Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)

Which of the following is not a likely source of information to assess fraud risks?

1)

_______
A)

Analytical procedures.
B)

Communications among audit team members.

C)

Inquiries of management.
D)

Consideration of fraud risks discovered during recent audits of other clients.

2)

Which party has the primary responsibility to oversee an organization's financial reporting and internal control
processes?

2)

_______
A)

Management of the company.

B)

The financial statement auditors.

C)

The board of directors.

D)

The audit committee.

 3)

When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to:

3)

_______
A)

issue an adverse opinion or a disclaimer of opinion.

B)

terminate the engagement with sufficient notice given to the client.

C)

obtain additional evidence to determine whether material fraud has occurred.

D)

re-issue the engagement letter.

4)

Which of the following best defines fraud in a financial statement auditing context?

4)

_______
A)

Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.
B)

Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality.
C)

Fraud is an intentional misstatement of the financial statements.

D)

Fraud is an unintentional misstatement of the financial statements.

5)

With whom should the auditor communicate whenever he or she determines that senior management fraud may be
present, even if the matter might be considered inconsequential?

5)
_______
A)

An appropriate level of management that is at least one level above those involved.
B)

Audit committee.
C)

PCAOB.
D)

The internal auditors.

6)

One of the earliest frauds occurred at McKesson-Robbins. This company committed fraud by doing which of the
following?

6)

_______
A)

Reporting fictitious fixed assets and underreporting expenses.

B)

Reporting fictitious contributed capital.

C)

Reporting fictitious sales and nonexistent inventory.

D)

Reporting expenses as capitalized items.

7)

Which of the following is one of the conditions for fraud described in SAS No. 99?

7)

_______
A)
 Yes No No
B)

No Yes No
C)

Yes No Yes
D)

No Yes Yes

8)

Management is responsible for:

8)

_______
A)

Yes No

B)

No No
C)

Yes Yes

D)

No Yes

9)

Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting?

9)

_______
A)

High turnover of accounting, internal audit, and information technology staff.

 B)

Ineffective oversight of financial reporting by the board of directors.

C)

Management's practice of making overly aggressive forecasts.

D)

Lack of controls related to the calculation and approval of accounting estimates.

10)

The most common technique used by management to misstate financial information is:

10)

______
A)

improper revenue recognition.

B)

understatement of liabilities.
C)

overstatement of expenses.

D)

understatement of assets.

11)

Which of the following issues is normally part of the "brainstorming" session required by SAS No. 99?

11)

______
A)

No No
B)
 Yes No
C)

Yes Yes
D)

No Yes

12)

Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?

12)

______
A)

Management's practice of making overly aggressive forecasts.

B)

Significant accounting estimates involving subjective judgments.

C)

High turnover of accounting, internal audit, and information technology staff.

D)

Excessive pressure for management to meet debt repayment requirements.

13)

Which of the following is not a factor that relates to opportunities to misappropriate assets?

13)

______
A)

Presence of large amounts of cash on hand.

B)

Adverse relationships between management and employees.

C)

Inappropriate segregation of duties or independent checks on performance.

D)
Inadequate internal controls over assets.

14)

Auditor responses to fraud risks include which of the following?

14)

______
A)

Yes No
B)

No Yes
C)

No No
D)

Yes Yes

15)

SAS No. 99 requires auditors to document which of the following matters related to the auditor's consideration of material
misstatements due to fraud?

15)

______
A)

Discussions with management regarding separation of duties.

B)

Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition.
C)

Procedures performed to obtain information necessary to identify and assess the risks of material fraud.
D)
Results of the internal auditor's procedures performed to address the risk of management override of controls.

16)

Which of the following most accurately defines professional skepticism as it is used in auditing standards?

16)

______
A)

It assumes that management is dishonest in only rare instances.

B)

It neither assumes that management is dishonest nor assumes unquestioned honesty.

C)

It assumes management is honest most of the time.

D)

It either assumes management is honest or slightly dishonest, but neither all the time.

17)

Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of
fraud risks. Which of the following is not a condition which should alert an auditor that the initial assessment should be
changed?

17)

______
A)

The auditor's lack of independence.

B)

Discrepancies in the accounting records.

C)

Missing or conflicting evidence.

D)

Unusual relationships between the auditor and management.

Chapter 12
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)

It is common in IT systems to have certain types of transactions initiated automatically by the computer. Which of the
following activities would not be an appropriate candidate for automatic computer initialization?

1)

_______
A)

In an investment brokerage firm, the sale of pharmaceutical stocks when the Dow-Jones Industrial Average falls below a
certain level.
B)

In a manufacturing facility ordering inventory at preset order levels.

C)

In a bank, periodic calculation of interest on customer accounts.

D)

In a hospital, the ordering of oxygen when pre-specified levels are achieved.

2)

Typical controls developed for manual systems which are still important in IT systems include:

2)

_______
A)

careful and complete preparation of source documents.

B)

competent and honest personnel.

C)

proper authorization of transactions.

D)

all of the above.

3)

Which of the following is not a general control?

3)

_______
A)

Processing controls.
B)

Hardware controls.
C)

Procedures for documenting, reviewing, and approving systems and programs.

D)

The plan of organization and operation of IT activity.

4)

The most important output control is:

4)

_______
A)

logic tests, which verify that no mistakes were made in processing.

B)

review of data for reasonableness by someone who knows what the output should look like.
C)

distribution control, which assures that only authorized personnel receive the reports generated by the system.
D)

control totals, which are used to verify that the computer's results are correct.

5)

Service auditors do not issue which of the following types of reports?

5)

_______
A)
Report on controls that have been implemented and tested for design effectiveness
B)

Report on implemented controls

C)

Report on controls that have been implemented and tested for operating effectiveness
D)

Each of the above is issued.

6)

In comparing (1) the adequacy of the hardware controls in the system with (2) the organization's methods of handling the
errors that the computer identifies, the independent auditor is:

6)

_______
A)

unconcerned with both (1) and (2).

B)

more concerned with (1) than with (2).

C)

equally concerned with (1) and (2).

D)

less concerned with (1) than with (2).

7)

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:

7)

_______
A)

overtime not approved by supervisors.

B)

deductions not authorized by employees.

 C)

payroll checks with unauthorized signatures.

D)

time tickets with invalid job numbers.

8)

Many clients have outsourced the IT functions. The difficulty the independent auditor faces when a computer service
center is used is to:

8)

_______
A)

gain the permission of the service center to review their work.

B)

determine the adequacy of the service center's internal controls.

C)

try to abide by the Code of Professional Conduct to maintain the security and confidentiality of client's data.
D)

find compatible programs that will analyze the service center's programs.

9)

Which of the following is not an application control?

9)

_______
A)

Separation of duties between computer programmer and operators.

B)

Preprocessing authorization of sales transactions.

C)

Post-processing review of sales transactions by the sales department.

D)
Reasonableness test for unit selling price of sale.

10)

Application controls vary across the IT system. To gain an understanding of internal control for a private company, the
auditor must evaluate the application controls for every:

10)

______
A)

every material audit area.

B)

every audit area.

C)

every audit area in which the client uses the computer.

D)

every audit area where the auditor plans to reduce assessed control risk.

11)

A database management system:

11)

______
A)

allows quick retrieval of data but at a cost of inefficient use of file space.
B)

stores data on different files for different purposes, but always knows where they are and how to retrieve them.
C)

allows quick retrieval of data, but it needs to update files continually.

D)

physically stores each element of data only once.

12)
Which of the following is not associated with converting from a manual to an IT system?

12)

______
A)

It usually centralizes data.

B)

It permits higher quality and more consistent controls over operations.

C)

It may take the recordkeeping function and the document preparation function away from those who have custody of
assets and put those functions into the IT center.
D)

It may eliminate the control provided by division of duties of independent persons who perform related functions and
compare results.

13)

Which of the following statements about general controls is not correct?

13)

______
A)

Disaster recovery plans should identify alternative hardware to process company data.
B)

Programmers should have access to computer operations to aid users in resolving problems.
C)

Successful IT development efforts require the involvement of IT and non-IT personnel.

D)

The chief information officer should report to senior management and the board.

14)

Which of the following statements is correct?

14)
______
A)

Auditors should evaluate application controls before evaluating general controls.

B)

Auditors should evaluate general controls before evaluating application controls.

C)

Auditors should evaluate application controls and general controls simultaneously.

D)

None of these statements is correct.

15)

Which of the following is least likely to be used in obtaining an understanding of client general controls?

15)

______
A)

Inquiry of client personnel (e.g., key users).

B)

Observation of transaction processing.

C)

Examination of system documentation.

D)

Reviews of questionnaires completed by client IT personnel.

16)

An important characteristic of IT is uniformity of processing. Therefore, a risk exists that:

16)

______
A)

erroneous processing can result in the accumulation of a great number of misstatements in a short period of time.
B)
auditors will not be able to access data quickly.
C)

auditors will not be able to determine if data is processed consistently.

D)

all of the above.

17)

Which of the following is not an example of an applications control?

17)

______
A)

After processing, all sales transactions are reviewed by the sales department.
B)

There are reasonableness tests for the unit selling price of a sale.
C)

An equipment failure causes system downtime.

D)

There is a preprocessing authorization of the sales transactions.

 Chapter 24

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)

If the auditor determines that a subsequent event that affects the current period financial statements occurred after
fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?

1)

_______
A)

No No Yes
B)

No Yes No
C)

Yes Yes No
D)

Yes No Yes

2)

Why must audit documentation be reviewed?

2)

_______
A)

To counteract bias that often enters into the auditor's judgment.

B)

To ensure that the audit meets the CPA firm's standard of performance.
C)

To evaluate the performance of inexperienced personnel.

D)

All of the above are reasons for review of audit documentation.

 3)

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential
liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true?

3)

_______
A)

The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual
liability.
B)

Disclosure may be unnecessary if the contingency is highly remote or immaterial.

C)

Frequently, the CPA firm obtains a separate evaluation of the potential liability from its own legal counsel rather than
relying on management or management's attorneys.
D)

Answers B and C are correct, but answer A is not.

4)

The process of "final evidence accumulation" is always done late in the engagement. Which one of the following would be
done the earliest in the engagement?

4)

_______
A)

Evaluate the going concern assumption.

B)

Final analytical procedures.

C)

Acquire the client's letter of representation.

D)

Search for contingent liabilities.

 5)

The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new
securities is normally limited to the period of time:

5)

_______
A)

beginning with the start of the fiscal year under audit and ending with the balance sheet date.
B)

beginning with the start of the fiscal year under audit and ending with the date of the auditor's report
C)

beginning with the balance sheet date and ending with the date of the auditor's report.
D)

beginning with the balance sheet date and ending with the date the registration statement becomes effective.

6)

Which of the following is not a reason why the auditor requests that the client provide a letter of representation?

6)

_______
A)

It impresses upon management its responsibility for the accuracy of the information in the financial statements.
B)

It provides written documentation of the oral responses already received to inquiries of management.
C)

Professional auditing standards require the auditor to obtain a letter of representation.

D)

It provides written documentation, which is a higher quality of evidence than management's oral responses to inquiries.

7)

Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which
of the following is the auditor's primary means of initiating action to corroborate such information?
7)

_______
A)

Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning
litigation, claims, and assessments.
B)

Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to
identify, evaluate, and account for litigation, claims, and assessments.
C)

Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the
nature and probable outcome of existing litigation, claims, and assessments.
D)

Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they
were consulted during the period under examination.

8)

Elise-Greer, LLP is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is
most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate's indebtedness have been
detected?

8)

_______
A)

Examine supporting documents for all entries in intercompany accounts.

B)

Obtain written confirmation of indebtedness from the auditor of the affiliate.

C)

Review client minutes and obtain a representation letter.

D)

Send the standard bank confirmation request to all of the client's lender banks.

9)

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?
9)

_______
A)

Review prior year's audit files with respect to such guarantees.

B)

Review the possibility of such guarantees with the chief accountant.

C)

Review minutes and resolutions of the board of directors.

D)

Review the legal letter returned by the company's outside legal counsel.

10)

An attorney is responding to an independent auditor as a result of the client's letter of inquiry. The attorney may
appropriately limit the response to:

10)

______
A)

asserted claims and litigation.

B)

matters to which the attorney has given substantive attention in the form of legal consultation or representation.
C)

items which have an extremely high probability of being resolved to the client's detriment.
D)

asserted, overtly threatened, or pending claims and litigation.

11)

A CPA has received an attorney's letter in which no significant disagreements with the client's assessments of contingent
liabilities were noted. The resignation of the client's lawyer shortly after receipt of the letter should alert the auditor that:

11)

______
 A)

the auditor must begin a completely new examination of contingent liabilities.

B)

the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments.
C)

an adverse opinion will be necessary.

D)

undisclosed unasserted claims may have arisen.

12)

Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under
examination because such events typically represent the:

12)

______
A)

culmination of conditions that existed at the balance sheet date.

B)

preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.
C)

final estimates of losses relating to casualties occurring in the subsequent events period.
D)

discovery of new conditions occurring in the subsequent events period.

13)

Which of the following is not required to be communicated to the audit committee or similarly designated body under
auditing standards?

13)

______
A)

Difficulties encountered in performing the audit, such as lack of availability of client personnel and failure to provide
necessary information.
B)

Auditor's responsibilities under generally accepted auditing standards, including responsibility for evaluating internal
control and the concept of reasonable rather than absolute assurance.
C)

Disagreements with management about the scope of the audit, applicability of accounting principles, or wording of the
audit report.
D)

All material frauds and illegal acts of a material nature.

14)

An auditor must obtain written client representations that normally should be signed by:

14)

______
A)

the president and the chairperson of the board.

B)

the chief executive officer and the chief financial officer.

C)

the corporate counsel and the audit committee chairperson.

D)

the treasurer and the internal auditor.

15)

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:

15)

______
A)

extend auditing procedures and assume responsibility for a greater period of time.
B)

accept responsibility for subsequent events.

 C)

assume responsibility for events subsequent to the issuance of the auditor's report.
D)

permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.

16)

After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or
inquiries with respect to the audited financial statements covered by that report unless:

16)

______
A)

new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's
report that may have affected the auditor's report.
B)

final determination or resolution was made of a contingency which had been disclosed in the financial statements.
C)

final determination or resolution was made on matters which had resulted in a qualification in the auditor's report.
D)

material adverse events occur after the date of the auditor's report.