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1. Which of the following standards-setting bodies has the authority to issue
auditing standards for financial statement audits: Auditing and standards board
not the PCOB
2. Whenever an independent expert is brought in to examine financial state-
ments with the hopes of adding credibility that engagement and reporting
process id known as an: Attestation NOT an Audit nothing in the question refers
to an audit
3. A CPA performed the following engagements in February of year 3. which is
considered an attestation engagement: Audit of year 2 and examination of year
4 15. the proceedures are likely to be performed in the planning stage of an
4. After an audit the financial statements are the responsibility of: the manage-
ment of the reporting company
5. According to the generally accepted auditing reporting standards which of
the following must be expressed in a standard auditor's report: in a standard
report the fact that the client disclosures and footnotes are adequate need not to be
reported and the consistent accounting principles does not apply
6. Laura is a covered member in an audit engagement which of the following
cannot work in any capacity for a company being audited by Laura: spouse
and dependent childe of the covered member can work for the company as long as
there is no influence on the financial statements
7. regarding a covered member of an audit engagement: would not be allowed if
a dependent child owns stock in the audit client even if the child was under the age
of five. no financial holding is allowed unless it is indirect like a mutual fund
8. a violation of the profession's independence standards most likely would
have occurred when: CPA issued a second year audit without collecting the first
year's payment
9. In an audit of financial statements of a non-issuer in accordance Generally
accepted auditing standards an auditor is required to: Document the auditors
understanding of the entity's internal control structure. NOT preform test of controls
to evaluate effectiveness of the entity;s accounting system(only need for Publicly
traded companies)
10. the following attestation engagements does a CPA gather evidence and
then provide an opinion regarding fair presentation of financial information: -
examination of forward-looking financial information and audits of historic financial
information
11. the following should be considered by a CPA prior to acceptance of an
audit engagement of a non issuer: The quality of the accounting records and the
future plans of the company
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12. Inquires of the predecessor auditor prior to acceptance of the engagement
should include specific questions regarding: the integrity of management and
disagreements with management
13. CPA should decide not to accept a new client for an audit engagement
if: neither 1. the CPA lacks understanding of the client's industry and 2. the clients
management had unusually high turnover
14. this procedure an auditor likely perform in the planning stage of a financial
statement audit: obtaining a sign engagement letter from the client's management.
examining documents is done in the investigation stage
audit: determining the extent of involvement of specialists and internal auditors
16. all of the following are correct regarding an auditor's understanding with
a potential client prior to beginning an audit: should cover responsibilities of the
independent auditor. understanding should cover the limitations of the engagement.
and should list the audit fees and billing terms. NOT understanding should be in the
form of an engagement letter in order to be in conformity with auditing standards
17. management responsibilities on the engagement letter include: engage-
ment letter should state management is responsible for the financial statements.
management is responsible for compliance and management is responsible for
internal control
18. the following is correct regarding the auditor's preliminary judgement
about materiality: the auditor makes a preliminary judgement about materiality in
the planning stage of the audit based on annualized interim financial statements
19. procedures an auditor preforms in planning a financial statement audit-
: coordinating the assistance of entity personnel in data preparation is usually
performed during planning stage. the auditor generally would read current years
interim financial statements.
20. following will cause the auditor to assess inherent risk as high: complex
transactions with third parties are discovered and management relies heavily on
estimates in the financial statements
21. Inherent risk: is assessed by the auditor but this assessment has no bearing
on the actual amount of inherent risk present
22. the following risks is assessed by the auditor in the planning stage: inher-
ent risk
23. the following is a component of audit risk: inherent risk and detection risk
and control risk
24. an auditor can lower overall audit risk by reducing: detection risk NOT
inherent or control risk
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25. when an auditor increases the assessed level of control risk, the auditor
would most likely: lower the detection risk
26. which of the following is correct control risk is not part of the overall audit
risk, although it is assessed by the auditor or detection risk is part of overall
audit risk but it is not assessed by the auditor: Detection risk is not assessed by
the auditor. control risk is part of the overall audit risk
27. inherent risk: not influenced by the amount of work or other testing performed
by the independent auditor and a characteristic of the accounting system and the
personnel who work in that system
28. control risk: good internal control at the company can mitigate the client's
control risk
29. if control risk and inherent risk are high for a particular account: the auditor
must then set the acceptable level of detection risk for that account to a relatively
low level. and the auditor will perform more substantive testing in that area
30. by gathering more evidence through substantive testing an auditor can
reduce: detection risk ONLY not control risk or inherent risk acessed by the auditor
but not affected by the work performed by the auditor
31. to reduce detection risk the auditor can: do more substantive testing or gather
evidence of better quality
32. an auditor decides to increase the accessed level of control risk: The
auditor would decrease the detection risk
33. in a financial statement audit, inherent risk is evaluated to help an auditor
assess: the susceptibility of the financial statements to a material misstatement
assuming there are not related controls
34. there is an inverse relationship detection risk and the auditor's assessment
of: inherent risk and control risk
35. the following is an example of fraudulent financial reporting: company
management changes inventory count tags and overstates ending inventory while
understating cost of goods sold and the recording of false sales to reach company
sales forecast
36. if a company incorrectly applies an accounting principle to a significant
transaction and the misstatement was other than intentional, this would be: an
ERROR
37. special consideration must be given to the possibility that fraud exists
during which phase of the audit: assessment of inherent risk, control risk and
substantive testing
38. the following is a fraud risk factor: 1 unauthorized client transaction and
unusual client delays is a fraud risk factor 2 company officials have issued a report
stating that they expect earnings per share to double 3 a threat of bankruptcy
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39. the following analytical procedures is likely to aid the auditor in evaluating
the risk of improper revenue recognition: comparison of sales volume to produc-
tion capacity and trend analysis of revenues and dales returns by month
40. component of the fraud triangle: pressure to commit fraud the oppertunity and
the ability to rationalize fraud
41. the following is a fraud risk factor regarding fraudulent financial state-
ments: the company recently announced that it expects earnings per share to
double and decision to go public could result in additional pressure to commit fraud
42. the following is a fraud risk factor regarding an opportunity to commit
fraudulent financial statements: 1. significant unusual or highly complex transac-
tion are recorded neat the end of the year 2. a number of reported balances are
based on significant estimations
43. the following is viewed as a fraud risk factor that indicates that manage-
ment or other employees have the incentive to carry out fraudulent financial
reproting: decline in customer demand and company plans to obtian debt financing
44. which stage of the audit may fraud risk factors for misappropriation of
assets be identified: Planning internal control and evidence gathering
45. the following factors would most likely heighten an auditors concern about
the risk of fraudulent financial reporting: an overly complex structure involving
unusual lines of authority
46. the auditors responsibility to detect fraud would change if the fraud was
caused by: neither 1. Management override of controls 2 collusion
47. the following statements reflects and auditors responsibility for detecting
errors and fraud: an auditor should design the audit to provide reasonable assur-
ance of decting errors and fraud that are material to the financial statements
48. management or employees have high personal debts and company layoffs
are anticipated reporting which leg of the fraud triangle would these relate
to: incentive to commit misappropriation of assets
49. following should be viewed as fraud risk factors that point to incentives or
pressure for employees to misappropriate assets: compensation levels incon-
sistent with expectations
50. an auditor would likely assess inherent risk to be high in which of the
following: management does not have an adequate understanding of information
technology in use by the company and employees not required to take vacations
51. if a company is planning on raising additional finacial capital in the near
future the auditor would likely consider this a fraud risk factor for intentional
manipulation because the company might wnat to inctease its: net reported
income
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52. every audit regardless of the outcome of brainstorming sessions there
exists a persumption of fraud risk in the following areas: revenue recognition
and management over rides of control
53. overstating ending inventory will result in an over statement of net in-
come: easiest way to overstate net income is to overstate ending inventory. an over
statement of ending inventory leads to lower cost of goods sold if sales were 400
-COGS 100 instead of 120 gross profit increase from 280 to 300
54. the following is required on an audit: test appropriateness of adjusting journal
entries
55. basic premise underlying the application of analytical procedures is that: -
plausible relationships among data may reasonably be expected to exist and contin-
ue in the absence of known conditions and transactions and analytical procedures
can substitute for test of controls
56. the following is not an analytical procedure: these are analytical procedures-
estimating payroll expense by multiplying the number of employees by the average
wage and number of hours and Developing the expected current year sales based
on the sales trend of the prior five years
57. management ability to foresee problems and takes steps in advance to
prevent problems is known as: control environment and control activities Is re-
sponsibility of the top management
58. internal controls of all of a reporting entity's operating ubits abd business
functions is a primary concern of: the entitiys management and those charged
with governance
59. the auditor is likely to focus the assessment of control risk on the entiys-
: reporting control and NOT operational controls
60. The component of internal control that refers to adequate physocal sage-
guards and segregation of duties is known: control activities NOT control envi-
ronment
61. an auditor generally test the segregation of duties by: personal inquiry and
observation NOT analytical procedures
62. in the internal control stage an independent audotir searches for control
activities: determine whether the opportunities to allow any person to both perpe-
trate and conceal fraud are minimized (segregation of duties) and determine whether
procedures and records concerning the safeguarding of the assets are reliable
63. an entitys ongoing monitoring activities often include: reviewing the payroll
cycle
64. an auditor gains an understanding on the clients attempt to keep internal
controls up to date this ongoing process of keeping controls effective: refers
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to the monitoring component of internal control and is often performed by the internal
audit function
65. the five components of internal control are: control environment, risk assess-
ment, control activities, information and communication monitoring
66. in an audit in conformity with GAAS an auditor gains an understanding of
the clients internal controls at this stage needs to be understood: the design
og the clients system and whether the controls have been in operation
67. in an audit in conformity with GAAS as part of understanding internal
controls an auditor is required to: ascertain whether internal controls have been
implemented NOT obtain knowledge about the operating effectiveness
68. auditors ultimate purpose of assessing control risk: make recommendation
regarding the five components of internal control
69. assessing control risk at low level most likely would involve: performing
more extensive substantive test than originally planned
70. after gaining and documenting an understanding of the components of
internal control the auditors should make a preliminary assessment of control
risk. if the investigation indicates that internal control is weak the auditor
should: emphasize substantive testing
71. an auditor must obtain an understanding of the components of a clients
internal control auditors often choose to use questionnaires to gain informa-
tion because: a no on the questionnaire suggests a internal control weakness and
compared to a flowcharting both strengths and weaknesses are easier to determine
with a questionnaire
72. flowchart of the accounting system is a diagrammatic representation that
shows the auditors: understanding of the system the chart does not show assess-
ment of control risk
73. to obtain audit enidence about control risk for degrefation of duties: the
auditor will use observation method
74. auditor is performing tests of controls in hopes of assessing control risk to
be low in order to reduce overall audit testing. after obtaining an understand-
ing of the design of an individual system the auditor should: seek to identify
specific control activities within that system that would reduce control risk
75. an auditor would test controls to gather evidence about: whether a control
is functioning as designed
76. the auditor should design further audit procedures before assessment
of: Neither control risk or inherent risk the further audit procedures will determine
what to use
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77. in an audit of financial statements the entity's management is responsi-
ble for: establishing maintaining and monitoring the entity's internal controls and
responsible for what controls are used
78. with regard to automated controls and manual controls an auditor would
expect to find manual controls when: judgement and discretion are required and
large non-recurring transaction are involved
79. an auditor would expect to find manual controls rather than automated
controls when: potential misstatements are more difficult to predict
80. inherent limitation of internal control are: collusion of employees and errors
in judegements
81. representation of inherent limitation of internal control: management over-
ride
82. under US GAAS which of the following is always necessary in a financial
statement: an indication whether or not the financial statements agree with the
accounting records and risk assessment procedures
83. audit performed under GAAS the following should an auditor do when con-
trol risk is at the maximum level: perform more substantive procedures document
the assessment
84. test of controls must be preformed: when the auditors risk assessment is
based on the assumption that controls are operating effectively and when substan-
tive procedures alone are not enough
85. an auditor maintains file within the audit documentation this file should-
: contain all of the evidential material gathered to support the opinion rendered by
the auditor and a working trial balance
86. the following would be maintained in the permanent file: copies of docu-
ments such as the reporting company organization chart and long term contracts.
NOT the audit plan and management representation letter only in the current file
87. permanent file most likely would include copies of the: Client debt agree-
ments do not change from year to year
88. permanent file of an auditors working papers would not include: bond
indenture or lease agreements are stored in the permanent file. lead schedules and
working trial balance relate to current file
89. no deletions of audit documentation are allowed after the: documentation
completion date
90. following factors would likely affect an auditors judgment about the quan-
tity and content of the auditors working papers: assessed level of control risk
and type of audit report issued
91. following is not a primary function of audit working papers: assisting man-
agement in providing that the financial statements are in accordance with GAAP
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92. the following are correct concerning related party transaction: audit proce-
dures directed toward identifying related-party transactions should include consid-
ering whether transaction occurring but are not given proper accounting recognition
93. following auditing procedures most likely would assist an auditor in identi-
fying related party transactions: reviewing confirmations of leans receivable and
payable for indications of loan guarantees
94. x company sells a significant amount of inventory to its affiliate y company.
they are separate companies but the same parent owns both. the amount of
these sales must be included in the notes to the financial statements produced
by: both companies need to report
95. the following loans made by the client the auditor would be suspicious of
a related party loan.: loans made with no maturity date and loans with low interest
rates
96. the following procedures would an auditor perform to obtain evidence
about the occurrence of subsequent events: NOT comparing the financial state-
ments being reported on with those of the prior period and not investigating person-
nel changes in the accounting department occurring after year-end
97. auditor believes that a clients financial statements need to be revised to
reflect a subsequent event and management does not make the revision the
auditor should express which type of opinion: qualified or adverse opinion NOT
unmodified opinion
98. following is correct regarding the auditors responsibility for subsequent
events: auditor has and active responsibility to make continuing inquires between
the fate of the financial statements and the date of the auditor report.
99. audit of a non issuer the following paragraphs is found in a standard
unmodified audit report: introductory management responsibility and auditors
responsibility no scope of work
100. how many paragraphs are found in a standard unmodified audit report: -
four paragraphs -introductory -managements responsibility -auditors responsibility-
and opinion paragraph
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