1. The auditor will utilize many resources to assess management integrity in the client acceptance process.
Which of the following will an auditor most likely refrain from using in this search?
a. Predecessor auditor.
b. Other professionals in the business community.
c. Public databases.
d. All of the above will typically be used by an auditor in the search.
2. Which of the following industries is usually considered high risk by audit firms?
a. High technology companies such as Internet firms.
b. Manufacturing companies such as toy producers.
c. Legal services such as attorney firms.
d. Non-profit companies such as trade associations.
3. In accepting a client, auditing standards suggest that the auditor focus on four questions. Which of the
following is not one of those four required questions of the predecessor?
a. Integrity of management.
b. The strength of the client’s internal control.
c. Disagreements with management as to accounting principles, auditing standards, or other similarly
significant matters.
d. Any communications by the predecessor to the client’s management or audit committee concerning fraud,
illegal acts by the client, and matters related to internal control.
4. Engagement risk has been defined as the risk of potential losses that are incurred by the auditor in being
associated with a particular client. Which of the following factors are not associated with increased
engagement risk for the auditor?
a. Management with questionable integrity. c. Materially misstated financial statements.
b. A failed company. d. All of these factors increase engagement risk.
5. In evaluating the quality of corporate governance, the auditor analyzes several key factors in determining to
accept or retain a client. Which of the following factors are not one of those key factors considered by the
auditor in evaluating corporate governance?
a. Independence and competency of the audit committee.
b. Participation of key stakeholders.
c. Existence of measurement risk.
d. Quality of management’s risk management process and internal controls.
6. Risk is pervasive to the audit process. An overview of the risk process associated with an audit includes all of
the following risks except which one?
a. Audit risk. c. Economic risk.
b. Engagement risk. d. Business risk.
7. Financial reporting risks are those risks that relate directly to the recording of transactions and the presentation
of financial data in an organization’s financial statements. Which of the following factors is not one of the key
factors affecting financial reporting risk?
a. Competence and integrity of management
b. Complexity of the company’s transactions and financial reporting.
c. Quality of the company’s internal controls.
d. All of these factors affect financial reporting risks.
8. Which of the following factors is not a component of the audit risk model?
a. Inherent risk. c. Detection risk.
b. Statistical risk. d. Control risk.
9. In the audit risk model, which of the risk components can be assessed by the auditor?
a. Inherent risk. c. Detection risk.
b. Control risk. d. Both A and B.
10. In the audit risk model, its risk components are either determined, assessed, or manipulated. Which of the
following risks are controllable by the auditor?
a. Audit risk. c. Detection risk.
b. Control risk. d. Both A and C.
11. In planning the audit, auditors assess control risk for
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a. each relevant assertion. c. significant account balances.
b. important classes of transactions. d. all of the above.
12. When would the auditor issue an unqualified opinion on the internal controls of a client?
a. No material weaknesses in internal controls are found.
b. No significant deficiencies in internal controls are found.
c. No errors are found in the accounts of the client.
d. Either A or B.
13. Which assertions and controls must be tested by the auditor?
a. All controls and assertions must be tested.
b. A sample of controls and assertions must be tested.
c. Material controls and assertions must be tested.
d. The majority of controls and assertions of the client must be tested.
14. In examining controls for transactions and events, which of the following assertions would not be included
a. occurrence. c. valuation.
b. completeness. d. all are included.
15. Which of the following is not correct about the performance of tests of controls?
a. Tests of controls must be performed for every account.
b. Some tests of controls must be performed to rely upon controls to reduce substantive testing.
c. The work of the internal auditor can be used to reduce substantive testing.
d. All of the above are correct.
16. In evaluating residual risk of account balances, tests of controls by the auditor involves the assessment of
a. the design of controls. c. the strength of the control environment.
b. the operation of controls. d. all of the above
17. In assessing internal controls the auditor is suppose to apply the concept of reasonable assurance, which
indicates that
a. there should be a clear separation of duties between personnel who authorize, record, and hold assets.
b. the costs of a control should not exceed its benefits.
c. testing of the controls should provide assurance that they work most of the time.
d. testing of the controls should provide reasonable assurance that they are working properly.
18. Which of the following statements about internal control is not correct?
a. The costs of the control should not exceed the benefits.
b. The auditor’s assessment of detection risk is inversely related to the assessment of control risk.
c. Stronger internal controls are directly related to the number of required substantive audit procedures.
d. Management is responsible for the maintenance of internal control.
19. Because of a material weakness in internal control, management of the company issues an adverse report.
What types of report(s) would the auditor issue?
a. An adverse opinion on management’s assessment of internal control and in their report on internal control.
b. An unqualified opinion on management’s assessment of internal control and an adverse opinion in their
report on internal control.
c. An unqualified opinion on management’s assessment of internal control and in their report on internal
control.
d. An adverse opinion on management’s assessment of internal control and an unqualified report on internal
control.
20. When assessing accounting processes which of the following factors is considered pervasive by the auditor
when deciding upon the extent of direct testing of account balances?
a. The control environment.
b. Audit testing of processes and controls.
c. Design and operation of controls.
d. Inherent and control risk.
21. The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful
accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure
is to substantiate the assertion of
a. existence of receivables b. cutoff of receivables
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c. valuation of receivables d. rights to receivables
22. What evidence is utilized by the auditor for analytical purposes in substantiating the completeness allowance
for bad debt estimate?
a. Accounts receivable aging schedule c. Confirmations returned without exception.
b. Copies of checks received from customers. d. Stock prices of customer companies.
23. Much of the understanding of revenue transactions for compliance with GAAP can be performed by
a. examining sales contracts and inquiry of management.
b. confirming sales with customers.
c. discussing the transactions with qualified members of the Financial Accounting Standards Board.
d. comparing shipping documents with invoices.
24. The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate
the assertion of
a. cutoff. c. legality.
b. completeness. d. occurrence.
25. In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping
documents shortly before year-end and immediately following the year under audit. The auditors compare
the documents to the sales journal in order to test
a. existence of sales.
b. presentation and disclosure of receivables.
c. cutoff of sales transactions.
d. completeness of receivables.
26. Completeness of revenues may be tested by the auditor through the selection of a sample of
a. shipping documents and tracing them to the sales journal.
b. accounts receivable and tracing them to cash receipts.
c. recorded sales transactions and tracing them to the general ledger.
d. inventory records and tracing them to the shipping documents.
27. Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample
of accounts receivable. This test is performed by Homer and Moe primarily to substantiate the
a. existence of related party transactions. c. obligation of debt.
b. existence of accounts receivable. d. cutoff of the allowance for bad debt.
28. The aged accounts receivable report is utilized by the auditor to
a. encourage the client to collect on receivables that are long past due.
b. select the type of confirmations that will be sent to banks.
c. assess the adequacy of the allowance for doubtful accounts.
d. identify debits in the receivables balance that should be reclassified to payables.
29. According to auditing standards, accounts receivable confirmations are required to be used
a. on every audit engagement. c. if the balance is material.
b. if the client agrees in writing to the procedure. d. if environmental risk is low.
30. The primary difference between positive and negative confirmations used in the audit of accounts receivable
is
a. the mode of response.
b. the amount of information included.
c. the control of the confirmation process by the auditor.
d. the level of assurance provided.
31. When testing the valuation assertion, the auditor would most likely
a. confirm inventory on consignment.
b. examine receiving reports for inventory, tracing them recorded amounts.
c. observe the taking of physical inventory.
d. perform price tests to the related cost flow assumption.
32. The auditor may discover that the recorded cost of inventory exceeds the designated market price when
testing which assertion?
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a. Existence. c. Valuation.
b. Cutoff. d. Rights.
33. Which of the following procedures will usually be performed by the auditor to actively determine obsolete
inventory?
a. Confirmation of inventory with customers.
b. Footing the inventory subsidiary ledger.
c. Tracing inventory ordered by the client to receiving reports.
d. Analysis of inventory turnover and sales reports.
34. A perpetual inventory system is preferable to periodic if adequately controlled and maintained because
a. it requires that a full inventory count be taken at year-end by all warehouse employees.
b. it allows management to calculate cost of goods sold at year end.
c. it provides information to management about inventory that approaches real-time.
d. it better controls the receipt of goods.
35. What is the significance of the auditor's recording and verification of the range of tag numbers used in a
periodic inventory count?
a. The auditor will trace all client counts back to the inventory report given to the auditor subsequent to the
physical inventory.
b. The auditor must determine the extent of inventory included in the client's inventory report as observed by
the auditor during the count.
c. The auditor must determine that the client has adequate control over cycle counts.
d. The auditor must give the impression that the counters are being carefully watched by an independent party
during the physical inventory.
36. The principle of lower of cost or market and the potential obsolescence of inventory are a concern for the
audit team as
a. they are uncommon and may not exist.
b. they are a burden to the auditor in the undue amount of work caused.
c. they are likely to occur in the last month of the year and cause cutoff problems.
d. they are an inherent component of complexity related to valuation.
37. The inventory of MegaMart Company is distributed between 85 stores throughout the United States, Puerto
Rico and Mexico. MegaMart has a calendar year-end, uses a periodic inventory system and performs a
physical count on January 1st of each year. In the planning of the audit of MegaMart, the engagement team
must consider
a. if the finance departments in Mexico and Puerto Rico are available to perform the audit testing on January
1st.
b. which of the stores to randomly visit and how many items to test.
c. the risk of the company transporting items from Maine to Mexico between audit counts.
d. coordinating with the client which stores will be visited for inventory observation.
38. When a check has been cut for payment to a vendor, the underlying documentation and the check should
be sent to which of the following for signature and cancellation?
a. controller c. treasurer
b. receptionist d. accounts payable supervisor
39. Which of the following types of analysis provides useful evidence of multi-location clients?
a. Multi-processing analysis c. Stratification analysis.
b. Cross-sectional analysis. d. Common-sized analysis.
40. Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will require
the auditor to examine
a. invoices representing the more recent purchases of inventory.
b. invoices representing the purchase of base year inventory in the year of inception.
c. shipping documents for a sample of cost of goods sold transactions during the year.
d. shipping documents for a sample of units on hand in the interim period.
41. Auditing sophisticated financial instruments requires the auditor to obtain an understanding of all of the
following except
a. Risks and objectives of the instruments.
b. Contracts and terms of the instrument.
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c. Financial accounting and disclosure for the instrument.
d. Credit rating of the client purchasing the instrument.
42. The auditor best determines the existence of investments by
a. footing the schedule of recorded investments.
b. confirming or examining recorded investments.
c. examining the recorded investments for name and title.
d. recomputation of interest and/or gains and losses.
43. The audit of investments includes the procedure of examining the documents for any restrictions in order
to test the assertion of
a. existence. c. completeness.
b. rights. d. valuation.
44. Accounting standards require that investments in marketable securities be presented and disclosed
a. by classification as trading, available-for-sale or held-to maturity.
b. for an analyst's determination of liquidity.
c. for the company's physical possession of the security versus agent holdings.
d. for the expected success of the organization of investment.
45. How does the auditor typically test for the existence of cash?
a. counting cash at the depository institution.
b. inquiry of management.
c. standard bank confirmation.
d. tracing the bank reconciliation to the general ledger.
46. In the course of testing cash balances at the balance sheet date, the auditor foots the bank reconciliation
and traces its reported book balance to the trial balance in addressing the assertion(s) of
a. rights. c. existence.
b. valuation. d. all of the above.
47. During the audit of EmpireAge, Inc., the auditor notes a large series of checks that does not clear for an
unusually long time after period end. What may the auditor suspect from this observation?
a. Vendors are eager to get their payments.
b. The reconciliation is accurate.
c. Cash does not exist.
d. The presence of held-checks at period-end.
48. The standard bank confirmation includes a designated place for the financial institution to report
a. loans and collateral. c. cash held on consignment.
b. a reconciliation of the lockbox. d. maturity dates for certificates of deposit.
49. Debt instruments with a variable interest rate are referred to as
a. junk bonds. c. event-risk protected debt.
b. floating rate note. d. zero-coupon bond.
50. Kiting is addressed by the auditor through the use of
a. cut-off bank reconciliations.
b. bank transfer schedules.
c. bank confirmations-account balances.
d. bank confirmations-loan guarantees.
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Answer Keys:
DABD*
C*BDA
DDCDA
AB*BA
*AADC
A**CA
DC*CB
DBC*A
DBBAC
DDA**
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