Auditing Chapter 1 Quiz: Key Terms and Concepts

CHAPTER 1
1. Which of the following is an incorrect phrase regarding auditing?

a. Auditing is a systematic process.
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions:
d. Auditing communicates results to interested users.
2. Set the following phases in proper order:

I. Pre-Engagement
II. Internal Controls
III. Evidence-Gathering
IV. Completing the Audit
V. Planning
VI. Post-Audit Responsibilities
VII. Reporting
a. I, II, III, IV, V, VI, VII
b. I, IV, III, II, VII, V, VI
c. I, V, II, III, IV, VII, VI
d. I, IV, II, III, V, VI, VIII
3. Which of the following procedures is not required to be performed by the auditor?

a. Risk assessment procedures
b. Substantive procedures
c. Tests of control
d. Analytical procedures
4. Which of the following procedures should be performed by the auditor prior to starting an initial audit?
I. Perform procedures regarding the acceptance of the client relationship and the specific audit engagement.
I. Communicate with the previous auditor, where there has been a change of auditors, in compliance with
relevant ethical requirements.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
5. Confirmation of receivable or bank balance is performed during what

phase?
a. Studying and evaluating internal controls phase
b. Substantive testing phase
c. Pre-engagement phase
d. Completing the audit phase
6. Which of the following would day be a consideration of a CPA. firm in deciding whether to accept a new
client?
a. The client's financial ability.
b. The client's relations with its previous CPA firm.
c. The client's standing in the business community
d. The client's probability of achieving an unqualified opinion
7. Management's integrity affects all of the following risks except:

a. Business risk
b. Audit risk
c. Financial reporting risk
d. All these risks are affected
8. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor
auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination of the engagement with an understanding that all information
disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit
procedures to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate
the confidential relationship between an auditor and the client.
d. Advise the client of the intention to contact the predecessor auditor and request a permission for the
contact.
9. When an independent auditor is approached to perform an audit for the first time, he or she should make
inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the
successor with information that will assist the successor in determining whether
a. The company rotates auditors
b. The engagement should be accepted
c. The predecessor's work should be used
d. In the predecessor's opinion, control risk is less than high
10. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding:
a. The predecessor's evaluation of matters of continuing accounting significance
b. Disagreement which the predecessor had with the client concerning auditing procedures and accounting
principles
c. The degree of cooperation the predecessor received concerning the inquiry of the client's legal counsel
d. The predecessor's assessment of inherent risk and judgments about materiality
11. If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the
successor should:
a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management
b. Accept the engagement but only after an equitable increase in the professional fee
c. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement
d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant
scope limitation
12. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the
predecessor auditor should:
a. Keep silent of the denial
b. Disclose the fact that the permission to disclosure is denied by the client
c. Disclose adequately to proposed auditor all noncompliance made by the client
d. Seek legal advice before responding to the proposed auditor
13. Which of the following factors would most likely cause a CPA to decide not to accept a new audit
engagement?
a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit
techniques.
b. Management's disregard of its responsibility to maintain an adequate internal control environment.
c. The CPA's inability to determine whether related-party transactions were consummated on terms equivalent
to arm's-length transactions.
d. Management's refusal to permit the CPA to perform substantive tests before the year-end.
14. In deciding whether to accept a new audit client, an auditor considers:

I. Part 1 of the Code of Ethics
I. Part 2 of the Code of Ethics
III. Part 3 of the Code of Ethics
IV. Part 4 of the Code of Ethics
a. I& IV only
b. I and III only
c. II and III only
d. I, III, and IV
15. Ultimately, the decision about whether or not an auditor is independent must be made by
a. Auditor
b. Client's management
c. Public
d. Audit committee
16. With regard to independence, which of the following statements is correct?

a. Audit engagements provide assurance to a wide range of potential users; consequently, both independence
in mind and independence in appearance are of particular importance.
b. Only the engagement partner is required by the Code of Ethics to be independent from their assurance clients.
c. In case of audits of financial statements, the Code of Ethics requires member of the assurance team, the firm
but not network firms to be independent of the client.
d. In case of audits of financial statements, the Code of Ethics requires the auditor to be independent from their
assurance team from the start of performing procedures required by the engagement up to the issuance of the
report.
17. Which of the following factors most likely would influence an auditor's determination of the auditability of
an entity's financial statements?
a. The operating effectiveness of control procedures
b. The existence of related-party transactions
c. The complexity of the accounting system
d. The adequacy of the accounting records
18. A firm has obtained information that would have caused it to decline an engagement had the information
been available earlier. Actions available to the auditor would include the following, except:
a. Reporting the information and its implications to the person/s who appointed the CPA
b. Withdraw from the client relationship
c. Withdraw from the engagement
d. Issue a disclaimer of opinion
19. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms
would need to be recorded in a(n)
a. Memo placed in the permanent section of the working papers
b. Client representation letter
c. Engagement letter
d. Comfort letter
20. Which of the following statements is/are correct?

Statement 1: The auditor and the client should agree on the terms of the engagement. Such an agreement may
be in the form of audit engagement letter or other suitable form of contract.
Statement 2: Even in those countries where the scope of the audit is established by law, an engagement letter
may be informative for the client.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
21. Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally
be sent to the client.
a. Before the commencement of the engagement
b. Before the auditor report is issued
c. After the audit report is issued
d. At the end of the fieldwork
22. An engagement letter is best described as

a. A letter from the company to the auditors specifying management's expectations for completion of the audit
on a timely basis and the fees.
b. A letter from the auditors to company management specifying that management is responsible for the
financial statements, and the auditors will issue an opinion on the financial statements.
c. A letter from the auditors to company management that specifies the responsibilities of both the company
and the auditors in completing the audit and the timing for its completion.
d. A letter from the Board of Directors' audit committee to the auditor that indicates the auditor has been engaged
to perform the audit and the fees to be paid.
23. An engagement letter is prepared with the interest(s) of:

a. The auditor only
b. The public
c. The client only
d. Both the client and the auditor
24. Engagement letters are widely used in practice for:

a. Professional engagements of all types
b. Assurance engagements only
c. Related services only
d. Audits only
25. Which of the following matters is generally included in an auditor's engagement letter?
a. The factors to be considered in setting preliminary judgments about materiality
b. Management's vicarious liability for illegal acts committed by its employees
c. Management's responsibility for the entity's compliance with laws and regulations
d. The auditor's responsibility to search for significant internal control deficiencies
26. Arrangements concerning with which of the following are least likely to be
included in the engagement letter?
a. Fees and billing
b. A predecessor auditor
c. CPA investment in client securities
d. Other services to be provided in addition to the audit
27. An audit engagement letter least likely include:

a. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material
misstatements may remain undiscovered
b. Description of any letters or reports that the auditor expects to submit to the client
c. Identification of specific audit procedures that the auditor needs to undertake
d. Basis on which fees are computed and any billing arrangements
28. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or division
(component), which of the following factors need not be considered in deciding whether to send a separate
engagement letter to the component?
a. Who appoints the auditor of the component
b. Legal requirements
c. Number of reports to be prepared during the peak audit season
d. Whether a separate audit report is to be issued on the component

Statement 1: On recurring audits, the auditor should consider whether circumstances require the terms of the
engagement to be revised and whether there is a need to remind the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established client.
b. Both statements are correct
C. Only statement 2 is correct
30. On recurring audit engagements, the auditor may decide not to send a new engagement letter each period.
In which of the following situations will there be no need to send a new letter?
a. Revisions or special terms of the engagement
b. Significant change in nature or size of the client's business
c. Indications of misunderstanding of the objective and scope of the audit
d. Recent change of middle management and rank and file organizational structure
31. If the auditor concludes that there is reasonable justification for the change
in engagement, the report to be issued would
a. Include reference to the original engagement
b. Be appropriate for the revised terms of the engagement
c. Include reference to any procedures that may have been performed in the original engagement
d. Not include reference to any procedures that may have been performed, particularly when the new
engagement is to undertake agreed-upon procedures

Statement 1: Where the terms of the engagement are changed, the auditor and the client should agree on the
new terms.
Statement 2: The auditor should not agree to a change of engagement when there is no reasonable justification
for doing so.
Statement 3: If the auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement, the auditor should withdraw and consider whether there is any obligation, either
contractual or otherwise, to report to other parties, such as the board of directors or shareholders, the
circumstances necessitating the withdrawal.
a. Only one statement is correct
b. Only two statements are correct
c. All statements are correct
d. All statements are incorrect
33. If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:
a. Withdraw from the engagement.
b. Qualify the report on the original engagement.
c. Continue with the revised engagement but make explicit reference about the original engagement.
d. Refuse to agree to management's request on the change of engagement and continue with the original
engagement.
34. One of the first things that the auditor will do after accepting a new client ist
a. Contact the client's attorney to discover legal obligations.
b. Communicate with the predecessor auditor.
c. Study the client's internal control structure.
d. Tour the client's facilities.
35. If a company's external auditor expresses an unqualified opinion as a result of the audit of the company's
financial statements, readers of the audit report can assume that
a. The company is financially sound, and the financial statements are accurate
b. The external auditor found no fraud
c. Internal control is effective
d. All material disagreements between the company and the auditor about the application of accounting
principles were resolved in the satisfaction of the external auditor.
CHAPTER 2
1. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an effective manner.
b. Planning an audit involves establishing the overall audit strategy for the engagement and developing the
audit plan, in order to reduce audit risk to an acceptably low level.
c. Planning involves the engagement partner and other key members of the engagement team to benefit from
their experience and insight and to enhance the effectiveness and efficiency of the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins
shortly after (or in connection with) the completion of the previous audit and continues until the finalization
of the audit program.

Statement 1: The client should plan the audit work so that the audit will be performed in an effective manner.
Statement 2: The auditor should develop and document an overall audit plan describing the scope and conduct
of the audit.
c. Only statement 2 is correct
3. Adequate planning of the audit work helps the auditor of accomplishing the following objectives) except:
a. Ensuring that appropriate attention is devoted to important areas of the audit.
b. Identifying the areas that need a service of an expert.
c. Gathering of all corroborating audit evidence.
d. The audit work is completed efficiently
4. The auditor should plan the audit work so that the audit will be performed in an effective manner. The extent
of planning will vary according to any of the following, except:
a. Auditor's experience with the entity and knowledge of the business.
b. The nature and complexity of the audit engagement
c. The assessed level of control risk.
d. Size of the audit client.
5. The auditors plan should

Succeed action
Be flexible
Be cost-beneficial
a. Yes
Yes
Yes
b. Yes
Yes
No
c. No
Yes
Yes
d. No
Yes
Yes

Statement 1: Obtaining knowledge of the entity business is an important part of the planning the audit work.
Statement 2: The auditor's knowledge of the entity's business assists in the identification of events, transactions
and practices which may have a material effect on the financial statements.
Statement 1: According to PSA 300, the auditor may discuss elements of planning with those charged with
governance and the entity's management.
Statement 2: The audit plan sets the scope, timing and direction of the audit guides the development of the more
detailed overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and includes the nature, timing and
extent of audit procedures to be performed engagement team members to obtain sufficient appropriate
audit evidence to reduce audit risk to an acceptably low level.
a. Only 1 statement is correct
b. All statements are correct
c. Only 2 statements are correct
d. All statements are incorrect
8. Which of the following helps prevent misunderstandings during audit planning?

a. Auditor involvement in the preparation of the client's financial records.
b. Client involvement in determining specific audit planning issues.
c. A preliminary meeting conference with the client to discuss fees, timing, client assistance and related
issues.
d. Involvement of the client's internal auditors in setting materiality levels and determining the scope of audit
tests.

Statement 1: The overall audit plan and the audit program should not be revised during the course of the audit.
Statement 2: The auditor should develop and document an audit program setting out the nature, timing and
extent of planned audit procedures required to implement the overall audit plan.
10. In planning the audit engagement, the auditor should consider each of the
following except
a. The kind of opinion (unqualified, qualified, or adverse) that is likely to be expressed.
b. Matters relating to the entity's business and the industry in which it operates.
c. The entity's accounting policies and procedures.
d. Materiality level and audit risk.
11. Which of the following matters should be considered by the auditor in developing the overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting requirements
including changes since the date of the prior audit
b. All of the choices
c. Conditions requiring special attention, such as the existence of the related parties
d. The setting of materiality level for audit purposes
12. In developing the overall audit strategy, the focus of the engagement team's efforts is considered. Which of
the following is not appropriately classified as a factor affecting the focus of the team's efforts?
a. The financial reporting framework on which the financial information to be audited has been prepared,
including any need for reconciliation to another reporting framework.
b. Setting materiality for planning purposes.
c. Audit areas where there is a higher risk of material misstatement.
d. Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal
control.
13. Which of the following is least likely considered by the CPA when he makes an overall audit plan?
a. The nature and timing of reports and other communication with the entity that are expected under the
engagement
b. Identification of complex accounting areas including those involving accounting estimates
c. The effect of information technology on the audit
d. The content of the representation letters
14. With respect to planning an audit, which of the following statements is

always true?
a. An inventory count must be observed at year-end.
b. An engagement should not be accepted after the client's year-end.
c. Final staffing decisions must be made prior to completion of the planning stage.
d. It is acceptable to perform a portion of the audit of a continuing client at interim dates.
15. Which of the following procedures would an auditor most likely perform in planning an audit of financial
statements?
a. Inquiring of the client's legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.
16. This serves as the set of instructions to assistants involved in the audit and as a means to control and record
the proper execution of the work of the personnel involved in the service.
a. Audit procedures
b. Audit program
c. Audit plan
d. Audit risk model
17. The auditor should design the written audit program, so that:
a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
D Each account balance will be tested under either tests of controls or
tests of transactions.
18. In designing audit programs, an auditor should establish specific audit objectives that related primarily to
the
a. Selected audit techniques
b. Financial statement assertions
c. Timing of audit procedures
d. Cost-benefit gathering evidence
19. The auditor should document the overall audit strategy and the audit plan, including significant changes
made during the audit engagement. Which of the following statements on documentation is incorrect?
a. Documentation of the overall audit strategy may be made in the form of a memorandum that contains key
decisions regarding the overall scope, timing and conduct of the audit.
b. The auditor may use standard audit programs or audit completion checklists, but such programs and
checklists need to be tailored to the particular client.
c. The auditor's documentation of any significant changes to the originally planned overall audit strategy and
to the detailed audit plan need not include the reasons for the significant changes.
d. The form and extent of documentation depend on such matters as the size and complexity of the entity,
materiality, the extent of other documentation, and the circumstances of the specific engagement.
20. Audit procedures may be classified as risk assessment procedures and father audit procedures. Which of the
following best describes risk assessment procedures?
a. These procedures are used detect material misstatements at the assertion level.
b. These procedures include tests of details of classes of transactions. account balances, and disclosures and
analytical procedures.
c. These procedures test the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.
d. These are procedures for obtaining an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial statement and assertion levels.
21. The audit program should contain the following, except:

a. Audit objective
b. Set of planned audit procedures
c. Time budget for the various audit areas
d. The combined assessed level of inherent and control risk
22. Which of the following procedures is not performed as a part of planning an audit engagement?
a Reviewing working papers of the prior year
b. Performing analytical procedures
c. Designing an audit program
d. Test of controls
23. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit
procedures is usually the least costly to perform?
a. Tests of balances
b. Analytical procedures
c. Tests of transactions
d. Tests of controls
24. Analytical procedures are required:
As a risk assessment procedure performed during planning
As a substantive test procedure during evidence gathering
As an overall review at audit completion
A. Yes
Yes
No
B. Yes
Yes
Yes
C. Yes
No
No
D. Yes
No
Yes
25. Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential misstatements will be identified.
c. Enhancing the auditor's understanding of the client's business.
d. Assuming the adequacy of the available evidential matter.
26. Which of the following procedures would an auditor least likely perform in planning a financial statement
audit?
a. Coordinating the assistance of entity personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the
entity.
c. Selecting a sample of vendor's invoices for comparison to receiving
reports.
d. Reading the current year's interim financial statements.
27. Audit risk has three components: inherent risk, control risk and detection risk. Which of the following
statements is correct?
a. Detection risk is a function of the efficiency of an audit procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
c. The risk that material misstatement will not prevent or detected on a timely basis by internal control can be
reduced to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of the
auditor.
28. Some accounts balances, such as those for retirement benefits and finance lease, are the results of complex
calculations. The susceptibility to material misstatements in these types of accounts is referred to as
a. Audit risk
b. Control risk
c. Detection risk
d. Inherent risk
29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:
a. Elements of audit risk while detection risk is not.
b. Changes at the auditor's discretion while detection risk is not.
c. Functions of the client and its environment while detection risk is not.
d. Considered at the individual account balance level while detection risk is not.
30. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both
quantitative and qualitative judgments.
d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable
person who will rely on the financial statements.
31. There is an inverse relationship that exist between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatement
b. Preliminary judgments about materiality levels
c. Assurance provided by substantive tests
d. Risk of misapplying audit process
32. In considering materiality for planning purposes, Ash, auditor believes that misstatements aggregating
P60,000 would have material effect on an entity's income statement, but that misstatements would have to
aggregate P40,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing
procedures that would be expected to detect misstatements that aggregate:
a. P40.000
b. P50.000
C. P60.000
d. P100.000
33. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment
about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity's annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.

Statement 1: Planning involves developing an overall strategy for the expected conduct and scope of the audit.
Statement 2: Supervision involves directing the efforts of assistants who are involved in accomplishing the
objectives of the audit and determining whether those objectives were accomplished.
35. In performing an audit of Anancial statements, the auditor should obtain a sufficient knowledge of a client's
business and industry to
a. Develop an attitude of professional skepticism concerning management's financial statement assertions.
b. Make constructive suggestions concerning improvements to the client's internal control.
c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole
to be materially misstated.
d. Understand the events and transactions that may have an effect on the client's financial statements.
CHAPTER 3
1. It is the process designed and effected by those charged with governance, management, and other personnel
to provide reasonable assurance about the achievement of the entity's objectives.
a. Internal auditing
b. Business strategy
c. Internal control
d. Accounting process
2. Internal controls are not designed to provide reasonable assurance that

a. The recorded accountability for assets is compared with the existing assets at reasonable intervals
b. Access to assets is permitted only in accordance with management's authorization
c. Transactions are executed in accordance with management's authorization
d. Irregularities will be eliminated
3. This is a basic concept of internal control which recognizes that the cost of
internal control should not exceed the benefits expected to be derived from
a. Management by exception
b. Limited liability
c. Management responsibility
d. Reasonable assurance
4. An internal control system that is working effectively

a. Eliminates risk and potential loss of to the entity
b. Cannot be circumvented by management
c. Reduces the need for management the review exception reports on a day-to-day basis
d. Is unaffected by changing circumstances and conditions encountered by the entity
5. Which of the following is an example of an inherent limitation in a client's internal control system?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance with
management's authorization.
c. In the performance of most control procedures, there are possibilities of errors arising from mistakes in
judgment.
d. Procedures for handling large numbers of transactions are processed by information technology (IT)
equipment.
6. Which of the following statements best describes "control environment"?

a. Policies and procedures that help ensure that management directives are carried out.
b. The system for transferring information from transaction processing systems to the general ledger or the
financial reporting system.
c. The entity's process for identifying business risks relevant to financial reporting objectives and deciding about
actions to address those risks and the results thereof.
d. This includes the governance and management functions and the attitudes, awareness, and actions of those
charged with governance and management concerning the entity's internal control and importance to the
entity.
7. Which of the following considered control environment elements?

Commitment to Competence
Detection Risk
Organizational Structure
a. Yes
No
Yes
b. Yes
Yes
Yes
c. No
No
No
d. No
No
Yes
8. An entity's risk assessment process includes how management:
Identifies risk
Assess significance and likelihood of occurrence of these identified risks
Decides upon actions to manage these risks
a. Yes
Yes
Yes
b. Yes
Yes
No
c. No.
Yes
Yes
d. Yes
No
No
9. Risks can arise or change due to circumstances such as the following, except:
a. There is a change in the regulatory or operating environment (i.e. a new law has been passed which prohibits
the use of a chemical which is a main ingredient of the company's major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five years, and no new
pronouncements have been made.
10. As part of a periodic planning exercise, Cedric Naranjo Company discovers that a political dispute may
interfere with the company's supply sources. This is an example of:
a. Control environment
b. Risk assessment
c. Control activities
d. Monitoring of controls
11. Control activities constitute one of the five components of internal control. Which of the following is not
included in this internal control component?
a. Segregation of duties
b. Performance reviews
c. An internal audit function
d. Authorization
12. Control activities are the policies and procedures that help ensure that management directives are carried
out. These include activities relating authorization, performance reviews, information processing, physical
controls and segregation of duties. There is proper segregation of duties when an individual who
a. Authorizes a transaction records it.
b. Maintains custody of an asset has access to the accounting records for the asset.
c. Authorizes transaction maintains custody of the asset that resulted from the transaction.
d. Records a transaction do not compare the accounting record of the asset with the asset itself.
13. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing
the quality of internal control performance over time. It involves assessing the design and operation of controls
on a timely basis and taking necessary corrective actions. Monitoring of controls is accomplished through
ongoing monitoring activities, separate evaluations, or a combination of the two. An entity's ongoing monitoring
activities often include
a. Periodic reporting by the entity's internal auditors about the functioning of internal control
b. The audit of the annual financial statements
c. Periodic audits by the audit committee
d. Reviewing the purchasing account
14. The primary purpose of the auditor's consideration of internal control is to

provide a basis for
a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing and extent of audit tests to be applied.
d. The expression of an opinion.
15. Which of the following statements concerning the relevance of various types of controls to a financial
statement audit is correct?
a. All controls are ordinarily relevant to a financial statement audit.
b. Controls over the reliability of assets and liabilities are of primary importance, while controls over the
reliability of financial reporting may also be relevant.
c. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial
statement audit, but other controls may also be relevant.
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
16. PSA 315 Redrafted requires the auditor to obtain an understanding of the client's internal controls
a. For every audit
b. For first-time audits
c. Whenever it would be appropriate
d. Sufficient to find any frauds which may exist
17. When obtaining knowledge about an entity's internal control, it is important for the auditor to consider the
competence of its employees, because their competence bears directly and Importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed
18. Obtaining an understanding of internal control involves:

Evaluating the design of a control
Determining whether the control has been implemented
Testing the effectiveness of a control
a. Yes
Yes
Yes
b. Yes
Yes
No
c. Yes
No
Yes
d. No
Yes
Yes
19. The primary objective of procedures performed to obtain an understanding of internal control is to provide
an auditor with
a. Information necessary to prepare flowcharts.
b. Evidence to use in reducing detection risk.
c. Knowledge necessary to plan the audit.
d. A basis for modifying test of controls.
20. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs
all of the following except:
a. Make inquiries
b. Make observations
c. Design substantive tests
d. Inspect documents and records
21. After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the
maximum level for some assertions because the auditor
a. Believes the internal control policies and procedures are unlikely to be ellective,
b. Determines that the pertinent internal control components are not well documented.
c. Performs tests of controls to restrict detection risk to an acceptable
d. Identifies internal control policies and procedures that are likely to prevent material misstatements.
22. After obtaining an understanding of internal control and assessing control risk, an auditor decided to
perform tests of controls. The auditor most likely decided that
a. Additional evidence to support a further reduction in control risk is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in planned substantive
tests.
c. An increase in the assessed level of control risk is justified for certain financial statement assertions.
d. There were many internal control weaknesses that could allow errors to enter the accounting system.
23. Information about segregation of duties ordinarily is best obtained by

a. Performing test of transactions that corroborate management's financial statements assertions.
b. Developing audit objectives that reduce control risk.
c. Observing employees as they apply specific controls.
d. Obtaining a flowchart of activities performed by entity personnel.
24. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of
material misstatement at the financial statements level, and at the assertion level for classes of transactions,
account balances, and disclosure. Some of these risks, in the auditor's judgment, require special audit
consideration, such as those that involve fraud or complex transactions. Such risks are called
a. Business risks
b. Significant risks
c. Audit risks
d. Material risks
25. The auditor's primary objective in obtaining an understanding of the client's control over the purchasing
function is to
a. Investigate the recording of unusual transactions regarding raw materials.
b. Determine the reliability of financial reporting by the purchasing function.
c. Observe the annual physical count.
d. Ascertain that raw material paid for are on hand.
26. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the
substance of controls rather than their form because:
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.
27. When obtaining an understanding of the accounting and internal control system the auditor may trace a few
transactions through the accounting system. This technique is:
a. Reperformance
b. Control test
c. Walk-through
d. Validity test
28. Control risk assessment procedures include all of the following, except
a. Inspection of documents
b. Confirmation of bank balances
c. Observation of procedures
d. Inquiry of client personnel
29. Evidence of the performance of control risk assessment procedures includes all of the following, except
a. Flowcharts
b. Questionnaires
c. Lead schedule
d. Memoranda
30. Which of the following statements regarding auditor documentation of the client's internal control structure
is correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of
documentation may vary.
31. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
a. Specified controls requiring segregation of duties may be circumvented by collusion.
b. Tests of controls may fail to identify controls relevant to assertions.
c. Material misstatement may exist in the financial statements.
d. Entity policies may be circumvented by senior management.
32. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor
believes
a. Evaluating the effectiveness of policies and procedures is inefficient
b. Sufficient evidential matter to support the assertions is likely to be available.
c. More emphasis on tests of controls than substantive tests is warranted
d. Considering the relationship of assertions to specific account balances is more efficient.
33. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the
auditor's
a. Assessment of control environment's effectiveness
b. Identification of weaknesses in the system
c. Understanding of the system
d. Assessment of control risk
34. Which of the following statements is true?

a. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.
b. Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum.
c. The auditor can simultaneously obtain an understanding of internal control and perform tests of controls.
d. After performing tests of controls, the auditor will always assess control risk at maximum.
35. After documenting internal control in an audit engagement, the auditor may perform tests on:
a. Those controls that the auditor plans to rely on.
b. Those controls that were reviewed (selected on a random basis).
c. Those controls in which deficiencies or weaknesses were identified.
d. Those controls that have a material effect on the balances in the financial statements.
36. In a financial statement audit, the auditor is required to perform test of controls when
I. The auditor's risk assessment includes expectation of the operating effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion
level.
a. I only
b. Either I or Il
c. II only
d. Neither I nor II
37. Tests of controls are used to test whether controls are:

a. Properly incorporated in the financial statements
b. Placed in operation or implemented
c. Properly documented by the client
d. Operating effectively
38. Tests of controls may include the following, except:

a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Inspection of documentary support to transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budget amount
39. An auditor intends to perform test of controls on a client's control procedures that leaves no audit trail of
documentary evidence. The auditor most likely will test the procedure by
a. Inquiry and inspection
b. Inquiry and observation
c. Confirmation and reperformance
d. Analytical procedures and confirmation
40. Which of the following is the auditor's purpose of further testing internal control procedures?
a. Provide a basis for reducing the assessed level of control risk below that which resulted from the auditor's
initial understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by internal control are not detected
by the independent audit.
c. Provide assurance that transactions are executed in accordance with management's authorization and access
to assets is limited by a proper segregation of functions.
d. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in accordance with PFRS.
41. Which of the following is not a characteristic of the lower control risk approach?
a. The auditor usually plans to place considerable reliance on the controls.
b. The auditor plans to perform extensive tests of controls.
Control risk is usually assessed at maximum level.
d. Substantive tests are usually restricted.
42. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a
control objective is referred to as:
a. Compensating control
b. Non-routine control
c. Conditional control
d. Offset control
43. When a compensating control exists, a weakness in the system:

a. Is no longer a concern because the potential for misstatement has been sufficiently reduced.
b. Is reduced but it is not removed; therefore, it is still of concern to the auditor.
c. Could cause a material loss, so it must be tested using substantive procedures.
d. Is magnified and must be removed from the sampling process and examined in its entity.
44. If no changes have occurred since the controls were last tested, a CPA should
a. Rely on the prior year audit's assessment of internal controls and use
this assessment in the current year.
b. Test the operating effectiveness of such controls at least once in every fourth audit.
c. Rely entirely on the performance of substantive audit procedures.
d. Test the operating effectiveness of such controls at least once in every third audit
45. Regardless of the assessed level of control risk, an auditor would perform some
a. Test of controls to determine the operating effectiveness of internal control policies
b. Analytical procedures to verify the design of internal control procedures
C. Substantive test to restrict detection risk for significant classes of transactions
d. Dual-purpose test to evaluate both the risk of monetary misstatement and preliminary control risk
CHAPTER 4
1. The transaction cycles approach leads to efficient processing of large number of transactions because
a. Transaction cycles are easy to understand.
b. Transaction cycles are easier to computerize.
c. The transaction cycle approach represents the natural order of business.
d. A large number of transactions within a given cycle can be categorized into a relatively small number of
distinct types.
2. What is the major difference between the revenue and the expenditure cycle?
a. The revenue cycle includes marketing activities; the expenditure cycle does not.
b. In the revenue cycle, cash is received; in the expenditure cycle cash is paid out.
c. The expenditure cycle includes paying employees.
d. The revenue cycle includes the activity of obtaining funds from investors.
3. The business owners obtain financing from outside investors, which result
to an inflow of cash into the company. This transaction is part of which cycle?
a. Revenue cycle
b. Payroll cycle
c. Production cycle
d. Financing cycle
4. The basic "give and take" functions of a business have been grouped into transaction cycles. The cycle that
includes the events of hiring employees and paying them is known as the
a. Human resources cycle
b. Financing cycle
c. Expenditure cycle
d. Revenue cycle
5. The transaction cycles relate to one another and interface with this to generate information for both
management and external parties.
a. General ledger and reporting system
b. Accounting information systems
c. Human resources cycle
d. Computer processor
1. Which of the following business function is associated with the revenue/receipt cycle?
a. Resources are held, used, or transformed.
b. Obligations are paid to vendors and employees.
c. Capital funds are received from investors and creditors,
d. Resources are distributed to outsiders in exchange for promises of future payments.
2. Which of the following is not normally considered a step in the credit sales functions?
a. Approving credit
b Accepting customer orders
c. Shipping the sales orders
d. Acquiring goods to fill the order
3. Which of the following is not typically included in the sales and collection cycle?
a. Bad debt expense.
b. Sales returns and allowances.
c. Allowance for uncollectible accounts.
d. Cash credits from the cash disbursement journal.
4. The overall objective in the audit of the sales and collection cycle is to evaluate whether
a. The sales account and the accounts receivable account are free of errors.
b. The sales account and the accounts receivable are free of material errors.
c. The account balances affected by the cycle are fairly presented in accordance with GAAP.
d. The sales account and the accounts receivable account are presented fairly in accordance with GAAP.
5. The internal controls surrounding the revenue cycle provide the organization with several assurances that
include all of the following except the
a. Approval of all credit sales transactions after they are processed.
b. Accurate recording, shipping, and billing of all valid sales transactions.
c. Proper authorization of all sales and sales return and allowance transactions.
d. Proper safeguarding of finished goods inventories while in stock and during the shipment process.
6. The internal control objectives of the revenue cycle include all of the following except
a Revenue cycle transaction are properly executed.
b. Transactions relating to revenue are properly recorded.
c. Appropriate goods are ordered so that sales can be made.
d. Custody over assets resulting from the revenue cycle is properly maintained.
7. Which of the following control procedures would most likely assure that access to shipping, billing, inventory
control, and accounting records is restricted to personnel authorized by management?
a. Segregate responsibilities for authorization, execution and recording, and prenumber and control custody
of documents
b. Establish cash receipts function in a centralized location and require daily reconciliation of cash receipts
records with deposit slips
c. Establish policy and procedures manuals, organization charts, and supporting documentation
d. Periodically substantiate and evaluate recorded account balances.
8. Before goods are shipped on account, a properly authorized person must

a. Approve credit
b. Prepare the sales invoice
c. Approve the journal entry
d. Verify that the unit price is accurate
9. In a credit merchandising organization, the best place to vest credit

approval is in:
a. Accounts receivable department.
b. Sales department.
c. A completely separate department.
d. The cashier area where receipts will eventually be sent.
10. To achieve good internal control, which department should perform the activities of matching shipping
documents with sales orders and preparing daily summaries?
a. Billing department
b. Shipping department
c. Credit department
d. Sales order department
11. Which of the following control procedures may prevent the failure to bill customers for some shipments?
a. Each shipment should be supported by a pre-numbered sales invoice that is accounted for.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
12. Which of the following control procedures could prevent or detect errors or frauds arising from shipments
made to unauthorized parties?
a. Document policies and procedures for scheduling shipments.
b. Establish procedures for reviewing and approving prices and sales terms before sale.
c. Prenumber bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.
13. Which of the following controls most likely would be effective in off, the tendency of sales personnel to
maximize sales volume at the expense high bad debt write-offs?
a. Employees responsible for authorizing bad debt write-offs are de access to cash.
b. Employees involved in the credit granting are separated from sale, function.
c. Shipping documents and sales invoices are matched by an employee who does not have authority to write-off
bad debts.
d. Subsidiary accounts receivable records are reconciled to the contra account by an employee independent of
the authorization of credit.
14. The use of pre-numbered invoices, then accounting for their numbered sequence, meets primarily the:
a. Completeness assertion
b. Rights and obligations assertion
c. Valuation or allocation assertion
d. Existence or occurrence assertion
15. Which of the following controls most likely would assure that all billed sales are correctly posted to the
account's receivable ledger?
a. Each shipment on credit is supported a prenumbered sales invoice.
b. Each sales invoice is supported by prenumbered shipping document.
c. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
d. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
16. To achieve control when there is no billing department, the billing function should be performed by the
a. Accounting department
b. Shipping department
c. Sales department
d. Credit and collection department
17. The person who opens the mail commonly prepares a remittance advice when a customer fails to return one
with a payment. Consequently, mail should be opened by the
a. Credit manager
b. Sales manager
C. Receptionist
d. Accounts receivable clerk
18. Which of the following is an effective internal control over accounis receivable?
a. Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control
account once a year, preferably at year-end.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the
cashier.
c. The billing function should be assigned to persons other than those responsible for maintaining accounts
receivable subsidiary records.
d. Only persons who handle cash receipts should be responsible for the preparation of documents that reduce
accounts receivable balances.
19. Which of the following would the auditor consider to be an incompatible operation if the cashier receives
remittances from the mail room?
a. The cashier endorses the checks.
b. The cashier prepares the daily deposit.
c. The cashier makes the daily deposit at a local bank.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.
20. Which of the following would best protect a company that wishes to prevent lapping?
a. Having customers send payments directly to the company's bank
b. Segregating duties so that accounting has no access to an incoming mail
c. Requesting that customers checks be made payable to the company andbe addressed to the treasurer
d. Segregating duties so that no employee has access both to checks from customers and to currency from daily
cash receipts
21. Which of the following isnot)a universal rule for achieving control over cash?
a. Separate the cash-handling and record-keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each day's cash receipts by the end of the day.
d. Have bank reconciliations performed by employees who do not handle cash.
22. Which of the following fraudulent activities most likely could be

perpetrated due to lack of effective control in the revenue cycle?
a. The failure to prepare shipping documents may cause an overstatement of inventory balances.
b. Authorization of credit memos by personnel who receives cash may permit the misappropriation of cash.
c. Fictitious transactions may be recorded that may cause an understatement of revenues and overstatement of
receivables.
d. Claims received from customers for goods returned may be intentionally recorded in other customer's
accounts.
23. Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to
conceal the misappropriation and unlikely to be detected?
a. Understating the sales journal
b. Overstating the accounts receivable control account
c. Overstating the accounts receivable subsidiary ledger
d. Overstating the cash receipts journal
24. Which of the following control procedures will likely prevent the concealment of a cash shortage that was
perpetrated by improperly writing off a trade accounts receivable?
a. Write-offs must be approved by the cashier.
b. Write-offs must be authorized by the field sales representatives.
c. Write-offs must be supported by an aging schedule showing that only receivables months overdue have been
written off.
d. Write-offs must be approved by a responsible officer after reviewing credit department recommendations
and supporting evidence.
25. During the review of a small owner-managed company's internal control, the auditor discovers that the
accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would
offset this deficiency?
a. The owner reviews errors in billings to customers and postings to subsidiary records.
b. The owner reviews credit memos after they are recorded.
C. The controller reconciles the detailed receivables records to the general ledger.
d. The controller reviews the monthly bank statement directly and reconciles the checking accounts.
26. Defective merchandise returned by customers should be presented to

a. Inventory control personnel
b. Receiving personnel
c. Purchasing personnel
d. Sales personnel
27. Sales invoices may be recorded in the incorrect accounting period. A

computer comparison of the invoice date with the accounting period when
the goods were shipped relates to the
a. Valuation or allocation assertion.
b. Completeness assertion.
c. Existence or occurrence assertion.
d. Existence or occurrence assertion and to the completeness assertion
28. The purpose of tests of controls over shipping is to determine whether

a. Shipments are billed
b. Billed goods have been shipped
c. Credit is approved before goods are shipped
d. Shipping department personnel are competent
29. The purpose of tests of controls over billing is to determine whether a,

a. Shipments are billed
b. Billed goods have been shipped
c. Credit is approved before goods are billed
d. Billing department personnel are competent
30. To determine whether internal control operates effectively to minimize errors of failure to invoice a shipment,
the auditor would select a sample of transactions from the population represented by the
a. Sales invoice
b. Bill of lading file
c. Customer order file
d. Subsidiary customer accounts ledger
31. Tracing copies of sales invoice to shipping documents provides evidence that
a. Shipments were billed
b. Billed sales were shipped
c. Shipments were recorded as receivables
d. Debits to accounts receivable were for sales shipped
32. Tracing shipping documents to sales invoices provides evidence that

a. Shipments were recorded as sales
b. Recorded sales were shipped
c. Invoiced sales were shipped
d. Shipments were billed
33. To test for recorded sales for which there were no actual shipments, the auditor traces from the
a. Bill of lading to the sales journal
b. Sales journal to the bill of lading
c. Sales journal to the accounts receivable subsidiary ledger
d. Bill of lading to the supporting customer order and sales order
34. To test for the possibility of a shipment to a fictitious customer, the auditor traces from the
a. Sales journal to the accounts receivable ledger
b. Accounts receivable ledger to the bill of lading
c. Credit authorization to the bill of lading
d. Bill of lading to the credit authorization
35. From the standpoint of good internal control, the credit manager should be responsible to the
a. Treasurer
b. Sales manager
c. Controller
d. Customer-service manager
1. Which of the following functions is not common to the expenditure/disbursement cycle?

a. Obligations to vendors are paid.
b. Resources are held, used or transformed
c. Resources are acquired from vendors in exchange for obligations to pay.
d. Resources are acquired from employees in exchange for obligations to pay.
2. The primary audit objective regarding the purchasing of materials by the client is to
a. Observe the annual physical count.
b. Ascertain that materials paid for are on hand.
c. Investigate the recording of unusual transactions regarding materials
d. Determine the reliability of financial reporting by the purchasing
function.
3. A request by an authorized employee for goods or services is made on the
a. Debit memo
b. Purchase requisition
c. Purchase order
d. Acquisition transaction file
4. Which of the following is a primary function of the purchasing department?

a. Authorizing the acquisition of goods
b. Reducing expenditures for goods acquired
c. Verifying the propriety of goods of a specified quality
d. Ensuring the acquisition of goods of a specified quality
5. If internal control is well-designed, employees in the same department most likely would approve purchase
orders and also
a. Inspect goods upon receipt
b. Negotiate terms with vendors
c. Authorize requisition of goods
d. Reconcile the open invoice file
6. The authority to accept incoming goods in receiving should be based on

a(n)
a. Bill of lading
b. Materials requisitions
c. Vendor's invoice
d. Approved purchase order
7. Internal control is improved when the quantity of merchandise ordered is omitted from the copy of the
purchase order sent to the
a. Department that initiated the requisition
b. Accounts payable department
c. Receiving department
d. Purchasing agent
8. When goods are received, the receiving clerk should match the goods witt
a. Purchase order and requisition
b. Vendor's invoice and the receiving report
c. Vendor's shipping document and the purchase order
d. Receiving report and the vendor's shipping documents
9. The accounts payable department receives a purchase order form to accomplish all of the following, except
a. Comparing invoice price to purchase order price
b. Comparing quantity ordered to quantity purchased
c. Ensuring that the purchase had been properly authorized
d. Ensuring that the goods had been received by the party requesting the goods
10. Matching, the suppliers' invoice, the purchase order, and the receiving report normally should be the
responsibility of the:
a. Treasury function
b. Receiving department
c. Accounting function
d. Purchasing department
11. Accounts payable department usually has responsibility for verifying the propriety of acquisitions by
comparing the details on the
a. Vendor's invoice and the receiving report
b. Vendor's invoice and the purchase requisition
c. Purchase order, receiving report, and vendor's invoice
d. Purchase requisition, purchase order, and receiving report
12. What is the reason for ensuring that every copy of a vendor's invoice has a receiving report?
a. To ascertain that merchandise billed by the vendor was received by the company
b. To ascertain that merchandise received by the company was billed by the vendor
c. To ascertain that a check was prepared for every invoice
d. To ascertain that the invoice was correctly prepared
13. Which of the following is the most effective control procedure to detect vouchers that were prepared for the
payment of goods that were not received?
a. Match the purchase order, receiving report and vendor's invoice for each voucher in accounts payable
department
b. Compare goods received with goods requisitioned in receiving department
c. Verify vouchers for accuracy and approval in internal audit department
d. Count goods upon receipt in the storeroom
14. Which of the following controls is not usually performed in the vouchers payable department?
a. Approving vouchers for payment by having an authorized employee sign the vouchers
b. Accounting for unused prenumbered purchase orders and receiving reports
c. Matching the vendor's invoice with the related receiving report
d. Indicating the asset and expense accounts to be debited
C 15. Which of the following controls is not usually performed in the treasurer's department?
a. Verifying the accuracy of checks and vouchers
b. Controlling the mailing of checks to vendors
c. Approving vendor's invoices for payment -
d. Cancelling payment vouchers when paid
16. When processing and recording cash disbursements, it is important to have a method of cancelling the
supporting documents to prevent their reuse as support for another check at a later time. A common method is
to
a. Transfer the possession of the documents to a bank vault such as a safety deposit box
b. Move the documents to a permanent off-site facility such as a warehouse
c. Write the check number on the supporting documents .
d. Shred the documents so that they can't be reused
17. For good internal control, the person who should sign checks is the
a. Person preparing the checks
b. Purchasing agent
c. Accounts payable clerk
d. Treasurer
B 18. Operating control of the check-signing machine normally should be the

responsibility of the
a. General accounting function
b. Treasury function
c. Internal audit function
d. Legal counsel
19. The mailing of disbursement checks and remittance advices should be controlled by the employee who
a. Signed the checks last
b. Approved the vouchers for payment
c. Matched the receiving reports, purchase orders, and vendor invoices
d. Verified the mathematical accuracy of the vouchers and remittance advices
20. The procedure that would discourage the resubmission of vendor invoices
after they have been paid is
a. A requirement for double endorsement of checks.
b. The cancellation of vouchers by accounting personnel.
c. The cancellation of vouchers by treasurer personnel.
d. The mailing of payments directly to payees by accounting personnel.
21. Which of the following is a standard control over cash disbursements?

a. Checks should be signed by the controller and at least one other employee of the company.
b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the
person preparing bank reconciliations.
c. Checks and supporting documents should be marked "paid" immediately after the check returned with the
bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents that authorize check
preparation.
22. Which of the following would prevent a paid disbursement from being paid a second time?
a. Individuals responsible for signing checks should prepare vouchers.
b. The official signing the check should cancel the supporting documents.
c. Disbursements should be approved by at least two responsible officials.
d. The disbursement date should be within a few days of the date the voucher is presented for payment.
23. The receipt of goods and services in the normal course of business represents the date clients normally
recognize
a. Liability
b. Warranty
C. Income
d. Expenses
24. The internal control objective to determine that "existing acquisition transactions are recorded" satisfies the
objective of
a. Validity
b. Authorization
c. Valuation
d. Completeness
25. The internal control which requires "examination of supporting documentation before signing of checks by
an authorized person" satisfies the objective of
a. Validity
b. Valuation and allocation
c. Completeness
d. Posting and summarization
26. Which of these functions is not a test of acquisitions?

a. Recognizing the liability
b. Receiving goods and services
c. Processing purchase orders
d. Processing cash disbursements
27. How can an auditor test to determine whether Receiving Department procedures are applied properly?
a. Review procedures manuals
b. Test a sample of receiving documents
c. Interview Receiving department personnel
d. Observe receiving procedures on a surprise basis
28. An auditor performs a test to determine whether all merchandise for which of the client was billed was
received. The population for this test consists of all
a. Merchandise received
b. Cancelled checks
c. Vendor's invoices
d. Receiving reports
29. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the
supporting documents. Which assertion would this test of controls most likely support?
a. Completeness
b. Existence or occurrence
c. Valuation or allocation
d. Rights and obligations
30. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and
the cash disbursement journal. The purpose of this substantive audit procedure most likely was to
a. Identify unusually large purchases that should be investigated further.
b. Verify that the cash disbursements were for goods actually received.
c. Test whether payments were for goods actually ordered.
d. Determine that purchases were properly recorded.
1. Which of the following departments most likely would approve changes in pay rates and deductions from
employee salaries?
d. Payroll
b. Treasurer
c. Controller
d. Personnel
2. For appropriate segregation of duties, journalizing and posting summary payroll transactions should be
assigned to
a. Payroll accounting
b. Treasury department
c. General accounting
d. Timekeeping department
3. Which of the following is not a common activity within personnel and payroll?
a. Initiating terminations
b. Preparing and recording payroll
c. Distributing paychecks to employees
d. Preparing and updating personnel records
4. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
c. The duties of hiring. payroll computation, and payment to employees should be segregated.
d. The payment of cash to employees should be replaced with payment by checks
5. The proper use of pre-numbered termination notice forms by the payroll department should provide
assurance that all
a. Personnel files are kept up to date.
b. Terminated employees are removed from the payroll.
c. Employees who have not been terminated receive their payroll checks.
d. Uncashed payroll checks were issued to employees who have not been
terminated.
6. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
a. Human resources function from the controllership function
b. Administrative controls from the internal accounting controls
c. Authorization of transactions from the custody of related assets
d. Operational responsibility from the record keeping responsibility
7. Which of the following procedures is most likely to ensure that employee job time tickets are accurate?
a. Check the employee check cards against the job time tickets.
b. Approve the payroll voucher in the accounts payable department.
c. Keep employment information in the human resources department.
d. Make sure that the number of hours per week on each employee's job time ticket is 49.
8. To minimize the opportunities for fraud, unclaimed cash payroll should be

a. Held by the controller
b. Held by the payroll custodian
c. Deposited in a safe deposit box
d. Deposited in a special bank account
9. In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been
terminated the previous week. Which of the following control procedures, if properly utilized, would have been
most effective in preventing the error or assuring prompt detection?
a. Use of a check digit for employee numbers
b. Use of a header label for the payroll input sheet
c. A control total for hours worked, prepared from time cards collected by the timekeeping department
d. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the computer
department for the processing of the payroll
10. Which of the following control procedures could best prevent direct labor from being charged to
manufacturing overhead?
a. Comparison of daily journal entries with factory labor summary.
b. Examination of routing tickets from finished goods on delivery.
c. Reconciliation of work in process inventory with cost records.
d. Recomputation of direct labor based on inspection of time cards.
11. In the audit of the following types of profit-oriented enterprises, which one would the auditor be most likely
to place special emphasis on testing the internal controls over proper classification of payroll transactions?
a. A service organization
b. A wholesaling organization
c. A retailing organization
d. A manufacturing organization
12. Which of the following procedures is most effective in providing reasonable assurance that payroll checks
are distributed only to bona fide employees?
a. An employee independent of payroll preparation compares endorsements on canceled payroll checks with
employee signatures in personnel records.
b. All changes in pay rates and deductions are reviewed and approved by a responsible official independent of
payroll preparation and distribution.
c. All unclaimed paychecks are returned to an employee independent of payroll preparation and distribution.
d. All personnel and payroll records and documents are prenumbered and physically protected from
unauthorized access.
13. Which of the following statements best explains why the accuracy of payroll calculations and of payroll
account distribution is critical to auditor?
a. Employees will complain to management if their paychecks do not reflect wages or salaries earned.
b. Payroll is paid in cash, an account that is highly susceptible to frauds.
c. Auditing standards require that tests of cash and payroll be coordinated
d. Payroll impacts several statement of financial position and statement of comprehensive income accounts
14. Test of controls over personnel and payroll focus on the preparation distribution, and recording of earned
salaries and wages. Which of the following is the primary source from which tests of personnel and payroll
are derived?
a. Payroll register
b. Employee earnings record
c. Time records
d. Labor distribution summary
15. On a surprise basis, an auditor may elect to distribute paychecks to employees personally. What is the
primary purpose of this audit procedure?
a. To assure that no extra payroll checks are prepared and distributed
b. To test whether all paid employees exist
C. To assure that paychecks are not distributed to an employee absent on the day the auditor distributes checks.
d. To test the procedures for distributing paychecks
1. The objectives of the internal structure for a production cycle are to provide assurance that transactions are
properly executed and recorded, and that
a. Production orders are pre-numbered and signed by a supervisor
b. Independent internal verification of activity reports is established
c. Custody of work in process and of finished goods is properly maintained
d. Transfers to finished goods are documented by a completed production report and a quality control report
2. Which of the following policies is an internal control weakness related to the acquisition of factory equipment?
a. Depreciation policies are reviewed only once a year
b. Advance executive approvals are required for equipment acquisitions
c. Acquisitions are to be made through and approved by the department in need of the equipment
d. Variances between authorized equipment expenditures and actual costs are to be immediately reported to
management
3. When perpetual inventory records are maintained in quantities and in peso, and internal control procedures
over inventory are deficient, the auditor would probably
a. Have to disclaim an opinion on the income statement that year
b. Increase the extent of tests for unrecorded liabilities at the end of the year
c. Want the client to schedule the physical inventory count at the end of the year
d. Insist that the client perform physical counts of inventory items several times during the year
4. An auditor's tests of a client's cost accounting system are designed primarily to determine that
a. Physical inventories substantially agree with book inventories
b. The system complies with generally accepted accounting principles and functions as planned
c. Costs have been assigned properly to finished goods, work in process, and cost of goods sold
d. Quantities on hand have been computed based on acceptable methods that reasonably approximate actual
quantities on hand
5. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a
representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain
assurance that
a. The final inventory is valued at cost
b. All inventory represented by an inventory tag is bona fide
c. Inventory sheets do not include untagged inventory items
d. All inventory represented by an inventory tag is listed on the inventory sheets
6. When verifying debits to a manufacturing company's perpetual inventory records, an auditor would be most
interested in testing a sample of purchase
a. Orders
b. Invoices
c. Approvals
d. Requisitions
7. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the
following could explain the difference?
a. Inventory items had been counted, but the tags placed on the items had not been taken off the items and added
to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer's books for several items returned to its suppliers.
d. An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been
reflected in the perpetual records.
8. For several years, a client's physical inventory count has been lower than what was shown on the books at the
time of the count so that downward adjustments to the inventory account were required. Contributing to the
inventory problem could be deficiencies in internal control that led to the failure to record some
a. Cash purchases
b. Sales discounts allowed
c. Sales returns received
d. Purchases returned to vendors
9. A client's physical count of inventories was higher than the inventer quantities per the perpetual records. This
situation could be the result of the failure to record
a. Sales
b. Purchases
c. Sales discounts
d. Purchase returns
10. An auditor would be most likely to learn of slow-moving inventory through

a. Inquiry of sales personnel
b. Inquiry of stores personnel
c. Physical observation of inventory
d. Review of perpetual inventory records
1. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections probably should be delegated to the
a. Chief Accountant
b. Cashier
c. Internal Auditor
d. Treasurer
2. A company has additional funds to invest. The Board of Directors decided to purchase marketable securities
and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to
make periodic reviews of the investment activity should be
a. An investment committee of the Board of Directors.
b. The chief operating officer.
c. The corporate controller.
d. The treasurer.
3. Which of the following is a responsibility that should not be assigned to only one employee?
a. Access to securities in the company's safe deposit box
b. Custodianship of tools and small equipment
c. Custodianship of the cash working fund
d. Reconciliation of bank statements
4. In reviewing and evaluating internal control over marketable securities, the auditor would be specially
concerned about:
a. Recording of stock investments by the controller.
b. Approval of stock investment purchases by the Board of Directors.
c. Access to stock certificates by the corporate treasurer.
d. Access to stock certificates by the controller.
5. When no independent. stock transfer agents are employed and the corporation issues its own stocks and
maintains stock records, canceled stock certificates should
a. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file.
b. Be destroyed to prevent fraudulent reissuance.
c. Be defaced and sent to the secretary of state.
d. Be defaced to prevent reissuance and attached to their corresponding stubs.

Auditing Chapter 1 Quiz: Key Terms and Concepts

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Auditing Chapter 1 Quiz: Key Terms and Concepts

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CHAPTER 1

1. Which of the following is an incorrect phrase regarding auditing?

2. Set the following phases in proper order:

3. Which of the following procedures is not required to be performed by the auditor?

5. Confirmation of receivable or bank balance is performed during what

7. Management's integrity affects all of the following risks except:

14. In deciding whether to accept a new audit client, an auditor considers:

16. With regard to independence, which of the following statements is correct?

20. Which of the following statements is/are correct?

22. An engagement letter is best described as

23. An engagement letter is prepared with the interest(s) of:

24. Engagement letters are widely used in practice for:

27. An audit engagement letter least likely include:

29. Which of the following statements is/are correct?

32. Which of the following statements is/are correct?

1. Which of the following statements is incorrect?

2. Which of the following statements is/are correct?

5. The auditors plan should

6. Which of the following statements is/are correct?

8. Which of the following helps prevent misunderstandings during audit planning?

9. Which of the following statements is/are correct?

14. With respect to planning an audit, which of the following statements is

21. The audit program should contain the following, except:

25. Analytical procedures used in planning an audit should focus on

30. Which of the following statements is not correct about materiality?

34. Which of the following statements is/are correct?

2. Internal controls are not designed to provide reasonable assurance that

4. An internal control system that is working effectively

6. Which of the following statements best describes "control environment"?

7. Which of the following considered control environment elements?

14. The primary purpose of the auditor's consideration of internal control is to

18. Obtaining an understanding of internal control involves:

23. Information about segregation of duties ordinarily is best obtained by

34. Which of the following statements is true?

37. Tests of controls are used to test whether controls are:

38. Tests of controls may include the following, except:

43. When a compensating control exists, a weakness in the system:

8. Before goods are shipped on account, a properly authorized person must

9. In a credit merchandising organization, the best place to vest credit

22. Which of the following fraudulent activities most likely could be

26. Defective merchandise returned by customers should be presented to

27. Sales invoices may be recorded in the incorrect accounting period. A

28. The purpose of tests of controls over shipping is to determine whether

29. The purpose of tests of controls over billing is to determine whether a,

32. Tracing shipping documents to sales invoices provides evidence that

1. Which of the following functions is not common to the expenditure/disbursement cycle?

4. Which of the following is a primary function of the purchasing department?

6. The authority to accept incoming goods in receiving should be based on

B 18. Operating control of the check-signing machine normally should be the

21. Which of the following is a standard control over cash disbursements?

26. Which of these functions is not a test of acquisitions?

8. To minimize the opportunities for fraud, unclaimed cash payroll should be

10. An auditor would be most likely to learn of slow-moving inventory through

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