Questions about chapter 2 audit planning:

1- A measure of how willing the auditor is to accept that the financial

statements may be materially misstated after the audit is completed and an
unqualified opinion has been issued is the
A) inherent risk.
B) acceptable audit risk.
C) statistical risk.
D) financial risk.
2- _______ is the risk that the financial statements contain a material
misstatement due to fraud or error prior to the audit.
A) Inherent risk
B) Client business risk
C) Acceptable audit risk
D) Risk of material misstatement
3- Which of the following statements is true regarding communications
between predecessor and successor auditors?
A) The burden of initiating the communication rests with the predecessor.
B) The predecessor's response can be limited to stating that no information
will be provided.
C) The predecessor should communicate with the successor only if the client
is public.
D) The predecessor auditor of a public company does not need permission
from the client before communicating with the successor auditor.
4- The two major factors affecting acceptable audit risk are
A) Inherent risk and the intended uses of the financial statements.
B) Control risk and the intended uses of financial statements.

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C) The likely statement users and their intended uses of the statements.
D) The audit firm and the intended uses of the statements
5- The predecessor auditor is required to respond to the request of the
successor auditor for information, but the response can be limited to stating
that no information will be provided when
A) The predecessor auditor has poor relations with the successor auditor.
B) The client is dissatisfied with the predecessor's work.
C) There are actual or potential legal problems between the client and the
predecessor.
D) The predecessor believes that the client lacks integrity.
6- When developing the overall strategy for the audit, the auditor will
A) Decide whether to accept a new client.
B) Determine if any audit specialists will be required.
C) Identify why the auditor needs an audit.
D) Obtain an engagement letter.
7- Most auditors assess the risk of material misstatement as high for related
parties and related-party transactions because
A) Of the unique classification of related-party transactions required on the
balance sheet.
B) Of the lack of independence between the parties.
C) Of the unique classification of related-party transactions required on the
income statement.
D) It is required by generally accepted accounting principles.
8- In order to obtain an understanding of the client's business, the audit firm
will consider
A) Inherent and control risk of the client.

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B) Audit risk to the CPA firm.
C) The client's business risk and the risk of material misstatements in the
financial statements.
D) The CPA firm's potential ongoing revenue from the audit client.
9- Related party
A) Transactions must be disclosed in the footnotes even if the amounts are
immaterial.
B) Disclosures include the nature of the related party relationship and a
description of the transaction.
C) Transactions are considered arm's-length transactions.
D) Disclosures are required only for public companies.
10- When analyzing a client's performance measurement system,
A) Ratio analysis and benchmarking against key competitors are utilized.
B) Only income statement numbers are used.
C) Inherent risk of financial statement misstatements may be decreased if the
performance measurement system encourages aggressive accounting.
D) The auditor is likely to decrease the extent of testing if the client has set
unreasonable objectives.
11- Which of the following is not a misstatement of the financial statements?
A) The client uses different inventory accounting methods for internal and
external reporting.
B) A departure from GAAP.
C) The footnote for pensions is omitted.
D) A clerk incorrectly based the allowance for doubtful accounts on 31% of
sales as opposed to 13% of sales as determined by the controller.
12- The primary responsibility for preventing fraud in an organization lies
with

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A) The audit committee of the board of directors.
B) The internal audit staff.
C) The external auditor.
D) The organization's management.
13- Which of the following relatively small misstatements most likely would
have a material effect on an entity's financial statements?
A) An illegal payment to a foreign official that was not recorded.
B) A piece of obsolete office equipment that was not retired.
C) A petty cash fund disbursement that was not properly authorized.
D) An uncollectible account receivable that was not written off.
14- An auditor obtains knowledge about a new client's business and its
industry in order to
A) Make constructive suggestions concerning improvements to the client's
internal control structure.
B) Develop an attitude of professional skepticism concerning management's
financial statement assertions.
C) Evaluate whether the aggregation of known misstatements causes the
financial statements taken as a whole to be materially misstated.
D) Understand the events and transactions that may have an effect on the
client's financial statements.
15- When dealing with materiality,
A) If the client refuses to correct a material misstatement, the auditor is
required to adjust the financial statements.
B) Management is responsible for determining whether financial statements
are materially misstated.
C) Materiality must be determined as as percentage of sales.

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D) The auditor must bring any material misstatements to the client's
attention.
16- Which of the following is the primary basis used to decide materiality
for a profit-oriented entity?
A) Net sales
B) Net assets
C) Net income before tax
D) All of the above
Questions about chapter 10 internal control:
1- Internal controls are NOT designed to provide reasonable assurance that
A) all frauds will be detected.
B) transactions are executed in accordance with management's authorization.
C) the company's resources are used efficiently and effectively.
D) company personnel comply with applicable rules and regulations.
2- The PCAOB places responsibility for the reliability of internal controls
over the financial reporting process on
A) the company's board of directors.
B) the audit committee of the board of directors.
C) management.
D) the CFO and the independent auditors.
3- In performing the audit of internal control over financial reporting, the
auditor emphasizes internal control over classes of transactions because
A) the accuracy of accounting system outputs depends heavily on the
accuracy of inputs and processing.
B) the class of transaction is where most fraud schemes occur.

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C) account balances are less important to the auditor then the changes in the
account balances.
D) classes of transactions tests are the most efficient manner to compensate
for inherent risk.
4- An auditor should consider two key issues when obtaining an
understanding of a client's internal controls. These issues are
A) the effectiveness and efficiency of the controls.
B) the frequency and effectiveness of the controls.
C) the design and operating effectiveness of the controls.
D) the implementation and operating effectiveness of the controls.
5- Reasonable assurance allows for
A) low likelihood that material misstatements will not be prevented or
detected by internal controls.
B) no likelihood that material misstatements will not be prevented or
detected by internal control.
C) moderate likelihood that material misstatements will not be prevented or
detected by internal control.
D) high likelihood that material misstatements will not be prevented or
detected by internal control.
6- Which of the following components of the control environment define the
existing lines of responsibility and authority?
A) organizational structure
B) management philosophy and operating style
C) human resource policies and practices
D) management integrity and ethical values
7- Which of the following is correct with respect to the design and use of
business documents?

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A) The documents should be in paper format.
B) Documents should be designed for a single purpose to avoid confusion in
their use.
C) Documents should be designed to be understandable only by those who
use them.
D) Documents should be prenumbered consecutively to facilitate control
over missing documents.
8- Which of the following best describes the purpose of control activities?
A) the actions, policies and procedures that reflect the overall attitudes of
management
B) the identification and analysis of risks relevant to the preparation of
financial statements
C) the policies and procedures that help ensure that necessary actions are
taken to address risks to the achievement of the entity's objectives
D) activities that deal with the ongoing assessment of the quality of internal
control by management
9- The risk assessment component of internal controls refers to
A) The auditor's assessment of control risk.
B) The auditor's assessment of audited risk.
C) The entity's identification and analysis of risks relevant to the
achievement of its objectives.
D) The entity's monitoring of the potential for material misstatements.
10- Internal controls:
A) are implemented by and are the responsibility of the auditors.
B) consist of policies and procedures designed to provide reasonable
assurance that the company achieves its objectives and goals.
C) guarantee that the company complies with all laws and regulations.

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D) only apply to SEC companies.
11- The quality of an organization's internal controls affects
A) the reliability of financial data.
B) the ability of management to make good decisions.
C) the ability to remain in business.
D) all of the above
12- Which of the following is not a reason that the auditor must gain an
understanding of the client’s internal control system?
A) better understand the client, its risks, and how it manages those risks.
B) assess control risk and identify the types of financial statement
misstatements that are most likely to occur.
C) plan direct tests of account balances to determine if misstatements have
occurred.
D) all are reasons why auditors must gain an understanding of the client’s
internal control system.
True or false Questions:
1) Section 404 of the Sarbanes-Oxley Act requires that both private and
public companies issue an internal control report.
2) Management has a legal and professional responsibility to be sure that the
financial statements are prepared in accordance with reporting requirements
of applicable accounting frameworks.
3) Control activities are a subcomponent of the information and
communication component of internal control.
4) The chart of accounts is helpful in preventing classification errors if it
accurately describes which type of transaction should be in each account.
5) If an auditor wishes to rely on the work of internal auditors (IA), the
auditor must obtain satisfactory evidence related to the IA's competence,
integrity, and objectivity.
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Questions about chapter 11 Risk of Fraud:
1- Which of the following best defines fraud in a financial statement
auditing context?
A) Fraud is an unintentional misstatement of the financial statements.
B) Fraud is an intentional misstatement of the financial statements.
C) Fraud is either an intentional or unintentional misstatement of the
financial statements, depending on materiality.
D) Fraud is either an intentional or unintentional misstatement of the
financial statements, depending on consistency.
2- Most cases of fraudulent reporting involve:
A) inadequate disclosures.
B) an overstatement of income.
C) an overstatement of liabilities.
D) an overstatement of expenses.
3-________ is fraud that involves theft of an entity's assets.
A) Fraudulent financial reporting
B) A "cookie jar" reserve
C) Misappropriation of assets
D) Income smoothing
4- Which of the following is a form of earnings management in which
revenues and expenses are shifted between periods to reduce fluctuations in
earnings?
A) Fraudulent financial reporting
B) Expense smoothing
C) Income smoothing
D) Each of the above is correct.

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5- Misappropriation of assets is normally performed by:
A) members of the board of directors.
B) employees at lower levels of the organization.
C) management of the company.
D) the internal auditors.
6- Financial statement manipulation risk is arguably present for all
companies' financial statements. However, the risk is raised for companies
that:
A) are heavily regulated.
B) have low amounts of debt.
C) have to make significant judgments for accounting estimates.
D) operate in stable economic environments.
7- Which of the following is NOT a factor that relates to opportunities to
commit fraudulent financial reporting?
A) Lack of controls related to the calculation and approval of accounting
estimates
B) Ineffective oversight of financial reporting by the board of directors
C) Management's practice of making overly aggressive forecasts
D) High turnover of accounting, internal audit, and information technology
staff
8- Fraud is more prevalent in smaller businesses and not-for-profit
organizations because it is more difficult for them to maintain:
A) adequate separation of duties.
B) adequate compensation.
C) adequate financial reporting standards.
D) adequate supervisory boards.

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9- Which of the following is a factor that relates to incentives or pressures to
commit fraudulent financial reporting?
A) Significant accounting estimates involving subjective judgments OPP
B) Excessive pressure for management to meet debt repayment requirements
C) Management's practice of making overly aggressive forecasts ATT.
D) High turnover of accounting, internal audit, and information technology
staff -OPP.
10- Auditors may identify conditions during fieldwork that change or
support a judgment about the initial assessment of fraud risks. Which of the
following is not a condition which should alert an auditor that the initial
assessment should be changed?
A) The subsidiary ledger agrees to the general ledger.
B) Discrepancies in the accounting records
C) Unusual relationships between the auditor and management
D) Missing or conflicting evidence
11- When analyzing accounts for fraud risk:
A) companies will generally attempt to overstate accounts payable and net
income.
B) the inventory account is generally not susceptible to fraud since the
auditor must verify the existence of the inventory.
C) payroll is rarely a significant risk for fraudulent financial reporting.
D) fixed assets are rarely stolen because of their large size.
True or false Questions:
1- Fraudulent financial reporting is an intentional misstatement or omission
of amounts or disclosures with the intent to deceive users.

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2- "Cookie jar reserves" are often created by companies whenever their
earnings are high to create reserves for future periods when earnings need to
be "boosted" upward.
3- Fraudulent financial reporting usually involves manipulation of amounts
rather than disclosures.
4- Because fraud perpetrators are often knowledgeable about audit
procedures, auditors should incorporate unpredictability into the audit plan.
5- The auditors should pay careful attention to accounting principles that
involve subjective measurements or complex transactions.
6- When the allowance for doubtful accounts is understated, bad debt
expense is understated and net income is also understated.
7- Fictitious revenue transactions have the same level of documentary
evidence as legitimate transactions.
8- Auditors should rely on original, rather than duplicate, copies of
documents.
9- The two most common areas of fraud in payroll are the creation of
fictitious employees and the overstatement of individual payroll hours.
Questions about chapter 14 sales & collection cycle:
1- Which of the following is not an important aspect of billing?
A) All shipments made have been billed.
B) No shipment has been billed more than once.
C) Each customer is billed for the proper amount.
D) Credit is approved to customers for sales on account.
2- A document sent to each customer showing his or her beginning accounts
receivable balance and the amount and date of each sale, cash payment
received, any debit or credit memo issued, and the ending balance is the
A) accounts receivable subsidiary ledger.
B) monthly statement.
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C) remittance advice.
D) sales invoice.
3- A ________ is a list prepared when cash is received by someone who has
no responsibility for recording sales, accounts receivable, or cash, and who
has no access to the accounting records.
A) prelisting of cash receipts.
B) sales invoice.
C) packing ticket.
D) vendor invoice.
4- Tracing bills of lading to sales invoices provides evidence that
A) Shipments to customers were recorded as sales.
B) Recorded sales were shipped.
C) Invoiced sales were shipped.
D) Shipments to customers were invoiced.
5- Which of the following tests of control most likely would help assure an
auditor that goods shipped are properly billed?
A) Scan the sales journal for sequential and unusual entries.
B) Examine shipping documents for matching sales invoices.
C) Compare the accounts receivable ledger to daily sales summaries.
D) Inspect unused sales invoices for consecutive prenumbering.
6- For effective internal control, the billing function should be performed by
the
A) Accounting Department.
B) Sales Department.
C) Shipping Department.
D) Credit and Collection Department.
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7- For the most effective internal control, monthly bank statements should
be received directly from the banks and reviewed by the
A) Controller.
B) Cash receipts accountant.
C) Cash disbursement accountant.
D) Internal auditor.
8- Auditors are more concerned with the occurrence assertion for revenues
than the completeness assertion because:
A) Clients are more likely to overstate than understate revenues.
B) Clients are more likely to understate than overstate revenues.
C) It is difficult to determine when services have been performed.
D) The allowance for doubtful accounts often is understated.
9- Proper authorization of write-offs of uncollectible accounts should be
approved in which of the following departments?
A) Accounts receivable
B) Credit
C) Accounts payable
D) Treasurer
True or false Questions:
1- A sales invoice is a document that usually indicates credit approval.
2- Credit should be approved before goods are shipped to a customer.
3- The receipt of a customer order from a customer is the starting point for
the entire sales and collection cycle.
4- The preparation of a sales invoice is the final step in the sales and
collection cycle.
Questions about chapter 16 sales & collection cycle:
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1- For sales, the occurrence transaction-related audit objective affects which
of the following balance-related audit objectives?
A) existence
B) completeness
C) rights
D) detail tie-in
2- Analytical procedures are substantive tests and, if the results of the
analytical procedures are favorable, the auditor would normally
A) reduce the extent of tests of details of balances.
B) reduce the extent of tests of controls.
C) reduce the tests of transactions.
D) reduce all of the other tests.
3- The most important aspect of evaluating the client's method of obtaining a
reliable cutoff is to
A) perform extensive detailed testing of cutoff.
B) evaluate the client's control procedures around cutoff.
C) confirm a sample of transactions near period end with customers.
D) confirm transaction with customers.
4- Which of the following most likely would be detected by a review of a
client's sales cutoff?
A) excessive sales discounts
B) unrecorded sales for the year
C) unauthorized goods returned for credit
D) lapping of year-end accounts receivable
5- The two primary classes of transactions in the sales and collection cycle
are

15 | P a g e
A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.
6- For cash receipts, the occurrence transaction-related audit objective
affects which of the following balance-related audit objectives?
A) existence
B) completeness
C) rights
D) detail tie-in
7- An auditor is performing a credit analysis of customers with balances over
60 days due. She is most likely obtaining evidence for which audit related
objective?
A) realizable value
B) existence
C) completeness
D) occurrence
True or false Questions:
1- Recording a sale that did not occur violates the occurrence transaction-
related audit objective and the existence balance-related audit objective.
2- The accounts receivable balance-related audit objective net realizable
value is not affected by assessed control risk for sales or cash receipts.
3-A high inherent risk increases planned detection risk and decreases
planned substantive tests.
4- Tests of the presentation and disclosure-related objectives are not
generally done as part of the completion phase of the audit.

16 | P a g e
5- Tests of completeness balance-related audit objective are for the purpose
of evaluating the allowance for doubtful accounts.
6- For most audits, a proper cash receipts cutoff is less important than either
the sales or the sales returns and allowances cutoff since cash only affects
the balance sheet, and not earnings.
7- Tests of details of balances focus on testing the year-end balances of
balance sheet /accounts.

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