Audit Chs. 1-7

98 Questions  I  By Pimen103
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  • 1. 
    Which of the following statements best describes a relationship between sample size and other elements of auditing?
    • A. 

      If materiality increases, so will the sample size

    • B. 

      If the desired level of assurance increases, sample sizes can be smaller

    • C. 

      If materiality decreases, sample size will need to increase

    • D. 

      There is no relationship between sample size and materiality or the desired level of assurance


  • 2. 
    Which of the following statements is not true with respect to assurance, attest, and audit services?
    • A. 

      These services are applied only to financial statements and financial statement accounts

    • B. 

      These services all involve obtaining and evaluating evidence

    • C. 

      These services all involve determining the correspondence of some information to a set of criteria

    • D. 

      These services all involve issuing a report


  • 3. 
    Why do auditors generally use a sampling approach to evidence gathering?
    • A. 

      Auditors are experts and do not need to look at much to know whether the financial statements are correct or not

    • B. 

      Auditors must balance the cost of the audit with the need for precision

    • C. 

      Auditors must limit their exposure to their client to maintain independence

    • D. 

      The auditor's relationship with the client is generally adversarial, so the auditor will not have access to all of the financial information of the company


  • 4. 
    Which of the following statements about the study of accounting is NOT true?
    • A. 

      The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors

    • B. 

      The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information

    • C. 

      The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements

    • D. 

      The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions


  • 5. 
    Which of the following best describes the concept of audit risk?
    • A. 

      The risk of the auditor being sued because of association with an audit client

    • B. 

      The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated

    • C. 

      The overall risk that a material misstatement exists in the financial statements

    • D. 

      The risk that auditors use audit procedures that are inappropriate


  • 6. 
    In the context of agency theory, information asymmetry refers to the idea that...
    • A. 

      Information can vary in its reliability

    • B. 

      Information can vary in its relevance

    • C. 

      Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders)

    • D. 

      Management likely will not act in the best interests of the absentee owners


  • 7. 
    Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?
    • A. 

      To promote an adversarial relationship between the auditor and the corporation's management

    • B. 

      To enhance auditor independence from the management of the corporation

    • C. 

      To encourage a policy of rotation of the independent auditors

    • D. 

      To give management more leverage over the auditor's decisions


  • 8. 
    Auditors are most likely to use the most rigorous audit procedures to examine
    • A. 

      Routine transactions

    • B. 

      Management assertions that are deemed to be of low risk

    • C. 

      Only the rights and obligations assertion

    • D. 

      Management assertions that are deemed to be of high risk


  • 9. 
    An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that:
    • A. 

      Any disputes over significant accounting issues have been settled to the auditor's satisfaction

    • B. 

      The auditor is satisfied that Stankey will be highly profitable in the future

    • C. 

      The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct

    • D. 

      The auditor has determined that Stankey's management is not qualified to lead the company


  • 10. 
    Which of the following is not a concept that is included in the scope paragraph of the auditor's report?
    • A. 

      The conformance of the financial statements with generally accepted accounting principles

    • B. 

      The audit was conducted in accordance with applicable auditing standards

    • C. 

      The audit was planned and performed to obtain reasonable, rather than absolute, assurance

    • D. 

      An audit involves examining items on a test (i.e. sampling) basis


  • 11. 
    The basic purpose of a financial statement audit is to...
    • A. 

      Detect fraud

    • B. 

      Examine individual transactions so that the auditor may certify as to their validity

    • C. 

      Provide assurance regarding whether the client's financial statements are fairly stated

    • D. 

      Assure the consistent application of correct accounting procedures


  • 12. 
    The authoritative body designed to promulgate standards concerning an accountant's association with audited financial statements of an entity that is required to file financial statements with the SEC is the...
    • A. 

      Financial Accounting Standards Board

    • B. 

      General Accounting Office

    • C. 

      Public Companies Accounting Oversight Board

    • D. 

      Auditing Standards Board


  • 13. 
    Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed within an attitude of...
    • A. 

      Objective cynicism

    • B. 

      Independent differentialism

    • C. 

      Professional skepticism

    • D. 

      Impartial conservatism


  • 14. 
    Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
    • A. 

      Audit firms cannot provide most types of nonaudit services to their public company audit clients

    • B. 

      Audit firms are required to rotate audit partners off audit engagements every five years for public company audits

    • C. 

      Firms that audit public companies are subject to inspection by the PCAOB

    • D. 

      A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement


  • 15. 
    The main difference between SAS and AU is:
    • A. 

      They are the same except that SAS are organized by chronologically and the AU are organized by topical area

    • B. 

      SAS are issued by the ASB and AU are issued by the PCAOB

    • C. 

      SAS are issued by the PCAOB and AU are issued by the ASB

    • D. 

      SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP


  • 16. 
    The AICPA's Statements on Auditing Standards can be described as...
    • A. 

      Providing very specific guidance about the specific activities an auditor must perform on each engagement

    • B. 

      Similar to financial accounting standards in that they are developed by the government

    • C. 

      Defining the minimum standards of performance for an auditor

    • D. 

      Providing assurance that an auditor will not issue an incorrect opinion


  • 17. 
    With regard to detecting fraud, auditing standards require auditors to...
    • A. 

      Perform procedures designed to detect all instances of fraud that might affect the financial statements

    • B. 

      Provide reasonable assurance that the financial statements are not materially misstated because of fraud

    • C. 

      Issue an unqualified opinion only when the auditor is satisfied that no instances of fraud have occurred

    • D. 

      Design the audit program to meet financial statement users' expectations concerning fraud


  • 18. 
    The three general standards are concerned with:
    • A. 

      Adequate training and proficiency of the auditor, proper planning and supervision, and due professional care

    • B. 

      Adequate training and independence

    • C. 

      Due professional care

    • D. 

      Adequate training and independence & due professional care


  • 19. 
    Which assertions may be tested for the "transactions and events" category of management assertions?
    • A. 

      Existence, completeness, rights and obligations, accuracy, cutoff and classification

    • B. 

      Occurrence, completeness, rights and obligations, accuracy, cutoff and classification

    • C. 

      Occurrence, completeness, authorization, accuracy, cutoff and classification

    • D. 

      Existence, rights and obligations, accuracy, authorization, and completeness


  • 20. 
    The three standards of fieldwork are concerned with:
    • A. 

      Planning and supervision and understanding the client's internal control system

    • B. 

      Choosing evidence with due professional care

    • C. 

      Adequate training to understand the client's internal controls system

    • D. 

      Ensuring consistency in financial statements for periods presented


  • 21. 
    What is the general character of the work conducted in performing a forensic audit for a company?
    • A. 

      Providing assurance that the financial statements are not materially misstated

    • B. 

      Detecting or deterring fraudulent activity

    • C. 

      Offering an opinion on the reliability of the specific assertions made by management

    • D. 

      Identifying the causes of an entity's financial difficulties


  • 22. 
    Due professional care requires...
    • A. 

      Auditors to plan and perform their duties with the skill and care that is commonly expected of accounting professionals

    • B. 

      The examination of all available corroborating evidence

    • C. 

      The exercise of error-free judgment

    • D. 

      A study and review of internal controls that includes tests of controls


  • 23. 
    The achieved (actual) level of audit risk...
    • A. 

      Can always be accurately assessed by the auditor

    • B. 

      Should be greater than or equal to acceptable audit risk

    • C. 

      Can never be known with certainty

    • D. 

      Is the same for all audit clients


  • 24. 
    The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as...
    • A. 

      Sampling risk

    • B. 

      Detection risk

    • C. 

      Nonsampling risk

    • D. 

      Inherent risk


  • 25. 
    All of the following are inherent risk factors that are pervasive to the financial statements except...
    • A. 

      Highly complex significant transactions

    • B. 

      Non-routine transactions

    • C. 

      Classes of transactions are not processed systematically

    • D. 

      Supplies inventory is difficult to count


  • 26. 
    Which of the following is not a misstatement of the financial statements?
    • A. 

      The client uses different inventory accounting methods for internal and external reporting

    • B. 

      A departure from GAAP

    • C. 

      The footnote for pensions is omitted

    • D. 

      A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller


  • 27. 
    All of the following represent an increased opportunity to commit fraud except:
    • A. 

      Significant related party transactions

    • B. 

      The auditor's relationship with management is strained

    • C. 

      Management is dominated by a single person

    • D. 

      The financial statements included highly subjective estimates


  • 28. 
    The auditor can respond to an increased risk of fraud by doing all of the following except...
    • A. 

      Heavily emphasizing the importance of professional skepticism

    • B. 

      Assigning more experienced personnel to the audit

    • C. 

      Increasing detection risk

    • D. 

      Taking steps to obtain more reliable evidence


  • 29. 
    Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?
    • A. 

      A misstatement exceeded five percent of net income

    • B. 

      The auditor also provides consulting services to the audit client

    • C. 

      The misstatement will cause the client to fail to meet an earnings forecast

    • D. 

      The audit committee is not well educated about the accounting principle in question


  • 30. 
    The auditor is most likely to presume that a high risk of a fraud exists if...
    • A. 

      The entity is a multinational company that does business in numerous foreign countries

    • B. 

      The entity does business with several related parties

    • C. 

      Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft

    • D. 

      Inadequate employee training results in lengthy EDP exception reports each month


  • 31. 
    Which of the following is correct concerning required auditor communications about fraud?
    • A. 

      Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved

    • B. 

      Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission

    • C. 

      Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor

    • D. 

      The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities


  • 32. 
    The risk of material misstatement includes which of the following:
    • A. 

      Detection risk

    • B. 

      Audit risk

    • C. 

      Inherent risk

    • D. 

      Nonsampling risk


  • 33. 
    Tolerable misstatements is...
    • A. 

      Materiality allocated to an assertion

    • B. 

      Materiality for the balance sheet as a whole

    • C. 

      Materiality for the income statement as a whole

    • D. 

      Materiality allocated to a specific account


  • 34. 
    Tracing is used primarily to test which of the following assertions about classes of transactions?
    • A. 

      Occurrence

    • B. 

      Completeness

    • C. 

      Cutoff

    • D. 

      Classification


  • 35. 
    A confirmation is used to:
    • A. 

      Verify the inventory count is correct

    • B. 

      Verify that a control is being observed

    • C. 

      Verify a representation from a third party

    • D. 

      Verify that a specific trend is correct


  • 36. 
    Vouching is used primarily to test which of the following assertions about classes of transaction?
    • A. 

      Occurrence

    • B. 

      Completeness

    • C. 

      Authorization

    • D. 

      Classification


  • 37. 
    Of the following, which is the least persuasive type of audit evidence?
    • A. 

      Documents mailed by outsiders to the auditor

    • B. 

      Correspondence between the auditor and third party vendors

    • C. 

      Copies of client sales invoices inspected by the auditor

    • D. 

      Computations made by the auditor


  • 38. 
    Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?
    • A. 

      Account analyses

    • B. 

      Supporting schedules

    • C. 

      Control accounts

    • D. 

      Lead schedules


  • 39. 
    An example of audit evidence with a medium level of reliability is:
    • A. 

      Scanning

    • B. 

      Recalculation

    • C. 

      Observation

    • D. 

      All of the above


  • 40. 
    The permanent audit file usually includes:
    • A. 

      Working trial balance

    • B. 

      Organizational chart

    • C. 

      Audit plan

    • D. 

      Audit programs


  • 41. 
    The current audit file usually includes:
    • A. 

      Working trial balance

    • B. 

      Organizational chart

    • C. 

      Accounting manual

    • D. 

      Copies of important contracts


  • 42. 
    Audit documentation prepared on audits of publicly held clients is the property of the...
    • A. 

      Shareholders

    • B. 

      The auditor

    • C. 

      The management of the entity being audited

    • D. 

      The SEC


  • 43. 
    Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the...
    • A. 

      Difficulty and expense involved in testing a particular item

    • B. 

      Assessment of control risk at a low level

    • C. 

      Low inherent risk involved

    • D. 

      Relationship between the cost of obtaining evidence and its usefulness


  • 44. 
    Which of the following presumptions is correct about the reliability of audit evidence?
    • A. 

      Information obtained indirectly from outside sources is the most reliable audit evidence

    • B. 

      To be reliable, audit evidence should be convincing rather than persuasive

    • C. 

      Reliability of audit evidence refers to the amount of corroborative evidence obtained

    • D. 

      An effective internal control system provides more reliable audit evidence


  • 45. 
    Of the following, the most reliable type of evidence typically is...
    • A. 

      Confirmation

    • B. 

      Inspection of records and documents

    • C. 

      Reperformance

    • D. 

      Observation


  • 46. 
    Which of the following types of documentary evidence should the auditor consider to be the most reliable?
    • A. 

      A sales invoice issued by the client and supported by a delivery receipt from an outside trucker

    • B. 

      Confirmation of an account payable balance mailed by and returned directly to the auditor

    • C. 

      A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditor

    • D. 

      A working paper prepared by the client's controller and reviewed by the client's treasurer


  • 47. 
    Which of the following types of audit evidence is the most persuasive?
    • A. 

      Prenumbered client purchase order forms

    • B. 

      Client worksheets supporting cost allocations

    • C. 

      Bank statements obtained from the client

    • D. 

      Client responses to auditor inquiries


  • 48. 
    You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases?
    • A. 

      Vouching transactions in accounting records to vendor invoices

    • B. 

      Tracing vendor invoices to accounting records

    • C. 

      Recalculation of vendor invoice amounts

    • D. 

      Confirmation of customer accounts


  • 49. 
    Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the...
    • A. 

      Adequacy of the preplanned audit program

    • B. 

      Ability to establish consistency in application of accounting principles between years

    • C. 

      Apparent scope limitation

    • D. 

      Integrity of management


  • 50. 
    All of the following refer to an internal auditor's competence except...
    • A. 

      The party in the entity to which the internal auditor reports

    • B. 

      The quality of internal audit documents and reports

    • C. 

      Professional certification

    • D. 

      Supervision and review of internal audit activities


  • 51. 
    An independent auditor might consider the procedures performed by the internal auditors because...
    • A. 

      They are employees whose work must be reviewed during substantive testing

    • B. 

      They are employees whose work might be relied upon

    • C. 

      Their work impacts upon the cost/ benefit tradeoff in evaluating inherent limitations

    • D. 

      Their degree of independence may be inferred by the nature of their work


  • 52. 
    An auditor obtains knowledge about a new client's business and its industry in order to...
    • A. 

      Make constructive suggestions concerning improvements to the client's internal control structure

    • B. 

      Develop an attitude of professional skepticism concerning management's financial statement assertions

    • C. 

      Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated

    • D. 

      Understand the events and transactions that may have an effect on the client's financial statements


  • 53. 
    In the context of an audit of financial statements, substantive procedures are audit procedures that...
    • A. 

      May be eliminated under certain conditions

    • B. 

      Are primarily designed to discover significant subsequent events

    • C. 

      May be either tests of details of transactions, tests of details of account balances, or analytical procedures

    • D. 

      Will increase proportionately with an increase in the auditor's reliance on internal control


  • 54. 
    Which of the following is not an audit procedure that is commonly used in performing tests of controls?
    • A. 

      Inquiring

    • B. 

      Observing

    • C. 

      Confirming

    • D. 

      Inspecting


  • 55. 
    Which of the following is not a typical analytical procedure?
    • A. 

      Study of relationships of the financial information with relevant nonfinancial information

    • B. 

      Comparison of the financial information with similar information regarding the industry in which the entity operates

    • C. 

      Comparison of recorded amounts of major disbursements with appropriate invoices

    • D. 

      Comparison of the financial information with budgeted amounts


  • 56. 
    An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of...
    • A. 

      Tests of transactions and balances

    • B. 

      A preliminary review of internal controls

    • C. 

      Specialized audit programs

    • D. 

      Analytical procedures


  • 57. 
    Analytical procedures are...
    • A. 

      Never required

    • B. 

      Required for planning, substantive testing, and overall review of the financial statements

    • C. 

      Required for planning and overall review of the financial statements

    • D. 

      Required during planning only


  • 58. 
    A dual-purpose test...
    • A. 

      Simultaneously tests debits and credits

    • B. 

      Is a procedure completed by both the internal and external auditors

    • C. 

      Is useful to both the entity and the auditor

    • D. 

      Is both a substantive test of transactions and a test of controls


  • 59. 
    In correct order, general types of audit tests include:
    • A. 

      Substantive procedures, tests of controls, and risk assessment procedures

    • B. 

      Substantive procedures, risk assessment procedures, and tests of controls

    • C. 

      Risk assessment procedures, tests of controls, and substantive procedures

    • D. 

      Risk assessment procedures, substantive procedures, and tests of controls


  • 60. 
    Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
    • A. 

      Obtaining a written representation letter from the client's management

    • B. 

      Examining documents to detect illegal acts having a material effect on the financial statements

    • C. 

      Considering whether the client's accounting estimates are reasonable in the circumstances

    • D. 

      Determining the extent of involvement of the client's internal auditors


  • 61. 
    Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?
    • A. 

      Relationships involving balance sheet accounts

    • B. 

      Transactions subject to management discretion

    • C. 

      Relationships involving income statement accounts

    • D. 

      Data subject to audit testing in the prior year


  • 62. 
    Under the Sarbanes-Oxley Act, the audit committee of a public company has the following requirement(s):
    • A. 

      Each member of the committee must be a board member and shall be independent

    • B. 

      The audit committee must pre-approve all audit and non-audit services

    • C. 

      The audit committee must establish and maintain procedures to handle all issues which relate to accounting, internal control, and auditing

    • D. 

      All of the above


  • 63. 
    An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if...
    • A. 

      The payments violated the client's policies regarding the prevention of illegal acts

    • B. 

      The client receives financial assistance from a federal government agency

    • C. 

      Documentation that is necessary to prove that the bribes were paid does not exist

    • D. 

      Management fails to take the appropriate remedial action


  • 64. 
    A primary purpose of internal controls is to...
    • A. 

      Form a basis for evaluating employees

    • B. 

      Monitor production quality

    • C. 

      Avoid clerical errors

    • D. 

      Meet objectives of maintaining sound documents and records and accurate financial reporting


  • 65. 
    An entity's control activities include all of the following except...
    • A. 

      Performance reviews

    • B. 

      Information processing

    • C. 

      External auditor's tests of controls

    • D. 

      Segregation of duties


  • 66. 
    Auditors are most likely to gather audit evidence solely using substantive procedures...
    • A. 

      If transactions are recurring

    • B. 

      For non-recurring, unusual transactions

    • C. 

      If control risk is very low

    • D. 

      If the entity has a well-designed automated system


  • 67. 
    Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of...
    • A. 

      Authorization, execution, and payment

    • B. 

      Authorization, recording, and custody

    • C. 

      Custody, execution, and reporting

    • D. 

      Authorization, payment, and recording


  • 68. 
    The documentation of an auditor's understanding of internal controls...
    • A. 

      Is optional

    • B. 

      Must be exclusively in either narrative, questionnaire, or flowchart form

    • C. 

      Must include flowcharts

    • D. 

      Can use any comination of narratives, questionnaire, or flowcharts


  • 69. 
    The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n)...
    • A. 

      Analytical procedure

    • B. 

      Test of controls

    • C. 

      Substantive procedure

    • D. 

      Functional test


  • 70. 
    Where computer processing is used in significant accounting applications, internal control activities may be defined by classifying control activities into two types: general and...
    • A. 

      Administrative

    • B. 

      Specific

    • C. 

      Application

    • D. 

      Authorization


  • 71. 
    Reports on service organizations typically...
    • A. 

      Provide reasonable assurance that their financial statements are free of material misstatements

    • B. 

      Ensure that the client will not have any misstatements in areas related to the service organization's activities

    • C. 

      Ensure that the client is billed correctly

    • D. 

      Assess whether the service organization's controls are suitably designed to achieve internal control objectives


  • 72. 
    A substantive strategy differs from a reliance strategy in that a substantive strategy includes...
    • A. 

      Increased implementation of detailed tests of transactions and balances

    • B. 

      Extra tests of controls

    • C. 

      Increased emphasis on verbal representations from management

    • D. 

      Setting control risk at a minimum level


  • 73. 
    As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except:
    • A. 

      Consider factors that affect the risk of material misstatement

    • B. 

      Ascertain whether internal control policies and procedures have been placed in operation

    • C. 

      Identify the types of potential misstatements that can occur

    • D. 

      Obtain knowledge about the operating effectiveness of the internal control


  • 74. 
    Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by...
    • A. 

      Employment of temporary personnel to aid in the separation of duties

    • B. 

      Direct participation by the owner of the business in the record-keeping activities of the business

    • C. 

      Engaging a CPA to perform monthly bookkeeping

    • D. 

      Delegation of full, clear-cut responsibility to each employee for the functions assigned to each


  • 75. 
    In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to...
    • A. 

      Identify specific internal control activities relevant to management's financial statement assertions

    • B. 

      Perform tests of controls to evaluate the effectiveness of the entity's accounting system

    • C. 

      Determine whether procedures are suitably designed to prevent or detect material misstatements

    • D. 

      Document the auditor's understanding of the entity's internal control


  • 76. 
    Which of the following procedures most likely would be included as part of an auditor's test of controls?
    • A. 

      Inspection

    • B. 

      Reconciliation

    • C. 

      Confirmation

    • D. 

      Analytical procedures


  • 77. 
    The auditor must understand internal control before assessing inherent risk.
    • A. 

      True

    • B. 

      False


  • 78. 
    Internal control consists of six components.
    • A. 

      True

    • B. 

      False


  • 79. 
    In order for an external auditor to complete an audit of a publicly traded entity, the entity's management must comply with all of the following except:
    • A. 

      Accept responsibility for the effectiveness of the entity's internal control over financial reporting

    • B. 

      Evaluate the effectiveness of the entity's internal control over financial reporting using suitable control criteria

    • C. 

      Support its evaluation with sufficient evidence, including documentation

    • D. 

      Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year


  • 80. 
    Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following:
    • A. 

      Reasonable assurance on the financial statements, absolute assurance on internal control

    • B. 

      Reasonable assurance on internal control, absolute assurance on the financial statements

    • C. 

      Absolute assurance on both the financial statements and internal control

    • D. 

      Reasonable assurance on both the financial statements and internal control


  • 81. 
    The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities, except...
    • A. 

      The maintenance of asset records

    • B. 

      The segregation of duties

    • C. 

      The authorization by management of receipts and expenditures

    • D. 

      The safeguarding of assets


  • 82. 
    A deficiency that implies that there is reasonable possibility of misstatement in the financial statements that is significant but not material is...
    • A. 

      A material weakness

    • B. 

      A significant deficiency

    • C. 

      An insignificant deficiency

    • D. 

      A probable deficiency


  • 83. 
    Which of the following is not a primary objective of internal control as established by COSO?
    • A. 

      Efficiency and effectiveness of operations

    • B. 

      Effective purchasing systems

    • C. 

      Compliance with laws and regulations

    • D. 

      Reliable financial reporting


  • 84. 
    Which of the following statements is false?
    • A. 

      The PCAOB focuses on the financial reporting objective of internal controls

    • B. 

      Management is required to base internal controls on a recognized control framework

    • C. 

      Most United States entities use the internal control framework developed by COSO in the early 1990s

    • D. 

      All controls relevant to financial reporting are accounting controls


  • 85. 
    The five step process in the audit of ICFR includes...
    • A. 

      Form an opinion on the safeguarding of the entity's assets

    • B. 

      Identify controls to test using a top-down, risk-based approach

    • C. 

      Form an opinion on the fairness of the presentation of the financial statements

    • D. 

      Form an opinion on the effectiveness of internal controls in meeting operational goals


  • 86. 
    Which of the following is false?
    • A. 

      Regardless of the achieved level of control risk in connection with the audit of the financial statements, auditing standards require the auditor to perform some substantive procedures for all significant accounts and disclosures

    • B. 

      The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective

    • C. 

      The audit of internal control is intended to draw conclusions about the effectiveness of internal control over financial reporting as of a specific date

    • D. 

      The auditor is required by AS5 to evaluate the implications of the financial statement audit for the effectiveness of internal control over financial reporting


  • 87. 
    In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except...
    • A. 

      Test some of the work performed by others to evaluate the quality and effectiveness of their work

    • B. 

      Evaluate the nature of the controls subjected to the work of others

    • C. 

      Evaluate the competence and objectivity of the individuals who performed the work

    • D. 

      All of the above are required


  • 88. 
    To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques:
    • A. 

      Reviewing management documentation

    • B. 

      Inquiry

    • C. 

      Scanning

    • D. 

      Transaction walkthroughs


  • 89. 
    Management's written representations concerning internal control are:
    • A. 

      Addressed to the users of the financial statements

    • B. 

      Normally drafted by management

    • C. 

      Included in the auditor's final report

    • D. 

      Signed by the CEO and CFO


  • 90. 
    In the context of an audit of internal controls, the auditor must document all of the following except...
    • A. 

      The extent to which he or she relied upon work performed by others

    • B. 

      The auditor's understanding and evaluation of the design of each of the components of the entity's internal control over financial reporting

    • C. 

      Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur

    • D. 

      The evaluation of any deficiencies discovered that could result in a modification of the auditor's report


  • 91. 
    Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion?
    • A. 

      Nothing has come to management's attention to suggest that the company's internal control is less than effective

    • B. 

      Statements suggesting only negative assurance

    • C. 

      A conclusion that the company's internal control over financial reporting is effective when a material weakness exists at the end of the reporting period

    • D. 

      Disclosure of material weaknesses corrected during the period


  • 92. 
    A modification of the standard report is required for all of the following conditions, except:
    • A. 

      There is a restriction on the scope of the engagement

    • B. 

      There is other information contained in management's report on internal control

    • C. 

      Management has concluded that internal controls are not effective

    • D. 

      A significant subsequent event has occurred since the date being reported on


  • 93. 
    Prior to issuing a report on internal controls over financial reporting, an auditor is required to:
    • A. 

      Perform procedures sufficient to identify all control deficiencies

    • B. 

      Communicate to management, in writing, all control deficiencies previously included in written communication from the internal auditors

    • C. 

      Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made

    • D. 

      Represent that no significant deficiencies were noted during the audit of internal control


  • 94. 
    In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to...
    • A. 

      Determine whether control procedures have been placed in operation

    • B. 

      Perform procedures to understand the design of internal control policies

    • C. 

      Document the understanding of the entity's internal control

    • D. 

      Search for significant deficiencies in the operation of the entity's internal control


  • 95. 
    An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means...
    • A. 

      The auditor must consider the integrated thoughts and ideas of everyone on the audit staff

    • B. 

      The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way

    • C. 

      The auditor must integrate the same objectives whether auditing internal control or auditing the financial statements

    • D. 

      Two independent CPA firms must work together on the audit


  • 96. 
    According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity?
    • A. 

      The entity's CEO and/ or CFO

    • B. 

      The entity's board of directors

    • C. 

      An internal control specialist

    • D. 

      The external editor


  • 97. 
    The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of?
    • A. 

      A management deficiency

    • B. 

      A design deficiency

    • C. 

      A deficiency in operation

    • D. 

      This is not an internal control deficiency


  • 98. 
    Examples of company-level controls include:
    • A. 

      Management's risk assessment process

    • B. 

      Controls to monitor results of operations

    • C. 

      The period-end financial reporting process

    • D. 

      All of the above are examples of company-level controls


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