Audit Theory

1. The fraud investigators should be constructed for insurance claim purposes, not to withstand a court trial.
Answer: False
2. A management representation letter would ordinarily be dated:
a) The same date as the balance sheet date.
b) The same date as the auditors report.
c) Five days after the balance sheet date.
d) Five days after the auditors report.
Answer: B
3. A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion
will be issued. Normally, such explanatory information is:
a) Included in the scope paragraph
b) Included in the opinion paragraph
c) Included in a separate paragraph in the report
d) Included in the introductory paragraph
Answer: C
4. In which circumstance will the auditor not consider the need to modify the report?
a) The clients legal counsel is requested to advise whether a material act is legal or illegal but refuses to do so.
b) The auditor concludes that the effect of an illegal acts creates substantial doubt about the entitys ability to
continue as a going concern.
c) The auditor concludes that the effects of an illegal act, taken alone or with similar acts, is material in amount and
has not been properly accounted for or disclosed in the financial statements.
d) All of the circumstances require modification of the auditors report.
Answer: D
5. An example of specific transaction authorization is the
a) Setting of automatic reorder points
b) Establishment of sales prices
c) Establishment of a customer's credit limits
d) Approval of a construction budget for a new warehouse
Answer: D
6. Analysis of which of the following would most likely enable IS Auditor to determine if an unapproved program
attempted to access sensitive data?
a) Abnormal job termination reports
b) Operator problem reports
c) System logs
d) Operator work schedules
Answer: C
7. When an accountant issues to an underwriter a comfort letter containing comments on data that have not been
audited, the underwriter most likely will receive
a) Negative assurance on capsule information.
b) Positive assurance on supplementary disclosures.
c) A limited opinion on pro forma financial statements.
d) A disclaimer on prospective financial statements.
Answer: A
When procedures short of an audit are applied to information such as capsule information, a comfort letter will
generally provide negative assurance.
8. Which of the following matters is covered in a typical comfort letter?
 a. Negative assurance concerning whether the entitys internal control procedures operated as designed during the
period being audited.
b. An opinion regarding whether the entity complied with laws and regulations under Government Auditing
Standards and the Single Audit Act of 1984.
c. Positive assurance concerning whether unaudited condensed financial information complied with generally
accepted accounting principles.
d. An opinion as to whether the audited financial statements comply in form with the accounting requirements of
the SEC.
Answer: D
In a comfort letter auditors provide an opinion as to whether the audited financial statements comply in form with
the accounting requirements of the SEC
9. Which of the following is not an essential component of quality control?
a. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies
b. Policies and procedures to ensure that the work performed by firm personnel meet applicable professional
standards
c. Policies to ensure that personnel maintain their independence in fact and in appearance
d. Policies that ensure that monitoring activities are effectively applied
Answer: A
10. Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in:
a. Accounting estimate rather than a change in accounting principle
b. Accounting principle rather than a change in accounting estimate
c. Both accounting principle and accounting estimate
d. Neither accounting principle nor accounting estimate
Answer: A
11. An official record of meetings of the board of directors and stockholders is included in the corporate:
a. Bylaws
b. Charter
c. Minutes
d. License
Answer: C
12. Which of the following summarizes the essence of general standards of GAAS?
a. Quality of professionals that perform an audit
b. Criteria used to judge whether the audit has met quality requirements
c. The standards that guide auditors in issuing the audit report
d. Whether the auditor obtained sufficient competent evidential matter to render an opinion
Answer: A
13. All of the following are examples of soft controls except:
a. Tone at the top
b. Vision
c. Verification
d. Communication
Answer: C
Verification of some activity or document is an example of a hard control.
14. All of the following statements are true about the integrated test facility (ITF) except
a. production reports are affected by ITF transactions
b. ITF databases contain "dummy" records integrated with legitimate records
c. ITF permits on-going application auditing
d. ITF does not disrupt operations or require the intervention of computer services personnel
 Answer: B
15. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control
risk from the originally planned. To achieve and overall audit risk level that is substantially the same as the planned audit
risk level, the auditor would
a. Decrease substantive testing
b. Decrease detection risk
c. Increase inherent risk
d. Increase materiality levels
Answer: B
16. The most reliable procedure for an auditor to use to test the existence of a clients inventory at an outside location
would be to.
a. observe physical counts of the inventory items
b. trace the total on the inventory listing to the general ledger inventory account.
c. obtain a confirmation from the client indicating inventory ownership.
d. analytically compare the current-year inventory balance to the prior-year balance.
Answer: A
17. The principal function of an accounting system's computerized controls is:
a. Detecting computer frauds
b. Preventing computer frauds
c. Encouraging programmer honesty
d. none of the answers are correct
Answer: B
18. Which of these comes closest in meaning to the term systems approach?
a. Narrow point of view
b. Broad point of view
c. Focus on achieving those goals important to computerized systems
d. Focus first and foremost on computerization
Answer: B
19. Auditors accumulate evidence to:
a. Defend themselves in the event of a lawsuit
b. Justify the conclusions they have otherwise reached
c. Satisfy the requirements of the Securities Acts of 1933 and 1934
d. Enable them to reach conclusions about the fairness of the financial statements
Answer: D
20. When a professional accountant is asked to provide a second opinion, the professional accountant has a responsibility
to identify potential threat to fundamental principles. If the identified threat is other than clearly insignificant, appropriate
safeguards should be applied. Which of the following safeguards could possibly eliminate the threat that arises when
providing second opinions?
a. Engage the services of an expert
b. Involving another firm to perform or re-perform part of the engagement
c. Seek client's permission to contact the existing accountant
d. Contact the existing accountant without obtaining the client's permission
Answer: C
21. Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of
interim financial information of a publicly held entity?
a. Verify changes in key account balances.
b. Read the minutes of the board of directors meetings.
c. Inspect the open purchase order file.
 d. Perform cut-off tests for cash receipts and disbursements.
Answer: B
The accountant will ordinarily read the minutes of meetings of stockholders, the board of directors, and
committees of the board of directors to identify actions that may affect the interim financial information.
22. The timing of substantive procedures is directly influenced by the level of control risk.
Answer: False
23. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
a. Eliminate the risk of nonsampling errors.
b. Reduce the level of audit risk and materiality to a relatively low amount.
c. Measure the sufficiency of the evidential matter obtained.
d. Minimize the failure to detect errors and fraud.
Answer: C
Statistical sampling helps the auditor to: (1) design an efficient sample, (2) measure the sufficiency of the
evidential matter obtained, and (3) evaluate the sample results.
24. Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional
manipulation of financial statements?
a. Turnover of senior accounting personnel is low
b. Insiders recently purchased additional shares of the entity's stock
c. Management places substantial emphasis on meeting earnings projections
d. The rate of change in the entity's industry is slow
Answer: C
25. In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.
Answer: False
26. Ethical Principles that are applicable to all CPAs no matter the type of services that are rendered does not include
which factor?
a. Due professional care
b. Integrity and objectivity
c. Planning and supervision
d. Professional behavior
Answer: C
27. Which of these statements is true?
a. Accountants need not bother with systems studies they are mostly performed by IT specialists.
b. System studies enable bright accountants to express ideas for improving a system.
c. Systems studies rarely involve accounting information systems
d. all of these are true
Answer: B
28. The segregation of receiving goods from the requisitioning and purchasing of those goods prevents those from making
requisitions from ordering products directly from suppliers and also prevents the purchasing department from gaining
access to goods improperly ordered.
Answer: True
29. If the balance sheet of a company is dated December 31, 2013, the audit report is dated February 8, 2014, and both
are released on February 15, 2014, this indicates that the auditor has searched for subsequent events that occurred up to:
a. December 31, 2013
b. January 1, 2014
c. February 8, 2014
d. February 15, 2014
Answer: C
30. Which of the following describes a property of an object or event?
 a. Entity attribute
b. Entity occurrence
c. Entity identifier
d. Composite keys
Answer: A
31. The current file of an auditors working papers most likely would include a copy of the:
a. Articles of incorporation and by-laws.
b. Current year schedules and analyses.
c. Long-term debt agreement.
d. Long-term customer contracts.
Answer: B
32. Which of the following services would be most likely to be structured as an attest engagement?
a. Advocating a clients position in tax matter.
b. A consulting engagement to develop a new database system for the revenue cycle.
c. An engagement to issue a report addressing an entitys compliance with requirements of specified laws.
d. The compilation of a clients forecast information.
Answer: C
CPAs may provide assurance as to compliance with requirements of specified laws through a variety of services,
including agreed-upon procedures engagements and various compliance audits
33. The primary purpose of the engagement letter is to
a. Remind management that the primary responsibility rests with management
b. Provide a written record of the agreement with the client as to the services to be provided
c. Provide a starting point for the auditor's preparation of the preliminary audit program
d. Satisfy the requirements of the CPA's liability insurance policy.
Answer: B
34. As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This
assessment occurred because the true deviation rate in the population was
a. Less than the risk of assessing control risk too low, based on the auditors sample.
b. Less than the deviation rate in the auditors sample.
c. More than the risk of assessing control risk too low, based on the auditors sample.
d. More than the deviation rate in the auditors sample.
Answer: D
When the true deviation rate in the population exceeds that in the sample, the auditor may assess control risk too
low.
35. Which of the following is most correct concerning the understanding of internal control needed by auditors to plan the
audit?
a. The auditors must understand the control environment, but not the accounting system or the control procedures
of an entity.
b. The auditors must understand the control environment and the accounting system, but not the control
procedures.
c. The auditors must understand the control environment, accounting system and must use judgment as to the
control procedures which must be considered.
d. The auditors must understand the control environment, accounting system and all control procedures.
Answer: C
36. What typically ends the acquisitions and payment cycle?
a. Issuance of a purchase requisition or request for purchase of goods/services
b. Issuance of a payment to a vendor
c. Approval of a new vendor
 d. Purchase requisition
Answer: B
37. There are three components of audit risk: inherent risk, control risk, and detection risk. Inherent risk is described as:
a. the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements
that are materially misstated
b. the susceptibility of an assertion to a material misstatement, assuming that there are no related internal control
structure policies or procedures
c. the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a
timely basis by the entitys internal control structure policies or procedures
d. the risk that the auditor will not detect a material misstatement that exists in an assertion.
Answer: B
Inherent risk is the probability of an error or irregularity causing a material misstatement in an assertion. This is
also referred to as the probability that a threat to the system will occur.
38. Which of the following matters is covered in a typical comfort letter?
a. Negative assurance concerning whether the entitys internal control procedures operated as designed during the
period being audited.
b. An opinion regarding whether the entity complied with laws and regulations under Government Auditing
Standards and the Single Audit Act of 1984.
c. Positive assurance concerning whether unaudited condensed financial information complied with generally
accepted accounting principles.
d. An opinion as to whether the audited financial statements comply in form with the accounting requirements of
the SEC.
Answer: D
In a comfort letter auditors provide an opinion as to whether the audited financial statements comply in form with
the accounting requirements of the SEC
39. Which of the following statements is a basic element of the auditors standard report?
a. The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
b. The auditor evaluated the overall internal control.
c. An audit includes assessing significant estimates made by management.
d. The financial statements are consistent with those of the prior period.
Answer: C
40. An auditor may issue the standard audit report when the
a. Auditor refers to the findings of a specialist.
b. Financial statements are derived and summarized from complete audited financial statements that are filed with a
regulatory agency.
c. Financial statements are prepared on the cash receipts and disbursements basis of accounting.
d. Group engagement partner assumes responsibility for the work of a component auditor.
Answer: D
A standard report may be issued in circumstances in which the principal auditor assumes responsibility for the
work of another auditor.