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Audit Final

79 Questions
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Questions and Answers
  • 1. 
    An independent audit aids in the communication of economic data because the audit
    • A. 

      Confirms the exact accuracy of management's financial representations

    • B. 

      Lends credibility to the financial statements

    • C. 

      Guarantees that financial data are fairly presented

    • D. 

      Assures the readers of financial statements that any fraudulent activity has been corrected.

  • 2. 
    Which of the following best describes the reason why an independent auditor is often retained to report on fianncial statements?
    • A. 

      Managements fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors.

    • B. 

      Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

    • C. 

      A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor's work

    • D. 

      An entity may have a poorly designed internal control system.

  • 3. 
    Which of the following best describes relationships among auditing, attest, and assurance services?
    • A. 

      Arrest is a type of auditing service.

    • B. 

      Auditing and attest services represent two distinctly different types of services.

    • C. 

      Auditing is a type of assurance service.

    • D. 

      Assurance is a type of attest service.

  • 4. 
    Which of the following statments relating to attest and assurance services is not correct?
    • A. 

      Independence is an important attribute of assurance service providers

    • B. 

      Assurance services can be performed to improve the quality or context of information for decision makers.

    • C. 

      Financial statement auditing is a form of attest service but it is not an assurance service.

    • D. 

      In performing an attest service, the CPA determines the correspondence of the subject matter (or an assertion about the subject matter) against criteria that are suitable and available to users.

  • 5. 
    For what primary purpose does the auditor obtain an understanding of the entity and its environment?
    • A. 

      To determine the audit fee.

    • B. 

      To decide which facts about the entity to include in the audit report.

    • C. 

      To plan the audit and determine the scope of audit procedures to be performed.

    • D. 

      To limit audit risk to an appropriately high level.

  • 6. 
    Which of the following statements best describes the role of materiality in a financial statement audit?
    • A. 

      Materiality refers to the "material" from which audit evidence is developed.

    • B. 

      The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

    • C. 

      The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

    • D. 

      The level of materiality has no bearing on the amount of evidence the auditor must gather.

  • 7. 
    Which of the following is the most important reason for an auditor to gain an understanding of an audit client's system of internal control over financial reporting?
    • A. 

      Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.

    • B. 

      Understanding a client's system of internal control can help the auditor make valuable recommendations to management at the end of the engagement.

    • C. 

      Understanding a client's system of internal control can help the auditor seel consulting services to the client.

    • D. 

      Understanding a client's system of internal control is not a required part of the audit process.

  • 8. 
    Preplanning the audit includes:
    • A. 

      Understanding the client and the client's industry.

    • B. 

      Determining audit engagement team requirements.

    • C. 

      Ensuring the independence of the audit team and audit firm.

    • D. 

      All of the above.

  • 9. 
    Which of the following statements best describes what is meant by unqualified audit opinion?
    • A. 

      Issuance of an unqualified auditor's report indicates that in the auditor's opinion the client's financial statements are not fairly enough presented in accordance with agreed-upon criteria to qualify for a clean opinion.

    • B. 

      Issuance of an unqualified auditor's report indicates that the auditor is not qualified to express an opinion that the client's financial statements are fairly presented in accordance with agreed-upon criteria.

    • C. 

      Issuance of an unqualified auditor's report indicates that the auditor is expressing different opinions on each of the basic financial statements regarding whether the client's financial statements are fairly presented in accordance with agreed-upon criteria.

    • D. 

      Issuance of a standard unqualified auditor's report indicates that in the audtior's opinion the client's financial statements are fairly presented in accordance with agreed-upon criteria, which no need for the inclusion of the qualifying phrases.

  • 10. 
    The auditing standards used to guide the conduct of the audit are
    • A. 

      Implicitly referred to in the opening paragraph of the auditor's standard report

    • B. 

      Explicitly referred to in the opening paragraph of the auditor's standard report

    • C. 

      Implicitly referred to in the scope paragraph of the auditor's standard report

    • D. 

      Explicitly referred to in the scope paragraph of the auditor's standard report

    • E. 

      Implicitly referred to in the opinion paragraph of the auditor's standard report

    • F. 

      Explicitly referred to in the opinion paragraph of the auditor's standard report.

  • 11. 
    A client has used an inappropriate method of accounting for its pension liability on the balance sheet.  The resulting misstatement is moderately material, but the auditor does not consider it to be pervasive.  The auditor is unable to convince the client to alter its accounting treatment.  The rest of the financial statements are fairly stated in the auditor's opinion.  Which kind of audit report would an auditor most likely issue under these circumstance?
    • A. 

      Standard unqualified opinion.

    • B. 

      Qualified opinion due to departure from GAAP.

    • C. 

      Adverse opinion.

    • D. 

      No opinion at all.

  • 12. 
    Which of the following best places the events of the last several years in proper sequence?
    • A. 

      Sarbanes-Oxley act, increased consulting services to audit clients, Enron and other scandals, prohibition of most consulting work for audit clients, establishment of PCAOB.

    • B. 

      Increased consulting services to audit clients, Sarbanes-Oxley act, Enron and other scandals, prohibition of most consulting work for audit clients, establishment of PCAOB.

    • C. 

      Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to audit clients, prohibition of most consulting work for audit clients, establishment of PCAOB.

    • D. 

      Increased consulting services to audit clients, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for audit clients, establishment of PCAOB.

  • 13. 
    Which of the following best describes the relationship between business objectives, strategies, processes, control and transactions?
    • A. 

      To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

    • B. 

      To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity's information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed.

    • C. 

      To achieve its objectives a business formulates strategies to implement its transactions, which are carried out through business processes. The entity's information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed.

    • D. 

      To achieve its business processes, a business formulates objectives, which are carried out through the entity's strategies. The entity's information and internal control systems must be designed to ensure that the entity's strategies are properly executed, captured, and processed.

  • 14. 
    Which of the following best describes the general character of the three generally accepted auditing standards classified as standards of field work?
    • 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 and related footnote disclosures.

    • C. 

      Criteria for audit planning and evidence gathering.

    • D. 

      The need to maintain an independence of mental attitude in all matters relating to the audit.

  • 15. 
    Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements?
    • A. 

      Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP.

    • B. 

      Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP.

    • C. 

      Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

    • D. 

      Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement.

  • 16. 
    The Public Company Accounting Oversight Board
    • A. 

      Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

    • B. 

      Is a quasi-governmental organization that has legal authority to set accounting standards for public companies.

    • C. 

      Is a quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards.

    • D. 

      Is a quasi-governmental organization that is independent of the SEC in setting auditing standards.

  • 17. 
    Which of the following is not a part of the role of internal auditors?
    • A. 

      Assisting the external auditors.

    • B. 

      Providing reports on the reliability of financial statments to investors and creditors.

    • C. 

      Consulting activities.

    • D. 

      Operational auditrs.

  • 18. 
    Operational auditing is oriented primaritly toward
    • A. 

      Future improvements to accomplish the goals of management.

    • B. 

      The accuracy of data reflected in management's financial records.

    • C. 

      Verification that an entity's financial statements are fairly presented.

    • D. 

      Past protection provided by existing internal control.

  • 19. 
    Which of the following would be considered an assurance service engagement? I.  Expressing an opinion about the reliability of a client's financial statments. II.  Reviewing and commenting on a client-prepared business plan.
    • A. 

      I only

    • B. 

      II only

    • C. 

      Both I and II.

    • D. 

      Neither I nor II

  • 20. 
    Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
    • A. 

      Internal control

    • B. 

      Expected misstatement.

    • C. 

      Control risk.

    • D. 

      Materiality and audit risk.

  • 21. 
    The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor
    • A. 

      Obtains reasonable assurance about whether the financial statements are free of material misstatement.

    • B. 

      Assesses the accounting principles used and also evaluates the overall financial statement presentation.

    • C. 

      Realizes that some matters, either individually or in the aggregate, are important while other matters are not important.

    • D. 

      Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

  • 22. 
    Risk of material misstatement refers to a combination of which two "client" components of the audit risk model?
    • A. 

      Audit risk and inherent risk.

    • B. 

      Audit risk and control risk

    • C. 

      Inherent risk and control risk.

    • D. 

      Control risk and detection risk.

  • 23. 
    Auditing standards require auditors to make certain inquiries of management regarding fraud.  Which of the following inquiries is required?
    • A. 

      Whether management has ever intentionally violated the securities laws.

    • B. 

      Whether management has any knowledge of fraud that has been perpetrated on or within the entity.

    • C. 

      Management's attitudes toward regulatory authorities.

    • D. 

      Management's attitutde about hiring ethical employees.

  • 24. 
    Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
    • A. 

      Turnover of senior accounting personnel is low.

    • B. 

      Insiders recently purchased additional shares of the entity's stock.

    • C. 

      Management places substantial emphasis on meeting earnings projections.

    • D. 

      The rate of change in the entity's industry is slow.

  • 25. 
    Which of the folliwng is a misappropriation of assets?
    • A. 

      Classifying inventory held for resale as supplies.

    • B. 

      Investing cash and earnings a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent.

    • C. 

      An employee of a consumer electronics store steals 12 CD players.

    • D. 

      Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts equal to 10 percent of sales.

  • 26. 
    Which of the following is an example of fraudulent financial reporting?
    • A. 

      Company management falsifies inventory count tags, thereby overstating ending inventory and understating cost of sales.

    • B. 

      An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses.

    • C. 

      An employee seals inventory, and the shrinkage is recorded as a cost of goods sold.

    • D. 

      An employee borrows small tools from the company and neglects to return them; the cost is reported as a a miscellaneous operating expense.

  • 27. 
    When is a duty to disclose fraud to parties other than the client's senior management and its audit committee most likely to exist?
    • A. 

      When the amount is material

    • B. 

      When the fraud results from misappropriation of assets rather than fraudulent financial reporting.

    • C. 

      In response to inquiries from a s successor auditor.

    • D. 

      When a line manager rather than a lower-level employee commits the fraudulent act.

  • 28. 
    • A. 

      The amount of misstatement that management is willing to tolerate in the financial statements.

    • 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.

  • 29. 
    As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to
    • A. 

      Find smaller errors.

    • B. 

      Find larger errors.

    • C. 

      Increase the tolerable misstatements in the accounts.

    • D. 

      Decrease the risk of over reliance.

  • 30. 
    Which of the following procedures would an auditor most likely rely on to verity management's assertion of completeness?
    • A. 

      Reviewing standard bank confirmations for indications of cash manipulations.

    • B. 

      Comparing a sample of shipping documents to related sales invoices.

    • C. 

      Observing the client's distribution of payroll checks.

    • D. 

      Confirming a sample of recorded receivables by direct communication with the debtors.

  • 31. 
    In testing the existence assertion for an asset, an auditor ordinarily works from the
    • A. 

      Financial statement to the potentially unrecorded items.

    • B. 

      Potentially unrecorded items to the financial statements.

    • C. 

      .Accounting records to the supporting documents.

    • D. 

      Supporting documents to the accounting records.

  • 32. 
    Which of the following statements concerning audit evidence is correct? 
    • A. 

      To be appropriate, audit evidence should be either persuasive or relevant but need not be both.

    • B. 

      The measure of the reliability of audit evidence lies in the auditor's judgment.

    • C. 

      The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.

    • D. 

      A client's general ledger may be sufficient audit evidence to support the financial statements.

  • 33. 
    Which of the following procedures would provide the most reliable audit evidence?
    • A. 

      Inquiries of the client's internal accounting staff.

    • B. 

      Inspection of prenumbered client purchase orders filed in the vouchers payable department.

    • C. 

      Observation of procedures performed by the client's personnel on the entity's trial balance.

    • D. 

      Inspection of bank statements obtained directly from the client's financial institution.

  • 34. 
    Which of the following types of audit evidence is the least reliable?
    • A. 

      Prenumbered purchase order forms prepared by the client.

    • B. 

      Bank statements obtained from the client.

    • C. 

      Test counts of inventory performed by the auditor.

    • D. 

      Correspondence from the client's attorney about litigation.

  • 35. 
    Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?
    • A. 

      Bank statements obtained from the client.

    • B. 

      Computations made by the auditor.

    • C. 

      Prenumbered client sales invoices.

    • D. 

      Vendors' invoices included in the client's files.

  • 36. 
    An auditor would be least likely to use confirmations in connection with the examination of
    • A. 

      Inventory held in a third-party warehouse.

    • B. 

      Refundable income taxes.

    • C. 

      Long-term debt.

    • D. 

      Stockholders' equity.

  • 37. 
    The current file of the auditor's working papers should generally include
    • A. 

      A flowchart of the accounting system.

    • B. 

      Organization charts.

    • C. 

      A copy of the financial statements.

    • D. 

      Copies of bond and note indentures.

  • 38. 
    The permanent file section of the working papers that is kept for each audit client most likely contains
    • A. 

      Review notes pertaining to questions and comments regarding the audit work performed.

    • B. 

      A schedule of time spent on the engagement by each individual auditor.

    • C. 

      Correspondence with the client's legal counsel concerning pending litigation.

    • D. 

      Narrative descriptions of the client's accounting system and control procedures.

  • 39. 
    An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n)
    • A. 

      Lead schedule.

    • B. 

      Supporting schedule.

    • C. 

      Audit control account.

    • D. 

      Working trial balance.

  • 40. 
    Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's
    • A. 

      Awareness of the consistency in the application of generally accepted accounting principles between periods.

    • B. 

      Evaluation of all matters of continuing accounting significance.

    • C. 

      Opinion of any subsequent events occurring since the predecessor's audit report was issued.

    • D. 

      Understanding as to the reasons for the change of auditors.

  • 41. 
    A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n)
    • A. 

      Internal control letter.

    • B. 

      Letter of audit inquiry.

    • C. 

      Management letter.

    • D. 

      Engagement letter.

  • 42. 
    Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the audit committee. In planning to use the internal auditors to help in performing the audit, the independent auditor most likely will
    • A. 

      Place limited reliance on the work performed by the internal auditors.

    • B. 

      Decrease the extent of the tests of controls needed to support the assessed level of detection risk.

    • C. 

      Increase the extent of the procedures needed to reduce control risk to an acceptable level.

    • D. 

      Avoid using the work performed by the internal auditors.

  • 43. 
    During the initial planning phase of an audit, a CPA most likely would
    • A. 

      Identify specific internal control activities that are likely to prevent fraud.

    • B. 

      Evaluate the reasonableness of the client's accounting estimates.

    • C. 

      Discuss the timing of the audit procedures with the client's management.

    • D. 

      Inquire of the client's attorney if it is probable that any unrecorded claims will be asserted.

  • 44. 
    When planning an audit, an auditor should
    • A. 

      Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.

    • B. 

      Determine planning materiality for audit purposes.

    • C. 

      Conclude whether changes in compliance with prescribed internal controls justify reliance on them.

    • D. 

      Prepare a preliminary draft of the management representation letter.

  • 45. 
    As generally conceived, the audit committee of a publicly held company should be made up of
    • A. 

      Representatives of the major equity interests (preferred stock, common stock).

    • B. 

      The audit partner, the chief financial officer, the legal counsel, and at least one outsider.

    • C. 

      Representatives from the client's management, investors, suppliers, and customers.

    • D. 

      Members of the board of directors who are not officers or employees.

  • 46. 
    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 payment 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.

  • 47. 
    Which of these statements concerning illegal acts by clients is correct?
    • A. 

      An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.

    • B. 

      An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements.

    • C. 

      An auditor considers illegal acts from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions.

    • D. 

      An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.

  • 48. 
    To help plan the nature, timing, and extent of substantive procedures, preliminary analytical procedures should focus on
    • A. 

      Enhancing the auditor's understanding of the client's business and of events that have occurred since the last audit date.

    • B. 

      Developing plausible relationships that corroborate anticipated results with measurable amount of precision.

    • C. 

      Applying ratio analysis to externally generated data such as published industry statistics or price indexes.

    • D. 

      Comparing recorded financial information to the results of other tests of transactions and balances.

  • 49. 
    The primary objective of final analytical procedures is to
    • A. 

      Obtain evidence from details tested to corroborate particular assertions.

    • B. 

      Identify areas that represent specific risks relevant to the audit.

    • C. 

      Assist the auditor in assessing the validity of the conclusions reached.

    • D. 

      Satisfy doubts when questions arise about a client's ability to continue in existence.

  • 50. 
    The substantive analytical procedure known as trend analysis is best described by
    • A. 

      The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data.

    • B. 

      Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or charges in account balances between accounting periods.

    • C. 

      The examination of changes in an account over time.

    • D. 

      The comparison of common-size financial statements over time.

  • 51. 
    The assurance bucket is filled with all of the following types of evidence except
    • A. 

      Test of controls.

    • B. 

      The audit report.

    • C. 

      Substantive analytical procedures.

    • D. 

      Tests of details.

  • 52. 
    An auditor's primary consideration regarding an entity's internal controls is whether they
    • A. 

      Prevent management override.

    • B. 

      Relate to the control environment.

    • C. 

      Reflect the management's philosophy and operating style.

    • D. 

      Affect the financial statement assertions.

  • 53. 
    Which of the following statements about internal control is correct?
    • A. 

      A properly maintained internal control system reasonably ensures that collusion among employees cannot occur.

    • B. 

      The establishment and maintenance of internal control is an important responsibility of the internal auditor.

    • C. 

      An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance.

    • D. 

      The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

  • 54. 
    Which of the following is not a component of an entity's internal control system?
    • A. 

      Control risk.

    • B. 

      The entity's risk assessment process.

    • C. 

      Control activities.

    • D. 

      Control environment.

  • 55. 
    In which of the following situations would an auditor most likely use a reliance strategy?
    • A. 

      The client has been slow to update its IT system to reflect changes in billing practices.

    • B. 

      The auditor hired an IT specialist whose report to the auditor reveals that the specialist did not perform sufficient procedures to allow the auditor to properly assess the effect of the IT system on control risk.

    • C. 

      A client receives sales orders, bills customers, and receives payment based only on information generated from its IT system- no paper trail is generated.

    • D. 

      The auditor has been unable to ascertain whether all changes to a client's IT system were properly authorized.

  • 56. 
    After obtaining an understading of an entity's internal control system, an auditor may set control risk at the maximum level for some assertions because he or she
    • A. 

      Believes the internal controls are unlikely to be effective.

    • B. 

      Determines that the pertinent internal control components are not well documented.

    • C. 

      Performs tests of controls to restrict detection risk to an acceptable level.

    • D. 

      Identifies internal controls that are likely to prevent material misstatements.

  • 57. 
    Regardless of the assessed level of control risk, an auditor would perform some
    • A. 

      Tests of controls to determine the effectiveness of internal controls.

    • B. 

      Analytical procedures to verify the design of internal controls.

    • C. 

      Substantive procedures to restrict detection risk for significant transaction classes.

    • D. 

      Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

  • 58. 
    Assessing control risk below maximum involves all of the following except
    • A. 

      Identifying specific controls to rely on.

    • B. 

      Concluding that controls are ineffective.

    • C. 

      Performing tests of controls.

    • D. 

      Analyzing the achieved level of control risk after performing tests of controls.

  • 59. 
    Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control?
    • A. 

      Inquiry of client personnel.

    • B. 

      Reperformance of the control by the auditor.

    • C. 

      Observation of the client personnel.

    • D. 

      Walkthrough.

  • 60. 
    Audit evidence concerning proper segregation of duties ordinarily is best obtained by
    • A. 

      Inspection of documents prepared by a third party, but which contain the initials of those applying client controls.

    • B. 

      Observation by the auditor of the employee performing control activities.

    • C. 

      Preparation of a flowchart of duties performed and available personnel.

    • D. 

      Making inquiries of co-workers about the employee who applies control activities.

  • 61. 
    Reports by the service organization's auditor 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 and operating effectively.

  • 62. 
    Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent
    • A. 

      Disclosures of information that significantly contradict the auditor's going concern assumption.

    • B. 

      Material fraud or illegal acts perpetrated by high-level management.

    • C. 

      Significant deficiencies in the design or operation of the internal control.

    • D. 

      Manipulation or falsification of accounting records or documents from which financial statements are prepared.

  • 63. 
    An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
    • A. 

      Program for tests of controls.

    • B. 

      Understanding of the system.

    • C. 

      Understanding of the types of fraud that are probable, given the present system.

    • D. 

      Documentation of the study and evaluation of the system.

  • 64. 
    An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus?
    • A. 

      Data capture controls.

    • B. 

      Application controls.

    • C. 

      Output controls.

    • D. 

      General controls.

  • 65. 
    The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false?
    • A. 

      The auditor should evaluate whether internal controls are effective in accurately and fairly reflecting the firm's transactions.

    • B. 

      Management's report should state its responsibility for establishing and maintaining an adequate internal control system.

    • C. 

      Management should identify material weaknesses in its report.

    • D. 

      The auditor should provide recommendations for improving internal control in the audit report.

  • 66. 
    A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a
    • A. 

      Deficiency in design.

    • B. 

      Deficiency in operation.

    • C. 

      Significant deficiency.

    • D. 

      Material weakness.

  • 67. 
    Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance?
    • A. 

      The susceptibility of the related assets or liability to loss or fraud.

    • B. 

      The interaction or relationship of the control with other controls.

    • C. 

      The financial statement amounts exposed to the deficiency.

    • D. 

      The nature of the financial statement accounts, disclosures, and assertions involved.

  • 68. 
    Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control?
    • A. 

      Controls to monitor results of operations.

    • B. 

      Management's risk-assessment process.

    • C. 

      Controls to monitor the inventory taking process.

    • D. 

      The period-end financial reporting process.

  • 69. 
    Which of the following controls would most likely be tested during an interim period?
    • A. 

      Controls over nonroutine transactions.

    • B. 

      Controls over the period-end financial reporting process.

    • C. 

      Controls that operate on a continuous basis.

    • D. 

      Controls over transactions that involve a high degree of subjectivity.

  • 70. 
    If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for their assessment.
    • A. 

      Documentation and test controls over specific risks.

    • B. 

      Self-assessment processes in conjunction with entity-level controls.

    • C. 

      Documentation and test entity-level controls over the entire entity.

    • D. 

      Selective control test at that location.

  • 71. 
    Auditing standard 5 requires an auditor to perform a walkthrough as part of the internal control audit. A walkthrough requires an auditor to
    • A. 

      Tour the organization's facilities and locations before beginning any audit work.

    • B. 

      Trace a transaction from every class of transactions from origination through the company's information system.

    • C. 

      Trace a transaction from every major class of transactions from origination through the company's information system.

    • D. 

      Trace a transaction from every major class of transactions from origination through the company's information system until it is reflected in the company's financial reports.

  • 72. 
    When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period?
    • A. 

      Any significant changes that occurred in internal control subsequent to the interim date.

    • B. 

      The length of the remaining period.

    • C. 

      The specific controls tested prior to the "as of" date and the results of those tests.

    • D. 

      The walkthrough of the control system conducted at interim.

  • 73. 
    AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the company hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the client's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control?
    • A. 

      An unqualified report.

    • B. 

      An adverse report.

    • C. 

      A disclaimer of opinion.

    • D. 

      An exculpatory opinion.

  • 74. 
    In auditing a public company client, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?
    • A. 

      An unqualified report.

    • B. 

      An adverse report.

    • C. 

      A disclaimer of opinion.

    • D. 

      An exculpatory opinion.

  • 75. 
    In auditing ICFR for a public company client, Emily finds that the company has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the company has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do?
    • A. 

      Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary.

    • B. 

      Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion.

    • C. 

      Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion.

    • D. 

      Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation.

  • 76. 
    Which of the following statements concerning control deficiencies is true?
    • A. 

      The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

    • B. 

      All significant deficiencies are material weaknesses.

    • C. 

      All control deficiencies are significant deficiencies.

    • D. 

      An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB.

  • 77. 
    Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent
    • A. 

      Material fraud or illegal acts perpetrated by high-level management.

    • B. 

      Disclosures of information that significantly contradict the auditor's going concern assumption.

    • C. 

      Significant deficiencies in the design or operation of internal control.

    • D. 

      Potential manipulation or falsification of accounting records.

  • 78. 
    Which of the following most likely represents a weakness in internal control of an IT system?
    • A. 

      The systems analyst reviews output and controls the distribution of output from the IT department.

    • B. 

      The accounts payable clerk prepares data for computer processing and enters the data into the computer.

    • C. 

      The systems programmer designs the operating and control functions of programs and participates in testing operating systems.

    • D. 

      The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

  • 79. 
    A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an IT system is that the auditor may
    • A. 

      Consider increasing the use of substantive tests of transactions in place of analytical procedures.

    • B. 

      Substantiate the accuracy of data through self-checking digits and hash totals.

    • C. 

      Reduce the level of required tests of controls to a relatively small amount.

    • D. 

      Access information stored on computer files while having a limited understanding of the client's hardware and software features.