Chapter  - The Audit Function in Society & Professional Standards

1. The risk that a company will not be able to meet its commitments is referred to as:
 a. business risk
 b. information risk
 c. inherent risk
 d. commitment risk

2. Which of the following in not a type of attest engagement?
 a. agreed-upon procedures
 b. compilation
 c. examination
 d. review

3. Some of the following criteria are essential to satisfactory performance in several professions.  Which one is unique to audit work by CPAs?
 a. Due professional care.
 b. Independence.
 c. General competence.
 d. Familiarity with a complex body of technical knowledge.

4. An audit designed to detect violations of laws and regulations would be referred to as:
 a. a  financial statement audit.
 b. a  compliance audit.
 c. a  performance audit.
 d. an operational audit.

5. When the auditors discover an illegal act they will ordinarily report it to the:
 a. audit committee of the company being audited.
 b. Securities and Exchange Commission on Form 8-M.
 c. Justice Department of the United States government.
 d. American Institute of Certified Public Accountants Division of Professional Ethics.

6. The generally accepted auditing standards of field work include a requirement that:
 a. the auditors exercise due professional care.
 b. the auditors obtain an understanding of internal control.
 c. financial statements be presented in accordance with generally accepted accounting principles.
 d. the auditors maintain an independent mental attitude.

7. The first general standard requires that a person or persons have adequate technical training and proficiency as an auditor.  This standard is met by:
 a. an understanding of the field of business and finance.
 b. education and experience in the field of auditing.
 c. continuing professional education.
 d. a thorough knowledge of the Statements on Auditing Standards.

8. In the event of an unresolvable difference of opinion between the client company and the CPA firm as  to the valuation of an asset in the financial statements:
 a. the final decision rests with the client's management and the auditors can express their disapproval in the audit report if they deem it appropriate to do so.
 b. the auditors should change the financial statements to show the valuation they consider proper.
 c. the difference of opinion should be submitted to arbitration by the FASB.
 d. the auditors should withdraw from the engagement.

9. An auditor's unqualified standard report:
 a. explicitly states that disclosure is adequate in the financial statements.
 b. implies that disclosure is adequate in the financial statements.
 c. explicitly states that all material facts have been disclosed in conformity with generally accepted accounting principles.
 d. takes no position, explicit or implicit, with respect to the adequacy of disclosures.

10. The auditors cannot guarantee the correctness of audited financial statements because:
 a. much of the audit work is performed by staff members with limited experience.
 b. new accounting principles and practices may have been approved by the FASB
    during the year under audit.
 c. the value of assets may change while the audit is in process.
 d. financial statements are largely a matter of estimate and opinion rather than of precise facts.

11. A CPA is most likely to refer to one or more of the three general auditing standards in determining:
 a. the nature of the CPA's report qualification.
 b. the scope of the CPA's auditing procedures.
 c. requirements for the consideration of internal control.
 d. whether the CPA should undertake an audit engagement.

12. Independent auditing can best be described as
 a. a branch of accounting.
 b. a professional activity that measures and communicates financial and business data.
 c. a regulatory function that prevents the issuance of improper financial information.
 d. a discipline that attests to the results of accounting and other functional operations and data.
 
 

Chapter  - Professional Ethics

1. A CPA ethically could:
 a. perform an audit of Big Moo for less than ½ of normal audit billing rates.
 b. base her audit fee on the proceeds of her client's stock issue.
 c. own preferred stock in a corporation which is an audit client.
 d. perform a review on a contingent fee basis.

2. The Code of Professional Conduct requires independence for all:
 a. audit and other accounting engagements.
 b. financial statement audits.
 c. services performed.
 d. services performed except tax engagements.

3. In which of the following circumstances is it most likely that a CPA has violated the Code of Professional Conduct?
 a. He has placed an ad in a newspaper in which he compares his audit firm personnel's experience with that of the personnel of several competing firms.
 b. He has started an audit of a nonpublic company for which last year's fees have not yet been received.
 c. He audits a company in which he previously owned stock.
 d. He serves as trustee of an audit client's profit-sharing trust.

4. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?
 a. The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information.
 b. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.
 c. Confidential client information is made available as part of a quality review of the CPA's practice by a review team authorized by the AICPA.
 d. An inquiry by a disciplinary body of a state CPA society requests confidential client information.

5. Which of the following fee arrangements for an audit would constitute a violation of the AICPA Code of Professional Conduct?
 a. A fixed fee.
 b. A fee that is based on the number of hours spent on the engagement.
 c. A fee that is computed as a percentage of audited net income.
 d. A fee that is based on the difficulty of the engagement.

6. The main need for a professional code of ethics is to:
a. avoid regulation by the federal government
b. increase public confidence in the profession
c. reduce competition from outside service agencies
d. reduce the number of lawsuits faced by Big Firms
 
 

Chapter  - Legal Liability of Auditors

1. Under common law, auditors are generally liable to the client for:
 a. lack of due diligence.
 b. ordinary negligence, but not gross negligence.
 c. ordinary negligence or gross negligence.
 d. gross negligence, but not ordinary negligence.

2. According to court decisions, the generally accepted auditing standards established by the AICPA apply:
 a. only to the AICPA membership.
 b. to all CPAs in public practice.
 c. only to those who choose to following.
 d. only when conducting audits subject to AICPA jurisdiction.

3. In the event that a CPA issues an unqualified audit report on financial statements which he knows to be misleading, he is:
 a. subject to criminal as well as civil liability.
 b. subject to civil liability.
 c. not subject to liability if the client also knows the financial statements to be misleading.
 d. not subject to liability if he performed no audit procedures relating to the misleading portions of the statements.
 

Chapter  - The Audit Evidence Process

1. As the acceptable level of detection risk decreases, an auditor is most likely to change the:
 a. timing of substantive tests by performing them at an interim date rather than at year-end.
 b. nature of substantive tests from a less effective to a more effective procedure.
 c. timing of tests of controls by performing them at several dates rather than at one time.
 d. assessed level of inherent risk to a higher amount.

2. Holding all other factors constant, increasing the extent of substantive audit procedures for accounts receivable ordinarily has what effect on audit risk?
 a. Increases.
 b. Decreases.
 c. No effect.
 d. Indeterminate.

3. Which of the following summarizes when analytical procedures are required to be performed on an audit?
      Planning      Substantive Tests            Final Review
 a.     Yes                     Yes                                Yes
 b.     Yes                      No                                Yes
 c.      No                     Yes                                Yes
 d.      No                      No                                No

4. The major reason auditors gather evidence is to:
 a. form an opinion on the financial statements.
 b. detect fraud.
 c. evaluate management.
 d. assess control risk.

5. Analytical procedures are:
 a. statistical tests of financial information designed to identify areas requiring intensive investigation.
 b. analytical tests of financial information made by a computer.
 c. evaluations of financial information made by a study and comparison of relationships among financial and nonfinancial data.
 d. diagnostic tests of financial information which may not be classified as evidential matter.

6. A principal purpose of a representation letter from management is to:
 a. serve as an introduction to company personnel and authorize the auditors to examine the records.
 b. remind management of its primary responsibility for the financial statements.
 c. substitute for other evidence-gathering audit procedures.
 d. confirm management's approval of the work performed by the auditors.

7. Which of the following procedures is not customarily used by the auditors in determining the existence of related parties?
 a. Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.
 b. Review prior years' work papers for the names of known related parties.
 c. Evaluate the company's procedures for identifying and properly accounting for related-party transactions.
 d. Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period.
 
 

Chapter  - Obtaining and Documenting Audit Evidence

1. Which of the following is the best example of a substantive test?
 a. Examining a sample of cash disbursements to test whether expenses have been properly approved.
 b. Confirming balances of accounts receivable.
 c. Comparing signatures on checks to a list of authorized check signers.
 d. Flowcharting a client's cash receipts system.

2. A successor auditor must attempt communication with a predecessor auditor:
 a. prior to accepting the engagement.
 b. after the engagement has been accepted.
 c. both prior to acceptance of the engagement and after the engagement has been accepted.
 d. is not required to do so.

3. The internal control portion of an audit program is generally organized around the:
 a. major transaction cycles.
 b. substantive tests.
 c. analytical procedures.
 d. inherent risk assessment.

4. Which of the following is the most likely first step the auditors would perform at the beginning of an initial audit engagement?
 a. Prepare a rough draft of the financial statements and of the auditors' report.
 b. Consider internal control.
 c. Tour the client's facilities and review the general records.
 d. Bill the client

5. Harrison,  CPA, requested permission to communicate with the predecessor auditors of a prospective client.  The prospective client's refusal to permit this will bear directly on Harrison's decision concerning the:
 a. adequacy of the preplanned audit program.
 b. ability to establish consistency in application of accounting principles between years.
 c. apparent scope limitation.
 d. integrity of management.

6. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:
 a. engage financial experts familiar with the nature of the business entity.
 b. obtain a knowledge of matters that relate to the nature of the entity's business.
 c. refer a substantial portion of the audit to another CPA.
 d. first inform management that an unqualified opinion cannot be issued.

7. Audit programs are modified to suit the circumstances of a particular engagement.  A final audit program for an engagement generally should be developed:
 a. prior to beginning the actual audit work.
 b. after the auditors have completed their consideration of the existing internal control.
 c. after reviewing the client's accounting records and procedures.
 d. when the audit engagement letter is prepared.

8. Listed below are the management assertion that are contained in financial statements, and several financial statement misstatements.  For each misstatement, indicate with the appropriate letter the assertion by management that is being violated.

  Assertion
 A Existence and occurrence
 B Completeness
 C Rights and obligations
 D Valuation or allocation
 E Presentation and disclosure

 Misstatements

 a. The client failed to include in their financial statements inventory that was consigned to others.
 b. The client had a significant amount of damaged goods that were presented at cost.
 c. The client failed to describe in the financial statements significant debt restrictions.
 d. The client recorded receivables that were fictitious.

9. Listed below are audit objectives for the audit of assets, and audit procedures designed to achieve certain of those objectives.  Match the procedure with the primary objectives that it is intended to achieve.

 Audit Objectives

 A Establish the existence of the assets
 B Establish the rights to the assets
 C Establish the completeness of recorded assets
 D Determine the appropriate valuation of the assets
 E Establish the clerical accuracy of the underlaying records
 F Determine the appropriate financial statement presentation

 Audit Procedures

 a. Confirm a sample of accounts receivable by direct communication with the customers.
 b. Observe the client's physical inventory.
 c. Obtain a lawyer's letter from the client's attorney.
 d. Vouch purchases of property, plant and equipment made during the year.
 e. Foot the subsidiary accounts receivable ledger.

Chapter  - Internal Control

1. Before assessing control risk at a level lower than the maximum,  the auditor obtains reasonable assurance that controls are in use and operating effectively.  This assurance is most likely obtained in part by:
 a. preparing flowcharts.
 b. performing substantive tests.
 c. analyzing tests of trends and ratios.
 d. inspecting documents.

2. Auditors must communicate internal control reportable conditions to:
 a. management.
 b. the audit committee.
 c. the shareholders.
 d. the SEC.

3. A significant deficiency in the design or functioning of internal control that could adversely affect the organization's ability to record, process, summarize, and report financial data is referred to as a:
 a. material weakness in internal control.
 b. inherent limitation of internal control.
 c. management override.
 d. reportable condition.

4. Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control?
 a. Inquiry of client personnel.
 b. Recomputation of account balance amounts.
 c. Observation of client personnel applying the control.
 d. Confirmation with outside parties.

5. The purpose of tests of controls is to provide reasonable assurance that the:
 a. accounting treatment of transactions and balances is valid and proper.
 b. controls are operating effectively.
 c. entity has complied with disclosure requirements of generally accepted accounting principles.
 d. entity has complied with requirements of quality control.

6. An auditor's flowchart of a client's internal control is a diagrammatic representation which depicts the auditors':
 a. understanding of the system.
 b. program for tests of controls.
 c. documentation of control risk.
 d. understanding of the types of irregularities which are probable, given the present system.

7. Which of the following is ordinarily considered a test of a control?
 a. Send confirmation letters to financial institutions.
 b. Count and list cash on hand.
 c. Examine signatures on checks.
 d. Obtain or prepare reconciliations of bank accounts as of the balance sheet date.
 
 

Chapter  - The Computer Environment  and the Internal Control Structure

1. Barnes uses an online sales order processing system to process its sales transactions.  Barnes' sales data are electronically sorted and subjected to edit checks.  A direct output of the edit checks most likely would be a:
 a. report of missing sales invoices.
 b. file of all rejected sales transactions.
 c. printout of all user code numbers and passwords.
 d. list of all voided shipping documents.

2. Which of the following situations is compatible with good internal control in an information systems department?
 a. Computer programmers have unsupervised access to computer terminals.
 b. Computer operators have detailed knowledge of computer programs.
 c. Computer librarians have physical control of program documentation.
 d. Computer programmers have access to input data.

3. A customer inadvertently ordered part number 47368 rather than part number 47638.  In processing this order, the error could be detected by the vendor with which of the following controls?
 a. Batch totals.
 b. Key verifying.
 c. Self-checking digit.
 d. Limit test.

4. Data control group activities in an information systems department would appropriately include:
 a. reviewing error listings and maintaining error logs and reports.
 b. investigating deviations from standard procedures in data handling.
 c. supervising distribution of output.
 d. all of the above.

5. The auditors may decide not to perform tests of the controls within the computerized portion of the client's internal control.  Which of the following would not be a valid reason for choosing to omit such tests?
 a. The controls appear adequate.
 b. The controls duplicate operative controls existing elsewhere in the system.
 c. There appear to be major weaknesses that would preclude reliance on the stated procedures.
 d. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests show the controls to be operating effectively.

6. Is the word "cointrol" in the chapter title:
 a. A clever play on words
 b. A Freudian slip
 c. Simply a misspelling
 d. None of these choices
 
 

Chapter - Audit Sampling - Concepts and Techniques

1. An increase in the tolerable deviation rate is most likely to be accompanied by an increase in the:
 a. planned assessed level of control risk.
 b. required sample size for test of controls.
 c. risk of assessing control risk too high
 d. population size.

2. An advantage of classical variables sampling approach over probability-proportional-to-size sampling is that:
 a. items with zero or negative balances do not require special treatment.
 b. the techniques are easier to use.
 c. no estimate of the standard deviation of the population is needed.
 d. when few misstatements are expected, the approach will generally result in a smaller sample size.

3. The estimated deviation rate obtained from attributes sampling is useful in satisfying the auditing standard which states:
 a. the work is to be adequately planned, and assistants if any, are to be properly supervised.
 b. sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion.
 c. the audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
 d. a sufficient understanding of internal control is to be obtained to plan the audit and determine the nature, timing, and extent of other audit tests.

4. For a large population of cash disbursement transactions, Brooke, CPA, is testing internal control by using attributes sampling techniques.  Anticipating a deviation rate of 3 percent, Brooke found from a table that the required sample size is 400 with a desired tolerable deviation rate of 5 percent and risk of assessing control risk too low of 5 percent.  If Brooke anticipated a deviation rate of only 2  percent, the sample size would be closest to:
 a. 200
 b. 400
 c. 533
 d. 800

5. There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an occurrence rate.  The statistical terms that roughly correspond to quantities and occurrence rate, respectively, are:
 a. attributes and variables.
 b. variables and attributes.
 c. constants and attributes.
 d. constants and variables.

6. The audit risk against which the auditors require reasonable protection is a combination of two separate risks.  The first of these is that material misstatements will occur and the second is that:
 a. a company's internal control structure is not adequate to detect misstatements.
 b. those misstatements that occur will not be detected in the auditors' examination.
 c. management may possess an attitude that lacks integrity.
 d. evidential matter is not competent enough for the auditors to form an opinion based on reasonable assurance.

7. Auditors often utilize sampling methods when performing tests of controls.  Which of the following sampling methods is most useful when testing controls?
 a. Attributes sampling.
 b. Variables sampling.
 c. Unrestricted random sampling with replacement.
 d. Stratified random sampling.

8. Which of the following best describes the distinguishing feature of statistical sampling?
 a. It provides for mathematically measuring the degree of uncertainty that results from examining only a part of the data.
 b. It allows the auditor to have the same degree of confidence as with nonstatistical sampling, but with substantially less work.
 c. It allows the auditor to substitute sampling techniques for audit judgment.
 d. It provides for measuring the actual misstatements in financial statements in terms of reliability and precision.

9. The statistical method used to estimate whether the rate of deviation in a population exceeds a tolerable rate is _________________ sampling.
a.  block
b.  audit
c.  attribute
d.  random

10. Statistical sampling provides a technique for
a. exactly defining materiality
b. greatly reducing the amount of substantive testing
c. eliminating judgment in testing
d. measuring the sufficiency of evidential matter
 

Chapter  - Revenue Cycle

1. Which of the following audit procedures is most effective in testing cash sales for overstatement?
 a. Age accounts receivable.
 b. Confirm accounts receivable.
 c. Trace a sample of initial sales through the slips summaries to recorded general ledger sales.
 d. Vouch a sample of recorded sales, from general ledger to initial sales slips.

2. A sales invoice for $6,300 was computed correctly but was incorrectly posted as $3,600, the amount on his monthly statement.  Which one of the following controls would have prevented this error?
 a. Totals derived directly from invoices are used to balance with postings to sales and accounts receivable control accounts.
 b. Serial numbers, prices, discounts, and extensions and footings are independently checked on each sales invoice.
 c. The company's monthly statements are verified and mailed by a responsible person other than the bookkeeper who prepared them.
 d. Unauthorized remittance deductions by customers are investigated promptly by an internal auditor.

3. Which of the following manipulations would overstate receivables on the financial statements?
 a. Overstatement of cash sales.
 b. Closing the sales journal prior to year-end.
 c. Closing the cash receipts journal prior to year-end.
 d. Overestimating the allowance for doubtful accounts.

4. To verify that all recorded sales are for items shipped, a test of transactions should be completed on a representative sample drawn from:
 a. entries in the sales journal
 b. the billing clerk's files of purchase orders
 c. the shipping department's file of shipping documents
 d. entries in the shipping log

5. The least crucial element of internal control over cash is:
 a. separation of cash record keeping from custody of cash
 b. preparation of the monthly bank reconciliation
 c. canceling the supporting documents for disbursements
 d. separation of cash receipts from preparing deposits

6. Moo Manufacturing Company's accounts receivable clerk has a friend who is also Moo's customer.  The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned.  The most effective procedure for preventing this activity is to:
 a. prenumber and account for all credit memorandums.
 b. require receiving reports to support all credit memorandums before they are approved
 c. have the sales department independent of the accounts receivable department
 d. mail monthly statements

7. Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?
 a. Segregate duties so that the bookkeeper in charge of the general ledger has no access
to incoming mail.
 b. Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
 c. Have customers send payments directly to the company's depository bank.
 d. Request that customers' payment checks be made payable to the company and addressed to the treasurer.

8. Sampling from the bills of lading to the sales journal addresses which assertion most directly?
 a. Completeness
 b. Existence or occurrence
 c. Rights and obligations
 d. Presentation and disclosure
 
 

Chapter  - Substantive Tests of Cash Balances and the Revenue Cycle

1. Kiting would most likely be detected by:
 a. tracing the amounts of daily deposits from the cash receipts journal to bank statements.
 b. confirming accounts receivables by direct communication with debtors.
 c. preparing a two-column bank reconciliation.
 d. preparing a schedule of interbank transfers using client records and bank statements around year-end.

2. Most receivable confirmation requests are being returned by customers indicating that they owe less than the audit client's records indicate.  This might be explained by a situation in which the:
 a. cash receipts journal was closed before year end.
 b. sales journal was closed prior to year-end.
 c. purchases journal was held open after year-end.
 d. cash disbursement journal was closed prior to year-end.

3. Which of the following is confirmed on the standard form used for cash balances at financial institutions?
 a. Notes payable to bank.
 b. Notes receivable from bank.
 c. Contingent liabilities to the bank.
 d. Uniform credit requirements.

4. The use of the positive [+]  (as opposed to the negative) form of receivables confirmation is indicated when:
 a. control risk for accounts receivable is assessed as low.
 b. there is reason to believe that a substantial number of accounts may be in dispute.
 c. a large number of small balances are involved.
 d. there is reason to believe a significant portion of the requests will be answered.

5. The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures.  The auditors' report on the financial statements should include:
 a. a description of the limitation on the scope of their examination and the alternative auditing procedures used, but an opinion qualification is not required.
 b. an opinion qualification, but reference to the use of alternative auditing procedures is not required.
 c. both a scope qualification and an opinion qualification.
 d. neither a comment on the use of alternative auditing procedures nor an opinion qualification.

6. To determine that sales transactions have been recorded in the proper accounting period the auditors perform a cutoff review.  Which of the following best describes the overall approach used when performing a cutoff review?
 a. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.
 b. Confirm year-end transactions with regular customers.
 c. Examine cash receipts in the subsequent period.
 d. Analyze transactions occurring within a few days before and after year end.

7. The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:
 a. verify the cash balance reported on the standard financial institution confirmation form.
 b. verify reconciling items on the client's bank reconciliation
 c. detect lapping
 d. detect kiting
 

Chapter  - Auditing the Expenditure Cycle

1. Unrecorded liabilities are most likely to be found during the review of which of the following?
 a. Disbursements subsequent to year-end.
 b. Shipping records.
 c. December cash disbursements journal.
 d. Unmatched sales invoices.

2. Of the following,  which best explains why accounts payable confirmation procedures are not always used by auditors?
 a. Inclusion of accounts payable balances in the liability certificate completed by the client allows the auditor to refrain from using confirmation procedures.
 b. Accounts payable usually are insignificant and can be audited by using analytical procedures.
 c. The auditor may believe that the confirmation request will cause certain creditors to press for payment.
 d. Confirmations are better at identifying overstatements as compared to understatements.

3. Ordinarily audit procedures for liabilities should have which of the following as the most important objective?
 a. Completeness
 b. Occurrence
 c. Presentation
 d. Rights

4. The most difficult type of irregularity to detect is fraud based on:
 a. the over recording of transactions.
 b. the nonrecording of transactions.
 c. recorded transactions in subsidiaries.
 d. related party receivables.

5. Which of the following is a standard control for cash disbursements?
 a. Checks should be signed by the controller and at least one other employee of the company.
 b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.
 c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.
 d. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.

6. Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?
 a. Quantities ordered are excluded from the receiving department copy of the purchase order.
 b. Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order.
 c. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.
 d. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

7. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
 a. this is a duplication of cutoff tests.
 b. accounts payable balances at the balance sheet date may not be paid before the audit is completed.
 c. correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment.
 d. there is likely to be other reliable external evidence available to support the balances.

8. Which of following audit procedures is least likely to detect an unrecorded liability?
 a. Analysis and recomputation of interest expense.
 b. Analysis and recomputation of depreciation expense.
 c. Mailing of standard bank confirmation form.
 d. Readings of the minutes of meetings of the board of directors.
 
 

Chapter  - Conversion and Payroll Cycles

1. An auditor is about to vouch (trace back) information on the inventory accumulation sheets to a number of tags.  Which assertion does this procedure relate to most directly?
 a. Completeness
 b. Valuation
 c. Existence
 d. Presentation

2. Which of the following inventory systems is most likely to discourage inventory theft and waste?
 a. Periodic inventory system
 b. Perpetual inventory system
 c. Shipping distribution inventory regulation system
 d. Raw material management system

3. From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?
 a. Observation of physical inventory counts.
 b. Written inventory representations from management.
 c. Confirmation of inventories in a public warehouse.
 d. auditor's recomputation of inventory extensions.

4. A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records.  This situation could be the result of the failure to record:
 a. sales
 b. sales returns
 c. purchases
 d. purchase discounts

5. An auditor would be most likely to learn of slow-moving inventory through:
 a. inquiry of sales personnel
 b. inquiry of stores personnel.
 c. physical observation of inventory.
 d. review of perpetual inventory records.

6. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets.  The purpose of this procedure is to obtain assurance that:
 a. the final inventory is valued at cost.
 b. all inventory represented by an inventory tag is listed on the inventory sheets.
 c. all inventory represented by an inventory tag is bona fide.
 d. inventory sheets do not include untagged inventory items.

7. From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:
 a. internal control is weak.
 b. accurate perpetual inventory records are maintained.
 c. inventory is slow-moving.
 d. significant amounts of inventory are held on a consignment basis.

8. Purchase cut-off procedures should be designed to test whether all inventory:
 a. purchased and received before the year-end was recorded.
 b. on the year-end balance sheet was carried at lower of cost or market.
 c. on the year-end balance sheet was paid for by the company.
 d. owned by the company is in the possession of the company.

9. A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
 a. all unclaimed payroll checks are properly returned to the cashier.
 b. the paymaster is not involved in the distribution of payroll checks.
 c. all employees have in their possession proper employee identification.
 d. names on the company payroll are those of bona fide employees presently on the job.
 
 

Chapter  - The Financing & Investing Cycle

1. Which of the following procedures is most likely to be performed in the audit of common stock of a publicly traded company?
 a. Compare stock market price to par value to test the lower of cost or market rule.
 b. Determine whether derivative values exceed those of issued stock.
 c. Evaluation compliance with any stock option plans.
 d. Determine that the required journal entries have been made for stock splits.

2. For a privately held client with three shareholders the auditor's examination of owner's equity is most likely to include:
 a. reconciliation of the stock certificate book with the general ledger.
 b. analysis of the accounting for proceeds for stock issuances.
 c. confirmation of outstanding shares with an independent registrar.
 d. tests of the computation of earnings per share.

3. Where no independent stock transfer agent is employed and the corporation issues its own stock and maintains stock records canceled stock certificates should:
 a. be defaced to prevent reissuance, and attached to their corresponding stubs.
 b. not be defaced, but segregated from other stock certificates and retained in a canceled certificates file.
 c. be destroyed to prevent fraudulent reissuance.
 d. be defaced and sent to the secretary of state.

4. If a company employs a capital stock registrar and/or transfer agent, the registrar or agent of both, should be requested to confirm directly to the auditors the number of shares of each class of stock:
 a. surrendered and canceled during the year.
 b. authorized at the balance sheet date.
 c. issued and outstanding at the balance sheet date.
 d. authorized, issued, and outstanding during the year.

5. An audit program for the audit of the retained earnings account should include a step that requires verification of the:
 a. gain or loss resulting from disposition of treasury shares.
 b. market value used to charge retained earnings to account for a two-for-one split.
 c. authorization for both cash and stock dividends.
 d. approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.

6. A company guarantees the debt of an affiliate.  Which of the following best describes the audit procedure that would make the auditor aware of the guarantee?
 a. Review minutes and resolutions of the board of directors.
 b. Review prior year's working papers with respect to such guarantees.
 c. Review the possibility of such guarantees with the chief accountant.
 d. Review the legal letter returned by the company's outside legal counsel.

7. During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account.  This observation could lead the auditors to suspect that:
 a. long-term debt is understated.
 b. discount on bonds payable is overstated.
 c. long-term debt is overstated.
 d. premium on bonds payable is understated.
 

8. In the audit of property, plant, and equipment, the auditor is least likely to attempt to determine the:
 a. design of internal control.
 b. property abandoned during the year.
 c. adequacy of replacement funds.
 d. reasonableness of depreciation expense.

9. To verify the existence and ownership of securities, which of the following procedures is least likely to be performed?
 a. Confirmation.
 b. Inspection.
 c. Vouching.
 d. Recomputation.

10. The financial management of a company should take steps to see that company investment securities are protected.   Which of the following is not a step that is designed to protect investment securities?
 a. custody of securities should be assigned to persons who have the accounting responsibility for securities.
 b. Securities should be properly controlled physically in order to prevent unauthorized usage.
 c. Access to securities should be vested in more than one person.
 d. Securities should be registered in the name of the owner.

11. To achieve effective internal control over fixed-asset additions, a company should establish procedures that require:
 a. capitalization of the cost of fixed-asset additions in excess of a specific dollar amount.
 b. performance of recurring fixed-asset maintenance work solely by maintenance department employees.
 c. classification as investments of those fixed-asset additions that are not used in the business.
 d. authorization and approval of major fixed-asset additions.

12. Which of the following is an internal control weakness related to the acquisition of factory equipment?
 a. Acquisitions are to be made through and approved by the department in need of the equipment
 b. Advance executive approvals are required for equipment acquisitions.
 c. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
 d. Depreciation policies are reviewed only once a year.

13. A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that:
 a. expenditures for fixed assets have been recorded in the proper period.
 b. capital expenditures have been properly authorized.
 c. noncapitalizable expenditures have been properly expensed.
 d. expenditures for fixed assets have been capitalized.
 
 

Chapter  - Completing the Engagement

1. Which of the following procedures is least likely to be completed before the balance sheet date?
 a. Observation of inventory
 b. Consideration of internal control over cash disbursements
 c. Search for unrecorded liabilities
 d. Confirmation of receivables

2. Three months after the issuance of her audit report, Wey becomes aware of facts which existed at the date of her report that affect the reliability of the financial statements of a client whose securities are widely held.  If the client refuses to make appropriate disclosure, Wey should notify:
 a. regulatory agencies having jurisdiction over the client.
 b. all stockholders
 c. all present and potential investors in the company.
 d. stockholders and the financial press.

3. Which of the following are the auditors least likely to communicate in their required communication to the board of directors?
 a. Disagreements with management.
 b. Information on management's significant accounting estimates.
 c. The CPA's responsibility under generally accepted auditing standards.
 d. Significant audit procedures performed.

4. When examining a client's statement of cash flows, or audit evidence, an auditor relies primarily upon:
 a. determination of the amount of working capital at year-end.
 b. analysis of significant ratios of prior years as compared to the current year.
 c. cross referencing to balances and transactions audited in connection with the examination of the other financial statements.
 d. the guidance provided by the FASB Statement on the statement of cash flows.

5. Which of the following situations has the best chance of being detected when a CPA compares current revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
 a. An increase in property tax rates has not been recognized in the company's 1999 accrual.
 b. The cashier began lapping accounts receivable in 1999.
 c. Because of worsening economic conditions, the 1999 provision for uncollectible accounts was inadequate.
 d. The company changed its capitalization policy for small tools in 1999.

6. Overall analysis of income statement accounts may bring to light errors omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts.  The income statement analysis can best be accomplished by comparing monthly:
 a. income statement ratios to balance sheet ratios.
 b. revenue and expense account balances to the monthly reported net income.
 c. income statement ratios to published industry averages.
 d. revenue and expense account totals to the corresponding figures of the preceding years.

7. The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals with the verification of:
 a. transactions.
 b. authorizations.
 c. costs.
 d. cutoffs.

8. For which of the following ledger accounts would the auditor be most likely to analyze the details?
 a. Service Revenue.
 b. Sales.
 c. Repairs and maintenance expense.
 d. Sales salaries expense.

9. The date of the management representation letter should coincide with the:
 a. date of the auditor's report.
 b. balance sheet date.
 c. date of the latest subsequent event referred to in the notes to the financial statement.
 d. date of the engagement agreement.

10. Auditors perform interim work at various times throughout the year.  The auditor's subsequent events work should be extended to the date of:
 a. a postdated footnote.
 b. the next scheduled interim visit.
 c. the final billing for audit services rendered.
 d. the auditors' report.

11. A client has a calendar year-end.  Listed below are four events that occurred after December 31.  Which one of these subsequent events might result in adjustment of the December 31 financial statements?
 a. The client decided to change depreciation methods in the coming year.
 b. A substantial portion of the company's inventory was written off as obsolete on January 31.
 c. The factory building was damaged by a fire on January 19.
 d. A major subsidiary was sold on February 7.
 
 

Chapter  - Reporting on Audited Financial Statements

1. Which of the following is least likely to result in explanatory language being added to what remains an unqualified auditor's report of a jewelry store client?
 a. A decision by the auditors to emphasize that the client is a part of a larger organization.
 b. Reliance placed upon a specialist to evaluate the diamonds.
 c. A change from FIFO to specific identification for inventory.
 d. A question as to whether the client will be able to remain a going concern.

2. It is not appropriate to refer a reader of an auditor's report to a financial statement note for details concerning:
 a. subsequent events
 b. the pro-forma effects of a business combination.
 c. sale of a discontinued operation.
 d. the method used to confirm receivables.

3. If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should:
 a. disclaim an opinion.
 b. qualify their opinion or issue an adverse opinion.
 c. add an emphasizing paragraph to their unqualified opinion.
 d. add an explanatory paragraph to their unqualified opinion.

4. Glarum, CPA, accepts a new client late in 1999 and therefore had no opportunity to observe the physical inventory taken at December 31, 1998.  Glarum found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for 1999.  Glarum observed the physical inventory at December 31, 1999 and completed the audit satisfactorily.  The report to be issued should:
 a. be unqualified.
 b. be unqualified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.
 c. be qualified as to all of the statements.
 d. be a disclaimer of opinion.

5. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:
 a. a note to the financial statements which discusses the basis for the opinion.
 b. the scope paragraph which discusses the basis for the opinion rendered.
 c. the consistency or lack of consistency in the application of generally accepted accounting principles.
 d. a separate paragraph which discusses the basis for the opinion expressed.

6. Which of the following reports could not be issued strictly because of a scope limitation?
a.  unqualified
b.  qualified
c.  adverse
d.  disclaimer

7. The use of negative assurance in a report by a CPA associated with a set of financial statements would be appropriate only in:
a. examinations
b. reviews
c. agreed-upon procedures
d. audits
 
 

Chapter  - Compilation and Review Engagements & Other Reports

1. Which of the following is not considered an attestation service?
 a. Compilation.
 b. Review.
 c. Agreed-upon procedures.
 d. Examinations.

2. Which of the following is most likely to result in modification of a compilation report?
 a. A departure from generally accepted accounting principles.
 b. A lack of consistency in application of generally accepted accounting principles.
 c. A question concerning an entity's ability to continue as a going concern.
 d. A major uncertainty facing the financial statements.

3. An auditors' report on cash-basis financial statements should include a statement that:
 a. the financial statements are not prepared in conformity with GAAP.
 b. the auditors are disclaiming an opinion.
 c. disclosure is inadequate.
 d. the financial statements are misleading.

4. Which of the following would not be included in a CPA's review report on the financial statements of a nonpublic company?
 a. A statement that the review was performed in accordance with generally accepted auditing standards.
 b. A statement that all information is based upon representations of management.
 c. A statement that a review is less in scope than an audit.
 d. A statement describing the principal procedures performed during a review.

5. Which of the following procedures is not included in a review of the financial statements of a nonpublic company?
 a. Inquiries of management.
 b. Obtaining a general understanding of the client's industry and business operations.
 c. Analytical procedures.
 d. A consideration of internal control.

6. When CPAs are associated with the financial statements of a public company, but they have not performed an audit or a review, their report should include:
 a. negative assurance.
 b. limited assurance.
 c. a disclaimer of opinion.
 d. a list of the investigative procedures performed.

7. CPAs who are not independent of the client may issue a:
 a. compilation report.
 b. review report.
 c. special report.
 d. report on internal control.
 
 

Chapter  - Internal, Operational and Compliance Auditing

1. When performing a financial type of audit for a governmental entity auditors generally do not report on:
 a. whether generally accepted accounting principles have been followed.
 b. economy and efficiency.
 c. compliance with laws and regulations.
 d. internal control.

2. Which of the following is correct concerning an auditor's examination report on compliance with laws and regulations as required by Government Auditing Standards?
 a. The report will include negative assurance on compliance with regulations having a direct and material effect on the financial statements.
 b. The report will include positive assurance on compliance with laws that were tested.
 c. The report is intended for the information of the tax paying public.
 d. The report provides only negative, and not positive assurance.

3. An internal auditor's independence is most likely to be assured if she reports to the:
 a. audit committee of the board of directors.
 b. controller.
 c. president.
 d. treasurer.

4. Which of the following best describes the internal auditing function:
 a. a fraud prevention function.
 b. an integral part of the accounting system of an organization.
 c. a part of the organization's monitoring controls.
 d. a function that adds credibility to the financial information provided to third parties.

5. Operational auditing focuses on all of the following, except:
 a. fairness.
 b. economy.
 c. efficiency.
 d. effectiveness.

6. A typical objective of an operational audit is for the auditors to:
 a. determine that the financial statements fairly present the entity's operating results.
 b. evaluate the feasibility of achieving the entity's operational objectives.
 c. make recommendations for improving performance.
 d. report on the entity's success in maximizing profits.