You are on page 1of 17

AUD1 50 Multiple Choice Questions

1. An independent auditor studies and evaluates a client's computer system. The


auditor's study includes tests of controls that might include which of the following?
A. Examination of systems flowcharts to determine whether they reflect the current
status of the system.
B. Examination of the systems manuals to determine whether procedures are satisfactory
C. Examination of the machine room log book to determine whether control information
is properly recorded.
D. Examination of organization charts to determine whether electronic data processing
department responsibilities are properly separated to afford effective control.
ANSWER: C
This answer is correct because tests of controls are designed to determine if the
purported controls are in effect. An examination of the machine room log book to
verify that control information is properly recorded would be such a test.
2. Which of the following is not an assertion embodied in managements discussion
and analysis (MD&A)?
A.
B.
C.
D.

Rights and obligations.


Occurrence.
Consistency with the financial statements
Completeness.

ANSWER: A
This answer is correct because the attestation standards on MD&A do not include an
assertion for rights and obligations. Those standards indicate that the four
standards are completeness, consistency with the financial statements, occurrence,
and presentation and disclosure.

3. An audit of a large public company following International Auditing Standards


ordinarily includes an opinion on
Financial statements
Yes
Yes
No
No

A.
B.
C.
D.
A.
B.
C.
D.

Internal control
Yes
No
Yes
No

C
A
D
B.

ANSWER: D
This answer is correct because only an opinion on the financial statements is
required.

4. Carlos, CPA, believes the industry-wide occurrence rate of client billing errors
is 3% and has established a maximum acceptable occurrence rate of 5%. In the review

of
A.
B.
C.
D.

AUD1 50 Multiple Choice Questions


client invoices Carlos should use
Discovery sampling.
Variable sampling.
Attribute sampling.
Stratified sampling.

ANSWER: C
This answer is correct because attribute sampling is used to estimate the error rate
for internal control activities.

5. An auditor plans to examine a sample of 20 checks for countersignatures as


prescribed by the clients internal control activities. One of the checks in the
chosen sample of 20 cannot be found. The auditor should consider the reasons for
this limitation and
A. Treat the missing check in the same manner as the majority of the other 19 checks
(i.e., countersigned or not).
B. Evaluate the results as if the sample size had been 19.
C. Choose another check to replace the missing check in the sample.
D. Treat the missing check as a deviation for the purpose of evaluating the sample.
ANSWER: D
This answer is correct because an auditor would ordinarily consider the selected
item to be a deviation.

6. Where no independent stock transfer agents are employed and the corporation
issues its own stocks and maintains stock records, canceled stock certificates
should
A. Be destroyed to prevent fraudulent reissuance.
B. Be defaced and sent to the Secretary of State.
C. Be defaced to prevent reissuance and attached to their corresponding stubs.
D. Not be defaced but segregated from other stock certificates and retained in a
canceled certificates file.
ANSWER: C
This answer is correct because canceled stock certificates should be defaced and
attached to corresponding stubs as is done with voided checks to prevent reissuance.

7. A review of a nonpublic companys financial statements is considered

A.
B.

An assurance engagement
Yes
Yes

An attest engagement
Yes
No
Page 2

C.
D.
A.
B.
C.
D.

No
No

AUD1 50 Multiple Choice Questions


Yes
No

A.
B
C
D

ANSWER: A
This answer is correct because the professional standards consider review to be both
assurance and attest engagements.

8. An attorney responding to an auditor as a result of the clients letter of audit


inquiry may appropriately limit the response to
A. Matters to which the attorney has given substantive attention in the form of
legal consultation or representation.
B. Items which have high probability of being resolved to the clients detriment.
C. Asserted claims and pending or threatened litigation.
D. Legal matters subject to unsettled points of law, uncorroborated information, or
other complex judgments.
ANSWER: A
This answer is correct because the professional standards state that an attorney may
appropriately limit his response to matters to which he has given substantive
attention in the form of legal consultation or representation.

9. After identifying related-party transactions, an auditor most likely would


A. Ascertain whether the transactions would have occurred if the parties had not
been related.
B. Discuss the implications of the transactions with third parties, such as the
entitys attorneys and bankers.
C. Substantiate that the transactions were consummated on terms equivalent to those
prevailing in arms-length transactions.
D. Determine whether the transactions were approved by the board of directors or
other appropriate officials.
ANSWER: D
This answer is correct because the lack of "arms length transactions" creates a
situation in which an auditor will attempt to determine whether the transactions
have been approved by the board of directors or other appropriate officials

10. Walk-throughs provide evidence that helps auditors to


A. Document systems flows throughout compliance testing of operational aspects of
transactions.
B. Confirm whether controls operate with absolute completeness.
Page 3

AUD1 50 Multiple Choice Questions


C. Substantiate account balances.
D. Evaluate design effectiveness of controls.
ANSWER: D
This answer is correct because walk-throughs provide evidence to confirm their
understanding of the flow of transactions and the design of controls, to evaluate
the effectiveness of the design of controls and to confirm whether controls have
been implemented.

11. Before reissuing a report which was previously issued on the financial
statements of a prior period, a predecessor auditor should
A. Review the successor auditors working papers.
B. Obtain a signed engagement letter from the client.
C. Obtain a letter of representation from the successor auditor.
D. Examine significant transactions or events since the date of previous issuance.
ANSWER: C
This answer is correct because the professional standards state that a predecessor
auditor should obtain a letter of representation from the successor auditor. The
predecessor auditor must also read the current financial statements and compare them
to the prior period statements.

12. Which of the following analyses appearing in a predecessors working papers is


the successor auditor least likely to be interested in reviewing?
A. Analysis of income statement accounts.
B. Analysis of current balance sheet accounts.
C. Analysis of contingencies.
D. Analysis of noncurrent balance sheet accounts.
ANSWER: A
This answer is correct because the successor will normally review working papers of
continuing accounting significance. Prior income statement accounts are less likely
to have continuing significance than are balance sheet accounts and contingencies.

13. Which of the following is necessary to audit balances in an on-line EDP system
in an environment of destructive updating?
A. Periodic dumping of transaction files.
B. An integrated test facility.
C. Year-end utilization audit hooks.
D. A well-documented audit trail.
ANSWER: D
Page 4

AUD1 50 Multiple Choice Questions


This answer is correct. Destructive updating in an online computer system is
destructive of transaction files. Accordingly, auditing of the balances in accounts
where transactions are periodically destroyed requires a well-documented audit trail
for the auditor.

14. Which of the following is true about requirements to send a letter of audit
inquiry to the clients lawyer under International Standards on Auditing?
A. A lawyers letter must be obtained if the auditor assesses a related risk of
material misstatement.
B. A lawyers letter must be obtained if the client uses an outside attorney.
C. A lawyers letter must be obtained in all audits.
D. A lawyers letter need never be obtained.
ANSWER: A
This answer is correct because under international auditing standards a lawyers
letter is only required when the auditor assesses a related risk of material
misstatement.

15. One important reason why a CPA, during the course of an audit engagement,
prepares internal control flowcharts is to
A. Decpict the organizational structure and document flow in a single chart for
review and reference purposes.
B. Assemble the internal control findings into a comprehensible format suitable for
analysis.
C. Prepare documentation that would be useful in the event of a future consulting
engagement.
D. Reduce the need for inquiries of client personnel concerning the operations of
internal control.
ANSWER: B
This answer is correct because flowcharts are prepared as part of the consideration
of internal control. The use of structure flowcharts assembles the internal control
findings into a comprehensible format.

16. When an auditor tests a computerized accounting system, which of the following
is true of the test data approach?
A. The program tested is different from the program used throughout the year by the
client.
B. Test data must consist of all possible valid and invalid conditions.
C. Test data are processed by the clients computer programs under the auditors
control.
D. Several transactions of each type must be tested.
Page 5

AUD1 50 Multiple Choice Questions


ANSWER: C
This answer is correct because the test data approach consists of processing a set
of dummy transactions on the clients computer system. The test data approach is
used to test the operating effectiveness of controls the auditor intends to rely
upon to assess control risk at a level lower than the maximum.

17. Which of the following client computer systems generally can be audited without
examining or directly testing computer programs of the system?
A. A system that performs relatively complicated processing and produces very little
detailed output.
B. A system that performs relatively uncomplicated processes and produces detailed
output.
C. A system that updates a few essential master files and produces no printed output
other than final balances.
D. A system that affects a number of essential master files and produces a limited
output.
ANSWER: B
This answer is correct because auditing around the system is possible if the system
performs uncomplicated processes and produces detailed output.

18. Which of the following procedures would an accountant most likely perform during
an engagement to review the financial statements of a non-issuer?
A. Inquire of management about related-party transactions.
B. Review the predecessor accountants working papers.
C. Communicate internal control deficiencies to senior management.
D. Corroborate litigation information with the entitys attorney.
ANSWER: A
This answer is correct because a review includes inquiries of management (on matters
such as the existence of related-party transactions) and analytical procedures.

19. In auditing through a computer, the test data method is used by auditors to test
the
A. Validity of the output.
B. Normalcy of distribution of test data.
C. Accuracy of input data.
D. Procedures contained within the program.
Page 6

AUD1 50 Multiple Choice Questions


ANSWER: D
This answer is correct because the auditor, when using test data, prepares a set of
dummy transactions to determine if the controls purported to be in effect in a
program are functioning as intended.

20. What is an auditors evaluation of a statistical sample for attributes when a


test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected
population deviation rate is 5%, and the allowance for sampling risk is 2%?
A. Modify the planned assessed level of control risk because the sample deviation
rate plus the allowance for sampling risk exceeds the tolerable rate.
B. Accept the sample results as support for the planned assessed level of control
risk because the sample deviation rate plus the allowance for sampling risk exceeds
the tolerable rate.
C. Modify the planned assessed level of control risk because the tolerable rate plus
the allowance for sampling risk exceeds the expected population deviation rate.
D. Accept the sample results as support for the planned assessed level of control
risk because the tolerable rate less the allowance for sampling risk equals the
expected population deviation rate.
ANSWER: A
This answer is correct because when the deviation rate plus the allowance for
sampling risk exceeds the tolerable rate, the assessed level of control risk may
increase. Here the deviation rate of 6% (3 deviations/50 documents) plus the
allowance for sampling risk of 2% equals 8% and exceeds the tolerable rate of 7%.

21. Which of the following is an auditors client most likely to use to perform
queries requested by the auditor of a relational database?
A. Data objective language.
B. Data control language.
C. Data manipulation language.
D. Data definition language.
ANSWER: C
This answer is correct because data manipulation language is composed of commands
used to maintain and query a database, including updating, inserting in, modifying
and querying (asking for data).

22. When conducting fieldwork for a physical inventory, an auditor cannot perform
which of the following steps using a generalized audit software package?
A. Recalculating balances in inventory reports.
B. Analyzing data resulting from inventory.
C. Selecting sample items of inventory.
Page 7

AUD1 50 Multiple Choice Questions


D. Observing inventory.
ANSWER: D
This answer is correct because the software itself cannot observe the inventory.

23. It would not be appropriate for the auditor to initiate discussion with the
audit committee concerning
A. The extent to which change in the companys organization will influence the scope
of the examination.
B. Details of potential problems which the auditor believes might cause a qualified
opinion.
C. Details of the procedures which the auditor intends to apply.
D. The extent to which the work of internal auditors will influence the scope of the
examination.
ANSWER: C
This answer is correct because while an auditor may reply to audit committee
questions concerning the detailed procedures to be applied, initiating the
discussion is generally not necessary.

24. Tech Company has disclosed an uncertainty due to pending litigation. The
auditors decision to issue a qualified opinion rather than an unqualified opinion
with an explanatory paragraph most likely would be determined by the
A. Lack of insurance coverage for possible losses from such litigation.
B. Lack of sufficient evidence.
C. Inability to estimate the amount of loss.
D. Entitys lack of experience with such litigation.
ANSWER: B
This answer is correct because the lack of sufficient evidence is a scope limitation
that may result in a qualified opinion.

25. When a client with a history of much costly litigation will not permit inquiry
of outside legal counsel, the audit report will ordinarily contain a(n)
A. Disclaimer of opinion.
B. Unqualified opinion with a separate explanatory paragraph.
C. "Except for" qualified opinion.
D. Standard unqualified opinion.
ANSWER: A
Page 8

AUD1 50 Multiple Choice Questions


This answer is correct because such a client imposed scope limitation is most likely
to result in a disclaimer of opinion.

26. Holding all other factors constant, decreasing the extent of substantive audit
procedures for accounts payable ordinarily has what effect on audit risk?
A. Decreases.
B. Increases.
C. Indeterminate.
D. No effect.
ANSWER: B
This answer is correct because decreasing the extent of substantive audit procedures
increases detection risk, and this will increase audit risk when all other factors
remain constant.

27. The auditor faces a risk that the examination will not detect material
misstatements which occur in the accounting process. In regard to minimizing this
risk, the auditor primarily relies on
A. Internal control.
B. Tests of controls.
C. Statistical analysis.
D. Substantive tests.
ANSWER: D
This answer is correct because the purpose of substantive tests is to obtain
evidence as to the validity and the propriety of accounting treatment of
transactions and balances or, conversely, of errors or irregularities. Thus, the
auditor relies on substantive tests to minimize the risk of failure to detect
material misstatements which occur in the accounting process.

28. A CPA in public practice must be independent in fact and appearance when
providing which of the following services?

A.
B.

Compilation of a
financial forecast
Yes
Yes

Compilation of personal
financial statements
No
Yes
Page 9

AUD1 50 Multiple Choice Questions


No
Yes
No
No

C.
D.
A.
B.
C.
D.

C
A
B
D.

ANSWER: D
This answer is correct because a CPA need not be independent when performing
compilations.

29. The AICPA allows an auditor to perform which of the following services for an
audit client?
A. Preparation and posting of journal entries without the clients approval.
B. Preparation of client source documents.
C. Performance of bookkeeping services for the client.
D. Authorization of transactions for the client.
ANSWER: C
This answer is correct in that the AICPA allows performance of bookkeeping services
for an audit client.

30. Which of the following is necessary for an auditor to be able to issue a report
on whether a previously reported material weakness disclosed in an integrated audit
continues to exist?
A. Management must support its written assertion that the material weakness has been
eliminated with sufficient evidence.
B. The auditor must have issued the original audit report indicating the existence
of the material weakness.
C. Management must provide a written assertion indicating that elimination of all
internal control deficiencies is its responsibility.
D. Management must adopt control criteria other than those used relating to the
original reporting on internal control.
ANSWER: A
This answer is correct because management must support its assertion with evidence,
including documentation.

Page 10

AUD1 50 Multiple Choice Questions


31. Which of the following is not correct relating to the Sarbanes-Oxley Act?
A. It restricts the types of consulting CPAs may perform for audit clients.
B. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement
for the Financial Accounting Standards Board.
C. It eliminates a significant portion of the accounting professions system of
self-regulation.
D. It toughens penalties for corporate fraud.
ANSWER: B
This answer is correct because while the Sarbanes-Oxley Act did create the PCAOB,
the PCAOB does not replace the Financial Accounting Standards Board.

32. Each page of a nonpublic entitys financial statements reviewed by an accountant


should include the following reference:
A. See Accountants Review Report.
B. Reviewed, No Accountants Assurance Expressed.
C. Reviewed, No Material Modifications Required.
D. See Accompanying Accountants Footnotes.
ANSWER: A
This answer is correct because SSARS indicate that each page should include a
reference such as, "See Accountants Review Report."

33. Which of the following procedures would an auditor most likely perform prior to
the balance sheet date?
A. Review subsequent events.
B. Review detail and test significant travel and entertainment expenses.
C. Send inquiry letter to clients legal counsel.
D. Perform search for unrecorded liabilities.
ANSWER: B
This answer is correct because the auditor may review the detail and test
significant expenses prior to that date and then update the analysis at a subsequent
date.

34. To determine the number of items to be selected in a sample for a particular


substantive test of details, the auditor should consider all of the following except
A. Allowable risk of incorrect acceptance.
B. Characteristics of the population.
C. Deviation rate.
Page 11

AUD1 50 Multiple Choice Questions


D. Tolerable misstatement.
ANSWER: C
This answer is correct because the deviation rate applies to attribute sampling
which is appropriate for tests of controls, not substantive tests.

35. An auditor most likely would apply analytical procedures near the completion of
the audit to
A. Determine whether additional audit evidence may be needed.
B. Identify auditing procedures omitted by the staff accountants.
C. Enhance the auditors understanding of subsequent events.
D. Evaluate the effectiveness of the internal control activities.
ANSWER: A
This answer is correct because these analytical procedures will help the auditor in
assessing the conclusions reached and in the evaluation of the overall financial
statement presentation; accordingly, results of the overall review may indicate that
additional evidence may be needed.

36. Which of the following procedures would best detect the theft of valuable items
from an inventory that consists of hundreds of different items selling for $1 to $10
and a few items selling for hundreds of dollars?
A. Have separate warehouse space for the more valuable items with sequentially
numbered tags.
B. Have an independent CPA firm prepare a report on the effectiveness of internal
control over inventory.
C. Maintain a perpetual inventory of only the more valuable items with frequent
periodic verification of the validity of the perpetual inventory record.
D. Require an authorized officers signature on all requisitions for the more
valuable items.
ANSWER: C
This answer is correct because to detect the theft of valuable items a perpetual
inventory system with periodic verification will be most helpful because differences
between the quantity counted and the quantity in inventory are identified.

37. A CPA establishes quality control policies and procedures for deciding whether
to accept a new client or continue to perform services for a current client. The
primary purpose for establishing such policies and procedures is
Page 12

AUD1 50 Multiple Choice Questions


A. To enable the auditor to attest to the integrity or reliability of a client.
B. To lessen the exposure to litigation resulting from failure to detect fraud in
client financial statements.
C. To comply with the quality control standards established by regulatory bodies.
D. To minimize the likelihood of association with clients whose management lacks
integrity.
ANSWER: D
This answer is correct because policies and procedures should be established for
deciding whether to accept or continue a client in order to minimize the likelihood
of association with clients whose management lacks integrity.

38. Which of the following statements most likely would be included in an engagement
letter from an auditor to a client?
A. The CPA firm will involve information technology specialists in the performance
of the audit.
B. The CPA firm will adjust the financial statements to correct misstatements before
issuing a report.
C. The CPA firm is responsible for ensuring that the client complies with applicable
laws.
D. The CPA firm will provide absolute assurance about whether the financial
statements are free of material misstatement.
ANSWER: A
This answer is correct because an engagement letter may include information on the
anticipated use of specialists.

39. Which of the following is not typically a characteristic of fraud?


A. Unintentional.
B. Collusion.
C. Falsified documentation.
D. Concealment.
ANSWER: A
This answer is correct because fraud is intentional, not unintentional.

40. While performing a review, information indicating that the entity being reviewed
may lack the ability to continue as a going concern has come to the accountants
attention. The client agrees that such a situation does exist, but refuses to add
disclosures relating to it. What effect is this most likely to have the accountants
Page 13

AUD1 50 Multiple Choice Questions


review report?
A. A qualified opinion should be issued, with modification of the opinion paragraph
and addition of an explanatory paragraph.
B. No effect, a standard unmodified (unqualified) report is appropriate.
C. An adverse opinion should be issued, with modification of the opinion paragraph
and addition of an explanatory paragraph.
D. The report should indicate a departure from generally accepted accounting
principles, with modification of the reports third paragraph and addition of an
explanatory paragraph.
ANSWER: D
This answer is correct because this is a departure from GAAP and this results in
modification of the reports third paragraph and addition of an explanatory
paragraph.

41. Auditing by testing the input and output of a computer system instead of the
computer program itself will
A. Not provide the auditor with confidence in the results of the auditing
procedures.
B. Detect all program errors, regardless of the nature of the output.
C. Provide the auditor with the same type of evidence.
D. Not detect program errors which do not show up in the output sampled.
ANSWER: D
This answer is correct because portions of the program may contain errors which are
not reflected in the output. For example, if a "loop" in a program is not used in
one application, it is not tested and therefore any errors within the "loop" cannot
be detected.

42. An auditor reviews a clients accounting policies and procedures when


considering which of the following planning matters?
A. Nature of reports to be rendered.
B. Method of sampling to be used.
C. Understanding of the clients operations and business.
D. Preliminary judgments about materiality levels.
ANSWER: C
This answer is correct because such information provides overall guidance to help an
auditor understand the clients operations and business.

Page 14

AUD1 50 Multiple Choice Questions


43. The auditor is unable to reach a conclusion as to the propriety of managements
representations due to managements inadequate record retention policies. The
auditor will have to consider issuing a(n)
A. Qualified opinion or a disclaimer of opinion.
B. Opinion qualified because of inadequate disclosure.
C. Opinion qualified because of uncertainty.
D. Adverse opinion or a qualified opinion.
ANSWER: A
This answer is correct because this is a scope limitation and a scope limitation
will ordinarily result in either a qualified opinion or a disclaimer of opinion
based on the importance of the representations.

44. When compiled financial statements are accompanied by a report, that report
should state all of the following except
A. A compilation is limited to presenting in the form of financial statements
information that is the representation of management.
B. A compilation consists principally of inquiries of company personnel and
analytical procedures applied to financial data.
C. A compilation has been performed.
D. The accountant does not express an opinion or any other form of assurance on
them.
ANSWER: B
This answer is correct because a review report, not a compilation report, states
that a review consists primarily of inquiries and analytical procedures.

45. In estimation sampling for attributes, which one of the following must be known
in order to appraise the results of the auditors sample?
A. Sample size.
B. Standard deviation of the values in the population.
C. Actual occurrence rate of the attribute in the population.
D. Estimated dollar value of the population.
ANSWER: A
This answer is correct because the sample size is needed in order to evaluate the
results of the attribute sampling since it is used to calculate the deviation rate
for the sample.

Page 15

AUD1 50 Multiple Choice Questions


46. An auditors report includes the following statement: The financial statements
do not present fairly the financial position, results of operations, or cash flows
in conformity with generally accepted accounting principles. This auditors report
was most likely issued in connection with financial statements that are
A. Inconsistent.
B. Misleading.
C. Based on prospective financial information.
D. Affected by a material uncertainty.
ANSWER: B
This answer is correct because language such as that quoted in this question is used
in an adverse opinion. Such an opinion is appropriate when financial statements are
considered to be misleading.

47. The primary responsibility for the adequacy of disclosure in the financial
statements of a publicly held company rests with the
A. Management of the company.
B. Partner assigned to the audit engagement.
C. Securities and Exchange Commission.
D. Auditor in charge of the fieldwork.
ANSWER: A
This answer is correct because financial statements are the representations of
management, and they have the responsibility for producing proper financial
statements.

48. An accountant has been engaged to review a nonissuers financial statements that
contain several departures from GAAP. Management is unwilling to revise the
financial statements, and the accountant believes that modification of the standard
review report is inadequate to communicate the deficiencies. Under these
circumstances, the accountant should
A. Determine the effects of the departures from GAAP and issue a special report on
the financial statements.
B. Withdraw from the engagement and provide no further services concerning these
financial statements.
C. Express a disclaimer of opinion on the financial statements and advise the board
of directors that the financial statements should not be relied on.
D. Inform management that a review of the financial statements cannot be completed
and request a change from a review to a compilation engagement.
ANSWER: B
This answer is correct because SSARS indicate that withdrawal is appropriate.

Page 16

AUD1 50 Multiple Choice Questions

49. In which of the following situations is there a violation of client


confidentiality under the AICPA Code of Professional Conduct?
A. A member discloses confidential client information to a court in connection with
arbitration proceedings relating to the client.
B. A member discloses confidential client information to a professional liability
insurance carrier after learning of a potential claim against the member.
C. A member uses a records retention agency to store clients records that contain
confidential client information.
D. A member whose practice is in bankruptcy discloses a clients name.
ANSWER: D
This answer is correct because a member may not disclose client information in
conjunction with a bankruptcy.

50. In estimation sampling for variables, which of the following must be known in
order to estimate the appropriate sample size required to meet the auditors needs in
a given situation?
A.
B.
C.
D.

The
The
The
The

estimated rate of error in the population.


acceptable level of risk.
total dollar amount of the population.
qualitative aspects of errors.

ANSWER: B
This answer is correct because for an auditor to estimate the appropriate sample
size, the auditor must first know the acceptable level of risk.

Page 17