AUDITING THEORY1. As an auditor which of the following would be classified as an error?a. Intentional omission of the recording of a transaction to benefit a third party.b. Misappropriation of assets for the benefit of management.c. Misinterpretation by management of the facts that existed when the financial statements wereprepared.d. Preparation of records by employee to cover a fraudulent transactions.2. Which of the following circumstances least likely indicate the possibility of fraud or error?a.b.c.d.Unrealistic time deadlines for audit completion imposed by management.Limitation in audit scope imposed by management.Conservative application of accounting principles.Significant difficult-to-audit figures in the accounts.3. Which of management’s concerns with respect to implementing internal controls is the auditor primarilyconcerned?a. Efficiency of operations.b. Reliability of financial reporting.c. Effectiveness of operations.d. Compliance with applicable laws and regulations4. Which of the following statements is not correct?a. The principal purpose in conducting a study and evaluation of the existing internal control system is forthe independent auditor to maintain a state of independence in mental attitude in all matters related tothe audit.b. Working papers can be destroyed after corporate and statutory retention requirements are met.c. The audit program contains the list of specific tasks to be performed and estimated time required.d. An audit program would not contain the documentation of system being reviewed.5. Which of the following conditions or events most likely would cause an auditor to have substantial doubtabout an entity’s ability to continue as a going concern?a. Cash flows from operating activities are negative.b. Research and development projects are postponed.c. Significant related party transactions are pervasive.d. Stock dividends replace annual cash dividends.6. Competence as an independent auditor includes all of the following excepta. Having the technical qualifications to perform the engagementb. Possessing the ability to supervise and evaluate the quality of staff workc. Warranting the infallibility of the work performedd. Consulting others if additional technical information is needed7. Which of the following engagements do not require independence?a. Assurance.c. Audit.b. Compilation.d. Review8. What assurance does the auditor provide that the following will be edLimitedReasonableMisappropriation ofassetsLimitedReasonableLimitedReasonable9. If permission from client to discuss its affairs with the proposed auditor is denied by the client, thepredecessor auditor should:a. Keep silent of the denial.b. Disclose the fact that the permission to disclose is denied by the client.c. Disclose adequately to proposed auditor all noncompliance made by the client.d. Seek legal advice before responding to the proposed auditor
10. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessorauditor regardinga. Disagreements the predecessor had with the client concerning auditing procedures and accountingprinciples.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.11. Tracing shipping documents to prenumbered sales invoices provides evidence thata.b.c.d.No duplicate shipments or billings occurred.Shipments to customers were properly invoiced.All goods ordered by customers were shipped.All prenumbered sales invoices were accounted for.12. Which of the following is not a component of an entity’s internal control?a.b.Control risk.Control activities.c. Monitoring.d. Control environment.13. The permanent file of an auditor’s working papers generally would not includea.b.c.d.Bond indenture agreements.Lease agreements.Working trial balance.Flowchart of internal control14. The audit working paper that reflects the major components of an amount reported in the financialstatements is thea. Interbank transfer schedule.b. Carry forward schedule.c. Supporting schedule.d. Lead schedule.15. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in thesubsequent year provide assurance about management’s assertion ofa. Presentation.c. Rights.b. Completeness.d. Existence.16. Which of the following is not an expert upon whose work an auditor may rely?a.b.Actuary.Appraiser.c. Internal auditor.d. Engineer.17. A purpose of a management representation letter is to reducea.b.c.d.Audit risk to an aggregate level of misstatement that could be considered material.An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on.The possibility of a misunderstanding concerning management’s responsibility for the financialstatements.The scope of an auditor’s procedures concerning related-party transactions and subsequent events.18. The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to provide theauditor witha. The probable outcome of asserted claims and pending or threatened litigation.b. Corroboration of the information furnished by management about litigation, claims, and assessments.c. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.19. When an auditor has chosen a random sample and is using nonstatistical attributes sampling, that auditora.b.c.d.Need not consider the risk of assessing control risk too low.Has committed a nonsampling error.Will have to use discovery sampling to evaluate the results.Should compare the deviation rate of the sample to the tolerable deviation rate.
20. The accounts payable department receives the purchase order form to accomplish all of the following excepttoa.b.c.d.Compare invoice price to purchase order priceEnsure that the purchase had been properly authorizedEnsure that the goods had been received by the party requesting the goodsCompare quantity ordered to quantity purchased21. When comparative financial statements are presented, the fourth standard of reporting, which refers tofinancial statements "taken as a whole," should be considered to apply to the financial statements of thea. Periods presented plus the one preceding periodb. Current period onlyc. Current period and those of the other periods presentedd. Current and immediately preceding period only22. Which of the following auditing procedures most likely would assist an auditor in identifying conditions andevents that may indicate substantial doubt about an entity's ability to continue as a going concern?a. Inspecting title documents to verify whether any assets are pledged as collateralb. Confirming with third parties the details of arrangements to maintain financial supportc. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmationd. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry23. When the auditor is unable to determine the amounts associated with the illegal acts of client personnelbecause of an inability to obtain adequate evidence, the auditor should issue a(n)a. Qualified opinionb. Disclaimer of opinionc. Adverse opiniond. Unqualified opinion with a separate explanatory paragraph24. The predecessor auditor, after properly communicating with the successor auditor, has reissued a reportbecause the audit client desires comparative financial statements. The predecessor auditor's report shouldmakea. No reference to the report or the work of the successor auditorb. Reference to the work of the successor auditor in the scope paragraphc. Reference to both the work and the report of the successor auditor in the opinion paragraphd. Reference to the report of the successor auditor in the scope paragraph25. Absolute assurance is provided for ina. An audit engagementb. A compilation engagementc. A review engagementd. None of the above26. During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statementscontain a material departure from generally accepted accounting principles. If management refuses to correctthe problem, the CPA shoulda. Disclose the departure in a separate paragraph of the reportb. Issue an adverse opinionc. Attach a footnote explaining the effects of the departured. Issue a compilation report27. Compilations provide which of the following types of assurance about the fair presentation of financialstatements?a. No assuranceb. Negative assurancec. Limited assuranced. Reasonable assurance28. Which of the following statements is true regarding the performance of an assurance service on informationsystems reliability by a CPA?a. The CPA is not permitted to provide any other services for the client if he or she is to perform the serviceb. The service will require the CPA to apply all of the attestation and auditing standardsc. The service provides information regarding whether the information system provides reliableinformation for internal operating decisionsd. Performing the service will not require the collection of evidence
29. An accountant may accept an engagement to apply agreed-upon procedures to prospective financialstatements provided thata. Distribution of the report is to be restricted to the specified users involvedb. The prospective financial statements also are examinedc. Responsibility for the adequacy of the procedures performed is taken by the accountantd. Negative assurance is expressed on the prospective financial statements taken as a whole30. The party responsible for assumptions identified in the preparation of prospective financial statements isusuallya. A third-party lending institutionb. The client's managementc. The reporting accountantd. The client's independent auditor31. Responding to a question such as "What would happen if " is an attribute of which of the following types ofengagements?a. Financial projectionb. Financial forecastc. Financial forecast and financial projectiond. Review32. Preliminary engagement activities include:a.b.c.d.Evaluating internal controls.Assessing audit risk at the account balance level.Setting materiality.Determining engagement team requirements.33. The auditor's report is generally addressed to the:a.b.c.d.Chief operating officer.Securities and Exchange Commission.Stockholders of the company.Chief financial officer.34. When obtaining an understanding of the entity and its environment, the auditor should obtain anunderstanding of internal controls primarily toa. 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.35. Before accepting an engagement to audit a new client, an auditor is required toa.b.c.d.Make inquiries of the predecessor auditor.Tell the client whether or not the auditor is willing to issue a "clean" opinion.Prepare a memorandum setting forth the staffing requirements and documenting the preliminary auditplan.Become a member of the client's board of directors.36. The accuracy of information included in footnotes accompanying the audited financial statements issued by acompany whose shares are traded on a stock exchange is the primary responsibility ofa. The stock exchange officialsb. The independent auditorc. The company's managementd. The Securities and Exchange Commission37. Which of the following best describes the concept of risk assessment on which auditors can provideindependent assurance?a. The risk that financial statements are misstated because of fraudb. The risk that financial statements are misstated because of error or fraudc. Whether management has systems in place to evaluate and effectively manage the entity's business risksd. Developing client acceptance and continuance practices that minimize the likelihood of lawsuits againstthe auditor
38. A typical objective of an operational audit is for the auditor toa.b.c.d.Determine whether the financial statements present fairly the entity's operationsEvaluate the feasibility of attaining the entity's operational objectivesMake recommendations for improving performanceReport on the entity's relative success in attaining profit maximization39. Governmental auditing often extends beyond examinations leading to the expression of an opinion on thefairness of financial presentation and includes audits of efficiency, effectiveness, anda. Monetary stimulusc. Accuracyb. Evaluationd. Compliance40. Which is not an attribute of an external auditor?a.b.c.d.IndependenceClient advocacyObjectivityConcern for the public interest41. What is the general character of the work conducted in performing a forensic audit for a company?a.b.c.d.Providing assurance that the financial statements are not materially misstatedDetecting or deterring fraudulent activityOffering an opinion on the reliability of the specific assertions made by managementIdentifying the causes of an entity's financial difficulties42. Which of the following is NOT a requirement of the Sarbanes-Oxley Act?a.b.c.d.Audit firms cannot provide most types of nonaudit services to their public company audit clientsAudit firms are required to rotate audit partners off audit engagements every five years for publiccompany auditsFirms that audit public companies are subject to inspection by the PCAOBA certain number of hours, which is based on the size of the company being audited, must be spent oneach audit engagement43. With regard to detecting fraud, auditing standards require