1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing

financial information for decision making is commonly called:

A) finance

B) auditing.**

C) accounting.

D) economics.

2) In "auditing" financial accounting data, the primary concern is with:

A) determining whether recorded information properly reflects the economic events that occurred during the
accounting period.**

B) determining if fraud has occurred.

C) determining if taxable income has been calculated correctly.

D) analyzing the financial information to be sure that it complies with government requirements.

3) The most common way for users to obtain reliable information is to:

A) have an internal audit.

B) have an independent audit.**

C) verify all information individually.

D) verify the information with management.

4) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by
another party is a(n):

A) accounting and bookkeeping service.

B) attestation service.**

C) assurance service.

D) tax service.

5) Which of the following services provides the lowest level of assurance on a financial statement?

A) A review**

B) An audit

C) Neither service provides assurance on financial statements.

D) Each service provides the same level of assurance on financial statements.

6) The four categories for describing the size of audit firms include: the Big Four international firms; national
firms; regional and local firms; and small firms. Which of the following is not a characteristic of a small firm?

A) Most have fewer than 25 professionals.

B) They perform audits on small and not-for-profit businesses.

C) Tax services are more important to their practice than auditing.

D) They do not audit publicly traded companies.**

7) Which of the following is not one of the responsibilities of an auditor under the principles underlying an
audit?

A) Possess appropriate competence and capabilities

B) Comply with ethical requirements

C) Plan work and supervise assistants**

D) Maintain professional skepticism and exercise professional judgment

8) To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, the auditor must fulfill several performance responsibilities, including:

A) verifying that all audit work is performed by a CPA with a minimum of three years experience.

B) obtaining sufficient, appropriate audit evidence.**

C) exercising professional judgment.

D) providing an opinion on the financial statements.

9) When assessing the risk of material misstatements in the financial statements,

A) inadequate internal control procedures will mitigate client business risk.

B) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain.

C) company management is responsible for determining materiality levels.

D) the auditor must have an understanding of the client's business and industry.**

10) In order to properly plan and perform an audit, an important fact for both the auditor and the client to
understand is that:

A) the internal control policies and procedures are developed by the auditors.

B) the purpose of an audit is to prevent fraud.

C) management is responsible for the preparation of the financial statements.**

D) management can restrict the auditor's access to important information relevant to the financial statements.

11) The auditor's responsibility section of the standard unqualified audit report states that the audit is designed
to:

A) discover all errors and/or irregularities.

B) discover material errors and/or irregularities.

C) conform to generally accepted accounting principles.

D) obtain reasonable assurance whether the statements are free of material misstatement.**

12) The standard unqualified audit report:

A) is sometimes called a clean opinion.**

B) can be issued only with an explanatory paragraph.

C) can be issued if only a balance sheet and income statement are included in the financial statements.

D) is sometimes called a disclaimer report.

13) The standard unqualified audit report for public entities includes the following three paragraphs:

A) introductory, scope and management's responsibility.

B) materiality, scope and report.

C) introductory, scope and opinion.**

D) scope, fieldwork and conclusion.

14) An adverse opinion is issued when the auditor believes:

A) some parts of the financial statements are materially misstated or misleading.

B) the financial statements would be found to be materially misstated if an investigation were performed.

C) the auditor is not independent.

D) the overall financial statements are so materially misstated that they do not present fairly the financial
position or results of operations and cash flows in conformity with GAAP.**

15) When the auditor determines that the financial statements are fairly stated, but there is a nonindependent
relationship between the auditor and the client, the auditor should issue:

A) an adverse opinion.

B) a disclaimer of opinion.**

C) either a qualified opinion or an adverse opinion.

D) either a qualified opinion or an unqualified opinion with modified wording.

16) If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued
a(n):

A) adverse opinion.

B) disclaimer of opinion.

C) unqualified opinion.

D) qualified opinion.**

17) Items that materially affect the comparability of financial statements generally require disclosure in the
footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue:
A) a disclaimer.

B) an unqualified opinion.

C) a qualified opinion.**

D) an adverse opinion.

18) In which of the following circumstances would an auditor most likely express an adverse opinion?

A) The CEO refuses to let the auditor have access to the board of director meeting minutes.

B) The financial statements are not in conformity with the FASB statement on loss contingencies.**

C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to
continue as a going concern.

D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk
at the maximum.

19) A misstatement in the financial statements can be considered material if knowledge of the misstatement
will affect a decision of:

A) the PCAOB.

B) a reasonable user of the financial statements.**

C) an accountant.

D) the SEC.

20) Misstatements must be compared with some measurement base before a decision can be made about
materiality. A commonly accepted measurement base includes:

A) net income.

B) total assets.

C) working capital.

D) all of the above.**

21) Ethics are:

A) needed in the professions, but is not needed for society in general.

B) a set of moral principles or values.**

C) not formed by life experiences.

D) always incorporated in laws.

22) The objective of an audit of the financial statements is an expression of an opinion on:

A) the fairness of the financial statements in all material respects.**

B) the accuracy of the financial statements.

C) the accuracy of the annual report.

D) the accuracy of the balance sheet and income statement.

23) If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion
because of insufficient evidence, the auditor:

A) should withdraw from the engagement.

B) should request an increase in audit fees so that more resources can be used to conduct the audit.

C) has the responsibility of notifying financial statement users through the auditor's report.**

D) should notify regulators of the circumstances.

24) The responsibility for adopting sound accounting policies and maintaining adequate internal control rests
with the:

A) board of directors.

B) company management.**

C) financial statement auditor.

D) company's internal audit department.

25) The auditor's best defense when material misstatements are not uncovered is to have conducted the audit:

A) in accordance with generally accepted auditing standards.**

B) as effectively as reasonably possible.

C) in a timely manner.

D) only after an adequate investigation of the management team.

26) Which of the following is not one of the reasons that auditors provide only reasonable assurance on the
financial statements?

A) The auditor commonly examines a sample, rather than the entire population of transactions.

B) Accounting presentations contain complex estimates which involve uncertainty.

C) Fraudulently prepared financial statements are often difficult to detect.

D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.**

27) When an auditor believes that an illegal act may have occurred, the auditor should first:

A) obtain an understanding of the nature and circumstances of the act.**

B) consult with legal counsel or others knowledgeable about the illegal act.

C) discuss the matter with the audit committee.

D) withdraw from the engagement.

28) Fraudulent financial reporting is most likely to be committed by whom?

A) Line employees of the company

B) Outside members of the company's board of directors

C) Company management**

D) The company's auditors

29) The concept of reasonable assurance indicates that the auditor is:

A) not a guarantor of the correctness of the financial statements.**

B) not responsible for the fairness of the financial statements.

C) responsible only for issuing an opinion on the financial statements.

D) responsible for finding all misstatements.

30) The auditor has considerable responsibility for notifying users as to whether or not the statements are
properly stated. This imposes upon the auditor a duty to:

A) provide reasonable assurance that material misstatements will be detected.**

B) be a guarantor of the fairness in the statements.

C) be equally responsible with management for the preparation of the financial statements.

D) be an insurer of the fairness in the statements.

31) Which of the following statements is usually true?

A) Materiality is easy to quantify.

B) Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion
among management.

C) Reasonable assurance is a low level of assurance that the financial statements are free from material
misstatement.

D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable
person using the statements.**

32) When an auditor knows that an illegal act has occurred, she must:

A) report it to the proper governmental authorities.

B) consider the effects on the financial statements, including the adequacy of disclosure.**

C) withdraw from the engagement.

D) issue an adverse opinion.

33) Why does the auditor divide the financial statements into smaller segments?

A) Using the cycle approach makes the audit more manageable.**

B) Most accounts have few relationships with others and so it is more efficient to break the financial
statements into smaller pieces.

C) The cycle approach is used because auditing standards require it.

D) All of the above are correct.

34) If a short-term note payable is included in the accounts payable balance on the financial statement, there is
a violation of the:

A) completeness assertion.

B) existence assertion.

C) cutoff assertion.

D) classification assertion.**

35) Management makes the following assertions about account balances:

A) existence, completeness, classification and cutoff.

B) existence, accuracy, classification and rights and obligations.

C) existence, completeness, valuation and allocation, and rights and obligations.**

D) existence, completeness, rights and obligations, and cutoff.

36) Which of the following statements is true about the completeness and occurrence assertions?

A) Both assertions are relevant to classes of transactions and events and account balances.

B) If management asserts that recorded sales transactions represent exchanges of goods or services that
actually took place, they are asserting to completeness.

C) Violations of the occurrence assertion relate to account overstatements.**

D) The failure to record a sale that did occur is a violation of the occurrence assertion.

37) Which of the following assertions is described as "this assertion addresses whether all transactions that
should be included in the financial statements are in fact included"?

A) Occurrence

B) Completeness**

C) Rights and obligations

D) Existence

38) Which of the following assertions is described as "this assertion addresses whether all transactions that
should be included in the financial statements are in fact included"?

A) Occurrence

B) Completeness**
C) Rights and obligations

D) Existence

39) The auditor is determining that the the correct selling price was used for billing and that the quantity of
goods shipped was the same as the quantity billed. She is gathering evidence about which transaction related
audit objective?

A) Existence

B) Completeness

C) Accuracy**

D) Cut-off

40) The posting and summarization audit objective is the auditor's counterpart to management's assertion of:

A) occurrence.

B) completeness.

C) accuracy.**

D) classification.

41) In testing for cutoff, the objective is to determine:

A) whether all of the current period's transactions are recorded.

B) whether transactions are recorded in the correct accounting period.**

C) the proper cutoff between capitalizing and expensing expenditures.

D) the proper cutoff between disclosing items in footnotes or in account balances.

42) The detail tie-in is part of the ________ assertion for account balances.

A) classification

B) valuation and allocation**

C) rights and obligations

D) completeness

43) Determining that the footnote disclosures related to long-term debt are accurate is an example of the
________ audit objective.

A) occurrence

B) completeness

C) presentation and disclosure**

D) classification and understandability

44) If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial
statements through understanding internal control, assessing control risk, testing controls, and analytical
procedures, then the auditor:

A) can issue an unqualified opinion.

B) can significantly reduce other substantive tests.**

C) can write the engagement letter.

D) needs to perform additional tests of controls so that the assurance level can be increased.

45) Audit evidence obtained directly by the auditor will not be reliable if:

A) the auditor lacks the competence to evaluate the evidence.**

B) it is provided by the client's attorney.

C) the client denies its veracity.

D) it is impossible for the auditor to obtain additional corroboratory evidence.

46) 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.

47) 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 called:

A) control risk.

B) acceptable audit risk.

C) statistical risk.

D) inherent risk.**

48) In what order should the following steps occur?

A. Assess client business risk

B. Understand the client's business and industry

C. Perform preliminary analytical procedures

D. Assess acceptable audit risk

A) D, B, C, A

B) B, A, C, D**
C) B, D, A, C

D) D, C, B, A

49) The auditor uses knowledge gained from the understanding of the client's business and industry to assess:

A) client business risk.**

B) control risk.

C) inherent risk.

D) audit risk.

50) Initial audit planning involves four matters. Which of the following is not one of these?

A) Develop an overall audit strategy.

B) Request that bank balances be confirmed.**

C) Schedule engagement staff and audit specialists.

D) Identify the client's reason for the audit.

51) 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 the financial statements.

C) the likely statement users and the intended uses of the statements.**

D) the audit firm and the intended uses of the statements

52) In making client acceptance decisions, the audit firm will consider:

A) inherent and control risk of the client.

B) audit risk to the CPA Firm.

C) the client's business risk and the risk of material misstatements in the financial statements.**

D) CPA Firm's potential ongoing revenue from the audit client.

53) The audit team gathers information about a new client's business and industry in order to obtain:

A) an understanding of the clients internal control system for financial reporting.

B) an understanding of how economic events and transactions have an effect on the company's financial
statements.**

C) information about control risk.

D) information regarding whether the company is engaging in financial statement fraud.

54) Business risk:

A) is the risk after considering the effectiveness of top management controls.

B) is the risk that the client's internal controls will fail.

C) can include a new technology which threatens to erode a company's competitive advantage.**

D) cannot be mitigated by management.

55) If an auditor establishes a relatively high level for materiality, then the auditor will:

A) accumulate more evidence than if a lower level had been set.

B) accumulate less evidence than if a lower level had been set.**

C) accumulate approximately the same evidence as would be the case were materiality lower.

D) accumulate an undetermined amount of evidence.

56) Lewis Corporation has a few large accounts receivable that total one million dollars whereas

Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one
account is more significant for Lewis corporation because of the concept of:

A) materiality.**

B) audit risk.

C) reasonable assurance.

D) comparative analysis.

57) Auditors generally allocate the preliminary judgment about materiality to the:

A) balance sheet only.**

B) income statement only.

C) income statement and balance sheet.

D) statement of cash flows.

58) Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of
control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as
the planned audit risk level, the auditor would:

A) increase materiality levels.

B) decrease detection risk.**

C) decrease substantive testing.

D) increase inherent risk.

59) The measurement of the auditor's assessment of the likelihood that there are material misstatements due
to error or fraud in a segment before considering the effectiveness of internal controls is defined as:

A) audit risk.
B) inherent risk.**

C) sampling risk.

D) detection risk.

60) Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to
________.

A) detection risk

B) audit report risk

C) acceptable audit risk**

D) inherent risk

61) The risk of material misstatement refers to:

A) control risk and acceptable audit risk.

B) inherent risk.

C) the combination of inherent risk and control risk.**

D) inherent risk and audit risk.

62) When management has an adequate level of integrity for the auditor to accept the engagement but cannot
be regarded as completely honest in all dealings, auditors normally:

A) reduce acceptable audit risk and increase inherent risk.**

B) reduce inherent risk and control risk.

C) increase inherent risk and control risk.

D) increase acceptable audit risk and reduce inherent risk.