Chapter One - Questions
14. Which of the following would be least likely to be included in an auditor's tests of controls?
a. Inspection.
b. Observation.
c. Inquiry.
d. Confirmation.
15. Tests of controls are concerned primarily with each of the following questions except
a. How were the procedures performed?
b. Why were the procedures performed?
c. Were the necessary procedures performed?
d. By whom were the procedures performed?
16. Which of the following is a primary function of the purchasing department?
a. Authorizing the acquisition of goods.
b. Ensuring the acquisition of goods of a specified quality.
c. Verifying the propriety of goods acquired.
d. Reducing expenditures for goods acquired.
17. An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing, and extent of the
a. Attribute tests.
b. Compliance tests.
c. Tests of controls.
d. Substantive tests.
18. When control risk is assessed at the maximum level for all financial statement assertions, an auditor should document the auditor's
Understanding Conclusion Basis for of the entity's that control concluding
internal risk is at the that control control maximum risk is at the components level maximum level
a. Yes No No
b. Yes Yes No
c. No Yes Yes
d. Yes Yes Yes
19. Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?
a. The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports.
b. Vendors' invoices are compared with purchase orders by an employee who is independent of the receiving department.
c. Receiving reports require the signature of the individual who authorized the purchase.
d. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.
20. Which of the following statements concerning material weaknesses and reportable conditions is correct?
a. An auditor should identify and communicate material weaknesses separately from reportable conditions.
b. All material weaknesses are reportable conditions.
c. An auditor should report immediately material weaknesses and reportable conditions discovered during an audit.
d. All reportable conditions are material weaknesses.
21. The auditor may observe the distribution of paychecks to ascertain whether
a. Payrate authorization is properly separated from the operating function.
b. Deductions from gross pay are calculated correctly and are properly authorized.
c. Employees of record actually exist and are employed by the client.
d. Paychecks agree with the payroll register and the time cards.
22. A flowchart is most frequently used by an auditor in connection with the
a. Preparation of generalized computer audit programs.
b. Documentation of the client's internal control procedures.
c. Use of statistical sampling in performing an audit.
d. Performance of analytical review procedures of account balances.
23. An auditor's purpose for performing tests of controls is to provide reasonable assurance that
a. The controls on which the auditor plans to rely are being applied as perceived during the preliminary evaluation.
b. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized.
c. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions.
d. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles.
24. An auditor would consider internal control over a client's payroll procedures to be ineffective if the payroll department supervisor is responsible for a. Hiring subordinate payroll department employees.
b. Having custody over unclaimed paychecks.
c. Updating employee earnings records.
d. Applying pay rates to time tickets.
25. Which of the following departments should have the responsibility for authorizing payroll rate changes?
a. Personnel.
b. Payroll.
c. Treasurer.
d. Timekeeping.
26. When considering the objectivity of internal auditors, an independent auditor should
a. Evaluate the quality control program in effect for the internal auditors.
b. Examine documentary evidence of the work performed by the internal auditors.
c. Test a sample of the transactions and balances that the internal auditors examined.
d. Determine the organizational level to which the internal auditors report.
27. Internal control procedures are strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.
28. An effective system of control procedures over the payroll function would include
a. Verification of agreement of job time tickets with employee clock card hours by a payroll department employee.
b. Reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.
c. Custody of rate authorization records by the supervisor of the payroll department.
d. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department.
29. Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?
a. Comparing the vendor's invoice with the receiving report.
b. Canceling supporting documentation after payment.
c. Verifying the mathematical accuracy of the vendor's invoice.
d. Signing the voucher for payment by an authorized person.
30. Which of the following is not a reason an auditor should obtain an understanding of the components of an entity's internal control in planning an audit?
a. Identify the types of potential misstatements that can occur.
b. Design substantive tests.
c. Consider the operating effectiveness of the internal control structure.
d. Consider factors that affect the risk of material misstatements.
31. Which of the following is not a component of an entity's internal control?
a. Control risk.
b. Control procedures.
c. Information and communication.
d. The control environment.
32. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and the requisition form.
b. Vendor's invoice and the receiving report.
c. Vendor's shipping document and the purchase order.
d. Receiving report and the vendor's shipping document.
33. The mailing of disbursement checks and remittance advices should be controlled by the employee who a. Signed the checks last.
b. Approved the vouchers for payment.
c. Matched the receiving reports, purchase orders, and vendors' invoices.
d. Verified the mathematical accuracy of the vouchers and remittance advices.
34. Which of the following statements is correct concerning an auditor's communication of internal control structure related matters (reportable conditions) noted in an audit?
a. The auditor may issue a written report to the audit committee representing that no reportable conditions were noted during the audit.
b. Reportable conditions should be recommunicated each year even if the audit committee has acknowledged its understanding of such efficiencies.
c. Reportable conditions may not be communicated in a document that contains suggestions regarding activities that concern other topics such as business strategies or administrative efficiencies.
d. The auditor may choose to communicate signifi-cant internal control structure related matters either during the course of the audit or after the audit is concluded.
35. An auditor uses the knowledge provided by the understanding of internal control and the assessed level of control risk primarily to
a. Determine whether procedures and records concerning the safeguarding of assets are reliable.
b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal irregularities are minimized.
c. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
d. Determine the nature, timing, and extent of substantive tests for financial statement assertions.
36. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
a. Program for tests of controls.
b. Understanding of the system.
c. Understanding of the types of irregularities that are probable, given the present system.
d. Documentation of the study and evaluation of the system.
37. After obtaining an understanding of an entity's internal control and assessing control risk, an auditor may next
a. Perform tests of controls to verify management's assertions that are embodied in the financial statements.
b. Consider whether evidential matter is available to support a further reduction in the assessed level of control risk.
c. Apply analytical procedures as substantive tests to validate the assessed level of control risk.
d. Evaluate whether the internal control structure policies and procedures detected material misstatements in the financial statements.
38. An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?
a. Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers.
b. Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers.
c. Select and examine canceled checks and ascertain that the related vouchers are dated no earlier than the checks.
d. Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
39. For effective internal control purposes, the vouchers payable department generally should
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
d. Establish the agreement of the vendor's invoice with the receiving report and purchase order.
40. A weakness in internal control over recording retirements of equipment may cause an auditor to a. Trace additions to the "other assets" account to
search for equipment that is still on hand but no longer being used.
b. Select certain items of equipment from the accounting records and locate them in the plant.
c. Inspect certain items of equipment in the plant and trace those items to the accounting records.
d. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.
41. Reportable conditions are matters that come to an auditor's attention, which should be communicated to an entity's audit committee because they represent
a. Material irregularities or illegal acts perpetrated by high-level management.
b. Significant deficiencies in the design or operation of the internal control structure.
c. Flagrant violations of the entity's documented conflict-of-interest policies.
d. Intentional attempts by client personnel to limit the scope of the auditor's field work.
42. Which of the following components of an entity's internal control includes the development of personnel manuals documenting employee promotion and training policies?
a. Control procedures.
b. Control environment.
c. Accounting system.
d. Quality control system.
43. After obtaining an understanding of an entity's internal control structure, an auditor may assess control risk at the maximum level for some assertions because the auditor
a. Believes the internal control policies and procedures are unlikely to be effective.
b. Determines that the pertinent internal control structure elements are not well documented.
c. Performs tests of controls to restrict detection risk to an acceptable level.
d. Identifies internal control policies and procedures that are likely to prevent material misstatements.
44. Which of the following control activities is not usually performed in the vouchers payable department?
a. Determining the mathematical accuracy of the vendor's invoice.
b. Having an authorized person approve the voucher.
c. Controlling the mailing of the check and remittance advice.
d. Matching the receiving report with the purchase order.
45. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with
a. Evidential matter to use in reducing detection risk.
b. Knowledge necessary to plan the audit.
c. A basis from which to modify tests of controls.
d. Information necessary to prepare flowcharts.
46. When assessing an internal auditor's objectivity, an independent auditor should
a. Evaluate the adequacy of the internal auditor's audit programs.
b. Inquire about the internal auditor's educational background and professional certification.
c. Consider the organizational level to which the internal auditor reports.
d. Review the internal auditor's working papers.
47. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that
a. Procedures requiring segregation of duties may be circumvented by employee collusion and management override.
b. Establishing and maintaining the internal control structure is an important responsibility of management.
c. The cost of an entity’s internal control structure should not exceed the benefits expected to be derived.
d. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.
48. Proper authorization procedures in the revenue cycle usually provide for the approval of bad debt write-offs by an employee in which of the following departments?
a. Treasurer.
b. Sales.
c. Billing.
d. Accounts receivable.
49. An auditor assesses control risk because it
a. Indicates where inherent risk may be the greatest.
b. Affects the level of detection risk the auditor may accept.
c. Determines whether sampling risk is sufficiently low.
d. Includes the aspects of nonsampling risk that are controllable.
50. When considering the objectivity of internal auditors, an independent auditor should
a. Test a sample of the transactions and balances that the internal auditors examined.
b. Determine the organizational level to which the internal auditors report.
c. Evaluate the quality control program in effect for the internal auditors.
d. Examine documentary evidence of the work performed by the internal auditors.
51. In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to
a. Identify specific internal control procedures relevant to management's financial statement assertions.
b. Perform tests of controls to evaluate the effectiveness of the entity's accounting system.
c. Determine whether procedures are suitably designed to prevent or detect material misstatements.
d. Document the auditor's understanding of the entity's internal control.
52. The acceptable level of detection risk is inversely related to the
a. Assurance provided by substantive tests.
b. Risk of misapplying auditing procedures.
c. Preliminary judgment about materiality levels.
d. Risk of failing to discover material misstatements.
53. When an auditor becomes aware of a possible client illegal act, the auditor should obtain an understanding of the nature of the act to
a. Increase the assessed level of control risk.
b. Recommend remedial actions to the audit committee.
c. Evaluate the effect on the financial statements.
d. Determine the reliability of management's representations.
54. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.
55. Mailing disbursement checks and remittance advices should be controlled by the employee who
a. Approves the vouchers for payment.
b. Matches the receiving reports, purchase orders, and vendors' invoices.
c. Maintains possession of the mechanical check-signing device.
d. Signs the checks last.
56. Immediately upon receipt of cash, a responsible employee should
a. Record the amount in the cash receipts journal.
b. Prepare a remittance listing.
c. Update the subsidiary accounts receivable records.
d. Prepare a deposit slip in triplicate.
57. What is the meaning of the generally accepted auditing standard which requires that the auditor be independent?
a. The auditor must be without bias with respect to the client under audit.
b. The auditor must adopt a critical attitude during the audit.
c. The auditor's sole obligation is to third parties.
d. The auditor may have a direct ownership interest in his client's business if it is not material.
58. What is the general character of the three generally accepted auditing standards classified as general standards?
a. Criteria for competence, independence, and professional care of individuals performing the audit.
b. Criteria for the content of the financial statements and related footnote disclosures.
c. Criteria for the content of the auditor's report on financial statements and related footnote disclosures.
d. The requirements for the planning of the audit and supervision of assistants, if any.
59. The accuracy of information included in footnotes that accompany the audited financial statements of 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.
60. 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 internal control.
d. Whether the CPA should undertake an audit engagement.
61. Which of the following criteria is unique to the auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of which his client is a part.
c. Due professional care.
d. Independence.
62. The auditor's report may be addressed to the company whose financial statements are being examined or to that company's
a. Chief operating officer.
b. President.
c. Board of Directors.
d. Chief financial officer.
63. 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 the company follows the policy of rotating its auditors.
c. Whether in the predecessor's opinion internal control of the company has been satisfactory.
d. Whether the engagement should be accepted.
64. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by the auditor. The best place to set forth these arrangements is in
a. A memorandum to be placed in the permanent section of the auditing working papers.
b. An engagement letter.
c. A client representation letter.
d. A confirmation letter attached to the constructive services letter.
65. 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. Schedules and analyses to be prepared by the client's staff.
66. Which of the following standards requires 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.
67. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
a. Reviewing investment transactions of the audit period to determine whether related parties were created.
b. Performing analytical procedures to identify areas that may represent specific risks.
c. Reading the minutes of stockholder and director meetings to discover whether any unusual transactions have occurred.
d. Obtaining a written representation letter from the client to emphasize management's responsibilities.
68. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding
a. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.
b. The predecessor's evaluation of matters of continuing accounting significance.
c. The degree of cooperation the predecessor received concerning the inquiry of the client's lawyer.
d. The predecessor's assessments of inherent risk and judgments about materiality.
69. To exercise due professional care an auditor should a. Attain the proper balance of professional
experience and formal education.
b. Design the audit to detect all instances of illegal acts.
c. Critically review the judgment exercised by those assisting in the audit.
d. Examine all available corroborating evidence supporting management's assertions.
70. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act to
a. Evaluate the effect on the financial statements.
b. Determine the reliability of management’s representations.
c. Consider whether other similar acts may have occurred.
d. Recommend remedial actions to the audit committee.
71. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that a. Specified controls requiring segregation of duties
may be circumvented by collusion.
b. Entity policies may be overridden by senior management.
c. Tests of controls may fail to identify procedures relevant to assertions.
d. Material misstatements may exist in the financial statements.
72. An auditor’s primary consideration regarding an entity’s internal control policies and procedures is whether the policies and procedures
a. Affect the financial statement assertions.
b. Prevent management override.
c. Relate to the control environment.
d. Reflect management’s philosophy and operating style.