data approach.
c. Parallel simulation.
d. Embedded audit module.
47. Companies with non-complex IT environments often rely on microcomputers to

medium perform accounting system functions. Which of the following is not an audit
d consideration in such an environment?
a. Limited reliance on automated controls.
b. Unauthorized access to master files.
c. Vulnerability to viruses and other risks.
d. Excess reliance on automated controls.
48. Internal control is ineffective when computer personnel:

medium a. participate in computer software acquisition decisions.
c b. design flowcharts and narratives for computerized systems.
c. originate changes in customer master files.
d. provide physical security over program files.
49. When using the test data approach:

medium a. test data should include only exception conditions.
d b. application programs tested must be virtually identical to those used by
employees.
c. select data may remain in the client system after testing.
d. none of the above statements is correct.
50. Because general controls have a _____ effect on the operating effectiveness of
medium application controls, auditors must consider general controls.
b a. nominal
b. pervasive
c. mitigating
d. worsening
51. Errors in data processed in a batch computer system may not be detected
immediately because:
medium a. transaction trails in a batch system are available only for a limited period of
time.
b b. there are time delays in processing transactions in a batch system.
c. errors in some transactions cause rejection of other transactions in the
batch.
d. random errors are more likely in a batch system than in an online system.
52. ______ link equipment in large geographic regions.

medium a. Cosmopolitan area networks (CANs)
c b. Local area networks (LANs)
c. Wide area networks (WANs)
d. Virtual area networks (VANs)
53. Which of the following computer-assisted auditing techniques allows fictitious

medium and real transactions to be processed together without client operating personnel
c being aware of the testing process?
a. Parallel simulation.
b. Generalized audit software programming.
c. Integrated test facility.
d. Test data approach.
54. Firewalls are used to protect:

medium a. erroneous internal handling of data.
d b. against insufficient documentation of transactions.
c. illogical programming commands.
d. unauthorized use of system resources.
55. In an IT system, automated equipment controls or hardware controls are
designed to:
medium a. correct errors in the computer programs.
c b. monitor and detect errors in source documents.
c. detect and control errors arising from the use of equipment.
d. arrange data in a logical sequential manner for processing purposes.
56. If a control total were to be computed on each of the following data items,
medium which would best be identified as a hash total for a payroll IT application?
b a. Gross wages earned.
b. Employee numbers.
c. Total hours worked.
d. Total debit amounts and total credit amounts.
57. What tools do companies use to limit access to sensitive company data?
medium
a Encryption Digital signatures Firewall
techniques
a. Yes Yes Yes
b. Yes No No
c. No Yes Yes
d. Yes Yes No
58. Rather than maintain an internal IT center, many companies use ________ to
medium perform many basic functions such as payroll.
b a. external general service providers
b. external application service providers
c. internal control service providers
d. internal auditors
59. A company uses the account code 669 for maintenance expense. However, one
medium of the company clerks often codes maintenance expense as 996. The highest
d account code in the system is 750. What internal control in the company’s
computer program would detect this error?
a. Pre-data input check.
b. Valid-character test.
c. Sequence check.
d. Valid-code test.
60. Which of the following is not an application control?

challenging a. Preprocessing authorization of sales transactions.
d b. Reasonableness test for unit selling price of sale.
c. Post-processing review of sales transactions by the sales department.
d. Separation of duties between computer programmer and operators.
61. It is common in IT systems to have certain types of transactions initiated

challenging automatically by the computer. Which of the following activities would not be
d an appropriate candidate for automatic computer initialization?
a. In a bank, periodic calculation of interest on customer accounts.
b. In a manufacturing facility ordering inventory at preset order levels.
c. In a hospital, the ordering of oxygen when pre-specified levels are
achieved.
d. In an investment brokerage firm, the sale of pharmaceutical stocks when
the Dow-Jones Industrial Average falls below a certain level.
62. Application controls vary across the IT system. To gain an understanding of

challenging internal control for a private company, the auditor must evaluate the application
controls for every:
d a. every audit area.
b. every material audit area.
c. every audit area in which the client uses the computer.
d. every audit area where the auditor plans to reduce assessed control risk.
63. Many clients have outsourced the IT functions. The difficulty the independent
challenging auditor faces when a computer service center is used is to:
c a. gain the permission of the service center to review their work.
b. find compatible programs that will analyze the service center’s programs.
c. determine the adequacy of the service center’s internal controls.
d. try to abide by the Code of Professional Conduct to maintain the security
and confidentiality of client’s data.
64. An auditor who is testing IT controls in a payroll system would most likely use
challenging test data that contain conditions such as:
a a. time tickets with invalid job numbers.
b. overtime not approved by supervisors.
c. deductions not authorized by employees.
d. payroll checks with unauthorized signatures.
65. Which of the following is not a general control?

challenging a. The plan of organization and operation of IT activity.
c b. Procedures for documenting, reviewing, and approving systems and
programs.
c. Processing controls.
d. Hardware controls.
66. In comparing (1) the adequacy of the hardware controls in the system with (2)
challenging the organization’s methods of handling the errors that the computer identifies,
the independent auditor is:
c a. unconcerned with both (1) and (2).
b. equally concerned with (1) and (2).
c. less concerned with (1) than with (2).
d. more concerned with (1) than with (2).
67. Service auditors do not issue which of the following types of reports?
challenging a. Report on implemented controls
b b. Report on controls that have been implemented and tested for design
effectiveness
c. Report on controls that have been implemented and tested for operating
effectiveness
d. Each of the above is issued.
68. The most important output control is:

challenging a. distribution control, which assures that only authorized personnel receive
b the reports generated by the system.
b. review of data for reasonableness by someone who knows what the output
should look like.
c. control totals, which are used to verify that the computer’s results are
correct.
d. logic tests, which verify that no mistakes were made in processing.
Other Objective Answer Frmat Questions
82. Match eight of the terms (a-n) with the definitions provided below (1-8):
medium
a. Application controls
b. Auditing around the computer
c. Auditing through the computer
d. Error listing
e. General controls
f. Generalized audit software
g. Hardware controls
h. Input controls
i. Output controls
j. Parallel simulation
k. Parallel testing
l. Pilot testing
m. Processing controls
n. Test data approach
k 1. The new and old systems operate simultaneously in all locations.
e 2. Controls that relate to all parts of the IT system.
j 3. Involves the use of a computer program written by the auditor

that replicates some part of a client’s application system.
n 4. A method of auditing IT systems which uses data created by the

auditor to determine whether the client’s computer program can
correctly process valid and invalid transactions.
i 5. Controls such as review of data for reasonableness, designed to

assure that data generated by the computer is valid, accurate,
complete, and distributed only to authorized people.
a 6. Controls that apply to processing of transactions.
l 7. A new system is implemented in one part of the organization

while other locations continue to rely on the old system.
h 8. Controls such as proper authorization of documents, check digits,

and adequate documentation, designed to assure that the
information to be processed by the computer is authorized,
complete, and accurate.
83. Inherent risk is often reduced in complex IT systems relative to less complex IT
easy systems.
b a. True
b. False
84. Parallel testing is used when old and new systems are operated simultaneously
easy in all locations.
a a. True
b. False
85. Firewalls can protect company data and software programs.

easy a. True
a b. False
86. Programmers should not have access to transaction data.

easy a. True
a b. False
87. One potential disadvantage of IT systems is the reduction or elimination of

easy source documents, which reduces the visibility of the audit trail.
a a. True
b. False
88. LANs link equipment within a single or small cluster of buildings and are used
easy only for intracompany purposes.
a a. True
b. False
89. In IT systems, if general controls are effective, it increases the auditor’s ability
medium to rely on application controls to reduce control risk.
a a. True
b. False
90. Parallel testing is more expensive than pilot testing.

medium a. True
a b. False
91. The effectiveness of manual controls depends solely on the competence of the
medium personnel performing the controls.
b a. True
b. False
92. The test data approach requires the auditor to insert an audit module in the
medium client’s application system to test transaction data specifically identified by the
b auditor as unusual.
a. True
b. False
93. General controls in smaller companies are usually less effective than in more
medium complex IT environments.
a a. True
b. False
94. (Public) Knowledge of both general and application controls is not particularly crucial
medium for auditors of public companies.
b a. True
b. False
95. Logic tests and completeness tests are examples of general controls.
medium a. True
b b. False
96. When the auditor decides to “audit around the computer,” there is no need to
medium test the client’s IT controls or obtain an understanding of the client’s internal
b controls related to the IT system.
a. True
b. False
97. Auditors normally link controls and deficiencies in general controls to specific
medium transaction-related audit objectives.
b a. True
b. False
98. Output controls focus on detecting errors after processing is completed rather
medium than preventing errors prior to processing.
a a. True
b. False
99. The objective of the computer audit technique known as the test data approach
medium is to determine whether the client’s computer programs can correctly process
a valid and invalid transactions.
a. True
b. False
100. Parallel simulation is used primarily to test internal controls over the client’s IT
medium systems, whereas the test data approach is used primarily for substantive
b testing.
a. True
b. False
101. Processing controls is a category of application controls.
medium a. True
a b. False
102. Controls that relate to a specific use of the IT system, such as the processing of
medium sales or cash receipts, are called application controls.
a a. True
b. False
103. “Auditing around the computer” is acceptable only if the auditor has access to
medium the client’s data in a machine-readable language.
b a. True
b. False
104. IT controls are classified as either input controls or output controls.

medium a. True
b b. False
105. One common use of generalized audit software is to help the auditor identify
medium weaknesses in the client’s IT control procedures.
b a. True
b. False
106. Tests of controls are normally performed only if the auditor believes the client’s
medium internal control may be effective.
a a. True
b. False
107. “Auditing around the computer” is most appropriate when the client has not
medium maintained detailed output or source documents in a form readable by humans.
b a. True
b. False
108. When auditing a client whose information is processed by an outside service

medium provider, it is not acceptable for the auditor to rely on the audit report of another
b independent auditor who has previously tested the internal controls of the
service provider, rather than testing the service provider’s controls himself or
herself.
a. True
b. False
109. When a client uses microcomputers for the accounting functions, the auditor
medium should normally rely only on non-IT controls or take a substantive approach to
a the audit.
a. True
b. False

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Chapter 6

1. The objective of the ordinary audit of financial statements is the expression of

3. Auditors accumulate evidence to:

4. The responsibility for adopting sound accounting policies and maintaining

6. If management insists on financial statement disclosures that the auditor finds

7. If management insists on financial statement disclosures that the auditor finds

14. Professional skepticism requires auditors to possess a(n) ______ mind.

16. Fraudulent financial reporting is most likely to be committed by whom?

19. Tests of details of balances are specific procedures intended to:

28. Fraudulent financial reporting is often called:

29. Which of the following statements is usually true?

30. Auditing standards make _____ distinction(s) between the auditor’s

42. Management assertions are:

43. Which of the following statements is true?

46. The occurrence assertion applies to _______.

47. Which of the following management assertions is not associated with

48. Which of the following statements is not true?

49. In testing for cutoff, the objective is to determine:

52. Which of the following is not a proper match of a transaction-related audit

53. Which of the following statements is not correct?

57. Which of the following combinations is correct?

58. If an auditor conducted an audit in accordance with auditing standards, which of

61. The essence of the attest function is to:

63. The auditor’s evaluation of the likelihood of material employee fraud is

65. Illegal acts are defined in SAS 54 (AU217) as:

66. Most illegal acts affect the financial statements:

Other Objective Answer Format Questions

h 1. An intentional misstatement of the financial statements.

e 2. A set of six audit objectives the auditor must meet, including

f 3. Implied or expressed representations made by the client about

a 4. Audit procedures testing for monetary misstatements to determine

g 5. A set of nine audit objectives the auditor must meet, including

b 6. Audit procedures designed to test the effectiveness of control

Audit Objectives Assertions

4. Trace from a sample of prelistings of cash receipts to the cash receipts

Audit Objectives Assertions

3. Compare dates on cancelled checks with the bank cancellation date.

4. Trace from a sample of cancelled checks to the cash disbursements journal.

5. Examine supporting documentation for a sample of transactions for

Audit Objectives Assertions

1. Obtain an aged listing of accounts receivable. For a sample of individual

3. Assess the reasonableness of the balance in the allowance for doubtful

4. Inquire as to whether any accounts receivable have been factored or sold

5. Inquire as to whether there are any receivables from related parties.

99. Under the cycle approach to segmenting an audit, transactions recorded in

103. The transaction-related audit objective of timing is related to the assertion of

113. The objective of the audit of financial statements by an independent auditor is to

Sample size Timing of audit procedures

2. Audit procedures may be performed:

3. Which of the following forms of evidence is most reliable?

4. Which of the following is not a characteristic of the reliability of evidence?

5. Which of the following is not a characteristic of the reliability of evidence?

8. Appropriateness of evidence is a measure of the:

9. Which of the following statements regarding the relevance of evidence is

10. Two determinants of the persuasiveness of evidence are:

13. An example of an external document is:

16. Often, auditor procedures result in significant differences being discovered by

17. Which of the following is not a purpose of analytical procedures?

19. Which of the following statements is not true? “The evidence-gathering

20. (SOX) Sarbanes-Oxley requires auditors of public companies to maintain audit

22. Which of the following statements is not correct?

24. Which of the following statements is not correct?

26. Which of the following is the most objective type of evidence?