An audit that involves obtaining and evaluating evidence

    Multiple Choice

    1.

    An audit that
    involves obtaining and evaluating evidence about the efficiency and
    effectiveness of an entity’s operating activities in relation to specified
    objectives is a(n):

    a.

    internal
    audit.

    b.

    external
    audit.

    c.

    operational
    audit.

    d.

    compliance
    audit.

    e.

    financial
    statement audit.

    2.

    An audit that
    involves obtaining and evaluating evidence in order to determine whether
    certain financial or operating activities of an entity conform to specified
    conditions, rules, or regulations is a(n):

    a.

    internal
    audit.

    b.

    external
    audit.

    c.

    operational
    audit.

    d.

    compliance
    audit.

    e.

    financial
    statement audit.

    3.

    Which one of
    the following statements is not true of the AICPA?

    a.

    It is public
    accounting’s national professional organization.

    b.

    Membership is
    mandatory for all CPA firms who practice in more than one state.

    c.

    It operates
    through a number of divisions.

    d.

    Its
    publications include the Journal of Accountancy.

    e.

    It provides a
    broad range of services to members.

    4.

    State
    accountancy laws are administered by:

    a.

    state boards.

    b.

    state
    societies.

    c.

    the AICPA.

    d.

    the SEC.

    e.

    the GAO.

    5.

    What level of
    assurance does the reader of a private company financial statement receive on
    the company’s system of internal controls?

    a.

    positive
    assurance

    b.

    reasonable
    assurance

    c.

    negative
    assurance

    d.

    no assurance

    e.

    limited assurance

    6.

    How many
    different opinions must an auditor of a publicly held company issue?

    a.

    1

    b.

    2

    c.

    3

    d.

    4

    e.

    5

    7.

    There are
    several paragraphs included in the auditor’s standard report in internal
    control over financial reporting. Which paragraph defines internal
    control over financial reporting?

    a.

    introductory
    paragraph

    b.

    scope
    paragraph

    c.

    inherent
    limitations paragraph

    d.

    definition
    paragraph

    e.

    explanatory
    paragraph

    8.

    Statements on
    auditing standards (SAS’s) are interpretations of?

    a.

    generally
    accepted auditing standards

    b.

    generally
    accepted accounting principles

    c.

    generally
    accepted accounting policies

    d.

    generally
    accepted auditing services

    e.

    AICPA code of
    professional conduct

    9.

    Auditing is
    based on the assumption that financial data are verifiable. Data are
    verifiable when two or more qualified individuals,

    a.

    working
    together, can prove, beyond doubt, the accuracy of the data.

    b.

    working
    independently, each reach essentially similar conclusions.

    c.

    working
    independently, can prove, beyond reasonable doubt, the truthfulness of the
    data.

    d.

    working
    together, can agree upon the accuracy of the data.

    e.

    working
    together, each reach essentially similar conclusions.

    10.

    Which one 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

    e.

    completeness

    11.

    If reported
    sales for 20X0 erroneously include sales that occurred in 20X1, the assertion
    violated on the 20X0 statements would be:

    a.

    existence or
    occurrence

    b.

    completeness

    c.

    valuation or
    allocation.

    d.

    presentation
    and disclosure

    e.

    rights and
    obligations

    12.

    The
    completeness assertion would be violated if:

    a.

    fictitious
    sales transactions were included in accounts receivable.

    b.

    the allowance
    for doubtful accounts was understated.

    c.

    unbilled
    shipments had occurred during the period.

    d.

    disclosure in
    the statements of pledged receivables was inadequate.

    e.

    the balance of
    accounts payable was overstated.

    13.

    The rights and
    obligations assertion applies to:

    a.

    current
    liability items only.

    b.

    revenue and
    expense items only.

    c.

    both income
    statement and balance sheet items.

    d.

    assets that
    are not owned by the company.

    e.

    balance sheet
    items only.

    14.

    Determining
    whether amounts are in conformity with GAAP addresses the proper measurement
    of assets, liabilities, revenues, and expenses which includes all of the
    following except:

    a.

    the
    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
    the application of accounting principles.

    d.

    the
    reasonableness of management’s accounting policies.

    e.

    proper application
    of the matching principle.

    15.

    Choices about
    audit evidence are influenced by all of the following except:

    a.

    the auditor’s
    understanding of the business and industry.

    b.

    decisions
    about inherent risk and control risk.

    c.

    comparisons of
    the auditor’s expectations of the financial statements with the client’s
    books and records.

    d.

    decisions
    about immaterial risk factors.

    e.

    decisions
    about assertions that are material to the financial statements.

    16.

    Accounting
    records generally include:

    a.

    contracts.

    b.

    minutes of
    meetings.

    c.

    internal
    control manuals.

    d.

    confirmations
    from third parties.

    e.

    Analysts’
    reports

    17.

    When planning
    the audit, the auditor must make the following important decisions except
    the:

    a.

    assignment of
    staff to perform audit tests.

    b.

    nature of
    tests to be performed.

    c.

    characteristics
    of tests to be performed.

    d.

    extent of
    tests to be performed.

    e.

    timing of
    tests to be performed.

    18.

    The five
    management assertions outlined in generally accepted auditing standards
    include all of the following except:

    a.

    rights and
    obligations.

    b.

    materiality.

    c.

    existence and
    occurrence.

    d.

    presentation and
    disclosure.

    e.

    valuation or
    allocation.

    19.

    With respect
    to audit objectives, the term validity relates to which of the
    assertions below?

    a.

    existence and
    occurrence

    b.

    Completeness

    c.

    valuation or
    allocation

    d.

    presentation
    and disclosure

    e.

    rights and
    obligations

    20.

    Knowledge of an entity’s financial reporting activities includes
    understanding such matters as the entity’s:

    a.

    acquisitions, mergers, and disposals of business activities.

    b.

    revenue recognition practices.

    c.

    debt structure

    d.

    use of information technology.

    e.

    products, services and markets.

    21.

    Knowledge of external factors affecting an entity’s business
    is necessary when planning an audit. Which of the following factors
    would least likely be considered an external factor:

    a.

    interest rates.

    b.

    market demand.

    c.

    Inflation.

    d.

    industry-specific accounting practices.

    e.

    related party transactions.

    22.

    Which of the following items is not one of the seven key
    steps in performing risk assessment procedures?

    a.

    Develop preliminary audit strategies for significant assertions.

    b.

    Consider audit risk, including the risk of fraud.

    c.

    Test the entity’s system of internal control.

    d.

    Make preliminary judgments about materiality.

    e.

    Obtain an understanding of the entity and its environment.

    23.

    The third phase of the audit involves performing audit
    tests. The primary purpose of this step is to obtain evidence about:

    a.

    the integrity of management.

    b.

    the effectiveness of management.

    c.

    the effectiveness of the internal control structure.

    d.

    the effectiveness and the integrity of management.

    e.

    the effectiveness of the internal control structure and the
    fairness of the financial statements.

    24.

    Before accepting an engagement, the auditor should evaluate
    whether other conditions exist that raise questions as to the prospective
    client’s auditability. Which of the following factors would be the least
    likely to cause concern about an entity’s auditability?

    a.

    Related party transactions.

    b.

    Lack of audit trail.

    c.

    Disregard of responsibility to maintain adequate internal
    controls.

    d.

    Important evidence available only in electronic form.

    e.

    Inability to review the details supporting beginning balances.

    25.

    The susceptibility of an assertion to a material misstatement,
    assuming that there are no controls, is:

    a.

    audit risk.

    b.

    control risk.

    c.

    analytical procedures risk.

    d.

    inherent risk.

    e.

    tests of details risk.

    26.

    The risk that the auditor may unknowingly fail to appropriately
    modify his or her opinion on financial statements that are materially
    misstated is:

    a.

    analytical procedures risk.

    b.

    control risk.

    c.

    tests of details risk.

    d.

    inherent risk.

    e.

    audit risk.

    27.

    The risk that a material misstatement that could occur in an
    assertion will not be prevented or detected on a timely basis by the
    entity’s internal controls is:

    a.

    control risk.

    b.

    audit risk.

    c.

    inherent risk.

    d.

    rejection risk.

    e.

    detection risk.

    28.

    The risk that the auditor will not detect a material
    misstatement that exists in an assertion is:

    a.

    control risk.

    b.

    audit risk.

    c.

    inherent risk.

    d.

    rejection risk.

    e.

    detection risk.

    29.

    The assessment of inherent risk requires consideration of 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 “specific account” matter?

    a.

    going concern problems such as lack of sufficient working capital.

    b.

    profitability of the entity relative to the industry.

    c.

    sensitivity of operating results to economic factors.

    d.

    complexity of calculations.

    e.

    management turnover, reputation, and accounting skills.

    30.

    Materiality at the account balance level is stated in planning an
    audit because:

    a.

    some users make decisions based upon individual account balances.

    b.

    the auditor verifies account balances in reaching an overall
    conclusion on the fairness of the financial statements.

    c.

    the opinion on the fairness of the financial statements extends to
    the individual account balances.

    d.

    official pronouncements have specified different levels of
    materiality for various financial statement items.

    e.

    the opinion on the fairness of the financial statements extends to
    the individual transactions.

    31.

    In making a preliminary judgments about materiality, the auditor
    initially determines the aggregate (overall) level of materiality for each
    statement. For planning purposes, the auditor should use the:

    a.

    levels separately.

    b.

    level he or she judges to be the more reliable.

    c.

    average of these levels.

    d.

    largest aggregate level.

    e.

    smallest aggregate level.

    32.

    Quantitative guidelines for setting materiality levels are
    currently provided by:

    a.

    neither GAAP nor GAAS.

    b.

    GAAP.

    c.

    GAAS.

    d.

    both GAAP and GAAS.

    e.

    the AICPA.

    33.

    Professional standards recognize that a misstatement that is
    quantitatively immaterial may be qualitatively material. In regard to
    these items, professional standards require the auditor to:

    a.

    plan the audit to search for them.

    b.

    design explicit procedures to detect them.

    c.

    be on the alert for them.

    d.

    report them to the audit committee.

    e.

    report them directly to client management.

    34.

    “Tolerable misstatement” is the termed used to indicate
    materiality at the:

    a.

    balance sheet level.

    b.

    account balance level.

    c.

    income statement level.

    d.

    company-wide level.

    e.

    transactions level.

    35.

    Which one of the following is not an inherent limitation in
    an entity’s internal controls?

    a.

    mistakes in judgment

    b.

    Collusion

    c.

    cost versus market

    d.

    Breakdowns

    e.

    management override

    36.

    Revision of the planned level of detection risk will be necessary
    whenever:

    a.

    accounts are affected by more than one transaction class.

    b.

    the multiple control risk assessments for the same account balance
    assertion differ.

    c.

    the lower assessed control risk approach is used.

    d.

    the final assessed control risk does not support the planned
    level.

    e.

    the final assessed control risk is not the same as the actual
    level.

    37.

    Use of auditor judgment or of a risk matrix is necessary in
    revising planned detection risk whenever:

    a.

    risk assessments are not quantified.

    b.

    assessed control risk at the account balance level does not
    support the planned level of control risk.

    c.

    control risk is assessed above the minimum.

    d.

    control risk is assessed below the maximum.

    e.

    tests of controls reveal substantial deviations from prescribed
    policies.

    38.

    The primary means by which the auditor meets the requirements of
    the third field work standard is through:

    a.

    designing substantive tests.

    b.

    gathering evidence to support the assessed level of control risk.

    c.

    preparing a detailed audit program.

    d.

    evaluating the results of substantive tests.

    e.

    performing substantive tests.

    39.

    The least costly form of testing is usually:

    a.

    tests of controls.

    b.

    tests of detail of transactions.

    c.

    analytical procedures.

    d.

    tests of detail of balances.

    e.

    tests of compliance.

    40.

    The auditor has decided to use PPS sampling in the confirmation of
    individual sales transactions with customers. The population and the
    logical sampling unit are most likely to be, respectively:

    a.

    all customer accounts and the individual dollars in the accounts.

    b.

    customer accounts with debit balances and individual dollars in
    the accounts.

    c.

    the sales invoice file and the individual dollars on the invoices.

    d.

    all recorded sales during the year and individual sales invoices.

    e.

    all sales invoices during the year and individual sales orders.

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