Chapter One - Questions
82. Which of the following representations should not be included in a report on internal control related
matters noted in an audit?
a. Reportable conditions related to the internal control structure design exist, but none is deemed to be a material weakness.
b. There are no significant deficiencies in the design or operation of the internal control structure.
c. Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit.
d. The auditor’s consideration of the internal control structure would not necessarily disclose all reportable conditions that exist.
83. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's
a. Opinion of any subsequent events occurring since the predecessor's audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.
84. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
a. An inadequate understanding of the entity's internal control structure.
b. The close proximity to the end of the entity's fiscal year.
c. Concluding that the entity's management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before assessing control risk.
85. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the
a. Auditor's system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditor's report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and proficiency as auditors.
86. An auditor obtains knowledge about a new client's business and its industry to
a. Make constructive suggestions concerning improvements to the client's internal control structure.
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.
87. Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's financial statements, and illegal acts that have a material, but indirect effect on the financial statements will be detected?
Direct effect Indirect effect illegal acts illegal acts
a. Reasonable None
b. Reasonable Reasonable
c. Limited None
d. Limited Reasonable
88. An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the
a. Auditor is precluded from obtaining sufficient competent evidence about the illegal act.
b. Illegal act has an effect on the financial statements that is both material and direct.
c. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.
d. Client refuses to accept the auditor's report as modified for the illegal act.
89. 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 judgment.
b. Independent integrity.
c. Professional skepticism.
d. Impartial conservatism.
90. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
a. Assessment of control risk.
b. Identification of weaknesses in the system.
c. Assessment of the control environment's effectiveness.
d. Understanding of the system.
91. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when
a. The audit committee is active in overseeing the entity's financial reporting policies.
b. External policies established by parties outside the entity affect its accounting practices.
c. Management is dominated by one individual who is also a shareholder.
d. Internal auditors have direct access to the board of directors and entity management.
92. An auditor should obtain sufficient knowledge of an entity's accounting system to understand the
a. Safeguards used to limit access to computer facilities.
b. Process used to prepare significant accounting estimates.
c. Procedures used to assure proper authorization of transactions.
d. Policies used to detect the concealment of irregularities.
93. When obtaining an understanding of an entity's internal control procedures, an auditor should concentrate on the substance of the procedures rather than their form because
a. The procedures may be operating effectively but may not be documented.
b. Management may establish appropriate procedures but not enforce compliance with them.
c. The procedures may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement procedures whose costs exceed their benefits.
94. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?
a. Incompatible duties.
b. Management override.
c. Mistakes in judgment.
d. Collusion among employees.
95. After obtaining an understanding of internal control and assessing control risk, an auditor decided not to perform additional tests of controls. The auditor most likely concluded that the
a. Additional evidence to support a further reduction in control risk was not cost beneficial to obtain.
b. Assessed level of inherent risk exceeded the assessed level of control risk.
c. Internal control structure was properly designed and justifiably may be relied on.
d. Evidence obtainable through tests of controls would not support an increased level of control risk.
96. Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?
a. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.
c. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
d. Inquire about the entity's credit granting policies and the consistent application of credit checks.
97. Which of the following internal control procedures most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.
98. An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for
a. Examining authorization forms for new employees.
b. Comparing payroll registers with original batch transmittal data.
c. Authorizing payroll rate changes for all employees.
d. Hiring all subordinate payroll department employees.
99. In a properly designed internal control system, the same employee most likely would match vendors' invoices with receiving reports and also
a. Post the detailed accounts payable records.
b. Recompute the calculations on vendors' invoices.
c. Reconcile the accounts payable ledger.
d. Cancel vendors' invoices after payment.
100. Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?
a. Periodic independent counts of work in process for
b. Comparison of daily journal entries with approved production orders.
c. Use of time tickets to record actual labor worked on production orders.
d. Reconciliation of work-in-process inventory with periodic cost budgets.
101. Which of the following internal control procedures most likely would be used to maintain accurate inventory records?
a. Perpetual inventory records are periodically compared with the current cost of individual inventory items.
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
c. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.
d. Periodic inventory counts are used to adjust the perpetual inventory records.
102. An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of
a. Valuation or allocation.
b. Completeness.
c. Existence or occurrence.
d. Rights and obligations.
103. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
a. Obtaining a written representation letter from the client's management.
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.
104. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?
a. The complexity of the accounting system.
b. The existence of related party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control procedures.
105. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated.
Under these circumstances, which party should initiate the communications between Hill and Post?
a. Hill, the successor auditor.
b. Post, the predecessor auditor.
c. Monday's controller or CFO.
d. The chairman of Monday's board of directors.
106. The senior auditor responsible for coordinating the field work usually schedules a pre-audit conference with the audit team primarily to
a. Give guidance to the staff regarding both technical and personnel aspects of the audit.
b. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
c. Establish the need for using the work of specialists and internal auditors.
d. Provide an opportunity to document staff disagreements regarding technical issues.
107. To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior-year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Reevaluate the client's internal control environment.
108. In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods
a. Influence the design of internal control.
b. Affect the auditor's preliminary judgment about materiality levels.
c. Assist in evaluating the planned audit objectives.
d. Determine the auditor's acceptable level of audit risk.
109. 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 planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
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.
110. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?
a. Management places little emphasis on meeting earnings projections.
b. The board of directors makes all major financing decisions.
c. Reportable conditions previously communicated to management are not corrected.
d. Transactions selected for testing are not supported by proper documentation.
111. When assessing the internal auditors' competence, the independent CPA should obtain information about the
a. Organizational level to which the internal auditors report.
b. Educational background and professional certification of the internal auditors.
c. Policies prohibiting the internal auditors from auditing areas where relatives are employed.
d. Internal auditors' access to records and information that is considered sensitive.
112. Proper segregation of duties reduces the opportunities to allow persons to be in positions to both a. Journalize entries and prepare financial statements.
b. Record cash receipts and cash disbursements.
c. Establish internal controls and authorize transactions.
d. Perpetuate and conceal errors and irregularities.
113. In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure a. Reflects management's philosophy and operating
style.
b. Affects management's financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management's decision-making processes.
114. Which of the following are considered control environment factors?
Personnel Detection policies and
risk practices
a. Yes Yes
b. Yes No
c. No Yes
d. No No
115. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that a. Tests of controls may fail to identify procedures
relevant to assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.
116. To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including
a. Inquiry.
b. Analytical procedures.
c. Calculation.
d. Confirmation.
117. Which of the following is a step in an auditor's decision to assess control risk at below the maximum?
a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.
b. Perform tests of details of transactions and account balances to identify potential errors and irregularities.
c. Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements.
d. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.
118. The likelihood of assessing control risk too high is the risk that the sample selected to test controls
a. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control structure justifies such an assessment.
b. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.
c. Contains proportionately fewer monetary errors or deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole.
d. Does not support the tolerable error for some or all of management's assertions.
119. Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
a. Internal auditor to investigate the listing for unusual transactions.
b. Treasurer to compare the listing with the monthly bank statement.
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
d. Entity's bank to compare the listing with the cashier's deposit slip.
120. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
a. Accounts receivable.
b. Credit.
c. Accounts payable.
d. Treasurer.
121. Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process?
a. Comparing control totals for shipping documents with corresponding totals for sales invoices.
b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.
c. Matching shipping documents with approved sales orders before invoice preparation.
d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
122. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
a. Completeness.
b. Existence or occurrence.
c. Valuation or allocation.
d. Rights and obligations.
123. Which of the following internal control procedures is not usually performed in the vouchers payable department?
a. Matching the vendor's invoice with the related receiving report.
b. Approving vouchers for payment by having an authorized employee sign the vouchers.
c. Indicating the asset and expense accounts to be debited.
d. Accounting for unused prenumbered purchase orders and receiving reports.
124. Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?
a. Are requests for major repairs approved at a higher level than the department initiating the request?
b. Are prenumbered purchase orders used for equipment and periodically accounted for?
c. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids?
d. Are procedures in place to monitor and properly restrict access to equipment?
125. The objective of tests of details of transactions performed as tests of controls is to
a. Monitor the design and use of entity documents such as prenumbered shipping forms.
b. Determine whether internal control structure policies and procedures have been placed in operation.
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether internal control structure procedures operated effectively.
126. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
a. Scan the sales journal for sequential and unusual entries.
b. Examine shipping documents for matching sales invoices.
c. Compare the accounts receivable ledger to daily sales summaries.
d. Inspect unused sales invoices for consecutive prenumbering.
127. Reportable conditions are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent
a. Disclosures of information that significantly contradict the auditor's going concern assumption.
b. Material irregularities or illegal acts perpetrated by high-level management.
c. Significant deficiencies in the design or operation of the internal control structure.
d. Manipulation or falsification of accounting records or documents from which financial statements are prepared.
128. Which of the following statements is correct concerning an auditor's required communication of reportable conditions?
a. A reportable condition previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.
b. An auditor should perform tests of controls on reportable conditions before communicating them to the client.
c. An auditor's report on reportable conditions should include a restriction on the distribution of the report.
d. An auditor should communicate reportable conditions after tests of controls, but before commencing substantive tests.
129. In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from a. Discussions with management personnel.
b. External quality reviews of the internal auditor's activities.
c. Previous experience with the internal auditor.
d. The results of analytical procedures.
130. 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. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
b. Procedures to be undertaken to discover litigation, claims, and assessments.
c. Pending legal matters to be included in the inquiry of the client's attorney.
d. Timing of inventory observation procedures to be performed.
131. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding a. Specialized accounting principles of the client's
industry.
b. The competency of the client's internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.
132. Which of the following statements would least likely appear in an auditor's engagement letter?
a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.
b. During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations.
c. Our engagement is subject to the risk that material errors or irregularities, including fraud and defalcations, if they exist, will not be detected.
d. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
133. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
a. Inquiring of the client's legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.
134. The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
a. That immaterial irregularities are 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. What benefits may be attained by the assistants' adherence to established time budgets.
d. Why certain documents are being transferred from the current file to the permanent file.
135. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity's annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
136. As the acceptable level of detection risk decreases, an auditor may
a. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.