CPA REVIEW SCHOOL OF THE PHILIPPINES AT-91 PW2

Manila

AUDITING THEORY CPA Review

REVIEW QUESTIONS-4

1. As a condition of obtaining a loan from Metro Manila Bank, Maasim Corp. is required to submit
an audited statement of financial position but not the related statements of income, changes
in equity, or cash flows. Maasim would like to engage a CPA to audit only its statement of
financial position. Under these circumstances, the CPA
A. May not audit only Maasim’s statement of financial position if the amount of the loan is
material to the financial statements taken as a whole.
B. May not audit only Maasim’s statement of financial position if Maasim is not a listed entity.
C. May audit only Maasim’s statement of financial position if the CPA disclaims an opinion on
the other financial statements.
D. May audit only Maasim’s statement of financial position if access to the information
underlying the basic financial statements is not limited.

2. An auditor believes there is substantial doubt about an entity’s ability to continue as a going
concern for a reasonable period of time. In evaluating the entity’s plans for dealing with the
adverse effects of future conditions and events, the auditor most likely would consider, as a
mitigating factor, the entity’s plans to
A. Purchase production facilities that are currently being leased from a third party.
B. Postpone expenditures to upgrade its information technology system.
C. Pay cash dividends that are in arrears to the preference shareholders.
D. Increase the useful lives of property, plant, and equipment for depreciation purposes.

3. In a practitioner’s review of interim financial information, the practitioner typically performs

each of the following, except
A. Reading the minutes of the meetings of shareholders, those charged with governance,
and other appropriate committees to identify matters that may affect the interim financial
information.
B. Obtaining corroborating external evidence.
C. Inquiring of members of management responsible for financial and accounting matters.
D. Applying financial ratios to the interim financial information.

4. Which of the following conditions identified during fieldwork of an audit is most likely to affect
the auditor’s assessment of the risk of misstatement due to fraud?
A. Checks for significant amounts outstanding at year-end.
B. Computer generated documents.
C. Missing documents.
D. Year-end adjusting journal entries.

5. Before assessing control risk at a level lower than the maximum, the auditor obtains
reasonable assurance that controls are in use and operating effectively. This assurance is
most likely obtained in part by
A. Preparing flowcharts.
B. Performing substantive tests.
C. Analyzing tests of trends and ratios.
D. Inspection of documents.

6. The work of internal auditors may affect the independent auditor’s

I. Procedures performed in obtaining an understanding of internal control.
II. Procedures performed in assessing the risk of material misstatement.
III. Substantive procedures performed in gathering direct evidence.
A. I and II only.
B. I and III only.
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C. II and III only.

D. I, II, and III.

7. Landing, CPA, is auditing the financial statements of Hilarion Company. Hilarion uses the
IT Service Center, Inc. to process its payroll transactions. IT’s financial statements are
audited by Copeng, CPA, who recently issued a report on IT’s internal control. Landing is
considering Copeng’s report on IT’s internal control in assessing control risk on the Hilarion
engagement. What is Landing’s responsibility concerning making reference to Copeng as a
basis, in part, for Landing’s own opinion?
A. Landing may refer to Copeng only if Landing is satisfied as to Copeng’s professional
reputation and independence.
B. Landing may refer to Copeng only if Landing relies on Copeng’s report in restricting the
extent of substantive tests.
C. Landing may refer to Copeng only if Landing’s report indicates the division of
responsibility.
D. Landing may not refer to Copeng under the circumstances above.

8. In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally

would be concerned about assumptions that are
A. Susceptible to bias.
B. Consistent with prior periods.
C. Insensitive to variations.
D. Similar to industry guidelines.

9. To which of the following matters would materiality limits not apply in obtaining written
management representations?
A. The availability of minutes of shareholders’ and directors’ meetings.
B. Losses from purchase commitments at prices in excess of market value.
C. The disclosure of compensating balance arrangements involving related parties.
D. Reductions of obsolete inventory to net realizable value.

10. The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is
to provide the auditor with
A. The probable outcome of asserted claims and pending or threatened litigation.
B. Corroboration of the information furnished by management about litigation, claims, and
assessments.
C. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
D. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.

11. Which of the following is least likely to be an approach followed when auditing the fair
values of assets and liabilities?
A. Review and test management’s process of valuation.
B. Confirm valuations with audit committee members.
C. Independently develop an estimate of the value of the account.
D. Review subsequent events relating to the account.

12. When auditing related-party transactions, an auditor places primary emphasis on

A. Ascertaining the rights and obligations of the related parties.
B. Confirming the existence of the related parties.
C. Verifying the valuation of the related-party transactions.
D. Evaluating the disclosure of the related-party transactions.

13. Which of the following most likely would be detected by an auditor’s review of a client’s
sales cutoff?
A. Shipments lacking sales invoices and shipping documents.
B. Excessive write-offs of accounts receivable.
C. Unrecorded sales at year-end.
D. Lapping of year-end accounts receivable.

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14. The predecessor auditor, who is satisfied after properly communicating with the successor
auditor, has reissued a report because the audit client desires comparative financial
statements. The predecessor auditor’s report should make
A. Reference to the report of the successor auditor only in the Key Audit Matters section.
B. Reference to the work of the successor auditor in the management’s responsibility and
opinion sections.
C. Reference to both the work and the report of the successor auditor only in the opinion
paragraph.
D. No reference to the report or the work of the successor auditor.

15. Which of the following inquiry or analytical procedures ordinarily is performed in an

engagement to review an entity’s financial statements?
A. Analytical procedures designed to test the accounting records by obtaining corroborating
audit evidence.
B. Inquiries concerning the entity’s procedures for recording and summarizing transactions.
C. Analytical procedures designed to test management’s assertions regarding continued
existence.
D. Inquiries of the entity’s attorney concerning contingent liabilities.

16. Financial statements of an entity that have been reviewed by a practitioner should be
accompanied by a report stating that
A. The financial statements are the responsibility of the company's management.
B. The scope of the inquiry and analytical procedures performed by the practitioner has
not been restricted.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.

17. Which of the following fundamental ethical principles prohibits association of professional
accountants with reports, returns, communications or other information that is believed to
contain a materially false or misleading statement?
A. Integrity
B. Objectivity
C. Professional competence and due care
D. Confidentiality

18. Safeguards created by the profession, legislation or regulation include the following, except
A. Continuing professional development requirements.
B. Professional standards.
C. Firm-wide and engagement specific safeguards.
D. Educational, training and experience requirements for entry into the profession.

19. Inherent risk is __________ related to detection risk and __________ related to the amount
of audit evidence.
A. Directly, inversely.
B. Directly, directly.
C. Inversely, inversely.
D. Inversely, directly.

20. The purpose of the requirement in having communication between the predecessor and
successor auditors is to
A. Allow the predecessor auditor to disclose information which would otherwise be
confidential.
B. Help the successor auditor to evaluate whether to accept the engagement.
C. Help the client by facilitating the change of auditors.
D. Ensure the predecessor collects all unpaid fees prior to a change in auditor.

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21. Which is usually recorded in the engagement letter?

A B C D
I. List of audit procedures to be used in inventory
observation. Yes No Yes No
II. The auditor’s assessment of audit risk. Yes No No Yes

22. An adverse opinion is issued when the auditor believes

A. Some parts of the financial statements are materially misstated or misleading.
B. The financial statements would be found to be materially misstated if an investigation
were performed.
C. The auditor is not independent.
D. The overall financial statements are so materially misstated that they do not present
fairly the financial position or results of operations and cash flows in accordance with
the applicable financial reporting framework.

23. The auditor has considerable responsibility for notifying users as to whether or not the
financial statements are properly stated. This imposes upon the auditor a duty to
A. Provide reasonable assurance that material misstatements will be detected.
B. Be a guarantor of the fairness in the statements.
C. Be equally responsible with management for the preparation of the financial statements.
D. Be an insurer of the fairness in the statements.

24. When comparing the auditor’s responsibility for detecting employee fraud and for detecting
errors, the profession has placed the responsibility
A. More on discovering errors than employee fraud.
B. More on discovering employee fraud than errors.
C. Equally on discovering either one.
D. On the senior auditor for detecting errors and on the manager for detecting employee
fraud.

25. The most important general ledger account included in and affecting several cycles is the
A. Cash account.
B. Inventory account.
C. Income tax expense and liability accounts.
D. Retained earnings account.

26. Which of the following is not a category of assertions that management makes about the
accounting information in the financial statements?
A. Assertions about classes of transactions for the period under audit.
B. Assertions about account balances at period end.
C. Assertions about the quality of source documents used to prepare the financial
statements.
D. Assertions about presentation and disclosure.

27. The auditor is determining that the recorded sales are for the amount of goods shipped and
are correctly billed and recorded. She is gathering evidence about which transaction related
audit objective?
A. Existence.
B. Completeness.
C. Accuracy.
D. Cut-off.

28. The primary purpose of performing analytical procedures in the planning phase of an audit
is to
A. Help the auditor obtain an understanding of the client’s industry and business.
B. Assess the going concern assumption.
C. Indicate possible misstatements.
D. Reduce detailed tests.

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29. What client information is needed by auditors in creating lead schedules?

A. Interim statements prepared by the client for the company’s 3rd quarter financial results.
B. General ledger information, including unadjusted ending balances and beginning
balances for accounts.
C. A schedule of adjusting entries made by the client for all balance sheet accounts.
D. Detailed transaction information that may explain the changes in balance sheet accounts
for the current year under audit.

30. A company frequently sells products at a price below inventory cost. Essential controls in
the risk assessment process would include
A. Adequate controls that address the risk of overstating inventory.
B. Adequate controls that address the risk of not including a purchased item in inventory.
C. Adequate controls that address the risk of understatement of inventory.
D. Adequate controls that address the risk of overstatement of cost of goods sold.

31. Internal controls can never be regarded as completely effective. Even if company personnel
could design an ideal system, its effectiveness depends on the
A. Adequacy of the computer system.
B. Proper implementation by management.
C. Ability of the internal audit staff to maintain it.
D. Competency and dependability of the people using it.

32. Of the following statements about internal controls, which one is least likely to be correct?
A. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost-benefit relationship, a client may apply controls on a test basis.
D. Control procedures reasonably ensure that collusion among employees cannot occur.

33. Which of the following is a factor that relates to incentives to misappropriate assets?
A. Significant accounting estimates involving subjective judgments.
B. Significant personal financial obligations.
C. Management’s practice of making overly aggressive forecasts.
D. High turnover of accounting, internal audit, and technology staff.

34. Auditors need to exhibit professional skepticism when auditing a client. This auditing
standard is best expressed by which of the following?
A. The auditor neither assumes dishonesty or honesty of management.
B. The auditor assumes dishonesty of management.
C. The auditor assumes honesty of management.
D. The auditor assumes management lacks integrity.

35. IT has several significant effects on an organization. Which of the following would not be
important from an auditing perspective?
A. Organizational changes.
B. The visibility of information.
C. The potential for misstatement.
D. None of the above; i.e., they are all important.

36. Which of the following statements related to application controls is correct?

A. Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions.
B. Application controls relate to various aspects of the IT function including physical
security and the processing of transactions in various cycles.
C. Application controls relate to all aspects of the IT function.
D. Application controls relate to the processing of individual transactions.

37. Auditors should evaluate which of the following before evaluating application controls
because of the potential for pervasive effects?
A. Input controls.

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B. Control environment.
C. Processing controls.
D. General controls.

38. The audit approach in which the auditor runs his or her own program on a controlled basis
to verify the client’s data recorded in a machine language is
A. The test data approach.
B. Called auditing around the computer.
C. The generalized audit software approach.
D. The microcomputer-aided auditing approach.

39. Collectively, procedures performed to obtain an understanding of the entity and its
environment, including internal controls, represent the auditor’s
A. Audit strategy.
B. Tests of controls.
C. Risk assessment procedures.
D. Tests of transactions.

40. If no material differences are found using analytical procedures and the auditor concludes
that misstatements are not likely to have occurred
A. Other substantive tests may be reduced.
B. It will be necessary to increase the tests of balances.
C. It will not be necessary to perform tests of balances.
D. It will be necessary to increase the tests of transactions.

41. Which of the following audit tests would be regarded as a test of controls?
A. Comparison of the inventory pricing to vendors’ invoices.
B. Tests of the signatures on canceled checks to board of directors’ authorizations.
C. Tests of the additions to property, plant, and equipment by physical inspections.
D. Review of the specific items making up the balance in a given general ledger account.

42. A major purpose of the auditor’s report on financial statements is to

A. Assure investors of the complete accuracy of the financial statements.
B. Clarify for the public the nature of the auditor’s responsibility and performance.
C. Deter creditors from extending loans in high-risk situations.
D. Describe the specific auditing procedures undertaken to gather evidence for the opinion.

43. As a result of sampling procedures applied as tests of controls, an auditor incorrectly

assesses control risk too low. The most likely explanation for this situation is that
A. The deviation rates of both the auditor’s sample and the population exceed the tolerable
rate.
B. The deviation rates of both the auditor’s sample and the population are less than the
tolerable rate.
C. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
D. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation
rate in the population is less than the tolerable rate.

44. When an audit is made in accordance with auditing standards, the auditor should always
A. Document the understanding of the client’s internal control but not the bases for the
conclusions about the assessed levels of control risk for financial statement assertions.
B. Employ analytical procedures as substantive tests to obtain evidence about specific
assertions related to account balances.
C. Obtain certain written representations from management.
D. Observe the taking of physical inventory on the balance sheet date.

45. Ads Co.’s directors voted immediately after year-end to double the advertising budget for
the coming year and authorized a change in advertising agencies. What is the effect of this
event on the year-end statements?
A. Disclosure by means of supplemental, pro forma financial data.

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B. Adjustment of the financial statements.

C. Disclosure in a note to the financial statements.
D. No financial statement disclosure necessary.

46. If the auditee has a material amount of treasury shares on hand at year end, the auditor
should
A. Count the certificates at the same time other securities are counted.
B. Count the certificates only if the company had treasury share transactions during the
year.
C. Not count the certificates if treasury shares are shown as deduction from equity.
D. Count the certificates only if the company classifies treasury shares with other assets.

47. A company makes a practice of investing excess short-term cash in trading securities that
are traded regularly on the Philippine Stock Exchange. A reliable test of the valuation of
these securities is
A. Consideration of current market quotations.
B. Confirmation of securities held by the broker.
C. Recalculation of investment value using a valuation model.
D. Calculation of premium or discount amortization.

48. During the preliminary survey phase of an audit of the organization’s production cycle,
management stated that the sale of scrap was well controlled. Evidence to verify that
assertion can best be gained by
A. Comparing current revenue from scrap sales with that of prior periods.
B. Interviewing persons responsible for collecting and storing the scrap.
C. Comparing the quantities of scrap expected from the production process with the
quantities sold.
D. Comparing the results of a physical inventory of scrap on hand with perpetual inventory
records.

49. For the week before Moron Company’s physical count, all receiving reports include a
notation that they have been prepared prior to the count. For the week after the physical
count, all receiving reports indicate that they have been prepared after the count. The
receiving department continues to receive goods after the cutoff time while the physical
count is in process. To determine the accuracy of the cutoff, the auditor should
A. Trace a sample of receiving reports issued after the last receiving report to the physical
items to see that they have been included in the physical count.
B. Trace a sample of receiving reports issued before the last receiving report to the physical
items to see that they have not been included in the physical count.
C. Observe that the receiving clerk is stamping the receiving reports properly.
D. List the number of the last receiving report for items included in the physical count.

50. Which of the following tests of details most likely would help an auditor determine whether
accounts payable have been misstated?
A. Examining reported purchase returns that appear too low.
B. Examining vendor statements for amounts not reported as purchases.
C. Searching for customer-returned goods that were not reported as returns.
D. Reviewing bank transfers recorded as cash received from customers.

51. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general
ledger control account as of October 31. By this procedure, the auditor is most likely to
learn of which of the following?
A. An October invoice was improperly computed.
B. An October check from a customer was posted in error to the account of another
customer with a similar name.
C. An opening balance in a subsidiary ledger account was improperly carried forward from
the previous accounting period.
D. An account balance is past due and should be written off.

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52. Which of the following is the greatest drawback of using subsequent collections evidenced
only by a deposit slip as an alternative procedure when responses to positive accounts
receivable confirmations are not received?
A. Checking of subsequent collections can never be used as an alternative auditing
procedure.
B. By examining a deposit slip only, the auditor does not know whether the payment is for
the receivable at the balance sheet date or a subsequent transaction.
C. A deposit slip is not received directly by the auditor.
D. A customer may not have made a payment on a timely basis.

53. If the objective of an auditor’s test of details is to detect a possible understatement of sales,
the auditor most likely would trace transactions from the
A. Sales invoices to the shipping documents.
B. Cash receipts journal to the sales journal.
C. Shipping documents to the sales invoices.
D. Sales journal to the cash receipts journal.

54. The primary difference between an audit of the balance sheet and an audit of the income
statement is that the audit of the income statement addresses the verification of
A. Transactions.
B. Authorizations.
C. Costs.
D. Cutoffs.

55. A secondary result of the auditor’s understanding of internal control in an audit of an entity’s
financial statements is that the understanding may
A. Provide a basis for designing the nature, timing, and extent of further audit procedures.
B. Assure that management’s procedures to detect all fraud are properly functioning.
C. Bring to the auditor’s attention possible control deficiencies.
D. Develop evidence to support the assessed risk of material misstatement.

56. Which of the following computerized control procedures is most effective in ensuring that
data uploaded from personal computers to a mainframe are complete and that no additional
data are added?
A. Self-checking digits to ensure that only authorized part numbers are added to the
database.
B. Batch control totals, including control totals and hash totals.
C. Passwords that effectively limit access to only those authorized to upload the data to
the mainframe computer.
D. Field-level edit controls that test each field for alphanumerical integrity.

57. Master files maintained as part of the processing of purchase transactions are
A. Accounts payable, bill of materials, finished goods inventory, and open purchase orders.
B. Accounts payable, open purchase orders, raw materials inventory, and work-in-process
inventory.
C. Accounts payable, bill of materials, and open purchase orders.
D. Accounts payable, open purchase orders, and raw materials inventory.

58. Which of the following should not be the responsibility of a database administrator?
A. Design the content and organization of the database.
B. Develop applications to access the database.
C. Protect the database and its software.
D. Monitor and improve the efficiency of the database.

59. The most likely reason an audit cannot reasonably be expected to bring all violations of laws
and regulations by the client to the auditor’s attention is that
A. Violations of laws and regulations are perpetrated by management override of the
information and communication component of internal control.
B. Violations of laws and regulations by clients often relate to operating aspects rather than
accounting aspects.

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C. The information and communication component of the client’s internal control

procedures may be so effective that the auditor performs only minimal substantive
testing.
D. Violations of laws and regulations may be perpetrated by the only person in the client’s
organization with access to both assets and the accounting records.

60. Which of the following computer hardware devices allows for an immediate update of
merchandise inventory in a retail environment?
A. Inventory control terminal.
B. CD-RW.
C. Video display terminal.
D. Point-of-sale terminal.

61. Computer manufacturers install software programs permanently inside the computer as part
of its main memory to provide protection from erasure or loss if electrical power is
interrupted. This concept is known as
A. File integrity.
B. Software control.
C. Firmware.
D. Random access memory (RAM).

62. The relationship between online, real-time database systems and batch processing systems
is that a firm
A. Will have only one processing mode because a single computer cannot do both.
B. Will not use batch processing if it has a large computer.
C. May use both processing modes concurrently.
D. Will always prefer an online, real-time processing system because batch processing is
slow.

63. The accountant’s knowledge of the accounting principles and practices of the client’s
industry should enable him/her to compile appropriate financial statements. Also, the
accountant should understand the nature of the entity’s business, its accounting records,
the qualifications of its personnel, the accounting basis of the financial statements, and their
content. To acquire such knowledge, the accountant does not normally
A. Consult Audit and Accounting Guides.
B. Read industry publications and consult textbooks and periodicals.
C. Obtain an understanding of internal control and assess control risk.
D. Make inquiries of the entity’s personnel.

64. During the course of an audit of the financial statements of Lason Corporation, Smokey,
CPA, discovered that the company vice-president had misrepresented one the company’s
products before the Food and Drug Administration of the Philippines by falsifying test
results. Unasserted claims, material in amount, loom in the near future. Management
refuses to permit the inclusion of a liability for such claims even though it is probable that
they will be asserted and the amount of loss can be reasonably estimated. Smokey should
issue a report with a/an
A. Basis for modification paragraph and either an adverse opinion or a qualified opinion.
B. Qualified opinion and a basis for qualified opinion paragraph but should not consider
expressing an adverse opinion.
C. Qualified opinion and no basis for qualified opinion paragraph.
D. Unmodified opinion and an emphasis of matter paragraph.

65. The date of the audit report is important because

A. The auditor cannot date the report earlier than the date on which sufficient appropriate
evidence to support the opinion has been obtained.
B. The auditor bills time to the client up to and including the audit report date, and the
statement to the client should reflect this date.
C. PSAs require all audits to be performed on a timely basis.
D. It should coincide with the date of the financial statements.

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66. Notes to financial statements may be used to

A. Describe the nature and type of auditing procedures applied to the financial statements.
B. Make an unsubstantiated claim that related party transactions were consummated on
terms equivalent to those that prevail in arm’s-length transactions.
C. Correct an improper financial statement presentation.
D. Indicate bases for valuing assets.

67. Which of the following statements is true concerning statistical sampling in tests of controls?
A. As the population size increases, the sample size should increase proportionately.
B. Deviations from specific controls at a given rate ordinarily result in misstatements at a
lower rate.
C. The relationship between the expected population deviation rate and the sample size is
inverse.
D. In determining the tolerable rate, an auditor considers detection risk and the sample
size.

68. As lower acceptable levels of both audit risk and materiality are established, the auditor
should plan more work on individual accounts to
A. Find smaller misstatements.
B. Find larger misstatements.
C. Increase the tolerable misstatement in the accounts.
D. Decrease the risk of assessing control risk too low.

69. In establishing the existence and ownership of an investment held by a corporation in the
form of publicly traded stock, an auditor should inspect the securities or
A. Obtain written representations from management confirming that the securities are
properly classified as trading securities.
B. Inspect the audited financial statements of the investee company.
C. Confirm the number of shares owned that are held by an independent custodian.
D. Determine that the investment is carried at fair value.

70. An auditor is concerned about the possibility of fraud if

A. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are
deposited in the bank daily.
B. The monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records.
C. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person.
D. One person, acting alone, has sole access to the petty cash fund (except for a provision
for occasional surprise counts by a supervisor or auditor).

71. Which of the following best describes a CPA’s engagement to report on an entity’s internal
control over financial reporting?
A. An assurance engagement that results in issuance of a report relating to the
effectiveness of internal control.
B. An audit of the financial statements that results in communicating significant
deficiencies in internal control.
C. A prospective engagement to project, for a period of time not to exceed one year, and
a report on the expected benefits of the entity’s internal control.
D. A consulting engagement to provide constructive advice to the entity on its internal
control.

72. In the accounting system of Apog Company, the quantities counted by the receiving
department and entered at a terminal are transmitted to the computer, which immediately
transmits the amounts back to the terminal for display on the terminal screen. This display
enables the operator to
A. Establish the validity of the account number.
B. Verify that the amount was entered accurately.
C. Verify the authorization of the disbursement.
D. Prevent the overpayment of the account.

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73. Disclosure in financial statements of a reporting entity that has participated in related-party
transactions that are material, individually or in the aggregate, should include all of the
following except
A. The nature of the relationship.
B. A description of the transactions for the period reported upon including amounts, if any,
and such other information necessary to an understanding of the effects on the financial
statements.
C. A statement that the transactions would have taken place regardless of whether the
parties were related.
D. The peso volume of the transactions amounts due from or to related parties and, if not
otherwise apparent, the terms and manner of settlement.

74. Which of the following activities is an analytical procedure an auditor would perform in the
final overall review stage of an audit to ensure that the financial statements are free from
material misstatement?
A. Reading the minutes of the board of directors’ meetings for the year under audit.
B. Obtaining a letter concerning potential liabilities from the client’s attorney.
C. Comparing the current year’s financial statements with those of the prior year.
D. Ensuring that a representation letter signed by management is in the file.

75. Which of the following is a definition of control risk?

A. The risk that a material misstatement will not be prevented or detected on a timely basis
by the client’s internal controls.
B. The risk that the auditor will not detect a material misstatement.
C. The risk that the auditor’s assessment of internal controls will be at less than the
maximum level.
D. The susceptibility of material misstatement assuming there are no related internal
control policies or procedures.

76. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit
team members should discuss the potential for material misstatement due to fraud. Which
of the following best characterizes the mindset that the audit team should maintain during
this discussion?
A. Presumptive C. Criticizing
B. Judgmental D. Questioning

77. Which of the following statements is correct regarding internal control?

A. A well-designed internal control environment ensures the achievement of an entity’s
control objectives.
B. An inherent limitation to internal control is the fact that controls can be circumvented
by management override.
C. A well-designed and operated internal control environment should detect collusion
perpetrated by two people.
D. Internal control is a necessary business function and should be designed and operated
to detect all errors and fraud.

78. Which of the following should an auditor do when control risk is assessed at the maximum
level?
A. Perform fewer substantive tests of details.
B. Perform more tests of controls.
C. Document the assessment.
D. Document the internal control system more extensively.

79. The company being audited has an internal auditor that is both competent and objective.
The independent auditor wants to assign tasks for the internal auditor to perform. Under
these circumstances, the independent auditor may
A. Allow the internal auditor to perform tests of internal controls.
B. Allow the internal auditor to audit a major subsidiary of the company.
C. Not assign any task to the internal auditor because of the internal auditor’s lack of
independence.

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D. Allow the internal auditor to perform analytical procedures, but not be involved with any
test of details.

80. Which of the following is least likely to be a test of a control?

A. Inquiries of appropriate personnel.
B. Inspection of management’s engagement letter.
C. Observation of the application of a policy.
D. Reperformance of the application of a policy.

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