Final Ch 1-3 Wrong Answers Flashcards
1
Q
1) In auditing accrued liabilities, an auditor's procedures most likely would focus primarily on management's assertion of A. valuation or allocation. B. presentation and disclosure. C. existence or occurrence. D. completeness.
A
completeness.
2
Q
2) Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?
A. Compare financial information with nonfinancial operating data.
B. Make inquiries of the client’s lawyer concerning pending litigation.
C. Perform cutoff tests of cash receipts and disbursements.
D. Recalculate the prior year’s accruals and deferrals.
A
Compare financial information with nonfinancial operating data.
3
Q
3) 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. completeness. B. existence or occurrence. C. presentation and disclosure. D. valuation or allocation.
A
presentation and disclosure.
4
Q
4) An auditor would least likely use computer software to
A. access client data files.
B. prepare spreadsheets.
C. construct parallel simulations to test the client’s computing system.
D. assess information systems control risk.
A
assess information systems control risk.
5
Q
5) Which of the following is true with respect to the PCAOB inspection process?
A. All firms performing audits of public entities are inspected every year.
B. PCAOB inspection teams review a sample of audit engagements conducted by the firm as well as the firm’s system of quality control.
C. PCAOB inspections are conducted by partners of other CPA firms.
D. Deficiencies from sample audit engagements reviewed by the inspection team and deficiencies in the firm’s system of quality control are publicly disclosed on the PCAOB’s website.
A
PCAOB inspection teams review a sample of audit engagements conducted by the firm as well as the firm’s system of quality control.
6
Q
6) Internal evidence
A. originates outside of the client’s system but has been received and processed by the client.
B. consists of documents that are produced, used, and stored within the client’s information system.
C. consists of representations made by the client’s officers, directors, owners, and employees.
D. is obtained directly from third parties independent of the client.
A
consists of documents that are produced, used, and stored within the client’s information system.
7
Q
7) The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing? A. Existence B. Rights and obligations C. Completeness D. Valuation
A
Valuation
8
Q
8) Which of the following presumptions does not relate to the reliability of audit evidence?
A. The independent auditors’ direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.
B. The auditors’ opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D. The more effective the client’s internal control, the more assurance it provides about the accounting data and financial statements.
A
The auditors’ opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
9
Q
9) An auditor has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the
A. effectiveness of the entity’s internal control activities.
B. control environment factors that affect the organizational structure.
C. correlation of detection risk and inherent risk.
D. possible effects on the entity’s financial statements.
A
possible effects on the entity’s financial statements.
10
Q
10) Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the PCAOB assertion of A. existence. B. completeness. C. rights and obligations. D. valuation. E. presentation.
A
valuation.
11
Q
11) What type of evidence would provide the highest level of assurance in an attestation engagement?
A. Evidence obtained from independent sources
B. Evidence obtained indirectly
C. Evidence secured solely from within the entity
D. Evidence obtained from multiple internal inquiries
A
Evidence obtained from independent sources
12
Q
12) Which of the following is not a way in which auditors use the concept of overall materiality?
A. As a guide to the evaluation of evidence
B. As a guide for assessing control risk
C. As a guide for making decisions about the audit report
D. As a guide to planning the audit plan
A
As a guide for assessing control risk
13
Q
13) Which of the following is not related to the responsibilities principle?
A. Firm-wide policies to evaluate the financial and professional relationships of its professionals
B. Specific auditing procedures designed to determine the effectiveness of the entity’s internal control over financial reporting
C. Continuing professional education to ensure that professionals’ knowledge keeps pace with changes in the accounting and auditing profession
D. The auditors’ use of professional judgment throughout the examination
A
Specific auditing procedures designed to determine the effectiveness of the entity’s internal control over financial reporting
14
Q
14) Before accepting an engagement to audit a new client, an auditor is required to
A. discuss the management representation letter with the prospective client’s audit committee.
B. obtain the prospective client’s signature to the engagement letter.
C. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D. make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
A
make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
15
Q
15) Which of the following is not one of the four major cycles? A. Cash receipts and disbursements B. Revenue and cash collection C. Financing and investing D. Acquisition and expenditure
A
Cash receipts and disbursements
16
Q
16) Which of the following is the essential purpose of the audit function?
A. Assurance of the consistent application of correct accounting procedures
B. Detection of fraud
C. Examination of individual transactions to certify as to their validity
D. Determination of whether the client’s financial statement assertions are fairly stated
A
Determination of whether the client’s financial statement assertions are fairly stated
17
Q
17) To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to
A. examine the audited financial statements of the investee company.
B. obtain market quotations from The Wall Street Journal or another independent source.
C. review the broker’s advice or canceled check for the investment’s acquisition.
D. inspect the stock certificates evidencing the investment.
A
inspect the stock certificates evidencing the investment.
18
Q
18) Which of the following is not true with respect to the responsibilities for establishing generally accepted auditing standards?
A. Interpretive publications are issued by the AICPA to provide guidance on the application of generally accepted auditing standards in specific circumstances.
B. Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission.
C. The PCAOB is the body with formal authority for the creation of auditing standards for the audits of public entities.
D. If specific guidance is not provided by PCAOB Auditing Standards, auditors may refer to Statements on Auditing Standards that have not been amended or superseded.
A
Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission.
19
Q
19) Which of the following best describes assurance services?
A. Independent professional services that report on the client’s financial statements
B. Independent professional services that improve the quality of information for decision makers
C. Independent professional services that improve the operations of the client
D. Independent professional services that report on specific written management assertions
A
Independent professional services that improve the quality of information for decision makers
20
Q
20) Auditors should design the written audit plan so that
A. substantive tests prior to the balance sheet date will be minimized.
B. each account balance will be tested under either tests of controls or tests of transactions.
C. all material transactions will be selected for substantive testing.
D. the audit procedures selected will achieve specific audit objectives.
A
the audit procedures selected will achieve specific audit objectives.
21
Q
21) When testing the completeness assertion for a liability account, an auditor ordinarily works from the
A. accounting records to the supporting evidence.
B. potentially unrecorded items to the financial statements.
C. trial balance to the subsidiary ledger.
D. financial statements to the potentially unrecorded items.
A
potentially unrecorded items to the financial statements.
22
Q
22) The confirmation of an accounts receivable balance provides primary evidence regarding which management assertion? A. Completeness B. Existence C. Valuation D. Allocation
A
Existence
23
Q
23) The three fundamental principles underlying GAAS include all of the following, except A. general principle. B. performance principle. C. reporting principle. D. responsibilities principle.
A
general principle.
24
Q
24) Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards?
A. Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities.
B. The PCAOB issues auditing standards for the audit of public entities, subject to SEC approval.
C. Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both public and private entities.
D. If not superseded by the PCAOB, Statements on Auditing Standards issued prior to 2003 are applicable to the audit of public entities.
A
Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities.
25
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25) The confirmation of a cash balance provides primary evidence regarding which management assertion?
A. Allocation
B. Existence
C. Completeness
D. Valuation
```
Existence
26
26) Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs) to determine whether comparable information is in agreement. Examples of such comparisons would not include
A. payroll details with personnel records.
B. observation of inventory accounts.
C. current and prior inventory to details of purchases and sales.
D. paid vouchers to disbursements.
observation of inventory accounts.
27
27) An attestation engagement is one in which a CPA is engaged to
A. testify as an expert witness in accounting, auditing or tax matters, given certain stipulated facts.
B. issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party.
C. assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.
D. provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.
issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party.
28
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28) Which of the following concepts is least related to the risk of material misstatement?
A. Inherent risk
B. Detection risk
C. Control risk
D. Materiality
```
Detection risk
29
29) 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. Concluding that the entity's management probably lacks integrity
C. The inability to perform preliminary analytical procedures before assessing control risk
D. The close proximity to the end of the entity's fiscal year
Concluding that the entity's management probably lacks integrity
30
30) Which of the following is not a PCAOB assertion about inventory related to presentation and disclosure?
A. All of these are PCAOB presentation and disclosure assertions about inventory.
B. Major inventory categories and their valuation bases are adequately disclosed in notes.
C. Inventory is properly classified as a current asset on the balance sheet.
D. Inventory is properly stated at its cost on the balance sheet.
Inventory is properly stated at its cost on the balance sheet.
31
31) Which of the following steps should an auditor perform first to determine the existence of related parties?
A. Request a list of related parties from management.
B. Review the company's business structure.
C. Review proxy and other materials filed with the SEC.
D. Examine invoices, contracts, and purchasing orders.
Request a list of related parties from management.
32
32) The characteristics that distinguish computer processing from manual processing would not include
A. automatic initiation and execution of transactions.
B. the possible concentration of control activities.
C. a high potential for unauthorized access to data.
D. a decrease of management supervision of operations.
a decrease of management supervision of operations.
33
33) Assurance services involve all of the following, except
A. nonfinancial information as well as traditional financial statements.
B. electronic databases as well as printed reports.
C. relevance as well as the reliability of information.
D. providing absolute rather than reasonable assurance.
providing absolute rather than reasonable assurance.
34
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34) The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of
A. quality assurance.
B. planning.
C. information evaluation.
D. supervision.
```
planning.
35
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35) The confirmation of an account payable balance selected from the general ledger provides primary evidence regarding which management assertion?
A. Existence
B. Allocation
C. Completeness
D. Valuation
```
Existence
36
36) Management's responsibility in a computer system would not include
A. maintaining a system of transaction processing that includes an audit trail.
B. assessing the control risk.
C. ensuring that the documentation of the system is complete and up to date.
D. making computer resources and knowledgeable personnel available for questions.
assessing the control risk.
37
37) Before accepting an engagement to audit a new client, a CPA is required to obtain
A. an assessment of fraud risk factors likely to cause material misstatements.
B. the prospective client's consent to make inquiries of the predecessor, if any.
C. the prospective client's signature to a written engagement letter.
D. an understanding of the prospective client's industry and business.
the prospective client's consent to make inquiries of the predecessor, if any.
38
```
38) Which of the following is not a category of audit documentation?
A. Temporary files
B. Audit administrative files
C. Permanent files
D. Current documentation files
```
Temporary files
39
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39) Which of the following is not included in the American Accounting Association (AAA) definition of auditing?
A. Systematic process
B. Assertions about economic actions
C. Potential conflict of interest
D. Established criteria
```
Potential conflict of interest
40
40) According to PCAOB Auditing Standard No. 5 (AS 5), the auditor should identify significant accounts and disclosures and their relevant assertions. Which of the following financial statement assertions is not explicitly identified in AS 5?
A. All of these are assertions identified in AS 5.
B. Valuation or allocation
C. Existence or occurrence
D. Completeness
E. Accuracy
Accuracy
41
41) Firm A performs audits of 60 public entities, while firm B performs audits of 120 public entities. How often must each firm undergo a PCAOB inspection?
A. Both firm A and firm B will be inspected every other year.
B. Firm A will be inspected every three years and firm B will be inspected annually.
C. Firm A will be inspected annually and firm B will be inspected every three years.
D. Both firm A and firm B will be inspected annually.
Firm A will be inspected every three years and firm B will be inspected annually.
42
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42) The process of a CPA obtaining a certificate and license in a state other than the state in which the CPA's certificate was originally obtained is referred to as
A. substantial equivalency.
B. re-examination.
C. quid pro quo.
D. relicensing.
```
substantial equivalency.
43
43) The initial development of auditing standards was in response to
A. auditors' concerns that all components of the financial statements were not being verified.
B. requests by companies for greater assurance with respect to the auditors' ability to detect financial statement misstatements.
C. independent inquiries of the public accounting profession made by the SEC.
D. a scandal involving embezzlement that was not detected during an audit engagement.
a scandal involving embezzlement that was not detected during an audit engagement.
44
44) An engagement letter is used primarily to
A. disclaim liability.
B. express an opinion on the financial statements.
C. ensure a clear contractual understanding of the services to be provided by the CPA.
D. provide management representations to be included in the audit evidence.
ensure a clear contractual understanding of the services to be provided by the CPA.
45
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45) The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of
A. quality assurance.
B. supervision.
C. planning.
D. information evaluation.
```
planning.
46
46) The essential advantages of a computer-assisted audit techniques (CAATs) package would not include the fact that
A. the same software can be used on different types of clients' computer environments.
B. software packages are always inexpensive.
C. there is an ability to control and modify the program to meet an auditors' need.
D. a large number of CAATs packages are currently available.
software packages are always inexpensive.
47
47) Which of the following types of audit evidence provides the least assurance of reliability?
A. Receivable confirmations from the client's customers
B. Prior months' bank statements obtained from the client
C. Municipal property tax bills prepared in the client's name
D. Prenumbered receiving reports completed by the client's employees
Prenumbered receiving reports completed by the client's employees
48
48) Which of the following is not a recommendation usually made following the completion of an operational audit?
A. Economic and efficient use of resources
B. Effective achievement of business objectives
C. Compliance with company policies
D. Attesting to the fairness of the financial statements
Attesting to the fairness of the financial statements
49
49) Pronouncements issued by the Public Company Accounting Oversight Board are subject to formal approval by the
A. Auditing Standards Board.
B. Securities and Exchange Commission.
C. American Institute of Certified Public Accountants.
D. International Auditing and Assurance Standards Board.
Securities and Exchange Commission.
50
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50) What is the term used to identify the risk that the client's financial statements may be materially false and misleading?
A. Client risk
B. Risk assessment
C. Information risk
D. Business risk
```
Information risk
51
51) Which of the following is not an ASB assertion about inventory related to presentation and disclosure?
A. Major inventory categories and their valuation bases are adequately disclosed in notes.
B. Inventory is properly stated at cost on the balance sheet.
C. All of these are ASB presentation and disclosure assertions about inventory.
D. Inventory is properly classified as a current asset on the balance sheet.
All of these are ASB presentation and disclosure assertions about inventory.
52
52) Which of the following best describes the main reason independent auditors report on management's financial statements?
A. The management that prepares the statements and the persons who use the statements may have conflicting interests.
B. Misstated account balances may be corrected as the result of the independent audit work.
C. The management that prepares the statements may have a poorly designed system of internal control.
D. Management fraud may exist and it is likely to be detected by independent auditors.
The management that prepares the statements and the persons who use the statements may have conflicting interests.
53
53) When testing the completeness assertion for a liability account, an auditor ordinarily works from the
A. trial balance to the subsidiary ledger.
B. financial statements to the potentially unrecorded items.
C. potentially unrecorded items to the financial statements.
D. accounting records to the supporting evidence.
potentially unrecorded items to the financial statements.
54
54) PCAOB inspections are conducted by
A. another public accounting firm selected by the firm being inspected.
B. the AICPA's Public Oversight Board.
C. individuals selected by the PCAOB who are not current employees of public accounting firms.
D. current employees of another public accounting firm selected by the PCAOB.
individuals selected by the PCAOB who are not current employees of public accounting firms.
55
55) Which of the following would be evaluated during the PCAOB inspection process?: Firms System of Quality control, Yes or No? Financial Viability of firm, Yes or No?
Quality control: yes
| Financial Viability: no
56
56) Errors in data processed in a batch computer system may not be detected immediately because
A. errors in some transactions cause rejection of other transactions in the batch.
B. transaction trails in a batch system are available for only a limited period of time.
C. random errors are more likely in a batch system than in an online system.
D. there are time delays in processing transactions in a batch system.
there are time delays in processing transactions in a batch system.
57
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57) Which of the following represent audit quality guides that remain stable over time and are applicable for all audits?
A. Auditing standards
B. System of quality control
C. Due care
D. Auditing procedures
```
Auditing standards
58
58) Which of the following is not true with respect to the auditors' report for a public entity?
A. The report title should contain the word "independent."
B. The opinion assesses the financial statements against an applicable financial reporting framework.
C. The report provides a detailed listing of major auditing procedures performed during the examination.
D. The report specifically identifies the financial statements and years examined by the auditor.
The report provides a detailed listing of major auditing procedures performed during the examination.
59
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59) The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as
A. professional skepticism.
B. independence in appearance.
C. due care.
D. professional judgment.
```
professional skepticism.
60
60) Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?
A. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
B. Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.
C. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.
D. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.
61
61) Generally accepted auditing standards are
A. specific actions performed by auditors during an examination.
B. legal requirements auditors must observe during the audits of public entities.
C. standards used by entities in deciding whether to engage or retain the services of auditors.
D. standards that guide the conduct of an audit examination.
standards that guide the conduct of an audit examination.
62
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62) The concept of ________ recognizes that a GAAS audit may fail to detect all material misstatements.
A. reasonable assurance
B. risk of material misstatement
C. absolute assurance
D. due care
```
reasonable assurance
63
63) 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.
Recognize the financial assertions made in management's financial statements and footnotes.
64
64) 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. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
D. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements.
Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.
65
65) Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted?
A. The entity has no formal written code of conduct.
B. Procedures requiring separation of duties are subject to management override.
C. The integrity of entity's management is suspect.
D. Management fails to modify prescribed controls for changes in conditions.
The integrity of entity's management is suspect.
66
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66) An auditor most likely would inspect additions to the audit client's Property, Plant, and Equipment account to obtain evidence concerning management's assertions about
A. rights and obligations.
B. presentation and disclosure.
C. valuation or allocation.
D. existence or occurrence.
```
existence or occurrence.
67
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67) An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of
A. rights and obligations.
B. existence or occurrence.
C. presentation and disclosure.
D. valuation or allocation.
```
existence or occurrence.
68
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68) The auditor looked at a bank statement received and held by the client. What kind of audit procedure would this be considered?
A. Examination of documents
B. Recalculation
C. Confirmation
D. Physical observation
```
Examination of documents
69
69) Control risk is
A. the risk that auditors will not properly control the staff on the audit engagement.
B. the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.
C. the probability that a material misstatement could occur and not be detected by auditors' procedures.
D. the risk that auditors will not be able to complete the audit on a timely basis.
the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.
70
70) Which of the following is not considered an accounting estimate?
A. Credit sales
B. Net realizable value of inventory
C. Percentage-of-completion revenue to be recorded
D. Allowance for loan losses
Credit sales
71
71) Which of the following statements is most accurate regarding sufficient and appropriate documentation?
A. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.
B. Accounting estimates are not considered sufficient and appropriate documentation.
C. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
D. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.
Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
72
72) 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 by that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
A. Post, the predecessor auditor
B. Monday's controller or CFO
C. Hill, the auditor
D. The chair of Monday's board of directors
Hill, the auditor
73
73) Which element of a system of quality control strives to provide the firm with reasonable assurance that its policies and procedures are operating effectively?
A. Human resources
B. Monitoring
C. Leadership responsibilities for quality within the firm
D. Relevant ethical requirements
Monitoring
74
74) Which of the following is not considered a type of audit evidence?
A. Verbal statements made by client personnel
B. Auditors' calculations
C. The entity's trial balance
D. Physical observation
The entity's trial balance
75
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75) Looking at vendors' invoices for particular information is an example of
A. physical observation.
B. scanning.
C. inspection of documents.
D. confirmation.
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inspection of documents.
76
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76) The risk an entity will fail to meet its objectives is referred to as
A. assurance risk.
B. audit risk.
C. information risk.
D. business risk.
```
business risk.
77
77) When assessing internal auditors' objectivity, an independent auditor should
A. consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
B. verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment.
C. review the internal auditors' reports to determine that their conclusions are consistent with the work performed.
D. evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations.
consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
78
78) Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit?
A. Reading specialized industry journals
B. Reevaluating the client's internal control environment
C. Performing tests of details of transactions and balances
D. Reviewing prior year audit documentation and the permanent file for the client
Reviewing prior year audit documentation and the permanent file for the client
79
79) A CPA firm would provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by
A. developing specific audit objectives to support management's assertions that are embodied in the financial statements.
B. establishing an understanding with each client concerning individual responsibilities in a signed engagement letter.
C. maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
D. assessing the risk that errors and fraud may cause the financial statements to contain material misstatements.
maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
80
80) The standard auditors' report refers to standards of the PCAOB and GAAP in which paragraph?
A. Standards of the PCAOB: Scope only; GAAP: Opinion only
B. Standards of the PCAOB: Introductory only; GAAP: All paragraphs
C. Standards of the PCAOB: Introductory and scope; GAAP: Opinion only
D. Standards of the PCAOB: Introductory only; GAAP: Scope and opinion
Standards of the PCAOB: Scope only; GAAP: Opinion only
81
81) Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
A. Trace test counts noted during the physical count of inventory to the summarization of quantities.
B. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.
C. Inspect the open purchase order file for significant commitments to consider for disclosure.
D. Inspect agreements for evidence of inventory held on consignment.
Inspect agreements for evidence of inventory held on consignment.
82
82) Which of the following is an underlying condition that in part creates the demand by users for reliable information?
A. Users separated from accounting records by distance and time
B. Economic transactions that are numerous and complex
C. All of these
D. Financial decisions that are important to investors and users
E. Decisions that are time-sensitive
All of these
83
83) Which of the following statements describes an appropriate relationship with respect to the reliability of audit evidence?
A. Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.
B. Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities.
C. A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.
D. Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers.
A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.
84
84) Which of the following is an important consideration during the planning of the audit?
incorrect Considering the independence of members of the audit team
Considering the impact of tests of controls on the overall assessment of control risk
incorrect Considering the ability and expertise of the audit team with respect to accounting and auditing issues in the client's industry
Performing some of the audit procedures prior to the end of the year under audit
84
85
```
85) Which of the following paragraphs references the conduct of the audit in accordance with PCAOB standards?
A. Internal control paragraph
B. Opinion paragraph
C. Scope paragraph
D. Introductory paragraph
```
Scope paragraph
86
```
86) The particular and specialized actions that auditors undertake to obtain evidence in a specific audit engagement are known as
A. Interim Auditing Standards.
B. Interpretive Publications.
C. Statements on Auditing Standards.
D. audit procedures.
```
audit procedures.
87
87) Which of the following use of computer-assisted audit techniques (CAATs) would most likely be considered a search for fraudulent activities?
A. Comparing a list of vendor addresses to employee address files
B. Selecting customers' accounts receivable for confirmation
C. Recalculating inventory extensions
D. Scanning accounts receivable balances for amounts over the credit limit
Comparing a list of vendor addresses to employee address files
88
88) Auditors try to achieve independence in appearance in order to
A. become independent in fact.
B. maintain public confidence in the profession.
C. comply with the responsibilities principle.
D. maintain an unbiased mental attitude.
maintain public confidence in the profession.
89
89) A vendor's invoice received and held by the client would be considered what type of evidence?
A. Written representation
B. Internal
C. External
D. External-internal
External-internal
90
90) A primary advantage of using computer-assisted audit techniques (CAATs) packages to audit the financial statements of a client that uses computerized information systems is that the auditor may
A. reduce the level of required tests of controls to a relatively small amount.
B. access information stored on computer files even with a limited understanding of the client's hardware and software features.
C. substantiate the accuracy of data by using self-checking digits and hash totals.
D. consider increasing the use of substantive tests of transactions in place of analytical procedures.
access information stored on computer files even with a limited understanding of the client's hardware and software features.
91
```
91) Which of the following types of auditors' reports does not require an additional paragraph to support the opinion?
A. Qualified opinion
B. Adverse opinion
C. Unmodified opinion
D. Disclaimer of opinion
```
Unmodified opinion
92
92) Which of the following would normally be considered earliest in the audit examination?
A. Determination of materiality levels for use during the audit
B. Evaluation of the type of audit opinion to be issued, based on the auditor's findings
C. Preparation of a written audit plan
D. Consideration of the ability of the entity's internal control to prevent or detect errors
Determination of materiality levels for use during the audit
93
```
93) In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating
A. $10,000.
B. $20,000.
C. $15,000.
D. $30,000.
```
$10,000.
94
```
94) An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about
A. existence.
B. rights and obligations.
C. presentation and disclosure.
D. valuation.
```
presentation and disclosure.
95
```
95) The audit objective that all the transactions and accounts presented in the financial statements represent real assets, liabilities, revenues, and expenses is related most closely to which of the PCAOB assertions?
A. Completeness
B. Existence or occurrence
C. Presentation and disclosure
D. Rights and obligations
```
Existence or occurrence
96
96) The relevant ethical requirements relating to due care, professional skepticism, and professional judgment are responsibilities of the auditor at which stage(s) of the audit? Risk assessment, yes or no? Audit Evidence, yes or no?
Risk assessment: yes
Audit Evidence: yes
97
97) Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?
A. Receiving the client's unopened mail for a reasonable period of time after year-end to search for unrecorded vendor's invoices
B. Confirming accounts payable balances with known vendors and suppliers who have zero balances at year-end
C. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for
D. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports
Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports
98
```
98) The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions?
A. Classification
B. Accuracy
C. Occurrence
D. Completeness
```
Classification
99
99) During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing: Test of Controls, Yes or No? Substantive Tests, Yes or No?
Yes, No is incorrect
Test of Controls: Yes
| Substantive Tests: yes
100
```
100) As it relates to audit evidence, appropriateness refers to the
A. timeliness of evidence gathered.
B. originality of evidence gathered.
C. quantity of evidence gathered.
D. quality of evidence gathered.
```
quality of evidence gathered.
101
101) Which of the following could serve as a source of professional guidance in the audit of a public entity?
Auditing Standards Issued by the PCAOB, Yes or No? Statements of Auditing Standards issued by the ASB, Yes or No?
PCAOB: Yes
ASB: Yes
102
```
102) Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of
A. objective judgment.
B. professional skepticism.
C. independent integrity.
D. impartial conservatism.
```
professional skepticism.
103
103) This year, Blakeney Enterprises engaged a new auditor who must
A. reject the engagement if the change in auditors resulted from a dispute with the predecessor.
B. seek the SEC's permission to accept the engagement if Blakeney is publicly owned.
C. attempt to communicate with the predecessor auditor before accepting the engagement.
D. review the predecessor's audit documentation if the audit is to be in accordance with GAAS.
attempt to communicate with the predecessor auditor before accepting the engagement.
104
104) Which of the following is not a concept from the performance principle under generally accepted auditing standards?
A. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.
B. The auditor must express an opinion in accordance with the auditor's findings.
C. The auditor must plan the work and properly supervise any assistants.
D. The auditor must determine and apply an appropriate materiality level throughout the audit.
The auditor must express an opinion in accordance with the auditor's findings.
105
105) The pre-engagement activities of an audit engagement for a public accounting firm do not include
A. evaluating the public accounting firm's independence with regard to the audit engagement.
B. ensuring that there are sufficient firm resources to complete the engagement on a timely basis.
C. obtaining an engagement letter.
D. obtaining predecessor audit documentation.
obtaining predecessor audit documentation.
106
```
106) In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the
A. timing of audit procedures.
B. selected audit techniques.
C. cost-benefit of gathering techniques.
D. financial statement assertions.
```
financial statement assertions.
107
```
107) In auditing the long-term debt account, an auditor's procedures most likely would focus primarily on management's assertion of
A. completeness.
B. rights and obligations.
C. existence.
D. allocation.
```
completeness.
108
108) 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
Assessment of inherent risk, no; assessment of control risk, no
109
109) The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating
A. all of these.
B. they are not aware of any false or misleading statements (or any key omitted disclosures).
C. they have read the financial statements.
D. they believe that the financial statements present an accurate picture of the company's financial condition.
all of these.
110
110) In order to be considered as external auditors with respect to government agencies, GAO auditors must be
A. guided by standards similar to GAAS.
B. empowered as the accounting and auditing agency by the U.S. Congress.
C. organizationally independent.
D. funded by the federal government.
organizationally independent.
111
111) A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?
A. Statement of Auditing Standards
B. Statements on Standards for Accounting and Review Services
C. Statements on Standards for Attestation Engagements
D. Statements on Standards for Consulting Services
Statements on Standards for Attestation Engagements
112
112) The relevant ethical requirements relating to due care, professional skepticism, and professional judgment are responsibilities of the auditor at which stage(s) of the audit?
Risk assessment, Yes or no? Audit Evidence, Yes or no?
Risk assessment: yes
| Audit Evidence: yes
113
113) The basic auditing application of the personal computer as an audit tool would not include
A. analytical review.
B. continuous monitoring of a client's internal control system.
C. spreadsheet analysis.
D. sample planning, selection, and evaluation.
continuous monitoring of a client's internal control system.
114
```
114) Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of
A. rights and obligations.
B. existence.
C. completeness.
D. presentation and disclosure.
```
completeness.
115
```
115) A periodic review of an audit firm's system of quality control by the PCAOB is referred to as a(n)
A. quality review.
B. inspection.
C. peer review.
D. principles review.
```
inspection.
116
116) 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. Inventory is properly valued.
B. The entity has rights to the inventory.
C. Inventory is properly presented in the financial statements.
D. Inventory is complete.
Inventory is complete.
117
117) Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?
A. The predecessor auditor's understanding of the reasons for the change of auditors
B. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years
C. Facts known to the predecessor auditor that might bear on the integrity of management
D. Disagreements between the predecessor auditor and management as to significant accounting policies and principles
Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years
118
118) Which of the following factors influences the risk of material misstatement? Susceptibility of the account balance to misstatement, Yes or No? Nature, timing and extent of further audit procedures, Yes or No?
Susceptibility of acct. balance: yes
| Nature, timing and extent of audit: no
119
119) 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. An auditor on the engagement owns a financial interest in the stock of the client.
C. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.
D. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm.
An auditor on the engagement owns a financial interest in the stock of the client.
120
120) The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of
A. the applicable financial reporting framework (i.e., GAAP in the United States).
B. quality control.
C. generally accepted auditing standards, which include the concept of materiality.
D. the auditor's evaluation of the audited company's internal control.
the applicable financial reporting framework (i.e., GAAP in the United States).
121
```
121) The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions?
A. Comprehensibility
B. Rights and obligations
C. Understandability
D. Occurrence
```
Understandability
122
122) Which of the following courses of action is most appropriate if an auditor concludes that there is a high risk of material misstatement?
A. Select more effective substantive tests.
B. Increase tests of controls.
C. Use smaller, rather than larger, sample sizes.
D. Perform substantive tests as of an interim date.
Select more effective substantive tests.
123
123) Which of the following is not included in the auditors' standard report representing an unmodified opinion?
A. An indication that the audit was conducted in accordance with standards established by the PCAOB
B. A brief indication of the responsibility of auditors and management for the financial statements
C. An indication that all appropriate disclosures have been made and included in the financial statements
D. The auditors' opinion on the fairness of the financial statements
An indication that all appropriate disclosures have been made and included in the financial statements
124
124) Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)?
A. Unmodified opinion or disclaimer of opinion
B. Qualified opinion or disclaimer of opinion
C. Qualified opinion or adverse opinion
D. Unmodified opinion or adverse opinion
Qualified opinion or adverse opinion
125
125) The Public Company Accounting Oversight Board was established by which of the following?
A. The Financial Accounting Standards Board
B. The International Accounting Standards Board
C. The Sarbanes-Oxley Act of 2002
D. The American Institute of Certified Public Accountants
The Sarbanes-Oxley Act of 2002
126
126) In a system of quality control, leadership responsibilities for quality within the firm are best characterized by
A. assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.
B. management's clear and consistent demonstration of its own commitment to quality control and high-quality work.
C. management's evaluation of the integrity and business reputation of the client.
D. basing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients.
management's clear and consistent demonstration of its own commitment to quality control and high-quality work.
127
127) Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
A. Comparing the financial statements to anticipated results
B. Examining computer-generated exception reports to verify the effectiveness of internal controls
C. Inquiring of the client's legal counsel concerning pending litigation
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities
Comparing the financial statements to anticipated results
128
128) The four basic requirements for becoming a CPA in most states are
A. education, the CPA Examination, experience, and substantial equivalency.
B. education, the CPA Examination, experience, and a state certificate.
C. the CPA Examination, experience, continuing professional education, and a state certificate.
D. continuing professional education, the CPA Examination, experience, and an AICPA certificate.
education, the CPA Examination, experience, and a state certificate.
129
129) Which of the following is least related to the concept of independence in appearance?
A. The employment of the auditor's family member in an important position with the client
B. The auditors' objectivity and ability to act impartially toward the client
C. The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements
D. The ownership of a financial interest in a client by the auditor
The auditors' objectivity and ability to act impartially toward the client
130
130) In testing the existence assertion for an asset, an auditor ordinarily works from the
A. accounting records to the supporting evidence.
B. potentially unrecorded items to the financial statement.
C. financial statements to the potentially unrecorded items.
D. supporting evidence to the accounting records.
accounting records to the supporting evidence.
131
```
131) An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on
A. nature of the item.
B. cumulative effects.
C. absolute size.
D. relative size.
```
relative size.
132
```
132) If an auditor is performing procedures related to the information that is contained in the client's pension footnote, he/she is most likely to obtain evidence concerning management's assertion about
A. presentation and disclosure.
B. valuation.
C. rights and obligations.
D. existence.
```
presentation and disclosure.
133
133) The underlying conditions that create demand by users for reliable information include all of the following, except
A. users lack professional skepticism.
B. financial decisions are important to investors and users.
C. decisions are time-sensitive.
D. users are separated from accounting records by distance and time.
E. transactions are numerous and complex.
users lack professional skepticism.
134
134) The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S. Comptroller General, is known as
A. the U.S. General Accountability Office (GAO).
B. the United States Legislative Auditors (USLA).
C. the Internal Revenue Service (IRS).
D. the Federal Bureau of Investigation (FBI).
the U.S. General Accountability Office (GAO).
135
135) The auditors' responsibility to express an opinion on the financial statements is
incorrect explicitly represented in the scope paragraph of the auditors' standard report.
implicitly represented in the auditors' standard report.
incorrect
explicitly represented in the opinion paragraph of the auditors' standard report.
explicitly represented in the introductory paragraph of the auditors' standard report.
135
136
136) Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?
A. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.
B. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
C. The firm must address all independence impairment issues on the date of the audit opinion.
D. Communications related to independence may occur in any form prior to issuance of the financial statements.
Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
137
```
137) An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that ultimately agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of
A. presentation and disclosure.
B. rights and obligations.
C. completeness.
D. valuation.
E. existence.
```
completeness.
138
138) Which of the following information would not be included in the auditors' standard report?
A. A description of the nature of an audit
B. An indication that all necessary disclosures have been presented
C. An opinion on the entity's financial statements
D. The names of the financial statements audited
An indication that all necessary disclosures have been presented
139
139) When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?
A. Considering the pattern of several unusual changes without trying to explain what caused them
B. Considering unaudited account balances and ratios to calculate what adjusted balances should be
C. Identifying reasonable explanations for unexpected differences before talking to client management
D. Comparing client data with client-determined expected results to reduce detailed tests of account balances
Identifying reasonable explanations for unexpected differences before talking to client management
140
140) 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. engage financial experts familiar with the nature of the industry.
B. obtain knowledge of matters that relate to the nature of the entity's business.
C. reduce audit risk by lowering the preliminary levels of materiality.
D. design special substantive tests to compensate for the lack of industry expertise.
obtain knowledge of matters that relate to the nature of the entity's business.
141
141) Which of the following situations would most likely be in conflict with the responsibilities principle?
A. Auditors are directly involved with a client manager in a strategic decision-making capacity.
B. Auditors obtain expertise in their client's industry as they are conducting the audit examination.
C. Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors.
D. Auditors fail to document their assessment of control risk following their study of internal control.
Auditors are directly involved with a client manager in a strategic decision-making capacity.
142
142) Which of the following presumptions is correct about the reliability of audit evidence?
A. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
B. To be reliable, audit evidence should be convincing rather than persuasive.
C. Information obtained indirectly from outside sources is the most reliable form of audit evidence.
D. An effective system of internal control provides more assurance about the reliability of audit evidence.
An effective system of internal control provides more assurance about the reliability of audit evidence.
143
143) The idea of the cycle approach is to group accounts together by
A. specific function.
B. transactions that affect all accounts in that particular group.
C. financial statement assertion.
D. audit objective.
transactions that affect all accounts in that particular group.
144
144) Which of the following is an example of the appropriate implementation of a system of quality control?
A. The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.
B. All firm employees must verbally confirm their compliance with the appropriate independence requirements before being assigned to an engagement.
C. The firm's quality control policies have evolved through the performance of audit procedures but are not formally developed or communicated to staff members.
D. The firm requires all documents obtained during the audit to be destroyed immediately following the engagement to ensure the client's information remains confidential.
The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.
145
145) An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to
A. give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.
B. give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).
C. certify the correctness of Camden's financial statements.
D. make a complete examination of Camden's records and verify all of Camden's transactions.
give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).
146
146) An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the following management assertions is supported by this test?
A. Valuation and allocation
B. Completeness
C. Rights and obligations
D. Presentation and disclosure
Completeness
147
```
147) An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them. This procedure most likely obtained evidence concerning management's assertion of
A. completeness.
B. valuation.
C. existence or occurrence.
D. rights and obligations.
```
existence or occurrence.
148
```
148) An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of
A. rights and obligations.
B. presentation and disclosure.
C. completeness.
D. existence or occurrence.
```
completeness.
149
149) An important role of the Public Company Accounting Oversight Board is to oversee the
A. peer review of member firms of the Private Companies Practice Section.
B. regulation of firms that audit public entities.
C. issuance of statements by the Financial Accounting Standards Board.
D. preparation and grading of the Uniform CPA Examination.
regulation of firms that audit public entities.
150
```
150) Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?
A. Criticizing
B. Presumptive
C. Judgmental
D. Questioning
```
Questioning
151
151) Which of the following statements is true with respect to the quality of audit evidence?
A. Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control.
B. In evaluating quality, sufficiency of evidence is of greater importance than appropriateness of evidence.
C. Quality is related to the relevance of evidence, but not the reliability of evidence.
D. Evidence is considered of higher quality when gathered prior to year-end than following year-end.
Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control.
152
152) The role of the Public Company Accounting Oversight Board in the standard-setting process is to develop
A. Auditing Standards for the audits of public entities.
B. Governmental Auditing Standards for the audits of governmental entities.
C. Statements on Auditing Standards for the audits of nonpublic entities.
D. International Standards on Auditing for the audits of foreign entities.
Auditing Standards for the audits of public entities.
153
```
153) Which of the following is most closely associated with the responsibilities principle?
A. Due care
B. Planning
C. Risk of material misstatement
D. Qualified audit opinion
```
Due care
154
154) Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client's accounting staff held in private
B. Inspection of bank statements obtained directly from the client's financial institution
C. Analytical procedures performed by auditors on the client's trial balance
D. Inspection of prenumbered client shipping documents
Inspection of bank statements obtained directly from the client's financial institution
155
155) In the preparation of an audit plan, which of the following items is not essential?
A. Assessment of inherent risk
B. The preparation of a budget identifying the costs of resources needed
C. A review of material from prior audits
D. An understanding of controls established by management
The preparation of a budget identifying the costs of resources needed
156
156) The primary purpose of the auditors' study of internal control for a nonpublic entity is
A. to identify and detect fraud and irregularities perpetrated by client personnel.
B. to provide constructive suggestions to the client for improving its internal control.
C. to determine the nature, timing, and extent of further audit procedures.
D. to report on internal control as required by Auditing Standard No. 5.
to determine the nature, timing, and extent of further audit procedures.
157
```
157) The audit objective that all transactions are recorded in the proper period is related most closely to which of the Audit Standards Board (ASB) transaction assertions?
A. Accuracy
B. Cutoff
C. Completeness
D. Occurrence
```
Cutoff
158
```
158) In determining whether transactions have been recorded, the direction of the audit testing should start from the
A. general ledger balances.
B. adjusted trial balance.
C. original source documents.
D. general journal entries.
```
original source documents.
159
```
159) An auditor selected items from the client's detailed inventory listing (that agreed to the financial statements). During the physical inventory observation, the auditor then found each item selected and counted the number of units on hand. Assuming that the amount on hand was the same as the amount in the client's detailed inventory listing, this procedure most likely would provide evidence concerning management's assertion of
A. presentation and disclosure.
B. valuation.
C. existence.
D. completeness.
E. rights and obligations.
```
existence.
160
160) Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?
Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.
Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
incorrect Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.
160
161
161) Which of the following would be a step in an internal control program?
A. Prepare and send confirmations on a sample of customers' accounts receivable.
B. Assess the control risk for sales and collections.
C. Read sales contracts for evidence of customers' rights of return or price allowance terms.
D. Obtain an aged trial balance of the accounts receivable.
Assess the control risk for sales and collections.
162
```
162) The probability that the information circulated by a company will be false or misleading is referred to as
A. assurance risk.
B. audit risk.
C. information risk.
D. business risk.
```
information risk.
163
```
163) Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of
A. presentation.
B. existence.
C. rights.
D. completeness.
```
completeness.
164
164) Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
A. Inquiring about receivables pledged under loan agreements
B. Comparing receivable turnover rates to industry statistics for reasonableness
C. Assessing the allowance for uncollectible accounts for reasonableness
D. Tracing amounts in the subsidiary ledger to details on shipping documents
Assessing the allowance for uncollectible accounts for reasonableness
165
165) Which of the following questions would be inappropriate for an auditor to ask a client when exhibiting an appropriate level of professional skepticism while completing an audit procedure related to the internal control system?
A. What happens when a key employee goes on vacation?
B. What else is important to know about this process?
C. What can go wrong in this process?
D. Which of your employees is a fraudster?
Which of your employees is a fraudster?
166
```
166) The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions?
A. Existence
B. Valuation
C. Completeness
D. Rights and obligations
```
Rights and obligations
167
167) Which of the following matters does an auditor usually include in the engagement letter?
A. Analytical procedures that the auditor plans to perform
B. Arrangements regarding fees and billing
C. Indications of negative cash flows from operating activities
D. Identification of working capital deficiencies
Arrangements regarding fees and billing
168
168) During which stages of an audit examination are auditors required to exhibit the appropriate use of professional judgment? Gathering evidence, yes or no? Drawing conclusions, yes or no?
Gathering evidence: yes
| Drawing conclusions: yes
169
```
169) The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions?
A. Valuation
B. Rights and obligations
C. Completeness
D. Existence
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Completeness
170
170) Audit documentation does not normally include the
A. industry accounting guides.
B. specific assertions under audit.
C. decisions made in the course of the audit.
D. record of the procedures performed.
industry accounting guides.
171
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171) An internal evaluation of the significant judgments made by the audit team and the conclusions reached in formulating its report for engagements meeting specified criteria is known as a(n)
A. inspection.
B. peer review.
C. engagement quality control review.
D. performance control evaluation.
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engagement quality control review.
172
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172) Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the ASB balance assertion of
A. existence.
B. presentation.
C. completeness.
D. valuation.
E. rights and obligations.
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valuation.
173
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173) The study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policies is referred to as
A. environmental auditing.
B. operational auditing.
C. compliance auditing.
D. financial auditing.
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operational auditing.
174
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174) An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about
A. valuation.
B. existence.
C. rights and obligations.
D. presentation and disclosure.
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presentation and disclosure.
175
175) When a firm decides to withdraw from an engagement, it should document all of the following except
A. significant consultations related to the decision to withdraw from the engagement.
B. the basis for any conclusions related to this decision to withdraw from the engagement.
C. significant issues influencing the decision to withdraw from the engagement.
D. significant effects the decision to withdraw from the engagement could have on the firm.
significant effects the decision to withdraw from the engagement could have on the firm.
176
176) Which of the following situations would result in the issuance of a disclaimer of opinion?
A. The auditor is discovered to own a financial interest in the entity.
B. The entity's financial statements are not presented in conformity with the applicable financial reporting framework.
C. The audit reveals weaknesses in the client's internal control over financial reporting.
D. The audit is performed, with limited exception, in accordance with generally accepted auditing standards.
The auditor is discovered to own a financial interest in the entity.
177
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177) A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as
A. due care.
B. professional skepticism.
C. independence.
D. professional judgment.
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due care.
178
178) All of the following are examples of procedures a firm can use to monitor its system of quality control except
A. devoting sufficient resources to developing a system of quality control.
B. conducting reviews of engagement documentation.
C. discussions with firm personnel.
D. assessing compliance with independence policies and procedures.
devoting sufficient resources to developing a system of quality control.
179
179) Computer-assisted audit techniques (CAATs) could not be used for which of the following audit tasks?
A. Evaluating control risk assessment
B. Comparing audit evidence from manual audit procedures to company needs
C. Testing calculations and making computations
D. Summarizing, resequencing, and reformatting data
Evaluating control risk assessment
180
180) Which of the following does not directly relate to an auditor's responsibility for having appropriate competence and capabilities to perform the audit?
A. Gaining experience through hands-on practice
B. Attending on-the-job training
C. Participating in continuing professional education
D. Obtaining reliable documentary evidence
Obtaining reliable documentary evidence
181
181) An independent auditor must have which of the following?
A. A pre-existing and well-informed point of view with respect to the audit
B. Experience in taxation that is sufficient to comply with generally accepted auditing standards
C. Technical training that is adequate to meet the requirements of a professional
D. A background in many different disciplines
Technical training that is adequate to meet the requirements of a professional
182
182) The fundamental principles developed by the Auditing Standards Board are best described as
A. ten basic standards underlying an audit.
B. industry-specific guidance on how audit procedures should be conducted.
C. standards that apply only to audits of public entities.
D. guidelines for the general conduct of audit engagements.
guidelines for the general conduct of audit engagements.
183
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183) Which of the following types of transactions would be routine and computerized?
A. Capital stock sales and repurchases
B. Bank loan transactions
C. Income tax expense and liability
D. Credit sales and billings
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Credit sales and billings
184
184) Which of the following is not true with respect to the concept of reasonable assurance?
A. Auditors should control the overall risk in an audit to an acceptably low level.
B. Reasonable assurance allows for mistakes and misinterpretations by the audit team throughout the examination.
C. Audit teams should evaluate all transactions and components of an account balance or class of transactions.
D. The nature of many audit procedures is such that they cannot always be relied upon to detect misstatements.
Audit teams should evaluate all transactions and components of an account balance or class of transactions.
