1) Which of the following assertions is NOT made by management in placing an item in the financial statements?
A. Existence or occurrence
B. Direct controls
C. Rights and obligations
D. Presentation and disclosure
2) Determining whether amounts are in conformity with generally accepted accounting principles addresses the proper measurement of assets, liabilities, revenues, and expenses, which includes all of the following EXCEPT the
A. reasonableness of management’s accounting estimates.
B. proper application of valuation principles, such as cost, net reliable value, market value, and present value.
C. consistency in applying accounting principles.
D. reasonableness of management’s accounting policies.
3) If reported sales for 2010 erroneously include sales that occur in 2011, the assertion violated on the 2010 statements would be
A. existence or occurrence.
C. valuation or allocation.
D. presentation and disclosure.
4) The Securities Act of 1933 is also known as the
A. Truth in Lending Act.
B. Truth in Securities Act.
C. Great Depression Act.
D. Sale of Securities Act.
5) Anyone identified to the auditor by name prior to the audit who is the principal recipient of the auditor’s report is a
A. third party.
B. foreseen beneficiary.
C. primary beneficiary.
D. foreseeable party.
6) Section 11 of the Securities Act of 1933 uses the term material fact to limit the amount of information required. Under the Act, the standard used to determine an item’s materiality
A. is the auditor’s professional judgment.
B. is the average prudent investor.
C. has been established by the SEC as a percent of net income or of total assets.
D. may be found in FASB pronouncements.
7) Which of the following best describes the relationship that should exist between the external auditor and the management of the client company?
A. Adversarial relationship
B. Mutual caution and suspicion
C. Mutual trust and respect
D. Advocacy of management’s position
8) Within generally accepted auditing standards, general standards relate primarily to
A. qualifications of the auditor and the quality of the auditor’s work.
B. the fairness of the financial statements.
C. qualifications of the auditor.
D. the relationship between generally accepted auditing standards and accounting principles.
9) What level of assurance does the reader of a private company financial statement receive on the company’s system of internal controls?
10) Which of the following is the service in which the CPA firm issues a written communication that expresses a conclusion about the reliability of a written assertion that is another party’s responsibility?
A. Consulting service
B. Compilation service
C. Attest service
D. Accounting service
11) Internal auditors are primarily involved with
A. compliance audits.
B. financial statement audits.
C. operational audits.
D. compliance audits and operational audits.
12) The Government Accounting Office reports directly to the
A. public via the news media.
B. U.S. Congress.
13) The five management assertions outlined in generally accepted auditing standards include all of the following EXCEPT
A. rights and obligations.
B. presentation and disclosure.
D. existence and occurrence.
14) With respect to audit objectives, the term validity relates to which of the assertions below?
A. Presentation and disclosure
C. Existence and occurrence
D. Valuation or allocation
15) Specific audit objectives are normally
A. developed for each item in the financial statements.
B. developed for each item in the financial statements and derived from the categories of management’s financial statement assertions.
C. the same as the categories of management’s financial statement assertions.
D. derived from the categories of management’s financial statement assertions.
16) The susceptibility of an assertion to a material misstatement, assuming there are no controls, is
A. inherent risk.
B. control risk.
C. audit risk.
D. analytical procedures risk.
17) The assessment of inherent risk requires considering matters that have a pervasive effect on assertions for all or many accounts and matters that may pertain only to assertions for specific accounts. Which of the following is an example of a pervasive effects matter?
A. Sensitivity of operating results to economic factors
B. Management turnover, reputation, and accounting skills
C. Complexity of calculations
D. Susceptibility to misappropriation
18) The risk that the auditor will NOT detect a material misstatement that exists in an assertion is
A. detection risk.
B. audit risk.
C. control risk.
D. inherent risk.
19) In accepting an engagement, an auditor takes on professional responsibilities to
A. the public, the client, and other members of the accounting profession.
B. the client.
C. the public.
D. other members of the accounting profession.
20) The third phase of the audit involves performing audit tests. The primary purpose of this step is to obtain evidence about the
A. effectiveness of the internal control structure and fairness of the financial statements.
B. effectiveness of management.
C. integrity of management.
D. effectiveness of the internal control structure.
21) The importance of the accept/reject decision for a particular client is reflected in the inclusion of acceptance and continuation of clients as
A. a quality control element for CPA firms.
B. the subject of SAS 7.
C. the subject of SAS 96.
D. a separate rule in the AICPA Code of Conduct.
22) In planning the audit, the auditor should assess materiality at two levels:
A. financial statement and account balance.
B. preliminary and final.
C. account balance and detailed item.
D. company and divisional.
23) Materiality at the account balance level is stated in planning an audit, because
A. official pronouncements have specified different levels of materiality for various financial statement items.
B. some users make decisions based on individual account balances.
C. the opinion on the fairness of the financial statements extends to the individual account balances.
D. the auditor verifies account balances in reaching an overall conclusion on the fairness of the financial statements.
24) In a normal audit, the relationship between the level of materiality used to plan the engagement and the level of materiality used to evaluate evidence is that
A. the former is lower than the latter.
B. they must be identical.
C. the former is higher than the latter.
D. the former may be higher or lower than the latter.
25) The Committee of Sponsoring Organizations (COSO) report identified five interrelated components of internal control. Since then, a sixth category has been identified, which is
A. antifraud programs and controls.
C. information and communication.
D. risk assessment.
26) Which of the following is an INCORRECT quotation from the second field work standard?
A. “determine the nature, timing, and extent of compliance tests…”
B. “A sufficient understanding…”
C. “to be obtained to…”
D. “of the internal control structure is…”
27) Which of the following is NOT one of the interrelated components of internal controls identified by the COSO report?
B. Control activities
C. Information and communication
D. Control environment
28) Which of the following necessary controls would address a potential misstatement arising from a voucher being paid twice?
A. A computer comparing the sum of checks issued with the entry to cash disbursements
B. Periodic independent bank reconciliations
C. Separate duties for approving payment vouchers and sighing checks
D. Electronic cancellation of vouchers and supporting information when a check is issued
29) Which of the following statements is TRUE about an auditor’s responsibility to communicate with respect to a public company’s internal controls?
A. The difference between a material weakness and a significant deficiency is inconsequential.
B. The auditor will issue an adverse report on the effectiveness of internal controls if a material weakness in internal controls over financial reporting exists.
C. Auditors are required to communicate all significant deficiencies in internal control to the audit committee, but not necessarily to management.
D. Auditors are required to communicate all significant deficiencies in internal control to management, but not necessarily to the audit committee.
30) “A significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected” is the definition of a
A. material misstatement.
B. control deficiency.
C. significant deficiency.
D. material weakness.
31) Which of the following is NOT one of the factors that make up the control environment?
A. Human resource policies and practices
B. Organizational structure
C. Board of directors and audit committee
D. Accounting personnel
32) To emphasize the importance of integrity and ethical values among all personnel or an organization, the chief executive officer and other top managers should do all of the following EXCEPT
A. reduce or eliminate incentives and temptations.
B. send e-mail messages to all employees, promoting ethical values.
C. communicate to all employees.
D. set the tone by example.
33) An effective accounting system should identify and record only the valid transaction of the entity that occurred in the current period, which relates to the
A. existence or occurrence assertion.
B. valuation or allocation assertion.
C. presentation and disclosure assertion.
D. rights and obligations assertion.
34) In performing tests of details of balances, the auditor would obtain the bank statement directly from the bank, prepare the bank reconciliation, and verify all reconciling items and mathematical accuracy if detection risk was
A. very low.
D. very high.
35) Who is responsible for establishing the process and controls for preparing accounting estimates?
A. The audit committee
C. The internal auditor
D. The independent auditor
36) An auditor has computed the revised level of detection risk by direct use of the audit risk model. This means that the auditor must have
A. quantified all the relevant risk assessments.
B. used the primarily substantive approach in planning the audit.
C. used a flowchart to document the understanding of the complete internal control structure.
D. assessed control risk at the maximum.
37) Audit sampling in involved whenever an auditor
A. performs tests of details.
B. performs tests of controls.
C. makes an inference about a population characteristic based on a partial examination of that population.
D. examines 100% of the population.
38) Which of the following is NOT an advantage of PPS sampling?
A. PPS sampling is generally easier to use than classical variables sampling.
B. PPS sampling, if the auditor expects no misstatements, will usually result in a smaller sample size than under classical sampling.
C. PPS sampling automatically results in a stratified sample.
D. PPS systematic sample selection automatically identifies any item that is individually significant if its value is less than an upper monetary cutoff.
39) PPS sampling would most likely NOT be cost-effective in
A. testing investment securities for overstatements.
B. confirming accounts receivable when unapplied credits to customer accounts are insignificant.
C. independently estimating the value of a certain class of transactions.
D. estimating the amount of dollar error caused by deviations from a particular control.
40) Which of the following positions maintains the custody of systems documentation, programs, and files?
C. Computer operator
D. Information technology manager
41) Which of the following management responsibilities is NOT established under PCAOB standards?
A. To perform cost-benefit analysis with respect to internal controls relating to assertions having a material effect on the financial statements
B. To accept responsibility for the effectiveness of the company’s internal control over financial reporting
C. To evaluate the effectiveness of the company’s internal control over financial reporting using suitable criteria
D. To present a written assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year
42) Public Company Accounting Oversight Board (PCAOB) standards require the auditor to evaluate the effectiveness of the audit committee as part of understanding the control environment and monitoring. Which of the following is NOT a factor the auditor should consider in making this evaluation?
A. The clarity with which the audit committee’s responsibilities are articulated
B. The independence of the audit committee from management
C. Compensation practices with respect to members of the audit committee
D. The audit committee’s responsiveness to issues raised by the auditor