Aditing Theory-Internal Control

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Which one of the following statements is not true about internal auditing?
a. Internal auditing is an objective evaluation function.
b. Internal auditing is established within an organization.
c. Internal auditing's purpose is to provide assurance regarding the company's compliance
with stated policies and procedures.
d. Internal auditing is established as an independent service to regulatory bodies and
creditors.

____ 2. An audit which has as its purpose the evaluation of the economy and efficiency with which resources are
employed is known as a(n)
a. financial audit.
b. compliance audit.
c. operational audit.
d. governmental audit.

____ 3. The audit agency for the U. S. Congress is the

a. SEC.
b. GAO.
c. IIA.
d. AICPA.

____ 4. What is the criteria used in an operational audit?

a. GAAP.
b. effectiveness and efficiency.
c. rules and regulations.
d. company policies.
e. Both B and C.

____ 5. Stockholders require accountability from management for:

a. financial performance
b. financial transparency
c. quality of internal controls
d. all of the above

____ 6. The audit committee has oversight responsibilities for:

a. outside reporting.
b. internal auditing.
c. external auditing.
d. all of the above.

____ 7. Governance failures over the past decade related to the stockholders included all of the following except:
 a. focus on short-term prices
b. failure to perform long-term growth analysis
c. abdication of    most responsibilities to management and analysts as long as stock price
increased
d. all of the above are failures

____ 8. The Public Oversight Board issued a report citing concerns with the audit process. These concerns included
all of the following except:
a. analytical procedures were being used inappropriately to replace direct tests of account
balances
b. audit documentation, especially related to the planning of the audit, was not in
compliance with professional standards
c. auditors were ignoring warning signals of fraud and other problems
d. all of the above were cited

____ 9. The audit committee should disclose the processes it uses in discharging its responsibilities, including all of
the following except:
a. the number of meetings each year
b. how the committee oversees the internal audit function
c. committee activities performed to assess the risk of fraudulent financial reporting
d. the committee’s role in its direct implementation of    internal controls

____ 10. The Public Company Accounting Oversight Board was established by:
a. an act of Congress.
b. the Securities and Exchange Commission.
c. the Public Oversight Board.
d. the self-governing association of certified public accountants.

____ 11. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional
Conduct?
a. a member must not take on an engagement that is beyond the member's professional
competence
b. a member must exercise duties prudently and professionally
c. a member must adequately plan and supervise the performance of professional services
d. a member firm must not advertise services to competing clients

____ 12. A CPA firm is considered independent when it performs which of the following services for a publicly traded
audit client?
a. Serving as a member of the client’s board of directors.
b. Determining which accounting policies will be adopted by the client as approved by the
board of directors.
c. Accounting information system design and implementation as approved by the board of
directors.
d. Tax return preparation as approved by the board of directors.

____ 13. In which of the following situations would a CPA not be considered independent?
 a. where a CPA has obtained an auto loan from a banking client in the current year.
b. where a CPA has obtained an automobile lease term from a client in the current year.
c. where a CPA has obtained a $4,000 retainer for services from a banking client in the
current year.
d. where a CPA has obtained a home mortgage loan from a client in the current year.

____ 14. Which one of the following is not a critical component of risks relevant in conducting an audit?
a. Business risks
b. Audit risks
c. Engagement risks
d. Decentralize risks

____ 15. What is the most important purpose that is achieved by having an auditor write a formal engagement letter
that is signed by the client?
a. Documented proof of auditor responsibility for financial statements in accordance with
GAAP.
b. Multiple degrees of legal separation of the client from the auditor.
c. A locking-in of fees and timetable that must be adhered to by the client.
d. A communication and clarification of the responsibilities and expectations of the auditor
and the client.

____ 16. In accepting a client, auditing standards suggest that the auditor focus on four questions. Which of the
following is not one of those four required questions of the predecessor?
a. Integrity of management.
b. The strength of the client’s internal control.
c. Disagreements with management as to accounting principles, auditing standards, or
other similarly significant matters.
d. Any communications by the predecessor to the client’s management or audit committee
concerning fraud, illegal acts by the client, and matters related to internal control.

____ 17. Engagement risk has been defined as the risk of potential losses    that are incurred by the auditor in being
associated with a particular client. Which of the following factors are not associated with increased
engagement risk for the auditor?
a. Management with questionable integrity.
b. A failed company.
c. Materially misstated financial statements.
d. All of these factors increase engagement risk.

____ 18. In the audit risk model, which of the risk components can be assessed by the auditor?
a. Inherent risk.
b. Control risk.
c. Detection risk.
d. Both A and B.

____ 19. In implementing the audit risk model, which of the following is not a component step in applying the model?
a. Understand management’s risk processes.
 b. Develop expectations.
c. Assess quality of control system.
d. All are component steps in implementing the audit risk approach.

____ 20. Under the audit risk approach which of the following is not a method used by the auditor to manage
detection and audit risk?
a. Adjusting audit staffing to reflect the risk associated with the client.
b. Developing direct tests of account balances consistent with the detection risk.
c. Anticipating potential misstatements or accounting problems likely to be associated with
account balances.
d. Adjusting the timing of audit tests to maximize overall audit risk.

____ 21. Residual risk is defined as

a. susceptibility of a transaction or accounting adjustment to be recorded in error, or for the
transaction not to be recorded in the absence of internal controls.
b. the risk that the client’s internal controls system will fail to prevent or detect a
misstatement.
c. the risk left in an account balance after application of internal controls.
d. risk that the audit procedures will fail to detect a material misstatement.

____ 22. Audit risk in the audit risk model concerns the risk that the auditor may issue an unqualified opinion on
financial statements that are materially misstated. What is the manner in which the auditor assesses audit
risk in using the audit risk model to determine the nature, extent and timing of audit evidence to collect in
an audit.
a. assessed to maintain low level of audit risk given residual risk
b. assessed to maintain low level of audit risk given financial statement risk
c. assessed to maintain a low level of audit risk given engagement risk
d. assessed to maintain a low level of audit risk given enterprise risk

____ 23. There is a high risk, as well as a history, that fraud is instituted through which of the following:
a. adjusting entries.
b. closing entries.
c. unusual journal entries.
d. all of the above.

____ 24. Personnel policies and procedures are designed to ensure that the organization
a. hires the right people.
b. complies with federal and state laws in its hiring and retention decisions.
c. has employees that are properly trained and supervised.
d. performs all of the above.

____ 25. An auditor of a client company that has multiple locations must:
a. increase control risk to moderate or high.
b. conclude that independent business units of the consolidation are immaterial.
c. issue multiple audit reports for each segment of the company.
d. determine the universal application of controls across the company.
____ 26. In a large company, who usually actively performs the monitoring of internal control?
a. Internal auditors
b. PCAOB
c. CFO
d. External auditors

____ 27. Which of the following is not true of the concepts that are embodied in the COSO framework of internal
control?
a. Internal control relates to the organization’s objectives.
b. The six components of internal control are logically and operationally intertwined.
c. Internal control applies across all activities of the organization.
d. All of the above are important concepts

____ 28. Which of the following is part of the control environment of an organization?
a. management’s philosophy and operating style.
b. organizational structure.
c. human resources.
d. all of the above

____ 29. When control risk is assessed as high the auditor needs to:
a. perform more tests of controls.
b. perform more direct testing of account balances.
c. perform significantly fewer tests of controls.
d. perform significantly less testing of account balances.

____ 30. For the auditor to assess control risk for account balances at less than the maximum
a. no significant weaknesses must have occurred.
b. the internal auditor must test and evaluate some of the controls.
c. the external auditor must test and evaluate some of the controls.
d. management must test and evaluate some of the controls.

____ 31. The amount of direct testing to be performed by the auditor is directly related to
a. audit risk
b. business risk.
c. subjectivity of account balances.
d. both B and C.

____ 32. The amount of direct testing to be performed by the auditor is inversely related to
a. audit risk.
b. enterprise risk.
c. subjectivity of accounting process.
d. materiality of account balance.

____ 33. In evaluating the extent to which the external auditor can rely on the work of the internal auditor, which of
the following factors would the external auditor consider?
a. The independence of the function from management.
b. The design and comprehensiveness of the internal audit testing approach.
 c. The documentation of the internal audit testing.
d. All would be considered.

____ 34. Which of the following statements about internal control is not correct?
a. The costs of the control should not exceed the benefits.
b. The auditor’s assessment of detection risk is inversely related to the assessment of
control risk.
c. Stronger internal controls result in an increase in the number of required substantive
audit procedures.
d. Management is responsible for the maintenance of internal control.

____ 35. The auditor could assess control risk for an account at the maximum when
a. immaterial control deficiencies exists in the account.
b. significant control deficiencies exists in an account.
c. material weaknesses exists in an account.
d. both A and B.

____ 36. The reliability of a client's internal documentation is most affected by which of the following?
a. the auditor's independence.
b. management's motivation to misstate accounts.
c. the type of audit report that will be issued.
d. management's ability to understand generally accepted audit standards.

____ 37. Directional testing is important to an auditor because of which of the following factors?
a. Certain accounts are more prone to be misstated by overstatement than others.
b. The auditor must remain organized when conducting an audit.
c. The primary concern of the auditor is the understatement of asset and revenue accounts.
d. It tests for existence and completeness simultaneously.

____ 38. The extent of procedures is affected mostly by which of the following factors?
a. the sheer volume of procedures to be applied by the auditor.
b. the time of year in which the client takes a physical inventory in the warehouse.
c. the auditor's judgment that misstatements are probable in certain balances.
d. the availability of the client's staff at or near the balance sheet date.

____ 39. Which of the following is an example of poorly-developed audit documentation?

a. clear communication as to how testing was performed, the results and conclusions.
b. organization and assembly of documentation in an orderly fashion.
c. headings that include the name and signature of the client representative that the
auditor interacted with while performing testing.
d. authenticated identification of the person responsible for completing the procedure and
conclusions.

____ 40. What is the role of a concurring partner in an audit engagement?

a. to provide a "fresh", quality review of the audit documentation and conclusions and its
relationship to the opinion.
b. to go back over the staff, senior and manager work and redo the more difficult areas of
 the audit.
c. to work as a liaison between the audit committee and the audit team should there be
disagreements.
d. to act as an advocate of the client in order to ensure quality customer service has been
given.

____ 41. Empire Business Machines, Inc. (EBM) is audited by Flintstone and Sigmond Co. Empire utilizes the FIFO cost
flow assumption at the lower of cost or market for its inventory and has ten locations throughout Wyoming,
Utah and Idaho. The audit program of Flintstone and Sigmond requires that the following procedures be
performed by the senior auditor:

B. Using the computerized audit software supplied by Flintstone and Sigmond:

1. Statistically select a sample of inventory units and perform price tests to the FIFO
cost flow assumption.
2. Perform lower of cost or market tests on the inventory sample selected above.

Procedure B-1 and B-2 of Flintstone and Sigmond primarily relates to which management’s assertion?
a. existence
b. valuation
c. rights and obligations
d. presentation and disclosure

____ 42. Which of the following types of audit evidence is the most reliable?
a. evidence from the client’s organization.
b. evidence from a poorly controlled system.
c. directly observable evidence.
d. facsimiles of documents.

____ 43. Auditors have traditionally focused most audit procedures on the direct tests of assets and liability account
balances, as opposed to examining transactions during the year, because
a. there are usually fewer items in ending balances.
b. more reliable evidence usually exists for ending balances.
c. there is a preference to focus on change in account balances.
d. both A and B.
e. all of the above.

____ 44. Nonsampling risk includes all of the following except

a. misinterpretation of information.
b. use of improper audit procedure.
c. improper projection of results to the population.
d. carelessness of the auditor.
e. all of the above.

____ 45. The probability proportional to size sampling is designed to test for
a. overstatements.
b. understatements.
 c. neither understatements nor overstatements.
d. either understatements or overstatements.

____ 46. The design of a MUS sample requires the auditor to determine all of the following except
a. detection risk.
b. inherent risk.
c. tolerable misstatement.
d. expected misstatement in the account balance.

____ 47. A primary difference in comparing the resulting misstatements analyzed after using statistical methods
compared to those using non-statistical methods is that
a. statistical methods determine the most likely misstatement while nonstatistical methods
determine misstatements by projecting the misstatement found in the sample back to the
population.
b. statistical methods determine misstatements by projecting the misstatement found in the
sample back to the population while nonstatistical methods determine the most likely
misstatement.
c. statistical methods take a multiple of the estimated misstatement while nonstatistical
methods use precision to determine the upper limit.
d. statistical methods ignore any sampling error as the probabilities have compensated for
them while nonstatistical methods must utilize the sampling error in the projection of the
upper limit.

____ 48. The upper misstatement limit is computed by adding

a. basic Precision
b. most Likely Misstatement
c. incremental Allowance for Sampling Error
d. all of the above

____ 49. Dividing the population into relatively homogeneous groups in order to reduce sample size is called
a. Ratio estimation.
b. Difference estimation.
c. Stratification.
d. MUS sampling.

____ 50. What is the best method an auditor may use to detect fraud in the financial statements of clients?
a. Use professional skepticism.
b. Understand and properly apply Generally Accepted Accounting Standards.
c. Brainstorm with the client to find the types of fraud occurring.
d. Actively search for all errors in the financial statements.

____ 51. The threshold of materiality may be lowered in the case of potential fraud in the financial statements under
audit. Why is this different from the usual materiality levels set by auditors?
a. The intentional act of committing fraud itself becomes material, regardless of dollar
amounts.
b. Fraud is not relative to internal control, which requires larger materiality limits.
 c. The act of fraud is a characteristic of certain types of managers, therefore, materiality is
irrelevant.
d. Normal audit procedures are designed to catch all fraud, even the smallest of infractions.

____ 52. Which of the following risks of fraud should ordinarily be presumed on a financial statement audit by the
audit team?
a. Chief financial officer misappropriation of funds.
b. Misapplication of revenue recognition principles.
c. Management's inappropriate use of reserves.
d. Lack of expenses related to stock options.

____ 53. Which of the following represents the primary difference between an audit and forensic accounting?
a. An audit has the focused responsibility to detect fraud in the client organization while
forensic accounting sets out to prevent fraud.
b. An audit has no responsibility for fraud while forensic accounting provides an audit
specific to material fraud discovery.
c. An audit must follow Generally Accepted Auditing Standards while the forensic
accountant is bound to Generally Accepted Fraud Standards.
d. An audit utilizes sampling techniques to detect material misstatements while forensic
accounting examines the entire population of fraudulent transactions.

____ 54. In an audit of financial statements, the risk of the high rate of return of products sold includes that of
a. sales that are recorded improperly.
b. an estimate of accrued returns that reduces net income.
c. a reduction of net sales for an increase to the sales returns and allowance account.
d. consignment goods that are returned and forwarded to third parties.

____ 55. According to auditing standards, accounts receivable confirmations are required to be used
a. on every audit engagement.
b. if the client agrees in writing to the procedure.
c. if the balance is material.
d. if environmental risk is low.

____ 56. The primary difference between positive and negative confirmations used in the audit of accounts receivable
is
a. the mode of response.
b. the amount of information included.
c. the control of the confirmation process by the auditor.
d. the valuation of the receivable.

____ 57. A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following?
a. customer collections that are over 90 days past due.
b. credit entries in customer accounts receivable for authorized write-offs.
c. recurring entries in the sales journal.
d. altered shipping documents and invoices.

____ 58. Sources of information used for determining substantive procedures include which of the following?
 a. knowledge of client’s business and industry.
b. assessment of risk of material misstatement.
c. results of analytical procedures.
d. all of the above.

____ 59. Purchasing is a separate function in many organizations due to all of the following rationale except which?
a. It promotes efficiency and effectiveness.
b. It eliminates potential favoritism.
c. It reduces the opportunity for fraud.
d. It decentralizes control.

____ 60. Which one of the following control procedures would not apply to the automated receipt of goods?
a. defined procedures for counting the quantity of goods received
b. access, edit, and reasonableness controls built into the computerized accounting
application
c. reconciliation of the purchaser's production data with the vendor's billing
d. a contract specifying terms of delivery, penalties, billing and payment terms, and a
process for resolving differences

____ 61. Management may have incentive to fraudulently overstate inventory balances in order to cover up
a. understated cost of goods sold
b. poor financial performance
c. poor internal control
d. taxable income

____ 62. Which of the following is an example of the type of analytics that an auditor would use for inventory?
a. Number of day's sales in receivables compared to industry averages.
b. Inventory turnover for the previous five years.
c. Number of obsolete units this period compared to last.
d. Salaries of marketing personnel as a percent of total inventory.

____ 63. The benefit of a cross sectional analysis of inventory across multiple stores includes
a. Auditor identification of locations for detailed testing of inventory.
b. Auditor detail as to specific units by month.
c. Auditor conclusions regarding the fair presentation of obsolescence.
d. Auditor evidence of physical existence.

____ 64. The client's legal expenses should be examined to

a. compare with previously released attorney's letters.
b. determine the types of fraud occurring in the organization.
c. ensure proper recording of vendor payables.
d. determine if there is any litigation pending or threatened.

____ 65. Inventory is a complex accounting and auditing area due to all of the following except
a. diversity of items in inventory.
b. high volume of activity.
c. potential difficulty in correctly valuing inventory.
 d. ease in identifying obsolete inventory.

____ 66. When testing the existence assertion for inventory, the auditor would most likely
a. observe the client's count of the annual physical inventory and test count.
b. review vendor invoices for the amounts recorded.
c. perform year-end tests of invoices received in the final month.
d. trace raw material purchases to invoices and to the general ledger.

____ 67. The auditor may discover that the recorded cost of inventory exceeds the designated market price when
testing which assertion?
a. Existence.
b. Cutoff.
c. Valuation.
d. Rights.

____ 68. A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained
because
a. it requires that a full inventory count be taken at year-end by all warehouse employees.
b. it allows management to calculate cost of goods sold at year end.
c. it provides information to management about inventory that approaches real-time.
d. it better controls the receipt of goods.

____ 69. The auditor in making inquiries regarding the standard cost systems normally does not make which of the
following inquiries?
a. the method for developing standard costs.
b. the method for identifying components of overhead and of allocating overhead to
products.
c. the method for identifying sales cutoff.
d. the method used for identifying variances, following up on their causes, and allocating
them to inventory and cost of goods sold.

____ 70. A fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit in both the
account from which the cash is withdrawn and the account to which it is transferred is
a. lapping of cash.
b. kiting of cash.
c. embezzlement of cash.
d. restrictive endorsements of cash.

____ 71. Most international companies purchase hedges to monitor its exposure to
a. interest rate changes.
b. currency fluctuations.
c. commodities price fluctuations.
d. stock price fluctuations.

____ 72. Debt instruments with a variable interest rate are referred to as
a. junk bonds.
b. floating rate note.
 c. event-risk protected debt.
d. zero-coupon bond.

____ 73. The tour of the manufacturing plant may best assist the auditor in identifying which of the following?
a. that all purchases are authorized.
b. machinery that is inoperative in the production cycle.
c. management's impairment strategy.
d. estimates of depreciation expense.

____ 74. When testing fixed assets for the reasonableness of the client's estimated useful lives, the audit team should
do which of the following?
a. consult the IRS code for regulated lives.
b. make the decision for the client upon purchase.
c. understand the economics of the client's business.
d. compare them with other clients in different industries.

____ 75. Analytical estimation of depreciation by the auditor is an important audit test because it does which of the
following?
a. it signals which additions will be vouched.
b. it yields statistical precision in sampling.
c. it is a good starting point for determining additional procedures.
d. it gives the auditor an indication of the impaired balances existing in financial statements.

____ 76. The first-time audit of a company with property, plant, and equipment may cause the auditor to do which of
the following?
a. request a complete physical inventory of the certain items in the account.
b. start fresh with an audit as of the end of the period.
c. send a confirmation to a sample of equipment suppliers.
d. review original invoices of immaterial equipment purchased during the period.

____ 77. The audit of the repairs and maintenance expense account is extremely important as it helps the auditor to
determine if
a. depreciation expense includes charges for repairs.
b. the net book value of assets achieves precision.
c. items that should be included as assets are charged as expenses.
d. all repairs and maintenance expenses add value to the assets.

____ 78. A test of controls to determine proper authorization for the addition of a major piece of equipment would
include all of the following except
a. examination of purchase agreements.
b. review of minutes of the board of directors' meetings.
c. review of approvals by a capital budgeting committee.
d. examination of the identification tags attached to equipment.

____ 79. An estimate of the reasonableness of depreciation expense and accumulated depreciation may be
accomplished by performing which of the following?
a. tests of controls.
 b. substantive tests of transactions.
c. analytical review procedures.
d. management inquiry.

____ 80. Which is the primary assertion tested in conjunction with the obtaining of evidence regarding impairment?
a. Valuation.
b. Cutoff.
c. Existence.
d. Rights.

____ 81. In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy the which of the
following assertions related to long-lived assets?
a. cutoff.
b. existence.
c. rights.
d. presentation.

____ 82. Which of the following represents a primary audit concern for errors in the recording of intangible assets?
a. Capitalized research and development costs.
b. Amortization of patents.
c. Capitalized costs to successfully defend a patent.
d. Amortization of franchise fees.

____ 83. After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the
land to its original condition. What is the cost of this restoration called?
a. depreciation expense.
b. depletion expense.
c. amortization expense.
d. reclamation expense.

____ 84. Useful methods to evaluate asset impairment of long-lived assets usually would not include which of the
following?
a. current market values of similar assets.
b. estimated future economic benefits to be derived from the asset.
c. an independent assessment of the value of the asset.
d. all of the above are useful in valuing impairment.

____ 85. The purchase of another company or division must be recorded on which basis?
a. pooling basis.
b. purchase basis.
c. push down basis.
d. merger basis.

____ 86. Which of the following best represents a complex valuation issue in the acquisition of a new entity?
a. Carrying value of assets and liabilities.
b. Book value of assets and liabilities.
c. Fair market value of assets and liabilities.
 d. Liquidation value of assets and liabilities.

____ 87. If the auditor is hesitant to rely on the appraisal of a specialist hired by management, which of the following
will be performed?
a. The auditor will make the appraisal.
b. The auditor will adjust the values to zero.
c. The auditor will resign from the engagement.
d. The auditor will hire a specialist to test the appraisal.

____ 88. According to current accounting principles, for the purposes of testing impairment, goodwill resulting from
the acquisition process must be identified
a. as an expense on the income statement.
b. on the books of the parent company.
c. on the basis of present value.
d. with an operating or reporting unit.

____ 89. What type of expert will usually be required by management and the auditors to evaluate the purchase price
of a target entity?
a. Actuary
b. Valuation
c. Registrar
d. Underwriter

____ 90. If the auditor concludes that there may be a going concern problem, the auditor should do which of the
following?
a. withdraw from the engagement.
b. issue a qualified or adverse opinion.
c. identify and assess management's plan to overcome the problem.
d. communicate this fact with management one level above the controller.

____ 91. An auditor passes on several errors discovered during the audit. Which of the following represents the best
reason for the auditor not requesting that the adjustments be made by management?
a. management has properly disclosed the extent of the errors in the footnotes to the
consolidated financial statements of the year under audit.
b. the attorney's response to audit inquiry includes the statement that counsel is unaware
of any errors and can make no such estimates.
c. the auditor is not required to discover all material errors in the financial statements
under the concept of reasonable assurance.
d. the errors are not material in aggregate after considering the reversing effects of passed
entries from previous periods.

____ 92. Which one of the following items would be most likely considered a contingent liability for Cannonbar, a
grocery store chain?
a. A patron slipped on a grape and broke her neck during the period under audit, no claim
has been made against Cannonbar.
b. The IRS has disagreed with deductions claimed on Cannonbar's previous period return.
 c. Management believes that a lawsuit that was filed during the period under audit against
Cannonbar will be settled.
d. Cannonbar has a note payable with a bank that was collateralized by all of the company's
receivables in the period under audit.

____ 93. When requiring a letter of audit inquiry from the client's attorney, which of the following information will be
requested?
a. A statement regarding conflicts of interest that the attorney may have with the client.
b. The attorney's expert opinion of proper GAAP treatment related to client contingencies.
c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from
contingencies.
d. Possible auditor defenses for third-party litigation related to ordinary negligence claims.

____ 94. After an audit report is issued, the auditor discovers through a peer review that an important audit
procedure has been omitted. The auditor should do which of the following?
a. notify all parties known to be relying on the report.
b. immediately request the client recall the report.
c. contact his or her professional liability insurance carrier.
d. determine whether the report can still be supported in light of the omitted procedure.

____ 95. Which one of the following is the best example of a Type II subsequent event?
a. Election of new board members.
b. Change in auditors.
c. Inability to collect from a significant customer.
d. Acquisition of a subsidiary.

____ 96. If the auditor concludes that there may be a going-concern problem with the client, the auditor should do
which of the following?
a. issue a qualified opinion.
b. identify and assess management's plan to overcome the situation.
c. chart the negative trends as an addendum to the audit report.
d. increase fees to cover the probable exposure.

____ 97. The auditor is responsible for evaluating the likelihood of a client not going bankrupt for the next 12 months.
What basis will the auditor use to assess this issue?
a. Management integrity.
b. Control environment.
c. Absolute assurance.
d. Substantial doubt.

____ 98. During the course of an audit, immaterial misstatements may be detected. The auditor should do which of
the following?
a. permanently pass on these immaterial misstatements as they do not individually impact
the financial statements.
b. request that management footnote the immaterial misstatements in the financial
statements for fair presentation.
 c. accumulate all of the known and projected misstatements to determine if the impact is
material in the aggregate.
d. roll them forward for three years when they will become material enough to adjust.

____ 99. Which one of the following is not a purpose of the management representation letter?
a. It clearly documents the audit procedures that were performed by the auditors.
b. It further acknowledges management's responsibility for the financial statements.
c. It confirms oral responses obtained by the auditor earlier in the audit and the continuing
appropriateness of those responses.
d. It reduces the possibility of misunderstanding concerning the matters that are the subject
of the representations.

____ 100. In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment
provided by management to the auditor, the client’s lawyer is not requested to provide information on
a. completeness of management’s list.
b. compliance of the disclosures with GAAP
c. the likelihood and range of possible losses.
d. any limitations on the lawyer’s response.

____ 101. Which one of the following is an instance in which the auditor would add a paragraph after the opinion
paragraph?
a. There is serious doubt that the client can continue as a going concern.
b. Management's disclosures are not adequate.
c. There are significant uncertainties that are not properly disclosed in the footnotes.
d. There is a material dollar misstatement on the financial statements.

____ 102. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion will
the auditor most likely give?
a. Adverse.
b. Unqualified with explanatory language.
c. Qualified.
d. Disclaimer of opinion.

____ 103. The division of responsibility between the reporting company's management and the auditor firm is set forth
in the
a. scope paragraph.
b. introductory paragraph.
c. notes to the financial statements.
d. opinion paragraph.

____ 104. When an auditor is faced with a material departure from GAAP that is pervasive, the audit report should
contain
a. an unqualified opinion.
b. a qualified opinion with an explanatory paragraph.
c. an adverse opinion.
d. a disclaimer of opinion.
____ 105. A CPA is required to be independent to perform

                Audits                                          Reviews                                        Compilations

a.  Yes                                              Yes                                                          Yes
b.  Yes                                              Yes                                                          No
c.  Yes                                              No                                                            No
d.  Yes                                              No                                                          Yes

____ 106. Which of the following services provides limited assurance?

a. Review.
b. Audit.
c. Examination.
d. Compilation.

____ 107. A reasonable cause for action against the auditor for breach of contract may include all of the following
except which of the following?
a. violating client confidentiality.
b. withdrawing from an audit engagement without justification.
c. failure to provide the audit report on time.
d. failure to discover an immaterial error.

____ 108. In order to reduce the auditor's liability exposure, engagement letters should include which of the following?
a. a clearly stated scope of the work to be done.
b. a statement that a trial by jury is acceptable.
c. the guaranteed fee structure for the engagement.
d. a statement that the auditor is not liable to the SEC.

____ 109. In making judgments about the effect of the internal auditors’ work on the external auditor’s procedures in
specific audit areas, which of the following is not among three issues related to the audit areas that should
be considered by the external auditor?
a. Materiality of the financial statement amounts.
b. Risk of material misstatement of the assertions related to these financial statement
amounts.
c. Review of quality of audit policies, programs, and procedures.
d. Degree of subjectivity involved in the evaluation of the audit evidence gathered in
support of the assertions.

____ 110. Which of the following best describes the nature of discontinued assets?
a. Impairment testing based on most likely sale or disposal price.
b. Impairment testing only if plants are closed or equipment is not used.
c. Lower of cost or market impairments, including an allowance for obsolescence.
d. Estimates and assumptions made in preparation of the estimate of income tax expense
for the year.
Auditing Theory-Internal Control
Answer Section

MULTIPLE CHOICE

1. ANS: D
2. ANS: C
3. ANS: B
4. ANS: B
5. ANS: D
6. ANS: D
7. ANS: D
8. ANS: D
9. ANS: D
10. ANS: A
11. ANS: D
12. ANS: D
13. ANS: D
14. ANS: D
15. ANS: D
16. ANS: B
17. ANS: D
18. ANS: D
19. ANS: D
20. ANS: D
21. ANS: C
22. ANS: C
23. ANS: D
24. ANS: D
25. ANS: D
26. ANS: A
27. ANS: B
28. ANS: D
29. ANS: B
30. ANS: C
31. ANS: D
32. ANS: A
33. ANS: D
34. ANS: C
35. ANS: C
36. ANS: B
37. ANS: A
38. ANS: C
39. ANS: C
40. ANS: A
41. ANS: B
42. ANS: C
43. ANS: E
44. ANS: C
45. ANS: A
46. ANS: B
47. ANS: A
48. ANS: D
49. ANS: C
50. ANS: A
51. ANS: A
52. ANS: B
53. ANS: D
54. ANS: A
55. ANS: C
56. ANS: A
57. ANS: D
58. ANS: D
59. ANS: D
60. ANS: A
61. ANS: B
62. ANS: B
63. ANS: A
64. ANS: D
65. ANS: D
66. ANS: A
67. ANS: C
68. ANS: C
69. ANS: C
70. ANS: B
71. ANS: B
72. ANS: B
73. ANS: B
74. ANS: C
75. ANS: C
76. ANS: A
77. ANS: C
 78. ANS: D
79. ANS: C
80. ANS: A
81. ANS: B
82. ANS: A
83. ANS: D
84. ANS: D
85. ANS: B
86. ANS: C
87. ANS: D
88. ANS: D
89. ANS: B
90. ANS: C
91. ANS: D
92. ANS: A
93. ANS: C
94. ANS: D
95. ANS: D
96. ANS: B
97. ANS: D
98. ANS: C
99. ANS: A
100. ANS: B
101. ANS: A
102. ANS: B
103. ANS: B
104. ANS: C
105. ANS: B
106. ANS: A
107. ANS: D
108. ANS: A
110. ANS: A