One of the following statements is NOT
an element of the internal control
structure. ** AUDIT**
To qualify to be an “outside director” on
an audit committee, one must. ** NOT
BE A PART OF MANAGEMENT**
The most important aspect of any system
of control is **COMPETENT
TRUSTWORTHY PERSONNEL**
In order to ensure unbiased information,
record keeping is typically included in a
separate department under the
When it is concluded by the auditor
during the planning phase that the client is
not auditable because the accounting
records are deficient, the auditor must
NOT **ISSUE AN ADVERSE
OPINION**
The process of having the auditor select
several documents for the initiation of a
transaction type and tracing them through
the entire accounting process is known as
**WALK-THROUGH**
Most audits of a company are done
annually by the same CPA firm. Except
**CONTROLLER**
Adequate separation of duties within an
EDP department would ensure that
**THE PROGRAMMER NOT HAVE
ACCESS TO COMPUTER
OPERATION**
Authorizations can be either general or
specific. Which of the following is NOT
an example of general authorization? **
A SALES MANAGER’S
AUTHORIZATION OF
CUSTOMERS**
The most important type of protective
For initial engagements, the auditor
begins the audit with a great deal of
information about the client’s internal
control structure developed in prior years.
Because systems and controls usually
don’t change frequently, **THIS
INFORMATION CAN BE UPDATED
AND CARRIED FORWARD TO THE
CURRENT YEAR’S AUDIT**
Narrative, flowcharts, and internal control
questionnaires are three commonly used
methods of **DOCUMENTING THE
Is **THE USE OF PHYSICAL
PRECAUTIONS**
Which of the following is NOT a control
related to safe-guarding EDP equipment,
programs, and data files?
**AUTOMATED INTERNAL
VERIFICATION PROCEDURES**
Once an understanding of the internal
control structure is obtained that is
sufficient for audit planning, then the
auditor must first assess **WHETHER
A LOWER LEVEL OF CONTROL
RISK COULD BE SUPPORTED**
STUDY OF INTERNAL CONTROL**
Which of the following statements is
NOT correct? **IT WOULD BE
UNUSUAL TO USE BOTH A
NARRATIVE AND FLOWCHART
TO DESCRIBE THE SAME
SYSTEM**
Which of the following statements about
the internal control questionnaire is NOT
correct? **IT IS UNACCEPTABLE
FOR THE AUDITOR TO RELY ON
AN INTRNAL CONTROL
QUESTIONAIRE WHICH HAS
Which of the following tests would NOT
be a programmed control? **PARITY
TEST**
Of the three common types of flowcharts,
for audit purposes the auditor generally
prefers **INTERNAL CONTROL
FLOWCHARTS**
The flowcharting convention for
arrowheads is that they should be used for
all directions of flow, **EXCEPT
DOWN AND TO THE RIGHT**

PERSONNEL** Was operating effectively, **THE **BATCH PROCESSING**

When a compensating control exists, a EXTENT OF TESTS OF THAT A process or form which is used to
weakness in the system **IS NO In order to show
CONTROL MAY separation
BE REDUCEDof duties, Conditions) noted inallanthe
determine whether audit? **THE
data that were
LONGER A CONCERN BECAUSE areas
THISof responsibility
YEAR IF THEare established on
AUDITOR AUDITOR MAY
put into system wereCHOOSE
processedTO is the
THE POTENTIAL FOR flowcharts
DETERMINES as **VERTICAL
THAT IT IS STILL IN COMMUNICATE
**CONTROL TOTALS** SIGNIFICANT
MISSTATEMENT HAS BEEN COLUMNS**
PLACE** INTERNAL CONTROL
Which of the following STRUCTURE
is NOT a control
SUFFICIENTLY REDUCED** A procedure
Input that are
documents would MOSTthe
typically likely be RELATED MATTERS
total? **KEY VERIFICATION** EITHER
When controls leave no documentary used
responsibility of the **USER tests of
by an auditor in performing DURING
Where dataTHE COURSE
are put OF THE
into machine-readable
evidence or trail, **THE AUDITOR control proceduresTHAT
DEPARTMENT that involve
TRANSMITS AUDIT OR AFTER THE
media, there is risk of key-entryAUDIT IS
error.
GENRALLY OBSERVES THEM segregation of
THE DOCUMENTS TO functions and that leave no CONCLUDED**
Which of the following would NOT
BEING APPLIED** transaction
ACCOUNTING trail is,BERFORE An accountant’s
Be used to detectreport expressing an
such error?
If evidence was obtained in the prior **OBSERVATION**
PROCESSING** opinion
**RECORD on an COUNT**
entity’s internal controls
years audit that indicates a key control Which of thedocuments
When input following arestatements is
collected, should contain a **BRIEF
CORRECT concerning and auditor’s EXPLANATION OF THE BROAD
communication of internal control OBJECTIVES AND INHERENT
CONTROL ** Rather than their form because, ORGANIZATIONAL LEVEL TO
An auditor uses the knowledge provided **MANAGEMENT MAY WHICH THE INTERNAL
by the understanding of the internal ESTABLISH APPROPRIATE AUDITORS REPORT**
control structure and the assessed level of POLICIES AND PROCEDURES BUT An internal control narrative, indicates
control risk primarily to **DETERMINE NOT ACT ON THEM** that an approved voucher is required to
THE NATURE, TIMING AND Evidential matter concerning proper support every check request for payment
EXTENT OF SUBSTANTIVE TESTS segregation of duties ordinarily is best of merchandise. Which of the following
FOR FINANCIAL STATEMENT obtained by **DIRECT PERSONAL procedures provides the greatest
And records that are concerned with the
ASSERTIONS** LEFT TO RIGHT**
OBSERVATION OF THE System
assurance of that
internal accounting
this control control?
is operating
safeguarding
When obtaining of assets and the
an understanding of an Which
EMPLOYEEof the following
WHO APPLIES best described the **PROCEDURES
effectively? **SELECT AND MANUAL**
**RELIABILITY OF FINANCIAL
entity’s control environment, an auditor inherent limitations
CONTROL PROCEDURES** that should be One important
EXAMINE reason why aCHECKS
CANCELED CPA, during
RECORDS**
should concentrate on the substance of recognized by an auditor when of
When considering the objectivity the course of an
AND ASCERTAIN THAT THE audit engagement,
Which of the following
management’s is anprocedures
policies and invalid considering the potential
internal auditors, effectiveness
an independent of
auditor prepare
RELATED systems flowcharts ARE
VOUCHERS is to, DATED
concept of internal control? **IN CASES a system of internal accounting control? **ASSEMBLE THE INTERNAL
WHERE A PERSON IS **PROCEDURES WHOSE CONTROL FINDING INTO A
RESPONSIBLE FOR ALL PHASES EFFECTIVENESS DEPENDS ON COMPREHENSIVE FORMAT
Proper segregation of functional
OF A TRANSACTION THERES The development ofOF
SEGREGATION constructive
DUTIES CAN Circumstances the auditor would MOST
SUITABLE FOR ANALYSIS**
responsibilities
HOULD BE A in an effective structure of
CLEAR suggestions to
BE CIRCUMVENTED clients for improvements
BY in likely **NOT INCREASE THE
Which of the following activities would
internal control calls
OFfor separation of the internal control is **A DESIRABLE EXTENT
DESIGN
Which OF PREDETERMINED
of the
** following is LEAST
audit likely
DESIGNATION THAT COLLUSION** be LEAST likely to strengthen a tests would
functions of **AUTHORIZATION,
PERSON’S RESPONSIBILITY** BY-PRODUCT OF ANisAUDIT
Which of the following NOT a medium SUBSTANTIVE
Which
to
be be evidence
regarded TESTS**
of theasfollowing
the
a auditor
test of statements
a examinesauditor
control? to
company’s internal control?
RECORDING,
The normal sequenceANDof CUSTODY**
documents and ENGAGEMENT**
that can normally be used by an auditor to WhichOf of
determine
**TESTS
During
the the
documentation following
whether
OF
following
which
The auditor’s study of
THE
phase theprocedures
operations
clients
SIGNATURES
statements
of an internal
audit are
about
and evaluation inof ON
an
**MAINTAINING INSURANCE FOR
When considering internal control, an Which of the following would be LEAST MOST likely
control
compliance
CANCELED
internal
examination would
structure
controlwith isbe
isCHECKS
theis
the
system,included
correct?
internal
preparation
done TO
which
for as
**NO part
control
each of ONE
BOARD
one
of isof
the
auditor should be aware of the concept of likely to be considered an objective of an an auditor’s
PARTICULAR
structure?
OF DIRECTORS
NOT
flowcharts
following tests
valid? MOST of control?
**CONFIRMATIONS
**CONTROL
reasons FORM OF **TOOF
appropriate?
EXCEPT:
reasonable assurance, which recognizes internal control structure **INSPECTION**
DOCUMENTATION
ACCOUNTS
AUTHORIZATIONS**
PROCEDURES
**REVIEW
PROVIDE AOF RECEIVABLE**
BASIS THE IS NECESSARY,
REASONABLY
SYSTEM
FOR OF
that the **COST OF INTERNAL **DETECTING MANAGEMENT An
Enterauditor
AND
In
Reportable is
considering
THE LEAST
receipts,THAT
INSURE
INTERNAL
CONSTRUCTIVE EXTENT the
conditions likely
internal
ACCOUNTING OF
are
COLLUSION tomatters
SERVICE test for that
control the
CONTROL SHOULD NOT EXCEED FRAUD** internal
came control
DOCUMENTATION
structure,
to
**MISAPPROPRIATION
AMONG
CONTROL**
SUGGESTIONS**anthe that
auditor’s
ENMPLOYEES provides
completion for
MAY
of
attention, a VARY**
OF CANNOTwhich
CASH**
THE BENEFITS EXPECTED TO BE After considering a client’s internal **CLASSIFICATION
The questionnaire
The
should reliance
practice
OCCUR**
Effective
A beof
secondary placed
is MOST
communicated
withholding
internal
objective OFof
on
control REVENUE
substantive
closely
to
of associated
anauditor’s
requires
the tests in
entity’s
receipts
DERIVED FROM INTERNAL control structure, an auditor has AND EXPENSE
relation
with
audit which
fromorganization
Of customers
studytheand to the
committee of
following TRANSACTIONS
reliance
the
evaluation following?
because
ofindependence
one date placed
statements, they
of and of
internal on BY
internal
represent,
giving the is
the control
BEST
CONTROL** concluded that it is well designed and is PRODUCT
control
**OBTAINING
**SIGNIFICANT
customer’s LINE**
varies
that the credit
statement
departments. of the
study in aCPA’s
at aAND
relationship
DEFICIENCES
later
Organizational
and date out
primary
evaluation that
of is IN
objective
provide,
ordinarily,
DOCUMENTING
THE
in DESIGN
cashindependence
received
reviewing **INVERSE**
from OR
customer
internal
would
**A BASIS OF RELIANCE ON THE AN
OPERATION
be is
control known
impaired
is that
in OF
as,
the
which
UNDERSTANDING
THE the INTERNAL
**LAPPING**
review
of
SYSTEM following
is intended
OF INTERNAL OF THE
toCONTROL
situations?
provide, **THE
**A
Coverage
BASIS
CONTROLLER
ACCOUNTINGofOFshortage
RELIANCE in one bank
REPORTS
CONTROL** ON THE account
TO THE
by means
SYSTEM
VICE
Internal of anANDunrecorded
PRESIDENT
accounting DETERMINING
OF check
control drawnTHE
comprises the
on another bank account is known as
**KITING**
It is any illegal misappropriation of bank
The independent auditor should acquire
an understanding of the internal audit
function as it relates to the independent
auditor’s study and evaluation of internal
accounting control because, **THE
WORK PERFORMED BY
INTERNAL AUDITORS MAY BE A
FACTOR IN DETERMINING THE
NATURE, TIMING, AND EXTENT
OF THE INDEPENDEDNT
AUDITORS’S PROCEDURES**
FRAUD AND ERRORS
Which of the following, if material, would
be an irregularity?
**MISAPPROPRIATION OF AN
ASSET OR GROUP OF ASSETS**
An error in which an item is posted to the
wrong personal account, or the incorrect
calculation of an amount constituting an
original entry an, **ERROR OF
COMMISSION**
A kind of fraud committed by making
entry of fictitious payments or failure to

Funds. Thus a teller who pockets a Examination with an attitude of, FRAUD WHERE THE
portion of his receipts with intent to **PROFESSIONAL SKEPTICISM** EXAMINATION INDICATES THAT
defraud the bank for the day is guilt of, Giving greater attention to errors that FRAUD
Accordance
Auditor MAY
AUDITOR’S did EXISTS**
with not
auditing
detectstandards
ATTENTION the embezzlement
WHICH
**ABSTRACTIN OF BANK FUNDS** arouse suspicion of fraud than other error The of
auditor
generally
CAUSE by
funds is
should, responsible
THE the
**NOT
company
AUDITOR BEfor treasurer.
detecting
RELIED
TO To
The independent auditor of 1900 differs during the conduct of an audit is an fraud,
UPON what**WHEN
TOextent
BELIEVE PROVIDE THE the
would
THAT APPLICATION
ASSURANCE
AN auditor be liable to
from the auditor of today in that the 1900 example of applying the criteria of, OF Legacy
THAT PSA WOULD
ILLEGAL
IRREGULARITYCommercial HAVE
ACTS for
WILL
lossesBE
EXITS** attributable
auditor was more concerned with the **RELATIVE RISK** UNCOVERED
DETECTED**
to
Whenthe theft? THE FRAUD**
**HE
the auditor’s WOOULD BE
regular examination
**DETECTION OF The auditor’s responsibility regarding the In connection
The regular
LIABLE with
leading examination
to FOR the examination
LOSSES
an opinion notof FS
ofonFSFSisdiscloses
IRREGULARITIES** detection of fraud is best indicated by this an independent
primarily
ATTRIBUTABLE
specificdesigned auditor could
to disclose
circumstances TOthat be
HIS
may result.
create
The auditor, in his plan for an statement: **THE AUDITOR MUST responsible
Normal
NEGLIGENCE**for failure
audit procedures
suspicion to
that fraud may detect
are MORE a material
exist, and he
examination in accordance with the PSA, EXTEND AUDITING PROCEDURES fraud
likely if, detect
When
to **THE
concludes engaged AUDITOR
a fraud
that results PLANNED
to prepare
the arising from,
unaudited
of FS if
such fraud,
being influenced by the possibility of OF ACTIVELY SEARCH FOR THE
**THEFT
forWORK
any, OF IN
a could
private AbeHASTY
INVENTORIES**
notcompany, theAND
so material CPAas to affect
material errors will therefore conduct the EVIDENCE OF INEFFICIENT
Because
responsibility
the auditor’s MANNER**
of his failureto detect
to adhere
opinion, hefraud,
to **IS
should;the
PSA LIMITED
in the course
**REFER TO
THEofINFORMING
his examination
MATTER TOTHEof
THE
the Legacy
CLIENT
APPROPRIATECommercial
OF ANY Inc. MATTERS
books, the THAT
RECOMMENDATION THAT IT BE Committed illegal acts, which of the Regarding an illegal act is the
PURSUED TO A CONCLUSION** following actions should be taken responsibility of the,
Which of the following statements best Reasonably
immediatelyassurance about **INQUIRE
by the auditor? the, **MANAGEMENT**
described the auditor’s responsibility with **ENTITY’S
OF THE CLIENT’SABILITY TO PROCESS
MANAGEMENT An auditor who finds that the client has
respect to illegal acts that do not have a AND SUMMARIZE
CONSULT WITH FINANCIAL
THE committed an illegal act would be MOST
material effect on the clients FS? DATA**
CLIENT’S LEGAL COUNSEL OR likely to withdraw from the engagement
**GENERALLY, THE AUDITOR IS OTHER SPECIALIST, AS when the, **ILLEGAL ACT AFFECTS
UNDER NO OBLIGATION TO NECESSARY, TO OBTAIN AN THE AUDITOR’S ABILITY TO
NOTIFY PARTIES OTHER THAN UNDERSTANDING OF THE RELY ON MANAGEMENT
PERSONNEL WITHIN THE NATURE OF THE ACTS AND REPRESENTATION**
CLIENT’S ORGANIZATION** THEIR POSSIBLE EFFCTS ON THE The auditor withdrawing from his audit
If, as a result of auditing procedures, an FINANCIAL STATEMENTS** engagement due to an illegal act
auditor believes that the client may have Generally, the decision to notify parties committed by client should,

OTHER ACTION, IF ANY, SHOULD RISK ASSESSMENT

BE TAKEN**
STRUCTURE SHOULDfrom
An auditor has withdrawn NOTan audit Generally accepted auditing standards, an PROCEDURES
SIGNIFICANT DEFICIENCIES IN
EXCEED THE BENEFITS
engagement of a publicly held company auditor is required to; **DOCUMENT An
THE auditor’s
OPERATIONprimary OF consideration
THE
EXPECTED TO BE DERIVED**
after finding irregularities which may THE AUDITOR’S regarding
INTERNAL CONTROL control
an entity’s internal
All of the following
materially affect the are
FS. elements of an
The auditor UNDERSTANDING OF THE structure policies and procedures is
STRUCTURE**
entity’s internal control structure
should set froth the reasons and findings ENTITY’S INTERNAL CONTROL whether
The the policies
primary objective andofprocedures,
procedures
EXCEPT; **CONTROL
in corresponded RISK** OF
to the, **BOARD STRUCTURE** **AFFECT
performed to THE
obtainFINANCIAL
an understanding of
As part of
DIRECTORS** understanding the internal Decisions table differs from program STATEMENT
the ASSERTIONS**
internal control structure is to provide
control structure, an auditor
An auditor would most likely be is not flowcharts in that decisions tables When
an considering
auditor the internal control
with, **KNOWLEDGE
required to; **OBTAIN KNOWLEDGE
concerned with internal control structure emphasize; **LOGICAL structure, an auditor
NECESSARY FORshould
AUDIT be aware of
ABOUT THE
policies and OPERATING
procedures that provide RELATIONSHIPS AMONG the concept or reasonable assurance,
PLANNING**
EFFECTIVENESS OF THE CONDITIONS AND ACTIONS** which
Duringrecognizes
which phase that,
of **THE
an auditCOST OF
INTERNAL CONTROL During consideration of the internal AN ENTITY’S INTERNAL
examination is the preparation of
STRUCTURE** control structure in a FS audit, an auditor flowcharts most appropriate?

**IT WOULD BE INEFFICIENT TO

PERFORM TESTS OF CONTROL
THAT WOULD RESULT IN
REDUCTION IN PLANNED
SUBSTANTIVE TESTS**
An auditor assessed control risk because
it; **AFFECTS THE LEVEL OF