1. What is the term used to identify the risk that the client’s financial statements may be materially false and misleading?
A. Business risk.
B. Information risk.
C. Client risk.
D. Risk assessment.
2. The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions?
3. Assurance services involve all of the following except
A. Relevance as well as the reliability of information.
B. Nonfinancial information as well as traditional financial statements.
C. Providing absolute rather than reasonable assurance.
D. Electronic databases as well as printed reports.
4. An attestation engagement is one in which a CPA is engaged to
A. Issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party.
B. Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.
C. Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts.
D. Assemble prospective financial statements based on the assumptions of the entity’s management without expressing any assurance.
5. The process by which a CPA obtains a certificate and license in a state other than the state in which the CPA’s certificate was originally obtained is referred to as
A. Substantial equivalency.
B. Quid pro quo.
6. Which of the following would be considered an assurance engagement?
A. Giving an opinion on a prize promoter’s claims about the amount of sweepstakes prizes awarded in the past.
B. Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles.
C. Giving an opinion on the fair presentation of a newspaper’s circulation data.
D. Giving assurance about the average drive length achieved by golfers with a client’s golf balls.
E. All of the above.
7. Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because
A. Financial statements are too complex to analyze themselves.
B. They are too far away from company headquarters to perform accounting and auditing themselves.
C. The consequences of making a bad loan are very undesirable.
D. They generally see a potential conflict of interest between company managers who want to get loans and the bank’s needs for reliable financial statements.
8. The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?
A. Bookkeeping services.
B. Internal audit services.
C. Valuation services.
D. All of the above.
9. The risk to investors that a company’s financial statements may be materially misleading is called
A. Client acceptance risk.
B. Information risk.
C. Moral hazard.
D. Business risk.
10. Substantial equivalency refers to
A. An auditor’s tendency not to believe management’s assertions without sufficient corroboration.
B. Providing consulting work for another firm’s audit client in exchange for the other firm’s providing consulting services to one of your clients.
C. The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization.
D. Permitting a CPA to practice in another state without having to obtain a license in that state.
11. Which of the following best describes the relationship between auditing and attestation engagements?
A. Auditing is a subset of attestation engagements that focuses on the certification of financial statements.
B. Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement.
C. Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support.
D. Attestation is a subset of auditing that improves the quality of information, or its context, for decision makers.
12. Which of the following best describes the focus of the following engagements?
A. Option A
B. Option B
C. Option C
D. Option D
13. Which of the following is an example of a regulatory auditor?
A. Internal auditors.
B. Big 4 auditors.
C. U.S. Internal Revenue Service auditors.
D. Operational auditors.
14. The definition of performance audits does not include
A. Economy audits.
B. Efficiency audits.
C. Financial audits.
D. Program audits.
15. CPA certificates and licenses to practice are issued by the
B. States or territories.
C. AICPA Examinations Division.
16. The attestation standards do not require the attestation report to include a statement that
A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria.
B. Indicates that the practitioner has significant reservations about the engagement.
C. Identifies the subject matter or assertion being reported on.
D. Indicates that the accountant assumes no responsibility to update the report.
17. Control risk is
A. The probability that a material misstatement could not be prevented or detected by the entity’s internal control policies and procedures.
B. The probability that a material misstatement could occur and not be detected by auditors’ procedures.
C. The risk that auditors will not be able to complete the audit on a timely basis.
D. The risk that auditors will not properly control the staff on the audit engagement.
18. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures?
A. Lending credibility to a client’s financial statements.
B. Using statistical sampling techniques.
C. Accepting and continuing client relationships and specific engagements.
D. Obtaining membership in the Center for Public Company Audit Firms.
19. Auditors try to achieve independence in appearance in order to:
A. Maintain public confidence in the profession.
B. Become independent in fact.
C. Comply with the responsibilities principle.
D. Maintain an unbiased mental attitude.
20. Which of the following is not included in the auditors’ standard report representing an unqualified opinion?
A. A brief indication of the responsibility of auditors and management for the financial statements.
B. An indication that all appropriate disclosures have been made and included in the financial statements.
C. An indication that the audit was conducted in accordance with standards established by the PCAOB.
D. The auditors’ opinion on the fairness of the financial statements.
21. Which of the following statements is true with respect to the persuasiveness of audit evidence?
A. Persuasiveness is related to the relevance of evidence but not the reliability of evidence.
B. Evidence is considered more persuasive when gathered prior to year-end than following year-end.
C. Evidence obtained under environments of stronger internal control is more persuasive than evidence obtained under environments of weaker internal control.
D. In evaluating persuasiveness, sufficiency of evidence is of more importance than appropriateness of evidence.
22. Which of the following is least related to the concept of independence in appearance?
A. The auditors’ objectivity and ability to act impartially toward the client.
B. The perceptions of individuals who rely on the financial statements and auditors’ opinion on the financial statements.
C. The ownership of a financial interest in a client by the auditor.
D. The employment of the auditor’s family member in an important position with the client.
23. The most persuasive evidence regarding the existence of newly acquired computer equipment is
A. Inquiry of management.
B. Documentation prepared externally.
C. Observation of auditee’s procedures.
D. Physical observation.
24. Which of the following combinations would provide the auditor the most persuasive evidence?
A. Option A
B. Option B
C. Option C
D. Option D
25. The human resources element of quality control in a public accounting firm includes which of the following?
A. Supervision appropriate for the competencies of the personnel assigned to the work is important.
B. Professional development should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities.
C. People at all organizational levels must maintain independence in fact and appearance.
D. When accepting and continuing client relationships, firms should consider their own competence.
26. The application of relevant training, knowledge, and experience in making informed decisions about appropriate courses of action during an audit is known as
A. Absolute assurance.
B. Professional judgment.
C. Professional skepticism.
D. Reasonable assurance.
27. C. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday’s predecessor auditor was K. Post, CPA, whom Monday has notified by that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
A. Hill, the auditor.
B. Post, the predecessor auditor.
C. Monday’s controller or CFO.
D. The chair of Monday’s board of directors.
28. The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard?
B. Adequate technical competence and capabilities.
C. Adequate planning and supervision.
D. Gathering sufficient competent evidence.
29. Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs) to determine whether comparable information is in agreement. Examples of such comparisons would not include
A. Payroll details with personnel records.
B. Current and prior inventory to details of purchases and sales.
C. Paid vouchers to disbursements.
D. Observation of inventory accounts.
30. The idea of the cycle approach is to group accounts together by
A. Specific function.
B. Financial statement assertion.
C. Audit objective.
D. Transactions that affect all accounts in that particular group.
31. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items.
B. Potentially unrecorded items to the financial statement.
C. Accounting records to the supporting evidence.
D. Supporting evidence to the accounting records.
32. In determining whether transactions have been recorded, the direction of the audit testing should start from the
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.
33. To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to
A. Inspect the stock certificates evidencing the investment.
B. Examine the audited financial statements of the investee company.
C. Review the broker’s advice or canceled check for the investment’s acquisition.
D. Obtain market quotations from The Wall Street Journal or another independent source.
34. An auditor most likely would inspect additions to the audit client’s Property, Plant, and Equipment account to obtain evidence concerning management’s assertions about
A. Existence or occurrence.
B. Rights and obligations.
C. Presentation and disclosure.
D. Valuation or allocation.
35. An auditor tests an entity’s control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management’s financial statement assertion of
A. Valuation or allocation.
B. Presentation and disclosure.
C. Existence or occurrence.
D. Rights and obligations.
36. A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to
A. Substantiate the accuracy of data through self-checking digits and hash totals.
B. Utilize the speed and accuracy of the computer.
C. Verify the performance of machine operations that leave visible evidence of occurrence.
D. Gather and store large quantities of supportive audit evidence in machine-readable form.
37. An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?
A. Schedules and analyses to be prepared by the client’s employees.
B. Methods of statistical sampling the auditor will use.
C. Specification of litigation in progress against the client.
D. Client representations about availability of all minutes of meetings of the board of directors.
38. When auditing Vandalay Jewelry, Costanza, CPA was not familiar with the quality and cut of the company’s precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist in the inventory valuation. Should Costanza refer to Benes’s work in the audit report?
A. Yes, the auditors’ report should mention the fact that a specialist was used.
B. The auditors’ report should mention the use of the specialist only when the specialist’s findings affect the auditors’ conclusions.
C. The use of a specialist need not be mentioned if the auditors decide not to take responsibility for the specialist’s findings.
D. The auditors’ report should mention the specialist only if Vandalay agrees with the specialist’s findings.
39 When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following?
A. Key factors that are consistent with prior periods.
B. Assumptions that are similar to industry guidelines.
C. Measurements that are objective and not susceptible to bias.
D. Evidence of a conservative systematic bias.
40. Which of the following is used to maintain control of the audit and ensure that it is completed on a timely basis?
A. Engagement letter.
B. Termination letter.
C. Time budget.
D. Analytical procedures.
41. Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance?
A. Unfavorable industry conditions.
B. Lack of working capital.
C. High liquidity.
D. Slow customer collections.
42. Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify “materiality” in terms of:
A. The maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit.
B. A maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit.
C. A cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit.
D. Controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.
43. If control risk increases and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?
A. Detection risk will decrease.
B. Inherent risk will increase.
C. Audit risk will decrease.
D. Detection risk will increase.
44. When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the
A. Liquidity of the account.
B. Degree of management estimation involved in determining the proper account balance.
C. Related internal control policies and procedures.
D. Complexity of calculations involved.
45. Analytical procedures used in planning an audit should focus on
A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditor’s understanding of the client’s business.
D. Assessing the adequacy of the available evidential matter.
46. Which of the following is not required by AU 240, “Consideration of Fraud in a Financial Statement Audit”?
A. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit.
B. Conduct a discussion by the audit team of the risks of material misstatement due to fraud.
C. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor.
D. Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.
47. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
A. Elements of audit risk whereas detection risk is not.
B. Changed at the auditor’s discretion whereas detection risk is not.
C. Considered at the individual account balance level whereas detection risk is not.
D. Functions of the client and its environment whereas detection risk is not.
48. The purpose of an audit strategy is
A. To provide a defense against litigation.
B. To gain an understanding of the client.
C. To comply with securities law.
D. To set the scope, timing, and direction for auditing each relevant assertion.
49. When the auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to
A. Recommend remedial actions to the audit committee.
B. Evaluate the effect of the noncompliance on the financial statements.
C. Determine whether to contact law enforcement officials.
D. Determine whether other similar acts could have occurred.
50. Which of the following relationships between types of analytical procedures and sources of information are most logical?
A. Option A
B. Option B
C. Option C
D. Option D