1. When the auditor's regular examination
leading to an opinion on financial statements discloses specific circumstances
that make him suspect that fraud may exist and he concludes that the results of
such fraud, if any, could not be so material as to affect his opinion, he
should
a. refer the matter to the appropriate representatives of the client with the recommendation that it is to be pursued to a conclusion.
b. immediately extend
his audit procedures to determine if fraud has occurred and, if so, the amount
thereof.
c. reach an
understanding with the client as to whether the auditor or the client, subject
to the auditor's review, is to make the investigation necessary to determine
whether fraud has occurred and, if so, the amount thereof.
d. make a note
in his working papers of the possibility of a fraud of immaterial amount so as
to pursue the matter next year.
2. When engaged to prepare unaudited
financial statements, the CPA's responsibility to detect fraud
a. is limited
to informing the client of any matters that come to the auditor's attention
which cause the auditor to believe that an irregularity exists.
b. is the same
as the responsibility that exists when the CPA is engaged to perform an audit
of financial statements in accordance with generally accepted auditing
standards.
c. arises out
of the CPA's obligation to apply procedures which are designed to bring to
light indications that a fraud or defalcation may have occurred.
d. does not
exist unless an engagement letter is prepared.
3. An auditor should recognize that the
application of auditing procedures may produce evidential matter indicating the
possibility of errors or irregularities and therefore should
a. plan and
perform the engagement with an attitude of professional skepticism.
b. not depend on internal accounting control features that are designed to prevent or detect errors or irregularities.
c. design audit
tests to detect unrecorded transactions.
d. extend the
work to audit most recorded transactions and records of an entity.
4. Most illegal acts affect the financial
statements
a. directly.
b. only
indirectly.
c. both
directly and indirectly.
d. materially
if direct; immaterially if indirect.
5. After
the auditor has completed all the procedures, it is necessary to combine the
information obtained to reach an overall conclusion as to whether the financial
statements are fairly presented. This is a highly subjective process that
relies heavily on
a. generally
accepted auditing standards.
b. the AICPA's Code
of Professional Conduct.
c. generally
accepted accounting principles.
d. the
auditor's professional judgment.
6. Only three management assertions are
associated with transaction-related audit objectives. Which one of the
following is not?
a. Existence or
occurrence
b. Completeness
c. Valuation or
allocation
d. Presentation
and disclosure
7. When the auditor believes an illegal
act may have occurred, it is necessary to
a. inquire of
management, at a level above those likely to be involved with the illegality.
b. consult with
the client's legal counsel.
c. consider accumulating
additional evidence to determine if there is actually an illegal act.
d. do all three
of the above.
8. "The auditor should not assume
that management is dishonest, but the possibility of dishonesty must be
considered." This is an example of
a. unprofessional
behavior.
b. an attitude
of professional skepticism.
c. due
diligence.
d. a rule in
the AICPA's Code of Professional Conduct.
9. To adequately plan the appropriate
audit evidence, generally accepted auditing standards require the auditor to
gain an understanding of the internal control structure. This understanding is
obtained by
a. reviewing
organizational charts and procedural manuals.
b. discussions
with client personnel.
c. observing
client activities.
d. all of the
above.
10. When
a CPA has concluded that action should be taken to prevent future reliance on
his report, he should
a. advise his
client to make appropriate disclosure of the newly discovered facts and their
impact on the financial statements to persons who are known to be currently
relying or who are likely to rely on the financial statements and the related
auditor's report.
b. recall the
financial statements and issue revised statements and include an appropriate
opinion.
c. advise the
client and others not to rely on the financial statements and make appropriate
disclosure of the correction in the statements of a subsequent period.
d. recall the
financial statements and issue a disclaimer of opinion which should generally
be followed by revised statements and a qualified opinion.
11. Auditing standards regarding the
detection of illegal acts clearly state that the auditor provides
a. no assurance
that they will be detected.
b. the same
reasonable assurance provided for other items.
c. assurance
that they will be detected, if material.
d. assurance
that they will be detected, if highly material.
12. When is the auditor responsible for
detecting fraud?
a. When the
fraud did not result from collusion.
b. When third
parties are likely to rely on the client's financial statements.
c. When the
client's system of internal control is judged by the auditor to be inadequate.
d. When the
application of generally accepted auditing standards would have uncovered the
fraud.
13. Which of the following statements is not
true?
a. Balance-related
audit objectives are applied to account balances.
b. Transaction-related
audit objectives are applied to classes of transactions.
c. Balance-related
audit objectives are applied to the ending balance in balance sheet accounts.
d. Balance-related
audit objectives are applied to both beginning and ending balances in balance
sheet accounts.
14. When the auditor knows that an illegal
act has occurred, the auditor must
a. report it to
the proper governmental authorities.
b. consider the
effects on the financial statements, including the adequacy of disclosure.
c. withdraw
from the engagement.
d. issue an
adverse opinion.
15. If
the auditor were responsible for making certain that all the assertions of
management in the statements were correct,
a. bankruptcies
could no longer occur.
b. bankruptcies
would be reduced to a very small number.
c. audits would
be much easier to complete.
d. audits would
not be economically feasible.
16. When the auditor has assessed control
risk of a particular area at a reduced level, he or she will then
a. proceed to
expand the sample sizes in that area.
b. eliminate
the need to gather evidence in that area.
c. test the
effectiveness of the controls in that area.
d. negotiate
with management to determine which controls will be tested in that area.
17. Many tests of controls involve
inspecting documents. These tests are commonly referred to as
a. tests of
transactions.
b. tests of
documentation.
c. tests of
balances.
d. tests of
analytical procedures.
18. The auditor's best defense when existing
material misstatements in the financial statements are not uncovered in the audit
is that
a. the audit
was conducted in accordance with generally accepted auditing standards.
b. the audit
was conducted in accordance with generally accepted accounting principles.
c. client is
guilty of contributory negligence.
d. the financial
statements are client's responsibility.
19. The cycle approach to segmenting an
audit requires that
a. the client's
natural business cycle or year be the primary consideration in planning the
audit.
b. closely
related transactions and account balances be kept in the same segment.
c. every
account balance on the financial statements must be treated as a separate
segment.
d. two
different audit teams will cycle between assignments to ensure that the firm
has an unbiased view of the client's records.
20. In
testing for cutoff, the objective is to determine
a. whether all
of the current period's transactions are recorded.
b. whether
transactions are recorded in the proper period.
c. that no
transactions of the current period have been delayed and recorded in a future
period.
d. that no
transactions from the prior period are included in the current period's
balances.
21. If an auditor was engaged to discover
errors and irregularities and the auditor performed extensive detail work,
which of the following could the auditor be expected to detect?
a. Unrecorded
transactions.
b. Mis-postings
of recorded transactions.
c. Counterfeit
signatures on paid checks.
d. Collusive
fraud.
22. In describing the cycle approach to
segmenting an audit, which of the following statements is not true?
a. All general
ledger accounts and journals are included at least once.
b. Some
journals and general ledger accounts are included in more than one cycle.
c. The
"capital acquisition and repayment" cycle is closely related to the
"acquisition of goods and services and payment" cycle.
d. The
"inventory and warehousing" cycle may be audited at any time during
the engagement since it is unrelated to the other cycles.
23. Which of the following journals would be
included most often in the various audit cycles?
a. Cash
receipts journal.
b. Cash
disbursements journal.
c. General
journal.
d. Sales
journal.
24. Which of the following statements best
describes the auditor's responsibility with respect to illegal acts that do not
have a material effect on the client's financial statements?
a. Generally,
the auditor is under no obligation to notify parties other than personnel
within the client's organization.
b. Generally,
the auditor is under an obligation to see that stockholders are notified.
c. Generally,
the auditor is obligated to disclose the relevant facts in the auditor's
report.
d. Generally, the
auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act.
25. The
detail tie-in objective is not concerned that the details in the account
balance
a. agree with
related subsidiary ledger amounts.
b. are properly
disclosed, in accordance with GAAP.
c. foot to the
total in the account balance.
d. agree with
the total in the general ledger.
26. The most important general ledger
account included in and affecting several cycles is the
a. cash
account.
b. inventory
account.
c. income tax
expense and liability accounts.
d. retained
earnings account.
27. Fraudulent financial reporting is often
called
a. management
fraud.
b. theft of
assets.
c. defalcation.
d. employee
fraud.
28. Analytical procedures are those that
a. evaluate the
accuracy of the account balances.
b. assess the
overall reasonableness of transactions and balances.
c. review the
effectiveness of internal control procedures.
d. analyze the effect
of management procedures on the accounting system.
29. Transaction cycles begin and end
a. at the
beginning and end of the fiscal period.
b. at the
balance sheet date.
c. at January 1
and December 31.
d. at the
origin and final disposition of the company.
30. For
the most part, auditors treat each transaction cycle
a. as an
interrelated unit with the other cycles throughout the entire audit.
b. separately
as the audit is being performed.
c. as a separate
business unit with different audit teams.
d. as a joint
venture with other clients in the same industry.
31. Which of the following statements is not
true?
a. Inclusion of
an account receivable from a customer in the accounts receivable trial balance
when there is no receivable from that customer violates the existence
objective.
b. Failure to
include an account receivable from a customer in the accounts receivable trial
balance when a receivable exists violates the completeness objective.
c. The accounts
receivable listing should include one total for all receivables from customers
and officers.
d. Individual
accounts receivable on a listing of accounts receivable should be the same in
the accounts receivable master file and the total should equal the general
ledger control account.
32. After the general objectives are
understood, specific objectives for each account balance on the financial
statements can be developed. Which of the following statements is true?
a. There should
be at least one specific objective for each relevant general objective.
b. There will
be only one specific objective for each relevant general objective.
c. There will
be many specific objectives developed for each relevant general objective.
d. There must
be one specific objective for each general objective.
33. To adequately plan the appropriate audit
evidence to gather, generally accepted auditing standards require the auditor
to gain an understanding of
a. the client's
procedural manuals.
b. the client's
organization charts.
c. the client's
internal control.
d. all of the
above.
34. Which of the following factors is most
important concerning an auditor's responsibility to detect errors and
irregularities?
a. The
susceptibility of the accounting records to intentional manipulations,
alterations, and the misapplication of accounting principles.
b. The
probability that unreasonable accounting estimates result from unintentional
bias or intentional attempts to misstate the financial statements.
c. The
possibility that management fraud, defalcations, and the misappropriation of
assets may indicate the existence of illegal acts.
d. The risk
that mistakes, falsifications, and omissions may cause the financial statements
to contain material misstatements.
35. Illegal
acts are defined in SAS 54 (AU217) as
a. violations
of laws or government regulations.
b. violations
of laws or government regulations, other than errors.
c. violations
of laws or government regulations, other than irregularities.
d. violations
of law which would result in the arrest of the perpetrator.
36. If the auditor has obtained a reasonable
level of assurance about the fair presentation of the financial statements
through understanding internal control, assessing control risk, testing
controls, and analytical procedures, then the auditor
a. can issue an
unqualified opinion.
b. can
significantly reduce the test of details.
c. can write
the engagement letter.
d. needs to do additional
tests of controls so that the assurance level can be increased.
37. Which one of the following is not an
example of misclassification for sales?
a. Recording
the sale of a subsidiary as a reduction in investments.
b. Recording a
sale of operating fixed assets as revenue.
c. Including
commercial sales as residential sales.
d. Including
cash sales as credit sales.
38. The auditor has considerable
responsibility for notifying users as to whether or not the statements are
properly stated. This imposes upon the auditor a duty to
a. provide
reasonable assurance that material misstatements will be detected.
b. be a
guarantor of the fairness in the statements.
c. be equally
responsible with management for the preparation of the financial statements.
d. be an
insurer of the fairness in the statements.
39. When preparing the financial statements,
it is acceptable for the auditor to prepare
a. the
statements for client.
b. the
footnotes for client.
c. a draft of
the statements for client.
d. a draft of
the statements and footnotes for client.
40. The
responsibility for the preparation of the financial statements and the
accompanying footnotes belongs to
a. the auditor.
b. management.
c. both management
and the auditor equally.
d. management
for the statements and the auditor for the notes.
41. The auditor gives an audit opinion on
the fair presentation of the financial statements and associates his or her
name with it when, on the basis of adequate evidence, the auditor concludes
that the financial statements are unlikely to mislead
a. investors.
b. management.
c. a prudent
user.
d. the reader.
42. 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.
43. Tests of details of balances are
specific procedures intended to
a. test for
monetary errors in the financial statements.
b. prove that
the accounts with material balances are classified correctly.
c. prove that
the trial balance is in balance.
d. identify the
details of the internal control system.
44. Which of the following statements is
true?
a. It is
usually easier for the auditor to uncover irregularities than errors.
b. It is
usually easier for the auditor to uncover errors than irregularities.
c. It is
usually equally difficult for the auditor to uncover errors or irregularities.
d. Usually,
none of the above statements is true.
45. Management
assertions are
a. implied or
expressed representations about the accounts in the financial statements.
b. stated in
the footnotes to the financial statements.
c. explicitly
expressed representations about the financial statements.
d. provided to
the auditor in the assertions letter, but are not disclosed on the financial
statements.
46. The disclosure objective is concerned
that
a. the account
balance is properly presented on the financial statements.
b. disclosure
requirements are properly presented on the financial statements and in the
footnotes.
c. both a and b
above.
d. none of the
above.
47. Which of the following statements best
describes the auditor's responsibility regarding the detection of fraud?
a. The auditor
is responsible for the failure to detect fraud only when such failure clearly
results from nonperformance of audit procedures specifically described in the
engagement letter.
b. The auditor
must extend auditing procedures to actively search for evidence of fraud in all
situations.
c. The auditor
must extend auditing procedures to actively search for evidence of fraud where
the examination indicates that fraud may exist.
d. The auditor
is responsible for the failure to detect fraud only when an unqualified opinion
is issued.
48. The essence of the attest function is to
a. assure the
consistent application of correct accounting procedures.
b. determine
whether the client's financial statements are fairly stated.
c. examine
individual transactions so that the auditor may certify as to their validity.
d. detect
collusion and fraud.
49. Which of the following is not a proper
match of auditor's objective with management's assertion?
a. Ownership
matches with rights and obligations.
b. Existence
matches with existence/occurrence.
c. Classification
matches with presentation/disclosure.
d. Completeness
matches with completeness.
50. Which
of the following statements is not true?
a. An example
of a completeness assertion would be that the notes payable account in the
balance sheet includes all such obligations of the entity.
b. An example
of an existence/occurrence assertion would be that sales in the income
statement represent exchanges of goods or services that actually took place.
c. An example
of a rights/obligations assertion would be that amounts capitalized for leases
in the balance sheet represent the cost of the entity's rights to leased
property.
d. An example
of a valuation/allocation assertion would be that property, plant, and
equipment are recorded at current market value.
51. In comparing management fraud with
employee fraud, the auditor's risk of failing to discover the fraud is
a. greater for
management fraud because managers are inherently smarter than employees.
b. greater for
management fraud because of management's ability to override existing internal
controls.
c. greater for
employee fraud because of the higher crime rate among blue collar workers.
d. greater for
employee fraud because of the larger number of employees in the organization.
52. When comparing the auditor's
responsibility for detecting employee fraud and for detecting errors, the
profession has placed the responsibility
a. more on
discovering errors than employee fraud.
b. more on
discovering employee fraud than errors.
c. equally on
discovering either one.
d. on the
senior auditor for detecting errors and on the manager for detecting employee
fraud.
53. Should the auditor uncover circumstances
during the audit that may cause suspicions of management fraud, the auditor
must
a. issue an
adverse opinion.
b. issue a
disclaimer.
c. evaluate
their implications and consider the need to modify audit evidence.
d. withdraw
from the engagement.
54. Which of the following statements is
true?
a. The auditor's
objectives follow and are closely related to management assertions.
b. Management's
assertions follow and are closely related to the auditor's objectives.
c. The
auditor's primary responsibility is to find and disclose fraudulent management
assertions.
d. Assertions
about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts.
55. Which
of the following statements is not correct?
a. There are
many ways an auditor can accumulate evidence to meet the overall audit
objectives.
b. Sufficient
competent evidence must be accumulated to meet the auditor's professional
responsibility.
c. The cost of
accumulating the evidence should be minimized.
d. Gathering
evidence and minimizing costs are equally important considerations that affect
the approach the auditor selects.
56. The primary difference between an audit
of the balance sheet and an audit of the income statement lies in the fact that
the audit of the income statement deals with the verification of
a. transactions.
b. authorizations.
c. costs.
d. cutoffs.
57. The auditor's evaluation of the
likelihood of material employee fraud is normally done initially as a part of
a. tests of
controls.
b. tests of
transactions.
c. understanding
the entity's internal control.
d. the
assessment of whether to accept the audit engagement.
58. Two overriding considerations affect the
many ways an auditor can accumulate evidence:
1. Sufficient competent evidence must be
accumulated to meet the auditor's professional responsibility.
2. Cost of accumulating evidence should be
minimized.
In evaluating these considerations,
a. the first is
more important than the second.
b. the second
is more important than the first.
c. they are
equally important.
d. it is
impossible to prioritize them.
59. Which of the following statements is true
regarding the distinction between general audit objectives and specific audit
objectives for each account balance?
a. The specific
audit objectives are applicable to every account balance on the financial
statements.
b. The general
audit objectives are applicable to every account balance on the financial
statements.
c. The general
audit objectives are stated in terms tailored to the engagement.
d. The specific
audit objectives are stated in terms tailored to the engagement.
60. If
there is fraud involving the collusion of several employees that includes the
falsification of documents, the chance that such a fraud would be uncovered in
a normal audit is
a. zero.
b. unlikely.
c. 50/50.
d. very high.
61. Which of the following statements about
the existence and completeness objectives is not true?
a. The
existence and completeness objectives emphasize opposite audit concerns.
b. Existence
deals with overstatements and completeness deals with understatements.
c. Existence
deals with understatements and completeness deals with overstatements.
d. The
completeness objective deals with unrecorded transactions.
62. Which of the following is not one of the
four phases in the audit process?
a. Plan and design
an audit approach.
b. Test
controls and transactions.
c. Inform
client of any adjustments or corrections to be made to the financial
statements.
d. Complete the
audit and issue the report.
63. When using the cycle approach to
segmenting the audit, the reason for treating capital acquisition and repayment
separately from the acquisition of goods and services is that
a. the
transactions are related to financing a company rather than to its operations.
b. most capital
acquisition and repayment cycle accounts involve few transactions, but each is
often highly material and therefore should be audited extensively.
c. both a and b
above.
d. neither a
nor b above.
64. When planning the audit, if the auditor
has no reason to believe that illegal acts exist, the auditor should
a. include
audit procedures which have a strong probability of detecting illegal acts.
b. still
include some audit procedures designed specifically to uncover illegalities.
c. ignore the
topic.
d. make inquiries
of management regarding their policies and regarding their knowledge of
violations, and then rely on normal audit procedures to detect errors,
irregularities, and illegalities.
65. The
objective of the ordinary examination by the independent auditor is the
expression of an opinion on
a. the fairness
of the financial statements.
b. the accuracy
of the financial statements.
c. the accuracy
of the annual report.
d. the balance
sheet and income statement.
66. The reason auditors accumulate evidence
is to
a. defend
themselves in the event of a lawsuit.
b. justify the
conclusions they have otherwise reached.
c. satisfy the
requirements of the Securities Acts of 1933 and 1934.
d. enable them
to reach conclusions about the fairness of the financial statements and issue
an appropriate audit report.
67. The factor which distinguishes an error
from an irregularity is
a. materiality.
b. intent.
c. whether it
is a dollar amount or a process.
d. whether it
is a caused by the auditor or the client.
68. In distinguishing between the detection
of a material management fraud and an equally material error, audits
a. should
provide complete assurance of detection.
b. should be
expected to provide the same degree of assurance.
c. cannot be
expected to provide the same degree of assurance.
d. provide no
assurance of detecting either.
69. Which of the following is not one of the
five broad categories of assertions, as classified in SAS 31?
a. General or
specific transaction objectives.
b. Existence or
occurrence.
c. Valuation or
allocation.
d. Presentation
and disclosure.
70. Which
of the following statements is not correct?
a. It would be
a violation of the completeness assertion if management would record a sale
that did not take place.
b. The
completeness assertion deals with matters opposite from those of the
existence/occurrence assertion.
c. The completeness
assertion is concerned with the possibility of omitting items from the
financial statements that should have been included.
d. The
existence/occurrence assertion is concerned with inclusion of amounts that
should not have been.
71. Which of the following statements is
true?
a. The evidence
which the auditor accumulates remains the same from audit to audit, but the
general audit objectives vary, depending on the circumstances.
b. The
circumstances may vary from audit to audit, but the evidence accumulated
remains the same.
c. The general
audit objectives may vary from audit to audit, but the circumstances remain the
same.
d. The general
audit objectives remain the same from audit to audit, but the evidence varies,
depending on the circumstances.
72. Which of the following "general
transaction-related audit objectives" is not part of the valuation or
allocation assertion?
a. Completeness
b. Accuracy
c. Classification
d. Timing
73. If a long-term note receivable is
included on an accounts receivable listing, there is a violation of the
a. completeness
objective.
b. existence
objective.
c. timing
objective.
d. classification
objective.
74. An audit process is a well-defined
methodology for organizing an audit to ensure that
a. the evidence
gathered is both sufficient and competent.
b. all
appropriate audit objectives are specified.
c. all
appropriate audit objectives are met.
d. all of the
above.
75. Discuss
the actions an auditor should take when the auditor discovers an illegal act.
76. There are six general
transaction-related audit objectives. One is the existence objective which
deals with whether recorded transactions have actually occurred. Identify and
discuss each of the remaining five general transaction-related audit
objectives.
77. There
are nine general balance-related audit objectives. One is the existence
objective which deals with whether the amounts included in the financial
statements should actually be included. Identify and discuss each of the
remaining eight general balance-related audit objectives.
1 - 10. a,
a, a, b, d, d, d, b, d, a
11 - 20. a,
d, d, b, d, c, a, a, b, b
21 - 30. b,
d, c, a, b, a, a, b, d, b
31 - 40. c,
a, c, d, c, b, a, a, d, b
41 - 50. c,
c, a, b, a, b, c, b, c, d
51 - 60. b,
a, c, a, d, a, c, a, b, b
61 - 70. c,
c, c, d, a, d, b, c, a, a
71 - 74. d,
a, d, d
75. The auditor should first consider the
effects of the illegal act on the financial statements, including the adequacy
of disclosures. If the auditor concludes that disclosures are inadequate, the
audit report should be modified accordingly. The auditor should also consider
the effect of the illegal act on its relationship with management, and
management's trustworthiness. Next, the client's audit committee or others of
equivalent authority should be informed of the illegal act. If the client does
not deal with the illegal act in a satisfactory manner, the auditor should
consider withdrawing from the engagement. Finally, if the client is publicly
held, the auditor may need to report the matter to the SEC.
76. ú
Completeness. Completeness deals with whether all transactions that
should be included in the journals have actually been included.
ú Accuracy. Accuracy deals with whether recorded
transactions are stated at the correct amounts.
ú Classification. Classification deals with
whether transactions included in the journals are properly classified; i.e.,
whether the proper accounts were debited and credited.
ú Timing. Timing deals with whether transactions
are recorded on the correct dates.
ú Posting and summarization. This objective deals
with whether recorded transactions are properly included in the master files
and are correctly summarized.
77. ú
Completeness. Completeness deals with whether all amounts that should be
included in the financial statements have actually been included.
ú Accuracy. Accuracy deals with amounts being
included in the financial statements at the correct arithmetic amount.
ú Classification. Classification deals with
determining whether items on a client's listing are included in the correct
accounts.
ú Cutoff. Cutoff deals with whether transactions
are recorded in the proper accounting period.
ú Detail tie-in. Detail tie-in deals with
determining whether details in the account balance agree with related master
file amounts, foot to the total in the account balance, and agree with the
total in the general ledger.
ú Realizable value. Realizable value deals with
whether an account balance has been reduced for declines from historical cost
to net realizable value.
ú Rights and obligations. This objective deals
with whether assets shown on the balance sheet are owned and liabilities are
obligations of the entity.
ú Presentation and disclosure. This objective
deals with whether account balances and related disclosure requirements are
properly presented in the financial statements.