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CEBU CPAR CENTER

Mandaue City, Cebu

AUDITING THEORY PREWEEK LECTURE Glossary of Terms

1. The series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. a. Computer information system c. Accounting system b. Internal control system d. Control en ironment !. The measure of the "uality of audit e idence and its rele ance to a particular assertion and its reliability. a. #ufficiency c. #ignificance b. Appropriateness d. Assurance $. It ser es as a set of instructions to assistants in ol ed in the audit and as a means to control the proper e%ecution of the work. a. Audit program c. &ngagement letter b. ' erall audit plan d. Internal control "uestionnaire (. )etection risk is a. The risk that the auditor gi es an inappropriate audit opinion when the financial statements are materially misstated. b. The risk that a misstatement, that could occur in an account balance or class of transactions and that could be material indi idually or when aggregated with misstatements in other balances or classes, will not be pre ented or detected and corrected on a timely basis by the accounting and internal control systems. c. The risk that an auditor*s substanti e procedures will not detect a misstatement that e%ists in an account balance or class of transactions that could be material, indi idually or when aggregated with misstatements in other balances or classes. d. The susceptibility of an account balance or class of transactions to misstatement that could be material, indi idually or when aggregated with misstatements in other balances of classes, assuming that there were no related internal controls. +. Tolerable error means a. An error that arises from an isolated e ent that has not recurred other than on specifically identifiable occasions and is therefore not representati e of errors in the population. b. An error that the auditor e%pects to be present in the population. c. The ma%imum error in a population that the auditor is willing to accept. d. The possibility that the auditor*s conclusion, based on a sample may be different from the conclusion reached if the entire population were sub,ected to the same audit procedure. -. The current period.s auditor who did not audit the prior period.s financial statements is called a. /redecessor auditor. c. Incoming auditor. b. 'ther auditor. d. /rincipal auditor 0. /rincipal auditor is a. The auditor who audited and reported on the prior period*s financial statements and continues as the auditor for the current period. b. A current period*s auditor who did not audit the prior period*s financial statements. c. The auditor who was pre iously the auditor of an entity and who has been replaced by an incoming auditor. d. The auditor with responsibility for reporting on the financial statements of an entity when those financial statements include financial information of one or more components audited by another auditor. 1. They are not presented as complete financial statements capable of standing alone, but are an integral part of the current period. a. Corresponding figures c. #upplementary report b. Comparati e financial statements d. 2otes of financial statements 3. The applications of auditing procedures using the computer as an audit tool refer to a. Integrated test facility c. Auditing through the computer b. )ata4based management system d. Computer assisted audit techni"ues

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15. A collection of files that is shared and used by a number of different users. a. )atabase c. Master file b. Information file d. Transaction file 11. A report, separate from the financial statements, in which an entity pro ides third parties with "ualitati e information on the entity*s commitments towards the en ironmental aspects of the business, its policies and targets in that field, its achie ement in managing the relationship between its business processes and en ironmental risk, and "uantitati e information on its en ironmental performance. a. &n ironmental performance report c. &n ironmental risk b. Annual report d. #pecial purpose audit report 1!. Comprises officers and others who also perform senior managerial functions. a. Management c. Audit committee b. Go ernance d. 6oard of directors 1$. It e%ists when other information contradicts information contained in the audited financial statements. a. Material inconsistency c. Material weaknesses b. Material misstatement of fact d. Misstatement 1(. The policies and procedures adopted by a firm to pro ide reasonable assurance that all audits done by the firm are being carried out in accordance with the 'b,ecti e and General /rinciples Go erning an Audit of 7inancial #tatements. a. Internal controls c. /eer re iew b. 8uality controls d. General controls 1+. 9hen an entity has the ability to control the other entity or e%ercise significant influence o er the other entity in making financial and operating decisions manifest: a. ;elated parties c. )ecentrali<ation b. ;elated ser ices d. Centrali<ed operations 1-. ;efers to the audit procedures deemed necessary in the circumstances to achie e the ob,ecti e of the audit. a. #cope of an audit c. Audit program b. #cope of a re iew d. #cope limitation 10. It relates to materiality of the financial statement assertions affected by the computer processing. a. Threshold c. Comple%ity b. ;ele ance d. #ignificance 11. A report issued in connection with the independent audit of financial information other than an auditor*s report on financial statements. a. #pecial purpose auditor*s report c. Annual report b. Compilation report d. Modified auditor.s report 13. #ubstanti e procedures are tests performed to obtain audit e idence to detect material misstatements in the financial statements. These include a. Test of details of transactions c. #ubstanti e analytical procedures b. Test of details of balances d. All of the abo e. !5. In ol es tracing a few transactions through the accounting system. a. Test of controls c. Analytical procedures b. 9alk4through test d. #ubstanti e procedures ' er iew of auditing =Related PSAs : /#A 155, 1!5, !55 and -15> !1. Assurance ser ices are best described as a. #er ices designed for the impro ement of operations, resulting in better outcomes. b. Independent professional ser ices that impro e the "uality of information, or its conte%t, for decision makers. c. The assembly of financial statements based on assumptions of a reasonable party. d. #er ices designed to e%press an opinion on historical financial statements based on the results of an audit.

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!!. Assurance ser ices least likely in ol e a. Impro ing the "uality of information for decision purposes. b. Impro ing the "uality of the decision model used. c. Impro ing the rele ance of information. d. Implementing a system that impro es the processing of information. !$. 9hich of the following statements is =are> true regarding the pro ision of assurance ser ices? a. The third party who recei es the assurance generally pays for the assurance recei ed. b. Assurance ser ices always in ol e a report by one person to a third party on which an independent organi<ation pro ides assurance. c. Assurance ser ices can be pro ided either on information or processes. d. All of the abo e. !(. In performing an attestation engagement, a C/A typically a. #upplies litigation support ser ices. b. Assesses control risk at a low le el. c. &%presses a conclusion about an assertion. d. /ro ides management consulting ad ice. !+. 9hich of the following ser ices would be most likely to be structured as an attest engagement? a. Ad ocating a client.s position in ta% matter. b. A consulting engagement to de elop a new data base system for the re enue cycle. c. An engagement to issue a report addressing an entity.s compliance with re"uirements of specified laws. d. The compilation of a client.s forecast information. !-. 9hich of the following is broadest in scope? a. Audits of financial statements. b. Assurance ser ices. c. Internal control audit. d. Attestation ser ices.

!0. Independent auditing can be described as a. A branch of accounting. b. A professional acti ity that measures and communicates financial and business data. c. A discipline which attests to the results of accounting and other functional operations and data. d. A regulating function that pre ents the issuance of erroneous or improper financial information. !1. A financial statement audit is designed to a. /ro ide assurance on internal control and to identify reportable conditions. b. )etect error or fraud in the financial statements, regardless of whether or not the error or fraud is material. c. 'btain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. d. 'btain absolute assurance on the financial statements and e%press an opinion on the financial statements. !3. 9hich of the following best describes why an independent auditor is asked to e%press an opinion on the fair presentation of financial statements? a. It is difficult to prepare financial statements that fairly present a company.s financial position and changes in financial position and operations without the e%pertise of an independent auditor. b. It is management.s responsibility to make a ailable independent aid in the preparation of the financial information shown in the financial statements. c. The opinion of an independent party is needed because a company may not be ob,ecti e with respect to its own financial statements. d. It is a customary courtesy that shareholders of a company recei e an independent report on management.s status in managing the affairs of the business. $5. An audit of the financial statements of Camden Corporation is being conducted by an e%ternal auditor. The e%ternal auditor is e%pected to a. &%press an opinion as to the fairness of Camden*s financial statements. b. &%press an opinion as to the attracti eness of Camden for in estment purposes. c. Certify to the correctness of Camden*s financial statements. d. Criti"ue the wisdom and legality of Camden*s business decisions.

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$1. A type of audit the purpose of which is to determine whether the auditee is following specific procedures or rules set down by some higher authority a. 'perational audit. c. 7inancial audit. b. Compliance audit. d. Management audit. $!. A techni"ue for regularly and systematically appraising a unit of function and its effecti eness against corporate and industry standards with the ob,ecti e of assuring management that its aims are being carried out and@or identifying conditions capable of being impro ed a. 7inancial auditing. c. 'perations auditing. b. Compliance tests. d. Management auditing. $$. A detailed e%amination of the utili<ation of the resources of the company, including the organi<ation structure to carry out ob,ecti es, to indicate areas of increased efficiency and possible cost reduction is a. Internal audit. c. Management audit. b. Audit of assets. d. 7inancial audit. $(. 9hich of the following types of audits are most similar? a. 'perational audits and compliance audits. b. Independent financial statement audits and operational audits. c. Compliance audits and independent financial statement audits. d. Internal audits and independent financial statement audits. $+. To make the internal audit department independent, he should report directly to the a. 6oard of )irectors. c. #tockholders. b. Audit committee. d. Controller. $-. An independent audit a. #upports an internal audit. )uplicates an internal audit. b. 2egates an internal audit. Complements an internal audit. $0. The members of the Commission on Audit should a. 6e a member of the bidding committee of the agency. b. Aold office for nine years without reappointment. c. 6e a commissioner and an associate commissioner. d. 6e a C/A or member of the 6ar with ten years e%perience. $1. 6esides e%pressing an opinion on the fairness of financial statement presentation, a go ernment auditor normally includes audit of effecti eness, compliance as well as a. Internal control. c. Mathematical accuracy. b. &conomy. d. ;isk e aluation. $3. Go ernmental effecti eness =program> auditing seeks to determine whether the desired results are being achie ed and ob,ecti es are being met. The first step in the performance of such an audit would be: a. & aluate the system used to measure results. b. )etermine the sampling frame to use in studying the system. c. Collect and analy<e "uantifiable data. d. Identify the legislati e intent of the program being audited. /rofessional Accounting /ractice =Related PSA : /reface to /#A and ;elated #er ices> (5. A per asi e characteristic of a C/A.s role in a Management Consulting #er ices engagement is that of being a=n> a. 'b,ecti e ad isor. c. Computer specialist. b. Independent practitioner. d. Confidential re iewer. (1. 9hich one of the following is not a logical function of a C/A in public accounting practice? a. Attest function. c. Ta% practice. c. d.

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b. #uper ision of internal audit staff.

d. Management consulting ser ices.

(!. The "uality of performance of an auditor is measured by the statements emanating from the a. Accounting #tandards Council b. 8uality Control #tandards c. Auditing #tandards and /ractices Council d. Interpretations of Accountants in /ractice ($. The /hilippine #tandards on Auditing issued by A#/C a. Are applicable only when an independent audit in ol ing an e%pression of an opinion on financial statements is carried out. b. Are the only authoritati e source of auditing standards for members of the accountancy profession in the /hilippines. c. Are general guidelines to help auditors. d. ;e"uire that in no circumstances would an auditor may ,udge it necessary to depart from a /#A, e en though such a departure may result to more effecti e achie ement of the ob,ecti e of an audit. ((. 9illiams B Co., a large international C/A firm, is to ha e an Ce%ternal peer re iew.D The peer re iew will most likely be performed by a. &mployees and partners of 9illiams B Co. who are not associated with the particular audits being re iewed. b. Audit re iew staff of the #ecurities and &%change Commission. c. Audit re iew staff of the American Institute of Certified /ublic Accountants. d. &mployees and partners of another C/A firm. (+. 'ne of the ad antages of the fi%ed fee =or flat sum> basis of billing a client is that the a. C/A.s compensation is more directly related to the "uality of his ser ice rather than to time spent. b. C/A is assured of a oiding a loss on the engagement e en if he underestimates his costs. c. 7i%ed fee method is particularly effecti e for measuring charges for routine engagements. d. Client pays for e%actly what he gets in terms of work performed. /hilippine Accountancy Act of !55( =;A 3!31> and its I;; (-. 9hich of the following is not one of the function of the 6oard of Accountancy as specifically pro ided under ;A 3!31? a. To determine and prescribe minimum re"uirements leading to the admission of candidates to the C/A e%amination. b. To in estigate iolations of the Accountancy Eaw and the rules and regulations promulgated thereunder. c. To perform isitorial powers or re iew professional work of accounting practitioners in a general or random basis. d. After due process, to suspend, re oke, or reissue certificates of registration for causes pro ided for by law by the rules and regulations promulgated therefor. (0. 2o person shall ser e the /rofessional ;egulatory 6oard of Accountancy for more than a. $ years b. - years c. 3 years d. 1! years (1. The Accountancy Eaw pro ided that a C/A certificate may be suspended or re oked on grounds e%cept a. Immoral or dishonorable conduct. b. Gross negligence or incompetence in the practice of profession. c. ;efusal to accept an audit engagement with a go ernment corporation. d. Conduct discreditable to the accounting profession. (3. Fnder the I;; of ;A 3!31, if a partner in a two4member partnership dies, the sur i ing partner may continue to practice as an indi idual under the e%isting firm title which includes the deceased partner.s name a. 7or a period of time not to e%ceed fi e years. b. 7or a period of time not to e%ceed two years. c. Indefinitely. d. Fntil the partnership payout to the deceased partner.s estate is terminated. +5. 9hich of the following is re"uired for a partnership for public accountancy practice? a. At least one of the partners must be a C/A.

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b. All partners must be /IC/A members. c. All partners must be C/As. d. 7irm name must contain names of partners only.

Code of &thics +1. 9hich of the following statements best e%plains why the C/A profession has found it essential to promulgate ethical standards and to establish means for ensuring their obser ance? a. Gigorous enforcement of an established code of ethics is the best way to pre ent unscrupulous acts. b. &thical standards that emphasi<e e%cellence in performance o er material rewards establish a reputation for competence and character. c. A distinguishing mark of a profession is its acceptance of responsibility to the public. d. A re"uirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues. +!. Eegacy Commercial Inc. engages the ser ices of Mr. C. )imalanta, C/A, to make a pro,ect study on the e%panded food ending operations of the corporation with the corresponding staffing and compensation package for its e%ecuti e staff. )imalanta, howe er, has primarily auditing e%pertise and only in general merchandising operations. Mr. )imalanta may properly a. Accept the engagement and carry it out consistent with GAA#. b. Accept the engagement but e%ercise due professional care. c. Accept the engagement and ac"uire the necessary competence or consult with established authorities. d. )ecline the engagement for lack of e%perience or competence in an entirely new line of speciali<ation. +$. )uring the course of an audit engagement, the C/A needed additional studies and consultation with e%perts. This additional study and consultation is deemed to be a. An unusual practice which should ha e oided the audit engagement. b. Eack of competence on the part of the C/A. c. An appropriate part of the professional conduct of the audit engagement. d. Fndertaken as a responsibility of management. +(. After beginning an audit of a new client, Earkin, C/A, disco ers that the professional competence necessary for the engagement is lacking. Earkin informs management of the situation and recommends another C/A, and management engages the other C/A. Fnder these circumstances a. Earkin*s lack of competence should be construed to be a iolation of GAA#. b. Earkin may re"uest compensation from the client for any professional ser ices rendered to it in connection with the audit. c. Earkin*s re"uest for a commission from the other C/A is permitted because a more competent audit can now be performed. d. Earkin may be indebted to the other C/A since the other C/A can collect from the client only the amount the client originally agreed to pay Earkin. ++. 'n an audit engagement performed by a C/A firm with one office, at the minimum, knowledge of the rele ant professional accounting and auditing standards should be held by a. The auditor with final responsibility for the audit. b. All professionals working upon the audit. c. All professional working upon the audit and the partner in charge of the C/A firm. d. All professionals working in the office. +-. A C/A who is seeking to sell an accounting practice must a. 2ot allow a peer re iew team to look at working papers and ta% returns without permission from the client prior to consummation of the sale. b. 2ot allow a prospecti e purchaser to look at working papers and ta% returns without permission from the client. c. Gi e all working papers and ta% returns to the client. d. ;etain all working papers and ta% returns for a period of time sufficient to satisfy the statute limitations.

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+0. #mith, C/A, issued an Ce%cept forD opinion on the financial statements of the 9ald Company for the year ended )ecember $1, !55+. 9ald has engaged another firm of C/As to make a second audit. The local bank has knowledge of #mith.s audit and has asked #mith to e%plain why the financial statements and his opinion ha e not been made a ailable. a. #mith cannot pro ide the bank with information about 9ald under any circumstances. b. If 9ald consents, #mith may pro ide the bank with information concerning 9ald. c. If the other firm of C/As consents, #mith may pro ide the bank with information concerning 9ald. d. The only way the bank can obtain information concerning #mith.s audit is to obtain it by subpoena. +1. Fnder the Code of /rofessional &thics, which of the following may a practicing C/A do in connection with educational seminars? a. #end announcements about his appearance on a seminar program to non4clients or in ite them to attend. b. #ponsor a seminar and send in itations to non4clients. c. Allow himself to be listed as a ta% e%pert on the seminar announcement. d. )istribute firm literature at the seminar to non4clients on a rele ant topic being discussed at the seminar. +3. A C/A, wrote an article for publication in /IC/A Accountants Hournal. The Code of /rofessional &thics would be iolated if the C/A allowed the article to state that the C/A was a a. Member of /IC/A b. /rofessor at a school of professional accountancy c. /artner in a national C/A firm d. /ractitioner speciali<ing in pro iding ta% ser ices. -5. &thically, the auditor could a. Ad ertise only as to his e%pertise in preparing income ta% returns. b. 6ase his audit fee on a percentage of the proceeds of his client*s stock issue. c. 'wn preferred stock in a corporation which is an audit client. d. /erform an e%amination for a financially distressed client at less than his customary fees. -1. According to the profession*s ethical standards, an auditor would be considered independent in which of the following instances? a. The auditor*s checking account, which is fully insured by a /)IC, is held at a client financial institution. b. The auditor is also an attorney who ad ises the client as its general counsel. c. An employee of the auditor donates ser ice as treasurer of a charitable organi<ation that is a client. d. The client owes the auditor fees for two consecuti e annual audits. -!. A C/A purchased a stock in a client corporation and placed it in a trust as an educational fund for the C/A*s minor child. The trust securities were not material to the C/A but were material to the child*s personal net worth. 9ould the independence of the C/A be considered to be impaired with respect to the client? a. Ies, because the stock would be considered a direct financial interest and conse"uently, materiality is not a factor. b. Ies, because the stock would be considered an indirect financial interest that is material to the C/A*s child. c. 2o, because the C/A would not be considered to ha e a direct financial interest in the client. d. 2o, because the C/A would not be considered to ha e a material indirect financial interest in the client. -$. 9hich of the following legal situations would be considered to impair the auditor*s independence? a. An e%pressed intention by the present management to commence litigation against the auditor alleging deficiencies in audit work for the client, although the auditor considers that there is only a remote possibility that such a claim will be filed. b. Actual litigation by the auditor against the client for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for management ad isory ser ices. c. Actual litigation by the auditor against the present management alleging management fraud or deceit d. Actual litigation by the client against the auditor for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for ta% ser ices.

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-(. 9hich of the following is not prohibited by the Code of /rofessional &thics for C/As? a. Ad ertising and solicitation of clients. b. /ayment of commission to obtain a client. c. ;ecei ing a contingent fee on a ta% case before the 6ureau of Internal ;e enue. d. 'ffering employment to a staff member of another C/A without first informing the C/A. -+. The C/A in public practice iolates the Code of /rofessional &thics for C/As if he accepts a fee which was a. 7i%ed by a public authority. b. 6ased on a price "uotation submitted in competiti e bidding. c. )etermined based on the results of ,udicial proceedings. d. /ayable after a specified finding was obtained. --. 9arner, C/A, places a !D % !D display ad ertisement in a national financial newspaper. The ad ertisement reads: C9anted: 'utgoing C/A with partnership potential. Must ha e + years e%perience in a ta% department of a C/A firm. ;eply 6o% 1($((.D Fnder the Code of /rofessional &thics such an ad ertisement would a. Giolate the pro isions dealing with ad ertising. b. Giolate the pro isions dealing with speciali<ation. c. Giolate the pro isions dealing with encroachment. d. 2ot be a iolation. -0. A practicing C/A is allowed by the C/A Code of &thics to do the following, e%cept a. Announce the change in office location in a newspaper. b. Eist his first name in the building lobby directory in good taste and modest si<e. c. Include his ta% account number and membership in /IC/A on his stationery. d. Eist his office telephones in the /E)T directory in bo% or bold type. -1. Inclusion of which of the following in a promotional brochure published by a C/A firm would be most likely to result in a iolation of the AIC/A rules of conduct? a. ;eprints of newspaper articles which are laudatory with respect to the firms e%pertise. b. #er ices offered and fees for such ser ices, including hourly rates and fi%ed fees. c. &ducational and professional attainments of partners. d. Testimonials and endorsements. -3. May a C/A hire for the C/A.s public accounting firm a non4C/A systems analyst who speciali<es in de eloping computer systems? a. Ies, pro ided the C/A is "ualified to perform each of the specialist.s tasks. b. Ies, pro ided the C/A is able to super ise the specialist and e aluate the specialist.s end product. c. 2o, because non4C/A professionals are not permitted to be associated with C/A firms in public practice. d. 2o, because de eloping computer systems is not recogni<ed as a ser ice performed by public accountants. 05. A iolation of the profession*s ethical standards would most likely occur when a C/A who a. Is also admitted to the 6ar represents on letterhead to be both an attorney and a C/A. b. 9rites a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail. c. Is controller of a bank permits the bank to use the controller*s C/A title in the listing of officers in its publications. d. Is the sole shareholder in a professional accountancy corporation that uses the designation Jand companyJ in the firm title. 01. 9hich of the following acts by a C/A who is not in public practice would most likely be considered a iolation of the ethical standards of the profession? a. Fsing the C/A designation without disclosing employment status in connection with financial statements issued for e%ternal use by the C/A*s employer. b. )istributing business cards indicating the C/A designation and the C/A*s title and employer. c. Corresponding on the C/A*s employer*s letterhead, which contains the C/A designation and the C/A*s employment status. d. Compiling the C/A*s employer*s financial statements and making reference to the C/A*s lack of independence.

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0!. 9hich of the following is re"uired if the professional accountant uses e%perts who are not professional accountants? a. The ultimate responsibility for the professional ser ice is assumed by the e%pert who is not a professional accountant. b. The professional accountant is discouraged to engage the ser ices of e%perts who are not a professional accountant. c. The professional accountant must take steps to see that such e%perts are aware of ethical re"uirements. d. &%perts who are not professional accountants need not be informed of ethical re"uirements because they are not members of the Accountancy profession. 0$. The ;ules of Conduct will ordinarily be considered to ha e been iolated when the professional accountant represents that specific consulting ser ices will be performed for a stated fee and it is apparent at the time of the representation that the a. Actual fee would be substantially higher. b. Actual fee would be substantially lower than the fees charged by other professional accountants for comparable ser ices c.7ee was a competiti e bid. d. /rofessional accountant would not be independent. 0(. The lead engagement partner should be rotated after a pre4defined period, normally no more than a. ! years b. $ years c. + years d. 0 years /rofessional ;esponsibilities (Related PSAs : /#A !(5re , !+5 and !-5> 0+. An auditor should recogni<e that the application of auditing procedures may produce e idential matter indicating the possibility of errors and irregularities and therefore should a. )esign audit tests to detect unrecorded transactions. b. &%tend the work to audit most recorded transactions and records of an entity. c. /lan and perform the engagement with an attitude of professional skepticism. d. 2ot depend on internal accounting control features that are designed to pre ent or detect errors or irregularities.

76. Audits of financial statements are designed to obtain assurance of detecting material misstatements due to
&rrors 7raudulent financial reporting Misappropriation of assets a Ies Ies Ies b Ies Ies 2o c Ies 2o Ies d 2o Ies 2o

00. 9hich of the following factors is most important concerning an auditor*s responsibility to detect errors and irregularities? a. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles. b. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements. c. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the e%istence of illegal acts. d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements. 01. In connection with the e%amination of financial statements, an independent auditor could be responsible for failure to detect a material fraud a. #tatistical sampling techni"ues were not used in the audit engagement. b. The auditor planned the work in a hasty and inefficient manner. c. Auditors performing important parts of the work failed to disco er a close relationship between the treasurer and the cashier. d. The fraud was perpetuated by one client employee who circum ented the e%isting internal controls. 03. An error in which an item is posted to the wrong personal account, or the incorrect calculation of an amount constituting an original entry is a=n>

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a. principle. b. Compensating error.

&rror of omission. &rror of commission.

c.

&rror d.

of

15. The term CerrorD refers to unintentional misrepresentations of financial information. &%amples of errors are when: =1> Assets ha e been misappropriated. =!> Transactions without substance ha e been recorded. =$> ;ecords and documents ha e been manipulated and falsified. =(> The effects of transactions ha e been omitted from records or documents. a. All of the abo e statements are true. b. 'nly statements =!> and =(> are true. c. 'nly statements =1> and =$> are true. d. All of the abo e statements are false. 11. Auditing standards re"uire that auditors be aware of rele ant factors relating to fraudulent reporting. 9hich of the following statements is false concerning fraudulent reporting? a. 7raud fre"uently in ol es a pressure or an incenti e to commit fraud and a percei ed opportunity to do so. b. Two types of fraud rele ant to the auditor include material misstatements arising from fraudulent financial reporting and material misstatements arising from misappropriation of assets. c. 7raud in ol es actions of management but e%cludes the actions of employees or third parties. d. An audit rarely in ol es the authentication of documentationK thus, fraud may go undetected by the auditor. 1!. 9hich of the following is an e%ample of fraudulent financial reporting? a. Company management changes in entory count tags and o erstates ending in entory, while understating cost of goods sold. b. The treasurer di erts customer payments to his personal due, concealing his actions by debiting an e%pense account, thus o erstating e%penses. c. An employee steals in entory, and the CshrinkageD is recorded in cost of goods sold. d. An employee steals small tools from the company and neglects to return themK the cost is reported as a miscellaneous operating e%pense. 1$. Eapping is a. Making the financial statements indicate a more fa orable position by gi ing effect to transactions is a period other than that in which these actually occurred. b. )one to inflate the cash position or co er the theft of cash by depositing at the end of the accounting period a check drawing on one bank account in another bank account without making the necessary deduction in the balance of the first bank. c. An irregularity that conceals cash shortages by a delay in recording cash collections, retaining a customer*s payment on credit sales and co ering up the shortage with subse"uent cash receipts. d. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts. 1(. In general, material fraud perpetrated by which of the following are most difficult to detect? a. Cashier. c. Internal auditor. b. Leypunch operator. d. Controller. 1+. Certain management characteristics may heighten the auditor*s concern about the risk of material misstatements. The characteristic that is least likely to cause concern is that management a. 'perating and financing decisions are made by numerous indi iduals. b. Commits to unduly aggressi e forecasts. c. Aas an e%cessi e interest in increasing the entity*s stock price through use of unduly aggressi e accounting practices. d. Is interested in inappropriate methods of minimi<ing earnings for ta% purposes.

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1-. 9hich of the following information disco ered during an audit most likely would raise a "uestion concerning possible illegal acts? a. ;elated party transactions, although properly disclosed, were per asi e during the year. b. The entity prepared se eral large checks payable to cash during the year. c. Material internal control weaknesses pre iously reported to management were not corrected. d. The entity was a campaign contributor to se eral local political candidates during the year. 10. In a financial statement audit, the auditor should consider categories of fraud risk factors relating to misstatements arising from =1> fraudulent financial reporting and =!> misappropriation of assets. 9hich of the following is a category of risk factors that should be considered in relation to misstatements arising from misappropriation of assets? a. Industry conditions. c. Management.s characteristics. b. 'perating characteristics. d. Controls. 11. The auditor is most likely to presume that a high risk of a defalcation e%ists if a. The client is a multinational company that does business in numerous foreign countries. b. The client does business with se eral related parties. c. Inade"uate segregation of duties places an employee in a position to perpetrate and conceal thefts. d. Inade"uate employee training results in lengthy &)/ e%ception reports each month. 13. 9hich of the following characteristics most likely would heighten an auditor.s concern about the risk of intentional manipulation of financial statements? a. Turno er of senior accounting personnel is low. b. Insiders recently purchased additional shares of the entity.s stock. c. Management places substantial emphasis on meeting earnings pro,ection. d. The rate of change in the entity.s industry is slow. 35. 9hich of the following circumstances most likely would cause an auditor to consider whether material misstatements e%ist in an entity.s financial statements? a. Management places little emphasis on meeting earnings pro,ections. b. The board of directors makes all ma,or financing decisions. c. ;eportable conditions pre iously communicated to management are not corrected. d. Transactions selected for testing are not supported by proper documentation. 31. 9hich of the following circumstances most likely would cause an auditor to belie e that material misstatements may e%ist in an entity.s financial statements? a. Accounts recei able confirmation re"uests yield significantly fewer responses than e%pected. b. Audit trails of computer4generated transactions e%ist only for a short4time. c. The chief financial officer does not sign the management representation letter until the last day of the auditor.s fieldwork. d. Management consults with other accountants about significant accounting matters. 3!. 9hich of the following in"uiries are auditors re"uired to make of management regarding fraud? a. 9hether management has e er intentionally iolated the securities law. b. 9hether management has any knowledge of fraud that has been perpetrated on or within the entity. c. Management.s attitudes toward its employees. d. Auditors are not re"uired to make in"uiries of management relating to fraud. 3$. 9hen fraud has been identified, C/A responsibility consists of a. ;eport the matter to the police. should ha e pre ented it. b. Ae is not at all responsible. )etermination of its e%tent. c. Ae d.

3(. 9hich of the following is correct concerning the re"uired documentation in the working papers of the performance of the assessment of the risk of material misstatement due to fraud? a. All risk factors considered should be documented and the response to each documented. b. Those risk factors identified and the auditor.s response to them should be documented.

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c. The ma,or categories of risk factors must be identified, but the particular responses to risk factors identified need not be documented. d. 2o specific documentation is re"uired. 3+. 9hen an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act to a. & aluate the effect on the financial statements. b. )etermine the reliability of management.s representation. c. Consider whether other similar acts may ha e occurred. d. ;ecommend remedial actions to the audit committee. 3-. 9hich of the following statements concerning illegal acts by clients is correct? a. An auditor*s responsibility to detect illegal acts that ha e a direct and material effect on the financial statements is the same as that for errors and irregularities. b. An audit in accordance with GAA# normally includes audit procedures specifically designed to detect illegal acts that ha e an indirect but material effect on the financial statements. c. An auditor considers illegal acts from the perspecti e of the reliability of management*s representations rather than their relation to audit ob,ecti es deri ed form financial statement assertions. d. An auditor has no responsibility to detect illegal acts by clients that ha e an indirect effect on the financial statements.

30. )etection of noncompliance, regardless of materiality, re"uires considerations of the following:

Integrity of management /ossible effect on other aspects of the audit. Eegal determination of the act of non4compliance. a Ies Ies Ies b Ies Ies 2o c Ies 2o Ies d 2o Ies 2o

31. If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the engagement, then the auditor should a. 2otify all parties who may rely upon the company.s financial statements of the company.s illegal act. b. Consult with legal counsel as to what other action, if any, should be taken. c. ;eturn all incriminating e idence and working papers to the client.s audit committee for follow4up. d. Contact the successor auditor to make the successor aware of the possible conse"uences of relying on management.s representations. 33. The regular e%amination of financial statements is not primarily designed to disclose fraud and other irregularities although their disco ery may result. 2ormal audit procedures are more likely to detect a fraud arising from a. 7orgeries on company checks. b. 7ailure to record cash receipts for ser ices rendered. c. Theft of in entories. d. Collusion on the part of se eral employees. 155. An entity*s financial statements were misstated o er a period of years due to large amounts of re enue being recorded in ,ournal entries that in ol ed debits and credits to an illogical combination of accounts. The auditor could most likely ha e been alerted to this irregularity by a. #canning the general ,ournal for unusual entries. b. /erforming a re enue cut4off test at year4end. c. Tracing a sample of ,ournal entries to the general ledger. d. &%amining documentary e idence of sales returns and allowances recorded after year4end. 8uality Controls =Related PSA : /#A !!5> 151. 9hich of the following best describes what is meant by GAA#? a. Acts to be performed by the auditor. b. Measures of the "uality of the auditor*s performance. c. /rocedures to be used to gather e idence to support financial statements. d. Audit ob,ecti es generally determined on audit engagements. 15!. The least important e idence of a C/A firm*s e aluation of its system of "uality controls would concern the C/A firm*s policies and procedures with respect to a. &mployment =hiring>.

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b. Confidentiality of audit engagements. c. Assigning personnel to audit engagements. d. )etermination of audit fees. 15$. The primary purpose of establishing "uality control policies and procedures for deciding whether to accept a new client is to a. &nable the C/A firm to attest to the reliability of the client. b. #atisfy the C/A firm.s duty to the public concerning the acceptance of clients. c. Minimi<e the likelihood of association with clients whose management lacks integrity. d. Anticipate before performing any fieldwork whether an un"ualified opinion can be e%pressed. 15(. A C/A firm*s "uality control procedures pertaining to the acceptance of a prospecti e audit client would most likely include a. In"uiry of management as to whether disagreements between the predecessor auditor and the prospecti e client were resol ed satisfactorily. b. Consideration of whether sufficient competent e idential matter may be obtained to afford a reasonable basis for an opinion. c. In"uiry of third parties, such as the prospecti e client*s bankers and attorneys, about information regarding the prospecti e client and its management. d. Consideration of whether the internal control structure is sufficiently effecti e to permit a reduction in the e%tent of re"uired substanti e tests. 15+. In pursuing a C/A firm.s "uality control ob,ecti es, a C/A firm may maintain records indicating which partners or employees of the C/A firm were pre iously employed by the C/A firm.s clients. 9hich "uality control ob,ecti e would this be most likely to satisfy? a. /rofessional relationship. c. Independence. b. #uper ision. d. Ad ancement. 15-. The audit work performed by each assistant should be re iewed to determine whether it was ade"uately performed and to e aluate whether the a. Auditor.s system of "uality control has been maintained at a high le el. b. ;esults are consistent with the conclusions to be presented in the auditor.s report. c. Audit procedures performed are appro ed in the professional standards. d. Audit has been performed by persons ha ing ade"uate technical training and proficiency as auditors. 150. 9hich of the following is the best criterion for e aluating a staff auditor.s work performance? a. 8uantity of deficiency findings. b. Ability to get along with clients. c. 9orking papers appearance. d. 7ulfillment of re"uirements set forth in the audit programs. 151. The auditor with final responsibility for an engagement and one of the assistants ha e a difference of opinion about the results of an auditing procedure. If the assistant belie es it is necessary to be disassociated from the matter.s resolution, the C/A firm.s procedures should enable the assistant to a. ;efer the disagreement to the /IC/A.s 8uality ;e iew Committee. b. )ocument the details of the disagreement with the conclusion reached. c. )iscuss the disagreement with the entity.s management or its audit committee. d. ;eport on the disagreement to an impartial peer monitoring team. AIC/A 11@3$ /re4engagement =Related PSAs: /#A !15> 153. 9hich of the following factors most likely would cause an auditor not to accept a new audit engagement? a. An inade"uate understanding of the entity.s internal control. b. The close pro%imity to the end of the entity.s fiscal year. c. Concluding that the entity.s management probably lacks integrity. d. An inability to perform preliminary analytical procedures before assessing control risk. 115. 6efore accepting an audit engagement, you as the successor auditor would least likely make specific in"uiries of the pre ious auditor regarding a. 7acts that might bear on the integrity of management. b. The degree of cooperation the pre ious auditor recei ed from the client.s lawyer.

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c. An in"uiry regarding disagreements with management as to auditing procedures. d. The predecessor auditor.s understanding as to the reasons for the change of auditors. 111. 9hich of the following factors most likely would influence an auditor.s determination of the auditability of an entity.s financial statements? a. The comple%ity of the accounting system. b. The e%istence of related4party transactions. c. The ade"uacy of the accounting records. d. The operating effecti eness of control procedures.

112. In making a decision to accept or continue with a client, the auditor should consider:
Its own independence Its ability to ser ice a client properly The integrity of the client.s management a Ies Ies Ies b 2o Ies Ies c Ies Ies 2o d 2o 2o Ies

11$. 9hich of the following is least likely a source of information about a potential new audit client? a. The predecessor auditor. b. Management. c. Industry ,ournal. d. The new auditor.s permanent file. 11(. /reliminary arrangements agreed to by the auditor and the client should be reduced to writing by the auditor. 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 constructi e ser ices letter. 11+. 9hen an auditor belie es that an understanding with the client has not been established, he or she should ordinarily a. /erform the audit with increased professional skepticism. b. )ecline to accept or perform the audit. c. Assess control risk at the ma%imum le el and perform a primarily substanti e audit. d. Modify the scope of the audit to reflect an increased risk of material misstatements due to fraud. 11-. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement letter to the client? a. A recent change in partner and@or staff in ol ed in the audit engagement. b. A change in the terms of engagement. c. A recent change of client management. d. A significant change in the nature or si<e of the client*s business. Audit planning (Related PSAs: /#A $55, $15, $!5, +!5 and +05> 110. Ade"uate audit planning helps ensure that appropriate attention is de oted: a. b. c. To important areas of the audit Ies Ies Ies #o that potential problems are promptly identified Ies Ies 2o #o that the work is completed e%peditiously 2o Ies 2o d. Ies 2o Ies

111. In planning an e%amination, the auditor would consider all of the following matters, e%cept a. Anticipated reliance on internal controls. b. /reliminary ,udgment about materiality le els for audit purposes. c. 7inancial statement items likely to re"uire ad,ustment. d. The kind of opinion =un"ualified, "ualified, disclaimer, or ad erse>, likely to be gi en. 113. 9hich of the following situations would most likely re"uire special audit planning by the auditor? a. #ome items of factory and office e"uipment do not bear identification numbers. b. )epreciation methods used on the client.s ta% return differ from those used on the books.

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c. Assets costing less than /+,555 are e%pensed e en though the e%pected life e%ceeds one year. d. In entory is comprised of precious stones. 1!5. This includes distributing assignments among staff assistants and re iewing the progress of such assignments on a periodic basis. a. #uper ision b. #taff training c. C/& d. /lanning. 1!1. The senior auditor responsible for coordinating the fieldwork usually schedules a pre4audit conference with the audit team primarily to a. Gi e guidance to the staff regarding both technical and personnel aspects of the audit. b. )iscuss staff suggestions concerning the establishment and maintenance of time budgets. c. &stablish the need for using the work of specialists and internal auditors. d. /ro ide an opportunity to document staff disagreements regarding technical issues. 1!!. An auditor obtains knowledge about a new client.s business and its industry to a. Make constructi e suggestions concerning impro ements to the client.s internal control. b. )e elop an attitude of professional skepticism concerning management.s financial statement assertions. c. & aluate whether the aggregation of known misstatements causes the financial statements takes as a whole to be materially misstated. d. Fnderstand the e ents and transactions that may ha e an effect on the client.s financial statements. 1!$. A C/A may reduce the audit work on a first4time audit by re iewing the working papers of the predecessor auditor. The predecessor should permit the successor to re iew working papers relating to matters of continuing accounting significance such as those that relate to a. &%tent of reliance on the work of specialists. b. 7ee arrangements and summaries of payments. c. Analysis of contingencies. d. #taff hours to complete the engagement. 1!(. 9hich of the following procedures would an auditor most likely perform in planning a financial statement audit? a. ;e iewing in estment transactions of he audit period to determine whether related parties were credited. b. /erforming analytical procedures to identify areas that may represent specific risks. c. ;eading the minutes of stockholder and director meetings to disco er whether any unusual transactions ha e occurred. d. 'btaining a written representation letter from the client to emphasi<e management.s responsibilities. 1!+. 9hich of the following procedures would an auditor least likely perform in planning a financial statement audit? a. Coordinating the assistance of entity personnel in data preparation. b. )iscussing matters that may affect the audit with firm personnel responsible for non4audit ser ices to the entity. c. #electing a sample of endor.s in oices for comparison to recei ing reports. d. ;eading the current year.s interim financial statements. 1!-. In de eloping the o erall audit plan for a new client, factor not to be considered is a. The terms of the engagement and any statutory responsibilities. b. The client*s business, including the structure of the organi<ation and accounting system used. c. The amount of estimated audit fee. d. The audit risk and procedures to be performed to achie e audit ob,ecti es. 1!0. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the =&> a. & idence to be gathered to pro ide a sufficient basis for the auditor.s opinion. b. /rocedures to be undertaken to disco er litigation, claims and assessments. c. /ending legal matters to be included in the in"uiry of the client.s attorney.

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d. Timing of in entory obser ation procedures to be performed. 1!1. A basic tool used by the auditor to control the audit work and re iew the progress of the audit. a. Audit program c. &ngagement letter. b. /rogress flowchart d. Time and &%pense #ummary

1!3. Those procedures specifically outlined in an audit program are primarily designed to a. Gather e idence. b. )etect errors or irregularities. c. Test internal systems. d. /rotect the auditor in the e ent of litigation. 1$5. An audit program pro ides proof that a. #ufficient competent e idential matter was obtained. b. The work was ade"uately planned. c. There was compliance with GAA# of reporting. d. There was a proper study and e aluation of internal control. 1$1. Audit programs should be designed so that a. Most of the re"uired procedures can be performed as interim work. b. Inherent risk is assessed at a sufficiently low le el. c. The auditor can make constructi e suggestions to management. d. The audit e idence gathered supports the auditor.s conclusions. 1$!. The audit program usually cannot be finali<ed until the a. Consideration of the entity.s internal control has been completed. b. &ngagement letter has been signed by the auditor and the client. c. ;eportable conditions ha e been communicated to the audit committee of the board of directors. d. #earch for unrecorded liabilities has been performed and documented. 1$$. In designing written audit programs, an auditor should establish specific audit ob,ecti es that related primarily to the a. Timing of audit procedures. c. #elected audit techni"ues. b. Cost4benefit of gathering e idence. d. 7inancial statement assertions. 1$(. 9hich item would not be contained in an audit program? a. #taff assigned to the audit. b. Eist of specific tasks to be performed. c. )ocumentation of system being re iewed. d. &stimated time re"uired to perform each task. 1$+. 9hen planning an e%amination, an auditor should a. Consider whether the e%tent of substanti e tests may be reduced based on the results of the internal control "uestionnaire. b. Make preliminary ,udgments about materiality le els for audit purposes. c. Conclude whether changes in compliance with prescribed control procedures ,ustifies reliance on them d. /repare a preliminary draft of the management representation letter. 1$-. The concept of materiality will be least important to the C/A in determining the a. #cope of his audit of specific accounts. b. #pecific transactions that should be re iewed. c. &ffects of audit e%ceptions upon his opinion. d. &ffects of his direct financial interest in a client upon his independence. 1$0. In considering materiality for planning purposes, an auditor belie es that misstatements aggregating /155,555 would ha e a material effect on an entity.s income statement, but the misstatements would ha e to aggregate /!55,555 to materially affect the balance sheet. 'rdinarily, it would be appropriate to design auditing procedures that would be e%pected to detect misstatements that aggregate

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a. /155,555

b. /!55,555

c. /1+5,555

d. /$55,555

1$1. The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. 9hich of the following is true? a. Audit risk is the risk that the auditor may unknowingly e%press a modified opinion when in fact the financial statements are fairly stated. b. The phrase in the auditor*s standard report Jpresent fairly, in all material respects, in conformity with generally accepted accounting principlesJ indicates the auditor*s belief that the financial statements taken as a whole are not materially misstated. c. If misstatements are not important indi idually but are important in the aggregate, the concept of materiality does not apply. d. Material fraud but not material errors cause financial statements to be materially misstated. 1$3. 9hich of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? a. 'btaining a written representation letter from the client.s management. b. &%amining documents to detect illegal acts ha ing a material effect on the financial statements. c. Consider whether the client.s accounting estimates are reasonable in the circumstances. d. )etermining the e%tent of in ol ement of the client.s internal auditors. 1(5. If the independent auditors decide that the work performed by the internal auditor may ha e a bearing on their own procedures, they should consider the internal auditor.s a. Competence and ob,ecti ity. c. Independence and re iew skills. b. &fficiency and e%perience. d. Training and super isory skills. 1(1. 9hen assessing an internal auditor.s ob,ecti ity, an independent auditor should a. & aluate the ade"uacy of the internal auditor.s audit programs. b. In"uire about the internal auditor.s educational background and professional certification. c. Consider the organi<ational le el to which the internal auditor reports. d. ;e iew the internal auditor.s working papers. 1(!. 7or which of the following ,udgments may an independent auditor share responsibility with an entity.s internal auditor who is assessed to be both competent and ob,ecti e? a. b. c. d. Materiality of misstatements Ies 2o 2o Ies & aluation of accounting estimates 2o Ies 2o Ies 1($. 9hich of the following is not a specialist upon whose work an auditor may rely? a. Eawyer. b. Internal auditor. c. Actuary. d. Appraiser. 1((. 9hich of the following statements is correct concerning an auditor.s use of the work of a specialist? a. The auditor need not obtain an understanding of the methods and assumptions used by the specialist. b. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements. c. The reasonableness of the specialist.s assumptions and their applications are strictly the auditor.s responsibility. d. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances. 1(+. 9hen using the work of another auditor, the principal auditor should ordinarily perform the following procedure a. 'btain information regarding the professional competence of the other auditor in the conte%t of the specific assignment undertaken by the other auditor. b. Ad ise the other auditor of the applicable independence re"uirements as regards both the entity and the component and obtain representation as to his compliance with them. c. Ad ise the other auditor of the applicable accounting, auditing and reporting re"uirements and obtain representation as to compliance with them. d. All of the abo e.

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;isk Assessment and ;esponse to Assessed ;isks (Related PSAs: /#A (55, $1+ and $$5> 1(-. The audit risk against which the auditor and those who rely on his@her opinion re"uire reasonable protection is a combination of three separate risks at the account4balance or class4of4transactions le el. The first risk is inherent risk. The second risk is that material misstatements will not be pre ented or detected by internal control. The third risk is that a. The auditor will re,ect a correct account balance as incorrect. b. Material misstatements that occur will not be detected by the audit. c. The auditor will apply an inappropriate audit procedure. d. The auditor will apply an inappropriate measure of audit materiality. 1(0. Audit risk consists of inherent risk, control risk, and detection risk. 9hich of the following statements is true? a. Cash is more susceptible to theft than an in entory of coal because it has a greater inherent risk. b. The risk that material misstatement will not be pre ented or detected on a timely basis by internal control can be reduced to <ero by effecti e controls. c. )etection risk is a function of the efficiency of an auditing procedure. d. The e%isting le els of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor. 1(1. Control risk should be assessed in terms of a. #pecific controls. b. Types of potential fraud. c. 7inancial statement assertions. d. Control en ironment factors.

1(3. After obtaining a sufficient understanding of internal control, the auditor assesses a. The need to apply GAA#. b. )etection risk to determine the acceptable le el of inherent risk. c. )etection risk and inherent risk to determine the acceptable le el of control risk. d. Control risk to determine the acceptable le el of detection risk. 1+5. An auditor may decide to assess control risk at the ma%imum le el for certain assertions because the auditor belie es a. Control policies and procedures are unlikely to pertain to the assertions. b. The entity.s control en ironment, accounting system, and control procedures are interrelated. c. #ufficient e idential matter to support the assertions is likely to be a ailable. d. More emphasis on tests of controls than substanti e tests is warranted. 1+1. 9hen control risk is assessed at the ma%imum le el for all financial statement assertions, an auditor should document the auditor.s a. b. c. d. Fnderstanding of the entity.s internal control structure elements Ies Ies 2o Ies Conclusion that control risk is at the ma%imum le el 2o Ies Ies Ies 6asis for concluding that control risk is at the ma%imum le el 2o 2o Ies Ies 1+!. 9hen an auditor increases the assessed le el of control risk because certain control acti ities were determined to be ineffecti e, the auditor would most likely increase the a. &%tent of tests of controls. c. &%tent of tests of details. b. Ee el of detection risk. d. Ee el of inherent risk. 1+$. The auditor faces a risk that the e%amination will not detect material errors which occur in the accounting process. In regard to minimi<ing this risk, the auditor primarily relies on a. #ubstanti e tests. c. Internal control. b. Compliance tests. d. #tatistical analysis. 1+(. The auditor uses the assessed le el of control risk =together with the assessed le el of inherent risk> to determine the acceptable le el of detection risk for financial statement assertions. As the acceptable le el of detection risk decreases, the auditor may do one or more of the following e%cept change the a. 2ature of substanti e tests to more effecti e procedures. b. Timing of substanti e tests, such as performing them at year4end rather than at an interim date. c. &%tent of substanti e tests, such as using larger sample si<es.

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d. Assurances pro ided by substanti e tests to a lower le el. 1++. 9hile performing an audit, #ebastian decides to restrict the risk of misstatement to $M. 9hat must the acceptable le el of detection risk be if inherent risk is !+M and control risk is (5M? a. 5.$M b. $5M c. 1!M d. $$.$M

Internal Control (Related PSAs/PAPSs: /#A (55, (5! and $1+> 1+-. An auditor uses the knowledge pro ided by the understanding of internal control and the assessed le el of control risk primarily to a. )etermine whether procedures and records concerning the safeguarding of assets are reliable. b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimi<ed. c. Modify the initial assessments of inherent risk and preliminary ,udgments about materiality le els. d. )etermine the nature, timing and e%tent of substanti e tests for financial statement assertions. 1+0. 9hich of the following is not a component of internal control? a. Control risk. c. Information and communication. b. Monitoring. d. The control en ironment. 1+1. 9hich of the following factors are included in an entity.s control en ironment? a b c d Audit committee Ies Ies 2o Ies Integrity and ethical alues Ies 2o Ies Ies 'rgani<ational structure 2o Ies Ies Ies 1+3. 6asic to a proper control en ironment are the "uality and integrity of personnel who must perform the prescribed procedures. 9hich is not a factor in pro iding for competent personnel? a. #egregation of duties. c. Training programs. b. Airing practices. d. /erformance e aluations. 1-5. Control acti ities constitute one of the fi e components of internal control. Control acti ities do not encompass a. /erformance re iews. c. /hysical controls. b. Information processing. d. An internal audit function. 1-1. /roper segregation of duties reduces the opportunities to allow persons to be in positions to both a. Hournali<e entries and prepare financial statements. b. ;ecord cash receipts and cash disbursements. c. &stablish internal controls and authori<e transactions. d. /erpetuate and conceal errors and irregularities. 1-!. 9hich of the following are compatible functions in a well4designed internal control structure. a. /reparing recei ing reports, and also appro ing purchase orders. b. Appro ing ouchers for payment, and also ha e access to unused purchased orders. c. Mailing signed checks, and also preparing bank reconciliations. d. Mailing signed checks, and also canceling supporting documents. 1-$. Internal control should follow certain basic principles to achie e its ob,ecti es. 'ne of these principles is the segregation of functions. 9hich one of the following e%amples does not iolate the principle of segregation of functions? a. The treasurer has the authority to sign checks but gi es the signature block to the assistant treasurer to run the check4signing machine. b. The warehouse clerk, who has the custodial responsibility o er in entory in the warehouse, may authori<e disposal of damaged goods.

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c. The sales manager has the responsibility to appro e credit and the authority to write off accounts. d. The department time clerk is gi en the undistributed payroll checks to mail to absent employees. 1-(. If internal control is well designed, two tasks that should be performed by different persons are a. Appro al of bad debt write4offs, and reconciliation of the accounts payable subsidiary ledger and controlling account. b. )istribution of payroll checks and appro al of sales returns for credit. c. /osting of amounts from both the cash receipts ,ournal and cash payments ,ournal to the general ledger. d. ;ecording of cash receipts and preparation of bank reconciliations. 1-+. A small entity may use less formal means to ensure that internal control ob,ecti es are achie ed. 7or e%ample, e%tensi e accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if a. Management is closely in ol ed in operations. b. The entity is in ol ed in comple% transactions. c. The entity is sub,ect to legal or regulatory re"uirements also found in larger entities. d. 7inancial reporting ob,ecti es ha e been established. 1--. 9hich of the following most likely would not be considered an inherent limitation of the potential effecti eness of an entity.s internal control? a. Incompatible duties. c. Mistakes in ,udgment. b. Management o erride. d. Collusion among employees. 1-0. The internal auditor recogni<es that certain limitations are inherent in any internal control system. 9hich one of the following scenarios is the result of an inherent limitation of internal control? a. The comptroller both makes and records cash deposits. b. A security guard allows one of the warehouse employees to remo e company assets from the premises without authori<ation. c. The firm sells to customers on account, without credit appro al. d. An employee, who is unable to read, is assigned custody of the firm*s computer tape library and run manuals that are used during the third shift. 1-1. 9hen considering the internal control structure, an auditor should be aware of the concept of reasonable assurance, which recogni<es that a. /rocedures re"uiring segregation of duties may be circum ented by employee collusion and management o erride. b. &stablishing and maintaining the internal control structure is an important responsibility of management. c. The cost of an entity.s internal control structure should not e%ceed the benefits e%pected to be deri ed. d. Ade"uate safeguards o er access to assets and records should permit an entity to maintain proper accountability. 1-3. It is important for the C/A to consider the competence of the audit client.s employees because their competence bears directly and importantly upon the a. Cost@benefit relationship of the system of internal control. b. Achie ement of the ob,ecti es of the system of internal control. c. Comparison of recorded accountability with assets. d. Timing of the tests to be performed. 105. 9hen an organi<ation has strong internal control, management can e%pect arious benefits. The benefit least likely to occur is a. ;educed cost of an e%ternal audit. b. &limination of employee fraud. c. Impro ement in the reliability and integrity of information for decision4making purposes. d. #ome assurance of compliance with go ernmental regulations. 101. 'f the following statements about an internal control system, which one is not alid?

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a. 2o one person should be responsible for the custodial responsibility and the recording responsibility for an asset. b. Transactions must be properly authori<ed before such transactions are processed. c. 6ecause of the cost@benefit relationship, a client may apply control procedures on a test basis. d. Control procedures reasonably insure that collusion among employees can not occur. 10!. The re"uirement that purchases be made from suppliers on an appro ed endor list is an e%ample of a a. /re enti e control. c. Correcti e control. b. )etecti e control. d. Monitoring control. 10$. Internal controls may be pre enti e, detecti e, or correcti e. 9hich of the following is pre enti e? a. ;e"uiring two persons to open mail. b. ;econciling the accounts recei able subsidiary file with the control account. c. Fsing batch totals. d. /reparing bank reconciliations. 10(. A good system of internal control pro ides reasonable assurance that errors and irregularities will be detected or pre ented. Identify the detecti e control for the procurement function. a. Goods recei ed are counted and compared to "uantities on purchase order and recei ing reports. b. The procurement function is organi<ationally separate from recei ing, disbursing, and accounting. c. ;e iew and appro al of each procurement action is re"uired prior to the final issuance of a purchase order. d. /renumbered standard purchase order forms include all rele ant terms re"uired to be used in all applicable instances. 10+. Audit committees ha e been identified as a ma,or factor in promoting both the internal and e%ternal auditor*s independence. 9hich of the following is the most important limitation on the effecti eness of audit committees? a. Audit committees may be composed of independent directors. Aowe er, those directors may ha e close personal and professional friendships with management. b. Audit committee members are compensated by the organi<ation and thus fa or a shareholder*s iew. c. Audit committees de ote most of their efforts to e%ternal audit concerns and do not pay much attention to internal auditing and the o erall control en ironment. d. Audit committee members do not normally ha e degrees in the accounting or auditing fields. 10-. C/As may send a formal Cmanagement letterD to clients in order that such a letter may pro ide a. A summary of the C/A.s obser ations arising out of his study of the client.s internal control system. b. A written record of discussion between the auditor and the client concerning the former.s obser ations and suggestions for impro ements in financial management. c. A permanent record of the re iew of the internal control work accomplished by the auditor during the course of his engagement. d. & idence as to the ade"uacy or inade"uacy of the operating internal control system. 100. A conceptually logical approach to the auditor*s e aluation of internal accounting control consists of the following four steps: I. )etermine whether the necessary procedures are prescribed and are being followed satisfactorily. II. Consider the types of errors and irregularities that could occur. III. )etermine the internal accounting control procedures that should pre ent or detect errors and irregularities. IG. & aluate any weakness to determine its effect on the nature, timing, or e%tent of auditing procedures to be applied and suggestions to be made to the client. 9hat should be the order in which these four steps are performed? a. III, IG, I, II b. II, III, I, IG c. III, I, II, IG d. II, I, III, IG

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101. Tests of controls are least likely to be omitted with regard to a. Accounts belie ed to be sub,ect to ineffecti e controls. b. Accounts representing few transactions. c. Accounts representing many transactions. d. #ubse"uent e ents. 103. To obtain e idential matter about control risk, an auditor selects tests from a ariety of techni"ues including a. In"uiry. b. Calculations. c. Analytical procedures. d. Confirmations. 115. A procedure that would most likely be used by an auditor in performing tests of control procedures that in ol e segregation of functions and that lea e no transaction trail is a. Inspection. b. ;eperformance. c. 'bser ation. d. ;econciliation. 111. 9hich of the following controls would an entity most likely use to assist in satisfying the completeness assertion related to long4term in estments? a. #enior management erifies that securities in the bank safe deposit bo% are registered in the entity.s name. b. The internal auditor compares the securities in the bank safe deposit bo% with recorded in estments. c. The treasurer ouches the ac"uisition of securities by comparing brokers. ad ices with canceled checks. d. The controller compares the current market prices of recorded in estments with the brokers. ad ices on file. 11!. 9hich of the following internal control procedures is not usually performed in the treasurer.s department? a. Gerifying the accuracy of checks and ouchers. b. Controlling the mailing of checks to endors. c. Appro ing endors. in oices for payment. d. Canceling payment ouchers when paid. 11$. 9hich of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? a. An independent trust company that has no direct contact with the employees who ha e record4keeping responsibilities has possession of securities. b. The internal auditor erifies the marketable securities in the entity.s safe each year on the balance sheet date. c. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. d. A designated member of the board of directors controls the securities in a bank safe deposit bo%. 11(. The treasurer makes disbursements by check and reconciles the monthly bank statements to accounting records. 9hich of the following best describes the control impact of this arrangement? a. Internal control will be enhanced because these are duties that the treasurer should perform. b. The treasurer will be in a position to make and conceal unauthori<ed payments. c. The treasurer will be able to make unauthori<ed ad,ustments to the cash account. d. Controls will be enhanced because the treasurer will ha e two opportunities to disco er inappropriate disbursements. 11+. 7rom the standpoint of good internal control, the billing department, for good internal control should be under directions of the a. Credit manager. b. Controller. c. #ales manager. d. Treasurer. 11-. To achie e good internal accounting control which department should perform the acti ities of matching shipping documents with sales orders and preparing daily sales summaries? a. 6illing. b. Credit. c. #hipping. d. #ales order.

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110. The most likely result of ineffecti e internal control policies and procedures in the re enue cycle is that a. Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped. b. 'mission of shipping documents could go undetected, causing an understatement of in entory. c. 7inal authori<ation of credit memos by personnel in the sales department could permit an employee defalcation scheme. d. 7ictitious transactions could be recorded, causing an understatement of re enues and o erstatement of recei ables.

111. #mith Manufacturing Company.s accounts recei able clerk has a friend who is also #mith.s customer. The accounts4recei able clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effecti e procedure for pre enting this type of acti ity is to a. /renumber and account for all credit memorandums. b. ;e"uire recei ing reports to support all credit memorandums before they are appro ed. c. Aa e all the sales department independent of the accounts4recei able department. d. Mail monthly statements. 113. /roper authori<ation of write4offs of uncollectible accounts should be appro ed in which of the following departments? a. Accounts recei able. c. Accounts payable. b. Credit. d. Treasurer. 135. 9hich of the following controls most likely would be effecti e in offsetting the tendency of sales personnel to ma%imi<e sales olume at the e%pense of high bad debt write4offs? a. &mployees responsible for authori<ing sales and bad debt write4offs denied access to cash. b. #hipping documents and sales in oices are matched by an employee who does not ha e authority to write off bad debts. c. &mployees in ol ed in the credit4granting function are separated from the sales function. d. #ubsidiary accounts recei able records are reconciled to the control account by an employee independent of the authori<ation of credit. 131. At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authori<ation least concern the auditor conducting an audit? a. )etermining discounts. c. Granting credit. b. #elling goods for cash. d. #hipping goods. 13!. An auditor obser es the mailing of monthly statements to a client.s customers and re iews e idence of follow4up on errors reported by the customers. This test of controls most likely is performed to support management.s financial statement assertion=s> of a. b. c. d. /resentation and disclosure Ies Ies 2o 2o &%istence or occurrence Ies 2o Ies 2o 13$. An auditor tests an entity.s policy of obtaining credit appro ed before shipping goods to customers in support of management.s financial statement assertion of a. Galuation or allocation. c. &%istence or occurrence. b. Completeness. d. ;ights and obligations. 13(. 9hich of the following audit procedures would an auditor most likely perform to test controls relating to management.s assertion concerning the completeness of sales transactions? a. Gerify that e%tensions and footings on the entity.s sales in oices and monthly customer statements ha e been recomputed. b. Inspect the entity.s reports of prenumbered shipping documents that ha e not been recorded in the sales ,ournal. c. Compare the in oiced prices on prenumbred sales in oices to the entity.s authori<ed price list.

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d. In"uire about the entity.s credit granting policies and the consistent application of credit checks. 13+. To determine whether the system of internal accounting control operated effecti ely to minimi<e errors of failure to in oice a shipment, the auditor would select a sample of transactions from the population represented by the a. Customer order file. c. 'pen in oice file. b. 6ill of lading file. d. #ales in oice file. 13-. Alpha Company uses its sales in oices for posting perpetual in entory records. Inade"uate controls o er the in oicing function allow goods to be shipped that are not in oiced. The inade"uate controls could cause an a. Fnderstatement of re enues, recei ables, and in entory. b. ' erstatement of re enues and recei ables, and an understatement of in entory. c. Fnderstatement of re enues and recei ables, and an o erstatement of in entory. d. ' erstatement of re enues, recei ables, and in entories. 130. 9hich of the following controls most likely addresses the completeness assertion for in entory? a. 9ork in process account is periodically reconciled with subsidiary records. b. &mployees responsible for custody of finished goods do not perform the recei ing function. c. ;ecei ing reports are prenumbered and periodically reconciled. d. There is a separation of duties between payroll department and in entory accounting personnel. 131. 9hich of the following controls most likely would be used to maintain accurate in entory records? a. /erpetual in entory records are periodically compared with the current cost of indi idual in entory items. b. A ,ust4in4time in entory ordering system keeps in entory le els to a desired minimum. c. ;e"uisitions, recei ing reports, and purchase orders are independently matched before payment is appro ed. d. /eriodic in entory counts are used to ad,ust the perpetual in entory records. 133. A weakness in internal control o er recording retirements of e"uipment may cause an auditor to a. Inspect certain items of e"uipment in the plant and trance those items to the accounting records. b. ;e iew the subsidiary ledger to ascertain whether depreciation was taken on each item of e"uipment during the year. c. Trace additions to the Cother assetsD account to search for e"uipment that is still on hand but no longer being used. d. #elect certain items of e"uipment from the accounting records and locate them in the plant. !55. The primary responsibility of a bank acting as registrar of capital stock is to a. Ascertain that di idends declared do not e%ceed the statutory amount allowable in the state of incorporation. b. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders. subsidiary ledger. c. Act as an independent third party between the board of directors and outside in estors concerning mergers, ac"uisitions, and the sale of treasury stock. d. Gerify that stock is issued in accordance with the authori<ation of the board of directors and the articles of incorporation. !51. 9ith well4de eloped internal control, employees in the same department most likely would appro e purchase orders, and also a. ;econcile the open in oice file. c. Authori<e re"uisition of goods. b. Inspect goods upon receipts. d. 2egotiate terms with endors. !5!. To strengthen the system of internal accounting control o er the purchase of merchandise, a company.s recei ing department should

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a. Accept merchandise only if a purchase order or appro al granted by the purchasing department is on hand. b. Accept and count all merchandise recei ed from the usual company endors. c. ;ely on shipping documents for the preparation of recei ing reports. d. 6e responsible for the physical handling of merchandise but not for the preparation of recei ing reports. !5$. 7or effecti e internal control, the accounts payable department generally should a. #tamp, perforate, or otherwise cancel supporting documentation after payment is mailed. b. Ascertain that each re"uisition is appro ed as to price, "uantity, and "uality by an authori<ed employee. c. 'bliterate the "uantity ordered on the recei ing department copy of the purchase order. d. &stablish the agreement of the endor.s in oice with the recei ing report and purchase order.

!5(. 9hich of the following controls is not usually performed in the ouchers payable department? a. Matching the endor.s in oice with the related recei ing report. b. Appro ing ouchers for payment by ha ing an authori<ed employee sign the ouchers. c. Indicating the asset and e%pense accounts to be debited. d. Accounting for unused prenumbered purchase orders and recei ing reports. !5+. In a properly designed internal accounting control system, the same employee may be permitted to a. ;ecei e and deposit checks, and also appro e write4offs of customer accounts. b. Appro e ouchers for payment, and also sign checks. c. ;econcile the bank statements, and also recei e and deposit cash. d. #ign checks, and also cancel supporting documents. !5-. In an audit of a purchasing department, which of the following ordinarily would be considered a risk factor? a. /urchase specifications are de eloped by the department re"uesting the material. b. /urchases are made against blanket or open purchase orders for certain types of items. c. /urchases are made from parties related to buyers or other company officials. d. There is a failure to rotate purchases among suppliers included on an appro ed endor list. !50. 9hich of the following constitutes the most significant risk within the purchasing cycle? a. ;ecei ing department personnel sign recei ing documents without inspecting or counting the goods. b. Earge "uantities of relati ely ine%pensi e parts are stored in open areas near work stations to reduce production slow4downs. c. /oor records of transfers between warehouses often result in unnecessary purchases and e%cess in entories. d. 9arehouse personnel do not compare "uantities recei ed to "uantities shown on transfer tickets. !51. In assessing control risk for purchases, an auditor ouches a sample of entries in the oucher register to the supporting documents. 9hich assertion would this test of controls most likely support? a. Completeness. c. Galuation or allocation. b. &%istence or occurrence. d. ;ights and obligations. !53. An entity.s internal control re"uires for e ery check re"uest that there be an appro ed oucher, supported by a prenumbred purchase order and a prenumbered recei ing report. To determine whether checks are being issued for unauthori<ed e%penditures, an auditor most likely would select items for testing from the population of all a. /urchase orders. c. ;ecei ing reports. b. Canceled checks. d. Appro ed ouchers. !15. 7rom the point of iew of good procedural control, distributing payroll checks to employees is best handled by the

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a. Treasurer*s department. &mployee*s department super isor. b. /ersonnel department. d. Accounting department.

c.

!11. 9hich of the following procedures most likely would be considered a weakness in an entity.s internal controls o er payroll? a. A oucher for the amount of the payroll is prepared in the general accounting department based on the payroll summary. b. /ayroll checks are prepared by the payroll department and signed by the treasurer. c. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. d. The personnel department sends employees. termination notices to the payroll department.

!1!. )uring the audit the independent auditor identified the e%istence of a weakness in the client.s internal control and orally communicated this finding to the client.s senior management and audit committee. The auditor should a. Consider the matter a scope limitation and therefore disclaim an opinion. b. )ocument the matter in the working papers and consider the effects of the conditions on the audit. c. #uspend all audit acti ities pending directions from the client.s audit committee. d. 9ithdraw from the engagement. !1$. )uring the planning phase of an audit, an auditor is identifying matters for communication to the entity.s audit committee. The auditor most likely would ask management whether a. There was significant turno er in the accounting department. b. It consulted with another C/A firm about installing a new computer system. c. There were changes in the application of significant accounting policies. d. It agreed with the auditor.s selection of fraud detection procedures. !1(. 9hich of the following statements is correct concerning an auditor.s re"uired communication with an entity.s audit committee? a. This communication is re"uired to occur before the auditor.s report on the financial statements is issued. b. This communication should include discussion of any significant disagreements with management concerning the financial assertions. c. Any significant matter communicated to the audit committee also should be communicated to management. d. #ignificant audit ad,ustments proposed by the auditor and recorded by management need not be communicated to the audit committee. !1+. Aow do the scope, procedures, and purpose of an e%amination of management.s written assertion on internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit? a b c d #cope #imilar )ifferent )ifferent )ifferent /rocedures )ifferent #imilar )ifferent #imilar /urpose #imilar #imilar )ifferent )ifferent

216. 9hich of the following statements is incorrect concerning a client who outsources a portion of
its IT function? a. Auditors need not be concerned with outsourced IT functions because those functions are re iewed by other auditors. b. The e%tent to which an auditor obtains an understanding of the ser ice center.s internal controls should be based upon the same criteria used to determine the understanding obtained for a client.s internal controls. c. It is common for a single independent auditor to obtain an understanding and test internal controls of a ser ice center for use by all its customers and their auditors. d. 2one of the above is correct.

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& idence , procedures and working papers =Related PSAs: /#A +55=re > /#A +51, +5+, +15, +!5, +(5, +(+, ++5, -!5, +-5 ,+15 and !$5, /A/# 1555, 155+ and 1555/h> !10. Assertions are representations of management that are embodied in financial statement components. They can be either e%plicit or implicit. 9hich of these assertions is not about aluation or allocation? a. /roperty is recorded at historical cost. b. Trade accounts recei able in the balance sheet are stated at net reali<able alue. c. 2otes payable in the balance sheet include all such obligations of the entity. d. /roperty cost is systematically allocated to appropriate accounting period. !11. 9hich of the following relates to rights and obligations assertion? a. All assets, liabilities and e"uity interests that should ha e been recorded ha e been recorded. b. Transactions and e ents that ha e been recorded ha e occurred and pertain to the entity. c. Assets, liabilities, and e"uity interests are included in the financial statements at appropriate amounts d. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. !13. Most of the independent auditor.s work in formulating an opinion on financial statements consists of a. #tudying and e aluating internal control. b. 'btaining and e%amining e idential matter. c. &%amining cash transactions. d. Comparing recorded accountability with assets. !!5. The principal reason for an independent auditor to gather and e aluate audit e idence is to a. 7orm an opinion on the financial statements. b. )etect fraud. c. & aluate management. d. & aluate internal control. !!1. 9hich of the following statements concerning e idential matter is correct? a. Competent e idence supporting management.s assertions should be con incing rather than merely persuasi e. b. An effecti e internal control structure contributes little to the reliability of the e idence created within the entity. c. The cost of obtaining e idence is not an important consideration to an auditor in deciding what e idence should be obtained. d. A client.s accounting data cannot be considered sufficient audit e idence to support the financial statements. !!!. 9hich of the following statements relating to the competence of e idential matter is always true? a. & idential matter gather by an auditor from outside an enterprise is reliable. b. Accounting data de eloped under satisfactory conditions of internal control are more rele ant than data de eloped under unsatisfactory internal control conditions. c. 'ral representations made by management are not alid e idence. d. & idence gathered by auditors must be both alid and rele ant to be considered competent. !!$. Audit information is usually considered rele ant when it is a. )eri ed through alid statistical sampling. b. 'b,ecti e and unbiased. c. 7actual, ade"uate, and con incing. d. Consistent with the audit ob,ecti es. !!(. #e eral types of documentary e idence were recei ed by the auditor, but of these only one is considered most reliable: a. 9orking papers prepared by the chief accountant and re iewed personally by the G/ for finance. b. A check issued by the treasurer with the payee.s endorsement, included with the statement mailed by the bank directly to the auditor.

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c. A deli ery receipt issued by the shipping department, signed by the customer, with an accompanying copy of the sale in oice. d. Confirmation of the balance of an accounts payable mailed by and returned directly to the auditor. !!+. 9hich of the following types of audit e idence is the least persuasi e? a. /renumbered purchase order forms. b. 6ank statements obtained from the client. c. Test counts of in entory performed by the auditor. d. Correspondence from the client.s attorney about litigation. !!-. Theoretically, which of the following would not ha e an effect on the amount of audit e idence gathered by the auditor? a. The type of opinion to be issued. b. The auditor.s e aluation of internal control. c. The types of audit e idence a ailable to the auditor. d. 9hether or not the client reports to the #ecurities and &%change Commission. !!0. )escribe substanti e audit tests in the conte%t of an audit of financial statements. a. #ubstanti e tests are audit procedures that may be either tests of transactions, direct tests of financial balances, or analytical tests. b. #ubstanti e tests are audit procedures that may be eliminated under certain conditions. c. #ubstanti e tests are audit procedures that are designed to disco er significant subse"uent e ents. d. #ubstanti e tests are audit procedures that will increase proportionately with the auditor.s reliance on internal control. !!1. In performing an audit, which one of the following procedures would be considered a Csubstanti eD testD? a. Comparing last year.s interest e%pense with this year.s interest e%pense. b. Comparing signatures on checks with the signatures of authori<ed check signers. c. ;e iewing initials on recei ed documents. d. ;e iewing procedures followed in recei ing, depositing, and disbursing cash. !!3. A basic premise underlying the application of analytical procedures is that a. The study of financial ratios is an acceptable alternati e to the in estigation of unusual fluctuations. b. #tatistical tests of financial information may lead to the disco ery of material misstatements in the financial statements. c. /lausible relationships among data may reasonably be e%pected to e%ist and continue in the absence of known conditions to the contrary. d. These procedures cannot replace tests of balances and transactions. !$5. The auditor will most likely perform e%tensi e tests for possible understatement of a. ;e enues. b. Eiabilities. c. Assets. d. Capital. !$1. Larl, an auditor with e%tensi e e%perience in the retail industry, is assigned to audit the reasonableness of accounting estimates in the year 1 financial statements of Aaas Company. Aaas Company, which was formed in year 1, markets fishing nets. 9hich of the following is the least important consideration for Larl in his audit of the reasonableness of accounting estimates? a. An ine%perienced employee at Aaas prepared the financial statements and was entirely responsible for the accounting estimates. b. Larl has ne er been in ol ed in an audit of a company that sells fishing nets. c. The accounting estimates in the financial statements of Aaas Company are based on numerous significant assumptions. d. The accounting estimates in the financial estimates are susceptible to bias. !$!. 9hich of the following statements is true about related party transactions? a. In the absence of e idence to the contrary, related party transactions should be assumed to be outside the ordinary course of business. b. An auditor should determine whether a particular transaction would ha e occurred if the parties had not been related.

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c. An auditor should substantiate that related party transactions were consummated on terms e"ui alent to those that pre ail in arm.s length transactions. d. The audit procedures directed toward identifying related party transactions should include considering whether transactions are occurring but are not being gi en proper accounting recognition. !$$. )uring the course of an audit engagement an auditor prepares and accumulates audit working papers. The primary purpose of the audit working papers is to a. Aid the auditor planning his work. b. /ro ide a point of reference for future audit engagements. c. #upport the underlying concepts included in the preparation of the basic financial statements. d. #upport the auditor*s opinion. !$(. 9hich of the following pairs of accounts would an auditor most likely analy<e on the same working paper? a. 2otes recei able and interest income. b. Accrued interest recei able and accrued interest payable. c. 2otes payable and notes recei able. d. Interest income and interest e%pense. !$+. 9hich of the following factors most likely would affect an auditor.s ,udgment about the "uantity, type, and content of the auditor.s working papers? a. The assessed le el of control risk. b. The likelihood of a re iew by a concurring =second> partner. c. The number of personnel assigned to the audit. d. The content of the management representation letter. !$-. The permanent =continuing> file of an auditor.s working papers most likely would include copies of the a. Eead schedules. c. 6ank statements. b. Attorney.s letters. d. )ebt agreements. #ampling =Related PSA: /#A +$5> !$0. In assessing sampling risk, the risk of incorrect re,ection and the risk of assessing control risk too high =risk of under4reliance> on internal accounting control relate to the a. &fficiency of the audit. c. #election of the sample. b. &ffecti eness of the audit. d. Audit "uality controls. !$1. #tatistical sampling pro ides a techni"ue for a. &%actly defining materiality. b. Greatly reducing the amount of substanti e testing. c. &liminating ,udgment in testing. d. Measuring the sufficiency of e idential matter. !$3. At times a sample may indicate that the auditor*s planned degree of reliance on a gi en control is reasonable when, in fact, the true compliance rate does not ,ustify such reliance. This situation illustrates the risk of a. ' er4reliance. c. Incorrect precision. b. Fnder4reliance. d. Incorrect re,ection. !(5. 9hen assessing the tolerable rate, the auditor should consider that, while de iations from control procedures increase the risk of material errors, such de iations do not necessarily result in errors. This e%plains why a. A recorded disbursement that does not show e idence of re"uired appro al may ne ertheless be a transaction that is properly authori<ed and recorded. b. )e iations would result in errors in the accounting records only if the de iations and the errors occurred on different transactions. c. )e iations from pertinent control procedures at a gi en rate ordinarily would be e%pected to result in errors at a higher rate. d. A recorded disbursement that is properly authori<ed may ne ertheless be a transaction that contains a material error.

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!(1. In audit sampling conte%ts, precision is a. A characteristic of the population at hand and is not under the direct control of the auditor. b. A measure of the accuracy with which one has generated sample estimates. )esired precision must be established before the sample is obtained and e aluated. c. & aluated independently of reliability in a gi en sample. d. Important for e aluating ariables samples, but not attributes samples. !(!. Conditions leading to smaller sample si<e in compliance testing: - ;eliance on internal control 1.1 lower reliance 1.! higher reliance - Acceptance rate of de iation from planned reliance on internal control !.1 lower acceptable rate !.! higher acceptable rate - Allowance risk of o er reliance $.1 lower risk $.! higher risk - Eikely rate or population de iation (.1 lower e%pected rate (.! higher e%pected rate a. Combination of 1.1, !.1, $.1, (.1 c. Combination of 1.1, !.!, $.!, (.1 b. Combination of 1.!, !.1, $.1, (.! d. Combination of 1.!, !.!, $.!, (.! !($. In testing payroll transactions, an auditor disco ers that four out of a statistical sample of one hundred selected time cards were not signed by the appropriate super isor. To e aluate the materiality or significance of this control deficiency, the auditor should a. Compare the tolerable de iation rate with the e%pected de iation rate. b. Compute an upper precision limit and compare with the tolerable rate. c. & aluate the dollar amount of the four time cards in relation to the financial statements. d. ;eport the de iations and let management assess the significance because they are in the best position to know. The ne%t two "uestions are based on the following: An auditor desired to test credit appro al on 15,555 sales in oices processed during the year. The auditor designed a statistical sample that would pro ide 1M risk of assessing control risk too low =33M confidence> that not more than 0M of the sales in oices lacked appro al. The auditor estimated from pre ious e%perience that about !NM of the sales in oices lacked appro al. A sample of !55 in oices was e%amined and 0of them were lacking appro al. The auditor then determined the achie ed upper precision limit to be 1M. !((. In the e aluation of this sample, the auditor decided to increase the le el of the preliminary assessment of control risk because the a. Tolerable rate =0M> was less than the achie ed upper precision limit. b. &%pected de iation rate =0M> was more than the percentage of errors in the sample =$N M> c. Achie ed upper precision limit =1M> was more than the percentage of errors in the sample =$NM>. d. &%pected de iation rate =!NM> was less than the tolerable rate =0M>. !(+. The allowance for sampling risk was a. +NM b. $NM c. (NM d. 1 M

!(-. #tatistical sampling techni"ues may be used to sample CattributesD as well as C ariablesD. An e%ample of a C ariableD that can be tested using statistical sampling techni"ue would be: a. The number of errors in the client4prepared aging schedule of accounts recei able. b. The balance in the accounts recei able account. c. Compliance with the re"uirement that each oucher be initialed by the treasurer before a check is prepared for payment of the oucher. d. The number of entries improperly posted to a ,ob order cost card. !(0. #ome conditions leading to a larger sample si<e in substanti e testing: - ;eliance on internal control 1.1 higher reliance 1.! lower reliance

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- ;eliance on other substanti e tests related or same audit ob,ecti es as class of transactions !.1 higher reliance !.! lower reliance - Measure of tolerable errors for a specific audit ob,ecti e $.1 larger measure $.! smaller measure - &%pected si<e and fre"uency of errors (.1 larger errors or higher fre"uency (.! smaller errors or lower fre"uency a. Combination of 1.!, !.!, $.!, (.1 c. Combination of 1.!, !.!, $.1, (.! b. Combination of 1.1, !.1, $.!, (.1 d. Combination of 1.1, !.1, $.1, (.! !(1. 9hich of the following statements is correct concerning the auditor.s use of statistical sampling? a. An auditor needs to estimate the peso amount of the standard de iation of the population to use classical ariables sampling. b. An assumption of //# sampling is that the underlying accounting population is normally distributed. c. A classical ariables sample needs to be designed with special considerations to include negati e balances in the sample. d. The selection of <ero balances usually does not re"uire special sample design considerations when using //# sampling. !(3. An auditor selects a preliminary sample of 155 items out of a population of 1,555 items. The sample statistics generate an arithmetic mean of /-5, a standard de iation of /- and a standard error of the mean of /.-5. If the sample was ade"uate for the auditor*s purposes and the auditor*s desired precision was plus or minus /1,555, the minimum acceptable peso alue of the population would be a. /-1,555 b. /+3,555 c. /-5,555 d. /+1,155 !+5. The statistical sampling drawn from a population of in oices indicates a mean alue of /1+5 and sampling precision of O /$5 at a 3+M confidence le el. 9hat is the correct interpretation of this sample data? a. In repeated sampling, the point estimates of the true population mean will be /1+5 about 3+M of the time. b. In repeated sampling, the true population mean will fall in the precision range of /1!5 to /115 about 3+M of the time. c. There is a 3+M probability that the true population mean falls in the range of /1$+ and /1-+. d. There is a 3+M probability that the true population mean is /1+5. Completing the Audit and /ost4Audit ;esponsibilities !+1. The primary ob,ecti e of analytical procedures used in the final re iew stage of an audit is to a. 'btain e idence from details tested to corroborate particular assertions. b. Identify areas that represent specific risks rele ant to the audit. c. Assist the auditor in assessing the alidity of the conclusions reached. d. #atisfy doubts when "uestions arise about a client*s ability to continue in e%istence. !+!. An auditor is concerned with completing arious phases of the e%amination after the balance4 sheet date. This Jsubse"uent periodJ e%tends to the date of the a. Auditor*s report. b. 7inal re iew of the audit working papers. c. /ublic issuance of the financial statements d. )eli ery of the auditor*s report to the client. !+$. 9hich of the following procedures would most likely be performed in connection with a re iew of subse"uent e ents? a. Test of shipping cut4offs. b. ;e iew of cut4of bank statements. c. Gouching of subse"uent payments of accounts payable

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d. ;eading of minutes of meetings of stockholders and board of directors up to the date of the audit report. !+(. 9hich of the following material e ents occurring subse"uent to the balance sheet date would re"uire an ad,ustment to the financial statements before they are issued? a. #ale of long4term debt or capital stock. b. Eoss of a plant as a result of a flood. c. Ma,or purchase of a business which is e%pected to double sales olume. d. #ettlement of litigation, in e%cess of the recorded liability. !++. The auditor*s primary means of obtaining corroboration of management*s information concerning litigation is a a. Eetter of audit in"uiry to the client*s lawyer. b. Eetter of corroboration from the auditor*s lawyer upon re iew of the legal documentation. c. Confirmation of claims and assessments from the other parties to the litigation. d. Confirmation of claims and assessments from an officer of the court presiding o er the litigation.

!+-. 9hich of the following conditions or e ents most likely would cause an auditor to ha e substantial doubt about an entity.s ability to continue as a going concern? a. Cash flows from operating acti ities are negati e. b. ;esearch and de elopment pro,ects are postponed. c. #ignificant related party transactions are per asi e. d. #tock di idends replace annual cash di idends. !+0. Cooper, C/A, belie es there is substantial doubt about the ability of Pero Corp. to continue as a going concern for a reasonable period of time. In e aluating Pero.s plans for dealing with the ad erse effects of future conditions and e ents, Cooper most likely would consider, as a mitigating factor, Pero.s plans to a. )iscuss with lenders the terms of all debt and loan agreements. b. #trengthen internal controls o er cash disbursements. c. /urchase production facilities currently being leased from a related party. d. /ostpone e%penditures for research and de elopment pro,ects. !+1. 9hen an auditor concludes there is a substantial doubt a continuing audit client.s ability to continue as a going concern for a reasonable period of time, the auditor.s responsibility is to a. Issue a "ualified or ad erse opinion, depending upon materiality, due to the possible effects on the financial statements. b. Consider the ade"uacy of disclosure about the client.s possible inability to continue as a going concern. c. ;eport to the client.s audit committee that management.s accounting estimates may need to be ad,usted. d. ;eissue the prior year.s auditor.s report and add an e%planatory paragraph that specifically refers to Csubstantial doubtD and Cgoing concernD. !+3. It is an accepted practice for e%ternal auditors to re"uest letter of representation from their clients. A principal purpose of a letter of representation form the client is to a. )ischarge the auditor from legal liability of his e%amination. b. Confirm in writing management.s appro al of limitations on the scope of audit. c. #er e as an introduction to company.s personnel and authori<ation to e%amine the records. d. ;emind management for its primary responsibility for financial statements. !-5. Items for inclusion in management representation letter are normally: a. )etermined by management. b. Co ering all the accounts in the financial statements c. )etermined by auditors based on the circumstances of the engagement. d. 6ased on A#/C.s standard list. !-1. 9hich of the following e ents occurring after the issuance of an auditor.s report most likely would cause the auditor to make further in"uiries about the pre iously issued financial statements?

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a. An uninsured natural disaster occurs that may affect the entity.s ability to continue as a going concern. b. A contingency is resol ed that had been disclosed in the audited financial statements. c. 2ew information is disco ered concerning undisclosed lease transactions of the audited period. d. A subsidiary is sold that accounts for !+M of the entity.s consolidated net income. Audit report (Related PSAs: /#A 055, 015, 0!5, +-5, +05, -55 and -!5> !-!. The fist standard of reporting re"uires that, Cthe report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.D This should be construed to re"uire a. A statement of fact by the auditor. c. An opinion by the auditor. b. An implied measure of fairness. d. An ob,ecti e of compliance. !-$. 9hen e%pressing an un"ualified opinion, the auditor who e aluates the audit findings should be satisfied that the a. Amount of known misstatement is documented in the management representation letter. b. &stimate of the total likely misstatement is less than a material amount. c. Amount of known misstatement is acknowledged and recorded by the client. d. &stimate of the total likely misstatement includes the ad,usting entries already recorded by the client.

26 . !ow are management"s responsibilit# and the auditor"s responsibilit# represented in the standard auditor"s report$
Management.s responsibility Auditor.s responsibility a. &%plicitly &%plicitly b. Implicitly Implicitly c. Implicitly &%plicitly d. &%plicitly Implicitly

!-+. 9hich of the following representations does an auditor make e%plicitly and which implicitly when issuing an un"ualified opinion? a. b. c. d. Conformity with GAA/ &%plicitly Implicitly Implicitly &%plicitly Ade"uacy of disclosure &%plicitly Implicitly &%plicitly Implicitly !--. The e%istence of audit risk is recogni<ed by the statements in the auditor.s standard report that the a. Auditor is responsible for e%pressing an opinion on the financial statements, which are the responsibility of management. b. 7inancial statements are presented fairly, in all material respects, in conformity with GAA/. c. Audit includes e%amining, on a test basis, e idence supporting the amounts and disclosures in the financial statements. d. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. !-0. 9hich of the following accounting changes does not affect consistency? a. Change in accounting principle. c. Change in accounting estimates b. Change in the reporting entity. Correction of an error in principle.

d.

!-1. In which of the following circumstances may the auditor issue an un"ualified standard audit report? a. There has been a departure from GAA/. b. There has been a lack of consistency of applying GAA/. c. The auditor relies on the report of another auditor. d. There are "uestions about the continued e%istence of the entity. !-3. 9hen audited financial statements are presented in a client.s document containing other information, the auditor should a. /erform in"uiry and analytical procedures to ascertain whether the other information is reasonable.

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b. Add an e%planatory paragraph to the auditor.s report without changing the opinion on the financial statements. c. /erform the appropriate substanti e auditing procedures to corroborate the other information. d. ;ead the other information to determine that it is consistent with the audited financial statements. !05. An auditor.s report on comparati e financial statements should be dated as of the date of the a. Issuance of the report. b. Completion of the auditor.s recent field work. c. Eatest financial statements d. East subse"uent e ent disclosed in the statements. !01. In determining the type of opinion to e%press, an auditor assesses the nature of the reporting "ualification and the materiality of their effects. Materiality will be the primary factor considered in the choice between a. An Ce%cept forD opinion and an ad erse opinion. b. An Ce%cept forD opinion and a Csub,ect toD opinion. c. An ad erse opinion and a disclaimer of opinion. d. A Csub,ect toD opinion and a piecemeal opinion. !0!. In which of the following circumstances would an auditor usually choose between issuing a "ualified opinion or a disclaimer of opinion? a. )eparture from GAA/. b. Inade"uate disclosure of accounting policies. c. Inability to obtain sufficient competent e idential matter. d. Fnreasonable ,ustification for a change in accounting principle. !0$. A client is presenting comparati e =!4year> financial statements. 9hich of the following is correct concerning reporting responsibilities of a continuing auditor? a. The auditor should issue one audit report which is on both presented years. b. The auditor should issue two audit reports, one on each year. c. The auditor should issue one audit report, but only on the most recent year. d. The auditor may issue either one audit report on both presented years, or two audit reports, one on each year. !0(. 9hen financial statements of a prior period are presented on a comparati e basis with financial statements of the current period, the continuing auditor is responsible for a. &%pressing dual dated opinions. b. Fpdating the report on the pre ious financial statements only if there has not been a change in the opinion. c. Fpdating the report on the pre ious financial statements only if the pre ious report was "ualified and the reasons for the "ualification no longer e%ist. d. Fpdating the report on the pre ious financial statements regardless of the opinion pre iously issued. !0+. Mead, C/A, had substantial doubt about Tech Co..s ability to continue as a going concern when reporting on Tech.s audited financial statements for the year ended Hune $5, !55+. That doubt has been remo ed in !55-. 9hat is Mead.s reporting responsibility if Tech is presenting it.s financial statements for the year ended Hune $5, !55-, on a comparati e basis with those of !55+? a. The e%planatory paragraph included in the !55+ auditor.s report should not be repeated. b. The e%planatory paragraph included in the !55+ auditor.s report should be repeated in its entirety. c. A different e%planatory paragraph describing Mead.s reasons for the remo al of doubt should be included. d. A different e%planatory paragraph describing Tech.s plans for financial reco ery should be included. !0-. If an amendment to other information in a document containing audited financial statements is necessary and the entity refuses to make the amendment, the auditor would consider issuing: a. 8ualified or ad erse opinion c. Fn"ualified opinion with e%planatory paragraph b. 8ualified or disclaimer of opinion d. Fn"ualified opinion.

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Auditing in a CI# en ironment (Related PSAs/PAPSs: /#A (51K /A/# 1551, 155!, 155$, 1551 and 1553> !00. A common difficulty in auditing a computeri<ed accounting system is: a. )ata can be erased from the computer with no isible e idence. b. 6ecause of the lack of an audit trail, computer systems ha e weaker controls and more substanti e testing is re"uired. c. 6ecause of the uniform nature of transaction processing, computer systems ha e strong controls and less substanti e testing is re"uired. d. The large dissemination of entry points into the computer system leads to weak o erall reliance on information generated by a computer. !01. 9hich of the following would not be an appropriate procedure for testing the general control acti ities of an information system? a. In"uiries of client personnel. b. Inspecting computer logs. c. Testing for the serial se"uence of source documents. d. &%amination of the organi<ational chart to determine the segregation of duties. !03. If an auditor is using test data in a client*s computer system to test the integrity of the systems output, which of the following types of controls is the auditor testing? a. General controls. c. Fser controls. b. 8uantitati e test controls. d. Application controls. !15. 9hen erroneous data are detected by computer program controls, such data may be e%cluded from processing and printed on an error report. This error report should be re iewed and followed up by the a. Computer operator. c. &)/ control group. b. #ystems analyst. d. Computer programmer. !11. The computer is sometimes blamed for making errors. In reality, computers make ery few mechanical errors. The most likely source of errors in a fully operational computer4based system is due to a. #ystems analysis. c. Input. b. /rogramming. d. /rocessing. !1!. The characteristics that distinguish computer processing from manual processing include the following: =1> Computer processing uniformly sub,ects like transactions to the same instructions. =!> Computer systems always ensure that complete transaction trails useful for audit purposes are preser ed for indefinite period =$> Computer processing irtually eliminates the occurrence of clerical errors normally associated with manual processing. =(> Control procedures as to segregation of functions may no longer be necessary in a computer en ironment. a. All of the abo e statements are true. c. 'nly statements =!> and =(> are true. b. 'nly statements =1> and =$> are true. d. All of the abo e statements are false. !1$. The increased use of database processing systems makes managing data and information a ma,or information ser ice function. 6ecause the databases of an organi<ation are used for many different applications, they are coordinated and controlled by a database administrator. The functions of a database administrator are a. )ata input preparation, database design, and database operations. b. )atabase design, database operation, and database security. c. )atabase design, database operation, and e"uipment operations. d. )atabase design, software support, and database security. !1(. 9hen a new application is being created for widespread use in a large organi<ation, the principal liaison between the Information #ystems =I#> department and the rest of an organi<ation is normally a=n> a. &nd user. c. Maintenance programmer. b. Application programmer. d. #ystems analyst.

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!1+. 9hich of the following procedures would enhance the control structure of a computer operations department? I. /eriodic rotation of operators. II. Mandatory acations. III. Controlled access to the facility. IG. #egregation of personnel who are responsible for controlling input and output. a. I, II. b. III, IG. c. I, II, III. d. I, II, III, IG. !1-. The most critical aspect of the separation of duties within a mainframe information systems en ironment is between a. /rogrammers and pro,ect leaders. c. /rogrammers and users. b. /rogrammers and systems analysts. d. /rogrammers and computer operators. !10. 9hich of the following best describes the primary reason that organi<ations de elop contingency plans for their &)/ operations? a. To ensure that they will be able to process ital transactions in the e ent of any type of disaster. b. To ensure the safety of important records. c. To help hold down the cost of insurance. d. To plan for sources of capital for reco ery from any type of disaster. !11. A critical aspect of a disaster reco ery plan is to be able to regain operational capability as soon as possible. In order to accomplish this, an organi<ation can ha e an arrangement with its computer hardware endor to ha e a fully operational facility a ailable that is configured to the user*s specific needs. This is best known as a=n> a. Fninterruptible power system. c. Cold site. b. /arallel system. d. Aot site. !13. 9hich of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a ma,or pro,ect? a. Grandfather4father4son record retention. c. #ystems documentation. b. Input and output alidation routines. d. Check digit erification. !35. /rogram documentation is a control designed primarily to ensure that a. /rogrammers ha e access to the tape library or information on disk files. b. /rograms do not make mathematical errors. c. /rograms are kept up to date and perform as intended. d. )ata ha e been entered and processed. !31. A company*s labor distribution report re"uires e%tensi e corrections each month because of labor hours charged to inacti e ,obs. 9hich of the following data processing input controls appears to be missing? a. Completeness test. c. Eimit test. b. Galidity test. d. Control total. !3!. 6ank tellers and their super isors sign on to an online deposit system with their employee numbers, which are readily a ailable to all tellers. The bank wants to pre ent teller access to certain appro al functions, such as withdrawals o er a specified dollar limit. The best control for implementing this restriction would be a. Tagging. b. /asswords. c. Callback. d. Eogs. !3$. 9hich of the following tasks could not be performed when using a generali<ed audit software package? a. #electing in entory items for obser ation. b. /hysical count of in entories. c. Comparison of in entory test counts with perpetual records. d. #ummari<ing in entory turno er statistics for obsolescence analysis. !3(. /arallel simulation is an audit techni"ue employed to erify processing logic by making use of audit test programs. These audit test programs CsimulateD the processing logic of an application program or programs under re iew. 9hich statement indicates the use of parallel simulation audit techni"ue? a. Ei e transactions are processed using li e programs.

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b. Ei e transactions are processed using test master file. c. Test transactions are processed using test programs. d. Ei e transactions are processed using test programs. !3+. 9hich of the following computer4assisted auditing techni"ues allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? a. /arallel simulation c. Test data approach b. Integrated test facility approach d. &%ception report tests !3-. 9hich of the following statement is not true about test data? a. Test data should consist only of conditions that interest the auditor. b. 'nly one transaction of each type need be tested. c. Test data must consist of all possible alid and in alid conditions. d. Test data are processed by the client.s software under the auditor.s control.

2%7. 9hich of the following is an incorrect statement regarding testing strategies related to
auditing through the computer? a. The test data approach in ol es processing the client.s data on a test basis to determine the integrity of the system. b. The test data approach in ol es processing the auditor.s test data on the client.s computer system to determine whether computer4performed controls are working properly. c. Test data should include all rele ant data conditions that the auditor is interested in testing. d. 9hen the auditor uses the embedded audit module approach, an audit module is inserted in the client.s system to capture transactions with certain characteristics. !31. Auditing by testing the input and output of a computer system44i.e., auditing JaroundJ the computer44instead of the computer software itself will a. 2ot detect program errors that do not appear in the output sampled. b. )etect all program errors, regardless of the nature of the output. c. /ro ide the auditor with the same type of e idence. d. 2ot pro ide the auditor with confidence in the results of the auditing procedures. 'ther ser ices (Related PSAs: /#A 315, 3!5, 3$5, 155, 115> !33. A C/A*s report on agreed4upon procedures related to management*s assertion about an entity*s compliance with specified re"uirements should contain: a. A statement of limitations on the use of the report. b. An opinion about whether management*s assertion is fairly stated. c. 2egati e assurance that control risk has not been assessed. d. An acknowledgment of responsibility for the sufficiency of the procedures. $55. 9hich of the following procedures does an accountant in a compilation engagement of a nonpublic entity ordinarily perform? a. ;eading the financial statements to consider whether they are free of ob ious mistakes in the application of accounting principles. b. 'btaining written representations from management indicating that the compiled financial statements will not be used to obtain credit. c. Making in"uiries of management concerning actions taken at meetings of the stockholders and the board of directors. d. Applying analytical procedures designed to corroborate management*s assertions that are embodied in the financial statement components. $51. The ob,ecti e of a re iew of interim financial information of a public entity is to pro ide an accountant with a basis for reporting whether: a. A reasonable basis e%ists for e%pressing an updated opinion regarding the financial statements that were pre iously audited. b. Material modifications should be made to conform with generally accepted accounting principles. c. The financial statements are presented fairly in accordance with standards of interim reporting.

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d. The financial statements are presented fairly in accordance with generally accepted accounting principles. $5!. The ob,ecti e of an agreed upon4procedures engagement is for the auditor to: a. Carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties ha e agreed and to report on factual findings. b. Carry out procedures of a re iew nature to which the auditor and the entity and any appropriate third parries ha e agreed and to report on factual findings. c. Carry out procedures of a re iew nature and to e%press limited assurance based on those agreed procedures. d. Carry out procedures of an audit nature and is e%press limited assurance. $5$. 9hich of the following is incorrect about agreed4upon procedures engagement? a. An engagement to perform agreed4upon procedures may in ol e the auditor in performing certain procedures concerning indi idual items of financial data. b. Fsers of the agreed4upon procedures report assess for themsel es the procedures and findings reported by the auditor and draw their conclusion from the auditor.s work. c. The auditor should be independent of the financial data or financial statements where agreed procedures ha e to be applied. d. The report is restricted to those parties that ha e agreed to the procedures to be preformed. $5(. 9hich of the following should the auditor perform in a re iew engagement ? a. Fnderstand matters that are rele ant to the financial statements. b. Fnderstand the entity.s internal control system. c. 'bser e the physical count of in entory. d. In"uire of legal counsel of pending litigations. $5+. Matters to be agreed in an agreed4upon procedures engagement include the following, e%cept: a. #tated purpose of the engagement b. Eimitations on distribution of the report of factual findings. c. Anticipated form of the report and the le el of assurance to be pro ided d. 2ature, timing and e%tent of the specific procedures to be applied. $5-. 9hich of the following is least likely done by the auditor in conducting a re iew of financial statements. a. #tudy of the relationships of the elements of the financial statements. b. Comparison of the financial statements with statements for prior period. c. Comparison of the financial statements with anticipated results and financial position. d. Comparison of in entory listing with physical in entory count. $50. The ;e iew ;eport include the following: a ;eference to /hilippine #tandard on Auditing applicable to re iew engagement. A statement that a re iew is limited to in"uiries and analytical procedures #pecific description of procedures that ha e been performed by the auditor Ies Ies 2o b 2o Ies Ies c Ies Ies Ies d 2o 2o Ies

$51. 9hich of the following is not included in the scope paragraph of a re iew report? a. A statement that a re iew is limited primarily to in"uires and analytical procedures. b. A reference to /hilippine #tandard on Auditing applicable to re iew engagement. c. A statement the re iew included an e aluation of reasonableness of accounting estimates made by management. d. A statement that an audit has not been performed. $53. In a re iew engagement, if there has been a material scope limitation, the auditor should describe the limitation in the re iew report and either a. &%press a "ualification of the negati e assurance or not pro ide any assurance. b. &%press a "ualification of the negati e assurance pro ided or issue an ad erse statement that the financial statement are not presented fairly.

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c. &%press an ad erse statement that the financial statements are not presented fairly or the auditor not issue any assurance. d. 2ot modify the negati e assurance or not issue an assurance.

&1'. An auditor*s report would be designated as a special report when it is issued in connection
with financial statements that are a. 7or an interim period and are sub,ected to a limited re iew. b. Fnaudited and are prepared from a client*s accounting records. c. /repared in accordance with a comprehensi e basis of accounting other than generally accepted accounting principles. d. /urported to be in accordance with generally accepted accounting principles but do not include a presentation of the #tatement of Cash 7lows. - end of exa !na"!onGood Luck!

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