CHAPT 8 AUDIT CONSIDERATION

11. Which of the following procedures would an entity most likely include in its disaster recovery plan?
A. Convert all data from external formats to an internal company format.
B. Maintain a program to prevent illegal activity.
C. Develop an auxiliary power supply to provide uninterrupted electricity.
D. Store duplicate copies of files in a location away from the computer center.

Difficulty: Medium
Source: AICPA

12. A service auditor's report on a service center should include a(n)

A. Detailed description of the service center's internal control.
B. Statement that the user of the report may assess control risk at the minimum level.
C. Indication that no assurance is provided.
D. Opinion on the operating effectiveness of the service center's internal control.

Difficulty: Hard

13. The report of a service auditor may provide assurance on whether:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Hard
14. Which of the following is a password security problem?
A. Users are assigned passwords when accounts are created, but do not change them.
B. Users have accounts on several systems with different passwords.
C. Users copy their passwords on note paper, which is kept in their wallets.
D. Users select passwords that are not listed in any online dictionary.

Difficulty: Easy
Source: AICPA

15. Which of the following is a software component of a computer system?

A. The operating system.
B. The storage unit.
C. The display monitor
D. The optical scanner.

Difficulty: Easy

16. Which of the following is least likely to be a general control over computer activities?
A. Procedures for developing new programs and systems.
B. Requirements for system documentation.
C. A change request log.
D. A control total.

Difficulty: Medium

17. Which of the following computer related employees should not be allowed access to program listings of
application programs?
A. The systems analyst.
B. The programmer.
C. The operator.
D. The librarian.

Difficulty: Hard
18. The advent of personal computers has resulted in a(n):
A. Decentralization of data processing activities.
B. Increased concern over the accuracy of computerized processing.
C. Decrease in the number of local area networks.
D. Increase for general computer control activities.

Difficulty: Medium

19. Which of the following is most likely to include user group development and execution of certain computer
applications?
A. Telecommunication transmission systems.
B. Database administration.
C. End user computing.
D. Electronic data interchange systems.

Difficulty: Medium

20. Which of the following is not a data transmission control?

A. Echo checks.
B. Data encryption.
C. File labels.
D. Parity checks.

Difficulty: Medium

21. Which of the following is an example of general computer control?

A. Input validation checks.
B. Control total.
C. Operations manual.
D. Generalized audit software.

Difficulty: Medium
22. Which of the following would the auditors consider to be a weakness in an IT system?
A. Operators have access to terminals.
B. Programmers are allowed access to the file library.
C. Reprocessing of exceptions detected by the computer is handled by a data control group.
D. More than one employee is present when the computer facility is in use.

Difficulty: Medium

23. Which of the following is least likely to be tested with generalized audit software?
A. An aging of accounts receivable.
B. A schedule of inventory.
C. A depreciation schedule.
D. A computer operations manual.

Difficulty: Easy

24. Which of the following would be least likely to be considered a desirable attribute of a database
management system?
A. Data redundancy.
B. Quick response to users' request for information.
C. Control of users' identification numbers and passwords.
D. Logging of terminal activity.

Difficulty: Medium

25. A problem for a CPA associated with advanced IT systems is that:

A. The audit trail normally does not exist.
B. The audit trail is sometimes generated only in machine readable form.
C. The client's internal auditors may have been involved at the design stage.
D. Tests of controls are not possible.

Difficulty: Easy
26. Which of the following testing techniques is more commonly used by internal auditors than by independent
auditors?
A. Integrated test facilities.
B. Test data.
C. Controlled programs.
D. Tagging and tracing transactions.

Difficulty: Medium

27. General controls over IT systems are typically tested using:

A. Generalized audit software.
B. Observation, inspection, and inquiry.
C. Program analysis techniques.
D. Test data.

Difficulty: Medium

28. When conducting field work for a physical inventory, an auditor cannot perform which of the following
steps using a generalized audit software package?
A. Observing inventory.
B. Selecting sample items of inventory.
C. Analyzing data resulting from inventory.
D. Recalculating balances in inventory reports.

Difficulty: Medium
Source: AICPA

29. Which of the following personnel is responsible for determining the computer processing needs of the
various users?
A. The application programmer.
B. The computer operator.
C. The systems analyst.
D. The systems programmer.

Difficulty: Medium
30. Which of the following testing techniques minimizes the possibility that the auditors will contaminate a
client's financial records?
A. Test data.
B. Integrated test facilities.
C. Controlled programs.
D. Tagging and tracing transactions.

Difficulty: Hard

31. Which of the following is not a distinctive characteristic of advanced IT systems?

A. Data communication.
B. Integrated database.
C. Batch processing of transactions.
D. Distributive data processing.

Difficulty: Medium

32. The best method of achieving internal control over advanced IT systems is through the use of:
A. Batch controls.
B. Controls written into the computer system.
C. Equipment controls.
D. Documentation controls.

Difficulty: Hard

33. Which of the following personnel is responsible for the proper functioning of the security features built into
the operating system?
A. The systems programmer.
B. The application programmer.
C. The computer operator.
D. The telecommunications specialist.

Difficulty: Hard
34. Which of the following is not a data transmission control?
A. Data encryption.
B. Parity check.
C. Message acknowledgment techniques
D. Distributed data processing.

Difficulty: Medium

35. Which of the following is not a programmed control?

A. Private lines.
B. Validity tests.
C. Self-checking numbers.
D. Limit tests.

Difficulty: Medium

36. A system in which the end user is responsible for the development and execution of the computer
application that he or she uses is referred to as:
A. Laptop computing.
B. End-user computing.
C. Distributed computing.
D. Decentralized computing.

Difficulty: Easy

37. In a client/server environment, the "client" is most likely to be the:

A. Supplier of the computer system.
B. Computers of various users.
C. Computer that contains the networks software and provides services to a server.
D. Database administrator.

Difficulty: Medium
38. When designing the physical layout of a data processing center, which of the following would be least likely
to be a necessary control that is considered?
A. Design of controls to restrict access.
B. Adequate physical layout space for the operating system.
C. Inclusions of an adequate power supply system with surge protection.
D. Consideration of risks related to other uses of electricity in the area.

Difficulty: Medium

39. A data warehouse is an example of:

A. On-line analytical processing.
B. On-line transaction processing.
C. Essential information batch processing.
D. Decentralized processing.

Difficulty: Hard

40. An example of an access control is a:

A. Check digit.
B. Password.
C. Test facility.
D. Read only memory.

Difficulty: Medium

41. End-user computing is most likely to occur on which of the following types of computers?
A. Mainframe.
B. Macrocomputers.
C. Personal computers.
D. Personal reference assistants.

Difficulty: Medium
42. Auditing through the computer is most likely to be used when:
A. Input transactions are batched and system logic is straightforward.
B. Processing primarily consists of sorting the input data and updating the master file sequentially.
C. Processing is primarily on line and updating is real-time.
D. Outputs are in hard copy form.

Difficulty: Medium
Source: IIA

43. Which of the following computer system risks would be increased by the installation of a database system?
A. Programming errors.
B. Data entry errors.
C. Improper data access.
D. Loss of power.

Difficulty: Hard
Source: IIA

44. Parallel simulation programs used by the auditors for testing programs:
A. Must simulate all functions of the production computer-application system.
B. Cannot be developed with the aid of generalized audit software.
C. Can use live data or test data.
D. Is generally restricted to data base environments.

Difficulty: Medium
Source: IIA

45. Auditing by testing the input and output of a computer system instead of the computer program itself will:
A. Not detect program errors which do not show up in the output sampled.
B. Detect all program errors, regardless of the nature of the output.
C. Provide the auditors with the same type of evidence.
D. Not provide the auditors with the confidence in the results of the auditing procedures.

Difficulty: Medium
Source: AICPA
46. If a control total were to be computed on each of the following data items, which would best be identified as
a hash total for a payroll computer application?
A. Net pay.
B. Department numbers.
C. Hours worked.
D. Total debits and total credits.

Difficulty: Medium
Source: AICPA

47. Smith Corporation has numerous customers. A customer file is kept on disk storage. Each account in the
customer file contains name, address, credit limit, and account balance. The auditor wishes to test this file to
determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:
A. Develop test data that would cause some account balance to exceed the credit limit and determine if the
system properly detects such situations.
B. Develop a program to compare credit limits with account balances and print out the details of any account
with a balance exceeding its credit limit.
C. Require a printout of all account balances so they can be manually checked against the credit limits.
D. Request a printout of a sample of account balances so they can be individually checked against the credit
limits.

Difficulty: Medium
Source: AICPA

48. In their consideration of a client's IT controls, the auditors will encounter general controls and application
controls. Which of the following is an application control?
A. The operations manual.
B. Hash total.
C. Systems documentation.
D. Control over program changes.

Difficulty: Hard
Source: AICPA
49. When erroneous data are detected by computer program controls, such data may be excluded from
processing and printed on an exception report. The exception report should most probably be reviewed and
followed up on by the:
A. Supervisor of computer operations.
B. Systems analyst.
C. Data control group.
D. Computer programmer.

Difficulty: Medium
Source: AICPA

50. The purpose of using generalized computer programs is to test and analyze a client's computer:
A. Systems.
B. Equipment.
C. Records.
D. Processing logic.

Difficulty: Hard
Source: AICPA

51. An auditor may decide not to perform tests of controls related to the control activities within the computer
portion of the client's internal control. Which of the following would not be a valid reason for choosing to omit
such test?
A. The controls duplicate operative controls existing elsewhere.
B. There appear to be major weaknesses that would preclude reliance on the stated procedure.
C. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests show
the controls to be operative.
D. The controls appear adequate.

Difficulty: Medium
Source: AICPA
52. A control feature in a computer system requires the central processing unit (CPU) to send signals to the
printer to activate the print mechanism for each character. The print mechanism, just prior to printing, sends a
signal back to the CPU verifying that the proper print position has been activated. This type of data transmission
is referred to as:
A. Echo control.
B. Validity control.
C. Signal control.
D. Check digit control.

Difficulty: Easy
Source: AICPA

53. Which of the following constitutes a weakness in the internal control of a computer system?
A. One generation of backup files is stored in an off-premises location.
B. Machine operators distribute error messages to the control group.
C. Machine operators do not have access to the complete systems manual.
D. Machine operators are supervised by the programmer.

Difficulty: Medium
Source: AICPA

54. The completeness of computer-generated sales figures can be tested by comparing the number of items
listed on the daily sales report with the number of items billed on the actual invoices. This process uses:
A. Self-checking numbers.
B. Control totals.
C. Validity tests.
D. Process tracing data.
Difficulty: Medium
Source: AICPA

55. Internal control is ineffective when computer department personnel:

A. Participate in computer software acquisition decisions.
B. Design documentation for computerized systems.
C. Originate changes in master files.
D. Provide physical security for program files.

Difficulty: Medium
Source: AICPA
56. Which of the following is likely to be of least importance to an auditor in considering the internal control in
a company with computer processing?
A. The segregation of duties within the computer center.
B. The control over source documents.
C. The documentation maintained for accounting applications.
D. The cost/benefit of data processing operations.

Difficulty: Easy
Source: AICPA

57. In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been
terminated the previous week. Which of the following controls, if properly utilized, would have been most
effective in preventing the error or ensuing its prompt detection?
A. A control total for hours worked, prepared from time cards collected by the timekeeping department.
B. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the computer
department for the processing of the payroll.
C. Use of a check digit for employee numbers.
D. Use of a header label for the payroll input sheet.

Difficulty: Medium
Source: AICPA

58. A company's labor distribution report requires extensive corrections each month because of labor hours
charged to inactive jobs. Which of the following data processing input controls appears to be missing?
A. Completeness test.
B. Validity test.
C. Limit test.
D. Control total.

Difficulty: Medium
Source: IIA

59. Passwords for microcomputer software programs are designed to prevent:

A. Inaccurate processing of data.
B. Unauthorized access to the computer.
C. Incomplete updating of data files.
D. Unauthorized use of the software.

Difficulty: Medium
Source: IIA
60. The capability for computers to communicate with physically remote terminals is an important feature in the
design of modern business information systems. Which of the following risks associated with the use of
telecommunications systems is minimized through the use of a password control system?
A. Unauthorized access to system program and data files.
B. Unauthorized physical availability of remote terminals.
C. Physical destruction of system program and data files.
D. Physical destruction of remote terminals.

Difficulty: Medium
Source: IIA

61. Consider the following computer applications:

(1) At a catalog sales firm, as phone orders are entered into their computer, both inventory and credit are
immediately checked.
(2) A manufacturer's computer sends the coming week's production schedule and parts orders to a supplier's
computer.
Which statement below is true for these applications?
A. Both applications are examples of EDI.
B. Both applications are examples of on-line real-time processing.
C. The first application is an example of EDI and the second is an example of on-line real-time.
D. The first application is an example of on-line real-time and the second is an example of EDI.

CHAPT 5 EVIDENCE

11. To be effective, analytical procedures in the overall review stage of an audit engagement should be
performed by.
A. The staff accountant who performed the substantive auditing procedures.
B. A beginning staff accountant who has had no other work related to the engagement.
C. A manager or partner who has a comprehensive knowledge of the client's business and industry.
D. The CPA firm's quality control manager.

Difficulty: Medium
12. The components of the risk of misstatement are:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium
13. Financial statement assertions are established for classes of transactions,

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Easy

14. Which of the following is correct concerning a "fraud risk factor"?

A. It may affect the auditor's assessment of fraud risk.
B. It requires modification of planned audit procedures.
C. It is also a material weakness in internal control.
D. If it involves senior management, it is likely to result in resignation of the auditor.

Difficulty: Hard

15. When performing a financial statement audit, auditors are required to explicitly assess the risk of material
misstatement due to:
A. Fraud.
B. Misappropriation.
C. Illegal Acts.
D. Business risk.

Difficulty: Hard
16. As planning materiality is decreased, the auditor should plan more work on individual accounts to.
A. Find smaller misstatements.
B. Find larger misstatements.
C. Increase the tolerable misstatement in the accounts.
D. Decrease the risk of assessing control risk too low.

Difficulty: Medium

17. Further audit procedures include:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium

18. Assertions that have a meaningful bearing on whether an account balance, transaction class or disclosure is
fairly stated are referred to as:
A. Appropriate assertions.
B. Sufficient assertions.
C. Relevant assertions.
D. Reliable assertions.

Difficulty: Medium
19. Which of the following is not an assertion relating to classes of transactions?
A. Accuracy.
B. Sufficiency.
C. Cutoff.
D. Classification.

Difficulty: Medium

20. Which of the following is required documentation in an audit?

A. A written engagement letter formalizing the level of services to be provided.
B. A flowchart of the client's organization.
C. A written audit program.
D. A memo setting forth the scope of the audit.

Difficulty: Hard

21. Which of the following is not considered to be an analytical procedure?

A. Comparisons of financial statement amounts with source documents.
B. Comparisons of financial statement amounts with nonfinancial data.
C. Comparisons of financial statement amounts with budgeted amounts.
D. Comparisons of financial statement amounts with comparable prior year amounts.

Difficulty: Medium

22. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date
rather than as of the balance sheet date. The auditor should be aware that this practice
A. Eliminates the use of certain statistical sampling methods that would otherwise be available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic conditions.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

Difficulty: Hard
Source: AICPA
23. An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of
sales is reasonable. What type of audit procedure was performed?
A. Test of transactions.
B. Analytical procedures.
C. Test of controls.
D. Test of details.

Difficulty: Easy
Source: AICPA

24. The inspection of a vendor's invoice by the auditors is:

A. Direct evidence about occurrence of a transaction.
B. Physical evidence about occurrence of a transaction.
C. Documentary evidence about occurrence of a transaction.
D. Part of the client's accounting system.

Difficulty: Medium

25. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts
receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material
misstatement could have bypassed the client's system of internal control. What is the maximum detection risk
the auditors should specify in their substantive procedures of details of accounts receivable?
A. 5%.
B. 12.5%.
C. 42.7%.
D. 60%.

Difficulty: Medium

26. Analytical procedures are required at the planning stage of all audits and as:
A. Tests of internal control.
B. Substantive procedures.
C. A part of the final overall review.
D. Computer generated procedures.

Difficulty: Easy
27. During financial statement audits, auditors seek to restrict which type of risk?
A. Control risk.
B. Detection risk.
C. Inherent risk.
D. Account risk.

Difficulty: Medium

28. Which of the following groups are not considered a specialist by AICPA Professional Standards:
A. Appraisers.
B. Internal auditors.
C. Engineers.
D. Geologists.

Difficulty: Medium

29. CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so:
A. Violates professional standards.
B. Is acceptable, but should only be done when cost justified.
C. Is acceptable, but only for non-public clients.
D. Is acceptable and desirable under all conditions.

Difficulty: Easy

30. Which of the following best describes the problem with the use of published industry averages for analytical
procedures?
A. Lack of comparability.
B. Lack of sufficiency.
C. Lack of accuracy.
D. Lack of availability.

Difficulty: Medium
31. In auditing an asset valued at fair value, which of the following potentially provides the auditor with the
strongest evidence?
A. A price for a similar asset obtained from an active market.
B. An appraisal obtained discounting future cash flows.
C. Management's judgment of the cost to purchase an equivalent asset.
D. The historical cost of the asset.

Difficulty: Medium

32. An auditor should expect that fair value is the price that would be received to sell an asset in an orderly
transaction between the market participants at the:
A. Acquisition date of the asset.
B. Audit report date.
C. Expected replacement date of the asset.
D. Measurement date (ordinarily the date of the financial statements).

Difficulty: Medium

33. Which of the following best describes the reason that auditors are concerned with the detection of related
party transactions?
A. The financial statements must often be adjusted for the effects of material related party transactions.
B. Material related party transactions must be disclosed in the notes to the financial statements.
C. The substance of related party transactions will differ from their form.
D. In a related party transaction one party has the ability to exercise significant influence over the other party.

Difficulty: Hard

34. Which of the following is not a basic procedure used in an audit?

A. Risk assessment procedures.
B. Substantive procedures.
C. Tests of controls.
D. Tests of direct evidence.

Difficulty: Medium
35. Which of the following is not a financial statement assertion relating to account balances?
A. Completeness
B. Existence.
C. Rights and obligations.
D. Valuation and allowances.

Difficulty: Hard

36. Which of the following is generally true about the sufficiency of audit evidence?
A. The amount of evidence that is sufficient varies inversely with the risk of material misstatement.
B. The amount of evidence concerning a particular account varies inversely with the materiality of the account.
C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the
account.
D. When evidence is appropriate with respect to an account it is also sufficient.

Difficulty: Hard

37. Which of the following is true about analytical procedures?

A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control.
C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the
reasonableness of specific account balances.
D. Analytical procedures are used in planning, as a substantive procedure for specific accounts, and in the final
review of the audited financial statements.

Difficulty: Medium
38. Which of the following is a basic approach often used by auditors to evaluate the reasonableness of
accounting estimates?
A. Confirmation.
B. Observation.
C. Reviewing subsequent events or transactions.
D. Analyzing corporate organizational structure.

Difficulty: Hard

39. An auditor is performing an analytical procedure that involves comparing a client's account balances over
time. This technique is referred to as:
A. Vertical analysis.
B. Horizontal analysis.
C. Cross-sectional analysis.
D. Comparison analysis.

Difficulty: Easy

40. An auditor is performing an analytical procedure that involves comparing a client's ratios with other
companies in the same industry. This technique is referred to as:
A. Vertical analysis.
B. Horizontal analysis.
C. Cross-sectional analysis.
D. Comparison analysis.

Difficulty: Easy

41. An auditor is performing an analytical procedure that involves developing common-size financial
statements. This technique is referred to as:
A. Vertical analysis.
B. Horizontal analysis.
C. Cross-sectional analysis.
D. Comparison analysis.

Difficulty: Easy
42. Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of
accounting estimates?
A. Confirmation of amounts.
B. Review of management's process of development.
C. Independent development of an estimate.
D. Review of subsequent events.

Difficulty: Medium

43. The audit time budget is an example of:

A. A supporting schedule.
B. An administrative working paper.
C. A lead schedule.
D. A corroborative working paper.

Difficulty: Easy

44. A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial
balance as a single amount, is referred to as a:
A. Supporting schedule.
B. Lead schedule.
C. Corroborating schedule.
D. Reconciling schedule.

Difficulty: Easy

45. Which of the following is not a function of working papers?

A. Provide support for the auditors' report.
B. Provide support for the accounting records.
C. Aid partners in planning and conducting future audits.
D. Document staff compliance with generally accepted auditing standards.

Difficulty: Easy
46. A schedule listing account balances for the current and previous years, and columns for adjusting and
reclassifying entries proposed by the auditors to arrive at the final amount that will appear in the financial
statement, is referred to as a:
A. Working trial balance.
B. Lead schedule.
C. Summarizing schedule.
D. Supporting schedule.

Difficulty: Easy

47. The auditors use analytical procedures during the course of an audit. The most important phase of
performing these procedures is the:
A. Vouching of all data supporting various ratios.
B. Investigation of significant variations and unusual relationships.
C. Comparison of client-computed statistics with industry data on a quarterly and full-year basis.
D. Recalculation of industry date.

Difficulty: Medium

48. The auditors must obtain written client representations that normally should be signed by:
A. The president and the chairperson of the board.
B. The treasurer and the internal auditor.
C. The chief executive officer and the chief financial officer.
D. The corporate counsel and the audit committee chairperson.

Difficulty: Easy
Source: AICPA

49. Which of the following ultimately determines the specific audit procedures necessary to provide
independent auditors with a reasonable basis for the expression of an opinion?
A. The audit time budget.
B. The auditors' judgment.
C. Generally accepted accounting quality standards.
D. The auditors' working papers.

Difficulty: Easy
Source: AICPA
50. Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily
mitigate by:
A. Performing substantive procedures.
B. Performing tests of controls.
C. Assessing control risk.
D. Obtaining a client representation letter.

Difficulty: Easy
Source: AICPA

51. An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office
building owned by a shareholder. This finding indicates the existence of:
A. Management fraud.
B. Related party transactions.
C. Window dressing.
D. Weak internal control.

Difficulty: Medium
Source: AICPA

52. Which of the following would not necessarily be considered a related party transaction?
A. Payment of a bonus to the president.
B. Purchases from another corporation that is controlled by the corporation's chief stockholder.
C. Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.

Difficulty: Easy
Source: AICPA

53. The date of the management representation letter should coincide with the:
A. Date of the auditor's report.
B. Balance sheet date.
C. Date of the latest subsequent event referred to in the notes to the financial statements.
D. Date of the engagement agreement.

Difficulty: Medium
Source: AICPA
54. An example of an analytical procedure is the comparison of:
A. Financial information with similar information regarding the industry in which the entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual population.
D. EDP generated data with similar data generated by a manual accounting system.

Difficulty: Medium
Source: AICPA

55. When considering the use of management's written representations as audit evidence about the completeness
assertion, an auditor should understand that such representations:
A. Complement, but do not replace, substantive procedures designed to support the assertion.
B. Constitute sufficient evidence to support the assertion when considered in combination with a moderate
assessed level of control risk.
C. Are generally sufficient audit evidence to support the assertion regardless of the assessed level of control
risk.
D. Replace the assessed level of control risk as evidence to support the assertions.

Difficulty: Medium
Source: AICPA

56. Which of the following expressions is least likely to be included in a client's representation letter?
A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the
financial statements.
B. The company has complied with all aspects of contractual agreements that would have a material effect on
the financial statements in the event of noncompliance.
C. Management acknowledges responsibility for illegal actions committed by employees.
D. Management has made available all financial statements, including notes.

Difficulty: Medium
Source: AICPA

57. Which of the following statements is generally correct about audit evidence?
A. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive
than information obtained indirectly from independent outside sources.
B. To be appropriate, audit evidence must be sufficient.
C. Accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified
opinion on financial statements.
D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

Difficulty: Easy
Source: AICPA
58. Which of the following statements relating to audit evidence is the most accurate statement?
A. Audit evidence gathered by an auditor from outside an enterprise is reliable.
B. Accounting data developed under satisfactory conditions of internal control are more relevant than data
developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. The auditor must obtain sufficient appropriate audit evidence.

Difficulty: Easy
Source: AICPA

59. Which of the following is not a typical analytical procedure?

A. Study of relationships of the financial information with relevant nonfinancial information.
B. Comparison of the financial information with similar information regarding the industry in which the entity
operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.

Difficulty: Medium
Source: AICPA

60. Which of the following is not a primary purpose of audit working papers?
A. To coordinate the examination.
B. To assist in preparation of the audit report.
C. To support the financial statements.
D. To provide evidence of the audit work performed.

Difficulty: Medium
Source: AICPA

61. Concerning retention of working papers, the Sarbanes-Oxley Act:

A. Has no provisions.
B. Requires permanent retention.
C. Requires retention for at least 7 years.
D. Requires retention for a period of 4 or less years.

Difficulty: Medium
62. During an audit engagement pertinent data are prepared and included in the audit working papers. The
working papers primarily are considered to be:
A. A client-owned record of conclusions reached by the auditors who performed the engagement.
B. Evidence supporting financial statements.
C. Support for the auditors' representations as to compliance with generally accepted auditing standards.
D. A record to be used as a basis for the following year's engagement.

Difficulty: Medium
Source: AICPA

63. Although the quantity, type, and content of working papers will vary with the circumstances, the working
papers generally would include the:
A. Copies of those client records examined by the auditor during the course of the engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the
audit.
C. Auditor's comments concerning the efficiency and competence of client management personnel.
D. Auditing procedures followed and the testing performed in obtaining audit evidence.

Difficulty: Medium
Source: AICPA

64. The permanent file section of the working papers that is kept for each audit client most likely contains:
A. Review notes pertaining to questions and comments regarding the audit work performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and controls.

Difficulty: Medium
Source: AICPA

65. Working papers that record the procedures used by the auditor to gather evidence should be:
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the books of account and the financial statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.

Difficulty: Easy
Source: AICPA
66. In general, which of the following statements is correct with respect to ownership, possession, or access to
working papers prepared by a CPA firm in connection with an audit?
A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in
litigation.
B. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions,
prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fee.
D. The working papers must be retained by the CPA firm for a period of ten years.

Difficulty: Easy
Source: AICPA

67. Confirmation would be most effective in addressing the existence assertion for the:
A. Addition of a milling machine to a machine shop.
B. Payment of payroll during regular course of business.
C. Inventory held on consignment.
D. Granting of a patent for a special process developed by the organization.

Difficulty: Medium
Source: AICPA

In preparing for an audit of the retail footwear division of a major retail organization, the auditor gathered the
following information about the organization's stores:
68. An auditor performs analytical procedures that involve comparing the gross margins of various divisional
operations with those of other divisions and with the individual division's performance in previous years. The
auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary
investigation and also notes that there were no changes in products, production methods, or divisional
management during the year. Based on the above information, the most likely cause of the increase in gross
margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the product.
C. An overstatement of year-end inventory.
D. An understatement of year-end accounts receivable.

Difficulty: Hard
Source: IIA

69. Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the
following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region?
I. The lower number of stores in the Mid-Central Region.
II. Sales employees are not as productive in generating sales as those in other regions.
III. The Mid-Central Region has a lower gross margin.
A. I only.
B. II only.
C. II and III only.
D. I, II and III.

Difficulty: Medium
Source: IIA

70. Based on the previous information, which of the following preliminary conclusions can the auditor use as a
basis for further investigations?
A. Sales per store are directly related to the size of the store.
B. Sale clerks are less productive in larger size stores.
C. Gross margin is directly related to the size of the store.
D. Average square feet of store correlates with the number of stores in the district.

Difficulty: Medium
Source: IIA
71. Which of the following statements is not correct regarding the auditor's further analysis?
A. The Mid-Central Region has fewer average full-time equivalent employees per store than the other regions
per store.
B. The other regions all generate higher sales per square foot than the Mid-Central Region.
C. The Mid-Central Region has the highest average wages per full-time equivalent employee.
D. The largest contributor to total corporate profits is the Southwest Region.

Difficulty: Medium
Source: IIA

72. Management has centralized purchasing and uses a model based upon previous year's sales with adjustments
for trends in the market place, e.g., the trend to more casual shoes. A staff auditor has suggested that the
centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region.
Which of the following would be the best single audit procedure to address the staff auditor's assertion?
A. Take a sample of receiving documents at stores and trace to purchase orders to determine the length of time
between the purchase and delivery of the goods.
B. Interview store managers in the Mid-Central Region to determine their attitude toward centralized
purchasing.
C. Perform an inventory count at selected stores in the Mid-Central Region and determine if adjustments are
needed to the perpetual records.
D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other
regions.

Difficulty: Hard
Source: IIA

73. What type of transactions ordinarily have high inherent risk because they involve management judgments or
assumptions in formulating accounting balances?
A. Estimation.
B. Nonroutine.
C. Qualified.
D. Routine.

Difficulty: Medium
74. Assertions with high inherent risk are least likely to involve:
A. Complex calculations.
B. Difficult accounting issues.
C. Routine transactions.
D. Significant judgment by management.

Difficulty: Medium

75. The date on which no information may be deleted from audit documentation is the
A. Client's year-end.
B. Documentation completion date.
C. Last date of significant fieldwork.
D. All of the above are incorrect in that no information may ever be deleted from audit documentation.

Difficulty: Medium

76. In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the
estimates are
A. Prepared in a satisfactory control environment.
B. Consistent with industry guidelines.
C. Based on verifiable objective assumptions.
D. Reasonable in the circumstances.

CHAPT 7 INTERNAL CONTROL

11. Which of the following matters would an auditor most likely consider to be a significant deficiency to be
communicated to the audit committee?
A. Management's failure to renegotiate unfavorable long-term purchase commitments.
B. Recurring operating losses that may indicate going concern problems.
C. Evidence of a lack of objectivity by those responsible for accounting decisions.
D. Management's current plans to reduce its ownership equity in the entity.

Difficulty: Medium
Source: AICPA
12. In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal
auditor:
A. Education levels.
B. Experience.
C. Organizational status within the company.
D. Training and supervisory skills.

Difficulty: Medium

13. In a financial statement audit performed following AICPA Professional Standards, how frequently must an
auditor test operating effectiveness of controls that appear to function as they have in past years and on which
the auditor wishes to rely upon in the current year?
A. Monthly.
B. Each audit.
C. At least every second audit.
D. At least every third audit.

Difficulty: Medium

14. After obtaining an understanding of internal control and arriving at a preliminary assessed level of control
risk, an auditor decided to perform tests of controls. The auditor most likely decided that:
A. Additional evidence to support a reduction in the assessed level of control risk is not available.
B. An increase in the assessed level of control risk is justified for certain financial statement assertions.
C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive
procedures.
D. There were many internal control deficiencies that would allow misstatements to enter the accounting
system.

Difficulty: Hard
Source: AICPA

15. Which of the following is least likely to be evidence of operating effectiveness of controls?
A. Cancelled supporting documents.
B. Confirmations of accounts receivable.
C. Records documenting usage of computer programs.
D. Signatures on authorization forms.

Difficulty: Hard
16. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal
control for planning purposes?
A. Checklist.
B. Flowchart.
C. Questionnaire.
D. Confirmation.

Difficulty: Easy

17. Tests of controls do not ordinarily address:

A. By whom a control was applied.
B. How a control was applied.
C. The consistency with which a control was applied.
D. The cost effectiveness of the way a control was applied.

Difficulty: Hard

18. Which is most likely when the assessed level of control risk increases?
A. Change from performing substantive procedures at year-end to an interim date.
B. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the
entity.
C. Use the maximum number of dual purpose tests.
D. Use larger sample sizes for substantive procedures.

Difficulty: Medium

19. Which of the following must the auditor communicate to the audit committee?
A. Significant deficiencies and material weaknesses.
B. Only significant deficiencies.
C. Only material weaknesses.
D. Neither significant deficiencies nor material weaknesses.

Difficulty: Medium
20. A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The
planned assessed level of control risk is at what level?
A. Zero.
B. Low.
C. Moderate.
D. Maximum.

Difficulty: Hard
21. Which of the following would be least likely to be regarded as a test of a control?
A. Tests of the additions to property by physical inspection.
B. Comparisons of the signatures on cancelled checks to the authorized check signer list.
C. Tests of signatures on purchase orders.
D. Recalculation of payroll deductions.

Difficulty: Hard

22. Which of the following is not considered one of the five major components of internal control?
A. Risk assessment.
B. Segregation of duties.
C. Control activities.
D. Monitoring.

Difficulty: Medium

23. Which of the following statements is correct concerning the understanding of internal control needed by
auditors?
A. The auditors must understand the information system, not the accounting system.
B. The auditors must understand monitoring and all preliminary accounting controls.
C. The auditors must have a sufficient understanding to assess the risks of material misstatement.
D. The auditors must understand the control environment, risk assessment, and all control activities.

Difficulty: Easy

24. The effectiveness of controls is not generally tested by:

A. Inspection of documents and reports.
B. Performance of analytical procedures.
C. Observation of the application of accounting policies and procedures.
D. Inquiries of appropriate client personnel.

Difficulty: Medium
25. On financial statement audits, it is required that the auditors obtain an understanding of internal control,
including:
A. Its operating effectiveness.
B. Whether it has been implemented (placed in operation).
C. Performing tests of controls for all material controls.
D. Its ability to provide reasonable assurance.

Difficulty: Medium

26. A significant deficiency:

A. Differs from a material weakness in that it involves internal control over operations rather than internal
control over financial reporting.
B. Involves an amount of discovered misstatements greater than the amount used as the planning measure of
materiality.
C. Is identical to a material weakness except that it need not be communicated to those responsible for oversight
of the company's financial reporting.
D. Is less severe than a material weakness.

Difficulty: Medium

27. This organization developed a set of criteria that provide management with a basis to evaluate controls not
only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with
laws and regulations:
A. Foreign Corrupt Practices Corporation.
B. Committee of Sponsoring Organizations.
C. Cohen Commission.
D. Financial Accounting Standards Board.

Difficulty: Medium

28. Which of the following is most likely to be considered a risk assessment procedure relating to internal
control?
A. Confirm accounts receivable.
B. Perform a test of a control relating to payroll.
C. Take test counts of the year-end inventory.
D. Trace a transaction through the information system relevant to financial reporting.

Difficulty: Hard
29. Which statement is correct concerning the definition of internal control developed by the Committee of
Sponsoring Organizations (COSO)?
A. Its applicability is largely limited to internal auditing applications.
B. It is recognized in the Statements on Auditing Standards.
C. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting.
D. It suggests that it is important to view internal control as an end product as contrasted to a process or means
to obtain an end.

Difficulty: Hard

30. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO)
includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations,
and:
A. Compliance with applicable laws and regulations.
B. Effectiveness of prevention of fraudulent occurrences.
C. Safeguarding of entity equity.
D. Incorporation of ethical business practice standards.

Difficulty: Medium

31. Which statement is correct concerning the relevance of various types of controls to a financial statement
audit?
A. An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used.
B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other
controls may also be relevant.
C. Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability
of financial reporting may also be relevant.
D. All controls are ordinarily relevant to an audit.

Difficulty: Hard

32. Which of the following is not a component of the control environment?

A. Integrity and ethical values.
B. Risk assessment.
C. Commitment to competence.
D. Organizational structure.

Difficulty: Medium
33. Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk
when an auditor is considering a client's risk assessment policies?
A. Salaried sales personnel.
B. Implementation of a new information system.
C. Rapid growth of the organization.
D. Corporate restructuring.

Difficulty: Medium

34. The Sarbanes-Oxley Act of 2002 requires that the audit committee:
A. Annually reassess control risk using information from the CPA firm.
B. Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm.
C. Require that the company's CPA firm rotate the partner in charge of the audit.
D. Review the level of management compensation.

Difficulty: Medium
35. When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed
level of control risk will:
A. Be less than the preliminary assessed level of control risk.
B. Equal the preliminary assessed level of control risk.
C. Equal the actual control risk.
D. Be less than the actual control risk.

Difficulty: Hard

36. Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that
anticipated in the audit plan?
A. The auditors have determined that controls have been implemented (placed in operation) but, in accordance
with the audit plan, have performed no tests of controls.
B. Certain controls do not leave a trail of documentary evidence.
C. Deviation rates were greater than zero and approached anticipated levels.
D. The operating effectiveness of certain controls was found to be less than expected, although no material
misstatements were identified.

Difficulty: Hard

37. The provisions of the Foreign Corrupt Practices Act apply to:
A. All U.S. corporations.
B. All U.S. corporations that engage in foreign operations.
C. All corporations that must file under the Securities Exchange Act of 1934.
D. All U.S. partnerships and corporations.

Difficulty: Medium

38. If the auditors do notperform tests of controls for certain assertions:

A. They have performed a substandard audit.
B. They are not required to communicate significant deficiencies relating to those accounts to management and
the board of directors.
C. They must issue a qualified opinion.
D. They must assess control risk at the maximum level for those assertions.

Difficulty: Medium
39. During financial statement audits, the auditors' consideration of their clients' internal control is integral to
both assess the risk of material misstatement and to:
A. Assess inherent risk.
B. Design further audit procedures.
C. Assess compliance with the Foreign Corrupt Practices Act.
D. Provide a reasonable basis for an opinion on compliance with applicable laws.

Difficulty: Easy

40. Which of the following comes closest to outlining the auditors' responsibility for considering internal
control in all financial statement audits?
A. An understanding of the control environment, information and communication, risk assessment and
monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is
performing tests of controls.
B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess
the risks of material misstatement for the audit.
C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum.
D. An understanding of the control environment is necessary, but no understanding of the other components is
necessary unless control risk is to be assessed at a level less than the maximum.

Difficulty: Medium

41. Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the
design of the relevant controls and to determine whether they have been implemented (placed in operation)?
A. Previous experience with the entity.
B. Inquiries of appropriate management personnel.
C. Performance of substantive procedures.
D. Inspection of document and records.

Difficulty: Medium

42. A control deficiency that is less severe than a material weakness, but important enough to merit attention by
those responsible for oversight of the company's financial reporting is referred to as a(n):
A. Control deficiency.
B. Inherent limitation.
C. Reportable deficiency.
D. Significant deficiency.

Difficulty: Medium
43. For effective internal control, which of the following functions should not be assigned to the company's
accounting department?
A. Reconciling accounting records with existing assets.
B. Recording financial transactions.
C. Signing payroll checks.
D. Preparing financial reports.

Difficulty: Medium

44. Which of the following is not a responsibility that should be assigned to a company's internal audit
department?
A. Evaluating internal control.
B. Approving disbursements.
C. Reporting on the effectiveness of operating segments.
D. Investigating potential merger candidates.

Difficulty: Hard

45. Which of the following is true about the auditors' consideration of internal control in a financial statement
audit?
A. The auditors must assess control risk at a level lower than the maximum.
B. The auditors must prepare a flowchart description of internal control for their working papers.
C. The auditors must obtain an understanding of the steps in processing major types of transactions.
D. The auditors must perform tests of controls.

Difficulty: Medium

46. Which of the following is an advantage of describing internal control through the use of a standardized
questionnaire?
A. Questionnaires highlight weaknesses in the system.
B. Questionnaires are more flexible than other methods of describing internal control.
C. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other
strengths in the system.
D. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of
describing internal control.

Difficulty: Medium
47. Which of the following is least likely to be considered a risk assessment procedure relating to internal
control?
A. Counting marketable securities at year-end.
B. Inquiries of client personnel.
C. Inspecting documents and reports.
D. Observing the application of specific controls.

Difficulty: Hard

48. Which of the following is least likely to be considered a risk assessment procedure?
A. Analytical procedures.
B. Inspection of documents.
C. Observation of the counting of inventory.
D. Observation of the performance of certain accounting procedures.

Difficulty: Hard

49. Which of the following is not a factor that is considered a part of the client's overall control environment?
A. The organizational structure.
B. The information system.
C. Management philosophy and operating style.
D. Board of directors.

Difficulty: Medium

50. Which of the following would be least likely to be considered a benefit of effective internal control?
A. Eliminating all employee fraud.
B. Restricting access to assets.
C. Detecting ineffectiveness.
D. Ensuring authorization of transactions.

Difficulty: Medium

51. After documenting the client's prescribed internal control, the auditors will often perform a walk-through of
each transaction cycle. An objective of a walk-through is to:
A. Verify that the controls have been implemented (placed in operation).
B. Replace tests of controls.
C. Evaluate the major strengths and weaknesses in the client's internal control.
D. Identify weaknesses to be communicated to management in the management letter.

Difficulty: Medium
52. The major components of internal control include all of the following, except:
A. Risk assessment.
B. The control environment.
C. Internal auditing.
D. Control activities.

Difficulty: Medium

53. Which of the following is correct with respect to control deficiencies discovered during an audit?
A. Auditors must communicate and recommend corrections relating to all material weaknesses in internal
control to management.
B. All material weaknesses in internal control should be reported to the audit committee.
C. All such matters must be communicated to the audit committee and regulatory agencies.
D. All control deficiencies are also significant deficiencies.

Difficulty: Hard

54. After considering the client's internal control the auditors have concluded that it is well designed and is
functioning as anticipated. Under these circumstances the auditors would most likely:
A. Cease to perform further substantive procedures.
B. Reduce substantive procedures in areas where the internal control was found to be effective.
C. Increase the extent of anticipated analytical procedures.
D. Perform all tests of controls to the extent outlined in the preplanned audit program.

Difficulty: Easy
Source: AICPA
55. The use of fidelity bonds protects a company from embezzlement loses and also:
A. Minimizes the possibility of employing persons with dubious records in positions of trust.
B. Reduces the company's need to obtain expensive business interruption insurance.
C. Allows the company to substitute the fidelity bonds for various parts of internal control.
D. Protects employees who made unintentional errors from possible monetary damages resulting from such
errors.

Difficulty: Medium
Source: AICPA
56. The independent auditors might consider the procedures performed by the internal auditors because:
A. They are employees whose work must be reviewed during substantive testing.
B. They are employees whose work might affect the independent auditors' work.
C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations.
D. Their degree of independence may be inferred by the nature of their work.

Difficulty: Medium
Source: AICPA

57. In the consideration of internal control, the operating effectiveness of controls is tested by:
A. Flowcharts verification.
B. Tests of controls.
C. Substantive procedures.
D. Decision tables.

Difficulty: Easy
Source: AICPA
58. The auditors who become aware of an internal control significant deficiency are required to communicate
this to the:
A. Client's legal counsel.
B. Compensation committee.
C. Audit committee.
D. Internal auditors.

Difficulty: Medium
Source: AICPA

59. A material weakness involves an amount that could result in a misstatement that is
A. Smaller than inconsequential.
B. Larger than inconsequential.
C. Tolerable.
D. Material.

Difficulty: Medium

60. At least what level of probability of a material misstatement is required for a control deficiency to be
considered a material weakness?
A. More than remote.
B. Probable.
C. Reasonable possibility.
D. Sufficient.

Difficulty: Medium
61. A situation in which the design or operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent or detect material misstatements on a timely
basis is referred to as a:
A. Control deficiency.
B. Material weakness.
C. Reportable condition.
D. Significant deficiency.

Difficulty: Medium
62. To provide for the greatest degree of independence in performing internal auditing functions, an internal
auditor most likely should report to the:
A. Financial vice-president.
B. Corporate controller.
C. Audit committee.
D. Corporate stockholders.

Difficulty: Medium
Source: AICPA

63. Well-designed internal control that is functioning effectively is most likely to detect an fraud arising from:
A. The fraudulent action of several employees.
B. The fraudulent action of an individual employee.
C. Informal deviations from the official organization chart.
D. Management fraud.

Difficulty: Medium
Source: AICPA

64. The program flowcharting symbol representing a decision is a:

A. Triangle.
B. Circle.
C. Rectangle.
D. Diamond.

Difficulty: Medium
Source: AICPA

65. Controls are not designed to provide assurance that:

A. Transactions are executed in accordance with management's authorization.
B. Fraud will be eliminated.
C. Access to assets is permitted only in accordance with management's authorization.
D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

Difficulty: Medium
Source: AICPA
66. The scope of substantive procedures as compared to the scope of tests of controls generally vary:
A. In a parallel manner.
B. Inversely.
C. Directly.
D. Equally.

Difficulty: Medium
Source: AICPA

67. Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of
misstatement requires special audit consideration?
A. Complex calculations are involved.
B. The rate of technological change is moderate in the industry.
C. The potential for fraud seems high.
D. Various subjective methods of application of a key accounting policy exist.

Difficulty: Easy

68. Which of the following audit tests would be regarded as a test of a control?
A. Tests of the specific items making up the balance in a given general ledger account.
B. Tests confirming receivables.
C. Tests of the signatures on canceled checks to board of director's authorizations.
D. Tests of the additions to property, plant, and equipment by physical inspection.

Difficulty: Medium
Source: AICPA

69. If the independent auditors decide that the work performed by the internal auditors may have a bearing on
their own procedures, they should consider the internal auditors':
A. Competence and objectivity.
B. Efficiency and experience.
C. Independence and review skills.
D. Training and supervisory skills.

Difficulty: Medium
Source: AICPA
70. In the consideration of internal control, the auditor is basically concerned that it provides reasonable
assurance that:
A. Management can not override the system.
B. Operational efficiency has been achieved in accordance with management plans.
C. Misstatements have been prevented or detected.
D. Controls have not been circumvented by collusion.

Difficulty: Medium
Source: AICPA

71. Which of the following is least likely to be considered an appropriate response relating to risks the auditors
identify at the financial statement level?
A. Assign more experienced staff.
B. Incorporate additional elements of unpredictability in the selection of audit procedures.
C. Increase the scope of auditor procedures.
D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

Difficulty: Easy

72. In assessing the competence of a client's internal auditor, an independent auditor most likely would consider
the
A. Internal auditor's compliance with professional internal auditing standards.
B. Client's policies that limit the internal auditor's access to management salary data.
C. Evidence supporting a further reduction in the assessed level of control risk.
D. Results of ratio analysis that may identify unusual transactions and events.

Difficulty: Medium
Source: AICPA

73. Which of the following factors would most likely be considered an inherent limitation to an entity's internal
control?
A. The complexity of the information processing system.
B. Human judgment in the decision making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.

Difficulty: Medium
Source: AICPA
74. Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both
A. Journalize cash receipts and disbursements and prepare the financial statements.
B. Monitor internal controls and evaluate whether the controls are operating as intended.
C. Adopt new accounting pronouncements and authorize the recording of transactions.
D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

Difficulty: Easy
Source: AICPA

75. Which of the following is intended to detect deviations from prescribed controls?
A. Substantive procedures specified by a standardized audit program.
B. Tests of controls designed specifically for the client.
C. Analytical procedures as set forth in an industry audit guide.
D. Computerized analytical procedures tailored for the configuration of the computer equipment in use.

Difficulty: Medium
Source: AICPA

76. An auditor's purpose for performing tests of controls is to provide reasonable assurance that:
A. Controls are operating effectively.
B. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is
minimized.
C. Transactions are executed in accordance with management's authorization and access to assets is limited by a
segregation of functions.
D. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity
with generally accepted accounting principles.

Difficulty: Medium
Source: AICPA
77. Of the following statements about internal control, which one is not valid?
A. No one person should be responsible for the custodial responsibility and the recording responsibility for an
asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost/benefit relationship, a client may apply control procedures on a test basis.
D. Control activities reasonably insure that collusion among employees can not occur.

Difficulty: Easy
Source: AICPA
78. Tests of controls are most likely to be performed when:
A. Controls seem weak and must be properly documented.
B. Inadequate substantive procedures exist to restrict audit risk to an acceptable level.
C. The auditor wishes to assess control risk at the maximum.
D. The client's control environment appears weak.

Difficulty: Hard

79. Which of the following would be least likely to be included in an auditor's tests of controls?
A. Inspection.
B. Observation.
C. Inquiry.
D. Analytical procedures.

Difficulty: Medium
Source: AICPA

80. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United
States:
A. All companies.
B. SEC registrants.
C. Only those companies included in the Fortune 500.
D. All nonpublic companies.

Difficulty: Medium
81. An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements
and:
A. Compliance with laws.
B. Internal control over asset safeguarding.
C. Internal control over financial reporting.
D. Suitable criteria.

Difficulty: Medium

82. A report on internal control performed in accordance with PCAOB Standard No. 2 includes an opinion on
internal control for:
A. The entire year.
B. The prior quarter.
C. The "as of date."
D. The end of each quarter.

Difficulty: Hard

83. When performing an audit of internal control under PCAOB requirements, auditors evaluate control:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium
84. When performing an internal control audit under PCAOB requirements, one or more material weaknesses
in internal control that exist at year-end may result in what type of report(s):

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Hard
85. When performing an internal control audit under PCAOB standards, one or more material weaknesses in
internal control that exist at year-end may result in what type of report(s):

A. Option A
B. Option B
C. Option C
D. Option D

CHAPT 6 Audit Planning, Understanding the Client, Assessing Risks, and RESPONSE

11. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. The prospective client has fired its prior auditor.
B. The CPA lacks a thorough understanding of the prospective client's operations and industry.
C. The CPA is unable to review the predecessor auditor's working papers.
D. The prospective client is unwilling to make financial records available to the CPA.

Difficulty: Medium
Source: AICPA

12. Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent
financial reporting?
A. Large amounts of liquid assets that are easily convertible into cash.
B. Low growth and profitability as compared to other entity's in the same industry.
C. Financial management's participation in the initial selection of accounting principles.
D. An overly complex organizational structure involving unusual lines of authority.

Difficulty: Hard
Source: AICPA

13. Which of the following factors would most likely cause a CPA to decide not to accept a new audit
engagement?
A. Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques.
B. Management's disregard for internal control.
C. The existence of related party transactions.
D. Management's attempt to meet earnings per share growth rate goals.

Difficulty: Hard
14. Which of the following matters is generally included in an auditor's engagement letter?
A. Limitations of the engagement.
B. Factors to be considered in establishing preliminary judgments about materiality.
C. Management's liability for illegal acts committed by its employees.
D. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.

Difficulty: Hard

15. Which of the following would heighten an auditor's concern about the risk of fraudulent financial
reporting?
A. Inability to generate positive cash flows from operations, while reporting large increases in earnings.
B. Management's lack of interest in increasing the dividend paid on common stock.
C. Large amounts of liquid assets that are easily convertible into cash.
D. Inability to borrow necessary capital without obtaining waivers on debt covenants.

Difficulty: Hard
Source: AICPA

16. To best test existence, an auditor would sample from the:

A. General Ledger to source documents.
B. General Ledger to the financial statements.
C. Source documents to the general ledger.
D. Source documents to journals.

Difficulty: Medium

17. The auditors' understanding established with a client should be established through a(an)
A. Oral communication with the client.
B. Written communication with the client.
C. Written or oral communication with the client.
D. Completely detailed audit plan.

Difficulty: Easy
18. Which of the following would be least likely to be considered an audit planning procedure?
A. Use an engagement letter.
B. Develop the overall audit strategy
C. Perform the risk assessment.
D. Develop the audit plan.

Difficulty: Medium

19. While assessing the risks of material misstatement auditors identify risks, relate risk to what could go
wrong, consider the magnitude of risks and
A. Assess the risk of misstatements due to illegal acts.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality levels.

Difficulty: Medium

20. Which of the following is correct concerning requirements about auditor communications about fraud?
A. Fraud that involves senior management should be reported directly to the audit committee regardless of the
amount involved.
B. All fraud with a material effect on the financial statements should be reported directly by the auditor to the
Securities and Exchange Commission.
C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through
use of an "emphasis of a matter" paragraph added to the audit report.
D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Difficulty: Hard

21. A predecessor auditor is required to attempt to initiate communication with the successor auditor:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Hard
22. Which measure of materiality (or both) considers quantitative considerations?

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium

23. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement
should not be accepted?
A. There are significant related party transactions that management claims occurred in the ordinary course of
business.
B. Internal control activities requiring the segregation of duties are subject to management override.
C. Management continues to employ an inefficient system of information technology to record financial
transactions.
D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Difficulty: Medium
Source: AICPA

24. In using the information on the statement of cash flows while obtaining an understanding of a profitable,
growing company, which of the following would ordinarily be least surprising to an auditor?
A. Decreases in accounts payable.
B. Decreases in accounts receivable.
C. Negative cash flows from investing.
D. Negative operating cash flows.

Difficulty: Hard
25. Audits of financial statements are designed to obtain reasonable assurance of detecting material
misstatements due to:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium
26. Which of the following is not one of the assertions made by management about an account balance?
A. Relevance.
B. Existence.
C. Valuation.
D. Rights and obligations.

Difficulty: Easy

27. When a company has changed auditors, according to the Professional Standards:
A. The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the
client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even
when aware of matters bearing on the integrity of management.
B. The predecessor must respond fully to all inquiries made by the successor auditor.
C. The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the
engagement.
D. The successor may choose not to attempt any communication with the predecessor auditor.

Difficulty: Hard

28. Which of the following procedures is not performed as a part of planning an audit engagement?
A. Reviewing the working papers of the prior year.
B. Performing analytical procedures.
C. Confirmation of all major accounts.
D. Designing an audit program.

Difficulty: Hard

29. The risk of a material misstatement occurring in an account, assuming an absence of internal control, is
referred to as:
A. Account risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.

Difficulty: Medium
30. Which of the following is least likely to be considered a financial statement audit risk factor?
A. Management operating and financing decisions are dominated by top management.
B. A new client with no prior audit history.
C. Rate of change in the entity's industry is rapid.
D. Profitability of the entity relative to its industry is inconsistent.

Difficulty: Hard

31. Which of the following is an example of fraudulent financial reporting?

A. Company management falsifies inventory count tags thereby overstating ending inventory and understating
cost of goods sold.
B. An employee diverts customer payments to his personal use, concealing his actions by debiting an expense
account, thus overstating expenses.
C. An employee steals inventor and the "shrinkage" is recorded in cost of goods sold.
D. An employee "borrows" tools from the company and neglects to return them; the cost is reported as a
miscellaneous operating expense.

Difficulty: Medium

32. Which of the following is most likely to be considered a risk factor relating to fraudulent financial
reporting?
A. Low turnover of senior management.
B. Extreme degree of competition within the industry.
C. Capital structure including various operating subsidiaries.
D. Sales goals in excess of any of the preceding three years.

Difficulty: Hard
33. Which of the following conditions identified during the audit increases the risk of employee fraud?
A. Large amounts of cash in the bank.
B. Existence of a mandatory vacation policy for employees performing key functions.
C. Inventory items of small size, but high value.
D. Presence of reconciling items on a client prepared year-end proof of cash.

Difficulty: Medium

34. Which of the following statements is accurate about "fraud risk factors" considered when conducting an
audit?
A. Factors whose presence indicates that fraud exists.
B. Factors whose presence often have been observed in circumstances where frauds have occurred.
C. Factors whose presence will require modification to planned audit procedures.
D. Factors obtained during the audit which lead to required communications with the audit committee.

Difficulty: Hard

35. Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when
significant risk is found to exist?
A. Apply increased professional skepticism about material transactions.
B. Increase the assessed level of detection risk.
C. Assign personnel with particular skill to areas of high risk.
D. Obtain increased evidence about the appropriateness of management's selection of accounting principles.

Difficulty: Medium

36. Which of the following is least likely to be required on an audit?

A. Evaluate the business rationale for significant, unusual transactions.
B. Make a legal determination of whether fraud has occurred.
C. Review accounting estimates for biases.
D. Test appropriateness of journal entries and adjustments.

Difficulty: Medium
37. Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing
the risks of material misstatement?

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Easy

38. Which of the following circumstances would an auditor most likely consider a risk factor relating to
misstatements arising from fraudulent financial reporting?
A. Several members of management have recently purchased additional shares of the entity's stock.
B. Several members of the board of directors have recently sold shares of the entity's stock.
C. The entity distributes financial forecasts to financial analysts that predict conservative operating results.
D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Difficulty: Medium
Source: AICPA

39. A successor auditor is required to attempt communication with the predecessor auditor prior to
A. Performing test of controls.
B. Testing beginning balances for the current year.
C. Making a proposal for the audit engagement.
D. Accepting the engagement.

Difficulty: Medium
Source: AICPA

40. If the business environment is experiencing a recession, the auditor most likely would focus increased
attention on which of the following accounts?
A. Purchase returns and allowances.
B. Allowance for doubtful accounts.
C. Common stock.
D. Noncontrolling interest of a subsidiary purchased during the year.

Difficulty: Hard
Source: AICPA
41. The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist
in an account balance when in fact such a misstatement does exist is referred to as:
A. Account risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.

Difficulty: Medium

42. Which of the following statements is correct regarding the auditor's determination of materiality?
A. The planning level of materiality should normally be the larger of the amount considered for the balance
sheet versus the income statement.
B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for
the various accounts.
C. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for
determining the planning level of materiality.
D. The amount used for the planning should equal that used for evaluation.

Difficulty: Hard

43. The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes
is:
A. The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of
the client's financial statements.
B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one
of the client's financial statements.
C. The auditors' preliminary estimate of the amount of misstatement that would be material to the client's
balance sheet.
D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

Difficulty: Medium

44. Which of the following topics is not normally included in an engagement letter?
A. The auditors' preliminary assessment of internal control.
B. The auditors' estimate of the fee for the engagement.
C. Limitations on the scope of the engagement.
D. A description of responsibility for the detection of fraud.

Difficulty: Hard
45. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
A. Only use certified public accountants on the engagement.
B. Place increased emphasis on the audit of objective transactions rather than subjective transactions.
C. Supervise members of the audit team less closely and rely more upon judgment.
D. Use less predictable audit procedures.

Difficulty: Hard

46. Which of the following is not an assertion that is made in the financial statements by management
concerning each major account balance?
A. Completeness.
B. Rights and obligations.
C. Legality.
D. Valuation.

Difficulty: Easy

47. Tests for unrecorded assets typically involve tracing from:

A. Source documents to recorded journal entries.
B. Source documents to observations.
C. Recorded journal entries to documents.
D. Recorded journal entries to observations.

Difficulty: Hard

48. Tracing from source documents forward to ledgers is most likely to address which assertion related to
posted entries:
A. Completeness.
B. Existence.
C. Rights.
D. Valuation.

Difficulty: Hard
49. Determining that receivables are presented at net-realizable value is most directly related to which
management assertion?
A. Existence.
B. Rights.
C. Valuation.
D. Presentation and disclosure.

Difficulty: Medium

50. Which of the following is not a general objective for the audit of asset accounts?
A. Establishing existence of assets.
B. Establishing proper valuation of assets.
C. Establishing proper liabilities relating to assets.
D. Establishing the completeness of assets.

Difficulty: Medium

51. Which of the following is not used by auditors to establish the completeness of recorded assets?
A. Assessing control risk.
B. Tracing from source documents to entries in the accounting records.
C. Performing analytical procedures.
D. Vouching transactions.

Difficulty: Hard

52. To test for unsupported entries in the journals, the direction of audit testing should be to the:
A. Ledger entries.
B. Journal entries.
C. Original source documents.
D. Financial statements.

Difficulty: Hard

53. A form filed with the SEC when a company changes auditors is a:
A. Form 8-K.
B. Form 10-K.
C. Form S-1.
D. Form B-1.

Difficulty: Medium
54. Which of the following is least likely to render material a quantitatively small misstatement material?
A. Affects the registrant's compliance with regulatory requirements.
B. Masks a change in earnings or other trends.
C. Arises from an item not capable of precise measurement.
D. The Transaction involves a related party.

Difficulty: Hard

55. A successor auditor has accepted an engagement that was previously performed by a predecessor auditor
and, prior to accepting the engagement, has communicated with the predecessor. When the successor believes
that the predecessor has performed satisfactory previous audits, which of the following is correct?
A. A second communication is required and must include details of previous audits.
B. Ordinarily the successor auditors may be able to accept the opening balances of the current year with a
minimum of verification work.
C. Absent ongoing litigation, a predecessor must provide all working papers requested by the predecessor.
D. The client should be informed of the need to perform a detailed audit of all opening balances.

Difficulty: Hard

56. The first standard of field work recognizes that early appointment of the independent auditors has many
advantages to the auditors and the client. Which of the following advantages is least likely to occur as a result of
early appointment of the auditors?
A. The auditors will be able to plan the audit work so that it may be done expeditiously.
B. The auditors will be able to complete substantive procedures prior to year-end.
C. The auditors will be able to better plan for the observation of the physical inventories.
D. The auditors will be able to perform the examination more efficiently and will be finished at an early date
after the year-end.

Difficulty: Medium
Source: AICPA

57. Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the
auditors. The best place to set forth these arrangements is in:
A. A memorandum to be placed in the permanent section of the auditing working papers.
B. An engagement letter.
C. A client representation letter.
D. A confirmation letter attached to the constructive services letter.

Difficulty: Easy
Source: AICPA
58. The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the
auditors. Which of the following would be the most useful source of information for the auditors during the
preliminary planning stage when they are trying to obtain a general understanding of audit problems that might
be encountered?
A. Client manuals of accounts and charts of accounts.
B. AICPA Industry Audit Guides.
C. Prior-year working papers of the predecessor auditors.
D. Latest annual and interim financial statements issued by the client.

Difficulty: Hard
Source: AICPA

59. The auditors will not ordinarily initiate discussion with the audit committee concerning the:
A. Extent to which the work of internal auditors will influence the scope of the examination.
B. Extent to which change in the company's organization will influence the scope of the examination.
C. Details of potential problems which the auditors believe might cause a qualified opinion.
D. Details of the procedures which the auditors intend to apply.

Difficulty: Hard
Source: AICPA

60. Which statement is correct relating to a potential successor auditor's responsibility for communicating with
the predecessor auditors in connection with a prospective new audit client?
A. The successor auditors have no responsibility to contact the predecessor auditors.
B. The successor auditors should obtain permission from the prospective client to contact the predecessor
auditors.
C. The successor auditors should contact the predecessors regardless of whether the prospective client
authorizes contact.
D. The successor auditors need not contact the predecessors if the successors are aware of all available relevant
facts.

Difficulty: Medium
Source: AICPA

61. Which of the following situations would most likely require special audit planning by the auditors?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client's tax return differ from those used on the books.
C. Assets costing less than $500 are expensed even though the expected life exceeds one year.
D. Inventory is comprised of precious stones.

Difficulty: Medium
Source: AICPA
62. When planning an audit, an auditor should:
A. Consider whether the extent of substantive procedures may be reduced based on the results of the internal
control questionnaire.
B. Make preliminary judgments about materiality levels for audit purposes.
C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them.
D. Prepare a preliminary draft of the management representation letter.

Difficulty: Medium
Source: AICPA

63. 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.

Difficulty: Medium
Source: AICPA

64. With respect to the auditor's planning of a year-end audit, which of the following statements is always true?
A. An engagement should not be accepted after the fiscal year-end.
B. An inventory count must be observed at the balance sheet date.
C. The client's audit committee should not be told of any specific audit procedures which will be performed.
D. It is an acceptable practice to carry out parts of the examination at interim dates.

Difficulty: Medium
Source: AICPA

65. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of
the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on
Hawkins' decision concerning the:
A. Adequacy of the preplanned audit program.
B. Ability to establish consistency in application of accounting principles between years.
C. Apparent scope limitation.
D. Integrity of management.

Difficulty: Medium
Source: AICPA
66. The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In
regard to minimizing this risk, the auditor primarily relies on:
A. Substantive procedures.
B. Tests of controls.
C. Internal control.
D. Statistical analysis.

Difficulty: Easy
Source: AICPA

67. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales
and inventories would most likely be identified in the planning phase of the audit by the use of:
A. Tests of transactions and balances.
B. An assessment of internal control.
C. Specialized audit programs.
D. Analytical procedures.

Difficulty: Easy
Source: AICPA

68. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding the predecessor's:
A. Awareness of the consistency in the application of generally accepted accounting principles between
accounting periods.
B. Evaluation of all matters of continuing accounting significance.
C. Opinion of any subsequent events occurring since the predecessor's audit report was issued.
D. Understanding as to the reasons for the change of auditors.

Difficulty: Medium
Source: AICPA
69. Which of the following is least likely to be included in an auditor's inquiry of management while obtaining
information to identify the risks of material misstatement due to fraud?
A. Are all financial reporting operations at one location?
B. Does it have knowledge of fraud or suspect fraud?
C. Does it have programs to mitigate fraud risks?
D. Has it reported to the audit committee the nature of the company's internal control?

Difficulty: Hard

70. An auditor selects a sample from the file of shipping documents to determine whether invoices were
prepared. This test is performed to satisfy the audit objective of:
A. Accuracy.
B. Completeness.
C. Control.
D. Existence.

Difficulty: Hard
Source: AICPA

71. Individuals who commit fraud are ordinarily able to rationalize the act and also have an:

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Easy
72. Which of the following is not a required source of information for the auditors' assessment of fraud risk?
A. Discussion among audit team members.
B. Fraud risk factors.
C. Results of tests of controls.
D. Inquiry of management and others.

Difficulty: Medium

73. Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the
following is not a procedure required to further address the fraud risk of management override of internal
control?
A. Reviewing accounting estimates for biases.
B. Examining physical controls over assets.
C. Evaluating the business rationale for significant unusual transactions.
D. Examining journal entries and other adjustments for evidence of fraud.

CHAPT 9 Audit Sampling

11. Using the difference estimation technique, estimated total audited value of the population is:
A. $100,000.
B. $120,000.
C. $140,000.
D. $144,000

Difficulty: Medium

12. Using the ratio estimation technique, the estimated total audited value of the population is:
A. $100,000.
B. $120,000.
C. $140,000.
D. $144,000

Difficulty: Medium

13. Using the mean-per-unit estimation technique, the estimated total audited value of the population is:
A. $100,000.
B. $120,000.
C. $140,000.
D. $144,000.

Difficulty: Medium
14. Using the mean-per-unit estimation method an auditor has properly calculated the estimated total audited
value of a population as $200,000. Her sample included 200 of the population's 40,000 items. She found that, in
her sample the average audited value was $1 less than the average book value. What was the average audited
value in the sample?
A. $4.
B. $5.
C. $6.
D. $10.

Difficulty: Hard

15. Using difference estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that
population has a book value of $200,000. She found that in her sample the average audited value was $4.20,
while the average book value was $5.20. What is the estimated total audited value of the population?
A. $160,000.
B. $161,538.
C. $168,000.
D. $200,000.

Difficulty: Medium

16. Using ratio estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that
population has a book value of $200,000. She found that in her sample the average audited value was $4.20,
while the average book value was $5.20. What is the estimated total audited value of the population?
A. $160,000.
B. $161,538.
C. $168,000.
D. $200,000.

Difficulty: Medium
17. Using mean-per-unit estimation, an auditor has taken a sample of 200 from a population's 40,000 items;
that population has a book value of $200,000. She found that in her sample the average audited value was
$4.20, while the average book value was $5.20. What is the estimated total audited value of the population?
A. $160,000.
B. $161,538.
C. $168,000.
D. $200,000.

Difficulty: Medium

18. If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is
$9,000, what would an auditor likely conclude?
A. Since the projected misstatement is less than the tolerable misstatement, the account is not misstated.
B. Since the projected misstatement is less than the tolerable misstatement, the account is misstated.
C. The risk is high that the account is materially misstated.
D. The analysis has been improperly performed since the projected misstatement is unequal to the tolerable
misstatement.

Difficulty: Hard

19. A dual purpose test simultaneously.

A. Addresses two different accounts.
B. Functions as a substantive test and as a test of controls.
C. Functions as an analytical procedure and a substantive test.
D. Substantiates an ending balance and the transactions making up the balance.

Difficulty: Medium

The 1000 accounts receivable of Winco Company have a total book value of $20,000 (Average book value =
$20). Bob Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:
1. Book value of $19.
2. Audited value of $19.60.
20. What is the estimated total audited value using mean per unit sampling?
A. $19,000.
B. $19,600.
C. $20,000.
D. $20,632.

Difficulty: Medium

21. What is the estimated total audited value using difference estimation sampling?
A. $19,387.
B. $19,400.
C. $19,600.
D. $20,600.

Difficulty: Hard

22. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and
decreasing the risk of assessing control risk too low would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.

Difficulty: Hard

23. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and
increasing the estimated population deviation rate would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.

Difficulty: Hard
24. An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

Difficulty: Medium

25. Which of the following is not generally used for selecting samples?
A. Random number tables.
B. Random number generators.
C. Physical representation numbers.
D. Systematic selection.

Difficulty: Easy

26. In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This
year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain
the same, which of the following is true regarding the relationship between this year's sample size compared to
last year's sample size?
A. This year's sample is larger than last year's sample.
B. This year's sample is smaller than last year's sample.
C. This year's sample is equal to last year's sample.
D. This year's sample is indeterminate in relation to last year's sample.

Difficulty: Medium

27. The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in
conformity with random selection procedures:
A. Need not consider the risk of assessing control risk too low.
B. Has committed a nonsampling error.
C. Will have to use discovery sampling techniques to evaluate the results.
D. Should compare the deviation rate of the sample to the tolerable rate.

Difficulty: Medium
28. When performing tests of controls over authorization of cash receipts, which of the following sampling
methods would be most appropriate?
A. Attributes.
B. Ratio.
C. Stratified.
D. Variables.

Difficulty: Easy

29. Which of the following statistical sampling techniques involves taking samples in a series of stages?
A. Systematic sampling.
B. Sequential sampling.
C. Continuous sampling.
D. Multiple location sampling.

Difficulty: Easy

30. Which of the following is generally not true about statistical sampling as compared to nonstatistical
sampling?
A. Statistical samples are more representative of the population.
B. Statistical sample plans involve additional costs of evaluation.
C. Statistical sampling allows a more objective evaluation of sample results.
D. Statistical sampling may assist the auditors in designing more efficient samples.

Difficulty: Medium

31. When using statistical sampling, which of the following need not be known to evaluate the results of an
attributes sample?
A. Sample size.
B. Risk of assessing control risk too low.
C. Number of deviations in the population.
D. Number of deviations found in the sample.

Difficulty: Easy
32. When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that:
A. Designing efficient samples is more difficult.
B. The costs of training staff may be higher.
C. Sampling without replacement must be used.
D. Objectively evaluating results is impossible.

Difficulty: Easy

33. Changing from a sampling plan using random selection with replacement to random selection without
replacement has what effect on the required sample size?
A. Increases.
B. Decreases
C. No effect.
D. An indeterminate effect.

Difficulty: Medium

34. When the auditors have chosen to test a control, what relationship will the tolerable rate normally have
when compared to the expected rate of deviations in the sample?
A. Exceed.
B. Equal.
C. Be less than.
D. Indefinite.

Difficulty: Hard

35. Increases in the planned allowance for sampling risk have what effect on required sample size?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

Difficulty: Medium
36. When using sampling for tests of controls, which of the following audit consequences may follow?
A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be
assessed too low.
B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be
assessed too high.
C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the
audit is likely to be faulty because of reduced substantive tests.
D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively,
control risk will be assessed too low.

Difficulty: Hard

37. The auditors expect a population deviation rate of billing errors of two percent, and have established a
tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified sequential sampling.
C. Discovery sampling.
D. None, as sampling does not seem appropriate in this situation.

Difficulty: Easy

38. The auditors expect a population deviation rate of billing errors of eight percent, and have established a
tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified random sampling.
C. Variables sampling.
D. None, as sampling does not seem appropriate in this situation.

Difficulty: Medium

39. Which of the following may be used to reduce the risk of nonsampling errors?
A. Increasing the size of audit samples.
B. Stratifying audit samples.
C. Adequately planning audit samples.
D. Using statistical sampling techniques.

Difficulty: Medium
40. Which of the following types of risk is of critical importance to auditors in performing tests of controls?
A. The risk of assessing control risk too low.
B. The risk of assessing control risk too high.
C. The risk of incorrect acceptance.
D. The risk of incorrect rejection.

Difficulty: Medium

41. The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data
processing procedure is described as a:
A. Statistical error.
B. Sampling misstatement.
C. Standard error of the mean.
D. Nonsampling error.

Difficulty: Easy

42. What effect does obtaining a sample with a standard deviation larger than that estimated during planning
have on the adjusted allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

Difficulty: Hard
The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has
selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100
accounts in the sample is $1,875.

43. Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts
receivable balance would be:
A. $37,500
B. $38,462
C. $38,500
D. $41,600

Difficulty: Medium
44. Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable
balance would be:
A. $37,500
B. $38,462
C. $38,500
D. $41,600

Difficulty: Hard

45. Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts
receivable balance would be:
A. $37,500
B. $38,462
C. $38,500
D. $41,600

Difficulty: Hard

46. The 3000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has
selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference
estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for
the entire population. The audited value of Smith's sample is:
A. $1,700
B. $1,800
C. $1,900
D. $2,300

Difficulty: Hard

47. The 3000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has
selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference
estimation technique, Smith has properly estimated a projected misstatement of a $9,000 overstatement for the
entire population. The estimated total audited value of the population is:
A. $51,000
B. $58,000
C. $60,000
D. $69,000

Difficulty: Medium
48. The 4000 accounts receivable of GHI Company have a total book value of $60,000. Bob Smith, CPA, has
selected and audited a sample of 100 accounts with a total book value of $1,600. Using the mean-per-unit
estimation technique, Smith has properly estimated a projected misstatement of a $8,000 overstatement for the
entire population. The audited value of Smith's sample is:
A. $1,300
B. $1,400
C. $1,600
D. $1,800

Difficulty: Hard

49. Which of the following is a correct statement with respect to evaluating results when using nonstatistical
sampling for substantive tests?
A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the
population is not misstated.
B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material
misstatement.
C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no
misstatements exist in the account.
D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will
generally conclude that the population is materially misstated.

Difficulty: Medium

50. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000
and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted
allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be
$650,000. Based on these results, the auditor would:
A. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that the
population does not contain a material misstatement.
B. Because the total audited value ± tolerable misstatement includes the book value, conclude that the
population does not contain a material misstatement.
C. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that there is
too great a risk that the account balance is materially misstated.
D. Because the total audited value ± adjusted allowance for sampling risk does not include the book value,
conclude that there is too great a risk that the account balance is materially misstated.

Difficulty: Hard
51. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000
and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted
allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be
$640,000. The projected misstatement based on this sample is:
A. $ 5,000
B. $45,000
C. $60,000
D. $70,000

Difficulty: Medium

52. The auditors have audited a sample with a standard deviation of audited values larger than they had
originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level
without increasing the size of the sample, which of the following statements is correct?
A. The adjusted allowance for sampling risk will be smaller than had been planned.
B. The adjusted allowance for sampling risk will be larger than had been planned.
C. The risk of incorrect rejection will necessarily decrease.
D. The size of the population must be decreased.

Difficulty: Hard

53. In the past, the auditors have found that the book value of a receivable account has been related to the
amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small
misstatements). Which of the following techniques is most likely to be efficient?
A. Mean-per-unit estimation.
B. Ratio estimation.
C. Difference estimation.
D. Sequential sampling estimation.

Difficulty: Medium

54. Which of the following statements is correct concerning the use of nonstatistical sampling for substantive
tests?
A. Its use is generally acceptable only for populations with an immaterial book value.
B. It requires the use of structured sample size selection techniques to be acceptable.
C. It may be especially useful in circumstances in which the combination of inherent and control risk is at the
maximum level.
D. Results will be projected to the population.

Difficulty: Medium
55. Which of the following situations will result in the auditors concluding that the risk of material misstatement
is too high when using nonstatistical sampling for substantive tests?
A. The projected misstatement exceeds the tolerable misstatement.
B. The allowance for sampling risk exceeds the projected misstatement.
C. The risk of incorrect acceptance exceeds the risk of incorrect rejection.
D. The tolerable misstatement exceeds the sample net misstatement.

Difficulty: Hard

56. During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of
$30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this
change?
A. A decrease in population standard deviation.
B. An increase in sample standard deviation.
C. An increase in required sample size.
D. A decrease in the required sample size.

Difficulty: Medium

57. Which of the following is an advantage of systematic selection over random number selection?
A. It provides a stronger basis for statistical conclusions.
B. It enables the auditor to use the more efficient "sampling with replacement" tables.
C. There may be correlation between the location of items in the population, the feature of sampling interest,
and the sampling interval.
D. It does not require establishment of correspondence between random numbers and items in the population.

Difficulty: Medium
Source: AICPA

58. Statistical sampling generally may be applied to test internal control when the client's internal control
procedures:
A. Depend primarily on appropriate segregation of duties.
B. Are carefully reduced to writing and are included in client accounting manuals.
C. Leave an audit trail in the form of evidence of compliance.
D. Enable the detection of material fraud in the accounting records.

Difficulty: Medium
Source: AICPA
59. Which of the following statements is correct about the sample size in statistical sampling when testing
internal controls?
A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining
sample size.
B. As the likely rate of deviation decreases, the auditor should increase the planned sample size.
C. The allowable risk of assessing control risk too low has no effect on the planned sample size.
D. Of all the factors to be considered, the population size has the greatest effect on the sample size.

Difficulty: Medium
Source: AICPA

60. To determine sample size in an attribute sampling application, what must be specified?
A. Population mean, expected error rate, allowance for sampling risk.
B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation.
C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.
D. Population mean, standard deviation, allowance for sampling risk.

Difficulty: Hard
Source: IIA

61. The tolerable deviation rate in sampling for tests of controls is:
A. Used to determine the probability of the auditor's conclusion based upon reliance factors.
B. The probability that the financial statements are not materially in error.
C. A measure of the reliability of substantive tests.
D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

Difficulty: Easy

62. In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected
customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance
is overstated. This is an example of:
A. Projected misstatement.
B. Sampling error.
C. Standard error.
D. Nonsampling error.

Difficulty: Medium
Source: IIA
63. An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From
experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In
using statistical sampling, the auditor's best course of action is to:
A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage.
B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of shrinkage.
C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed
separately.
D. Continue to draw new samples until a sample is drawn which includes none of the items known to be subject
to large amounts of shrinkage.

Difficulty: Hard
Source: IIA

64. If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable
rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would
cause the required sample size to:
A. Increase.
B. Remain the same.
C. Decrease.
D. Change by 4%.

Difficulty: Hard
Source: AICPA

65. Which of the following factors does an auditor need to consider in planning a particular audit sample for a
test of control?
A. Number of items in the population.
B. Total dollar amount of the items to be sampled.
C. Acceptable level of risk of assessing control risk too low.
D. Tolerable misstatement.

Difficulty: Medium
Source: AICPA

66. When using a statistical sampling plan, the auditors would probably require a smaller sample if the:
A. Population increases.
B. Desired allowance for sampling risk decreases.
C. Desired risk of incorrect acceptance increases.
D. Expected deviation rate increases.

Difficulty: Medium
Source: AICPA
67. Which of the following statements is correct concerning statistical sampling in tests of controls?
A. The population size has little effect on determining sample size except for very small populations.
B. The expected population deviation rate has little or no effect on determining sample size except for very
small populations.
C. As the population size doubles, the sample size also should double.
D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate
decreases.

Difficulty: Medium
Source: AICPA

68. An advantage of using statistical sampling techniques is that such techniques:

A. Mathematically measure risk.
B. Eliminate the need for judgmental decisions.
C. Define the values of allowance for sampling risk and tolerable misstatement required to provide audit
satisfaction.
D. Have been established in the courts to be superior to judgmental sampling.

Difficulty: Medium
Source: AICPA

69. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate
to the:
A. Efficiency of the audit.
B. Effectiveness of the audit.
C. Selection of the sample.
D. Audit quality controls.

Difficulty: Medium
Source: AICPA

70. When performing a test of a control over cash disbursements, a CPA may use a systematic sampling
technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that
the items in the population:
A. Must be recorded in a systematic pattern before the sample can be drawn.
B. May occur in a systematic pattern and destroy the sample randomness.
C. May systematically occur more than once in the sample.
D. Must be systematically replaced in the population after sampling.

Difficulty: Easy
Source: AICPA
71. While performing a substantive test of details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not
materially misstated. This situation illustrates the risk of:
A. Incorrect acceptance.
B. Incorrect rejection.
C. Assessing control risk too high.
D. Assessing control risk too low.

Difficulty: Medium
Source: AICPA

72. An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's
control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider
the reasons for this limitation and:
A. Evaluate the results as if the sample size had been 19.
B. Treat the missing check as a deviation for the purpose of evaluating the sample.
C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not.
D. Choose another check to replace the missing check in the sample.

Difficulty: Medium
Source: AICPA

73. There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical
estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to
"quantities" and "occurrence rate", respectively, are:
A. Attributes and variable.
B. Variables and attributes.
C. Constants and attributes.
D. Constants and variables.

Difficulty: Easy
Source: AICPA

74. Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of
interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor may fail to recognize deviations in the documents examined for the chosen sample.
D. The documents related to the chosen sample may not be available for inspection.

Difficulty: Easy
Source: AICPA
75. Which of the following statistical selection techniques is least desirable for use by an auditor?
A. Systematic selection.
B. Stratified selection.
C. Block selection.
D. Sequential selection.

Difficulty: Medium
Source: AICPA

76. Various factors influence the sample size for a substantive test of details of an account balance. All other
factors being equal, which of the following would lead to a larger sample size?
A. Lower assessment of control risk.
B. Greater reliance on analytical procedures.
C. Smaller expected frequency of misstatements.
D. Smaller measure of tolerable misstatement.

Difficulty: Hard
Source: AICPA

77. An important statistic to consider when using a statistical sampling audit plan is the population variability.
The population variability is measured by the:
A. Sample mean.
B. Standard deviation.
C. Standard error of the sample mean.
D. Estimated population total minus the actual population total.

Difficulty: Easy
Source: AICPA

78. In variables estimation sampling, the sample standard deviation is used to calculate the
A. Point estimate of central tendency.
B. Tainting of the sample interval.
C. Risk of incorrect acceptance.
D. Adjusted allowance for sampling risk.

Difficulty: Easy
Source: AICPA
79. Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when:
A. The total book value is known and corresponds to the sum of all the individual book values.
B. A book value for each sample item is unknown.
C. There are some observed differences between audited values and book values.
D. The audited values are nearly proportional to the book value.