MCQs - RICCHIUTE TEST BANK Chapter 1 - Auditing: Integral to the Economy
1. To become a Certified Public Public Accountant (CPA), an individual individual must must pass the the Uniform CPA Examination and a. Demonstrate his or her independence. b. Comply with state education and experience requirements. c. Obtain employment with a public accounting firm. d. Become a member of the AICPA. Answer: B 2. An independent audit is important to readers of financial f inancial statements because it a. Provides a measure of management's stewardship function. b. Measures and communicates the financial data included in financial statements. c. Objectively examines and reports on management's financial statements. d. Reports on the accuracy of information in the financial statements. (AICPA ADAPTED) Answer: C 3. Statements on Auditing Standards a. Relate to the filing requirements and enforcement activities of the SEC. b. Describe procedures to be applied in specific areas of audit activity to eliminate inconsistencies in audit practice. c. Are intended to limit the degree of auditor judgment needed to fulfill the attest function. d. Interpret standards that provide guidelines or measures of quality for an independent audit. Answer: D 4. The primary purpose of an independent independent financial financial statement statement audit is to a. Provide a basis for assessing management's performance. b. Comply with state and federal regulatory requirements. c. Assure management that the financial statements are unbiased and free from material error. d. Provide users with an unbiased opinion about the fairness of information reported in the financial statements. Answer: D 5. Independent auditing can best best be be described described as a a. Branch of accounting. b. Discipline that attests to the results of accounting and other operations and data. c. Professional activity that measures and communicates financial and business data. d. Regulatory function that prevents the issuance of improper financial information. (AICPA ADAPTED) Answer: B 6. An independent audit aids in the communication communication of economic data because the audit a. Confirms the accuracy of management's financial representations. b. Lends credibility to the financial f inancial statements. c. Guarantees that financial data are fairly presented. d. Assures the readers of financial statements that any fraudulent activity has been corrected. (AICPA ADAPTED) Answer: A
7. Which of the following following types of audits are most most similar? similar? a. Operational audits and compliance audits. b. Independent financial statement audits and operational audits. c. Compliance audits and independent financial statement audits. a udits. d. Internal audits and independent financial statement audits. Answer: C 8. The Auditing Standards Board a. Sets rules and regulations that govern public accounting firms. b. Is an arm of the Financial Accounting Standard Board. c. Is a senior technical body of the AICPA designated to issue authoritative auditing pronouncements. d. Reports directly to the Securities and Exchange Commission. Answer: C 9. The essence essence of of the attest function is to a. Detect fraud. b. Examine individual transactions so that the auditor can certify as to their validity. c. Determine whether the client's financial statements are fairly stated. d. Ensure the consistent application of correct accounting procedures. (AICPA ADAPTED) Answer: C 10. Which of the following criteria is unique to the independent auditor's auditor's attest function? a. General competence. b. Familiarity with the particular industry of each client. c. Due professional care. d. Independence. (AICPA ADAPTED) Answer: C 11. The definition of auditing contained within within A Statement Statement of Basic Basic Auditing Concept Conceptss recognizes that auditing includes both a(an) a. Documentation process and an evaluation e valuation process. b. Evaluation process and a reporting process. c. Investigative process and a reporting process. d. Documentation process and a reporting process. Answer: C 12. An operational audit is designed to a. Assess the efficiency and effectiveness of management's operating procedures. b. Assess the presentation of management's financial statements in accordance with generally accepted accounting principles. c. Determine whether management has complied with applicable laws and regulations. d. Determine whether the audit committee of the board of directors is effectively discharging its responsibility to oversee management's operations. oper ations. Answer: A
13. The market for auditing services is driven by a. The regulatory authority of the Securities and Exchange Commission. b. A demand by external users of financial statements. c. Pronouncements issued by the Auditing Standards Board. d. Congress at the federal level and elected legislative bodies at the state level. Answer: B 14. The first contemporary audit related legislation was the a. Securities Act of 1933. b. Securities Exchange Act of 1934. c. British Joint Stock Companies Act of 1844. d. Companies Act of 1947. Answer: A 15. The first authoritative auditing pronouncement in the U.S. was a. Statement on Auditing Procedures No. 1, "Extensions of Auditing Procedures." b. Statement on Auditing Standards No. 1, "Codification of SASs." c. "Uniform Accounting: A Tentative Proposal Submitted by the Federal Reserve Board (1917)." d. "Examination of Financial Statements by Independent Public Accountants (1936)." Answer: A 16. The first authoritative audit standards-setting body empowered to issue auditing pronouncements in the U.S. was the a. The Committee on Auditing Procedure. b. The Auditing Standards Executive Committee. c. The Auditing Standards Board. d. The Accounting and Review Services Committee. Answer: A 17. Which of the following incorrectly matches the authoritative body with its authoritative pronouncements? a. Accounting and Review Services Committee: "Statements on Standards for Accounting and Review Services" b. Auditing Standards Board: "Statements on Auditing Standards" c. Auditing Standards Executive Committee: "Statements on Auditing Procedure" d. Securities and Exchange Commission: "Financial Reporting Releases" Answer: C 18. A license to practice as a certified public accountant is granted by a. State boards of accountancy. b. The AICPA. c. State societies of CPAs. d. The SEC. Answer: A
19. The purpose of a compliance audit for a governmental entity is to determine whether a. Financial statements comply with GAAP and whether the entity is operating efficiently. b. Financial statements comply with GAAP and the entity has complied with applicable laws and regulations. c. The entity has complied with applicable laws and regulations. d. Financial statements comply with GAAP. Answer: B 20. Pursuant to the AICPA rules of conduct, the auditor's responsibility to the profession is defined by a. The AICPA Code of Professional Conduct. b. Federal laws governing licensed professionals who are involved in interstate commerce. c. Statements on Auditing Standards. d. The Bylaws of the AICPA. (AICPA ADAPTED) Answer: A
Chapter 2 - The Risk of Fraud and Mechanisms to Address Fraud: Regulation, Corporate Governance, and Audit Quality
1. In a financial statement audit, inherent risk represents a. The susceptibility of an account balance to error that could be material. b. The risk that error could occur and not be prevented or detected by the internal control structure. c. The risk that error could occur and not be detected by the auditor's procedures. d. The risk that the auditor fails to modify materially misstated financial statements. Answer: A 2. To a. b. c. d.
minimize the opportunities for fraud, unclaimed cash payroll should be Deposited in a safe deposit box. Held by the payroll custodian. Deposited in a special bank account. Held by the controller.
(AICPA ADAPTED)
Answer: C 3. The auditor is most likely to presume that a high risk of irregularities exists if a. The client is a multinational company that does business in numerous foreign countries. b. The client does business with several related parties. c. Inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts. d. Inadequate employee training results in lengthy EDP exception reports each month. (AICPA ADAPTED) Answer: C 4. Due professional care requires a. A critical review of the work done at every level of supervision. b. The examination of all corroborating evidence available. c. The exercise of error-free judgment. d. A consideration of internal control structure that includes tests of controls. Answer: A
5. If an auditor believes a client may have committed illegal acts, which of the following actions should the auditor take? a. Consult with the client's counsel and the auditor's counsel to determine how the suspected illegal acts will be communicated to stockholders. b. Extend auditing procedures to determine whether the suspected illegal acts have a material effect on the financial statements. c. Make inquiries of the client's management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements. d. Notify each member of the audit committee of the board of directors about nature of the acts and request that they advise an approach to be taken by the auditor. (AICPA ADAPTED) Answer: C 6. If an illegal act is discovered during the audit of a publicly held company, the auditor should a. Notify the regulatory authorities. b. Determine who was responsible for the act. c. Modify the extent of auditing procedures. d. Report the act to high-level personnel within the client's organization. (AICPA ADAPTED) Answer: D 7. The Foreign Corrupt Practices Act requires that a. Auditors engaged to examine the financial statements of publicly held companies report all illegal payments to the SEC. b. Privately held companies devise and maintain an adequate internal control structure. c. Publicly held companies devise and maintain an adequate internal control structure. d. U.S. firms doing business abroad report sizable payments to non -U.S. citizens to the Justice Department. (AICPA ADAPTED) Answer: C 8. The third general standard states that due care is to be exercised in the performance of an audit, and should be interpreted to mean that an auditor who undertakes an engagement assumes a duty to perform a. With reasonable diligence and without fault or error. b. As a professional who will assume responsibility for losses consequent upon error of judgment. c. To the satisfaction of the client and third parties. d. As a professional possessing the degree of skill commonly possessed by others in the field. (AICPA ADAPTED) Answer: D 9. The auditor's judgment concerning the overall fairness of the presentation of financial positions, results of operations, and cash flows is applied within the framework of a. Quality control. b. Generally accepted auditing standards that include the concept of materiality. c. The auditor's evaluation of the audited company's internal controls. d. Generally accepted accounting principles. (AICPA ADAPTED) Answer: D 10. An audit conducted in accordance with generally accepted auditing standards generally should a. Be expected to provide assurance that illegal acts will be detected when internal control is effective. b. Be relied on to disclose violations of truth in lending laws. c. Include a plan to actively search for illegal acts. d. Not be relied on to provide assurance that illegal acts will be detected. (AICPA ADAPTED) Answer: D
11. An audit client's board of directors and audit committee refused to take action about an immaterial illegal act that was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning a. Inadequate financial statement disclosures. b. Compliance with the Foreign Corrupt Practices Act. c. Scope limitations resulting from the inaction. d. Reliance on management's representations. (AICPA ADAPTED) Answer: D 12. Reportable conditions are matters that come to an auditor's attention and that should be communicated to an entity's audit committee because they represent a. Material irregularities or illegal acts perpetrated by management. b. Significant deficiencies in the design or operation of internal control. c. Flagrant violations of the entity's documented conflict-of-interest policies. d. Intentional attempts by client personnel to limit the scope of the auditor's work. (AICPA ADAPTED) Answer: B 13. Which of the following is not done by an auditor when obtaining an understanding of an entity's internal controls? a. Identify the types of potential misstatements that can occur. b. Consider the operating effectiveness of the internal controls. c. Design substantive tests. d. Consider factors that affect the risk of material misstatements. (AICPA ADAPTED) Answer: B 14. The independent auditor's plan for an audit in accordance with generally accepted auditing standards is influenced by the possibility of material errors. The auditor will therefore conduct the examination with an attitude of a. Professional skepticism. b. Subjective mistrust. c. Objective indifference. d. Professional responsiveness. (AICPA ADAPTED) Answer: A 15. When an independent auditor decides that the work performed by internal auditors may have a bearing on the nature, timing, and extent of contemplated audit procedures, the independent auditor should plan to evaluate the objectivity of the internal auditors. Relative to objectivity, the independent auditor should a. Consider the organization level to which internal auditors report the results of their work. b. Review the quality control program in effect for the internal audit staff. c. Examine the quality of the internal audit reports. d. Consider the qualifications of the internal audit staff. (AICPA ADAPTED) Answer: A
16. With respect to errors and fraud, which of the following should be part of an auditor's planning of the audit engagement? a. Plan to search for errors or fraud that would have a material or immaterial effect on the financial statements. b. Plan to discover errors or fraud that are either material or immaterial. c. Plan to discover errors or fraud that are material. d. Plan to consider factors affecting the risk of material misstatement both at the financial statement and the account balance level. (AICPA ADAPTED) Answer: D 17. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the a. Efficiency of the audit. b. Effectiveness of the audit. c. Selection of the sample. d. Audit quality controls. (AICPA ADAPTED) Answer: A 18. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely to a. b. c. d.
Make inquiries of the proposed client's legal counsel. Review financial statements of the proposed client. Make inquiries of previous auditors. Review the personnel practices of the proposed client.
(AICPA ADAPTED)
Answer: D 19. When seeking to recover stock market losses from a public accounting firm on the basis of an unqualified opinion that accompanied a registration statement, an investor must establish that a. The audited financial statements were materially misstated. b. He or she relied on the financial statements. c. The firm did not act in good faith. d. If the firm had exercised due care, the material misstatement would have been discovered. (AICPA ADAPTED) Answer: A 20. A lawyer's response to a letter of audit inquiry may be limited to matters that are considered individually or collectively material to the financial statements if a. The auditor has instructed the lawyer about the limits of materiality in financial statements. b. The client and the auditor have agreed on the limits of materiality and the lawyer has been notified. c. The lawyer and auditor have reached an understanding about the limits of materiality. d. The lawyer's response to the inquiry explains the legal meaning of materiality limits and establishes quantitative parameters. (AICPA ADAPTED) Answer: C
Chapter 3 - Internal Control over Financial Reporting: Management’s Responsibilities and Importance to the External Auditors
1. Internal control procedures are not designed to provide reasonable assurance that a. Transactions are executed in accordance with management's authorization. b. Irregularities will be eliminated. c. Access to assets is permitted only in accordance with management's authorization. d. The recorded accountability for assets is compared with the existing assets at reasonable intervals. (AICPA ADAPTED) Answer: B 2. A secondary purpose of the auditor's consideration of internal control is to provide a. A basis for constructive suggestions about improvements in internal control structure. b. A basis for assessing control risk. c. An assurance that the records and documents have been maintained in accordance with existing company policies and procedures. d. A basis for the determination of the resultant extent of the tests to which auditing procedures are to be restricted. (AICPA ADAPTED) Answer: A 3. When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes that a. Employment of competent personnel provides assurance that the objectives of internal control will be achieved. b. Establishment and maintenance of internal control is an important responsibility of the management and not of the auditor. c. Cost of internal control procedures should not exceed the benefits expected to be derived from the control. d. Segregation of incompatible functions is necessary to ascertain that the control procedures are effective. (AICPA ADAPTED) Answer: C 4. After considering a client's internal control, an auditor has concluded that the system is well designed and is functioning as anticipated. Under these circumstances, the auditor would most likely a. Cease to perform further substantive tests. b. Not increase the extent of planned substantive tests. c. Increase the extent of anticipated analytical procedures. d. Perform all tests of controls to the extent outlined in the preplanned audit program. (AICPA ADAPTED) Answer: B 5. The primary purpose of the auditor's consideration of internal control is to provide a basis for a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable. b. Constructive suggestions to clients concerning deficiencies in internal control. c. Determining the nature, timing, and extent of audit tests to be applied. d. The expression of an opinion. (AICPA ADAPTED) Answer: C
6. The purpose of tests of controls is to provide reasonable assurance that the a. Accounting treatment of transactions and balances is valid and proper. b. Control procedures are functioning as intended. c. Entity has complied with disclosure requirements of GAAP. d. Entity has complied with requirements of quality control.
(AICPA ADAPTED)
Answer: B
7. The auditor's review of the client's internal control is documented in order to substantiate a. Conformity of the accounting records with GAAP. b. Compliance with generally accepted auditing standards. c. Adherence to requirements of management. d. The fairness of the financial statement presentation. (AICPA ADAPTED) Answer: B 8. After consideration of a client's internal control, an auditor might decide to a. Increase the extent of substantive testing in areas where the control structure is strong. b. Reduce the extent of tests of controls in areas where the controls are strong. c. Reduce the extent of both substantive tests and tests of controls in areas where the controls are strong. d. Increase the extent of substantive testing in areas where the controls are weak. (AICPA ADAPTED) Answer: D 9. After documenting internal control in an audit engagement, the auditor may perform tests on a. Those controls that the auditor plans to rely on. b. Those controls in which deficiencies were identified. c. Those controls that have a material effect on the financial statement balances. d. A random sample of the controls that were reviewed. (AICPA ADAPTED) Answer: A 10. The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a a. b. c. d.
Test of controls. Substantive test. Dual-purpose test. Test of balances.
(AICPA ADAPTED)
Answer: A
11. In an auditor's consideration of internal control, the completion of a questionnaire is most closely associated with which of the following? a. b. c. d.
Separation of duties. Understanding the system. Flowchart accuracy. Tests of controls.
Answer: B
(AICPA ADAPTED)
12. The reliance placed on substantive tests in relation to control risk varies in a relationship that is ordinarily a. Parallel. b. Inverse. c. Direct. d. Equal. (AICPA ADAPTED) Answer: B 13. The auditor observes client employees in order to a. Prepare a flowchart. b. Update information contained in the organization and procedure manuals. c. Corroborate the information obtained during the initial review of the system. d. Determine the extent of compliance with quality control standards.
(AICPA ADAPTED)
Answer: C 14. A consideration of internal control made during an audit is usually not sufficient to express an opinion on an entity's controls because a. b. c. d.
Weaknesses in the system may go unnoticed during the audit engagement. A consideration of internal control is not necessarily made during an audit engagement. Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated. Controls can change each year. (AICPA ADAPTED)
Answer: C 15. An auditor's report on internal control of a publicly held company would ordinarily be of least use to a. b. c. d.
Shareholders. Officers. Directors. Regulatory agencies.
(AICPA ADAPTED)
Answer: A 16. The accountant's report expressing an opinion on an entity's internal controls should state that the a. Establishment and maintenance of internal control is the responsibility of management. b. Objectives of the client's internal controls are being met. c. Consideration of the internal controls was conducted in accordance with generally accepted auditing standards. d. Inherent limitations of the client's internal controls were examined. (AICPA ADAPTED) Answer: A 17. The accountant's report expressing an opinion on an entity's internal controls would not include a a. Description of the scope of the engagement. b. Specific date that the report covers rather than a period of time. c. Brief explanation of the broad objectives and inherent limitations of internal control. d. Statement that the entity's internal controls are consistent with that of the prior year after giving effect to subsequent changes. (AICPA ADAPTED) Answer: D
18. A CPA's consideration of internal control in an audit a. Is generally more limited than that made in connection with an engagement to express an opinion on internal control. b. Is generally more extensive than that made in connection with an engagement to express an opinion on internal control. c. Will generally be identical to that made in connection with an engagement to express an opinion on internal control. d. Will generally result in the CPA expressing an opinion on the internal control. (AICPA ADAPTED) Answer: A 19. The auditor who becomes aware of reportable conditions is required to communicate this to the a. Audit committee and client's legal counsel. b. Board of directors and internal auditors. c. Senior management and board of directors. d. Internal auditors and senior management. (AICPA ADAPTED) Answer: C 20. Which of the following is likely to be of least importance to an auditor when assessing control risk in a company that processes data by computer? a. The segregation of duties within the computer department. b. The control over source documents. c. The documentation maintained for accounting applications. d. The cost-benefit ratio of data processing operations. (AICPA ADAPTED) Answer: D Chapter 4 - Professional Liability and the Need for Quality Auditor Judgments and Ethical Decisions
1. Which of the following best describes a trend in litigation involving CPAs? a. A CPA cannot render an opinion on a company unless the CPA has audited all affiliates of that company. b. A CPA may successfully assert as a defense that the CPA had no motive to be part of a fraud. c. A CPA may be exposed to criminal as well as civil liability. d. A CPA is primarily responsible for a client's footnotes in an annual report filed with the SEC. (AICPA ADAPTED) Answer: C 2. As a consequence of failure to adhere to generally accepted auditing standards in the course of an audit of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft? a. No liability since the ordinary examination cannot be relied on to detect defalcations. b. No liability because privity of contract is lacking. c. Liable for losses attributable to her or his negligence. d. Liable only if it could be proved that he or she was grossly negligent. (AICPA ADAPTED) Answer: C
3. The Apex Surety Company wrote a general fidelity bond covering defalcations by the employees of Watson, Inc. Thereafter, Grand, an employee of Watson, embezzled $18,999 of company funds. When his activities were discovered, Apex paid Watson the full amount in accordance with the terms of the fidelity bond and then sought recovery against Watson's auditors, Kane & Dobbs, CPAs. Which of the following would be Kane & Dobbs' best defense? a. Apex is not in privity of contract. b. The shortages were the result of clever forgeries and collusive fraud that would not be detected by a n examination made in accordance with generally accepted auditing standards. c. Kane & Dobbs were not guilty of either gross negligence or fraud. d. Kane & Dobbs were not aware of the Apex-Watson surety relationship. (AICPA ADAPTED) Answer: B 4. Martin Corporation orally engaged Humm & Dawson to audit its year-end financial statements. The engagement was to be completed within two months after the close of Martin's fiscal year for a fixed fee of $2,500. Under these circumstances, what obligation is assumed by Humm & Dawson? a. None. The contract is unenforceable since it is not in writing. b. An implied promise to exercise reasonable standards of competence and care. c. An implied obligation to take extraordinary steps to discover all defalcations. d. The obligation of an insurer of its work, which is liable without fault. (AICPA ADAPTED) Answer: B 5. In which of the following statements about a public accounting firm's action is scienter or its equivalent absent? a. Reckless disregard for the truth. b. Actual knowledge of fraud. c. Intent to gain monetarily by concealing fraud. d. Performance of substandard auditing procedures. (AICPA ADAPTED) Answer: D 6. Doe and Co., CPAs, issued an unqualified opinion on the 2005 financial statements of Marx Corp. These financial statements were included in Marx's annual report and form 10K filed with the SEC. Doe did not detect material misstatements in the financial statements as a result of negligence in the performance of the audit. Based on the financial statements, Fitch purchased stock in Marx. Shortly thereafter, Marx became insolvent, causing the price of the stock to decline drastically. Fitch has commenced legal action against Doe for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Doe's best defense to such an action would be that a. Fitch lacks privity to sue. b. The engagement letter specifically disclaimed all liability to third parties. c. There is no proof of scienter. d. There has been no subsequent sale for which a loss can be computed. (AICPA ADAPTED) Answer: C
7. Hall purchased bonds for Eon Corp. in a public offering subject to the Securities Act of 1933. Kosson and Co., CPAs, rendered an unqualified opinion on Eon's financial statements, which were included in Eon's registration statement. Kosson is being sued by Hall based on misstatements contained in the financial statements. In order to be successful, Hall must prove materiality of Kosson's
a. b. c. d.
Damages Yes Yes Yes No
Misstatement Yes Yes No Yes
Scienter Yes No No Yes
(AICPA ADAPTED)
Answer: B 8. Lewis & Clark, CPAs, rendered an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a false statement in the financial statements, Lewis & Clark are being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? a. The investor has not met the burden of proving fraud or negligence by Lewis & Clark. b. The investor did not actually rely on the false statement. c. Detection of the false statement by Lewis & Clark occurred after their examination date. d. The false statement is immaterial in the overall context of the financial statements. (AICPA ADAPTED) Answer: B 9. Gibson is suing Simpson & Sloan, CPAs, to recover losses incurred in connection with Gibson's transactions in Zebra Corporation securities. Zebra's Annual Form 10-K Report contained material false and misleading statements in the financial statements audited by Simpson & Sloan. To recover under the Securities and Exchange Act of 1934, Gibson must, among other things, establish that a. All of his past transactions in Zebra securities, both before and after the auditors' report date, r esulted in net losses. b. The transaction in Zebra securities that resulted in a loss occurred within 90 days of the auditors' report date. c. He relied on the financial statements in his decision to purchase or sell Zebra securities. d. The market price of the stock dropped significantly after Zebra issued corrected financial statements. (AICPA ADAPTED) Answer: C 10. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? a. The audit program. b. The auditor's judgment. c. Generally accepted auditing standards. d. The auditor's working papers. (AICPA ADAPTED) Answer: B 11. An auditor who believes that a material irregularity may exist should initially a. Discuss the matter with those believed to be involved in the perpetration of the material irregularity. b. Discuss the matter with a higher level of management. c. Withdraw from the engagement. d. Consult legal counsel. (AICPA ADAPTED) Answer: B
12. Which of the following, if material, would be an irregularity? a. Mistakes in the application of accounting principles. b. Clerical mistakes in the accounting data underlying the financial statements. c. Misappropriation of an asset or groups of assets. d. Misinterpretations of facts that existed when the financial statements were prepared. (AICPA ADAPTED) Answer: C 13. When unable to determine the amounts associated with certain illegal acts committed by a client, the auditor would most likely issue a. A review opinion with a separate explanatory paragraph. b. Only an adverse opinion. c. Either a qualified opinion or an adverse opinion. d. Either a qualified opinion or a disclaimer of opinion. (AICPA ADAPTED) Answer: D 14. The auditor is most likely to presume that a high risk of irregularities exists if a. The client is a multinational company that does business in numerous foreign countries. b. The client does business with several related parties. c. Inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts. d. Inadequate employee training results in lengthy EDP exception reports each month. (AICPA ADAPTED) Answer: C 15. An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the a. Illegal act affects the auditor's ability to rely on management representations. b. Illegal act has material financial statement implications. c. Illegal act has received widespread publicity. d. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements. (AICPA ADAPTED) Answer: A 16. A third party sues a public accounting firm for negligence under common law on the basis of materially false financial statements. Which of the following is the firm's defense? a. Lack of privity. b. Lack of reliance. c. Lack of intent. d. Contributory negligence. (AICPA ADAPTED) Answer: A 17. Purchasers of securities have brought suit against an independent auditor under the Securities Act of 1933. The firm will prevail in the suit, even though the firm issued an unqualified opinion on materially misstated financial statements, if a. The firm was unaware of the material misstatements. b. The purchasers had no direct dealings with the auditor. c. The firm can show that the purchasers did not rely on the financial statements. d. The firm can show that there was no intent to deceive or manipulate the purchasers. (AICPA ADAPTED) Answer: C
18. An auditor is subject to criminal liability if he or she a. Refuses to return a client's working papers. b. Performs an audit negligently. c. Willfully omits a material fact required to be stated in a registration statement. d. Willfully breaches a contract with a client.
(AICPA ADAPTED)
Answer: C 19. If an independent auditor believes that material errors or fraud exist, he or she should a. Consider the implications and discuss the matter with appropriate levels of management. b. Make the investigation necessary to determine whether the errors or fraud have, in fact, occurred. c. Request that management investigate whether the errors or fraud have, in fact, occurred. d. Consider whether the errors or fraud were the result of a failure by employees to comply with existing internal controls. (AICPA ADAPTED) Answer: A 20. Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Industries, Inc. to the Securities and Exchange Commission. The audit was deficient in several respects. Markum is now insolvent and unable to satisfy shareholders' claims. The shareholders have taken legal action against Donalds under Section 10b and Rule 10b5 of the Securities Exchange Act of 1934. Which of the following is Donalds' best defense? a. Donalds did not intend to deceive, manipulate, or defraud Markum's shareholders. b. Section 10b does not apply. c. Donalds was not in privity to the shareholders. d. The engagement letter specifically disclaimed liability to any third party. (AICPA ADAPTED) Answer: A Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process
1. The reason an independent auditor gathers evidence is to a. Form an opinion on the financial statements. b. Detect fraud. c. Evaluate management. d. Evaluate internal controls.
(AICPA ADAPTED)
Answer: A 2. The audit process is a. A special application of the scientific method of inquiry. b. Regulated by the AICPA. c. The only service a CPA is allowed to perform by law. d. Performed only by CPAs. Answer: A 3. Which of the following has historically had the least influence on the practice of public accounting? a. The Governmental Accounting Standards Board. b. The Institute of Internal Auditors. c. The Securities and Exchange Commission. d. The U.S. Congress. Answer: D
4. Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a. The elements of materiality and risk. b. The element of internal control. c. The element of corroborating evidence. d. The element of reasonable assurance. (AICPA ADAPTED) Answer: A 5. Under generally accepted auditing standards, an auditor's responsibility to detect and report violations of laws and regulations is to a. Assess the risk that violations of laws and regulations may cause materially misstated financial statements and to design the audit accordingly. b. Report all violations of laws and regulations to the U.S. GAO. c. Detect all violations of laws and regulations, including those that are neither direct nor material. d. Coordinate the search for violations of laws and regulations with all agencies from which the entity has received financial assistance. Answer: A 6. Statement on Auditing Standards No. 74 , "Compliance Auditing Applicable to Governmental Entities and to Other Recipients of Governmental Financial Assistance," describes an independent auditor's responsibilities for all but which of the following? a. Laws and regulations under generally accepted auditing standards. b. Laws and regulations in conjunction with a regulatory agency's criteria. c. The GAO's government auditing standards. d. The Single Audit Act. Answer: B 7. Under government auditing standards issued by the U.S. GAO, a report on internal control should address all of the following except a. The entity's internal control categories. b. The scope of the work performed in obtaining an understanding of the entity's internal controls. c. The auditor's opinion on the appropriateness of the internal control in complying with future grants. d. Deficiencies in internal control not significant enough to be considered reportable conditions under SAS No. 60, "Communication of Internal Control Structure Related Matters Noted in an Audit." Answer: C 8. Which of the following would not be included in an accountant's review report on the f inancial statements of a nonpublic entity? a. A statement that the review was made in accordance with generally accepted auditing standards. b. A statement that all information included in the financial statements is the representation of management. c. A statement describing the principal procedures performed. d. A statement describing the auditor's conclusions based on the results of the review. (AICPA ADAPTED) Answer: A
9. An auditor has been engaged to audit financial statements that were prepared on a cash basis. The auditor a. Must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of the omissions. b. May not be associated with statements that are not in accordance with GAAP. c. Must render a qualified report explaining the departure fr om GAAP in the opinion paragraph. d. Must restate the financial statements on an accrual basis and then issue the standard report. (AICPA ADAPTED) Answer: A 10. Jones was engaged to audit the financial statements of Gamma Corporation, a J une 30 year-end client. Having completed testing of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? a. Tracing recorded dividend income to cash receipts records and validated deposit slips. b. Utilizing analytical review techniques and statistical sampling. c. Comparing recorded dividends with amounts appearing on Federal Information Form 1099. d. Comparing recorded dividends with a standard financial reporting service's record of dividends. (AICPA ADAPTED) Answer: D 11. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client's treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? a. The confirmation request was signed by the treasurer. b. Sending the request was meaningless because the account was closed before the year-end. c. The request was mailed by the assistant treasurer. d. The CPA did not sign the confirmation request before it was mailed. (AICPA ADAPTED) Answer: C 12. Which of the following statements best describes the primary purpose of Statements on Auditing Standards? a. Guides intended to set forth auditing procedures that are applicable to a variety of situations. b. Outlines intended to narrow the areas of inconsistency and divergence of auditor opinion. c. Authoritative statements, enforced through the code of professional conduct, and intended to limit the degree of auditor judgment. d. Interpretations intended to clarify the meaning of generally accepted auditing standards. (AICPA ADAPTED) Answer: D 13. Of the following, which is the most efficient audit procedure for testing accrued interest earned on bond investments? a. Tracing interest declarations to an independent record book. b.Recomputing interest earned. c. Confirming interest rate with the issuer of the bonds. d.Vouching the receipt and deposit of interest checks. (AICPA ADAPTED) Answer: B
14. The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all a. b. c. d.
Expenditures for plant assets have been recorded in the proper period. Capital expenditures have been properly authorized. Noncapitalizable expenditures have been properly expensed. Expenditures for plant assets have been capitalized.
(AICPA ADAPTED)
Answer: D 15. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that a. Only bona fide employees worked, and their pay was properly computed. b. Jobs on which employees worked were charged with the appropriate labor cost. c. Internal controls relating to payroll disbursements are operating effectively. d. All employees worked the number of hours for which their pay was computed. (AICPA ADAPTED) Answer: D 16. Taylor Sales Corp. maintains a large full-time internal audit staff, which reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that control risk is low. The independent auditor will probably a. Eliminate compliance testing. b. Increase tests of controls. c. Avoid duplicating the work performed by the internal audit staff. d. Place limited reliance on the work performed by the internal audit staff. (AICPA ADAPTED) Answer: D 17. To verify that all sales transactions have been recorded, a test of transactions should be completed on a representative sample drawn from a. Entries in the sales journal. b. The billing clerk's file of sales orders. c. A file of duplicate copies of sales invoices for which all prenumbered forms in the series have been accounted. d. The shipping clerk's file of duplicate copies of shipping documents. (AICPA ADAPTED) Answer: D 18. In a financial statement audit, the independent auditor would not rely on the work of an internal auditor in a. Obtaining an understanding of the internal control structure. b. Assessing risk. c. Determining a preliminary estimate of materiality. d. Performing substantive tests. Answer: C
19. An attorney is responding to an independent auditor as a result of the audit client's letter of inquiry. The attorney may appropriately limit the response to a. Asserted claims and litigation. b. Matters to which the attorney has given substantive attention in the form of legal consultation or representation. c. Asserted, overtly threatened, or pending claims and litigation. d. Items that have an extremely high probability of being resolved to the client's detriment. (AICPA ADAPTED) Answer: B 20. To strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic a. Increase in insurance coverage. b. Inspection of equipment and reconciliation with accounting records. c. Verification of liens, pledges, and collateralizations. d. Accounting for work orders. (AICPA ADAPTED) Answer: B
Chapter 6 - A Framework for Audit Evidence
1. Of a. b. c. d.
the following, which is the least persuasive type of audit evidence? Documents mailed by outsiders to the auditor. Correspondence between auditor and vendors. Copies of sales invoices inspected by the auditor. Computations made by the auditor.
(AICPA ADAPTED)
Answer: C 2. Analytical procedures are a. Substantive tests designed to evaluate a system of internal control. b. Tests of controls designed to evaluate the validity of management's representation letter. c. Substantive tests designed to evaluate the reasonableness of financial information. d. Tests of controls designed to evaluate the reasonableness of financial information. (AICPA ADAPTED) Answer: C 3. Which of the following best describes the primary purpose of audit procedures? a. To detect errors or irregularities. b. To comply with generally accepted accounting principles. c. To gather corroborative evidence. d. To verify the accuracy of account balances.
(AICPA ADAPTED)
Answer: C 4. The procedures specifically outlined in an audit program are primarily designed to a. Protect the auditor in the event of litigation. b. Detect errors or irregularities. c. Test internal control structure. d. Gather evidence. Answer: D
(AICPA ADAPTED)
5. Which of the following is ordinarily designed to detect possible material dollar errors on the financial statements? a. Tests of controls. b. Analytical procedures. c. Computer controls. d. Post audit working paper review. (AICPA ADAPTED) Answer: B 6. Which of the following statements relating to the competence of evidential matter is always true? a. Evidential matter gathered by an auditor from outside an enterprise is reliable. b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory conditions. c. Oral representations made by management are not valid. d. Evidence gathered by auditors must be both valid and relevant to be considered competent. (AICPA ADAPTED) Answer: D 7. In the context of an audit of financial statements, substantive tests are audit procedures that a. May be eliminated under certain conditions. b. Are designed to discover significant subsequent events. c. May be either tests of transactions, direct tests of financial balances, or analytical tests. d. Will increase proportionately with the auditor's assessment of control risk. (AICPA ADAPTED) Answer: C 8. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion? a. Auditor judgment. b. Materiality. c. Relative risk. d. Reasonable assurance. (AICPA ADAPTED) Answer: A 9. Which of the following factors will least affect the independent auditor's judgment as to the quantity, type, and content of the working papers desirable for a particular engagement? a. Nature of the auditor's report. b. Nature of the financial statements, schedules, or other information upon which the auditor is reporting. c. Need for supervision and review. d. Number of personnel assigned to the audit. (AICPA ADAPTED) Answer: D 10. An auditor's working papers will generally be least likely to include documentation showing how the a. Client's schedules were prepared. b. Engagement had been planned. c. Client's internal control structure had been reviewed and evaluated. d. Unusual matters were resolved. (AICPA ADAPTED) Answer: A
11. Which of the following is not a primary purpose of audit working papers? a. To coordinate the examination. b. To assist in preparation of the audit report. c. To support the financial statements. d. To provide evidence of the audit work performed.
(AICPA ADAPTED)
Answer: C 12. The understanding between the client and the auditor as to the degree of responsibility to be assumed by each is normally set forth in a(n) a. Representation letter. b. Engagement letter. c. Management letter. d. Comfort letter. (AICPA ADAPTED) Answer: B 13. Audit evidence takes different forms and varies in persuasiveness. Which of the following is the least persuasive type of evidence? a. Vendor's invoice. b. Bank statement obtained from the client. c. Computations made by the auditor. d. Canceled checks. (AICPA ADAPTED) Answer: B 14. The following statements were made in a discussion of audit evidence by two independent auditors. Which statement is untrue? a. “I am seldom convinced beyond all doubt about all aspects of the financial statements being audited.” b. “I would not undertake that procedure because, at best, the results would only be persuasive and I'm looking for convincing evidence.” c. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.” d. “I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.” (AICPA ADAPTED) Answer: B 15. As the acceptable level of detection risk decreases, an auditor may change the a. Timing of substantive tests by performing them at an interim date rather than at year-end. b. Nature of substantive tests from a less effective to a more effective procedure. c. Timing of tests of controls by performing them at several dates rather than at one time. d. Assessed level of inherent risk to a higher amount. (AICPA ADAPTED) Answer: B 16. When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining whether a. The predecessor's work should be used. b. The company rotates auditors. c. Control risk is low, in the predecessor’s opinion . d. The engagement should be accepted. (AICPA ADAPTED) Answer: D
17. The purpose of tests of controls is to provide reasonable assurance that a. The extent of substantive testing is minimized. b. Evidence will be obtained to determine an assessed level of control risk. c. Errors and irregularities are prevented or detected in a timely manner. d. The auditor has an understanding of the control environment. ADAPTED)
(AICPA
Answer: B 18. An auditor's working papers should a. Not be permitted to serve as a reference source for the client. b. Not contain comments critical of management. c. Show that the accounting records agree or reconcile with the financial statements. d. Be considered the primary support for the financial statements being audited. (AICPA ADAPTED) Answer: C 19. Which of the following is not a factor affecting the independent auditor's judgment about the quantity, type, and content of audit working papers? a. The needs for supervision and review of the work performed by assistants. b. The nature and condition of the client's records and internal controls. c. The expertise of client personnel and their participation in preparing schedules. d. The type of the financial statements, schedules, or other information on which the auditor is reporting. (AICPA ADAPTED) Answer: C 20. During an audit engagement, data are compiled and included in the audit working papers. The working papers are a. A client-owned record of conclusions reached by the auditors who performed the engagement. b. Evidence supporting financial statements. c. Support for the auditor's compliance with generally accepted auditing standards. d. A record to be used as a basis for the following year's engagement. (AICPA ADAPTED) Answer: C Chapter 7 - Planning an Audit: Identifying and Responding to the Risk of Material Misstatement
1. Due professional care requires a. A critical review of the work done at every level of supervision. b. The examination of all corroborating evidence available. c. The exercise of error-free judgment. d. A consideration of internal control structure that includes tests of controls. (AICPA ADAPTED) Answer: A 2. The first general standard requires that the audit of financial statements be performed by a person or persons having adequate technical training and a. Independence with respect to the financial statements and supplementary disclosures. b. Exercising professional care as judged by peer reviewers. c. Proficiency as an auditor, which likely has been acquired from previous experience. d. Objectivity as an auditor, as verified by proper supervision. (AICPA ADAPTED) Answer: C
3. An auditor, while performing an audit, strives to achieve the appearance of independence in order to a. Reduce risk and liability. b. Comply with the generally accepted standards of fieldwork. c. Become independent in fact. d. Maintain public confidence in the profession. (AICPA ADAPTED) Answer: D 4. Adequate technical training and proficiency as an auditor encompasses an ability to understand a computer system sufficiently to identify and evaluate a. The processing and imparting of information. b. Essential accounting control features. c. All control procedures. d. The degree to which programming conforms to the application of generally accepted accounting principles. (AICPA ADAPTED) Answer: D 5. Ultimately, the decision about whether or not an auditor is independent must be made by the a. Auditor. b. Client. c. Audit committee. d. Public. (AICPA ADAPTED) Answer: A 6. Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of an error in any one account is, therefore, greater for Madison than for Nassau. This is an example of the auditor's concept of a. Account bias. b. Audit risk. c. Materiality. d. Reasonable assurance. (AICPA ADAPTED) Answer: C 7. Which of the following best describes what is meant by generally accepted auditing standards? a. Acts to be performed by the auditor. b. Measures of the quality of an auditor's performance. c. Procedures used to gather evidence to support financial statements. d. Audit objectives generally determined on audit engagements. (AICPA ADAPTED) Answer: B 8. There is an inverse relationship between the effectiveness of an entity's internal control structure and the a. Reliability of financial statements. b. Extent of detailed audit tests required. c. Degree of staff supervision required in the performance of an audit. d. Fairness of management assertions in the financial statements. Answer: B
9. Which of the following best describes the character of the three generally accepted auditing standards classified as general standards? a. Criteria for competence, independence, and professional care of individuals performing the audit. b. Criteria for the content of the financial statements and related footnote disclosures. c. Criteria for the content of the auditor's report. d. The requirements for planning and supervision. (AICPA ADAPTED) Answer: A 10. The generally accepted standards of fieldwork relate to a. The competence, independence, and professional care of persons performing the audit. b. Criteria for the content of the auditor's report on financial statements. c. Audit planning and evidence gathering. d. The need to maintain independence in mental attitude. (AICPA ADAPTED) Answer: C 11. Which of the following statements is correct concerning the concept of materiality? a. Materiality is determined by reference to AICPA guidelines. b. Materiality depends only on the dollar amount involved. c. Materiality depends on the nature of an item rather than on the dollar amount. d. Materiality is a matter of professional judgment.
(AICPA ADAPTED)
Answer: D 12. The generally accepted standards of reporting encompass all of the following except a. Consideration of an entity's internal control structure. b. Consistent application of accounting principles. c. Informative disclosures. d. Conformity of financial statements with GAAP. Answer: A 13. An objective of the fourth generally accepted standard of reporting, relating to the expression of an opinion, is to a. Prohibit the auditor from issuing a report that does not include an opinion on the financial statements taken as a whole. b. Inform users that the financial statements and related notes a re the joint responsibility of the auditor and management. c. Prevent users of financial statements from misinterpreting the degree of responsibility assumed by the auditor. d. Ensure adequate informative disclosures in the financial statements. Answer: C 14. Which of the following is not an element of quality control? a. Documentation. b. Inspection. c. Supervision. d. Consultation. Answer: A
(AICPA ADAPTED)
15. In a financial statement audit, audit risk represents the probability that a. Internal control fails and the failure is not detected by the auditor's procedures. b. The auditor unknowingly fails to modify an opinion on materially misstated financial statements. c. Inherent and control risk cause errors that could be material to the financial statements. d. The auditor is not retained to conduct a financial statement audit in the succeeding year. Answer: B 16. The "hallmark" of auditing is a. Available audit technology. b. Generally accepted auditing standards. c. Professional judgment. d. Materiality and audit risk. Answer: C 17. An auditor is most likely to refer to one or more of the three general auditing standards in determining a. The nature of a report qualification. b. The scope of auditing procedures. c. Requirements for the consideration of internal control. d. Whether the auditor should undertake an audit engagement. (AICPA ADAPTED) Answer: D 18. Which of the following is mandatory if the auditor is to comply with the general standards of the AICPA’s generally accepted auditing standards? a. Adequate technical training b. Use analytical procedures. c. Use statistical sampling when feasible on an audit engagement. d. Confirmation of material accounts receivable balances. (AICPA ADAPTED) Answer: A 19. The first general standard requires that a person or persons have adequate technical training and proficiency as an auditor. This standard is met by a. Understanding business and finance. b. Education and experience in auditing. c. Continuing professional education. d. Knowledge of Statements of Auditing Standards. (AICPA ADAPTED) Answer: B 20. A public accounting firm studies its personnel advancement experience to determine whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to a. Generally accepted auditing standards. b. Attestation standards. c. Supervision and review. d. Quality control standards. (AICPA ADAPTED) Answer: D
Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software
1. The application of statistical sampling techniques is least related to which of the following generally accepted auditing standards? a. The work is to be adequately planned, and assistants, if any, are to be properly supervised. b. In all matters relating to the assignment, independence in mental attitude is to be maintained by the auditor or auditors. c. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. d. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion about the financial statements under audit. Answer: B 2. An auditor plans to test a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and a. Evaluate the results as if the sample size had been 19. b. Treat the missing check as a deviation for the purpose of evaluating the sample. c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not. d. Choose another check to replace the missing check in the sample. (AICPA ADAPTED) Answer: B 3. The tolerable rate of deviation for tests of controls necessary to justify a control risk assessment depends primarily on which of the following? a. The cause of errors. b. The extent of reliance to be placed on the procedures. c. The amount of any substantive errors. d. The limit used in audits of similar clients. (AICPA ADAPTED) Answer: B 4. Which of the following sampling methods is most useful to auditors when performing tests of controls? a. Discovery sampling. b. Attribute estimation. c. Variable sampling. d. Unrestricted random sampling with replacement. (AICPA ADAPTED) Answer: B 5. An a. b. c. d.
underlying feature of random sampling is that each Stratum of the accounting population be given equal representation in the sample. Item in the accounting population be randomly ordered. Item in the accounting population should have an opportunity to be selected. Item must be systematically selected using replacement. (AICPA ADAPTED)
Answer: C
6. Given random sampling, the same sample size, and the same tolerable error for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population is a. The same as the risk of assessing control risk too low on the larger population. b. Higher than the risk of assessing control risk too low on the larger population. c. Lower than the risk of assessing control risk too low on the larger population. d. Indeterminable relative to the risk of assessing control risk too low on the larger population. (AICPA ADAPTED) Answer: C 7. At times, a sample may indicate that the auditor's assessed level of control risk for a given control is reasonable when, in fact, the true compliance rate does not justify the assessed level. This situation illustrates the risk of a. Assessing control risk too low. b. Assessing control risk too high. c. Incorrect precision. d. Incorrect rejection. (AICPA ADAPTED) Answer: A 8. Which of the following is an element of sampling risk? a. Choosing an audit procedure that is inconsistent with the audit objective. b. Choosing a sample size that is too small to achieve the sampling objective. c. Failing to detect an error on a document that has been inspected by the auditor. d. Failing to perform audit procedures that are required by the sampling plan. (AICPA ADAPTED) Answer: B 9. An auditor examining inventory may appropriately apply sampling for attributes in order to estimate the a. Average price of inventory items. b. Percentage of slow-moving inventory items. c. Dollar value of inventory. d. Physical quantity of inventory items. (AICPA ADAPTED) Answer: B 10. The tolerable rate of deviations for a test of controls is generally a. Lower than the expected rate of errors in the related accounting population. b. Higher than the expected rate of errors in the related accounting records. c. Identical to the expected rate of errors in the related accounting records. d. Unrelated to the expected rate of errors in the related accounting records.
(AICPA ADAPTED)
Answer: B 11. In comparison with probability-proportional-to-size (PPS) sampling, which of the following is an advantage of classical variables sampling in auditing? a. If no errors are expected, classical variables sampling usually results in a smaller sample size than PPS sampling. b. A classical variables sample can be designed more easily and sample selection can begin before the complete population is available. c. If there are many individual differences between recorded and audited amounts in the population, classical variables sampling may result in a smaller sample size. d. Classical variables sampling automatically results in a stratified sample because items are selected in proportion to their dollar amounts. Answer: C
12. In assessing the risk of incorrect acceptance, an auditor should consider each of the following except a. Audit risk. b. The risk that internal control structure fails to detect material errors that occur. c. Tolerable error. d. The risk that analytical procedures and other tests fail to detect material errors that occur and that are not detected by internal control. Answer: C 13. An auditor is evaluating the results of a variables sampling plan. Which of the following is not relevant to the auditor's judgment about the sample? a. Management's explanations for why errors in the sample occurred. b. Projecting the sample error to the population. c. Considering the effects of sampling risk. d. Qualitative information that lends insight into errors found. Answer: A 14. In comparison with classical variables sampling, which of the following is an advantage of probability proportional-to-size (PPS) sampling? a. PPS sampling automatically results in a stratified sample. b. PPS sampling results in a smaller sample size if many differences are expected between audited and recorded amounts. c. PPS sampling is particularly appropriate when understatement errors are expected. d. PPS sampling is less likely to overstate the allowance for sampling risk when errors are found in the sample. Answer: A 15. An auditor is applying probability-proportional-to-size (PPS) sampling. In determining sample size, which of the following is not necessary? a. A reliability factor for overstatement errors. b. A reliability factor for understatement errors. c. Tolerable error. d. Anticipated error. Answer: B 16. Probability-proportional-to-size (PPS) sampling is most appropriate when a. The auditor anticipates understatement errors. b. The auditor anticipates overstatement errors. c. The auditor expects no errors. d. The auditor has assessed control risk at the maximum. Answer: C 17. Which of the following sampling methods could be designed to estimate the dollar value of an audit population? a. Sampling for variables. b. Sampling for attributes. c. Discovery sampling. d. Probability-proportional-to-size sampling. (AICPA ADAPTED) Answer: A
18. Which of the following statements is correct about statistical sampling? a. An auditor needs to estimate the population standard deviation to use classical variables sampling. b. An assumption of probabilityproportionaltosize sampling is that the underlying accounting population be distributed normally. c. A classical variables sample needs to include negative balances in the sample. d. The selection of zero balances usually does not require special sample design considerations when using probabilityproportionaltosize sampling. (AICPA ADAPTED) Answer: A 19. An accounts receivable aging schedule was prepared on 300 pages with each page containing the aging data for 50 accounts. The pages were numbered from 1 to 300 and the accounts listed on each were numbered from 1 to 50. An auditor selected accounts receivable for confirmation using a table of numbers as illustrated: Select Column from Table of Numbers 02011 85393 97265 61680 16656 42751 69994 07942 10231 53988
Separate 5 Digits: First 3 Digits, Last 2 Digits 020 11 x 853 93 * 972 65 * 616 80 * 166 56 * 427 51 * 699 94 * 079 42 y 102 31 z 539 88 *
x Mailed confirmation to account 11 listed on page 20 y Mailed confirmation to account 42 listed on page 79 z Mailed confirmation to account 31 listed on page 102 * Rejected This is an example of which of the following sampling methods? a. b. c. d.
Block sampling. Systematic sampling. Haphazard sampling. Random number sampling.
(AICPA ADAPTED)
Answer: D 20. Assume you are auditing a retail department store and want to estimate the dollar amount of errors on sales invoices using probability proportional to size sampling. Which of the following is true? a. The risks of incorrect acceptance and incorrect rejection are greater than for a classical variables sampling plan. b. Tolerable error is ignored. c. An invoice with a large balance has a greater chance of being selected than one with a smaller balance. d. The estimate will be unreliable if the error rate is small. Answer: C
