1. Which of the following eliminates
voluminous details from the auditor's working trial balance by classifying and
summarizing similar or related items?
a. Account analyses.
b. Lead schedules.
c. Control accounts.
d. Supporting schedules.
2. An auditor who accepts an audit
engagement and does not possess the industry expertise of the business entity
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.
3. Early appointment of the independent
auditor will enable
a. a more thorough examination to be
performed.
b. a proper study and evaluation of internal
control to be performed.
c. sufficient competent evidential matter to
be obtained.
d. a more efficient examination to be planned.
4. The first standard of fieldwork
requires, in part, that audit work be properly planned. Proper planning as
intended by the first standard of fieldwork would occur when the auditor
a. physically observes the movement of
securities already counted to guard against the substitution of such securities
for others that are not actually on hand.
b. uses negative accounts receivable
confirmations instead of positive confirmations because the latter require
mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date
to avoid performing time-consuming cash cutoff procedures.
d. eliminates the possibility of counting
inventory items more than once by arranging to make extensive test counts.
5. A CPA is conducting the first examination of a non-public
company's financial statements. The CPA hopes to reduce the audit work by
consulting with the predecessor auditor and reviewing the predecessor's working
papers. This procedure is
a. acceptable if the client and the
predecessor auditor agree to it.
b. acceptable if the CPA refers in the audit
report to reliance upon the predecessor auditor's work.
c. required if the CPA is to render an
unqualified opinion.
d. unacceptable because the CPA should bring
an independent viewpoint to a new engagement.
6. Before applying principal substantive
tests to the details of asset and liability accounts at an interim date, the
auditor should
a. assess the difficulty in controlling
incremental audit risk.
b. investigate significant fluctuations that
have occurred in the asset and liability accounts since the previous balance-sheet
date.
c. select only those accounts which can
effectively be sampled during year-end audit work.
d. consider the tests of controls that must be
applied at the balance-sheet date to extend the audit conclusions reached at
the interim date.
7. Which of the following is not one of
the three main reasons why the auditor should properly plan engagements?
a. To enable proper on-the-job training of
employees.
b. To enable the auditor to obtain sufficient
competent evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.
8. Which of the following would not be a
consideration of a CPA firm in deciding whether to accept a new client?
a. Client's standing in the business
community.
b. Client's financial stability.
c. Client's relation with its previous CPA
firm.
d. Client's probability of achieving an
unqualified opinion.
9. The working papers are
a. the property of client.
b. property of the auditor although prepared
by client.
c. the primary means of documenting that an
adequate audit was conducted in accordance with GAAS.
d. used primarily as a basis for the partners
to review and reward the work of the managers, seniors, and staff.
10. Audit programs are modified to suit the circumstances on
particular engagements. A complete audit program for an engagement generally
should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an
evaluation of the existing internal accounting control.
c. after reviewing the client's accounting
records and procedures.
d. when the audit engagement letter is
prepared.
11. Which of the following would ordinarily
not be found in the permanent file?
a. The history of the company.
b. The name of the predecessor auditor.
c. A record of the most important accounting
policies.
d. A list of the major lines of business.
12. Transactions with related parties are
important to the auditors because they will be disclosed in the financial
statements if material. Generally accepted accounting principles would not
require disclosure of
a. the nature of the related-party
relationship.
b. a description of transactions, including
dollar amounts.
c. the amounts due from and to related parties.
d. Loans to officers during the year which had
been repaid before the balance sheet date.
13. Audit programs generally include
procedures to test actual transactions and resulting balances. These procedures
are primarily designed to
a. gather corroborative evidence.
b. test the adequacy of internal control.
c. detect irregularities that result in
misstated financial statements.
d. obtain information of informative
disclosures.
14. Which of the following items would not
normally be included, in whole or in part, in the auditor's permanent file on a
client?
a. The articles of incorporation and bylaws.
b. Analyses of accounts such as long-term debt
and stockholders' equity.
c. Organization charts and internal control
questionnaires.
d. The audit program.
15. When a company changes auditors, SAS No. 7 requires
communication between the predecessor and successor auditors. The burden of
initiating the communication rests with the
a. predecessor.
b. client.
c. successor.
d. SEC.
16. A measure of how willing the auditor is
to accept that the financial statements may be materially misstated after the
audit is completed and an unqualified opinion has been issued is the
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.
17. A measure of the auditor's assessment of
the likelihood that there are material misstatements in an account before
considering the effectiveness of the client's internal control is
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.
18. Investigation of new clients and
reevaluation of existing ones is an essential part of deciding
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.
19. The largest portion of the auditor's
working papers is the
a. lead schedules.
b. adjusting and reclassification entries.
c. supporting schedules.
d. working trial balance.
20. The current file of the auditor's working papers generally
should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
d. copies of bond and note indentures.
21. Which of the following would not be
classified as a related-party transaction?
a. An advance of one week's salary to an
employee.
b. Sales of merchandise between affiliated
companies.
c. Loans or credit sales to the principal
owner or client.
d. Exchanges of equipment between two companies
owned by the same person.
22. Which of the following would not be
found in the corporate charter?
a. The kinds and amount of capital stock
authorized.
b. The date of incorporation.
c. The types of business activity that the
corporation is allowed to conduct.
d. The rules and procedures adopted by the
stockholders.
23. During the course of an audit engagement
an auditor prepares and accumulates audit working papers. The primary purpose
of the audit working papers is to
a. aid the auditor in adequately planning the
work.
b. provide a point of reference for future
audit engagements.
c. support the underlying concepts included in
the preparation of the basic financial statements.
d. support the auditor's opinion.
24. Ordinarily, the working papers can be
provided to someone else only with the express permission of the client. This
is the case even if
a. the papers are subpoenaed by a court.
b. the papers are used as a part of an AICPA
quality review program.
c. the papers are requested as evidence in an
AICPA Trial Board hearing.
d. the papers are transferred as a result of a
CPA selling his/her practice to another CPA firm.
25. The purpose of an engagement letter is to
a. reduce the CPA firm's responsibility to
external users of the audited financial statements.
b. reduce the terms of the engagement to
writing in order to minimize misunderstandings.
c. notify the audit staff of an upcoming
engagement so that personnel scheduling can be facilitated.
d. satisfy the Statute of Frauds which
requires that contracts for professional services must be in writing to be
enforceable.
26. The auditor is likely to accumulate more
evidence when the audit is for a company
a. whose stock is publicly held.
b. which has extensive indebtedness.
c. which is to be sold in the near future.
d. All three of the above.
27. Which of the following is not an
inherent risk that is common to all clients in certain industries?
a. Potential inventory obsolescence in the
fashion clothes industry.
b. Reserve for loss in the casualty insurance
industry.
c. Accounts receivable collection in the
consumer loan industry.
d. Brand loyalty in the cosmetics industry.
28. One means of informing the client that
the auditor is not responsible for the discovery of all acts of fraud is the
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.
29. Which of the following is the most likely
first step an auditor would perform at the beginning of an initial audit
engagement?
a. Prepare a rough draft of the financial
statements and of the auditor's report.
b. Study and evaluate the system of internal
administrative control.
c. Tour the client's facilities and review the
general records.
d. Consult with and review the work of the
predecessor auditor prior to discussing the engagement with the client
management.
30. The permanent section of the auditor's working papers
generally should include
a. time and expense reports.
b. a copy of the engagement letter.
c. a copy of key customer confirmations.
d. names and addresses of all audit staff
personnel on the engagement.
31. Which of the following would you expect
to find in a corporation's bylaws?
a. The kinds and amounts of capital stock
authorized.
b. The date of incorporation.
c. The rules and procedures adopted by the
stockholders of the corporation.
d. The types of business activities that the
corporation is authorized to conduct.
32. Which of the following would not usually
be included in the minutes of the board of directors and/or stockholders?
a. The duties and powers of the corporate
officers.
b. Declaration of dividends.
c. Authorization of long-term loans.
d. Authorization of individuals to sign
checks.
33. The purpose of the requirement in SAS
No. 7 of having communication between the predecessor and successor auditor is
a. to allow predecessor to disclose
information which would otherwise be confidential.
b. to help the successor auditor to evaluate
whether to accept the engagement.
c. to help the client by facilitating the
change of auditors.
d. to ensure that information which is
provided to the SEC on Form 8-K will be accurate.
34. An auditor should examine minutes of the
board of directors' meetings
a. through the date of the financial
statements.
b. through the date of the audit report.
c. only at the beginning of the audit.
d. on a test (sample) basis.
35. An extensive understanding of the client's business and
industry and knowledge about the company's operations are essential for doing
an adequate audit. For a new client, most of this information is obtained
a. from the predecessor auditor.
b. from the Securities and Exchange
Commission.
c. from the permanent file.
d. at the client's premises.
36. Most auditors assess inherent risk as
high for related parties and related-party transactions because
a. of the accounting disclosure requirement.
b. of the lack of independence between the
parties.
c. both a and b.
d. it is required by generally accepted
accounting principles.
37. Which of the following would not fit the
description of a related-party transaction?
a. An unusually large sale of merchandise to
the company's best and largest customer.
b. Sales of merchandise between a parent
company and its subsidiary.
c. Exchanges of equipment between two
companies owned by the same person.
d. Loans to corporate officers at market rates
of interest with a regular repayment schedule.
38. One of the first things that the auditor
will do after accepting a new client is
a. communicate with the client's predecessor
auditor.
b. contact the client's attorney to discover
legal obligations.
c. study the client's internal controls.
d. tour the client's facilities.
39. The first standard of field work
recognizes that early appointment of the independent auditor has many advantages
to the auditor and the client. Which of the following advantages is least
likely to occur as a result of early appointment of the auditor?
a. The auditor will be able to plan the audit
work so that it may be done expeditiously.
b. The auditor will be able to complete the
audit work in less time.
c. The auditor will be able to better plan for
the observation of the physical inventories.
d. The auditor will be able to perform the
examination more efficiently and will be finished at an early date after the
year-end.
40. The predecessor auditor is required to respond to the request
of the successor auditor for information, but the response can be limited to
stating that no information will be provided when
a. predecessor auditor has poor relations with
successor auditor.
b. client is dissatisfied with predecessor's
work.
c. there are legal problems between client and
predecessor.
d. predecessor believes that client lacks
integrity.
41. Permanent files contain all the data
a. about the most recent audits.
b. about the current audit and financial
statements.
c. of a historical or continuing nature about
the client.
d. of a historical or continuing nature
pertinent to the current audit.
42. With respect to records in a CPA's
possession, rules of conduct provide that
a. copies of client records incorporated into
audit working papers must be returned to the client upon request.
b. worksheets in lieu of a general ledger
belong to the auditor and need not be furnished to the client upon request.
c. an extensive analysis of inventory prepared
by the client at the auditor's request belongs to the auditor and needs not be
furnished to the client upon request.
d. the auditor who returns copies of client
records must return the original records upon request.
43. An example of a reclassification entry
would be an entry
a. to reduce inventory when client failed to
write down its obsolete raw materials.
b. to change material credit balances in
accounts receivable accounts to accounts payable accounts.
c. to increase the allowance for doubtful
accounts when it was discovered that a customer had filed for bankruptcy
protection under Chapter 11.
d. to increase the federal income tax
liability account when it was discovered that client would be in a higher tax
bracket than originally estimated.
44. The engagement letter
a. affects the CPA firm's responsibility to
external users of audited financial statements.
b. can be used to alter the auditor's
responsibilities under generally accepted auditing standards.
c. can affect legal responsibilities to the
client.
d. is useful only if it is an audit
engagement, but has no effect for review or compilation services.
45. The first standard of field work, which states that the work
is to be adequately planned and assistants, if any, are to be properly
supervised, recognizes that
a. early appointment of the auditor is
advantageous to the auditor and the client.
b. acceptance of an audit engagement after the
close of the client's fiscal year is generally not permissible.
c. appointment of the auditor subsequent to
the physical count of inventories requires a disclaimer of opinion.
d. performance of substantial parts of the
examination is necessary at interim dates.
46. The least effective method of
identifying related parties would be
a. an inquiry of management.
b. a review of SEC filings.
c. a review of the purchases and sales journals
for the period under audit.
d. an examination of stockholders' listings to
identify principal stockholders.
47. Which of the following is not a document
or record that should be examined early in the engagement?
a. Management letter.
b. Corporate charter and bylaws.
c. Contracts.
d. Minutes of board of directors' and
stockholders' meetings.
48. Which of the following is not a
potential effect of an auditor's decision that a lower acceptable audit risk is
appropriate?
a. More evidence is required.
b. Less evidence is required.
c. Special care is required in assigning
experienced staff.
d. Review of the working papers by personnel
who were not assigned to the engagement.
49. The official record of the meetings of
the board of directors and stockholders is contained in the corporate
a. bylaws.
b. charter.
c. minutes.
d. license.
50. Which of the following is a basic tool used by the auditor to
control the audit work and review the audit progress?
a. Audit program.
b. Engagement letter.
c. Time and expense summary.
d. Progress flowchart.
51. Companies filing with the SEC are
required by FASB 14 to
a. prepare financial statements for each
different segment of the business.
b. disclose segment information for different
lines of business in the financial statements.
c. disclose if there are segments of the
business, but they are not required to disclose the percentage of revenue
generated by each segment.
d. disclose segment information on the 10-K
filed with the SEC, but it is not required on the financial statements which
are published in the annual report.
52. Reclassification entries are recorded in
the
a. sales journal.
b. cash receipts journal.
c. general journal.
d. financial statements but not in the general
ledger.
53. An auditor searching for related party
transactions should obtain an understanding of each subsidiary's relationship
to the total entity because
a. the business structure may be deliberately
designed to obscure related-party transactions.
b. this may reveal whether particular
transactions would have taken place if the parties had not been related.
c. intercompany transactions may have been
consummated on terms equivalent to arm's-length transactions.
d. this may permit the audit of intercompany
account balances to be performed as of concurrent dates.
54. Since SAS No. 21 requires audit testing of
segment information if client has different lines of business, it is important
for the auditor to
a. visit all the different business locations
before the audit is completed.
b. identify the segments early.
c. develop an audit program for each line of
business.
d. have an office in each city where a
business segment is located.
55. After preliminary audit arrangements have been made, an
engagement confirmation letter should be sent to the client. The letter usually
would not include
a. a reference to the auditor's responsibility
for the detection of errors or irregularities.
b. an estimation of the time to be spent on
the audit work by audit staff and management.
c. a statement that management advisory
services would be made available upon request.
d. a statement that a management letter will
be issued outlining comments and suggestions as to any procedures requiring the
client's attention.
56. Which of the following would not be
included in the auditor's working papers?
a. The accounting manual.
b. The results of the preceding year's audit.
c. Descriptive information about the internal
control structure.
d. A time budget for the various audit areas.
57. It is easier and more common to
implement increased evidence accumulation for inherent risk than for acceptable
audit risk because
a. inherent risk can usually be isolated to
one or two accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are
set statistically.
d. acceptable audit risk does not impact on
the amount of evidence which must be accumulated.
58. Discuss the purpose of an audit
engagement letter.
59. Define the term "related
party" and discuss why an auditor should identify the client's related
parties early in the audit.
1 - 10. b, b, d, a, a, a,
a, d, c, b
11 - 20. b,
d, a, d, c, b, d, b, c, c
21 - 30. a,
d, d, d, b, d, d, a, c, b
31 - 40. c,
a, b, b, d, c, a, d, b, c
41 - 50. d,
c, b, c, a, c, a, b, c, a
51 - 57. b,
d, b, b, c, a, a
58. The purpose of an audit engagement
letter is to establish a clear understanding between the auditor and the client
of the terms of the engagement.
59. A related party is an affiliated
company, principal owner of the client company, or any other party with which
the client deals where one of the parties can influence the management or
operating policies of the other. Auditors need to be aware of who are the
client's related parties early in the audit to enable the auditor to identify
related-party transactions, especially those that have not been disclosed.