1.

Projecting an expected total for the current year's sales based on sales figures and
trends over past years is an example of what?

a. Assessing risk
b. An analytical procedure
c. Creating an internal control
d. Establishing quality control

2. Which of the following is true regarding securities?

a. People who have accounting responsibilities for securities should also have custody of the
securities.
b. People who have accounting responsibilities for securities should never have custody of the
securities.
c. Only one person should have access to the securities.
d. It is not necessary to register the securities in the name of the owner.

3. Which of the following statements about using systems flowcharts to document internal
controls are correct?

I. They provide a visual explanation of the activities of clients.

II. They help auditors quickly grasp the design of the internal controls system.
III. They make it easy to identify weaknesses in the internal controls.
IV. They are always better than using internal control questionnaires.

a. I and II
b. II and III
c. III and IV
d. I, II, III, and IV

4. How would you determine the record count for the invoices in this entity's batch?

Invoice Quantity Price Discount

3107 20 $5.00 N/A

3108 40 $20.00 N/A

3109 50 $10.00 N/A

3110 25 $5.00 N/A

3111 5 $20.00 N/A

3112 15 $35.00 N/A

a. Add all the items in the quantity column

b. Multiply the quantity by the price in each row, and then add those figures to create a total
c. Count the number of invoices
d. Add all the items in the price column
5. What is the principal that states that the internal controls of an entity should not be
greater than the benefits those controls can be expected to deliver?

a. Reasonable assurance
b. Quality control
c. Segregation of duties
d. Risk assessment

6. Which of the following has the goal of evaluating the effectiveness and efficiency of an
entity's operations with the goal of finding areas that need improvement?

a. Financial statement auditing

b. Internal control examination
c. Operational auditing
d. Analytical procedures

7. CPA Sheryl Smith audited the December 31, 2007 financial statements of Capstone,
completing the fieldwork on March 12, 2008. A later event occurred on March 23, 2008 that
required her to adjust Capstone's 2007 financial statement. The event came to Smith's
attention on April 1, 2008, and she corrected the statement on April 7, 2008. Smith made
the adjustment without disclosure of the event. Under most circumstances, what would
the report be dated?

a. December 31, 2007

b. March 12, 2008
c. April 1, 2008
d. April 7, 2008

8. When auditing a nonpublic company, which of the following is true about performing
tests of controls?

I. It should be done if the auditor relies on the controls.

II. It should be done if substantive tests alone are not sufficient to the audit needs.

a. I only
b. II only
c. I and II
d. Neither I nor II

9. Which of the following statements is most correct about the standard financial
statement report by an auditor?

a. The scope paragraph includes the generally accepted auditing standards (GAAS) followed
during the audit.
b. The opinion paragraph includes the generally accepted auditing standards (GAAS) followed
during the audit.
c. The scope paragraph explains that the financial statements comply with generally accepted
auditing principles (GAAP) followed during the audit.
d. The opinion paragraph explains that the financial statements comply with the generally
accepted auditing principles (GAAP).

10. Which statement about batch processing transactions and online transaction
processing is most accurate?
a. Batch processing transactions creates an audit trail that is generally easier to follow than online
transaction processing does.
b. Online transaction processing creates an audit trail that is generally easier to follow than
batching processing transactions does.
c. There is no difference in the audit trail created by either method.
d. The ease of following the audit trail cannot be predicted by knowing the transaction processing
method.

11. Amp Co. determines the cost of its domestic inventory using LIFO, and determines the
cost of the inventory of its international subsidiary using LIFO.

Given the information above, which of the following statements is true?

a. There is an inherent lack of consistency between accounting periods.

b. Using both methods creates a deviation from generally accepted accounting principles
(GAAP).
c. The auditor's report on Amp Co. should express an unqualified opinion.
d. The auditor's report should express an adverse opinion.

12. During a financial statement audit, an auditor is required to explicitly assess the risk of
material misstatements that arise as a result of:

a. Human error
b. Software error
c. Fraud
d. Criminal acts

13. As a result of inadequate disclosure, an auditor expresses a qualified opinion in a

financial statement report. Which of the following should the auditor do?

I. Include an explanation of the omission in a separate explanatory paragraph

II. Modify the opinion paragraph

a. I only
b. II only
c. I and II
d. Neither I nor II

14. Which of the following is intended to provide assurance of the privacy, security,
business practices/transaction integrity, availability, and confidentiality of a website?

a. TechZone
b. WebTrust
c. WebSafe
d. TechTrust

15. If the tolerable rate is greater than the deviation rate in a population, and if the auditor
estimates-based on sample results-that the tolerable rate is greater than the deviation rate,
which of the following statements is most accurate?

a. The control risk is above the planned assessed level.

b. The control risk is below the planned assessed level.
c. The control risk is above or equal to the planned assessed level.
d. The control risk is below or equal to the planned assessed level.

16. A registration statement filed with the SEC includes audit reports on financial
statements for different periods by two different, independent auditors-the predecessor
auditor and the successor auditor. The predecessor auditor must:

a. Read the pertinent sections of the registration statement.

b. Obtain a letter of representation from the successor auditor.
c. Read the pertinent sections of the registration statement and obtain a letter of representation
from the successor auditor.
d. Neither read the pertinent sections of the registration statement nor obtain a letter of
representation from the successor auditor.

17. An auditor is considering materiality for planning purposes. The auditor should design
auditing procedures to detect misstatements that aggregate which amount?

a. The smallest amount that would have a material effect on the entity's income statement
b. The largest amount that would have a material effect on the entity's income statement
c. The smallest amount that would have a material effect on the balance sheet
d. The combined total of the smallest amounts that would affect the income statement and the
balance sheet

18. The expected rate of errors in an accounting record is usually:

a. Higher than the tolerable rate of deviations for a test of a related control.
b. The same as the tolerable rate of deviations for a test of a related control.
c. Lower than the tolerable rate of deviations for a test of a related control.
d. Twice as high as the tolerable rate of deviations for a test of a related control.

19. At which points of an audit is an auditor prohibited from identifying risk factors?

a. Planning
b. Conducting fieldwork
c. Considering acceptance of clients and engagements
d. None of the above

20. Which of the following is true of deviations from control procedures?

I. They necessarily result in errors.

II. They increase the risk of material misstatements.

a. I only
b. II only
c. I and II
d. Neither I nor II

1. Correct: b
Explanation: An analytical procedure is a comparison of reported financial information with
expected results using real data. In this case, using past sales figures and trends to determine an
estimate for the current year's sales is an example of an analytical procedure.

2. Correct: b

Explanation: As a control to protect investment securities, the custody, authorization, and record-
keeping of assets, including securities, should always be kept separate. Answer (c) is incorrect
because more than one person should have custody of securities, and answer (d) is incorrect
because securities should be registered in the owner's name.

3. Correct: a

Explanation: Flowcharts provide a visual explanation of client's activities and help make it easy to
quickly grasp the design of the internal controls system. However, they do not identify
weaknesses in the internal controls, and there are times when it's useful to use internal control
questionnaires.

4. Correct: c

Explanation: The record count is simply the number of records in a file or batch, which in this
case is 6.

5. Correct: a

Explanation: Reasonable assurance states that the internal controls of an entity should not be
greater than the benefits those controls can be expected to deliver.

6. Correct: c

Explanation: Operational auditing is the process of evaluating the effectiveness and efficiency of
an entity's operations. The goal is generally to identify any areas that could be improved. Answer
(a) is incorrect because this type of auditing focuses on financial statements, not operations, and
answer (d) is incorrect because analytical procedures are a way of evaluating information by
estimations based on existing data.

7. Correct: b

Explanation: According to AU 530, the date on which fieldwork ends should be used as the date
of the report under these circumstances.

8. Correct: c

Explanation: An auditor should perform tests of controls if the auditor is relying on those controls,
or if substantive tests alone are not sufficient to the audit needs.

9. Correct: a

Explanation: The scope paragraph includes the generally accepted auditing standards (GAAS)
followed during the audit. Answers (b) and (d) are incorrect because the opinion paragraph
indicates that the financial statements follow GAAP.
10. Correct: a

Explanation: Because similar transactions are routed through the system in groups during batch
processing, it creates an audit trail that is generally easier to follow.

11. Correct: c

Explanation: This situation generally calls for an unqualified opinion. There is no lack of
consistency (see AU 420 for more on this issue), no deviation from GAAP, and no need for an
adverse opinion.

12. Correct: c

Explanation: During a financial statement audit, an auditor is required to explicitly assess the risk
of material misstatements that arise as a result of fraud. This is mandated by AU 316 and SAS
109. Answers (a) and (b) are incorrect because although SAS 109 calls for an assessment of the
risk of material misstatements, it does not call for the assessment of material misstatements
specifically due to errors.

13. Correct: c

Explanation: According to AU 508, only the opinion paragraph should be modified in this
circumstance, and a separate explanatory paragraph should be added to include an explanation
of the omission.

14. Correct: b

Explanation: WebTrust is the seal awarded to websites to help assure users of the privacy,
security, business practices/transaction integrity, availability, and confidentiality of the website. It
was established by the American Institute of Chartered Public Accountants (AICPA) and the
Canadian Institute of Chartered Accountants (CICA). The others listed do not exist.

15. Correct: d

Explanation: The control risk is below or equal to the planned assessed level. To support the
planned level, the population's tolerable rate must be greater than the deviation rate, and the
auditor must estimate that the tolerable rate is greater than the deviation rate.

16. Correct: c

Explanation: According to AU 711, the predecessor auditor must read the pertinent sections of
the registration statement and obtain a letter of representation from the successor auditor in this
situation.

17. Correct: a

Explanation: The auditor should design auditing procedures to detect misstatements that
aggregate the smallest amount that would have a material effect on the entity's income
statement. According to AU 312, the auditor should design the audit to secure reasonable
assurance that the financial statements have no material misstatement. Because it's hard to know
during the planning stage how misstatements might affect a financial statement, the auditor
generally must use the lowest amount that would have a material effect on the income statement
during the planning phase.
18. Correct: c

Explanation: The expected rate of errors in an accounting record is usually lower than the
tolerable rate of deviations for a test of a related control. It is not necessary to rely on internal
control unless the expected error rate is lower that the tolerable rate of deviations, which is the
maximum rate of deviations from a prescribed control procedure that an auditor would accept.

19. Correct: d

Explanation: An auditor is not prohibited from identifying risk factors during any of the points listed
above. According to AU 316, an auditor can identify fraud risk factors during planning, obtaining
an understanding, or while conducting fieldwork, and in addition, risk factors can be identified
while considering acceptance or continuance of engagements and clients.

20. Correct: b

Explanation: Deviations from control procedures do increase the risk of material misstatements,
but it is possible for a deviation to exist without creating an error.

for chapter 1 – I had made the notes (I normally write -right in the margin of the
book) about the (a) explanatory paragraphs, and (b) modification of pragraphs. Let me
share this with you and Tulip92 – you guys might find it helpful -

Memorize this – it would really help you guys, and this would make chapter 1 easier.
(a) what paragraphs you modify under difference scenarios:
Ans:
1- In case of division of responsibility – Modify all 3 (introductory, scope, and opinion)
paragrah
2- In case of GAAP problem (Qualified and Adverse) – Modify ONLY Opinion
paragraph
3- In case of GAAS problem (Qualified) – Modify Scope and Opinion paragraph.
4- In case of GAAS problem (Disclaimer) – Omitt the Scope paragraph and modify the
Introduction and Opinion paragraph.

(b) Explanatory pragraph (before or after the opinion paragraph.

Ans
1- For qualified, disclaimer, adverse, or update opnion- place the explanatory paragraph
before the opinion paragraph.
2- For Lack of consistancy, selected financial data, and going concern – place the
explanatory paragraph after the opinion paragrah.

ALSO – remember that

1-You don’t use any explanatory paragraphs for the division of responsibility (only
modify all 3 paragraphs).
2-If you have going concern problem and it is disclosed propery then use unqualified or
disclaimer of opinion. BUT if you have going concern problem and it is NOT disclosed
properly then use qualified and adverse opinion.
3- If the cash flow statements are omitted – then Qualify the opinion.
3- For lack of independence and un-audited FS – Disclaim the opinion.