8. Why do auditors generally use a sampling approach to evidence gathering?

A. Auditors are experts and do not need to look at much to know whether the financial statements
are correct or not.
B. Auditors must balance the cost of the audit with the need for precision.
C. Auditors must limit their exposure to their client to maintain independence.
D. The auditor's relationship with the client is generally adversarial, so the auditor will not have
access to all of the financial information of the company.

9. Which of the following statements best describes a relationship between sample size and other
elements of auditing?
A. If materiality increases, so will the sample size.
B. If the desired level of assurance increases, sample sizes can be smaller.
C. If materiality decreases, sample size will need to increase.
D. There is no relationship between sample size and materiality or the desired level of assurance.

10. Which of the following statements about the study of auditing is NOT true?
A. The study of auditing can be valuable to future accountants and business decision makers
whether or not they plan to become auditors.
B. The study of auditing focuses on learning the analytical and logical skills necessary to evaluate
the relevance and reliability of information.
C. The study of auditing focuses on learning the rules, techniques, and computations required to
analyze financial statements.
D. The study of auditing begins with the understanding of a coherent logical framework and
techniques useful for gathering and analyzing evidence about others' assertions.

11. The basic purpose of a financial statement audit is to

A. Detect fraud.
B. Examine individual transactions so that the auditor may certify as to their validity.
C. Provide assurance regarding whether the client's financial statements are fairly stated.
D. Assure the consistent application of correct accounting procedures.
12. Assurance services may improve all of the following except
A. Relevance.
B. Credibility.
C. Periodicity.
D. Reliability.

13. Evidence is reliable if it

A. Signals the true state of a management assertion.
B. Applies to the period being audited.
C. Relates to the audit assertion being tested.
D. Is consistent with management's assertions.

14. Which of the following best describes the concept of audit risk?
A. The risk of the auditor being sued because of association with an audit client.
B. The risk that the auditor will provide an unqualified opinion on financial statements that are, in
fact, materially misstated.
C. The overall risk that a material misstatement exists in the financial statements.
D. The risk that auditors use audit procedures that are inappropriate.

15. An auditor who accepts an audit engagement and does not possess expertise with respect to the
business entity's industry, 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, who will act as the principal auditor.
D. First inform management that an unqualified opinion cannot be issued.

16. For publicly-held companies, which of the following is integrated into the audit of financial
statements?
A. Budgetary information audit.
B. The audit of internal controls.
C. Audit of management forecasts.
D. Audit of interim financial statements.
17. During the first phase of an audit, a CPA most likely would
A. Identify specific internal control activities that are likely to prevent fraud.
B. Evaluate the reasonableness of the client's accounting estimates.
C. Evaluate the integrity of management.
D. Inquire of the client's attorney as to whether any unrecorded claims are probable or asserted.

18. In the context of agency theory, information asymmetry refers to the idea that
A. Information can vary in its reliability.
B. Information can vary in its relevance.
C. Management has more information about the entity's true financial position than do the
absentee owners (i.e. stockholders).
D. Management likely will not act in the best interests of the absentee owners.

19. Which of the following best describes why an independent auditor is asked to express an
opinion on the fair presentation of financial statements?
A. It is difficult to prepare financial statements that fairly present a company's financial position
and changes in cash flows without the expertise of an independent auditor.
B. It is management's responsibility to seek available independent aid in the appraisal of the
financial information shown in its financial statements.
C. The opinion of an independent party is needed because a company is not likely to be considered
objective with respect to its own financial statements.
D. It is a customary courtesy that all stockholders of a company receive an independent report on
management's stewardship in managing the affairs of the business.

20. Which of the following best describes the fundamental, underlying reason for why there is
demand for an independent auditor to report on financial statements?
A. A management fraud may exist and it is more likely to be detected by auditors if they are
independent.
B. Different interests may exist between the company preparing the statements and the parties
using the statements.
C. A misstatement of account balances may exist and it is the independent auditor's responsibility
to ensure that financial statements are not misstated.
D. A poorly designed internal control system may be in place.
21. Which of the following best describes why publicly-traded corporations follow the practice of
having the external auditor appointed by the board of directors or elected by the stockholders?
A. To promote an adversarial relationship between the auditor and the corporation's management.
B. To enhance auditor independence from the management of the corporation.
C. To encourage a policy of rotation of the independent auditors.
D. To give management more leverage over the auditor's decisions.

22. The definition of auditing refers to auditing as a "systematic process of objectively obtaining
and evaluating evidence regarding assertions(" What is meant by "systematic process"?
A. All audits involve obtaining the same evidence.
B. All audits involve evaluating evidence in the same manner.
C. There should be a well-planned approach for obtaining and evaluating evidence.
D. All assertions are equally important for all audits.

23. Which of the following would best be described as an assurance service?

A. Preparing a report representing a client's position during an IRS audit.
B. Working with a client to develop a more efficient method of processing financial transactions.
C. Offering an opinion concerning the accuracy of statements made on a client's website relating
to the client's online privacy policies.
D. Assisting a client in identifying potential sources of capital for potential acquisitions.

24. Which of the following statements is not true with respect to assurance, attest, and audit
services?
A. These services are applied only to financial statements and financial statement accounts.
B. These services all involve obtaining and evaluating evidence.
C. These services all involve determining the correspondence of some information to a set of
criteria.
D. These services all involve issuing a report.
25. Auditors are most likely to use the most rigorous audit procedures to examine
A. Routine transactions.
B. Management assertions that are deemed to be of low risk.
C. Only the rights and obligations assertion.
D. Management assertions that are deemed to be of high risk.

26. When obtaining an understanding of the entity and its environment, the auditor should obtain
an understanding of internal controls primarily to
A. Identify areas of relatively high risk of misstatement and plan the audit accordingly.
B. Provide suggestions for improvement to the client.
C. Serve as a basis for setting audit risk and materiality.
D. Decide whether to perform an audit for the client.

27. Which one of the following statements best describes the concept of materiality?
A. Materiality is determined by reference to specific quantitative guidelines established by the
AICPA.
B. Materiality depends only on the dollar amount of an item relative to other items in the financial
statements.
C. Materiality depends on the nature of an item but not on the dollar amount of the item.
D. Materiality is largely a matter of professional judgment.

28. Before accepting an engagement to audit a new client, an auditor is required to

A. Make inquiries of the predecessor auditor.
B. Tell the client whether or not the auditor is willing to issue a "clean" opinion.
C. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
D. Become a member of the client's board of directors.
29. An investor is reading the financial statements of the Stankey Corporation and observes that
the statements are accompanied by an auditor's unqualified report. From this, the investor may
conclude that
A. Any disputes over significant accounting issues have been settled to the auditor's satisfaction.
B. The auditor is satisfied that Stankey will be highly profitable in the future.
C. The auditor is certain that Stankey's financial statements have been prepared accurately and that
all account balances are precisely correct.
D. The auditor has determined that Stankey's management is not qualified to lead the company.

30. Preliminary engagement activities include

A. Evaluating internal controls.
B. Assessing audit risk at the account balance level.
C. Setting materiality.
D. Performing background checks on top management.

31. The auditor's report is generally addressed to the

A. Chief operating officer.
B. Securities and Exchange Commission.
C. Stockholders of the company.
D. Chief financial officer.

32. An auditor would issue an adverse opinion if

A. The auditor encounters adverse attitudes toward the auditor on the part of client management.
B. A qualified opinion cannot be given because the auditor is not qualified to do so.
C. An immaterial misstatement is present.
D. The statements taken as a whole do not fairly present the financial condition and results of
operations of the company.
33. Which of the following is true with respect to the auditor's report?
A. The report indicates that the client's financial statements were audited in accordance with
generally accepted accounting standards.
B. The report indicates that the client's financial statements were audited in accordance with
applicable auditing standards.
C. The report indicates that the client's financial statements were audited in accordance with the
auditor's best judgment.
D. The report indicates that the client's financial statements were audited in accordance with
statements issued by the FASB.

34. Which of the following is not a concept that is included in the scope paragraph of the auditor's
report?
A. The conformance of the financial statements with generally accepted accounting principles.
B. The audit was conducted in accordance with applicable auditing standards.
C. The audit was planned and performed to obtain reasonable, rather than absolute, assurance.
D. An audit involves examining items on a test (i.e. sampling) basis.

11. The Audit Committee consists of

A. Members of management.
B. A subcommittee of the AICPA who establish the SAS.
C. Members of the Board of Directors.
D. Appointed government overseers.

12. What organization is responsible for setting auditing standards for audits of publicly-traded
companies in the U.S.?
A. AICPA.
B. FASB.
C. GASB.
D. PCAOB.
13. The Public Company Accounting Oversight Board's role is to
A. Conduct the final review of auditors' work before the auditor's opinion is issued.
B. Oversee the auditors of public companies in order to protect the interests of investors.
C. Conduct audits of governmental entities.
D. Sanction auditors who fail to follow GAAS.

14. The authoritative body designed to promulgate standards concerning an accountant's

association with audited financial statements of an entity that is required to file financial
statements with the SEC is the
A. Financial Accounting Standards Board.
B. General Accounting Office.
C. Public Company Accounting Oversight Board.
D. Auditing Standards Board.

15. The auditor must be independent of the audit client unless

A. The lack of independence does not influence his or her professional judgment.
B. Both parties agree that the independence issue is not a problem.
C. The lack of independence is insignificant.
D. None of the above—the auditor cannot lack independence.

16. Which of the following describes the PCAOB generally accepted auditing standard requiring a
critical review of the work done and the judgment exercised by those assisting in an audit at every
level of supervision?
A. Proficiency.
B. Audit risk.
C. Inspection.
D. Due care.
17. Which of the following best describes the general character of the three PCAOB generally
accepted auditing standards that are classified as standards of fieldwork?
A. The competence, independence, and professional care of persons performing the audit.
B. Criteria for the content of the auditor's report on financial statements and related footnote
disclosures.
C. The criteria of audit planning and evidence-gathering.
D. The need to maintain independence in mental attitude in all matters relating to the audit.

18. The first PCAOB general standard requires that the examination of financial statements is to
be performed by a person or persons having adequate technical training and
A. Independence with respect to the financial statements and supplementary disclosures.
B. Exercising professional care as judged by peer reviewers.
C. Proficiency as an auditor which likely has been acquired from previous experience.
D. Objectivity as an auditor as verified by proper supervision.

19. The first PCAOB standard of reporting requires that, "the report shall state whether the
financial statements are presented in accordance with generally accepted accounting principles."
This passage requires
A. A statement of fact by the auditor.
B. An opinion by the auditor.
C. An implied measure of fairness.
D. An objective measure of compliance.

20. Because of the risk of material misstatement, an audit of financial statements in accordance
with generally accepted auditing standards should be planned and performed with an attitude of
A. Objective cynicism.
B. Independent differentialism.
C. Professional skepticism.
D. Impartial conservatism.
21. The accuracy of information included in footnotes accompanying the audited financial
statements issued by a company whose shares are traded on a stock exchange is the primary
responsibility of
A. The stock exchange officials.
B. The independent auditor.
C. The company's management.
D. The Securities and Exchange Commission.

22. The primary responsibility for the adequacy of disclosures in the financial statements of a
publicly held company rests with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Auditor in charge of the fieldwork.
D. Securities and Exchange Commission.

23. The largest public accounting firms typically are structured as

A. Subchapter S corporations.
B. Professional corporations.
C. Limited liability partnerships.
D. Limited liability corporations.

24. Typically, an external auditor first gets supervisory experience at what level of authority?
A. Associate.
B. Senior.
C. Manager.
D. Partner.

25. An "in-charge" auditor typically holds the rank of

A. Associate.
B. Senior.
C. Manager.
D. Partner.
26. Which of the following best describes the concept of risk assessment on which auditors can
provide independent assurance?
A. The risk that financial statements are misstated because of fraud.
B. The risk that financial statements are misstated because of error or fraud.
C. Whether management has systems in place to evaluate and effectively manage the entity's
business risks.
D. Developing client acceptance and continuance practices that minimize the likelihood of
lawsuits against the auditor.

27. Forensic audits include all of the following except

A. Criminal investigations.
B. Manufacturers' assertions about product quality.
C. Employee fraud.
D. Management fraud.

28. A typical objective of an operational audit is for the auditor to

A. Determine whether the financial statements present fairly the entity's operations.
B. Evaluate the feasibility of attaining the entity's operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity's relative success in attaining profit maximization.

29. Governmental auditing often extends beyond examinations leading to the expression of an
opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness,
and
A. Monetary stimulus.
B. Evaluation.
C. Accuracy.
D. Compliance.
30. External auditors are referred to as "external" because
A. They report to users outside of the audited entity.
B. They are paid by parties outside of the audited entity.
C. They are not employees of the entity being audited.
D. Their offices are not at the entity's place of business.
31. Which is not an attribute of an external auditor?
A. Independence.
B. Client advocacy.
C. Objectivity.
D. Concern for the public interest.

32. What is the general character of the work conducted in performing a forensic audit for a
company?
A. Providing assurance that the financial statements are not materially misstated.
B. Detecting or deterring fraudulent activity.
C. Offering an opinion on the reliability of the specific assertions made by management.
D. Identifying the causes of an entity's financial difficulties.

33. Which of the following is NOT a requirement of the Sarbanes-Oxley Act?

A. Audit firms cannot provide most types of nonaudit services to their public company audit
clients.
B. Audit firms are required to rotate audit partners off audit engagements every five years for
public company audits.
C. Firms that audit public companies are subject to inspection by the PCAOB.
D. A certain number of hours, which is based on the size of the company being audited, must be
spent on each audit engagement.

34. A CPA is most likely to refer to one or more of the three PCAOB 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 entity and its environment.
D. Whether the CPA should undertake an audit engagement.
35. Who bears ultimate responsibility for the financial statements?
A. Management of the organization, equally with the external auditor that audits the statements.
B. Management and the shareholders of the organization.
C. The external auditor that audits the statements.
D. Management of the organization.
36. The three PCAOB general standards are concerned with
A. Adequate training and proficiency of the auditor, proper planning and supervision, and due
professional care.
B. Adequate training and independence.
C. Due professional care.
D. Both b and c.

37. The first PCAOB general standard recognizes that regardless of how capable an individual
may be in other fields, the individual cannot meet the requirements of the auditing standards
without the proper
A. Business and finance courses.
B. Quality control and peer review.
C. Education and experience in auditing.
D. Supervision and review skills.

38. The main difference between SAS and AU is

A. They are the same except that SAS are organized chronologically and the AU are organized by
topical area.
B. SAS are issued by the ASB and AU are issued by the PCAOB.
C. SAS are issued by the PCAOB and AU are issued by the ASB.
D. SAS define minimum standards of performance for auditors while AU define financial
accounting principles that must be followed according to GAAP.

39. The AICPA's Statements on Auditing Standards can be described as

A. Providing very specific guidance about the specific activities an auditor must perform on each
engagement.
B. Similar to financial accounting standards in that they are developed by the government.
C. Defining the minimum standards of performance for an auditor.
D. Providing assurance that an auditor will not issue an incorrect opinion.
40. Due professional care requires auditors to
A. Obtain independent, third party (non-client) documentation as evidence for all information
presented in the financial statements.
B. Exercise professional skepticism during the audit.
C. Disregard any evidence generated by the client during the audit.
D. Find every error contained in the financial statements prepared by management.

41. The objective of the second PCAOB Standard of Reporting is to provide assurance that
A. There are no variations in the format and presentation of financial statements.
B. Substantially different transactions and events are not accounted for on an identical basis.
C. The auditor is consulted before material changes are made in the application of accounting
principles.
D. The comparability of financial statements between periods is not materially affected by
changes in accounting principles that are not disclosed.

42. An internal auditor is likely to be more concerned with _________________ than the external
auditor.
A. Internal administrative procedures.
B. Cost accounting procedures.
C. The efficiency of operations.
D. Internal control.

43. Which of the following is not included in the broad category of assurance services?
A. Operational audit.
B. Reporting on internal control.
C. Accounting or review services.
D. Evaluation of the client's risk management framework.
44. Which of the following is not explicitly a part of the IIA's definition of internal auditing?
A. Internal auditing is an objective assurance activity.
B. Internal auditing is a consulting activity.
C. Internal auditing should help an organization accomplish its objectives.
D. Internal auditors should help external auditors complete the annual financial statement audit.
45. Which of the following statements regarding the PCAOB is incorrect?
A. It is a public-sector, nonprofit corporation.
B. It is overseen by the SEC.
C. It sets standards for public company audits.
D. It has delegated all of its standard-setting authority to the AICPA.

46. Due professional care requires

A. Auditors to plan and perform their duties with the skill and care that is commonly expected of
accounting professionals.
B. The examination of all available corroborating evidence.
C. The exercise of error-free judgment.
D. A study and review of internal controls that includes tests of controls.

47. Which of the following best describes the role of corporate governance?
A. Management decides which accounting principles are the most appropriate.
B. Shareholders vote to decide who should be members of the board of directors.
C. Holding the management team accountable to shareholders and other constituents for the
utilization of the entity's resources.
D. Management often is compensated based on the company's profitability.

48. The four PCAOB standards of reporting are concerned with all of the following except
A. The presentation of the financial statements based on GAAS.
B. The presentation of the financial statements based on GAAP.
C. Whether principles are consistently applied, whether all informative disclosures have been
made and the degree of responsibility the auditor is taking.
D. The degree of responsibility the auditor is taking.
49. Which of the following best describes what is meant by generally accepted auditing
standards?
A. Audit assertions generally determined on audit engagements.
B. Acts to be performed by the auditor.
C. Standards of quality for the auditor's performance.
D. Procedures to be used to gather evidence to support financial statements.
50. The fourth PCAOB standard of reporting requires an auditor to render a report whenever an
auditor's name is associated with financial statements. The overall purpose of the fourth standard
of reporting is to require that reports
A. State that the examination of financial statements has been conducted in accordance with
generally accepted auditing standards.
B. Indicate the character of the auditor's examination and the degree of responsibility assumed by
the auditor.
C. Imply that the auditor is independent in fact as well as in appearance with respect to the
financial statements under examination.
D. Express whether the accounting principles used in preparing the financial statements have been
applied consistently in the period under examination.

51. The three PCAOB standards of fieldwork are concerned with

A. Planning and supervision and understanding the client's internal control system.
B. Choosing evidence with due professional care.
C. Adequate training to understand the client's internal controls system.
D. Ensuring consistency in financial statements for periods presented.

52. The fourth PCAOB reporting standard requires the auditor's report to contain either an
expression of opinion regarding the financial statements taken as a whole or an assertion to the
effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent
A. An auditor from reporting on one basic financial statement and not the others.
B. An auditor from expressing different opinions on each of the basic financial statements.
C. Management from reducing its final responsibility for the basic financial statements.
D. Misinterpretations regarding the degree of responsibility the auditor is assuming.

14. Hawkins requested permission to communicate with the predecessor auditor and review
certain portions of the predecessor auditor's working papers. The prospective client's refusal to
permit this will bear directly on Hawkins' 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.
15. In assessing whether to accept a client for an audit engagement, a CPA should consider
A. The current financial health of the prospective client.
B. The integrity of management.
C. The CPA's overall engagement risk.
D. All of the above should be considered.

16. Evaluating a prospective client requires the following step(s):

A. Communicate with the predecessor auditor.
B. Preplan the audit.
C. Establish the terms of the engagement.
D. None of the above.

17. An auditor has withdrawn from an audit engagement of a publicly held company after finding
fraud that may materially affect the financial statements. The auditor should set forth the reasons
and findings in correspondence with the
A. Securities and Exchange Commission.
B. Client's legal counsel.
C. Stock exchanges where the company's stock is traded.
D. Audit committee of the board of directors.
18. When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be
able to provide the successor with information that will assist the successor in determining
A. Whether the predecessor's work should be utilized.
B. Whether, in the predecessor's opinion, the financial statements are materially correct.
C. Whether, in the predecessor's opinion, the company's internal controls have been satisfactory.
D. Whether the engagement should be accepted.

19. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on management integrity.

20. Which of the following factors most likely would cause a CPA not to accept a new audit
engagement?
A. The prospective client's unwillingness to permit inquiry of its legal counsel.
B. The inability to review the predecessor auditor's documentation.
C. The CPA's lack of understanding of the prospective client's operations and industry.
D. Indications that management has not investigated employees in key positions before hiring
them.

21. An auditor who discovers that a client's employees paid small bribes to municipal officials
most likely would withdraw from the engagement if
A. The payments violated the client's policies regarding the prevention of illegal acts.
B. The client receives financial assistance from a federal government agency.
C. Documentation that is necessary to prove that the bribes were paid does not exist.
D. Management fails to take the appropriate remedial action.
22. A successor auditor should request the new client to authorize the predecessor auditor to allow
a review of the predecessor's
A. Engagement letter.
B. Audit working papers.
C. Engagement letter and audit working papers.
D. It would not be typical to allow a review of either the engagement letter or the audit working
papers.

23. Evaluating a prospective client requires the following step(s):

A. Communicate with the SEC.
B. Preplan the audit.
C. Determine if the firm is independent of the client.
D. Communicate with the AICPA.

24. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should be rejected?
A. The details of most recorded transactions are not available after a specified period of time.
B. Internal control activities requiring segregation of duties are subject to management override.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the
financial statements.
D. Management has a reputation for consulting with several accounting firms about significant
accounting issues.

25. Which of the following factors most likely would cause a CPA to decide not to accept a new
audit engagement?
A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted
audit techniques.
B. Management's disregard of its responsibility to maintain an adequate control environment.
C. The CPA's inability to determine whether related party transactions were consummated on
terms equivalent to arm's-length transactions.
D. Management's refusal to permit the CPA to perform substantive procedures before the year-end.
26. Before accepting an engagement to audit a new client, a CPA is required to obtain
A. An understanding of the prospective client's industry and business.
B. The prospective client's signature on the engagement letter.
C. A preliminary understanding of the prospective client's control environment.
D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

27. Which of the following situations would most likely require special audit planning?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client's tax return differ from those used on the books.
C. Assets costing less than $500 are expensed even though the expected life exceeds one year.
D. Inventory is comprised of precious stones.

28. During the initial planning phase of an audit, a CPA most likely would
A. Identify specific internal control activities that are likely to prevent fraud.
B. Evaluate the reasonableness of the client's accounting estimates.
C. Discuss the timing of the audit procedures with the client's management.
D. Inquire of the client's attorney as to any unrecorded claims.

29. An auditor is required to establish an understanding with a client regarding the responsibilities
for each engagement. This understanding generally includes
A. Management's responsibility to guarantee that there are no material misstatements due to fraud.
B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not
absolute, assurance of detecting material errors or fraud.
C. Management's responsibility for providing the auditor with an assessment of the risk of
material misstatement due to fraud.
D. The auditor's responsibility for the fairness of the financial statements.
30. A written understanding between the auditor and the client concerning the auditor's
responsibility for the discovery of illegal acts is usually set forth in a(n)
A. Client representation letter.
B. Letter of audit inquiry.
C. Management letter.
D. Engagement letter.
31. Engagement letters include all of the following except:
A. A list of additional services that will be provided.
B. A list of adjusting journal entries.
C. Information about the audit fee.
D. Arrangements involving the use of specialists.

32. Which of the following matters generally is included in an auditor's engagement letter?
A. Management's responsibility for the entity's compliance with laws and regulations.
B. The factors to be considered in setting preliminary judgments about materiality.
C. Management's liability for illegal acts committed by its employees.
D. The auditor's responsibility to guarantee accuracy of the financial statements.

33. To provide for the greatest degree of independence in performing internal audit functions, an
internal auditor most likely should report to the
A. Vice-President - Finance
B. Corporate controller.
C. Audit committee of the board of directors.
D. Corporate stockholders.

34. All of the following refer to an internal auditor's competence except:

A. The party in the entity to which the internal auditor reports.
B. The quality of internal audit documents and reports.
C. Professional certification.
D. Supervision and review of internal audit activities.

35. An independent auditor might consider the procedures performed by the internal auditors
because
A. They are employees whose work must be reviewed during substantive testing.
B. They are employees whose work might be relied upon.
C. Their work impacts the cost/benefit tradeoff in evaluating inherent limitations.
D. Their degree of independence may be inferred by the nature of their work.
36. As generally conceived, the audit committee of a publicly held company should be made up
of
A. Representatives of the major equity interests (preferred stock, common stock).
B. The audit partner, the chief financial officer, the legal counsel, and at least one outsider.
C. Representatives from the client's management, investors, suppliers, and customers.
D. Members of the board of directors who are not officers or employees.

37. To emphasize auditor independence from management, publicly traded corporations are
required to
A. Appoint a partner of the CPA firm conducting the examination to the corporation's audit
committee.
B. Establish a policy of discouraging social contact between employees of the corporation and the
independent auditors.
C. Request that a representative of the independent auditor be on hand at the annual stockholders'
meeting.
D. Have the independent auditor report to an audit committee of independent members of the
board of directors.

38. An auditor obtains knowledge about a new client's business and its industry in order to
A. Make constructive suggestions concerning improvements to the client's internal control.
B. Develop an attitude of professional skepticism concerning management's financial statement
assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial statements taken
as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client's financial
statements.
39. Which of the following is an example of a related party transaction?
A. An action is taken by the directors of Company A to provide additional compensation for vice
presidents in charge of the principal business functions of Company A.
B. A long-term agreement is made by Company A to provide merchandise or services to Company
B, a long-time, friendly competitor.
C. A short-term loan is granted to Company A by a bank that has a depositor who is a member of
the board of directors of Company A.
D. A nonmonetary exchange occurs whereby Company A exchanges property for similar property
owned by Company B, an unconsolidated subsidiary of Company A.
40. An independent auditor finds that Holdaway Corporation occupies office space, at no charge,
in an office building owned by a shareholder. This finding likely indicates the existence of
A. Management fraud.
B. Related party transactions.
C. Window dressing.
D. Weak internal control.

41. Which of the following would not necessarily be a related party transaction?
A. Sales to another corporation with a similar name.
B. Purchases from another corporation that is controlled by the corporation's chief stockholder.
C. Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.

42. The existence of a related party transaction may be indicated when another entity
A. Sells real estate to the corporation at a price that is comparable to its appraised value.
B. Absorbs expenses of the corporation under audit.
C. Borrows from the corporation at a rate of interest which equals the current market rate.
D. Lends to the corporation at a rate of interest which equals the current market rate.

43. In the context of an audit of financial statements, substantive procedures are audit procedures
that
A. May be eliminated under certain conditions.
B. Are primarily designed to discover significant subsequent events.
C. May be either tests of details of transactions, tests of details of account balances, or analytical
procedures.
D. Will increase proportionately with an increase in the auditor's reliance on internal control.
44. Which of the following is not an audit procedure that is commonly used in performing tests of
controls?
A. Inquiring.
B. Observing.
C. Confirming.
D. Inspecting.

45. Tolerable misstatement is

A. Materiality allocated to an assertion.
B. Materiality for the balance sheet as a whole.
C. Materiality for the income statement as a whole.
D. Materiality allocated to a specific account.

46. Which of the following would an auditor most likely use in determining the auditor's planning
materiality?
A. The anticipated sample size for planned substantive procedures.
B. The entity's annualized interim (i.e. quarterly) financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.

47. Which of the following is not a qualitative factor that may affect an auditor's establishment of
materiality?
A. Potential for fraud.
B. The company is close to violating loan covenants.
C. Firm policy sets materiality at 4% of pretax income.
D. A small misstatement would interrupt an earnings trend.
48. Which of the following is not a concern as to whether a misstatement is qualitatively
material?
A. The misstatement hides a failure to meet analysts' expectations.
B. The misstatement is less than 5% of pretax income.
C. The misstatement increases management's compensation.
D. The misstatement changes a small amount of profit to a small reported loss.
49. In assessing the competence of an internal auditor, an independent CPA most likely would
obtain information about the
A. Quality of the internal auditor's work.
B. Organization's commitment to integrity and ethical values.
C. Influence of management on the scope of the internal auditor's duties.
D. Organizational levels to which the internal auditor reports.

50. Which of the following procedures would an auditor most likely include in the initial planning
of a financial statement audit?
A. Perform detailed testing of the individual balance sheet accounts.
B. Examining documents to detect illegal acts having a material effect on the financial statements.
C. Considering whether the client's accounting estimates are reasonable in the circumstances.
D. Determining the extent of involvement of the client's internal auditors.

51. The in-charge auditor most likely would have a supervisory responsibility to explain to the
staff assistants
A. That immaterial fraud is not to be reported to the client's audit committee.
B. How the results of various auditing procedures performed by the assistants should be evaluated.
C. How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk.
D. How overall materiality was selected.

52. Which of the following audit procedures would be least likely to disclose the existence of
related party transactions of a client during the period under audit?
A. Reading "conflict-of-interest" statements obtained by the client from its management.
B. Scanning accounting records for large transactions at or just prior to the end of the period under
audit.
C. Reading minutes of the Board of Directors meetings for authorization or discussion of material
transactions.
D. Confirming purchases and sales transactions with the vendors and/or customers involved.
53. A dual-purpose test
A. Simultaneously tests debits and credits.
B. Is a procedure completed by both the internal and external auditors.
C. Is useful to both the entity and the auditor.
D. Is both a substantive test of transactions and a test of controls.

54. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
A. Methods of statistical sampling to be used in confirming accounts receivable.
B. Pending legal matters to be included in the inquiry of the client's attorney.
C. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
D. Timing of the audit.

55. The audit client's board of directors and audit committee refused to take any action with
respect to an immaterial illegal act which was brought to their attention by the auditor. Because of
their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw
was primarily due to doubts concerning
A. Adequate financial statement disclosures.
B. Compliance with the statutory laws and regulations.
C. Scope limitations resulting from their inaction.
D. The integrity of management.

56. Which of the following procedures would an auditor most likely include in the initial planning
of an examination of financial statements?
A. Assess the need for the use of specialists in the audit.
B. Inquiring of the client's attorney as to any claims that are likely to be asserted.
C. Perform detailed testing of the individual financial statement accounts.
D. Determining whether necessary internal controls procedures are being applied as prescribed.
57. An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this fraud by
A. Scanning the general journal for unusual entries.
B. Performing a revenue cutoff test at year-end.
C. Tracing a sample of journal entries to the general ledger.
D. Examining documentary evidence of sales returns and allowances recorded after year-end.

58. Under the Sarbanes-Oxley Act, the audit committee of a public company has the following
requirement(s):
A. Each member of the committee must be a board member and shall be independent.
B. The audit committee must preapprove all audit and nonaudit services.
C. The audit committee must establish and maintain procedures to handle all issues that relate to
accounting, internal control, and auditing.
D. All of the above.

59. Which of the following is a general audit test?

A. Fee assessment procedures.
B. Tests of controls.
C. Preparation of corporate tax returns.
D. Active testing procedures.

60. Which of the following arranges the general types of audit tests in the order they are normally
performed in an audit?
A. Substantive procedures, tests of controls, and risk assessment procedures.
B. Substantive procedures, risk assessment procedures, and tests of controls.
C. Risk assessment procedures, tests of controls, and substantive procedures.
D. Risk assessment procedures, substantive procedures, and tests of controls.
61. Which of the following relatively small misstatements most likely would have a material
effect on an entity's financial statements?
A. An illegal payment to a foreign official that was not recorded.
B. A piece of obsolete office equipment that was not retired.
C. A petty cash fund disbursement that was not properly authorized.
D. An uncollectible account receivable that was not written-off.

62. Which of the following is the most important qualitative factor that auditors should consider
when making materiality judgments?
A. A misstatement exceeded five percent of net income.
B. The auditor also provides consulting services to the audit client.
C. The misstatement will cause the client to fail to meet an earnings forecast.
D. The audit committee is not well-educated about the accounting principle in question.

63. Which element(s) is/are pervasive to the application of generally accepted auditing standards,
particularly the standards of fieldwork and reporting?
A. The elements of materiality and audit risk.
B. The element of internal control.
C. The element of corroborating evidence.
D. The element of reasonable assurance.
64. Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for the aggregate level of misstatements that could be material
to any one of the financial statements individually.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve
both quantitative and qualitative judgments.
D. An auditor's consideration of materiality is influenced by the auditor's perception of the needs
of a reasonable person who will rely on the financial statements.

9. Engagement risk is
A. The risk of issuing an incorrect audit opinion.
B. The auditor's risk of loss from events arising in connection with financial statements audited
and reported upon.
C. The overall risk of material misstatement.
D. The risk of the client's financial failure.

10. Client risk as defined in the text is

A. The auditor's risk of loss from events arising in connection with financial statements audited
and reported upon.
B. The overall risk of material misstatement.
C. The risk that audit procedures will fail to detect material misstatements.
D. The risk of the client's financial failure.

11. Under Statements on Auditing Standards, which of the following would be classified as an
error?
A. Misappropriation of assets for the benefit of management.
B. Misinterpretation by management of facts that existed when the financial statements were
prepared.
C. Preparation of records by employees to cover a fraudulent scheme.
D. Intentional omission of the recording of a transaction to benefit a third party.
12. When assessing the risk of material misstatement, auditors evaluate the reasonableness of an
entity's accounting estimates. An auditor normally would be concerned about assumptions that are
A. Susceptible to bias.
B. Consistent with prior periods.
C. Insensitive to variations.
D. Similar to industry guidelines.

13. Which of the following characteristics most likely would heighten an auditor's concern about
the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low.
B. Insiders recently purchased additional shares of the entity's stock.
C. Management places substantial emphasis on meeting earnings projections.
D. The rate of change in the entity's industry is slow.

14. Which of the following is a known misstatement?

A. A management estimate that is outside the range of reasonable outcomes determined by the
auditor.
B. A fixed asset being recorded at the incorrect cost.
C. A projected misstatement resulting from errors found during sampling.
D. Difference in judgment between the auditor and management.

15. Engagement risk can be eliminated by

A. Establishing policies for client acceptance and continuance.
B. Lowering audit risk.
C. Lowering materiality.
D. Engagement risk cannot be eliminated.

16. The achieved (actual) level of audit risk

A. Can always be accurately assessed by the auditor.
B. Should be greater than or equal to acceptable audit risk.
C. Can never be known with certainty.
D. Is the same for all audit clients.
17. An auditor knows that an audit client operating in an industry in which common stock is
valued based on the price-earnings ratio will soon make an initial public offering. All of the
following are true except:
A. Materiality should be reduced.
B. Risk of material misstatement should increase.
C. Detection risk should decrease.
D. Audit risk should increase.

18. The risk that an auditor will conclude, based on substantive procedures, that a material error
does not exist in an account balance when, in fact, such an error does exist is referred to as
A. Sampling risk.
B. Detection risk.
C. Nonsampling risk.
D. Inherent risk.

19. The risk of material misstatement differs from detection risk in that it
A. Arises from the misapplication of auditing procedures.
B. May be assessed in either quantitative or qualitative terms.
C. Exists independently of the actions of the auditor.
D. Can be changed at the auditor's discretion.

20. All of the following are inherent risk factors that are pervasive to the financial statements
except:
A. Highly complex significant transactions.
B. Non-routine transactions.
C. Classes of transactions are not processed systematically.
D. Supplies inventory is difficult to count.
21. When an auditor increases the assessed level of risk of material misstatement because certain
control procedures were determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of controls.
B. Level of detection risk.
C. Extent of substantive tests.
D. Level of inherent risk.

22. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of risk of material misstatement from that originally planned. To achieve an overall
audit risk level that is substantially the same as the planned audit risk level, the auditor would
A. Decrease amount of substantive testing.
B. Decrease detection risk.
C. Increase detection risk.
D. Increase materiality levels.

23. The risk of material misstatement includes which of the following?

A. Detection risk.
B. Audit risk.
C. Inherent risk.
D. Nonsampling risk.

24. An auditor learns that a client employee in control of inventory gets divorced and is
responsible for paying a large amount of child support. All of the following for the audit of
inventory likely are true except:
A. Fraud risk increases.
B. The risk of misappropriation of assets increases.
C. Risk of material misstatement increases.
D. Detection risk increases.
25. Which of the following audit risk components may be assessed in qualitative terms?
A. Risk of material misstatement.
B. Detection risk.
C. Neither risk of material misstatement nor detection risk.
D. Both risk of material misstatement and detection risk.

26. When an entity moves into a significant new line of business, all of the following increase
except:
A. Client risk.
B. Acceptable audit risk.
C. Risk of material misstatement.
D. Entity business risk.

27. Which of the following procedures would not be used to obtain an understanding of the entity
and its environment?
A. Observe entity operations.
B. Reperform entity processes.
C. Verify proper valuation of inventory subject to technological obsolescence.
D. Review prior year's audit documentation.

28. Which of the following is not an important consideration in an auditor's evaluation of an

entity's business risk?
A. The specific business risks an entity faces that may result in financial statement errors and
fraud.
B. Business risk factors that impact the ability of the entity to be profitable and survive.
C. Audit standards include many entity business risk factors that identify circumstances that
increase the likelihood of material misstatements.
D. Audit standards require the auditor to evaluate the entity's business risk in order to provide
suggestions to improve the entity's profitability.
29. Which of the following is a source of detection risk?
A. Unstable business environment.
B. Poor client controls.
C. A non-representative sample.
D. Inherent risk assessed too high.

30. In general, material frauds perpetrated by which of the following are most difficult to detect?
A. Internal auditor.
B. Keypunch operator.
C. Cashier.
D. Controller.

31. Which of the following circumstances most likely would cause an auditor to believe that
material misstatements may exist in an entity's financial statements?
A. Accounts receivable confirmation requests yield significantly fewer responses than expected.
B. Audit trails of computer-generated transactions exist only for a short time.
C. The chief financial officer does not sign the management representation letter until the last day
of the auditor's field work.
D. Management consults with other accountants about significant accounting matters.

32. The primary responsibility for preventing fraud in an organization lies with
A. The audit committee of the board of directors.
B. The internal audit staff.
C. The external auditor.
D. The organization's management.

33. Which of the following is not a misstatement of the financial statements?

A. The client uses different inventory accounting methods for internal and external reporting.
B. A departure from GAAP.
C. The footnote for pensions is omitted.
D. A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to
13% of sales as determined by the controller.
34. All of the following represent an increased opportunity for management to commit fraud
except:
A. Significant related party transactions.
B. The auditor's relationship with management is strained.
C. Management is dominated by a single person.
D. The financial statements included highly subjective estimates.

35. The auditor can respond to an increased risk of fraud by doing all of the following except:
A. Heavily emphasizing the importance of professional skepticism.
B. Assigning more experienced personnel to the audit.
C. Increasing detection risk.
D. Taking steps to obtain more reliable evidence.

36. An auditor discovers a likely fraud during an audit but concludes that the overall effect of the
fraud is not sufficiently material to affect the audit opinion. The auditor should probably
A. Disclose the fraud to the appropriate level of the client's management.
B. Disclose the fraud to appropriate authorities external to the client.
C. Discuss with the client the additional audit procedures that will be needed to identify the exact
amount of the fraud.
D. Modify the audit program to include tests specifically designed to identify the fraud and its
impact on the financial statements.

37. The acceptable level of detection risk is inversely related to the

A. Extent of the substantive procedures.
B. Risk of misapplying auditing procedures.
C. Planning materiality.
D. Risk of failing to discover material misstatements.
38. As the acceptable level of detection risk decreases, an auditor may change the
A. Timing of tests of controls by performing them at an interim date rather than at year-end.
B. Nature of substantive procedures from less effective to more effective procedures.
C. Timing of tests of controls by performing them at several dates rather than at one time.
D. Assessed level of risk of material misstatement to a higher amount.
39. As the acceptable level of detection risk decreases, the assurance directly provided from
A. Substantive procedures should increase.
B. Substantive procedures should decrease.
C. Tests of controls should increase.
D. Tests of controls should decrease.

40. Increased fraud risk could also result in all of the following except:
A. Lower detection risk.
B. Higher inherent risk.
C. Lower control risk.
D. Higher client risk.

41. The objectives of the engagement partner's communication with the audit team include
A. Maintaining an adversarial atmosphere between the auditor and management.
B. Complying with SEC rules.
C. Complying with FASB rules.
D. Emphasizing the importance of professional skepticism.

42. The auditor is most likely to presume that a high risk of a fraud exists if
A. The entity is a multinational company that does business in numerous foreign countries.
B. The entity does business with several related parties.
C. Inadequate segregation of duties places an employee in a position to perpetrate and conceal
theft.
D. Inadequate employee training results in lengthy EDP exception reports each month.

43. Which of the following factors most likely would heighten an auditor's concern about the risk
of fraudulent financial reporting?
A. Inability to generate cash flows from operations while reporting substantial earnings growth.
B. Management's lack of interest in increasing the entity's earnings trend.
C. Large amounts of liquid assets that are easily converted into cash.
D. Inability to borrow necessary capital without granting debt covenants.
44. A properly planned and performed audit may fail to detect a material misstatement resulting
from fraud because
A. Audit procedures that are otherwise effective may be ineffective for fraud that is concealed
through collusion.
B. An audit is planned and performed to provide reasonable assurance of detecting material
misstatements caused by errors but not by fraud.
C. The factors considered in assessing control risk indicated an increased risk of error but only a
low risk of fraud in the financial statements.
D. The auditor did not consider factors influencing audit risk for account balances that have
effects pervasive to the financial statements taken as a whole.

45. Which of the following is correct concerning required auditor communications about fraud?
A. Fraud that involves senior management should be reported directly by the auditor to the audit
committee regardless of the amount involved.
B. Fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
C. Any requirement to disclose fraud outside the entity is the responsibility of management and
not that of the auditor.
D. The professional standards provide no requirements related to the communication of fraud, but
the auditor should use professional judgment in determining communication responsibilities.

11. A confirmation is used to

A. Verify the inventory count is correct.
B. Verify that a control is being observed.
C. Verify a representation from a third party.
D. Verify that a specific trend is correct.

12. Which of the following elements ultimately determines the amount of audit work that is
necessary in the circumstances to afford a reasonable basis for an opinion?
A. Auditor judgment.
B. Materiality.
C. Relative risk.
D. Reasonable assurance.
13. Which of the following is an essential factor in evaluating the sufficiency of evidence? The
evidence must
A. Be well documented and cross-referenced in the audit documents.
B. Be based on sources that are considered reliable.
C. Bear a direct relationship to the audit assertion.
D. Be persuasive enough to enable the auditor to form an opinion.

14. Which set of assertions is tested when, during completion of the audit, the audit partner
conducts a final review of the format of the entity's balance sheet?
A. Assertions about classes of transactions and events.
B. Assertions about account balances at the period end.
C. Assertions about presentation and disclosure.
D. None of the above.

15. In testing plant and equipment balances, an auditor may physically inspect new additions listed
on the summary of plant and equipment transactions for the year. This procedure is designed to
obtain evidence concerning management's assertions about classes of transactions and events, and
specifically, which assertion?
A. Occurrence.
B. Cutoff.
C. Authorization.
D. Classification.

16. Which assertions may be tested for the "account balances" category of management
assertions?
A. Existence, accuracy, rights and obligations, completeness.
B. Existence, rights and obligations, completeness, valuation and allocation.
C. Occurrence, rights and obligations, completeness, valuation and allocation.
D. Occurrence, accuracy, rights and obligations, completeness.
17. Which assertions may be tested for the "transactions and events" category of management
assertions?
A. Existence, completeness, rights and obligations, accuracy, cutoff and classification.
B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification.
C. Occurrence, completeness, authorization, accuracy, cutoff and classification.
D. Existence, rights and obligations, accuracy, authorization, and completeness.

18. Which assertions may be tested for the "presentation and disclosure" category of management
assertions?
A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and
valuation.
B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification.
C. Occurrence, completeness, classification and understandability, cutoff and classification.
D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy
and valuation.

19. Tracing is used primarily to test which of the following assertions about classes of
transactions?
A. Occurrence.
B. Completeness.
C. Cutoff.
D. Classification.

20. Vouching is used primarily to test which of the following assertions about classes of
transaction?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Classification.
21. In designing written audit programs, an auditor should plan specific audit procedures to test
A. Timing of audit procedures.
B. Cost-benefit of gathering evidence.
C. Selected audit techniques.
D. Management assertions.

22. Footing is an example of

A. Recalculation.
B. Confirmation.
C. Inquiries.
D. Analytical procedures.

23. In determining whether transactions have been recorded, the direction of the audit testing
should start from the
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.

24. To test for unsupported entries in the ledger, the direction of audit testing should start from the
A. Ledger entries.
B. Journal entries.
C. Externally generated documents.
D. Original source documents.
25. Which of the following presumptions does not relate to the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides about the
accounting data and financial statements.
B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based
on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than evidence
secured solely within the entity.
D. The independent auditor's direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly.

26. Of the following, which is the least persuasive type of audit evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between the auditor and third party vendors.
C. Copies of client sales invoices inspected by the auditor.
D. Computations made by the auditor.

27. The third general auditing standard requires that due professional care be exercised in the
performance of the examination and the preparation of the report. Due professional care deals with
what is done by the independent auditor and how well it is done. For example, due care in the
matter of audit documents requires that audit documents'
A. Format be neat and orderly and include both a permanent file and a general file.
B. Content be sufficient to provide support for the auditor's report, including the auditor's
representation as to compliance with auditing standards.
C. Ownership be determined by the legal statutes of the state where the auditor practices.
D. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers,
and partners.

28. Which of the following show the detailed general ledger accounts that make up a financial
statement category on the auditor's working trial balance?
A. Account analyses.
B. Supporting schedules.
C. Control accounts.
D. Lead schedules.
29. The permanent (continuing) file of an auditor's working papers most likely would include
copies of the
A. Bank statements.
B. Debt agreements.
C. Lead schedules.
D. Attorney's letters.

30. An example of audit evidence with a medium level of reliability is

A. Scanning.
B. Recalculation.
C. Observation.
D. All of the above.

31. Audit documentation prepared on audits of public clients is the property of the
A. Shareholders.
B. Auditor.
C. Management of the entity being audited.
D. SEC.

32. All of the following are typically in the current file except:
A. Adjusting journal entries.
B. Copies of the audit report.
C. Chart of accounts.
D. Lead schedules.

33. You are auditing a store that sells merchandise. Some of the store merchandise is held on
consignment. Which account balance assertion for inventory should you be most concerned about
verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Valuation or allocation.
34. You are auditing a manufacturing company that has a large production facility. Some of the
production equipment is held through lease agreements. Which of the following is the account
balance assertion you would be most concerned about?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Accuracy.

35. Which of the following procedures would an auditor most likely perform to verify
management's assertion of completeness?
A. Compare a sample of shipping documents to related sales invoices.
B. Observe the client's distribution of payroll checks.
C. Confirm a sample of recorded receivables by direct communication with the debtors.
D. Review standard bank confirmations for indications of kiting.

36. Which of the following best describes the primary purpose of audit procedures?
A. To detect all errors or fraudulent activities.
B. To comply with generally accepted accounting principles.
C. To gather corroborative evidence about management's assertions.
D. To verify the accuracy of the balance sheet account balances.

37. Procedures specifically outlined in an audit program are designed primarily to

A. Assess risk for planning purposes.
B. Detect all errors or fraudulent activities.
C. Test internal control systems.
D. Gather evidence about management's assertions.
38. Which statement concerning audit evidence is not valid?
A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial
statements being audited.
B. The auditor performs tests to collect convincing evidence that the financial statements are not
misstated.
C. The auditor weighs the cost of obtaining evidence with its usefulness.
D. The auditor considers the amount of risk present in deciding the nature and extent of evidence
to be collected.

39. Each of the following might, by itself, form a valid basis for an auditor to reduce substantive
testing except for the:
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Low inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.

40. Of the following, the most reliable type of evidence typically is:
A. Confirmation.
B. Inspection of records and documents.
C. Reperformance.
D. Observation.

41. Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable audit evidence.
B. To be reliable, audit evidence should be convincing rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control system provides more reliable audit evidence.
42. Which of the following types of documentary evidence should the auditor consider to be the
most reliable?
A. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
B. Confirmation of an account payable balance mailed by and returned directly to the auditor.
C. A check issued by the company and bearing the payee's endorsement that is included with the
bank statement mailed directly to the auditor.
D. A working paper prepared by the client's controller and reviewed by the client's treasurer.

43. Which of the following is the least persuasive documentation in support of an auditor's
opinion?
A. Schedules of details of physical inventory counts conducted by the client.
B. Notation of auditor's inferences drawn from ratios and trends.
C. Notation of appraisers' conclusions documented in the auditor's working papers.
D. Lists of negative confirmation requests for which no response was received by the auditor.

44. Which of the following statements is generally correct about the appropriateness of audit
evidence?
A. The more effective the internal control, the more assurance it provides about the reliability of
the accounting data and financial statements.
B. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained.
C. Information obtained indirectly from independent outside sources is more persuasive than the
auditor's direct personal knowledge obtained through observation and inspection.
D. Appropriateness of audit evidence refers only to audit evidence obtained from outside the
entity.

45. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client responses to auditor inquiries.
46. Following are several statements regarding accounting records or audit documentation. Which
of the statements is correct?
A. Accounting records belong to the client.
B. Documentation of an auditor's understanding of client's internal control system is not necessary.
C. Audit documents may be regarded as a substitute for the client's accounting records.
D. The independent auditor may discard audit documents after two years.

47. Audit documents record the results of the auditor's evidence-gathering procedures. When
preparing audit documents, the auditor should remember that
A. Audit documents should be kept on the client's premises so that the client can have access to
them for reference purposes.
B. Audit documents should be the primary support for the financial statements being examined.
C. Audit documents should be considered as a substitute for the client's accounting records.
D. Audit documents should be designed to facilitate the review and supervision of work done by
auditors assigned to the engagement.

48. Audit documents that record the procedures used by the auditor to gather evidence should be
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the accounting records and the financial statements.
C. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager,
and partner on the engagement.
D. Retained until the audited entity ceases to be a client.

49. In creating lead schedules for an audit engagement, what client information is needed to
begin?
A. Interim financial information, such as third quarter sales, net income, and inventory and
receivables balances.
B. Specialized journal information, such as the invoice and purchase order numbers of the last few
sales and purchases of the year.
C. General ledger information, such as account numbers, prior-year account balances, and current
year unadjusted information.
D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries.
50. Audit documentation
A. Must be in electronic form.
B. Must be in paper form only.
C. Is not required, but is strongly recommended.
D. May be in paper, electronic, or some other form.

51. Based on conversations with the owner-manager of an audit client, the auditor ascertained that
the company's primary motivation is to avoid paying income taxes. Based on this motivation,
which account balance assertion for ending inventory will the auditor be most concerned about
verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Observation.

52. Your audit client is under intense pressure to meet an earnings target. Which transaction
assertion for transactions within the purchasing process are you most concerned with?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.

53. You are concerned with unrecorded transactions in the purchasing cycle. Which audit
procedure are you most likely to use when auditing purchases?
A. Vouching transactions in accounting records to vendor invoices.
B. Tracing vendor invoices to accounting records.
C. Recalculation of vendor invoice amounts.
D. Confirmation of customer accounts.
54. The following statements were made in a discussion of audit evidence between two CPAs.
Which statement is not valid concerning audit evidence?
A. "I am seldom convinced beyond all doubt with respect to all aspects of the statements being
examined."
B. "I would not undertake that procedure because at best the results would only be persuasive and
I'm looking for convincing evidence."
C. "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."
D. "I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it."

55. Which of the following statements concerning audit evidence is correct?

A. Appropriate evidence supporting management's assertions should be convincing rather than
persuasive.
B. Effective internal controls contribute little to the reliability of the evidence created within the
entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what
evidence should be obtained.
D. A client's accounting data cannot be considered sufficient audit evidence to support the
financial statements.

56. The permanent audit file usually includes

A. Working trial balance.
B. Organizational chart.
C. Audit plan.
D. Audit programs.

57. The current audit file usually includes

A. Working trial balance.
B. Organizational chart.
C. Accounting manual.
D. Copies of important contracts.
58. All audit documentation should have a heading, which includes
A. Name of the client.
B. Title of the working paper.
C. Client's year-end date.
D. All of the above.

59. The audit working papers belong to

A. The client.
B. The government.
C. The audit firm.
D. They are public record documents.

60. Which of the following are ordinarily designed to detect possible material monetary errors in
the financial statements?
A. Tests of controls.
B. Analytical procedures.
C. Computer controls.
D. Post-audit review of audit documents.

61. An auditor's decision either to apply analytical procedures as substantive procedures or to

perform tests of transactions and account balances usually is determined by
A. Availability of data aggregated at a high level.
B. Relative effectiveness and efficiency of the tests.
C. Timing of tests performed after the balance sheet date.
D. Auditor's familiarity with industry trends.
62. A company sells a particular product only in the last month of its fiscal year. The company
uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales
are made. The agents' sales were $10 million. Experience indicates that 10% of the sales are
usually not collected and 2% are returned in the first month of the new year. The auditor would
expect the year-end balance in the accrued commissions payable account to be
A. $528,000.
B. $540,000.
C. $588,000.
D. $600,000.

63. Which of the following nonfinancial information would an auditor most likely consider in
performing analytical procedures during the planning phase of an audit?
A. Turnover of personnel in the accounting department.
B. Objectivity of audit committee members.
C. Square footage of selling space.
D. Management's plans to repurchase stock.

64. A not-for-profit organization published a monthly magazine that had 15,000 subscribers on
January 1, 2011. The number of subscribers increased steadily throughout the year and at
December 31, 2011, there were 16,200 subscribers. The annual magazine subscription cost was
$10 on January 1, 2011 and was increased to $12 for new members on April 1, 2011.
Subscriptions are paid in full at the beginning of the member term. An auditor should expect that
the revenue from subscriptions for the year ended December 31, 2011, would be approximately
A. $179,400.
B. $171,600.
C. $164,400.
D. $163,800.
65. Analytical procedures performed in the overall review stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely would
indicate that
A. Fraud exists within the relevant accounts.
B. Internal control activities are not operating effectively.
C. Additional tests of details are required.
D. The communication with the audit committee should be revised.
66. Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial information.
B. Comparison of the financial information with similar information regarding the industry in
which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.

67. Analytical procedures may be classified as being primarily which of the following?
A. Tests of controls.
B. Substantive procedures.
C. Tests of ratios.
D. Detailed tests of balances.

68. An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning phase of the
audit by the use of
A. Tests of transactions and balances.
B. A preliminary review of internal controls.
C. Specialized audit programs.
D. Analytical procedures.

69. An example of an analytical procedure is the comparison of

A. Financial information with similar information regarding the industry in which the entity
operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual population.
D. EDP generated data with similar data generated by a manual accounting system.
70. Analytical procedures used in planning an audit should focus on identifying
A. Material weaknesses in internal control.
B. The predictability of financial data from individual transactions.
C. The various assertions that are embodied in the financial statements.
D. Areas that may represent specific risks relevant to the audit.
71. Analytical procedures are
A. Never required.
B. Required for planning, substantive testing, and overall review of the financial statements.
C. Required for planning and overall review of the financial statements.
D. Required during planning only.

72. As a result of analytical procedures conducted during the planning phase, the independent
auditor determines that the gross profit percentage has declined from 30% in the preceding year to
20% in the current year. The auditor should
A. Express an opinion that is qualified due to the inability of the client company to continue as a
going concern.
B. Evaluate management's performance in causing this decline.
C. Require footnote disclosure.
D. Consider the possibility of an error in the financial statements.

73. The auditor generally gives most emphasis to ratio and trend analysis in the examination of
the
A. Statement of Changes in Stockholders' Equity and Retained Earnings.
B. Income Statement.
C. Balance Sheet.
D. Statement of Cash Flows.

74. The auditor notices significant fluctuations in key elements of the company's financial
statements. If management is unable to provide an acceptable explanation, the auditor should
A. Consider the matter a scope limitation.
B. Perform additional audit procedures to investigate the matter further.
C. Intensify the examination with the expectation of detecting management fraud.
D. Withdraw from the engagement.
75. Which of the following tends to be most predictable for purposes of analytical procedures
applied as substantive procedures?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.

76. Analytical procedures enable the auditor to predict the balance or quantity of an item under
audit. Information to develop this estimate can be obtained from all of the following except:
A. Tracing transactions through the system to determine whether procedures are being applied as
prescribed.
B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g.,
budgets and forecasts) and similar data for the industry in which the entity operates.
C. Study of the relationships of elements of financial data that would be expected to conform to a
predictable pattern based upon the entity's experience.
D. Study of the relationships of financial data with relevant nonfinancial data.

77. An auditor's analytical procedures performed during the overall review stage indicated that the
client's accounts receivable balance had doubled since the end of the prior year. However, the
allowance for doubtful accounts as a percentage of accounts receivable remained about the same.
Which of the following client explanations most likely would satisfy the auditor?
A. The client liberalized its credit standards in the current year and sold much more merchandise
to customers with poor credit ratings.
B. Twice as many accounts receivable were written off in the prior year than in the current year.
C. A greater percentage of accounts receivable were currently listed in the "more than 90 days
overdue" category than in the prior year.
D. The client opened a second retail outlet in the current year and its credit sales approximately
equaled the older, established outlet.
78. Which of the following would be least likely to be comparable between similar corporations in
the same industry or line of business?
A. Earnings per share.
B. Return on total assets before interest and taxes.
C. Accounts receivable turnover.
D. Operating cycle.
79. Which of the following ratios would an engagement partner most likely calculate when
reviewing the balance sheet in the overall review stage of an audit?
A. Quick assets divided by accounts payable.
B. Accounts receivable divided by inventory.
C. Interest payable divided by interest receivable.
D. Total debt divided by total assets.