1.

An audit of historical financial statements most commonly includes the *

3 points

a. statement of cash flows, balance sheet, and the statement of retained earnings.
b. balance sheet, statement of retained earnings, and the statement of cash flows.
c. balance sheet, income statement, statement of cash flows, and the statement of
changes in stockholders' equity
d. income statement, the statement of cash flows, and the statement of net working
capital.

2. What category of audit report will be issued if the auditor concludes that the financial
statements are not fairly presented? *
2 points

a. qualified
b. disclaimer
c. standard unmodified opinion
d. adverse

3. Which of the following requires recognition in the auditor's opinion as to consistency?  *

4 points

a. The change from the cost method to the equity method of accounting for
investments in common stock.
b. A change in depreciation method which has no effect on current year's financial
statements but is certain to affect future years.
c. A change in the estimate of provisions for warranty costs.
d. The correction of an error in the prior year's financial statements resulting from a
mathematical mistake in capitalizing interest.
4. If the balance sheet of a private company is dated December 31, 2016, the audit report is
dated February 8, 2017, and both are released on February 15, 2017, this indicates that
the auditor has searched for subsequent events that occurred up to *
3 points

a. December 31, 2016.

b. January 1, 2017.
c. February 15, 2017.
d. February 8, 2017.

5. ________ risk reflects the possibility that the information upon which the business
decision *
3 points

a. Business
b. Information
c. Client acceptance
d. Control

6. The King Surety Company wrote a general fidelity bond covering thefts of assets by the
employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled
$17,200 of company funds. When the activities were discovered, King paid Wilson the
full amount in accordance with the terms of the fidelity bond, and then sought
recovery against Wilson's auditors, Lynch & Merritt, CPAs. Which of the following
would be Lynch & Merritt's best defense? *
4 points

a. The shortages were the result of clever forgeries and collusive fraud which would not
be detected by an examination made in accordance with generally accepted auditing
standards.
b. Lynch & Merritt were not aware of the King-Wilson surety relationship.
 c. Lynch & Merritt were not guilty either of gross negligence or fraud.
d. King is not in privity of contract.

7. In comparing management fraud with employee fraud, the auditor's risk of failing to
discover the fraud is *
5 points

a. greater for employee fraud because of the larger number of employees in the
organization
b. Optiongreater for management fraud because managers are inherently more
deceptive than employees.
c. greater for management fraud because of management's ability to override existing
internal controls.
d. greater for employee fraud because of the higher crime rate among blue collar
workers.

8. Freedom from ________ means the absence of relationships that might interfere with
objectivity or integrity *
3 points

a. conflicts of interest
b. impartiality
c. independence
d. acts discreditable

9. When an auditor knows that an illegal act has occurred, she must *
4 points

a. withdraw from the engagement.

b. issue an adverse opinion.
c. consider the effects on the financial statements, including the adequacy of disclosure.
 d. report it to the proper governmental authorities.

10. To be considered reliable evidence, confirmations must be controlled by *

4 points

a. the external auditor.

b. the client's controller or CFO.
c. the client's internal audit department.
d. the client's employee responsible for accounts receivable.

11. ________ is the auditor's examination of the client's documents and records to
substantiate that the information is included in the financial statements. *
4 points

a. Footing
b. Verification
c. Inspection
d. Recalculation

12. Which of the following is false concerning the principal CPA firm's alternatives when
issuing a report when another CPA firm performs part of the audit? *
4 points

a. Make no reference to the other CPA firm in the audit report, and issue the standard
unqualified opinion.
b. Option Issue a joint report signed by both CPA firms.
c. A qualified opinion or disclaimer, depending on materiality, is required if the principal
auditor is not willing to assume any responsibility for the work of the other auditor.
d. Make reference to the other auditor in the report by using modified wording (a
shared opinion or report).
 13. The responsibility for the preparation of the financial statements and the
accompanying footnotes belongs to *
0 points

a. management for the statements and the auditor for the notes.
b. both management and the auditor equally.
c. Optiothe auditor.
d. management.

14. When assessing the risk of material misstatements in the financial statements, *
3 points

a. GAAS specifies in detail how much and what types of evidence the auditor needs to
obtain.
b. company management is responsible for determining materiality levels.
c. inadequate internal control procedures will mitigate client business risk. angel
d. the auditor must have an understanding of the client's business and industry

15. The unmodified opinion audit report with emphasis-of-matter paragraph does not
meet the criteria of a complete audit with satisfactory results. *
2 points

a. True
b. False

16. For audit evidence to be compelling to the auditor it must be sufficient and
appropriate. Which statement below is not correct regarding the appropriateness of
audit evidence *
3 points
 a. The more effective the internal control system, the more assurance it provides the
auditor about the reliability of financial reporting by the client.
b. An auditor's opinion, to be economically useful and profitable to the auditing firm
needs to be formed within a reasonable time and based on evidence obtained that
assures profits for the auditing firm.
c. Evidence obtained from independent sources outside the entity is generally more
reliable than evidence secured solely within the entity.
d. The independent auditor's direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.

17. Which of the following statements is true when the CPA has been engaged to perform
an audit of financial statements? *
3 points

a. The CPA firm has primary responsibility to the FASB

b. Should a situation arise where there is no convincing authoritative standard available,
and there is a choice of actions which could impact a client's financial statements, the
CPA is free to endorse the choice which is in the investors' interests.
c. The CPA firm is engaged and paid by the client; therefore, the firm has primary
responsibility to be an advocate for the client.
d. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the
audit are those who rely on the financial statements.
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18. Another term for misappropriation of assets is

2 points

a. management fraud.
b. collusion.
 c. employee fraud.
d. illegal acts.

19. When assessing the risk of material misstatements in the financial statements, *
4 points

a. the auditor must have an understanding of the client's business and industry
b. company management is responsible for determining materiality levels.
c. GAAS specifies in detail how much and what types of evidence the auditor needs to
obtain.
d. inadequate internal control procedures will mitigate client business risk.

20. A(n) ________ failure occurs when an auditor issues an erroneous opinion because it
failed to comply with requirements of auditing standards. *
2 points

a. ethics
b. business
c. process
d. audit

21. In order to properly plan and perform an audit, an important fact for both the auditor
and the client to understand is that *
3 points

a. management can restrict the auditor's access to important information relevant to

the financial statements
b. the purpose of an audit is to prevent fraud.
c. management is responsible for the preparation of the financial statements.
d. the internal control policies and procedures are developed by the auditors.
 22. Which of the following auditor's defenses usually means nonreliance on the financial
statements by the user? *
2 points

a. non negligent performance

b. lack of duty
c. absence of causal connections
d. contributory negligence

23. The auditor's responsibility section of the standard unmodified opinion audit report
states that the audit is designed to *
4 points

a. obtain reasonable assurance whether the statements are free of material

misstatement.
b. discover material errors and/or irregularities.
c. discover all errors and/or irregularities.
d. conform to generally accepted accounting principles.

24. ________ is an attitude that includes a questioning mind, being alert to conditions
that might indicate possible misstatements due to fraud or error, and a critical
assessment of audit evidence. *
3 points

a. Professional skepticism
b. Due Diligence
c. Competence
d. Reasonableness
 25. Physical examination *
4 points

a. can be used for both tangible assets and documents.

b. is a direct means of verifying that an asset really exists.
c. is not generally a reliable type of audit evidence.
d. is sufficient evidence to verify that the existing assets are owned by the client.

26. Which of the following forms of evidence would be least persuasive in forming the
auditor's opinion about marketable securities and other investments held by the
company? *
4 points

a. responses to auditor's questions by the president and controller regarding the

investments account
b. correspondence with a stockbroker regarding the quantity of client's investments
held in street name by the broker
c. minutes of the board of directors authorizing the purchase of stock as an investment
d. the auditor's count of marketable securities

27. The possibility that a business may not be able to repay a bank loan because of an
economic downturn is referred to as *
3 points

a. interest rate risk. SHANIA

b. information risk.
c. materiality risk.
d. business risk.
 28. When the auditor becomes aware of or suspects noncompliance with laws and
regulations *
3 points

a. all of the above

b. the auditor should obtain additional information to evaluate the possible effects on
the financial statements.
c. the auditor should evaluate the effects of the noncompliance on other aspects of the
audit.
d. the auditor should discuss the matter with management at a level above those
suspected of the noncompliance.

29. Which staff level in a CPA firm performs most of the detailed audit work? *
2 points

a. partner
b. staff assistant
c. senior auditor
d. senior manager

30. The "Principles Underlying an Audit in Accordance with Generally Accepted Auditing
Principles" provides a framework to help auditors *
2 points

a. obtain complete assurance that the financial statements are free from any error.
b. prevent fraud.
c. understand the ten GAAS standards.
d. report on the financial statements.
 31. The standard of due care to which the auditor is expected to adhere to in the
performance of the audit is referred to as the *
3 points

a. common law doctrine.

b. constructive care concept.
c. true person concept
d. prudent person concept.

32. When comparing the auditor's responsibility for detecting employee fraud and for
detecting errors, the profession has placed the responsibility *
3 points

a. equally on discovering errors and employee fraud.

b. more on discovering errors than employee fraud.
c. on the senior auditor for detecting errors and on the manager for detecting employee
fraud
d. more on discovering employee fraud than errors.

33. Which of the following loans would be prohibited between a CPA firm or its members
and an audit client? *
0 points

a. unpaid credit card balances not exceeding $10,000 in total

b. new home mortgage loans
c. automobile loans
d. loans fully collateralized by cash deposits at the same financial institution
 34. The major conclusion of the 1931 Ultramares case was that *
4 points

a. third parties must file criminal charges, not civil charges, against the auditor.
b. ordinary negligence is insufficient for liability to third parties.
c. fraud or gross negligence is sufficient for liability to third parties.
d. auditors have no liabilities to third parties.

35. Management is required by GAAP to reduce information risk, even if the costs
outweigh the benefits. *
2 points

a. True
b. False

36. CPA firms are never allowed to provide bookkeeping services for clients. *
2 points

a. False
b. True

37. Which one of the following is more difficult to evaluate objectively? *

4 points

a. efficiency and effectiveness of operations

b. compliance with government regulations
c. All three of the above are equally difficult.
d. presentation of financial statements in accordance with generally accepted
accounting principles
 38. Which of the following statements best describes the auditor's responsibility regarding
the detection of fraud? *
3 points

a. The auditor is responsible for the failure to detect fraud only when such failure
clearly results from nonperformance of audit procedures specifically described in the
engagement letter.
b. The auditor is required to provide reasonable assurance that the financial statements
are free of both material errors and fraud.
c. The auditor is responsible for detecting material financial statement fraud, but not a
material misappropriation of assets.
d. The auditor is responsible for the failure to detect fraud only when an unqualified
opinion is issued.

39. Which of the following statements is not correct? *

3 points

a. The decision of how many items to test must be made by the auditor for each audit
procedure.
b. It is possible to vary the sample size from one unit to 100% of the items in the
population.
c. Cost is an adequate justification for not gathering an adequate sample size.
d. The sample size for any given procedure is likely to vary from audit to audit.

40. The trait that distinguishes auditors from accountants is the *

4 points

a. auditor's education beyond the bachelor's degree.

b. auditor's ability to interpret accounting principles generally accepted in the United
States.
c. auditor's expertise in the accumulation and interpretation of audit evidence.
d. auditor's ability to interpret FASB Statements.