1.

The extent of testing normally applies

A. exclusively to the number of items to be tested.
B. to both the number of items tested and the number of tests performed.
 C. exclusively to the number of substantive tests performed.
D. to both the nature of items tested and the number of tests performed.

2. Which of the following, when performed by the auditor, is not a test of mechanical
accuracy?
A. Extending sales invoices
B. Adding journals and ledgers
C. Tracing amounts from journals to ledgers
D. Calculating the current ratio

3. In the examination of the financial statements of Delta Company, the auditor determines that
in performing a test of internal control effectiveness, the rate of error in the sample does not
support the auditor's preconceived notion of a tolerable occurrence rate when, in fact, the
actual error rate in the population does meet the auditor's notion of effectiveness. This
situation illustrates the risk of
A. underassessment of control risk.
B. overassessment of control risk.
C. incorrect rejection.
D. incorrect acceptance.

4. Several risks are inherent in the evaluation of audit evidence which has been obtained
through the use of statistical sampling. Which of the following risks is an example of the risk
of underassessment of control risk?
A. Failure to properly define the population to be sampled.
B. Failure to draw a random sample from the population.
C. Failure to accept the statistical hypothesis that internal control is unreliable when, in
fact, it is.
D. Failure to accept the statistical hypothesis that a book value is not materially misstated
when the true book value is not materially misstated.

5. As a result of tests of controls, an auditor underassessed control risk and decreased

substantive testing. This underassessment occurred because the true occurrence rate in the
population was
A. Less than the risk of underassessment in the auditor's sample.
B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor's sample.

6. Which of the following sampling plans would be designed to estimate a numerical

measurement of a population, such as a peso value?
A. Numerical sampling.
B. Discovery sampling.
C. Sampling for attributes.
D. Sampling for variables.

7. Which of the following statements is an advantage of classical variables sampling?

 A. If no errors are expected, classical variables sampling will result in a smaller sample
size than probability-proportional-to-size sampling.
B. A classical variables sampling plan can begin before the completed population is
available.
C. Classical variables sampling may result in a smaller sample size than probability-
proportional-to-size sampling if there are many differences between recorded and
audited amounts.
D. Classical variables sampling does not require recorded values for individual sampling
units.

8. What is the primary objective of using stratification as a sampling method in auditing?

A. To increase the confidence level at which a decision will be reached from the results of
the sample selected.
B. To determine the occurrence rate for a given characteristic in the population being
studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.

9. An auditor is applying PPS sampling. In determining the sample size, which of the
following is not necessary?
A. a reliability factor for overstatement errors
B. a reliability factor for understatement errors
C. tolerable error
D. anticipated error

10. In a variable sampling plan, an auditor must generally consider each of the following except
A. variation within the population.
B. acceptable risk of incorrect acceptance.
C. tolerable error.
D. Population.

11. When sampling methods are used in a substantive test, all of the following factors must be
considered in determining an optimum sample size, except the
A. variation in the population.
B. risk levels that the auditor is willing to accept.
C. deviation occurrence rate that the auditor expects to exist in the sample.
D. tolerable misstatement.
12. PPS sampling is most appropriate when the auditor
A. anticipates understatement errors.
B. anticipates overstatement errors.
C. expects no errors.
D. has assessed control risk at the maximum.

13. The mean-per-unit estimation method calculates the estimated total audited value of a
population of accounts receivable as:
 A. A summation of the total individual accounts values in the population.
B. The sample mean audited value multiplied by the number of items in the population.
C. The estimated total audited value of the population multiplied by the number of items
in the sample.
D. The summation of the sample multiplied by the number of discrete samples in the
population.

14. What is the best description of "tolerable misstatement" for mean-per-unit estimation?
A. The maximum misstatement that may exist without causing an account to be materially
misstated.
B. The "bounds" around the sample mean that we would expect the value to fall within to
be correct.
C. The "projected" misstatement in the population based upon the sample chosen.
D. The upper limit (or lower limit for liabilities) of asset values for which the book value
may exceed that sample mean without being materially misstated.

15. When are the ratio estimation and difference estimation techniques most likely to be
preferable to the mean-per-unit estimation method?
A. The choice between any of the methods is irrelevant, since they all provide similar
results.
B. When differences between book and audited values are infrequent.
C. When differences between book and audited values are frequent.
D. When differences between book and projected misstatement is estimated to be small.

16. What is one of the main advantages of the probability-proportional-to-size sampling

technique over the classical variables approach?
A. It provides a more accurate estimation of the sample mean.
B. It provides a wider range for acceptance so that less substantive testing needs to be
done.
C. It provides a smaller range for acceptance so that more errors are discovered.
D. It often requires a smaller sample size to be selected.

17. Probability-proportional-to-size sampling will result in what type of sample items being
selected?
A. Highly representative of the population because it is wholly randomized.
B. A higher proportion of small value items then large value items because of the
sampling interval used.
C. A higher proportion of large value items than small value items because of the
sampling interval used.
D. A biased sample means that may not be representative of the population.

18. While performing a substantive test of details during an audit, the auditor determined that the
sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
A. alpha risk.
B. assessing control risk too low.
 C. beta risk.
D. assessing control risk too high.

19. The risk of incorrect acceptance relates to the:

A. Effectiveness of the audit.
B. Efficiency of the audit.
C. Preliminary estimate of materiality.
D. Allowable risk of tolerable error.

20. Sample results support the conclusion that a recorded account balance is materially misstated
but, unknown to the auditor, the account is not misstated, suggesting the risk of
A. incorrect rejection.
B. assessing control risk too high.
C. incorrect acceptance.
D. assessing control risk too low.

21. Which of the following business functions is associated with the revenue/receipt cycle?
A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for promises of future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.

22. Which of the following is not a common activity in the revenue/receipt cycle?
A. Order entry
B. Receiving
C. Inventory control
D. cash collection

23. The cash account is involved in which cycle?

A. Revenue and collection.
B. Acquisition and expenditure.
C. Production and conversion.
D. All of the given choices.

24. Which of the following is an appropriate audit procedure to test cancelled checks for
authorized signatures?
A. Compare the check date with the first cancellation date.
B. Determine that all checks are to be signed by individual officers who are authorized by
the board.
C. Examine a representative sample of signed checks and trace their signatures to the
specimen signature book of authorized signatories.
D. Confirm the signatures from a sample of checks directly with the bank.

25. Which of the following is not likely a source of information about the accounting system in
the revenue area?
A. Direct inquiry of customers.
 B. Prior experience with the client.
C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.

26. Which of the following gives an indication of a potential fraudulent activity?

A. Numerous credit memoranda have been issued to the company's biggest customer.
B. Internal auditor cannot locate several credit memoranda to support reductions of
customers' balances.
C. The year-end bank reconciliation has no outstanding checks or deposits older than 15
days.
D. No one was absent the day the auditors handed out the paychecks.

27. 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 the shipments of goods.
B. Establish procedures for reviewing and approving the prices and sales terms before
sale.
C. Prenumber the bills of lading and assure that the related billings are made on a
periodic basis.
D. Prepare and periodically update the lists of authorized customers.

28. 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 the responsibilities for authorization, execution, and recording, and
prenumber and control the custody of documents.
B. Establish the cash receipts function in a centralized location and require a 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 the recorded account balances.

29. An entity has implemented a control procedure which requires that authorized personnel
reconcile the total of individual customer accounts receivable with control totals. This
control relates to which of the following control objectives?
A. Sales, cash receipts, and related transactions should be recorded at the correct
amounts, in the proper period, and should be properly classified.
B. Recorded accounts receivable balances should reflect underlying transactions and
events.
C. Billings, collections, and related adjustments transactions should be posted accurately
to individual customer accounts.
D. Access to cash and cash-related records should be restricted to personnel authorized
by management.

30. Which of the following internal control procedures most likely would deter lapping of
collections from customers?
 A. Independent internal verification of dates of entry in the cash receipts journal with
dates of daily cash summaries.
B. Authorization of writeoffs of uncollectible accounts by a supervisor who is
independent of credit approval.
C. Segregation of duties between receiving cash and posting collections to the accounts
receivable ledger.
D. Supervisor‟s comparison of the daily cash summary with the sum of the cash receipts
journal entries.

31. What sequence of steps does an auditor undertake when identifying control procedures that
are potentially reliable in assessing control risk below the maximum?
A. Consider the errors or frauds that might occur, determine control procedures, identify
control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider the errors or frauds
that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that might occur, determine
control procedures, and design tests of controls.
D. Design tests of controls, determine control procedures, consider the errors or frauds
that might occur, and identify control objectives.

32. 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.

33. Which of the following is most likely to provide management with incentives to overstate
earnings?
A. Projected quarterly dividends.
B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.

34. Under which of the following circumstances does management have some discretion in
timing the recognition of revenue?
A. The timing of revenue is not reasonably determinable and the earnings process is not
complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm‟s length.

35. After preparing a flowchart of internal control for sales and cash receipts transactions and
evaluating the design of the system, the auditor would perform tests of controls on all
control procedures
A. That are documented in the flowchart.
 B. that are considered to be deficiencies that might allow errors to enter the accounting
system.
C. that are considered to be strengths that the auditor plans to rely on in assessing
control risk.
D. that would help in preventing irregularities.

36. 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 posts the receipts to the accounts receivable subsidiary ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.

37. Which of the following is not 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 reconciliation prepared by employees who do not handle cash.