Chapter 1 1.

Operational audits generally have been conducted by internal auditors and governmental audit agencies, but may be performed by certified public accountants. A primary purpose of an operational audit is to provide A. a means of assurance that internal controls are functioning as planned. B. aid to the independent auditor, who is conducting the audit of the financial statements. C. the result of internal examinations of financial and accounting matters to a company's top-level management.

D. evidence about the efficiency and effectiveness of an entity's operations.

2. An attestation engagement is one in which a CPA is engaged to A. B. C. D. issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party. provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts. assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.

3. Which of the following services would be considered attest services? A. a financial statement audit B. a review providing negative assurance on financial statements C. an examination of prospective financial information D. All of the above are attest services.

4. Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures? A. Personnel Management Yes; Monitoring Yes; Consultation No B. Personnel Management Yes; Monitoring Yes; Consultation Yes C. Personnel Management No; Monitoring Yes; Consultation Yes D. Personnel Management Yes; Monitoring No; Consultation Yes

5. A CPA firm studies its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to prescribed standards of A. supervision and review. B. quality control. C. continuing professional education. D. professional development.

6. A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by A. adhering to generally accepted auditing standards. B. having an appropriate system of quality control. C. joining professional societies that enforce ethical conduct. D. maintaining an attitude of independence in its engagements.

7. Which one of the following are normally part of the audit process? A. B. C. D. Assertions about economic events Yes; Evaluating Evidence No; Using Established Criteria Yes Assertions about economic events No; Evaluating Evidence No; Using Established Criteria Yes Assertions about economic events Yes; Evaluating Evidence Yes; Using Established Criteria Yes Assertions about economic events Yes; Evaluating Evidence No; Using Established Criteria No

8. Which of the following best describes the established criteria for a compliance audit? A. generally accepted accounting principles B. COSO criteria for evaluating internal controls C. objectives set by management D. management's policy or laws and regulations

9. Assurance Services are: A. professional services that result in issuing an independent opinion. B. a systematic process for evaluating evidence. C. D. independent professional service that improve the quality of information, or its context, for decision makers. independent judgments made by qualified professional to render an opinion on financial statements.

10. Which of the following best describe an inherent limitation of the audit? A. The audit is limited by access to capital markets. B. Audits cannot add exactness to the uncertainty of accounting estimates. C. There is a conflict of interest between management and shareholders. D. Financial statement users cannot expect direct access to accounting records.

11. Which of the following is a public sector organization associated with the public accounting profession? A. The American Institute of CPAs B. The Institute of Internal Auditors C. The Financial Accounting Standards Board D. The Securities and Exchange Commission

12. Which of the following is a private sector, nonprofit corporation that was created by the Sarbanes Oxley Act of 2002 to oversee the auditors of public companies? A. The Public Companies Auditing Oversight Board. B. The Securities and Exchange Commission C. The Public Companies Accounting Oversight Board. D. The Certified Public Accountants Oversight Board.

13. Which of the following is a level of assurance that is substantially less than an audit where the CPA states that he or she is not aware of any material modifications that should be made to 3

management's assertion? A. an examination engagement B. an agreed-upon procedures engagement C. a compilation engagement D. a review engagement

14. Which of the following organizations has the authority to issue a license to practice as a CPA? A. The Securities and Exchange Commission B. The Public Companies Accounting Oversight Board. C. State Boards of Accountancy D. The American Institute of CPAs.

15. One of the following is not a proper condition that supports the need for an independent audit of financial statements. A. conflict of interest between management and the CPA B. complexity of the financial statements C. remoteness of users from the accounting records D. consequences of the financial statements in the user's decision process Chapter 2 1. Which of the following are involved in auditing, rather than accounting? A. B. C. D. analyzing events and transaction yes; performing risk assessment procedures yes; measuring and recording transaction data yes analyzing events and transaction yes; performing risk assessment procedures no; measuring and recording transaction data yes analyzing events and transaction yes; performing risk assessment procedures yes; measuring and recording transaction data no analyzing events and transaction no; performing risk assessment procedures yes; measuring and recording transaction data no

2. The concept of fair presentation of financial position, results of operations, and cash flows, in all material respects implies that. 4

A. management has integrity. B. there is a level of imprecision in accounting. C. audits may not be accurate. D. auditors may be inexperienced.

3. The approach an auditor should typically take toward management's assertions is one of A. professional skepticism. B. an adversarial relationship. C. an attitude of mutual trust. D. an attitude that places the shareholder above all else.

4. Which of the following statements best describes the phrase generally accepted auditing standards? A. They identify the policies and procedures the conduct of the audit. B. They define the nature and extent of the auditor's responsibilities. C. They provide guidance to the auditor with respect to planning the audit and writing the audit report.

D. They establish a framework for conducting audits.

5. The general standards of the generally accepted auditing standards includes a requirement that A. the auditor's report states whether or not the financial statements conform to generally accepted accounting principles.

B. the field work be adequately planned and supervised. C. due professional care be exercised by the auditor. D. informative disclosures in the financial statements be reasonably adequate.

6. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion? A. conformity with GAAP explicitly; adequacy of disclosure explicitly

B. conformity with GAAP implicitly; adequacy of disclosure implicitly C. conformity with GAAP implicitly; adequacy of disclosure explicitly D. conformity with GAAP explicitly; adequacy of disclosure implicitly

7. When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may issue a (an) A. qualified opinion yes; disclaimer of opinion no B. qualified opinion yes; disclaimer of opinion yes C. qualified opinion yes; disclaimer of opinion yes D. qualified opinion no; disclaimer of opinion no

8. How are management's responsibility and the auditor's responsibility represented in the standard auditor's report? A. management's responsibility explicitly; auditor's responsibility -- explicitly B. management's responsibility implicitly; auditor's responsibility -- implicitly C. management's responsibility implicitly; auditor's responsibility -- explicitly D. management's responsibility explicitly; auditor's responsibility -- implicitly

9. The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor A. B. C. D. obtains reasonable assurance about whether the financial statements are free of material misstatement. assesses the accounting principles used and also evaluates the overall financial statement presentation. realizes some matters, either individually or in the aggregate, are important while other matter are too important. is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

10. The following explanatory paragraph was included in an auditor's report to indicate a last of consistency: As discussed in note T to the financial statements, the company changed its method of computing depreciation in 1990. 6

How should the auditor report on this matter if he auditor concurred with the change? A. B. C. D. type of opinion unqualified; location of explanatory paragraph before opinion paragraph type of opinion unqualified; location of explanatory paragraph after opinion paragraph type of opinion qualified; location of explanatory paragraph before opinion paragraph type of opinion qualified; location of explanatory paragraph after opinion paragraph

11. Which of the following statements concerning illegal acts by clients is correct? A. B. An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements. An auditor considers illegal acts from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statements assertions. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.

C.

D.

12. The auditor should plan the audit to provide reasonable assurance that the following fraud is detected: A. Fraudulent Financial Reporting Material; Misappropriation of Assets Material and Immaterial

B. Fraudulent Financial Reporting Material; Misappropriation of Assets -- Material C. D. Fraudulent Financial Reporting Material and Immaterial; Misappropriation of Assets -Material Fraudulent Financial Reporting Material and Material; Misappropriation of Assets Material and Immaterial

13. Which of the following best describes the auditor's responsibility for auditing internal control over financial reporting? A. The auditor's responsibility is the same for public companies and for private companies.

B. C. D.

The auditor only must audit internal controls over financial reporting for public companies. The auditor only must audit internal controls over financial reporting for private companies. The auditor is not required to audit internal control over financial reporting for either public companies or private companies.

14. If management clearly states that the company has a material weakness in internal controls over financial reporting, which of the following best represent the opinion that should be given by the auditor? A. B. C. D. opinion on management's assertion unqualified; opinion on the effectiveness of internal controls unqualified opinion on management's assertion unqualified; opinion on the effectiveness of internal controls adverse opinion on management's assertion adverse; opinion on the effectiveness of internal controls unqualified opinion on management's assertion adverse; opinion on the effectiveness of internal controls adverse

15. Which of the following results in an unqualified opinion on the effectiveness of internal control over financial reporting? A. The company has a deficiency in internal control over financial reporting. B. The company has a significant deficiency in internal control over financial reporting. C. The company has a material weakness in internal control over financial reporting. D. Both the company has a deficiency in internal control over financial reporting and the company has a significant deficiency in internal control over financial reporting above. The company has a material weakness in internal control over financial reporting, the company has a deficiency in internal control over financial reporting and the company has a significant deficiency in internal control over financial reporting.

E.

Chapter 3 1. The AICPA Code of Professional Conduct contains both principles that are aspirational in character and also a A. list of violations that would cause the automatic suspension of the CPA's license. B. set of specific, mandatory rules describing minimum levels of conduct the CPA must maintain.

C. description of he CPA's procedures for responding to an inquiry from a trial board. D. list of specific crimes that would be considered as acts discreditable to the profession.

2. The AICPA rule on integrity and objectivity applies to: A. CPAs in public practice yes; CPAs in industry yes B. CPAs in public practice yes; CPAs in industry no C. CPAs in public practice no; CPAs in industry yes D. CPAs in public practice no; CPAs in industry no

3. According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? A. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client.

B. The auditor is also an attorney who advises the client as its general counsel. C. An employee of the auditor donates service as treasurer of a charitable organization that is a client.

D. The client owes the auditor fees for two consecutive annual audits.

4. A CPA who is a covered person purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered impaired with respect to the client? A. B. C. D. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child. No, because the CPA would not be considered to have a direct financial interest in the client. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. No, because the CPA would not be considered to have a material indirect financial interest in the client.

5. Under the AICPA ethics rules on independence, which of the following individuals would NOT be a covered member?

A. B. C.

A consulting manager in another office who provides 100 hours of nonaudit no to the audit client. A partner in the same office as the lead partner who provides no services to the audit client. A partner in another office who evaluates partner performance and compensation, but provides no services to the audit client.

D. A tax partner in another office who provides 9 hours of tax services to the audit client. E. An audit manager who participates in quality control activities for the firm.

6. Fred Fastfoot is a chief financial officer of a not-for-profit organization, and a CPA. Fred was also a member of the AICPA. At year-end Fred accepted the word of a CEO and booked a loan from a bank as contribution income. The CEO represented that the loan had been forgiven as a contribution from the bank to the not-for-profit organization. Fred made no investigation to obtain evidence that the loan was forgiven. Subsequently it was learned that the loan had not been forgiven, and that the financial statements were materially misstated. A. Fred did not violate the AIPCA code of ethics because it does not apply to members in industry.

B. Fred violated rule 101 on independence because he was not independent in fact. C. D. Fred violated rule 102 on integrity and objectivity because he subordinated judgment to his boss, the CEO, without making any investigation of his own. Fred did not violate the AICPA code of ethics because he could not disclose confidential client information.

7. Which of the following best describes independence in fact? A. B. C. D. Independence in fact refers to a CPAs state of mind yes; Independence in fact refers to being unbiased and not subordinating the public trust yes Independence in fact refers to a CPAs state of mind no; Independence in fact refers to being unbiased and not subordinating the public trust yes Independence in fact refers to a CPAs state of mind yes; Independence in fact refers to being unbiased and not subordinating the public trust no Independence in fact refers to a CPAs state of mind no; Independence in fact refers to being unbiased and not subordinating the public trust no

8. Which of the following best describes the independence requirements for a close relative of a covered member? A. A close relative cannot have an immaterial, direct investment in an audit client.

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B. A close relative cannot have a loan from an audit client. C. A close relative cannot hold a key position with an audit client. D. A close relative cannot have an immaterial, indirect investment in an audit client.

9. Which of the following legal situations would be considered to impair the auditor's independence? A. an expressed intention by the present management to commence litigation against the auditor alleging deficiencies in auditor work for the client, although he auditor considers that there is only a remote possibility that such a claim will be filed actual litigation by the auditor against the client for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for management advisory services actual litigation by the auditor against the present management alleging management fraud or deceit actual litigation by the client against the auditor for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for tax services

B.

C. D.

10. Which of the following non-audit service would impair independence for an auditor of a private company? A. B. C. In a consulting engagement, a CPA assists in introducing the client to possible sources of capital that meet the client's specifications and criteria. In an assurance engagement, a CPA provides recommendations for improving the system for monitoring business risks. In an accounting service engagement, a CPA records transactions for which management has determined or approved the appropriate account classification and prepares financial statements based on information in the trial balance. When performing benefit plan administration a CPA may maintains custody of client securities.

D.

11. Without the consent of the client, a CPA should not disclose confidential client information contained in working papers to a A. voluntary quality control review board. B. CPA firm that is a likely successor auditor. C. federal court that has issued a valid subpoena.

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D. disciplinary body created under state statute. Chapter 4 1. If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following is the CPA's best defense? A. The CPA did not financially benefit from the alleged fraud. B. There was contributory negligence of the client. C. The stockholder lacks privity to sue. D. The auditor followed GAAS.

2. Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr at a minimum must prove that Cox A. was a party to the fraud. B. acted recklessly or with a lack of reasonable grounds for belief. C. failed to exercise due care. D. was grossly negligent.

3. Waldo, CPA, was engaged to audit the financial statements of Safe and Secure Savings Bank. Subsequent to issuing an unqualified opinion on the financial statements it was discovered that the institution's only loan officer had embezzled a material amount from the bank. The CPA is liable to his client if, at a minimum, the client can prove that Waldo A. the CPA was negligent in performing the audit. B. the CPA was grossly negligent in performing the audit. C. the CPA was involved in committing the fraud. D. the CPA negligently failed to issue an engagement letter.

4. John Ross, CPA, audited the financial statements of False Value Hardware for the year ended June 30, 20X7. During the course of planning the audit, Ross noted that audited financial

12

statements were required for compliance with a debt covenant on a loan with Fifth County Bank. Subsequently, copies of the financial statements were distributed to Fifth County Bank and to Joan Bigbucks, a foreseeable third party who purchased of 50% of the stock of the business. On June 1, 20X8, it was discovered that the financial statements were materially misstated, False Value declared bankruptcy, and the bank lost 80% of the value of its loan and the purchaser of 50% of the stock lost 100% of her investment. Under the Rosenblum decision, the benefits of privity extend to A. Fifty County Bank yes; John Bigbucks - yes B. Fifty County Bank yes; John Bigbucks - no C. Fifty County Bank no; John Bigbucks - yes D. Fifty County Bank no; John Bigbucks - no

5. Russell Vega, CPA audited the financial statements of Black Cherry Winery. Vega acknowledged that the financial statements were used to secure a loan from First State Bank. Black Cherry Winery also secured a loan from Second County Bank, which was unforeseen to Vega. It turned out that most of the inventory listed in the financial statements did not exist and that the financial statements were materially misstated. Under the Credit Alliance decision, what third parties would only have to prove that Vega was negligent in performing the audit? A. First State Bank yes; Second County Bank yes B. First State Bank yes; Second County Bank no C. First State Bank no; Second County Bank yes D. First State Bank no; Second County Bank no

6. One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed pursuant to the Securities Act of 1933 is that A. there was a material false or misleading statement in the financial statements. B. the plaintiff knew the auditor. C. the issuer and plaintiff were in privity of contract with each other. D. the issuer failed to exercise due care in connection with the sale of the securities.

7. To be successful in a civil action against an auditor under the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove

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A. B. C. D.

defendant's intent to deceive yes; the plaintiff's reliance on the financial statements yes defendant's intent to deceive yes; the plaintiff's reliance on the financial statements no defendant's intent to deceive no; the plaintiff's reliance on the financial statements yes defendant's intent to deceive no; the plaintiff's reliance on the financial statements no

8. In which of the following statements concerning a CPA firm's action is scienter or its equivalent absent? A. actual knowledge of fraud B. performance of substandard auditing procedures C. reckless disregard for the truth D. intent to gain monetarily by concealing fraud

9. The Escott vs. BarChris Construction Corp. was a critical case under the 1933 Securities Act because it established: A. that the auditor would have to be grossly negligent to be liable to third parties. B. that the auditor would not have been liable if the client had not gone bankrupt. C. that performing an audit in accordance with generally accepted auditing standards would be a due diligence defense.

D. that auditors could be found guilty of criminal liability.

10. The Ernst and Ernst v. Hochfeler case was: A. B. C. D. an important case under the 1933 securities act where the auditor had to found guilty of intent to deceive. an important case under the 1934 securities act where the auditor had to found guilty of intent to deceive. an important case under the 1933 securities act where the auditor had to found guilty of only negligence. an important case under the 1934 securities act where the auditor had to found guilty of only negligence.

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11. The Private Securities Litigation Reform Act of 1995 resulted in a number of changes in statutory law that revised the SEC Acts of 1933 and 1934. Which of the following was NOT one of the major changes that resulted from the Private Securities Litigation Reform Act of 1955? A. The statute instituted a system of proportionate liability for CPAs who were not found to knowingly commit a violation of the securities laws.

B. The statute imposed a responsibility to report indirect illegal acts to the SEC. C. That statute provided that auditors would not be held liable for private actions for statements made in the reporting of direct and material illegal acts to the SEC.

D. The statute created a cap on damages based on the amount of equity of a CPA firm.

12. How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law? A. Purchasers only have to prove loss caused by reliance on audited financial statements. B. Privity with purchasers is not a necessary element of proof. C. Purchasers have to prove either fraud or gross negligence as a basis for recovery. D. Auditors are held to a standard of care described as professional skepticism.

13. The Sarbanes Oxley Act of 2002: A. requires auditors to maintain all audit or review working papers for two years. B. makes it unlawful for any office or director of an issuer to take any action to fraudulently influence, coerce, manipulate, or mislead any auditor for the purpose of rendering the financial statements materially misleading. makes it unlawful for management to hire an accountant to perform nonattest services. limits punitive damages by eliminating securities fraud as a basis for bring action under RICO.

C. D. Chapter 5

1. Which of the following best describe the steps involved in a financial statement audit? A. (1) Identify relevant financial statements assertions, (2) assess the risk of material misstatement, (3) collect evidence, (4) perform further audit procedures, (5) evaluate evidence, and (6) communicate audit finding. (1) Perform risk assessment procedures, (2) relate factors to potential misstatements in the financial statements, (3) respond to assessed risks, (4) perform substantive tests, (5)

B.

15

evaluate evidence, and (6) communicate audit finding. C. (1) Perform risk assessment procedures, (2) assess the risk of material misstatement, (3) respond to assessed risks, (4) perform further audit procedures, (5) evaluate evidence, and (6) communicate audit finding. (1) Perform risk assessment procedures, (2) relate factors to potential misstatements in the financial statements, (3) respond to assessed risks, (4) perform substantive tests, (5) evaluate evidence, and (6) write audit report.

D.

2. The purpose of performing risk assessment procedures is to: A. fully understand the risk of material misstatement. B. allow the auditor to make preliminary judgments about materiality. C. support an opinion on the financial statements. D. prevent fraudulent financial reporting.

3. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of A. completeness. B. presentation and disclosure. C. existence and occurrence. D. valuation and allocation.

4. In the mid 1990s, Sunbeam Corporation overstated revenues and receivables due to channel stuffing and revenue recognition problems. This was a problem with which of the following financial statement assertions? A. existence or occurrence. B. completeness. C. right and obligations. D. valuation or allocation.

5. An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statements assertion of

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A. existence or occurrence. B. completeness. C. presentation and disclosure. D. valuation or allocation.

6. An important reason for an auditor to understand the entity and its environment is: A. it supports the auditor's ability to sell consulting services. B. it directly supports an opinion on the financial statements. C. an auditor must understand the underlying economic substance of the business being audited.

D. an auditor must understand the entity in order to be independent.

7. The concept of materiality will usually be important to the CPA in determining the A. scope of his or her audit of specific accounts. B. reliability of audit evidence. C. whether the auditor has sufficient competence to perform part of the audit. D. the significance of business risks.

8. The risk that an auditor's procedures will lead to the conclusion that a material misstatement does NOT exist in an assertion when, in fact, such misstatement does exist is referred to as A. audit risk. B. inherent risk. C. control risk. D. detection risk

9. The auditor assesses that the risk of material misstatement for the completeness assertion for accounts payable is at the maximum. The auditor's tests of controls show that internal controls are very effective, and as a result the auditor limits substantive tests to obtain the desired level of reasonable assurance. Which of the articulations of the audit risk model best matches the

17

situation described above? A. auditor risk = 100%; inherent risk = 100%; control risk = 20%; detection risk = 50% B. auditor risk = 100%; inherent risk = 100%; control risk = 75%; detection risk = 25% C. auditor risk = 2%; inherent risk = 100%; control risk = 50%; detection risk = 4% D. auditor risk = 2%; inherent risk = 100%; control risk = 7%; detection risk = 29%

10. Which of the following is NOT one of the reasons to understand the entity's system of internal control in the audit of a private company? A. to identify the types of potential misstatements B. to express an opinion on internal control over financial reporting C. to consider factors that affect the risks of material misstatement D. to design the nature, timing and extent of further audit procedures

11. Which of the following best describes the elements of the fraud triangle? A. Opportunity, Incentives and Pressures and Inherent Risk B. Opportunity, Incentives and Pressures and Control Risk C. Opportunity, Incentives and Pressures and Rationalization D. Incentives and Pressures, Rationalization, and Detection Risk

12. Which of the following is NOT one of the steps in assessing the risk of material misstatement? A. relating risk factors to potential financial statement misstatements B. determining the likelihood that risk will results in a material misstatement C. determining whether risk are of a magnitude that will result in a material misstatement in the financial statements

D. determining whether the client is ethical

13. The auditor normally responds to assessed risk by making decisions about: A. the nature, timing, extent and staffing of audit tests.

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B. the nature and timing of audit tests. C. whether or not to perform analytical procedures. D. making decisions about sample size.

14. Further audit procedures normally include: A. further risk assessment procedures and substantive tests. B. tests of controls and substantive tests. C. further risk assessment procedures, tests of controls, and substantive tests. D. client acceptance procedures, tests of controls, and substantive tests.

15. The purpose of substantive tests is to: A. provide evidence about whether internal controls are operating effectively. B. C. provide evidence about the fair presentation of management's assertions in the financial statements. provide evidence about whether the accounting principles chosen by the client are comparable with others in the industry.

D. provide evidence about the accuracy of the audit report.

16. When communicating the results of an audit: A. the auditor's only tool is the audit report. B. the auditor usually reports on internal controls in audits of private companies. C. the auditor is required to discuss additional issues, such as significant audit adjustments, with the audit committee or board of directors.

D. the auditor will issue an adverse opinion if the company imposes a scope restriction. Chapter 6 1. Which of the following statements is NOT true about accounting records? A. Accounting records generally include records of initial entries and supporting records. B. Examples of accounting records include invoices, checks, contracts, and the general and subsidiary ledgers.

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C. D.

Accounting records alone generally provide sufficient evidence on which to base an audit opinion on the financial statements. Management prepares the financial statements based on the accounting records of the entity.

2. Which of the following statements is generally correct about the reliability of audit evidence? A. B. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained from inference. To be competent, evidential matter must be either valid or relevant, but need NOT be both.

C. Documents generated internally is a very strong source of reliable audit evidence. D. Competence of evidential matter refers to the amount of corroborative evidence to be obtained.

3. Which of the following best describes the auditor's decision about changing the nature of audit tests? A. The auditor chooses to perform analytical procedures rather than tests of controls. B. The auditor chooses to send confirmations of accounts receivable as of October 31 rather than December 31.

C. The auditor chooses to confirm 20% of the population of accounts receivable. D. The auditor chooses to perform tests of controls as part of both the interim and final portions of the audit engagement.

4. Audit objectives are important because: A. they provide a more general framework than audit assertions. B. each audit objective usually is affected by different risks and requires different evidence. C. each audit objective usually has different inherent risks but similar control risks for the same assertion.

D. audit objectives guide decisions about the necessary accounting records.

5. The auditor wants to design audit procedures to ascertain that all sales transactions were recorded in the proper time period and that no January 20x2 transactions were recorded in December 20x1. This is related to which of the following audit objectives? A. Classification 20

B. Accuracy C. Cutoff D. Rights and obligations.

6. An auditor wants to determine that all sales returns have been recorded. This relates to which of the following transaction class audit objectives? A. occurrence B. classification C. accuracy D. completeness

7. An auditor wants to determine that recorded receivables represent amounts actually owing from customers. This relates to which of the following audit objectives? A. the transaction class audit objective related to completeness B. the account balance audit objective related to existence C. the disclosure audit objective related to classification and understandability D. the account balance audit objective related to valuation and allocation

8. The auditor wants to wants to determine that sales are recorded in correct amounts based on the number of items shipped and appropriate prices. This related to which of the following audit objectives? A. the transaction class audit objective related to accuracy B. the account balance audit objective related to valuation and allocation C. the disclosure audit objective related to completeness D. the transaction class audit objective related to cutoff

9. Which of the following best describe a situation which would cause the auditor to obtain more evidence rather than less evidence? A. Assertions are less material to financial statement users. 21

B. The auditor is auditing a small population. C. The assertion being audited has a higher risk of material misstatement. D. The audit population is more homogenous.

10. Which of the following situations represents the least reliable, rather than more reliable, evidence? A. Evidence is obtained from an independent source, such as a bank. B. Evidence is not documented in a contemporaneous fashion, such as a subsequent oral representation.

C. The auditor directly observe the application of an internal control. D. Evidence is obtained in the form of a written record of analysis of budget variations.

11. If the auditor studies plausible relations among both financial statement financial data and other nonfinancial data, this is best described as which of the following types of audit procedures? A. computer assisted audit techniques. B. confirmation C. recalculation D. analytical procedures

12. If an auditor vouches entries in accounting records, such as a sales invoice, to supporting accounting records, such as a bill of lading, this is an example of which of the following types of audit procedures? A. inspection of documents and records B. observation C. confirmation D. inspection of tangible assets

13. Which of the following is the best example of changing the timing of audit procedures?

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A.

The auditor obtains an understanding of the entity and its environment early in the audit.

st st B. The auditor sends confirmations at October 31 rather than December 31 (year-end).

C.

Early in the audit the auditor decides to assign more experienced staff to high risk audit areas.

D. After year-end the auditor investigates significant subsequent events.

14. An auditor's working papers should A. not be permitted to serve as a reference source for the client. B. not contain critical comments concerning management. C. show that the accounting records agree or reconcile with the financial statements. D. be considered the primary support for the financial statements being audited.

15. Which of the following statements concerning working papers is INCORRECT? A. An auditor may support an opinion by other means in addition to working papers. B. C. D. The form of working papers should be designed to meet the circumstances of a particular engagement. An auditor's working papers are not the place to like assessed risks and resultant audit procedures. Working papers should show that internal controls have been studied and evaluated to the degree necessary.

16. The current file of the auditor's working papers generally should include A. a flowchart of the internal accounting controls. B. organization charts. C. a copy of the financial statements. D. copies of bond and note indentures.

17. The audit working paper that reflects the major components of an amount reported in the financial statements is the

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A. interbank transfer schedule. B. carryforward schedule. C. supporting schedule. D. lead schedule.

18. Audit evidence can come in different forms with different degrees of reliability. Which of the following is the least reliable type of evidence? A. regular bank statements B. confirmation C. client sales invoices D. vendor's invoice Chapter 7 1. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's A. awareness of the consistency in the application of GAAP between periods. B. evaluation of all matters of continuing accounting significance. C. opinion of any subsequent events occurring since the predecessor's audit report was issued.

D. understanding as to the reasons for the change of auditors.

2. 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 review of the internal control structure. D. whether the CPA should undertake an audit engagement.

3. Engagement letters are widely used in practice for professional engagements of all types. The primary purpose of the engagement letter is to

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A. B.

provide a written record of the agreement with the client as to the services to be provided. remind management that the primary responsibility for the financial statements rests with management.

C. satisfy the requirements of the CPA's liability insurance policy. D. provide a starting point for the auditor's preparation of the preliminary audit program.

4. Identifying special circumstances and risks during client acceptance and retention usually relates to the auditors consideration of A. the auditor's business risk B. the client's risk of material misstatement in the financial statements. C. the potential for disagreement with management about audit fees. D. the need for personnel with special skills on the audit team.

5. Which of the following issues might have the most negative influence on client acceptance or retention? A. Management shows integrity in business and accounting decisions. B. The client has a strong accounting system with good internal controls. C. D. The client is experiencing cash flow problems and is close to violations of debt covenants. The audit firm must hire an outside specialist, which it has used in the past, to evaluate certain audit evidence.

6. Which of the following steps is least likely to be performed as part of risk assessment procedures? A. making preliminary judgments about materiality B. performing substantive tests C. considering the risk of fraud D. developing preliminary audit strategies

7. The auditor would be LEAST likely to use an understanding of the entity and its environment to: 25

A. evaluate the integrity of management. B. develop a knowledgeable perspective about the entity and its financial statements. C. evaluate the client's industry conditions. D. assess the risk of material misstatement in the financial statements.

8. The auditor would be LEAST likely to use an understanding of management's objectives, strategies, and related business risks to: A. evaluate the company's ability to generate revenues when faced with new technology introduced by competitors.

B. evaluate the risks associated with regulatory requirements C. make decisions about the extent of audit procedures. D. evaluate the entity's need for financing.

9. Which of the following would NOT be considered part of the industry, regulatory, and other external factors that an auditor would normally understand when planning an audit? A. accounting principles and industry specific practices B. the market and competition, including demand, capacity and price competition C. the general level of economic activity D. government policies such as tariffs and trade restrictions

10. Which of the following factors would most likely influence a heightened risk of material misstatement in the financial statements? A. The client has lost technological advantage to its competitors. B. The company is experiencing similar growth to overall economic growth. C. A start-up company is primarily equity financed. D. A company provides warranties for defects discovered in the first 3 months of use.

11. Which of the following would NOT be considered part of understanding an entity's business operations?

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A. understanding its methods of obtaining revenues B. understanding its employment, union contracts, and post employment benefits C. understanding the stages and methods of production D. understanding the entity's operational approaches by which management intends to achieve its objectives

12. Which of the following would NOT be considered part of understanding how an entity measures and reviews its financial performance? A. understanding its use of key performance indicators B. understanding its use of budgets, forecasts and variance analyses C. understanding its use of derivative financial instruments D. understanding its use of key ratios and operating statistics

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