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Reviewer For Auditing Theory
Reviewer For Auditing Theory
1. Which of the following eliminates voluminous details from the auditor's working trial balance by
classifying and summarizing similar or related items?
a. Account analyses.
b. Lead schedules.
c. Control accounts.
d. Supporting schedules.
2. An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should
a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entity's business.
c. refer a substantial portion of the audit to another CPA who will act as the principal auditor.
d. first inform management that an unqualified opinion cannot be issued.
4. The first standard of fieldwork requires, in part, that audit work be properly planned. Proper
planning as intended by the first standard of fieldwork would occur when the auditor
a. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negative accounts receivable confirmations instead of positive confirmations because
the latter require mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff
procedures.
d. eliminates the possibility of counting inventory items more than once by arranging to make
extensive test counts.
5. A CPA is conducting the first examination of a non-public company's financial statements. The
CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the
predecessor's working papers. This procedure is
6. Before applying principal substantive tests to the details of asset and liability accounts at an
interim date, the auditor should
7. Which of the following is not one of the three main reasons why the auditor should properly plan
engagements?
8. Which of the following would not be a consideration of a CPA firm in deciding whether to accept
a new client?
10. Audit programs are modified to suit the circumstances on particular engagements. A complete
audit program for an engagement generally should be developed
12. Transactions with related parties are important to the auditors because they will be disclosed in
the financial statements if material. Generally accepted accounting principles would not require
disclosure of
13. Audit programs generally include procedures to test actual transactions and resulting balances.
These procedures are primarily designed to
14. Which of the following items would not normally be included, in whole or in part, in the auditor's
permanent file on a client?
15. When a company changes auditors, SAS No. 7 requires communication between the predecessor
and successor auditors. The burden of initiating the communication rests with the
a. predecessor.
b. client.
c. successor.
d. SEC.
16. 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.
17. A measure of the auditor's assessment of the likelihood that there are material misstatements in
an account before considering the effectiveness of the client's internal control is
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.
18. Investigation of new clients and reevaluation of existing ones is an essential part of deciding
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.
a. lead schedules.
b. adjusting and reclassification entries.
c. supporting schedules.
d. working trial balance.
20. The current file of the auditor's working papers generally should include
22. Which of the following would not be found in the corporate charter?
23. During the course of an audit engagement an auditor prepares and accumulates audit working
papers. The primary purpose of the audit working papers is to
24. Ordinarily, the working papers can be provided to someone else only with the express
permission of the client. This is the case even if
a. reduce the CPA firm's responsibility to external users of the audited financial statements.
b. reduce the terms of the engagement to writing in order to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. satisfy the Statute of Frauds which requires that contracts for professional services must be
in writing to be enforceable.
26. The auditor is likely to accumulate more evidence when the audit is for a company
27. Which of the following is not an inherent risk that is common to all clients in certain industries?
28. One means of informing the client that the auditor is not responsible for the discovery of all acts
of fraud is the
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.
29. Which of the following is the most likely first step an auditor would perform at the beginning of
an initial audit engagement?
a.Prepare a rough draft of the financial statements and of the auditor's report.
b.Study and evaluate the system of internal administrative control.
c.Tour the client's facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.
30. The permanent section of the auditor's working papers generally should include
31. Which of the following would you expect to find in a corporation's bylaws?
32. Which of the following would not usually be included in the minutes of the board of directors
and/or stockholders?
33. The purpose of the requirement in SAS No. 7 of having communication between the predecessor
and successor auditor is
35. An extensive understanding of the client's business and industry and knowledge about the
company's operations are essential for doing an adequate audit. For a new client, most of this
information is obtained
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the client's premises.
36. Most auditors assess inherent risk as high for related parties and related-party transactions
because
37. Which of the following would not fit the description of a related-party transaction?
a. An unusually large sale of merchandise to the company's best and largest customer.
b. Sales of merchandise between a parent company and its subsidiary.
c. Exchanges of equipment between two companies owned by the same person.
d. Loans to corporate officers at market rates of interest with a regular repayment schedule.
38. One of the first things that the auditor will do after accepting a new client is
39. The first standard of field work recognizes that early appointment of the independent auditor
has many advantages to the auditor and the client. Which of the following advantages is least likely to
occur as a result of early appointment of the auditor?
a. The auditor will be able to plan the audit work so that it may be done expeditiously.
b. The auditor will be able to complete the audit work in less time.
c. The auditor will be able to better plan for the observation of the physical inventories.
d. The auditor will be able to perform the examination more efficiently and will be finished at
an early date after the year-end.
40. 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
42. With respect to records in a CPA's possession, rules of conduct provide that
a. copies of client records incorporated into audit working papers must be returned to the
client upon request.
b. worksheets in lieu of a general ledger belong to the auditor and need not be furnished to
the client upon request.
c. an extensive analysis of inventory prepared by the client at the auditor's request belongs to
the auditor and needs not be furnished to the client upon request.
d. the auditor who returns copies of client records must return the original records upon
request.
a. to reduce inventory when client failed to write down its obsolete raw materials.
b. to change material credit balances in accounts receivable accounts to accounts payable
accounts.
c. to increase the allowance for doubtful accounts when it was discovered that a customer had
filed for bankruptcy protection under Chapter 11.
d. to increase the federal income tax liability account when it was discovered that client would
be in a higher tax bracket than originally estimated.
a. affects the CPA firm's responsibility to external users of audited financial statements.
b. can be used to alter the auditor's responsibilities under generally accepted auditing
standards.
c. can affect legal responsibilities to the client.
d. is useful only if it is an audit engagement, but has no effect for review or compilation
services.
45. The first standard of field work, which states that the work is to be adequately planned and
assistants, if any, are to be properly supervised, recognizes that
a. early appointment of the auditor is advantageous to the auditor and the client.
b. acceptance of an audit engagement after the close of the client's fiscal year is generally not
permissible.
c. appointment of the auditor subsequent to the physical count of inventories requires a
disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim dates.
46. The least effective method of identifying related parties would be
a. an inquiry of management.
b. a review of SEC filings.
c. a review of the purchases and sales journals for the period under audit.
d. an examination of stockholders' listings to identify principal stockholders.
47. Which of the following is not a document or record that should be examined early in the
engagement?
a. Management letter.
b. Corporate charter and bylaws.
c. Contracts.
d. Minutes of board of directors' and stockholders' meetings.
48. Which of the following is not a potential effect of an auditor's decision that a lower acceptable
audit risk is appropriate?
49. The official record of the meetings of the board of directors and stockholders is contained in the
corporate
a. bylaws.
b. charter.
c. minutes.
d. license.
50. Which of the following is a basic tool used by the auditor to control the audit work and review
the audit progress?
a. Audit program.
b. Engagement letter.
c. Time and expense summary.
d. Progress flowchart.
a. sales journal.
b. cash receipts journal.
c. general journal.
d. financial statements but not in the general ledger.
53. An auditor searching for related party transactions should obtain an understanding of each
subsidiary's relationship to the total entity because
54. Since SAS No. 21 requires audit testing of segment information if client has different lines of
business, it is important for the auditor to
a. visit all the different business locations before the audit is completed.
b. identify the segments early.
c. develop an audit program for each line of business.
d. have an office in each city where a business segment is located.
55. After preliminary audit arrangements have been made, an engagement confirmation letter
should be sent to the client. The letter usually would not include
56. Which of the following would not be included in the auditor's working papers?
a.
inherent risk can usually be isolated to one or two accounts.
b.
inherent risk applies to the entire audit.
c.
acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be
accumulated.
1 - 10. b, b, d, a, a, a, a, d, c, b
11 - 20. b, d, a, d, c, b, d, b, c, c
21 - 30. a, d, d, d, b, d, d, a, c, b
31 - 40. c, a, b, b, d, c, a, d, b, c
41 - 50. d, c, b, c, a, c, a, b, c, a
51 - 57. b, d, b, b, c, a, a
1. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPA’s approach to the service.
ANSWER: C
a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.
ANSWER: C
3. Internal auditing often extends beyond examinations leading to the expression of an opinion on
the fairness of financial presentation and includes audits of efficiency, effectiveness, and
a. Internal control.
b. Evaluation.
c. Accuracy.
d. Compliance.
ANSWER: D
a. It requires the constant review by internal auditors of the administrative controls as they relate
to operations of the company.
b. It concentrates on implementing financial and accounting control in a newly organized
company.
c. It attempts and is designed to verify the fair presentation of a company's results of
operations.
d. It concentrates on seeking out aspects of operations in which waste would be reduced by
the introduction of controls.
ANSWER: D
5. The auditor's judgment concerning the overall fairness of the presentation of financial position,
results of operations, and changes in financial position is applied within the framework of
ANSWER: A
6. Which of the following is not considered an assertion as formulated by the Auditing Standards
Board?
a. Valuation or allocation.
b. Mathematical accuracy.
c. Rights and obligations.
d. Presentation and disclosure.
ANSWER: B
risk-based auditing?
ANSWER: C
a. Audit committee.
b. Controller.
c. Chief financial officer.
d. Director of information systems.
ANSWER: A
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.
ANSWER: C
10. The best description of the scope of internal auditing is that it encompasses
ANSWER: B
11. A typical objective of an operational audit is to determine whether an entity's
ANSWER: D
12. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in
the
ANSWER: D
a. cadb
b. cdab
c. bcda
d. adcb
ANSWER: A
13. Which of the following statements is not true regarding the competence of audit evidence?
ANSWER: A
15. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements.
ANSWER: C
16. Which of the following statements is not a distinction between independent auditing and internal
auditing?
a. Independent auditors represent third party user external to the auditee entity, whereas internal
auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors
are concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent
contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and
performance auditing.
ANSWER: B
17. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve
misunderstandings between CPA and client regarding the precise nature of the work to be performed
and the type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in the audit process.
d. The engagement letter should be signed by both the client and the CPA and should be used only for
independent audits.
ANSWER: B
18. In assessing audit risk, the CPA needs to do all of the following except
ANSWER: A
19. Which of the following tasks should be performed prior to the final audit?
ANSWER: C