Multiple Choice

 
  1. An audit that involves obtaining and evaluating evidence about the efficiency and
 
effectiveness of an entity’s operating activities in relation to specified objectives is a(n):
  a. internal audit.  
  b. external audit.  
  c. operational audit.  
  d. compliance audit.  
  e. financial statement audit.  
       
  2. An audit that involves obtaining and evaluating evidence in order to determine whether
certain financial or operating activities of an entity conform to specified conditions, rules,  
or regulations is a(n):
  a. internal audit.  
  b. external audit.  
  c. operational audit.  
  d. compliance audit.  
  e. financial statement audit.  
       
  3. Which one of the following statements is not true of the AICPA?  
  a. It is public accounting’s national professional organization.  
  b. Membership is mandatory for all CPA firms who practice in more than one state.  
  c. It operates through a number of divisions.  
  d. Its publications include the Journal of Accountancy.  
  e. It provides a broad range of services to members.  
       
  4. State accountancy laws are administered by:  
  a. state boards.  
  b. state societies.  
  c. the AICPA.  
  d. the SEC.  
  e. the GAO.  
         

5. What level of assurance does the reader of a private company financial statement receive on
the company’s system of internal controls?
  a. positive assurance
  b. reasonable assurance
  c. negative assurance
  d. no assurance
  e. limited assurance
     
  6. How many different opinions must an auditor of a publicly held company issue?
  a. 1
  b. 2
  c. 3
  d. 4
  e. 5
     
7. There are several paragraphs included in the auditor’s standard report in internal
control over financial reporting.  Which paragraph defines internal control over
financial reporting?
  a. introductory paragraph
  b. scope paragraph
  c. inherent limitations paragraph
  d. definition paragraph
  e. explanatory paragraph
     
  8. Statements on auditing standards (SAS’s) are interpretations of?
  a. generally accepted auditing standards
  b. generally accepted accounting principles
  c. generally accepted accounting policies
  d. generally accepted auditing services
  e. AICPA code of professional conduct
     
 9. Auditing is based on the assumption that financial data are verifiable.  Data are
verifiable when two or more qualified individuals,
  a. working together, can prove, beyond doubt, the accuracy of the data.
  b. working independently, each reach essentially similar conclusions.
  c. working independently, can prove, beyond reasonable doubt, the
truthfulness of the data.
  d. working together, can agree upon the accuracy of the data.
  e. working together, each reach essentially similar conclusions.
 
10. Which one of the following assertions is not made by management in placing an item
in the financial statements?
  a. existence or occurrence  
  b. direct controls  
  c. rights and obligations  
  d. presentation and disclosure  
  e. completeness  
       
 11. If reported sales for 20X0 erroneously include sales that occurred in 20X1, the
 
assertion violated on the 20X0 statements would be:
  a. existence or occurrence  
  b. completeness  
  c. valuation or allocation.  
  d. presentation and disclosure  
  e. rights and obligations  
     
 
 
  12. The completeness assertion would be violated if:  
  a. fictitious sales transactions were included in accounts receivable.  
  b. the allowance for doubtful accounts was understated.  
  c. unbilled shipments had occurred during the period.  
  d. disclosure in the statements of pledged receivables was inadequate.  
  e. the balance of accounts payable was overstated.

   

 
       
  13. The rights and obligations assertion applies to:  
  a. current liability items only.  
  b. revenue and expense items only.  
  c. both income statement and balance sheet items.  
  d. assets that are not owned by the company.  
  e. balance sheet items only.  
       
  14. Determining whether amounts are in conformity with GAAP addresses the proper
measurement of assets, liabilities, revenues, and expenses which includes all of the  
following except:
  a. the reasonableness of management’s accounting estimates.  
  b. proper application of valuation principles such as cost, net reliable
 
value, market value, and present value.
  c. consistency in the application of accounting principles.  
  d. the reasonableness of management’s accounting policies.  
  e. proper application of the matching principle.  
       
  15. Choices about audit evidence are influenced by all of the following except:  
  a. the auditor’s understanding of the business and industry.  
  b. decisions about inherent risk and control risk.  
  c. comparisons of the auditor’s expectations of the financial statements
 
with the client’s books and records.
  d. decisions about immaterial risk factors.  
  e. decisions about assertions that are material to the financial statements.  
   
  16. Accounting records generally include:  
  a. contracts.  
  b. minutes of meetings.  
  c. internal control manuals.  
  d. confirmations from third parties.  
  e. Analysts’ reports  
       
 17. When planning the audit, the auditor must make the following important decisions  
 except the:
  a. assignment of staff to perform audit tests.  
  b. nature of tests to be performed.  
  c. characteristics of tests to be performed.  
  d. extent of tests to be performed.  
  e. timing of tests to be performed.  
     
 
 
  18. The five management assertions outlined in generally accepted auditing standards
 
include all of the following except:
  a. rights and obligations.  
  b. materiality.  
  c. existence and occurrence.  
  d. presentation and disclosure.  
  e. valuation or allocation.  
       
  19. With respect to audit objectives, the term validity relates to which of the assertions
 
below?
  a. existence and occurrence  
  b. Completeness  
  c. valuation or allocation  
  d. presentation and disclosure  
  e. rights and obligations  
       
  20. Knowledge of an entity’s financial reporting activities includes understanding such
matters as the entity’s:
  a. acquisitions, mergers, and disposals of business activities.  
  b. revenue recognition practices.  
  c. debt structure  
  d. use of information technology.  
  e. products, services and markets.  
       
 21. Knowledge of  external factors affecting an entity’s business is necessary when
planning an audit.  Which of the following factors would least likely be  
considered an external factor:
  a. interest rates.  
  b. market demand.  
  c. Inflation.  
  d. industry-specific accounting practices.  
  e. related party transactions.  
   
  22. Which of the following items is not one of the seven key steps in performing risk
 
assessment procedures?
  a. Develop preliminary audit strategies for significant assertions.  
  b. Consider audit risk, including the risk of fraud.  
  c. Test the entity’s system of internal control.  
  d. Make preliminary judgments about materiality.  
  e. Obtain an understanding of the entity and its environment.  
       
  23. The third phase of the audit involves performing audit tests.  The primary purpose
 
of this step is to obtain evidence about:
  a. the integrity of management.  
  b. the effectiveness of management.  
  c. the effectiveness of the internal control structure.  
  d. the effectiveness and the integrity of management.  
  e. the effectiveness of the internal control structure and the fairness of the
 
financial statements.
       
  24. Before accepting an engagement, the auditor should evaluate whether other
conditions exist that raise questions as to the prospective client’s auditability. 
 
Which of the following factors would be the least likely to cause concern about an
entity’s auditability?
  a. Related party transactions.  
  b. Lack of audit trail.  
  c. Disregard of responsibility to maintain adequate internal controls.  
  d. Important evidence available only in electronic form.  
  e. Inability to review the details supporting beginning balances.  
       
  25. The susceptibility of an assertion to a material misstatement, assuming that there
 
are no controls, is:
  a. audit risk.  
  b. control risk.  
  c. analytical procedures risk.  
  d. inherent risk.  
  e. tests of details risk.  
       
  26. The risk that the auditor may unknowingly fail to appropriately modify his or her
 
opinion on financial statements that are materially misstated is:
  a. analytical procedures risk.  
  b. control risk.  
  c. tests of details risk.  
  d. inherent risk.  
  e. audit risk.  
       
  27. The risk that a material misstatement that could occur in an assertion will not be
 
prevented or detected on a timely basis by the entity’s internal controls is:
  a. control risk.  
  b. audit risk.  
  c. inherent risk.  
  d. rejection risk.  
  e. detection risk.  
       
  28. The risk that the auditor will not detect a material misstatement that exists in an
 
assertion is:
  a. control risk.  
  b. audit risk.  
  c. inherent risk.  
  d. rejection risk.  
  e. detection risk.  
     
 
 
  29. The assessment of inherent risk requires consideration of matters that have a
pervasive effect on assertions for all or many accounts and matters that may
 
pertain only to assertions for specific accounts.  Which of the following is an
example of a “specific account” matter?
  a. going concern problems such as lack of sufficient working capital.  
  b. profitability of the entity relative to the industry.  
  c. sensitivity of operating results to economic factors.  
  d. complexity of calculations.  
  e. management turnover, reputation, and accounting skills.

   

 
       
 30 Materiality at the account balance level is stated in planning an audit because:
.
  a. some users make decisions based upon individual account balances.  
  b. the auditor verifies account balances in reaching an overall conclusion
 
on the fairness of the financial statements.
  c. the opinion on the fairness of the financial statements extends to the
 
individual account balances.
  d. official pronouncements have specified different levels of materiality
 
for various financial statement items.
  e. the opinion on the fairness of the financial statements extends to the
 
individual transactions.
  31. In making a preliminary judgments about materiality, the auditor initially
determines the aggregate (overall) level of materiality for each statement.  For  
planning purposes, the auditor should use the:
  a. levels separately.  
  b. level he or she judges to be the more reliable.  
  c. average of these levels.  
  d. largest aggregate level.  
  e. smallest aggregate level.  
       
  32. Quantitative guidelines for setting materiality levels are currently provided by:  
  a. neither GAAP nor GAAS.  
  b. GAAP.  
  c. GAAS.  
  d. both GAAP and GAAS.  
  e. the AICPA.  
       
  33. Professional standards recognize that a misstatement that is quantitatively
immaterial may be qualitatively material.  In regard to these items, professional  
standards require the auditor to:
  a. plan the audit to search for them.  
  b. design explicit procedures to detect them.  
  c. be on the alert for them.  
  d. report them to the audit committee.  
  e. report them directly to client management.  
   
 34. “Tolerable misstatement” is the termed used to indicate materiality at the:  
  a. balance sheet level.  
  b. account balance level.  
  c. income statement level.  
  d. company-wide level.  
  e. transactions level.  
       
  35. Which one of the following is not an inherent limitation in an entity’s internal
 
controls?
  a. mistakes in judgment  
  b. Collusion  
  c. cost versus market  
  d. Breakdowns  
  e. management override
 
 
  36. Revision of the planned level of detection risk will be necessary whenever:
  a. accounts are affected by more than one transaction class.  
  b. the multiple control risk assessments for the same account balance
 
assertion differ.
  c. the lower assessed control risk approach is used.  
  d. the final assessed control risk does not support the planned level.  
  e. the final assessed control risk is not the same as the actual level.  
                       

  37. Use of auditor judgment or of a risk matrix is necessary in revising planned detection
risk whenever:
  a. risk assessments are not quantified.
  b. assessed control risk at the account balance level does not support the planned
level of control risk.
  c. control risk is assessed above the minimum.
  d. control risk is assessed below the maximum.
  e. tests of controls reveal substantial deviations from prescribed policies.
     
38. The primary means by which the auditor meets the requirements of the third field work
standard is through:
  a. designing substantive tests.
  b. gathering evidence to support the assessed level of control risk.
  c. preparing a detailed audit program.
  d. evaluating the results of substantive tests.
  e. performing substantive tests.
     
39. The least costly form of testing is usually:
  a. tests of controls.
  b. tests of detail of transactions.
  c. analytical procedures.
  d. tests of detail of balances.
  e. tests of compliance.
 
40. The auditor has decided to use PPS sampling in the confirmation of individual sales
transactions with customers.  The population and the logical sampling unit are most likely
to be, respectively:
  a. all customer accounts and the individual dollars in the accounts.  
  b. customer accounts with debit balances and individual dollars in the accounts.  
  c. the sales invoice file and the individual dollars on the invoices.  
  d. all recorded sales during the year and individual sales invoices.  
  e. all sales invoices during the year and individual sales orders.