CASH/ACCOUNTS RECEIVABLE/REVENUE CYCLE

Which of the following is the focus of an audit of cash for most companies?
a. General cash account.
b. Payroll cash account.
c. Petty cash account.
d. Money market account.
The test of details of balances procedure that requires the auditor to foot the outstanding check list and deposits in
transit is an attempt to satisfy which audit objective?
a. Cutoff.
b. Presentation and disclosure.
c. Detail tie-in.
d. Completeness.
Which of the following cycles does not affect cash in bank?
a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.
The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with
the general ledger can be tested by which of the following procedures?
a. Performing tests for kiting.
b. Receiving and testing a cutoff bank statement.
c. Footing the outstanding checks list and the list of deposits in transit.
d. Examining the minutes of the board of directors for restrictions on the use of cash.

Which of the following statements is correct?

a. Auditors must obtain bank confirmations on every audit.
b. Auditors obtain bank confirmations at their discretion.
c. Auditing standards do not address specific requirements regarding bank confirmations.
d. Auditing standards do not require bank confirmations except when there are an unusually large number of
inactive bank accounts.
Which of the following statements is correct?
a. Bank personnel are responsible for providing reasonable assurance that a response to a bank confirmation is
accurate.
b. Bank personnel are responsible for providing complete assurance that a bank confirmation is complete.
c. Bank personnel are not responsible for searching their records for bank balances or loans beyond those
included on the bank confirmation.
d. Bank personnel are not responsible for providing information related to interest on the bank confirmation.
The general cash account is considered significant in almost all audits:
a. where the ending balance is material.
b. even when the ending balance is immaterial.
c. except those of not-for-profit organizations.
d. where either the beginning or ending balance is material.
Which of the following errors would be least likely to be discovered during the audit of the acquisitions and
payments cycle?
a. Duplicate payment of a vendors invoice.
b. Improper payments of officers personal expenditures.
c. Payment of interest to a related party for an amount in excess of the going rate.
d. Payment for raw materials that were not received.

Testing the reasonableness of the cash balance at year-end is less important when the year-end bank reconciliation is
verified:
a. on a 100% basis.
b. by someone in clients organization who is independent of the treasurers function.
c. by someone in clients organization who is independent of the controllers function.
d. by the owner/manager.

The starting point for the verification of the balance in the general bank account is to obtain:
a. a bank reconciliation from the client.
b. the clients cash account from the general ledger.
c. a cutoff bank statement directly from the bank.
d. the clients year-end bank statement and reconcile it.
In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of
balance procedures?
a. Trace the book balance on the reconciliation to the general ledger.
b. Trace outstanding checks to subsequent period bank statements.
c. Perform a four-column proof of cash.
d. Review financial statements to make sure that material savings accounts and certificates of deposit are
disclosed separately.
The audit procedure which requires the auditor to record the last check number used on the last day of the year and
subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit
objective of:
a. detail tie-in.
b. existence.
c. completeness.
d. cutoff.
The direct receipt of a confirmation from every bank with which the client does business is:
a. required by auditing standards for every audit.
b. not necessary unless material fraud is suspected.
c. typically done but not required by auditing standards.
d. necessary for every audit except when there are an unusually large number of active accounts.
The reason for testing the clients bank reconciliation is to verify whether the clients recorded bank balance is the
same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling
items. The information needed to complete the tests of the reconciliation are provided by the:
a. clients records and ledgers for the year under audit.
b. cutoff bank statement.
c. clients records and ledgers for the subsequent year.
d. canceled checks for the year under audit.
Which of the following items would not normally appear on bank reconciliations?
a. Balance per bank
b. List of deposits in transit
c. Outstanding deposits
d. Outstanding checks
A proof of cash is effective at identifying which of the following misstatements?
a. Checks written for incorrect amounts.
b. Checks issued to invalid vendors.
c. Fraudulent checks.
d. Checks recorded by the books for an amount different than the check.
If a bank does not respond to a bank confirmation request, an auditor may:

Ask the client to communicate with the

bank to ask them to complete and return
Perform alternative Send a second request the confirmation
procedures
No Yes Yes
No No Yes
Yes No Yes
Yes Yes No
Which of the following cash transfers results in a misstatement of cash at December 31, 2007?
Bank Transfer Schedule
Recorded Disbursement Recorded Date
transfer paid by transfer received
in books by bank in books by bank
a. 12/31/07 1/04/08 12/31/07 12/31/07
b. 1/04/08 1/05/08 12/31/07 1/04/08
c. 12/31/07 1/05/08 12/31/07 1/04/08
d. 1/04/08 1/11/08 1/04/08 1/04/08
_____ is cash stolen from an organization before it is recorded in the accounting records.
a. Theft
b. Cash larceny
c. Skimming
d. Floating

During his examination of a January 19, 2008 cutoff bank statement, an auditor noticed that the majority of checks
listed as outstanding at December 31, 2007, had not cleared the bank. This would indicate:
a. a high probability of kiting.
b. a high probability of lapping.
c. that the 2007 cash disbursements records had been closed prior to December 31, 2007.
d. that the 2007 cash disbursements records had been held open past December 31, 2007.
The following information applies to the questions below:
Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December
2007 and early January 2008:
Bank Account One Bank Account Two
Disbursing Date Receiving Date
(Month/Day) (Month/Day)
Per Bank Per Books Per Bank Per Books
1. 12/31 12/30 12/31 12/30
2. 1/2 12/30 12/31 12/31
3. 1/3 12/31 1/2 1/2
4. 1/3 12/31 1/2 12/31
Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in cash cutoff at
December 31, 2007?
a. 1
b. 2
c. 3
d. 4

Based on the schedule of interbank transfers above, which of the cash transfers would appear as a deposit in transit
on the December 31, 2007 bank reconciliation?
a. 1
b. 2
c. 3
d. 4
Based on the schedule of interbank transfers above, which of the cash transfers would not appear as an outstanding
check on the December 31, 2007 bank reconciliation?
a. 1
b. 2
c. 3
d. 4

Which of the following errors would be least likely to be discovered during the tests of the bank reconciliation?
a. Payment was made to an employee for more hours than he worked.
b. Cash received by the client subsequent to the balance sheet date was recorded as cash receipts in the current
year.
c. Payments on notes payable were debited directly to the bank balance by the bank were not entered in the
clients records.
d. Deposits were recorded in the cash receipts records near the end of the year, deposited in the bank, and were
included in the bank reconciliation as a deposit in transit.

A proof of cash is not an effective procedure for identifying which of the following types of misstatements?
a. All recorded disbursements were paid by the bank.
b. All recorded cash receipts were deposited.
c. All amounts that were paid by the bank were recorded.
d. Some checks were written for incorrect amounts.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500
imprest petty cash fund?
a. Reimbursement occurs twice each week.
b. The custodian endorses reimbursement checks.
c. Reimbursement vouchers are not prenumbered.
d. The custodian occasionally uses the cash fund to cash employee checks.
Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the
corporate:
a. board of directors.
b. treasurer.
c. controller.
d. executive committee.

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the
check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded.
The auditor will best detect this form of kiting by:
a. examining the composition of deposits in both bank A and bank B subsequent to year-end.
b. examining paid checks returned with the bank statement of the next account period after year-end.
c. preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and
subsequent to year-end.
d. comparing the detail of cash receipts as shown by the clients cash receipts records with the detail on the
confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.

If an auditor proves the bank statement in the month subsequent to the balance sheet date, it is primarily a test for:
a. errors.
b. omissions.
c. kiting.
d. intentional misstatements.
55. When a client engages in transactions involving derivatives, the auditor should
A. Develop an understanding of the economic substance of each derivative.
B. Confirm with the client's broker whether the derivatives are for trading purposes.
C. Notify the audit committee about the risks involved in derivative transactions.
D. Add an explanatory paragraph to the auditor's report describing the risks associated with each
derivative.

57. An auditor compares annual revenues and expenses with similar amounts from the prior year
and investigates all changes exceeding 10%. This procedure most likely could indicate that
A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early
in the subsequent year.
B. Unrealized gains from increases in the value of available-for-sale securities were recorded in
the income account for trading securities.
C. The annual provision for uncollectible accounts expense was inadequate because of
worsening economic conditions.
D. Notice of an increase in property tax rates was received by management, but was not recorded
until early in the subsequent year.
Which of the following is least likely to be typically considered to be an alternate procedure for
handling nonreplies to accounts receivable confirmations?
A. Examine bills of lading.
B. Physically examine items sold.
C. Examine correspondence.
D. Examine subsequent cash receipts.

Your client performed the physical count of inventory as of November 30, one month prior to
year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year
end, and reported those two days' credit sales in January of the next year. Assuming the client
uses a perpetual inventory system which of the following is most likely to be overstated relating
to the year XX financial statements?
A. Sales.
B. Cash.
C. Inventory.
D. Accounts receivable.

Which of the following would be least likely to diminish the validity of evidence obtained
through confirmation of accounts receivable?
A. The confirmations are sent on the client's letterhead.
B. The confirmations are mailed to customers by the internal auditors.
C. The client's mailroom personnel closely monitor and inspect confirmations during mailing.
D. The return address on the envelope used to send the confirmation request is that of the client.

When control risk for the existence assertion is assessed at a high level, which of the following is
a likely effect with respect to the auditors' confirmation of receivables?
A. The account balances as of year end will generally be confirmed.
B. The auditors will in general use blank rather than positive confirmations.
C. The auditors will be required to confirm accounts as of an interim date (during the year under
audit) and as of year end.
D. Confirmations will not in general be used as the auditor will rely primarily upon support such
as vendors' invoices, purchase orders and receiving reports.

Which of the following is not typically considered to be an alternate procedure for handling
nonreplies to accounts receivable confirmations?
A. Examine sales invoices.
B. Inclusion of the information in the engagement letter.
C. Examine correspondence.
D. Examine any subsequent cash receipts.
Which of the following is a likely procedure to test the adequacy of the allowance for doubtful
accounts?
A. Examine cash receipts received after year-end.
B. Confirm receivables.
C. Examine dates of purchase orders.
D. Foot the receivables lead schedule.

For effective internal control, the billing function should not be performed by the:
A. Sales department.
B. Accounting department.
C. Finance department.
D. Information Processing department.

Analytical procedures performed during an audit indicate that accounts receivable doubled since
the end of the prior year. However, the allowance for doubtful accounts as a percentage of
accounts receivable remained about the same. Which of the following client explanations would
satisfy the auditor?
A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue"
category than in the prior year.
B. Internal control activities over the recording of cash receipts have been improved since the
end of the prior year.
C. The client opened a second retail outlet during the current year and its credit sales
approximately equaled the older outlet.
D. The client tightened its credit policy during the current year and sold considerably less
merchandise to customers with poor credit ratings.

After the CPAs have selected particular accounts receivable for confirmation:
A. As a control measure, the CPAs should carefully list the audited values of all of those
accounts before turning the letters over to the client to type and mail.
B. It is important that every account selected that has a material balance ultimately be verified by
confirmation or the application of alternative procedures; immaterial balances never require any
follow-up through alternative procedures.
C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return
address and should include a return envelope addressed to the CPA firm.
D. All differences between confirmation replies and book values should be reconciled by the
CPAs, rather than the client.

. Which of the following manipulations would understate receivables on the financial

statements?
A. Understatement of cash sales.
B. Closing the sales journal prior to year-end.
C. Closing the cash receipts journal prior to year-end.
D. Underestimating the allowance for doubtful accounts.
You were surprised to note that approximately 95% of returned positive accounts receivable
confirmations indicated that the customers thought that they owed a larger balance than the
amount that had been printed by your client on the confirmation. This might be explained by the
fact that:
A. The cash receipts journal was closed before year-end.
B. The cash receipts journal was held open after year-end.
C. There are many unrecorded liabilities.
D. The sales journal was held open after year-end.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test
control activities related to transactions involving the sale of goods to customers with the
A. Collection of receivables.
B. Purchase of merchandise inventory.
C. Payment of accounts payable.
D. Sale of long-term debt.

Which of the following procedures is least likely to help auditors to assess the adequacy of
management's accounting estimate of the allowance for doubtful accounts?
A. Investigate confirmation exceptions for indication of amounts in dispute.
B. Review accounts which have been written off as uncollectible prior to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful accounts.

Which of the following is consistent with effective internal control over sales transactions?
A. The accounting department prepares a shipping report authorizing the shipment of goods.
B. The accounting department accounts for all receiving reports.
C. The billing department accounts for all shipping documents.
D. The accounts payable department annually approves the extension of credit to customers.

. Which of the following generally provides the least evidence regarding the valuation of
accounts receivable?
A. Reviewing an aging of accounts receivable.
B. Examination of cash receipts subsequent to the balance sheet date.
C. Confirming current (0-30 day) year-end accounts receivable.
D. Reviewing credit files for selected account.

Which of the following is not true about the confirmation of accounts receivable?
A. Confirmation requests should bear the auditors' return address.
B. Confirmation requests should be signed by the auditors.
C. Confirmation requests should be mailed directly by the auditors.
D. Confirmation requests should include a return envelope addressed to the office of the auditors.
Which of the following is not true about the auditors' verification of notes receivable?
A. The interest revenue on notes receivable is usually audited by independent computation.
B. Inspecting the notes is sufficient evidence of existence of the notes.
C. The auditors may evaluate the collectibility of notes by inspecting credit files.
D. Confirmation of notes payable to banks may be accomplished in conjunction with the
confirmation of cash balances.

. To verify that all sales that have been shipped to customers have been recorded, a test of
transactions should be completed on a representative sample drawn from:
A. The sales journal.
B. The billing clerk's file of sales orders.
C. Duplicate copies of sales invoices.
D. The shipping clerk's file of duplicate copies of bills of lading.

. It is sometimes impossible for the auditors to use normal accounts receivable confirmation
procedures. In such situations the best alternative procedure the auditors might resort to would
be:
A. Examining subsequent receipts of year-end accounts receivable.
B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a
subsequent date.
C. Requesting that management increase the allowance for uncollectible accounts by an amount
equal to some percentage of the balance in those accounts that cannot be confirmed.
D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis

The audit working papers often include a client-prepared, aged trial balance of accounts
receivable as of the balance sheet date. This aging is best used by the auditors to:
A. Consider internal control over credit sales.
B. Test the accuracy of recorded charge sales.
C. Estimate credit losses.
D. Verify the validity of the recorded receivables.

Which of the following is not a primary objective of the auditors in the examination of accounts
receivable?
A. Determine the approximate realizable value.
B. Consider the adequacy of internal control.
C. Establish the existence of receivables.
D. Determine the expected day of collection of each of the receivables.

Once a CPA has determined that accounts receivable have increased due to slow collections in a
"tight money" environment, the CPA would be likely to:
A. Increase the balance in the allowance for bad debts accounts.
B. Review the going concern ramifications.
C. Review the credit and collection policy.
D. Expand tests of collectibility.
In your review of ABC Company's financials, you note that Receivables have increased
approximately 200% from the previous year, while Cash has declined. Further investigation
reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If
financial statement fraud is involved, which type is most likely?
A. Fictitious revenues
B. Timing differences
C. Improper asset valuations
D. Improper disclosures

An auditor discovered that a client's accounts receivable turnover is substantially lower for the
current year than for the prior year. This may indicate that
A. Obsolete inventory has not yet been reduced to fair market value.
B. There was an improper cutoff of sales at the end of the year.
C. An unusually large receivable was written off near the end of the year.
D. The aging of accounts receivable was improperly performed in both years.

The least crucial element of control over cash is

a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Separation of cash receipts from cash disbursements.
d. Batch processing of checks.

Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?
a. Timing
b. Realizable value
c. Completeness
d. Accuracy

The appropriate evidence to be obtained from tests of details must be decided on a(n):
a. efficiency basis.
b. effectiveness basis.
c. audit objectives basis.
d. none of the above.
Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?
a. Occurrence
b. Completeness
c. Rights
Which of the following types of receivables would not deserve the special attention of the auditor?
a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.
Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle. Which
of the following is not one of those controls?
a. Controls that detect or prevent embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.
Generally accepted accounting principles require that material sales returns and allowances be:
a. recorded in the period when the merchandise is returned.
b. recorded in the period when the credit memo is issued.
c. matched with related sales.
Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the
communication is correct or incorrect is a:
a. representation letter.
b. negative confirmation.
c. bank confirmation.
A type of positive confirmation known as a blank confirmation:
a. requests the recipient to fill in the amount of the balance.
b. is considered less reliable than the regular positive confirmation.
c. generates as high a response rate as the regular positive confirmation form.
Which of the following is likely to be determined first when performing tests of details for accounts receivable?
a. Recorded accounts receivable exist.
b. Accounts receivable in the aged trial balance agree with related master file amounts, and the total is
correctly added and agrees with the general ledger.
c. Accounts receivable are owned.
Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor
will:
a. reduce the extent of tests of details of balances.
b. reduce the extent of tests of controls.
c. reduce the tests of transactions.
d. reduce all of the other tests.
Tests of details of balances are directed to:
a. balance sheet accounts for all cycles.
b. income statement accounts for all cycles.
c. balance sheet accounts for some cycles and income statement accounts for other cycles.
d. all general ledger accounts for all cycles.

The most important test of details of balances for accounts receivable is:
a. confirmations.
b. recalculation of the aged receivables and uncollectible accounts.
c. tracing credit memos for returned merchandise to receiving room reports.
Because of its central role in auditing of accounts receivable, the ______________ is one of the first items tested.
a. accounts receivable master file
b. customer file
c. aged trial balance
If the clients internal control for recording sales returns and allowances is evaluated as ineffective:
a. a larger sample is needed to verify cutoff.
b. sampling is not appropriate.
c. all sales returns must be traced to supporting documentation.
d. all sales returns must be confirmed with the customer.
Which of the following audit procedures would not likely detect a clients decision to pledge or factor accounts
receivable?
a. A review of the minutes of the board of directors meetings.
b. Discussions with the client.
c. Confirmation of receivables.
When do most companies record sales returns and allowances?
a. During the month in which the sale occurs.
b. During the accounting period in which the return occurs.
c. Whenever the customer contacts the company regarding the credit.
A positive confirmation is more reliable evidence than a negative confirmation because:
a. fewer confirmations can be sent out.
b. the auditor has a document which can be used in court.
c. the debtors lack of response indicates agreement with the stated balance.
The advantage of using the negative form of confirmations is that:
a. larger sample sizes can be used without increasing the costs above what would have been required for
positive confirmations.
b. a non-response from the customer proves that the balance is correct.
c. follow-up procedures are scheduled automatically.
Which of the following procedures do most auditors perform when auditing the allowance for doubtful accounts?
a. Send positive confirmations.
b. Inquire of the clients credit manager.
c. Send negative confirmations.
When positive confirmations are used, auditing standards require follow-up procedures for confirmations not
returned by the customer. In such a situation, which of the following would not be classified as an alternative
procedure?
a. Send a second confirmation request.
b. Examine subsequent cash receipts to determine if the receivable has been paid.
c. Examine shipping documents to verify that the merchandise was shipped.
d. Examine customers purchase order and the duplicate sales invoice to determine that the merchandise was
ordered.
For which of the following accounts is cutoff least important?
a. Sales
b. Sales returns and allowances
c. Cash collections
Which of the following most likely would be detected by a review of a clients sales cutoff?
a. Excessive sales discounts.
b. Unrecorded sales for the year.
c. Unauthorized goods returned for credit.
d. Lapping of year-end accounts receivable.
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
a. no reply to a positive confirmation request is received.
b. no reply to a negative confirmation request is received.
c. collectibility of the receivables is in doubt.
d. pledging of the receivables is probable.

If the auditor decides not to confirm accounts receivable, the auditor should:
a. always use alternative procedures to audit the accounts receivable.
b. include copies of customer statements in the audit files.
c. document the reasons for such a decision in the audit files.
A procedure to test for a cash receipts cutoff error is:
a. reconciling the bank statement.
b. performing a four-column proof-of-cash.
c. observing the counting of cash at the balance sheet date.
d. tracing recorded cash receipts to bank deposits on the bank statement of a different period.
The most reliable evidence from confirmations is obtained when they are sent:
a. as close to the balance sheet date as possible.
b. at various times throughout the year to different segments of the sample, so that the entire sample is
representative of account balances scattered throughout the year.
c. several months before the year-end, so the auditor will have adequate time to perform alternate procedures if
they are required.
d. at various times throughout the year to the same group in the sample, so that the sample will not have a time
bias.
Which of the following is the least important consideration in determining the sample size of confirmations?
a. The types of confirmations being sent; that is, positive or negative.
b. The results of related analytical procedures.
c. Total annual credit sales.
d. The auditors assessment of detection risk.
For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of
cash:
a. is detected and correct when cash is separately audited.
b. is unlikely to have a material impact on the balance sheet or the income statement.
c. affects on the cash and accounts receivable balances on the balance sheet and does not affect net income.
d. rarely occurs given the control consciousness of most entities.
Negative confirmations of receivables are less effective than positive confirmations of receivables because:
a. they do not produce evidence that is statistically quantifiable.
b. the auditor cannot infer that all non-respondents have verified their account information.
c. some recipients may report incorrect balances that require extensive follow-up.
d. a majority of recipients usually lack the willingness to respond objectively.
An auditor would be least likely to use confirmations in connection with the examination of:
a. inventories.
b. long-term debt.
c. property, plant, and equipment.
d. stockholders equity.
When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:
a. all accounts receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all sales invoices less sales return credit memos.

1. During the process of confirming receivables as of December

31, 2002, a positive confirmation was returned indicating
the "balance owed as of December 31 was paid on January 9,
2003." The auditor would most likely
a. Determine whether there were any changes in the
account between January 1 and January 9,
2003.
b. Determine whether a customary trade discount was taken
by the customer.
c. Reconfirm the zero balance as of January 10, 2003.
d. Verify that the amount was received.

2. Which of the following analytical audit findings would most

likely indicate a possible problem?
a. A material decrease in the receivables turnover.
b. A material increase in inventory turnover.
c. A material decrease in days' sales outstanding.
d. A material increase in the acid test ratio.

3. When the objective of the auditor is to evaluate the

appropriateness of adjustments to sales, the best available
evidence would normally be
a. Oral evidence obtained by discussing adjustment-
related procedures with controller
personnel.
b. Analytical evidence obtained by comparing sales
adjustments to gross sales for a period of time.
c. Physical evidence obtained by inspection of goods
returned for credit.
d. Documentary evidence obtained by inspecting documents
supporting entries to adjustment accounts.
4. An auditor will most likely detect kiting by
a. Completing an analysis of interbank transfers and
obtaining cutoff bank statements directly from all
banks.
b. Reconciling all bank accounts as of year end.
c. Reconciling Bank A as of year end and Bank B at the
end of the first week following year end.
d. Reconciling Bank B as of year end and Bank A at the
end of the first week following year end.

5. An auditor should perform alternative procedures to

substantiate the existence of accounts receivable when
a. No reply to a positive confirmation request is
received.
b. No reply to a negative confirmation request is
received.
c. Collectability of the receivables is in doubt.
d. Pledging of the receivables is probable.

6. When counting cash on hand, the auditor must exercise

control over all cash and other negotiable assets to
prevent
a. Theft.
b. Irregular endorsement.
c. Substitution.
d. Deposits in transit.

7. An auditor would primarily rely upon which type of

evidential matter when evaluating the collectability of
accounts receivable?
a. Positive confirmation.
b. Negative confirmation.
c. Aged accounts receivable listing.
d. Management's representations

8. A client who wishes to inflate earnings decides to hold the

sales record open beyond year-end and record Year 2 sales
in Year 1. Although the invoices are dated as of year end,
the shipments were made in the following period. Moreover,
the goods were included in the ending inventory of the
period under audit. Which of the following auditing
procedures would not assist in detecting this form of
fraudulent financial reporting?
a. The auditor confirms accounts receivable on a positive
basis as of year end.
 b. The auditor examines shipping documents relating to
sales recorded during the last few days of the year.
c. The auditor examines shipping documents relating to
sales recorded during the first few days of the year
following the period under audit.
d. The auditor applies analytical procedures that compare
gross profit rates and sales volume by month for the
current and preceding years.

9. Although most substantive testing is performed during the

final audit, some substantive tests may be done on the
interim audit. Which of the following statements
concerning the timing of substantive tests is true?
a. When internal control is weak, extensive substantive
testing should be performed during the interim audit.
b. Substantive testing should be performed during the
interim audit only under conditions of excellent
internal control.
c. As a general rule, the auditor performs substantive
tests of balances as of the balance sheet date and
tests transactions during the interim audit as well as
the final audit.
d. If internal control is weak, the auditor should
confirm accounts receivable as of a point in time at
least one month prior to the client's fiscal year end.

10. Which source document should an auditor use to verify the

correct sales date for an item sold FOB shipping point?
a. Carrier's bill of lading.
b. Customer's payment document.
c. Customer's purchase order.
d. Sales invoice.

11. A member of the audit team noted that only one of the
company's ten divisions had a large number of material
sales transactions close to the end of the fiscal year. In
terms of risk analysis, this would most likely lead the
auditor to conclude that
a. There is a relatively higher risk of overstatement of
revenues for this division than for other divisions.
b. Risks associated with auditing this division are not
affected by this information.
c. There is a high risk that liabilities of this division
are understated.
d. There is a high risk that the other nine divisions
have understated revenues.
12. Working papers ordinarily would not include
a. Initials of the in-charge auditor indicating review of
the staff assistants' work.
b. Cut-off bank statements received directly from the
banks.
c. A memo describing the preliminary review of the
internal control structure.
d. Copies of the client inventory count sheets

13. Which of the following statements regarding a balanced audit

approach is true?
a. Under conditions of weak internal control, assets and
revenues should be tested for overstatement.
b. A balanced audit approach suggests that assets and
revenues be tested for overstatement, while
liabilities and expenses be tested for understatement.
c. To properly apply the concept of a balanced audit
approach, the auditor must give equal attention to all
of the financial statements.
d. A balanced audit approach suggests that assets and
expenses be tested for overstatement, while
liabilities and revenues be tested for understatement.

14. An auditor confirms a representative number of open accounts

receivable as of December 31, 2002, and investigates
respondents' exceptions and comments. By this procedure,
the auditor would be most likely to learn of which of the
following?
a. One of the cashiers has been covering a personal
embezzlement by lapping.
b. One of the sales clerks has not been preparing charge
slips for credit sales to family and friends.
c. One of the CBIS control clerks has been removing all
sales invoices applicable to his account from the
data file.
d. The credit manager has misappropriated remittances
from
customers whose accounts have been written off

15. An entity's financial statements were misstated over a

period of years due to large amounts of revenue being
recorded in journal entries that involved debits and
credits to an illogical combination of accounts. The auditor
could most likely have been alerted to this fraud by
a. Scanning the general journal for unusual entries.
b. Performing a revenue cut-off test at year-end.
c. Tracing a sample of journal entries to the general
 ledger.
d. Examining documentary evidence of sales returns and
allowances recorded after year-end.

16. Which of the following auditing procedures would the auditor

not apply to a cutoff bank statement?
a. Trace year end outstanding checks and deposits in
transit to the cutoff bank statement.
b. Compare dates, payees and endorsements on returned
checks with the cash disbursements record.
c. Determine that the year end deposit in transit was
credited by the bank on the first working day of the
following accounting period.
d. Reconcile the bank account as of the end of the cutoff
period.

17. Before applying principal substantive tests to the details

of asset and liability accounts at an interim date, the
auditor should
a. Assess the difficulty in controlling incremental audit
risk.
b. Investigate significant fluctuations that have
occurred
in the asset and liability accounts since the previous
balance sheet date.
c. Select only those accounts which can effectively be
sampled during year-end audit work.
d. Consider the control tests that must be applied at
the balance sheet date to extend the audit conclusions
reached at the interim date.

18. For customers not responding to a first request for positive

confirmation requests, the auditor should next
a. Contact the customer by telephone and attempt to
confirm the balance orally.
b. Analyze subsequent remittances from the customer to
see if the year end balance has been paid.
c. Send a second request for confirmation.
d. Examine underlying documentation supporting the year
end balance.

19. A large university has relatively poor internal control.

The auditor seeks assurance that all tuition revenue has
been recorded. The auditor could best obtain the desired
assurance by
a. Confirming a sample of tuition payments with the
students.
 b. Observing tuition payment procedures on a surprise
basis.
c. Comparing business office revenue records with
registrar's office records of students enrolled.
d. Preparing a year-end bank reconciliation.

20. A client maintains two bank accounts. One of the accounts,

Bank A, has an overdraft of $10,000. The other account,
Bank B, has a positive balance of $5,000. To conceal the
overdraft from the auditor, the client may decide to
a. Draw a check for at least $10,000 on Bank A for
deposit in Bank B. Record the receipt but not the
disbursement and list the receipt as a deposit in
transit. Record the disbursement at the beginning of
the following year.
b. Draw a check for $10,000 on Bank B for deposit in Bank
A. Record the disbursement but not the receipt. List
the disbursement as an outstanding check, but do not
list the receipt as a deposit in transit. Record the
receipt at the beginning of the following period.
c. Draw a check for at least $10,000 on Bank B for
deposit in Bank A. Record the receipt but not the
disbursement and list the receipt as a deposit in
transit. Record the disbursement at the beginning of
the following year.
d. Draw a check for at least $10,000 on Bank A for
deposit in Bank B. Record the disbursement but not
the receipt and list the disbursement as an
outstanding check. Record the receipt at the
beginning of the following year.

21. On receiving the bank cutoff statement, the auditor should

trace
a. Deposits in transit on the year-end bank
reconciliation to deposits in the cash
receipts journal.
b. Checks dated prior to year end to the outstanding
checks listed on the year-end bank reconciliation.
c. Deposits listed on the cutoff statement to deposits in
the cash receipts journal.
d. Checks dated subsequent to year-end to the outstanding
checks listed on the year-end bank reconciliation.

22. The auditor should ordinarily mail confirmation requests to

all banks with which the client has conducted any business
during the year, regardless of the year-end balance, since
 a. The confirmation form also seeks information about
indebtedness to the bank.
b. This procedure will detect kiting activities which
would otherwise not be detected.
c. The mailing of confirmation forms to all such banks
is required by generally accepted auditing standards.
d. This procedure relieves the auditor of any
responsibility with respect to non-detection of forged
checks.

23. Which of the following would be the most appropriate audit

procedure to test the processing of interbank transfers?
a. Analyze a sample of interbank transfers throughout the
period including period-end reconciliations.
b. Obtain cutoff bank statements for each bank account
and reconcile them to accounting records.
c. Send bank confirmation requests to each bank in which
accounts are maintained and reconcile the completed
forms to accounting records.
d. Trace all bank deposits recorded in accounting records
near the end of the fiscal period to supporting
documentation and to bank statements.

24. The auditor should use positive confirmation of accounts

receivable
a. When variables estimation sampling techniques are not
used.
b. For individual account balances that are immaterial in
amount.
c. When internal controls over the receivables process
are believed to be strong.
d. When the possibility of disputes in the accounts is
greater than usual.

25. An internal auditor is concerned that a division may be

intentionally shipping unordered merchandise to customers
near the end of each quarter to meet sales goals. To
determine if this is happening, the auditor should:
a. Trace from a sample of shipping documents to related
documents indicating removal from inventory.
b. Trace from a sample of shipping documents to related
sales invoices.
c. Send accounts receivable confirmations to selected
customers as of the end of the quarter.
d. Trace from a sample of sales invoices to related
shipping documents.
26. In the confirmation of accounts receivable, the auditor
would most likely
a. Request confirmation of a sample of the inactive
accounts.
b. Seek to obtain positive confirmations for at least 50%
of the total dollar amount of the receivables.
c. Require confirmation of all receivables from agencies
of the federal government.
d. Require that confirmation requests be sent within one
month of the fiscal year end.

27. Negative confirmation of accounts receivable is less

effective than positive confirmation of accounts
receivable because
a. A majority of recipients usually lack the willingness
to respond objectively.
b. Some recipients may report incorrect balances that
require extensive follow-up.
c. The auditor cannot infer that all non-respondents have
verified their account information.
d. Negative confirmations do not produce evidential
matter that is statistically quantifiable.

28. Which of the following circumstances would most likely cause

an auditor to suspect that material fraud exists in a
client's financial statements?
a. Property and equipment are usually sold at a loss
before being fully depreciated.
b. Significantly fewer responses to confirmation requests
are received than expected.
c. Monthly bank reconciliations usually include several
in-transit items.
d. Clerical errors are listed on an CBIS-generated
exception report.

29. Each of the following might, by itself, form a valid basis

for an auditor to decide to omit a test except for the
a. Difficulty and expense involved in testing a
particular item.
b. Assessed level of control risk.
c. Relative risk involved.
d. Relationship between the cost of obtaining evidence
and its usefulness.

30. While performing an audit of cash, an auditor begins to

suspect check kiting. Which of the following is the best
 evidence that the auditor could obtain concerning whether
kiting is taking place?
a. Documentary evidence obtained by vouching entries in
the cash account to supporting documents.
b. Documentary evidence obtained by vouching credits on
the latest bank statement to supporting documents.
c. Evidence obtained by preparing a schedule of interbank
transfers.
d. Oral evidence obtained by discussion with controller
personnel.

PAYROLL CYCLE

The use of fidelity bonds protects a company from embezzlement losses and also
a. Minimizes the possibility of employing persons with dubious records in positions of trust.
b. Protects employees who make unintentional errors form possible monetary damages
resulting from such errors.
c. Allows the company to substitute the fidelity bonds for various parts of internal control.
d. Reduces the companys need to obtain expensive business interruption insurance.

10. Which of the following would best protect a company that wishes to prevent lapping?
a. Segregating duties so that accounting has no access to an incoming mail
b. Segregating duties so that no employee has access both to checks from customers and to
currency from daily cash receipts
c. Having customers send payments directly to the companys bank
d. Requesting that customers checks be made payable to the company and be addressed to
the treasurer

11. Defective merchandise returned by customers should be presented to

a. Inventory control personnel. c. Purchasing personnel
b. Sales personnel. d. Receiving personnel

For appropriate segregation of duties, journalizing and posting summary payroll transactions
should be assigned to
a. The treasurers department c. Payroll accounting
b. General accounting d. The timekeeping department

Low Tek, Inc. has changed from a conventional to a computerized payroll clock card system.
Factory employees now record time in and out with magnetic cards, and the computer system
automatically updates all payroll records. Because of this change,
a. The auditor must audit through the computer
b. Internal control has improved
c. Part of the audit trail has been lost
d. The potential for payroll related fraud has been diminished
For internal control purposes, which of the following individuals should preferably be
responsible for the distribution of payroll checks?
a. Bookkeeper c. Cashier
b. Payroll clerk d. Receptionist

Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries?
a. Personnel c. Controller
b. Treasurer d. Payroll

Which of the following is not a common activity within personnel and payroll?
a. Initiating terminations.
b. Preparing and updating personnel records.
c. Preparing and recording payroll.
d. Distributing paychecks to employees.
INVENTORY/ACCOUNTS PAYABLE

2. Information regarding the proper cutoff of accounts payable is generally obtained in

conjunction with the audit of inventories.
TRUE

3. The confirmation of existing accounts payable does not prove the completeness of recorded
accounts payable.
TRUE

12. Which of the following best describes a voucher prepared under good internal control?
A. A document prepared by Stores that indicates amount to be purchased.
B. A document prepared by Receiving that indicates the quantity received and approves
payment.
C. A document prepared by Accounts Payable authorizing a cash disbursement.
D. A document received by Purchasing, from a supplier, indicating quantity of goods purchased
and amount due.

15. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payable applies to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments.
D. Reconciling vendors' statements to the file of receiving reports to identify items received just
prior to the balance sheet date.

17. A client recorded a payable for a large purchase twice. Which of the following controls
would be most likely to detect this error in a timely and efficient manner?
A. Footing the purchases journal.
B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
C. Tracing totals from the purchases journal to the ledger accounts.
D. Sending written quarterly confirmations to all vendors.

20. A likely analytical procedure to test the accuracy of purchase discounts would be to compute
the ratio of cash discounts earned to
A. Accounts payable.
B. Notes payable.
C. Purchases.
D. Sales discounts.
21. Auditors may choose not to confirm accounts payable because:
A. Confirmation obtains evidence identical to that obtained by cutoff tests.
B. Other reliable external evidence to support the balances is likely to be available.
C. A reading of the corporate minutes reveals that confirmation is unnecessary.
D. The balances due will have changed between the year-end and the date of confirmation.

24. Which statement is correct with respect to accounts payable confirmations?

A. The negative form is used in most circumstances
B. Accounts with new suppliers are always confirmed
C. They are a required auditing procedure
D. They are more frequently used in situations in which some vendors don't send monthly
statements.

Which of the following audit procedures is aimed most directly at testing the completeness
assertion for accounts payable:
A. Footing the list of accounts payable.
B. Examining underlying documentation for cash disbursements in the period after year-end.
C. Tracing shipping reports issued on or before year-end to related customer purchase orders and
invoices.
D. Tracing shipping reports after year-end to related customer purchase orders and invoices.

Which of the following best describes the auditors' approach to the audit of accrued liabilities?
A. Test computations.
B. Confirmation.
C. Observation.
D. A low planned assessed level of control risk.

28. Which of the following statements is correct regarding accounts payable and the auditor's
procedures?
A. Because it is generally more difficult to discover a transaction that has not been recorded than
to discover one that has been recorded incorrectly, the audit objective of completeness drives
many of the substantive procedures applied to these balances.
B. A judgment whether an unrecorded payable should be recorded before the financial
statements are prepared depends entirely upon the source of the payable.
C. The confirmation of accounts payable selected from the year-end trial balance of such
accounts is most effective in discovering unrecorded liabilities.
D. Unrecorded payables are often discovered through examining vouchers payable entered into
the voucher register prior to the balance sheet date.

31. Most of the audit work on accounts payable is typically performed:

A. Before the balance sheet date.
B. At the balance sheet date in conjunction with inventory cutoff tests.
C. After the balance sheet date.
D. Simultaneously with the audit of accrued liabilities.
33. Which of the following procedures for detecting unrecorded transactions at the client's
December 31 year-end is least likely to result in discovery of an unrecorded year-end account
payable?
A. Examination of invoices received after year-end.
B. Examination of vouchers payable entered in the January voucher register.
C. Examination of January receiving reports prepared for goods shipped FOB destination in
December to the client.
D. Confirmation of year-end accounts payable.

35. Auditors should be aware that a voucher system may result in which of the following at year-
end:
A. Understatement of liabilities.
B. Overstatement of assets.
C. Understatement of owners' equity.
D. Overstatement of expenses.

36. Accrued liabilities generally differ from accounts payable in that accrued liabilities:
A. Accumulate over time.
B. Are usually confirmed at year-end.
C. Depend upon the existence of a transaction for original recording of the account.
D. Are never included in cost of goods sold.

38. Which of the following is a control procedure that is usually applied to accounts payable?
A. Periodic confirmation of accounts payable.
B. Mailing statements to vendors detailing their account.
C. Periodic aging of accounts payable.
D. Reconciliation of vendor statements with accounts payable.

39. Which of the following is the best control procedure to prevent the payment of an invoice
twice?
A. Review of supporting documentation by the person signing the check.
B. Requiring dual signatures on checks.
C. Use of a check protector.
D. Reconciliation of vendor statements to accounts payable.

40. The auditors' search for unrecorded liabilities is completed:

A. During an interim period.
B. At the balance sheet date.
C. Subsequent to the balance sheet date.
D. At any time during the examination.

42. Internal control over accounts payable is improved when:

A. Purchase orders show approved prices.
B. Informal bids are obtained.
C. Annual trial balance of accounts payable subsidiary ledgers is required.
D. Payment is made upon approval of the purchasing agent.
43. With properly designed internal control, the same employee should not be permitted to:
A. Sign checks and cancel supporting documents.
B. Receive merchandise and prepare a receiving report.
C. Prepare disbursement vouchers and sign checks.
D. Initiate a request to order merchandise and approve merchandise received.

44. Unrecorded liabilities are most likely to be found during the review of which of the following
documents?
A. Unpaid bills.
B. Shipping records.
C. Bills of lading.
D. Unmatched sales invoices.

45. Which of the following procedures is least likely to be completed before the balance sheet
date?
A. Observation of inventory.
B. Review of internal control over cash disbursements.
C. Search for unrecorded liabilities.
D. Confirmation of receivables.

46. Which of the following audit procedures is least likely to detect an unrecorded liability?
A. Analysis and recomputation of interest expense.
B. Analysis and recomputation of depreciation expense.
C. Mailing of a cash confirmation form.
D. Reading of the minutes of meetings of the board of directors.

1. Observation of inventories is a generally accepted auditing standard.

FALSE

2. The receiving department should accept only goods for which there is an approved purchase
order on hand.
TRUE

9. The use of a tagging system for inventory taking is designed to prevent double counting of
goods.
TRUE

8. To test the client's cutoff of inventories, the auditors will make a record of the serial number of
the final receiving and shipping documents used prior to the taking of the physical inventory.
TRUE
11. An auditor suspects that certain client employees are ordering merchandise for themselves
over the Internet without recording the purchase or receipt of the merchandise. When vendors'
invoices arrive, one of the employees approves the invoices for payment. After the invoices are
paid, the employee destroys the invoices and the related vouchers. In gathering evidence
regarding the fraud, the auditor most likely would select items for testing from the file of all
A. Cash disbursements.
B. Approved vouchers.
C. Receiving reports.
D. Vendors' invoices.

15. Which of the following audit procedures most likely would provide assurance that a
manufacturing entity's inventory valuation is proper?
A. Testing the entity's computation of standard overhead rates.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing a cutoff procedure for inventories.
D. Tracing test counts to the entity's inventory listing.

19. A "bill and hold" scheme is most likely to include:

A. Shipment of items to a customer beyond what the customer has ordered.
B. Recording as sales items that the company retains as of year-end.
C. Billing of items that are held by customers for future revenue production purposes.
D. Selling items at substantial discounts near year-end.

20. Which of the following is an auditor least likely to consider a departure from generally
accepted accounting principles?
A. Valuing inventory at cost.
B. Including in inventory items that are consigned out to vendors, but not yet sold.
C. Using standard cost as the measure of inventory cost.
D. Including in inventory items shipped subsequent to year-end, but for which valid orders did
exist at year-end.

21. Which of the following is least likely to be accurate statement concerning characteristics of
an audit?
A. An analysis of inventory turnover addresses whether the proper method of determining
inventory costs--as contrasted to market values--is being applied.
B. Characteristics of the double entry bookkeeping system make it possible to test for overstated
sales when tests of accounts receivable are being performed.
C. The direction of tests for overstatement errors is generally directed from the recorded entry to
source documents.
D. Use of a perpetual rather than a periodic inventory system is likely to affect the nature of
cutoff errors made at year-end.
22. Which of the following is not a reason for the special significance attached by the auditors to
the verification of inventories?
A. The determination of inventory valuation directly affects net income.
B. The existence of inventories is inherently difficult to substantiate.
C. Special valuation problems often exist for inventories.
D. Inventories are often the largest current asset of an enterprise.

23. Which of the following is true about the auditors' observation of the client's physical
inventory?
A. The count must be made at year-end.
B. The auditors should supervise the client's personnel.
C. The auditors' observation addresses the existence assertion.
D. The auditors should justify any omission of the observation in the audit report.

24. In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor
would be most interested in examining the:
A. Purchases journal.
B. Purchase requisitions.
C. Purchase orders.
D. Vendors' invoices.

Which of the following is not a procedure that typically is used by the auditors in their
examination of a client's goods held in the custody of a public warehouse?
A. Confirmation.
B. Obtaining reports on internal control at the warehouse.
C. Observation.
D. Corresponding with the state agency regarding the authenticity of the public warehouse.

Which of the following best describes the reason that the auditors record their inventory test
counts in the working papers?
A. To document every test count.
B. For subsequent comparison with the completed inventory listing.
C. To document compliance with generally accepted accounting principles.
D. For use in subsequent audits.

Which of the following best describes the auditors' response to a client's use of statistical
sampling techniques to estimate the inventory?
A. The auditors should satisfy themselves as to the statistical validity of the technique, and the
reasonableness of the allowance for sampling risk and sampling error used.
B. The auditors should qualify their opinion, because the client must perform a complete count
of the inventory.
C. The auditors should increase the extent of their test counts to compensate for the use of a
statistical technique.
D. The auditors should withdraw from the engagement.
Which one of the following procedures would not be appropriate for the auditors in discharging
their responsibilities concerning the client's physical inventories?
A. Confirmation of goods in the hands of public warehouses.
B. Supervising the taking of the annual physical inventory.
C. Carrying out physical inventory procedures at an interim date.
D. Obtaining written representation from the client as to the existence, quality, and dollar amount
of the inventory.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an
outside location would be to
A. Observe physical counts of the inventory items.
B. Trace the total on the inventory listing to the general ledger inventory account.
C. Obtain a confirmation from the client indicating inventory ownership.
D. Analytically compare the current-year inventory balance to the prior-year balance.

In auditing a manufacturing entity, which of the following procedures would an auditor least
likely perform to determine whether slow-moving, defective, and obsolete items included in
inventory are properly identified?
A. Test the computation of standard overhead rates.
B. Tour the manufacturing plant or production facility.
C. Compare inventory balances to anticipated sales volume.
D. Review inventory experience and trends.

Which of the following is not a function within the inventory and warehousing cycle?
a. Process the goods.
b. Store raw materials.
c. Ship finished goods.
d. Process invoices for shipped goods

The classes of transactions in the acquisition and payment cycle include acquisition of:
a. goods.
b. goods and services.
c. goods and services, and cash disbursements.
d. goods and services, cash disbursements, and purchase returns and allowances.
The audit of the acquisition and payment cycle often takes ____ time to audit than other cycles.
a. less
b. about the same
c. more
d. no less
Which of the following accounts is not included in the acquisitions class of transactions?
a. Inventory.
b. Prepaid expenses.
c. Purchase discounts.
Comparing expenses to prior years is an effective analytical procedure for accounts payable
because expenses from year to year are:
a. erratic.
b. variable.
c. dynamic.
The overall objective in the audit of accounts payable is to determine whether accounts payable:
a. is fairly stated and properly disclosed.
b. is overstated.
c. is understated.
d. is accurately stated.
a. Accounts payable master file
b. Cash disbursements file.
c. Acquisitions transaction file.
d. Purchase approval file.
Which of the following business functions is not considered to be part of the acquisitions class
of transactions?
a. Processing purchase orders.
b. Recognizing liabilities.
c. Receiving goods and services.
d. Processing cash disbursements.
It usually takes more time to audit the acquisition and payment cycle than other cycles because:
a. there is a greater possibility of fraud in these transactions.
b. internal controls in this area are usually the weakest.
c. of the large number of accounts affected.
d. there is a greater likelihood of lawsuits against the CPA relating to these accounts.
A written purchase order is a legal document that is:
a. an offer to buy.
b. not enforceable if it is not in writing.
c. a binding agreement between purchaser and vendor.
d. an acceptance of a vendors catalog offer to sell.
For good internal control, the purchasing department should not be responsible for:
a. finding the lowest cost vendor.
b. reviewing vendors catalog descriptions and prices for standardized items.
c. designing the purchase order form.
d. authorizing the acquisition of goods.
An important control in the accounts payable and IT departments is to ensure that those
personnel who record acquisitions do not have access to:
a. vendors price lists.
b. the accounts payable master file.
c. lists of vendors names and addresses.
d. cash, marketable securities, and other easily convertible assets.
When a client uses perpetual inventory records, the tests of details of balances for inventory can
be significantly reduced if the auditor believes the records are accurate. The controls over the
acquisitions included in the records are normally tested as a part of the:
a. tests of controls.
b. tests of controls and tests of transactions.
c. tests of details of balances.
d. analytical procedures and tests of controls.
Once the auditor has decided on the specific procedures, the acquisitions tests and the cash
disbursements tests are typically performed:
a. concurrently.
b. sequentially.
c. independently.
The most important controls over cash disbursements include all but which of the following?
a. Signing of checks by an authorized employee.
b. Random examination of the supporting documents by the authorized check signer before
signing checks.
c. Separation of responsibilities for signing the checks and performing the accounts payable
function.
Because of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements, it is common in this audit area to use:
a. block sampling.
b. variables sampling.
c. attributes sampling.
Because many of the types of errors and irregularities that may be found in the acquisition and
payment cycle represent a misstatement of earnings and are of significant concern to the
auditor, the tolerable exception rate selected by the auditor will be:
a. low.
b. high.
c. average.
d. very high.
The main focus taken by the auditor in verifying liability balances is on the discovery of:
a. understated liabilities.
b. overstated liabilities.
c. understated or omitted liabilities.
d. overstated or extraneous liabilities.
By tracing receiving reports issued at and before year-end to vendors invoices and making sure
they are included in accounts payable, the auditor is testing for:
a. theft of merchandise by employees.
b. unrecorded obligations.
c. lapping.
d. kiting.
The extent of a search for unrecorded liabilities largely depends on:
a. materiality and inherent risk.
b. materiality and control risk.
c. materiality only.
d. inherent risk only.
Which of the following is most reliable for verifying the correct balance of accounts payable?
a. Vendors invoices.
b. Vendors statements.
c. Confirmations.
d. Bills of lading.
Vendors statements and vendors invoices are both relatively reliable evidence because they:
a. come directly to the auditor without being in clients possession.
b. originate from a third party.
c. validate the effectiveness of the control system.
d. are compared to and reconciled with sales invoices.
Cutoff information for inventory acquisitions should be obtained during:
a. the interim period prior to year-end.
b. the interim period immediately following year-end.
c. the physical observation of inventory.
d. either the interim period prior to or immediately following year-end..
Which of the following is an effective internal accounting control over cash payments?
a. Signed checks should be mailed under the supervision of the check signer.
b. Spoiled checks that have been voided should be disposed of immediately.
c. Checks should be prepared only by persons responsible for cash receipts and
disbursements.
d. A check-signing machine with two signatures should be used.
When assets are being verified, auditors focus much of their attention on making sure that the
accounts are not overstated. Alternatively, auditors focus their efforts on understatement when
auditing liabilities. What is the primary reason for this difference in focus?
a. Auditors legal liability.
b. GAAP.
c. GAAS requirements.
d. All of the above.
a. acquisitions are correctly valued.
b. existing acquisitions are recorde+d.
c. acquisitions are correctly classified.
d. recorded acquisitions are for goods and services received.
The test of transactions which requires one to reconcile recorded cash disbursements with the
cash disbursements on the bank statement satisfies the objective of:
a. occurrence.
b. completeness.
c. accuracy.
d. posting and summarization.

Which of the following statements is false?

a. The ownership objective is an important part of verifying assets but not liabilities.
b. In auditing liabilities, the emphasis is on the search for understatements rather than
overstatements.
c. Because of the emphasis on understatements in liability accounts, out-of-period liability
tests are important for accounts payable.
d. The success of the auditors search for unrecorded liabilities is not dependent upon the
materiality of the potential balance in the account.
To test for cutoff errors which overstate liabilities, the auditor should trace, to vendors
invoices, the receiving reports issued:
a. after year-end.
b. before year-end.
c. the last day of the fiscal year.
In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be
coordinated with the:
a. confirmation of payables.
b. tests on long-term liabilities.
c. observation of inventory.
d. cash count.
The auditor gets highly reliable evidence about individual transactions by examining:
a. vendors invoices.
b. vendors statements.
c. confirmations of accounts payable balances.
d. detailed inventory counting instructions.
Which of the following documents is best for verifying the correct balance in accounts payable?
a. Bills of lading.
b. Confirmations.
c. Vendors invoices.
d. Vendors statements.
A CPA learns that his client has paid a vendor twice for the same shipment, once based upon
the original invoice and once based upon the monthly statement. A control procedure that
should have prevented this duplicate payment is:
a. attachment of the receiving report to the disbursement report.
b. prenumbering of disbursement vouchers.
c. use of a limit or reasonableness test.
d. prenumbering of receiving reports.
Which of the following expenses is not typically evaluated as part of the audit of the acquisition
and payment cycle?
a. Depreciation expense.
b. Insurance expense.
c. Bad debts expense.
Which of the following statements is false?
a. The payroll cycle consists of one class of transactions.
b. Balance sheet accounts related to payroll are generally more significant than related
transactions.
c. Internal controls over payroll are effective for most companies.
d. Small companies usually have effective controls over payroll.

Which of the following is not correct regarding controls over the processing of payroll?
a. The person authorized to sign paychecks should not be otherwise involved in the
preparation of the payroll.
b. A check-signing machine should not be used to replace a manual signature.
c. Distribution of pay checks should be performed by someone who is not involved in the
other payroll functions.
d. Unclaimed paychecks should be immediately returned for redeposit.
Which of the following types of audit procedures is ordinarily emphasized the least when
auditing payroll?
a. Tests of controls
b. Tests of transactions
c. Analytical procedures
d. Tests of details of balances
To minimize the opportunity for fraud, unclaimed salary checks should be:
a. deposited in a special bank account.
b. kept in the payroll department.
c. left with the employees supervisor.
d. held for the employee in the personnel department.
Which of the following type of employee typically does not complete time cards?
a. Hourly employees.
b. Salaried employees.
c. All employees must complete time cards.
d. Time cards are typically completed by salaried employees, but may also be completed by
hourly employees.
When examining payroll transactions, an auditor is primarily concerned with the possibility of:
a. incorrect summaries of employee time records.
b. overpayments and unauthorized payments.
c. under withholding of amounts required to be withheld.
d. posting of gross payroll amounts to incorrect salary expense accounts.
For which of the following functions is the use of prenumbered documents least important?
a. Use of prenumbered time cards in the payroll function.
b. Use of prenumbered sales invoices in the sales function.
c. Use of prenumbered receiving reports in the acquisitions function.
d. d. Use of prenumbered deposit slips in the cash receipts function

Which of the following statements about payroll checks is correct?

a. After a payroll check is cashed and returned to the employee it is referred to as a
depository check.
b. As soon as a payroll check is signed by an authorized employee, it becomes an asset.
c. Payroll checks are written for the amount of gross pay due employees.
d. It is rare that payroll checks are direct-deposited into employees bank accounts.

No individual with access to time cards, payroll records, or checks should also be permitted
access to:
a. the computer.
b. job time tickets.
c. personnel records.
Which of the following types of audit tests is usually emphasized due to a lack of independent
third-party evidence related to payroll transactions?
a. Analytical procedures
b. Tests of details of balances
c. Tests of controls
d. Each of the above is emphasized.

The most important means of verifying account balances in the payroll and personnel cycle are:
a. tests of controls and tests of transactions.
b. analytical procedures and tests of controls.
If an auditor wishes to test the completeness transaction-related audit objective in the payroll
and personnel cycle, which of the following would be a reasonable test of control?
a. Account for a sequence of payroll checks.
b. Examine procedures manual and observe the recording of transactions.
c. Examine payroll records for indication of pay rate approval.
d. Reconcile the payroll bank account.
c. analytical procedures and tests of transactions.
d. test of controls and tests of details of balances.

The audit of ______ is often the most difficult and complex part of an audit.
a. property, plant and equipment
b. cash
c. inventory
d. prepaid insurance
Inventory is a complex area to audit for all but which of the following reasons?
a. Inventory is often in different locations.
b. There are several acceptable valuation methods and some entities use different methods for different
types of inventory.
c. Inventory is often the largest account in working capital.
d. Inventory valuation includes few estimates.

When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:
a. inventory and warehousing cycle.
b. payroll and personnel cycle.
c. acquisitions and payments cycle.
d. cash cycle.

The audit procedure observe the client taking a physical inventory count and test the count is sufficient to
determine all of the following except:
a. whether recorded inventory actually exists.
b. whether recorded inventory was properly valued by the client.
c. whether recorded inventory was properly counted by the client.
d. whether client inventory instruction had properly been followed

With regard to the physical count of inventory, necessary control procedures include:
a. proper instructions for the physical count.
b. independent third-party verification of the counts.
c. third-party reconciliations of the physical counts with perpetual inventory master files.
d. counting the inventory only on the year-end date.
If the auditor concludes that physical controls over inventory are so inadequate that the inventory will be difficult to
count, the auditor should ordinarily:
a. withdraw from the engagement.
b. issue a qualified audit report.
c. conduct expanded observation tests of physical inventory.
d. hire a specialist to assist the auditor.
From which of the following evidence-gathering audit procedures would an auditor obtain most assurance
concerning the existence of inventories?
a. Observation of physical inventory counts.
b. Written inventory representations from management.
c. Confirmation of inventories in a public warehouse.
d. Auditors recomputation of inventory extensions.

If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of
the following tests would be most appropriate?
a. Compilation tests.
b. Price tests.
c. Confirmation of inventory held by outside parties.
d. Physical examination of the inventory.
d. Process invoices for shipped goods
The inventory and warehousing cycle can be thought of as having two separate but closely related systems, one
involving the actual physical flow of goods, and the other the:
a. related costs.
b. storage of the goods.
c. internal control over those goods.
d. prevention of waste, obsolescence, and theft.
In any company involved in manufacturing, an adequate cost accounting internal control system is necessary to
indicate the relative profitability of the various products for management planning and control and to:
a. determine variances from standards.
b. determine variances from budgets.
c. value inventories for financial statement purposes.
d. value inventories for audit verification.

A well-designed computerized system of perpetual inventory master files includes information about the:
a. units of inventory purchased, sold, and on hand.
b. unit costs of inventory purchased, sold, and on hand.
c. units of raw materials, work-in-process, and finished goods.
d. units and unit costs of inventory purchased, sold, and on hand.

Which of the following is not an aspect of concern when auditing the cost accounting system?
a. Unit cost records.
b. Physical controls over inventory.
c. Documents and records for transferring inventory.
d. Safeguarding the raw materials from point of receipt to the storeroom.

Tests of the perpetual inventory master files for the purpose of reducing the tests of physical inventory or changing
their timing are done through the use of:
a. inquiry.
b. observation.
c. confirmation.
d. documentation.

A major difficulty in the verification of inventory cost records is determining reasonableness of:
a. direct labors hourly rate.
b. raw materials per unit cost.
c. cost allocations.
d. number of direct labor hours applied.

When auditing the inventory and warehousing cycle, the use of analytical procedures is:
a. not important for this cycle.
b. less important than for any other cycle.
c. more important than for any other cycle.
d. as important as their use in any other cycle.

When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the
perpetual records for transactions:
a. throughout the year.
b. which are a representative sample of the period under audit.
c. from the date of the count to year-end.
d. from the date of the count to the end of the audit field work.

The most important part of the observation of inventory is to determine whether:

a. all counts are accurate.
b. the inventory-takers are qualified.
c. obsolete inventory has been identified.
d. the physical count is being taken in accordance with the clients instructions.
A useful starting point for becoming familiar with the clients inventory is for the auditor to:
a. read the AICPAs Industry Audit Guide.
b. review accounting theory covering special problems, such as gas and oil accounting, or lease-purchase
agreements.
c. read the clients Accounting Manual.
d. tour the clients facility.
Most of the audit testing of the storage of finished goods as well as the shipment of merchandise takes place during
the testing of the:
a. sales and collection cycle.
b. payroll and personnel cycle.
c. acquisitions and payments cycle.
d. inventory and warehousing cycle.

Auditors test the quantity of materials charged to work-in-process by tracing these quantities to:
a. cost ledgers.
b. perpetual inventory records.
c. receiving reports.
d. material requisitions.

When an auditor observes that personnel who are responsible for physically counting inventory are not following the
inventory instructions, the auditor should:
a. contact a clients supervisor in an attempt to correct the problem.
b. modify the clients physical inventory instructions.
c. not discuss the problem with clients supervisor in order to maintain independence.
d. assign audit staff to the inventory count.

The audit of year-end physical inventories should include steps to verify that the clients purchases and sales cutoffs
were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at
year-end was not recorded as a:
a. sale in the current period.
b. sale in the subsequent period.
c. purchase in the current period.
d. purchase return in the subsequent period.

Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing
overhead for all but which of the following?
a. reasonableness.
b. computational correctness.
c. adherence to FASB pronouncement
d. consistency.

Which of the following control procedures would most likely be used to maintain accurate perpetual inventory
records?
a. Independent storeroom count of goods received.
b. Periodic independent comparison of records with goods on hand.
c. Periodic independent reconciliation of control and subsidiary records.
d. Independent matching of purchase orders, receiving reports, and vendors invoices.
Cost accounting controls are those related to the physical inventory and the consequent costs from the point at
which:
a. materials are ordered for purchase until the finished product is sold.
b. the customers order is received until the finished product is shipped.
c. raw materials are requisitioned until the finished product is sent to storage.
d. raw materials are requisitioned until the finished product is completely manufactured.
Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same
amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount
are known as:
a. standard cost controls.
b. pricing internal controls.
c. compilation internal controls.
d. count quantity internal controls.

When an outside specialist has assumed full responsibility for taking the clients physical inventory, reliance on the
specialists report is acceptable if:
a. the auditors report contains a reference to the assumption of full responsibility.
b. the auditor is satisfied through application of appropriate procedures as to the reputation and competence
of the specialist.
c. the auditor conducted the same audit tests and procedures as would have been applicable if the clients
employees took the physical inventory.
d. circumstances made it impracticable or impossible for the auditor either to do the work personally or
observe the work done by the inventory firm.
Hardy Company mass-produces eight different products. The controller who is interested in strengthening internal
controls over the accounting for materials used in production would be most likely to implement a(n):
a. perpetual inventory system.
b. job order cost accounting system.
c. economic order quantity system.
d. separation of duties among production personnel.
When auditing a public warehouse, which of the following is the most important audit procedure with respect to
disclosing unrecorded liabilities?
a. Observation of inventory.
b. Review of outstanding receipts.
c. Inspection of receiving and issuing procedures.
d. Confirmation of negotiable receipts with holders.

INTERNAL CONTROL
When management is evaluating the design of internal control, management evaluates whether
the control can do which of the following?

Detect material misstatements Correct material misstatements

a. Yes Yes
b. No No
c. Yes No
d. No Yes
When one material weakness is present at the end of the year, management of a public company must conclude that
internal control over financial reporting is:
a. insufficient.
b. inadequate.
c. ineffective.
d. inefficient.
Management must disclose material weaknesses in internal control:
a. whenever the weakness is deemed significant to a single class of transactions.
b. whenever the weakness is significant to overall financial reporting objectives.
c. if the weakness exists at the end of the year.
d. only if the auditor identifies the weakness as significant.
The initial presumption in the audit of a public company is that control risk is:
a. low.
b. moderate.
c. high.
d. low or moderate, but not high.
The essence of an effectively controlled organization lies in the:
a. effectiveness of its independent auditor.
b. effectiveness of its internal auditor.
c. attitude of its employees.
d. attitude of its management.
Authorizations can be either general or specific. Which of the following is not an example of a
general authorization?
a. Automatic reorder points for raw materials inventory.
b. A sales managers authorization for a sales return.
c. Credit limits for various classes of customers.
d. A sales price list for merchandise.
The most important type of protective measure for safeguarding assets is:
a. adequate separation of duties among personnel.
b. proper authorization of transactions.
c. the use of physical precautions.
d. adequate documentation.
Which of the following is correct with respect to the design and use of business documents?
a. Not all documents used for internal purposes need to be prenumbered.
b. Documents should be designed for single purposes only to avoid confusion in their use.
c. Documents should be designed to be understandable only by those who use them.
d. Documents designed for external use must be prenumbered.
Which of the following is correct?
a. Approval is a policy decision implemented by employees.
b. Approval occurs as a matter of general policy and includes significant transactions only.
c. Authorization is a policy decision for either a general class of transactions or specific
transactions.
d. Approval should be given by the employee responsible for recording the transaction.
Which of the following principles is not necessary for the proper design and use of documents
and records?
a. Designed for a single use to increase efficiency of operations.
b. Constructed in a manner that encourages correct preparation.
c. Prepared at the time a transaction takes place.
d. Designed for multiple uses to increase efficiency of operations.
Which of the following is not one of the levels of an absence of internal controls?
a. Major deficiency.
b. Material weakness.
c. Significant deficiency.
d. Control deficiency.
Which of the following is the correct definition of control deficiency?
a. A control deficiency exists if the design or operation of controls does not permit company
personnel to prevent or detect misstatements on a timely basis.
b. A control deficiency exists if one or more deficiencies exist that adversely affect a
 companys ability to prepare external financial statements reliably.
c. A control deficiency exists if the design or operation of controls results in a more than
remote likelihood that controls will not prevent or detect misstatements.
d. A control deficiency exists if the design or operation of controls results in a more than
probable likelihood that controls will prevent or detect misstatements.
A(n) _______ deficiency exists if a necessary control is missing or not properly formulated.
a. control
b. significant
c. design
d. operating
Which of the following is correct?
a. A significant deficiency is always a material weakness.
b. A control deficiency is always a material weakness.
c. A material weakness is less significant that a control deficiency.
d. A material weakness is always a significant deficiency.
Before making the final assessment of internal control at the end of an integrated audit, the
auditor must:

Test controls Perform substantive tests of details

a. Yes Yes
b. No No
c. Yes No
d. No Yes
Audit evidence concerning proper segregation of duties normally is best obtained by:
a. direct personal observation of the employee who applies control procedures.
b. making inquiries of co-workers about the employee who applies control procedures.
c. preparation of a flowchart of duties performed and available personnel.
d. inspection of third-party documents containing the initials of who applied control
procedures.
Significant deficiencies are matters that come to an auditors attention and should be
communicated to an entitys audit committee because they represent:
a. material frauds perpetrated by high-level management.
b. internal control deficiencies that could adversely affect a companys ability to initiate,
record, process, or report external financial statements reliably.
c. flagrant violations of the entitys documented conflict-of-interest policies.
d. intentional attempts by client personnel to limit the scope of the auditors field work.
How must significant deficiencies and material weaknesses be communicated to those charged
with governance?
a. Either oral or written communication is acceptable.
b. Oral communication is required.
c. Written communication is required.
d. Written communication is required for material weaknesses, but oral communication is
allowed for significant deficiencies.
The financial statements are not likely to correctly reflect GAAP if the:
a. controls affecting the reliability of financial reporting are inadequate.
b. companys controls do not promote efficiency.
c. companys controls do not promote effectiveness.
d. companys control do not promote compliance with applicable rules and regulations.
The primary emphasis by auditors is on controls over:
a. classes of transactions.
b. account balances.
c. both a and b, because they are equally important.
d. both a and b, because they vary from client to client.
Compared to a public company, the most important difference in a nonpublic company in
assessing control risk is the ability to assess control risk at _______ for any or all control-related
objectives.
a. low
b. moderately low
c. medium
d. high
When planning an audit, the auditors assessed level of control risk is:
a. determined by using actuarial tables.
b. calculated by using the audit risk model.
c. an economic issue, trading off the costs of testing controls against the cost of testing
balances.
d. calculated by using the formulas provided in the AICPAs auditing standards.
When a compensating control exists, the absence of a key control:
a. is no longer a concern because there is no longer a significant deficiency or material
weakness.
b. is still a major concern to the auditor.
c. could cause a material loss, so it must be tested using substantive procedures.
d. is magnified and must be removed from the sampling process and examined in its entirety.
Which of the following matters would an auditor most likely consider to be a
significant deficiency to be communicated to the audit committee?
A. Management's failure to renegotiate unfavorable long-term purchase
commitments.
B. Recurring operating losses that may indicate going concern problems.
C. Evidence of a lack of objectivity by those responsible for accounting
decisions.
D. Management's current plans to reduce its ownership equity in the entity.

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

15. Which of the following is least likely to be evidence of operating

effectiveness of controls?
A. Cancelled supporting documents.
B. Confirmations of accounts receivable.
C. Records documenting usage of computer programs.
D. Signatures on authorization forms.

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

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

21. Which of the following would be least likely to be regarded as a test of a

control?
A. Tests of the additions to property by physical inspection.
B. Comparisons of the signatures on cancelled checks to the authorized check
signer list.
C. Tests of signatures on purchase orders.
D. Recalculation of payroll deductions.

26. A significant deficiency:

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

28. Which of the following is most likely to be considered a risk assessment

procedure relating to internal control?
A. Confirm accounts receivable.
B. Perform a test of a control relating to payroll.
C. Take test counts of the year-end inventory.
D. Trace a transaction through the information system relevant to financial
reporting.

33. Which of the following is not ordinarily considered a factor indicative of

increased financial reporting risk when an auditor is considering a client's risk
assessment policies?
A. Salaried sales personnel.
B. Implementation of a new information system.
C. Rapid growth of the organization.
D. Corporate restructuring.

36. Under which circumstance is it likely that the extent of substantive

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

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

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

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

44. Which of the following is not a responsibility that should be assigned to a

company's internal audit department?
A. Evaluating internal control.
B. Approving disbursements.
C. Reporting on the effectiveness of operating segments.
D. Investigating potential merger candidates.

46. Which of the following is an advantage of describing internal control

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

48. Which of the following is least likely to be considered a risk assessment

procedure?
A. Analytical procedures.
B. Inspection of documents.
C. Observation of the counting of inventory.
D. Observation of the performance of certain accounting procedures.

60. At least what level of probability of a material misstatement is required for

a control deficiency to be considered a material weakness?
A. More than remote.
B. Probable.
C. Reasonable possibility.
D. Sufficient.

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

63. Well-designed internal control that is functioning effectively is most likely

to detect an fraud arising from:
A. The fraudulent action of several employees.
B. The fraudulent action of an individual employee.
C. Informal deviations from the official organization chart.
D. Management fraud.

Professional Standards

14. An audit provides reasonable assurance of detecting which of the following

types of important illegal acts?

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

21. An audit should be designed to achieve reasonable assurance of detecting

material misstatements due to:
A. Errors.
B. Errors and fraud.
C. Errors, fraud, and those illegal acts with a direct effect on financial statement
amounts.
D. Errors, fraud and illegal acts.

27. Which of the following best describes a portion of the auditors'

responsibility regarding illegal acts by clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate
actions.
C. If the auditors suspect illegal acts have been performed, they should conduct
a legal audit of the company.
D. The auditors' responsibility for the detection of all illegal acts is the same as
their responsibility regarding material misstatements due to errors and fraud.

28. The auditors who find that the client has committed an illegal act would be
most likely to withdraw from the engagement when the:
A. Management fails to take appropriate corrective action.
B. Illegal act has material financial statement implications.
C. Illegal act has received widespread publicity.
D. Auditors cannot reasonably estimate the effect of the illegal act on the
financial statements.

56. As compared with the US nonpublic company audit report, the international
audit report:
A. Is shorter in length.
B. Includes enhanced explanation of the audit process.
C. Includes the name of the partner and managers on the audit, while the US
report includes only the CPA firm name.
D. Is dated as of year-end, whereas the US report is dated as of the last date of
significant field work.

57. A peer review in which the peer reviewers study and appraise a CPA firm's
system of quality control to perform accounting and auditing work is referred to
as a(n):
A. Engagement review.
B. Inspection review.
C. Supervision review.
D. System review.

58. An engagement review form of peer review is least likely to include a peer
reviewer's detailed analysis of:
A. Compilation reports.
B. Documentation of procedures followed on a review
C. Overall system of quality control.
D. Review reports.

FRAUDS

________ is a form of earnings management in which revenues and expenses are shifted between periods to reduce
fluctuations in earnings.
a. Fraudulent financial reporting
b. Expense smoothing
c. Income smoothing
d. Each of the above is correct
Which of the following is one of the conditions for fraud described in SAS No. 99?

Attitudes/rationalization Risk Factors Opportunities

a. Yes No Yes
b. No Yes Yes
c. Yes No No
d. No Yes No
Which of the following is not a factor that relates to opportunities to commit fraudulent
financial reporting?
a. Lack of controls related to the calculation and approval of accounting estimates.
b. Ineffective oversight of financial reporting by the board of directors.
c. Managements practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit, and information technology staff.
The most common technique used by management to misstate financial information is:
a. overstatement of expenses.
b. improper revenue recognition.
c. understatement of liabilities.
d. understatement of assets.
Which of the following is a factor that relates to incentives or pressures to commit fraudulent
financial reporting?
a. Significant accounting estimates involving subjective judgments.
b. Excessive pressure for management to meet debt repayment requirements.
c. Managements practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit, and information technology staff.
Which of the following statements describes circumstances that underlie employee incentives to
misappropriate assets?
a. Dissatisfied employees may steal from a sense of entitlement.
b. Weak internal controls encourage employees to take chances.
c. If management cheats customers and gets away with it, then employees believe they can
do the same to the company.
d. Employees have a vested interest in making the companys financial statements erroneous.

Which of the following is a factor that relates to incentives to misappropriate assets?

a. Significant accounting estimates involving subjective judgments.
b. Significant personal financial obligations.
c. Managements practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit and information technology staff.
Sources of information gathered to assess fraud risks usually do not include:
a. analytical procedures.
b. inquiries of management.
c. communication among audit team members.
d. review of corporate charter and bylaws.
After fraud risks are identified and documented, the auditor should evaluate factors that ______
fraud risk before developing an appropriate response to the risk of fraud.
a. enhance
b. reduce
c. increase
d. increase or decrease
Fraud awareness training should be:
a. broad and all-encompassing
b. extensive and include details for all functional areas
c. specifically related to the employees job responsibility
d. focused on employees understanding the importance of ethics
Which of the following is least likely to uncover fraud?
a. External auditors
b. Internal auditors
c. Internal controls
d. Management
Which of the following is not a likely source of information to assess fraud risks?
a. Communications among audit team members.
b. Inquiries of management.
c. Analytical procedures.
d. Consideration of fraud risks discovered during recent audits of other clients.
Which of the following is not a category of inquiry used by auditors?
a. Assessment inquiry
b. Declarative inquiry
c. Interrogative inquiry
d. Informational inquiry
Which party has the primary responsibility to oversee an organizations financial reporting and
internal control processes?
a. The board of directors
b. The audit committee
c. Management of the company
d. The financial statement auditors
When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to:
a. terminate the engagement with sufficient notice given to the client.
b. issue an adverse opinion or a disclaimer of opinion.
c. obtain additional evidence to determine whether material fraud has occurred.
d. re-issue the engagement letter.

Independence

When CPAs are able to maintain their actual independence, it is referred to as independence in:
a. conduct.
b. appearance.
c. fact.
d. total.
Which of the following statements is true? The CPA firm will lose its independence if:
a. a staff auditor providing audit services to the client acquires stock in that client.
b. a staff tax preparer who provides 15 hours of non-audit services to the client acquires stock in that client.
c. an audit manager in an office different than the office providing audit services has a direct, immaterial
financial interest in the audit client.
d. a covered member has an indirect, immaterial financial interest in an audit client.
The financial interests of which of the following parties would not be included as a direct financial interest of the
CPA?
a. Spouse.
b. Dependent child.
c. Relative supported by the CPA.
d. Sibling living in the same city as the CPA.
Interpretations of the rules regarding independence allow an auditor to serve as:
a. a director or officer of an audit client.
b. an underwriter for the sale of a clients securities.
c. a trustee of a clients pension fund.
d. an honorary director for a not-for-profit charitable or religious organization.
The CPA must not subordinate his or her professional judgment to that of others in any:
a. engagement.
b. audit engagement.
c. engagement excluding tax services.
d. engagement excluding management advisory services.
Which of the following would be a violation of the rule requiring objectivity by the CPA?
a. The auditor accepts managements opinion regarding the collection of accounts receivable without an
independent evaluation.
b. In preparing a clients tax return, the CPA encourages a client to take a deduction which the CPA believes is
risky, but unlikely to be found during an IRS audit.
c. Either a or b would be a violation of the rule.
d. Neither a nor b would be a violation of the rule.
Several months after an unqualified audit report was issued, the auditor discovers the financial statements were
materially misstated. The clients CEO agrees that there are misstatements, but refuses to correct them. She claims
that confidentiality prevents the CPA from informing anyone.
a. The CEO is correct and the auditor must maintain confidentiality.
b. The CEO is incorrect, but because the audit report has been issued it is too late.
c. The CEO is correct, but to be ethically correct the auditor should violate the confidentiality rule and disclose
the error.
d. The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not
correct the financial statements.
Which of the following activities is allowed for a CPA firms attestation clients?

a. Contingent fees based on savings due to implementation of an information system.

b. Commissions for referring a review client to an insurance agency for insurance coverage.

c. Preparation of tax returns for which fees are based upon client refunds.

d. Each of the above is allowed.

Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing
services to the public and other public accountants.
a. Elise cannot be a partner in any separate partnership that offers data processing services.

b. Elise may form a separate partnership.

c. Elise may form a separate partnership as long as partners are CPAs.

d. Elise may form a separate partnership, but must give up the public accounting practice.

Which of the following statements is not true with respect to audit committees?

a. Individuals not on a firms board of directors should comprise the audit committee.

b. The audit committee generally helps in resolving conflicts between the auditors and company management.

c. All companies listed on the NYSE are required to have an audit committee.

d. Audit committees are required for all companies.

An example of an indirect ownership interest in a client would be ownership of a clients stock by a members:

a. dependent child.

b. spouse.

c. non-dependent grandfather.

d. All of the above are examples of indirect ownership.

Interpretations of Rule 101 regarding a direct financial interest have presumed that a violation exists in which of
the following circumstances, unless other circumstances offset such a presumption?
a. When close relatives such as nondependent children, brothers, and sisters have a significant financial interest in
the client.
b. When close relatives such as nondependent children, brothers, and sisters have any financial interest in the
client.
c. When the CPA owns shares in a mutual fund that has an ownership interest in the client.

d. When close relatives such as brother, sister, or in-laws are employed by client.

Which of the following services is not prohibited by the SEC whenever a CPA also audits the company?

a. Actuarial services.

b. Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K).

c. Investment banker services.

d. Bookkeeping services.

An increasing number of companies require stockholders to approve the selection of a new CPA firm or the
continuation of the existing CPA firm because:
a. stockholders are presumably more objective than management.

b. the SEC requires it.

c. the AICPA requires it.

d. the stockholders are in a better position to evaluate the performance of previous or potential auditors.

A CPA is allowed to accept a referral fee for recommending a client to another CPA if:

The client pre-approves

the transaction Payment of the referral fee is disclosed to the client
a. Yes Yes
b. No No
c. Yes No
d. No Yes
According to the professions ethical standards, an auditor would be considered independent in
which of the following instances?
a. The auditors checking account, which is fully insured by a federal agency, is held at a
client financial institution.
b. The auditor is also an attorney who advises the client as its general counsel.
c. An employee of the auditor serves as treasurer of a charitable organization that is a client.
d. The client owes the auditor fees for two consecutive annual audits.
Companies are required to disclose in their proxy statement or annual filings with the SEC the total amount of audit
and non-audit fees paid to the audit firm for the two most recent years. Which of the following is not one of the
categories of fees that must be disclosed?
a. Tax fees
b. Consulting fees
c. Audit-related fees
d. All other fees
Generally, loans between a CPA firm or its members and an audit client are prohibited because it is a financial
relationship. Which of the following, made under normal lending procedures, is not an exception to this rule?
a. Immaterial loans.
b. Home mortgages.
c. Material loans.
d. Secured loans.
Which of the following statements regarding professional and regular corporations is not true?
a. Shareholders in both professional corporations and regular corporations are individually liable in litigation
against the CPA firm.
b. The shareholders, officers, and employees must comply with all Code of Professional Conduct requirements.
c. Stock in a public accounting corporation must be held by only those CPAs who are qualified to practice.
d. The firm name must meet the same requirements as those for a single proprietorship and partnership.
In which of the following instances would the independence of the CPA most likely not be considered to be
impaired? The CPA has been retained as the auditor of a:
a. charitable organization in which an employee of the CPA serves as treasurer.
b. municipality in which the CPA owns $250,000 of the $2,500,000 indebtedness of the municipality.
c. cooperative apartment house in which the CPA owns an apartment and is not part of the management.
d. company in which the CPAs investment club owns a one-tenth interest.

16. A small CPA firm provides audit services to a large local company. Almost eighty percent of
the CPA firm's revenues come from this client. Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The small CPA firm does not have the proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in
the audit.
D. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report
adequately disclosing this information and then it may issue an unqualified opinion.

18. Which of the following is least likely to impair a CPA firm's independence with respect to a
nonpublic audit client in the Oklahoma City office of a national CPA firm?
A. A partner in the Oklahoma City office owns an immaterial amount of stock in the client.
B. A partner in the Jersey City office owns 7% of the client's stock.
C. A partner in the Oklahoma City office, who does not work on the audit, previously served as
controller for the audit client.
D. A partner in the Chicago office is also the vice president of finance for the audit client.
23. Which of the following statements is correct?
A. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to
the CPA are received.
B. CPA working papers are the joint property of the CPA and the client.
C. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may
be withheld by the CPA if fees for the engagement remain unpaid.
D. CPA working papers that include copies of client's records are not available to third parties
under any circumstances.

37. A CPA should maintain objectivity and be free of conflicts of interest when performing:
A. Audits, but not any other professional services.
B. All attestation services, but not other professional services.
C. All attestation and tax services, but not other professional services.
D. All professional services.

40. Independence of a CPA with respect to a client is not impaired if:

A. The CPA has a loan to an officer of the client.
B. The CPA has an immaterial direct interest in the client.
C. The CPA is trustee for the client's pension plan.
D. The CPA has an immaterial joint, closely held business investment with the client

54. A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an
educational fund for the CPA's minor child. The trust securities were not material to the CPA but
were material to the child's personal net worth. Would the independence of the CPA be
considered to be impaired with respect to the client?
A. Yes, because the stock would be considered a direct financial interest and, consequently,
materiality is not a factor.
B. Yes, because the stock would be considered an indirect financial interest that is material to the
CPA's child.
C. No, because the CPA would not be considered to have a direct financial interest in the client.
D. No, because the CPA would not be considered to have a material indirect financial interest in
the client.