1. A typical objective of an operational
audit is for the auditor to
a. determine whether
the financial statements fairly present the entity's operations.
b. evaluate the
feasibility of attaining the entity's operational objectives.
c. make
recommendations for improving performance.
d. resort on the
entity's relative success in attaining profit maximization.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
29. 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.
30. Discuss the purposes of audit working
papers.
1 - 10. c,
a, d, d, b, c, d, a, c, a
11 - 20. d,
b, b, c, a, b, b, a, c, a
21 - 29. a,
b, c, b, c, d, c, b, d
30. The overall purpose of working papers is to
aid the auditor in providing reasonable assurance that an adequate audit was conducted
in accordance with generally accepted auditing standards. Specifically, the
working papers provide a basis for planning the audit, a record of the evidence
accumulated and the results of the tests, data for determining the proper type
of audit report, and a basis for review by supervisors and partners.