Exam 1

Question 1

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of:
A) presentation and disclosure.
B) completeness.
C) rights and obligations.
D) existence.

Answer 1

B) completeness

Question 2

During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management’s assertion of:
A) existence or occurrence.
B) completeness.
C) valuation or allocation.
D) presentation and disclosure.

Answer 2

D) presentation and disclosure

Question 3

What type of evidence would provide the highest level of assurance in an attestation engagement?
A) Evidence secured solely from within the entity.
B) Third party evidence directly obtained from independent sources.
C) Third party evidence obtained indirectly through the client.
D) Evidence obtained from multiple internal inquiries.

Answer 3

B) Third party evidence directly obtained from independent sources.

Question 4

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
A) The entity has rights to the inventory.
B) Inventory is properly valued.
C) Inventory is properly presented in the financial statements.
D) Inventory is complete.

Answer 4

D) Inventory is complete

Question 5

Which of the following types of audit evidence provides the least assurance of reliability?
A) Receivable confirmations received from the client’s customers.
B) Prenumbered receiving reports completed by the client’s employees.
C) Prior months’ bank statements obtained from the client.
D) Municipal property tax bills prepared in the client’s name.

Answer 5

B) Prenumbered receiving reports completed by the client’s employees.

Question 6

In auditing the long-term debt account, an auditor’s procedures most likely would focus primarily on management’s assertion of:
A) existence.
B) completeness.
C) allocation.
D) rights and obligations.

Answer 6

B) completeness.

Question 7

To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process?
A) Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes.
B) Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes.
C) Recognize the financial assertions made in management’s financial statements and footnotes.
D) Evaluate the evidence produced by the performance of procedures and decide whether management’s assertions conform to generally accepted accounting principles and reality.

Answer 7

C) Recognize the financial assertions made in management’s financial statements and footnotes.

Question 8

Which of the following best describes the primary role and responsibility of independent external auditor?
A) Produce a company’s annual financial statements and notes.
B) Express an opinion on the fairness of a company’s annual financial statements and footnotes.
C) Provide business consulting advice to audit clients.
D) Obtain an understanding of the client’s internal control structure and give management a report about control problems and deficiencies.

Answer 8

B) Express an opinion on the fairness of a company’s annual financial statements and footnotes.

Question 9

In performing an attestation engagement, a CPA typically:
A) supplies litigation support services.
B) assesses control risk at a low level.
C) expresses a conclusion on an assertion about some type of subject matter.
D) provides management consulting advice.

Answer 9

C) expresses a conclusion on an assertion about some type of subject matter.

Question 10

The probability that the information circulated by a company will be false or misleading is referred to as:
A) business risk.
B) information risk.
C) assurance risk.
D) audit risk.

Answer 10

B) information risk.

Question 11

Control risk is
A) the probability that a material misstatement could not be prevented or detected by the entity’s internal control policies and procedures.
B) the probability that a material misstatement could occur and not be detected by auditors’ procedures.
C) the risk that auditors will not be able to complete the audit on a timely basis.
D) the risk that auditors will not properly control the staff on the audit engagement.

Answer 11

A) the probability that a material misstatement could not be prevented or detected by the entity’s internal control policies and procedures.

Question 12

Which of the following is not considered a type of audit evidence?
A) The entity’s trial balance
B) Auditors’ calculations
C) Physical observation
D) Verbal statements made by client personnel

Answer 12

A) The entity’s trial balance

Question 13

An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to:
A) certify the correctness of Camden’s financial statements.
B) make a complete examination of Camden’s records and verify all of Camden’s transactions.
C) give an opinion on the fair presentation of Camden’s financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).
D) give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

Answer 13

C) give an opinion on the fair presentation of Camden’s financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).

Question 14

Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards?
A) An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.
B) The client’s Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm.
C) An auditor on the engagement owns a financial interest in the stock of the client.
D) The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

Answer 14

C) An auditor on the engagement owns a financial interest in the stock of the client.

Question 15

Which of the following statements is generally correct about the appropriateness of audit evidence?
A) Auditors’ direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.
B) To be reliable, audit evidence must be either valid or relevant, but need not be both.
C) Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements.
D) Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

Answer 15

A) Auditors’ direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.

Question 16

Which of the following is not included in the auditors’ standard report representing an unmodified opinion?
A) A brief indication of the responsibility of auditors and management for the financial statements
B) An indication that all appropriate disclosures have been made and included in the financial statements
C) An indication that the audit was conducted in accordance with standards established by the PCAOB
D) The auditors’ opinion on the fairness of the financial statements

Answer 16

B) An indication that all appropriate disclosures have been made and included in the financial statements

Question 17

Which of the following is not a concept from the performance principle under generally accepted auditing standards?
A) The auditor must plan the work and properly supervise any assistants.
B) The auditor must express an opinion in accordance with the auditor’s findings.
C) The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.
D) The auditor must determine and apply an appropriate materiality level throughout the audit.

Answer 17

B) The auditor must express an opinion in accordance with the auditor’s findings.

Question 18

Under generally accepted auditing standards, which of the following relates to the responsibilities principle?
A) The initial planning of the audit engagement
B) The confirmation of accounts receivable
C) The completion of an internal control questionnaire
D) Maintaining professional skepticism and exercising professional judgment

Answer 18

D) Maintaining professional skepticism and exercising professional judgment

Question 19

Which of the following is most closely associated with the responsibilities principle?
A) Due care
B) Planning
C) Qualified audit opinion
D) Risk of material misstatement

Answer 19

A) Due care

Question 20

Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards?
A) The PCAOB issues auditing standards for the audit of public entities, subject to SEC approval.
B) Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities.
C) The Auditing Standards Board currently issues auditing standards for the audit of nonpublic entities.
D) Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both public and private entities.

Answer 20

B) Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities.

Question 21

Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
A) An inadequate understanding of the entity’s internal controls.
B) The close proximity to the end of the entity’s fiscal year.
C) Concluding that the entity’s management probably lacks integrity.
D) The inability to perform preliminary analytical procedures before assessing control risk.

Answer 21

C) Concluding that the entity’s management probably lacks integrity.

Question 22

Before accepting an engagement to audit a new client, a CPA is required to first obtain:
A) an assessment of fraud risk factors that likely to cause material misstatements.
B) an understanding of the prospective client’s industry and business.
C) the prospective client’s signature to a written engagement letter.
D) the prospective client’s consent to make inquiries of the predecessor, if any.

Answer 22

D) the prospective client’s consent to make inquiries of the predecessor, if any.

Question 23

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
A) Determine the type of audit opinion to issue.
B) Comparing the financial statements to anticipated results.
C) Examining computer-generated exception reports to verify the effectiveness of internal controls.
D) Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

Answer 23

B) Comparing the financial statements to anticipated results.

Question 24

C. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday’s predecessor auditor was K. Post, CPA, whom Monday has notified that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
A) Hill, the auditor.
B) Post, the predecessor auditor.
C) Monday’s controller or CFO.
D) The chair of Monday’s board of directors.

Answer 24

A) Hill, the auditor.

Question 25

An engagement letter is used primarily to:
A) ensure a clear contractual understanding of the services to be provided by the CPA.
B) express an opinion on the financial statements.
C) provide management representations to be included in the audit evidence.
D) disclaim liability.

Answer 25

A) ensure a clear contractual understanding of the services to be provided by the CPA.

Question 26

The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard?
A) Independence.
B) Adequate technical competence and capabilities.
C) Adequate planning and supervision.
D) Gathering sufficient competent evidence.

Answer 26

C) Adequate planning and supervision.

Question 27

Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should:
A) reduce audit risk by lowering the preliminary levels of materiality.
B) design special substantive tests to compensate for the lack of industry expertise.
C) assess the control risk of the client at the maximum level.
D) obtain knowledge of matters that relate to the nature of the entity’s business.

Answer 27

D) obtain knowledge of matters that relate to the nature of the entity’s business.

Question 28

Management’s responsibility in a computer system would not include:
A) ensuring that the documentation of the system is complete and up to date.
B) maintaining a system of transaction processing that includes an audit trail.
C) assessing the control risk related to the computer system.
D) making computer resources and knowledgeable personnel available for questions.

Answer 28

C) assessing the control risk related to the computer system.

Question 29

For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective?
A) Assessment of inherent risk, yes; assessment of control risk, yes.
B) Assessment of inherent risk, yes; assessment of control risk, no.
C) Assessment of inherent risk, no; assessment of control risk, yes.
D) Assessment of inherent risk, no; assessment of control risk, no.

Answer 29

D) Assessment of inherent risk, no; assessment of control risk, no.

Question 30

Looking at shipping document for the date of shipment made is an example of:
A) physical observation.
B) confirmation.
C) inspection of documents.
D) Analytical procedure.

Answer 30

C) inspection of documents.

Question 31

Management fraud generally refers to:
A) unintentional mistakes.
B) noncompliance.
C) intentional distortions of financial statements.
D) violations of GAAS.

Answer 31

C) intentional distortions of financial statements.

Question 32

Which of the following information that comes to an auditor’s attention most likely would raise a question about the occurrence of illegal acts?
A) The exchange of property for similar property in a nonmonetary transaction.
B) The discovery of unexplained payments made to government employees.
C) The presence of several difficult-to-audit transactions affecting expense accounts.
D) The failure to develop adequate procedures that detect unauthorized purchases.

Answer 32

B) The discovery of unexplained payments made to government employees.

Question 33

The primary purpose for obtaining an understanding of the entity’s environment, including its internal control, in a financial statement audit is:
A) To determine the nature, timing, and extent of substantive procedures to be performed.
B) To make consulting suggestions to the entity’s management.
C) To determine whether the entity has changed any accounting principles.
D) To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements.

Answer 33

A) To determine the nature, timing, and extent of substantive procedures to be performed.

Question 34

While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company’s sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor’s initial concern about the potential for fraud in sales revenue?
A) There is a broad indication of misappropriation of assets.
B) There is an indication of theft of the entity’s assets.
C) There is an indication of embezzling cash receipts.
D) There is a broad indication of financial reporting fraud.

Answer 34

D) There is a broad indication of financial reporting fraud.

Question 35

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?
A) Unfavorable industry conditions.
B) Lack of working capital.
C) High liquidity.
D) Slow customer collections.

Answer 35

C) High liquidity.

Question 36

An auditor assesses the risk of material misstatement because it:
A) is relevant to the auditor’s understanding of the control environment.
B) provides assurance that the auditor’s overall materiality levels are appropriate.
C) indicates to the auditor where inherent risk may be the greatest.
D) affects the level of detection risk that the auditor may accept.

Answer 36

D) affects the level of detection risk that the auditor may accept.

Question 37

Which of the following statements best describes auditors’ responsibility to detect errors and frauds?
A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.
B) Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure.
C) Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.
D) Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.

Answer 37

A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.

Question 38

The probability that an audit team will give an inappropriate opinion on financial statements best describes:
A) audit risk.
B) inherent risk.
C) control risk.
D) detection risk.

Answer 38

A) audit risk.

Question 39

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?
A) Detection risk will decrease.
B) Inherent risk will increase.
C) Audit risk will decrease.
D) Detection risk will increase.

Answer 39

A) Detection risk will decrease.

Question 40

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the:
A) liquidity of the account.
B) degree of management estimation involved in determining the proper account balance.
C) related internal control policies and procedures.
D) complexity of calculations involved.

Answer 40

C) related internal control policies and procedures.

Question 41

Training and Proficiency
Independent in mental attitude
Due Professional Car

Answer 41

Responsibility Stage

Question 42

Planning and supervising
Understanding of entity and environment
Obtain sufficient and appropriate evidence

Answer 42

Performance Stage

Question 43

Financial statements in accordance with GAAP
Express or disclaim an opinion
GAAP applied consistently
Adequate disclosures

Answer 43

Reporting Stage

Question 44

Audit Stages

Answer 44

Responsibility (Obtaining or Retaining Clients)
Performance (Engagement planning, Risk assessment, Audit evidence gathering)
Reporting