1. Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called:

a. finance. b. auditing. *c. accounting. d. economics.

2. Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n):

a. accounting and bookkeeping service. *b. attestation service. c. assurance service. d. tax service.

3. The Sarbanes-Oxley Act applies to which of the following companies?

a. All companies. b. Privately held companies. *c. Public companies. d. All public companies and privately held companies with assets greater than $500 million.

4. Providing quantitative information that management and others can use to make decisions is the function of:

a. management information systems. b. auditing. c. finance. *d. accounting.

5. An audit of historical financial statements most commonly includes the:

a. balance sheet, the income statement, and the statement of cash flows. b. income statement, the statement of cash flows, and the statement of net working capital. c. statement of cash flows, the balance sheet, and the retained earnings statement. *d. balance sheet, the income statement, and the statement of cash flows.

6. An operational audit has as one of its objectives to:

a. determine whether the financial statements fairly present the entity's operations. b. evaluate the feasibility of attaining the entity's operational objectives. *c. make recommendations for improving performance. d. report on the entity's relative success in attaining profit maximization.

7. An audit of historical financial statements is most often performed to determine whether the:

a. organization is operating efficiently and effectively. b. entity is following specific procedures or rules set down by some higher authority. c. management team is fulfilling its fiduciary responsibilities to shareholders. *d. none of these choices.

8. An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n):

a. audit of financial statements. *b. compliance audit. c. operational audit. d. production audit.

9. Which of the following is a type of audit evidence?

a. Oral responses to the auditor from employees of the company under audit. b. Written communications from company employees or outsiders. c. Observations made by an auditor. *d. Evidence may take any of these forms.

10. Which of the following services provides the lowest level of assurance on a financial statement?

*a. A review. b. An audit. c. Neither service provides assurance on financial statements. d. Each service provides the same level of assurance on financial statements.

11. Financial statement users often receive unreliable financial information from companies. Which of the following is not a common reason for this?

a. Complex business transactions. b. Large amounts of data. c. Lack of firsthand knowledge about the business. *d. Each of these choices is a common reason for unreliable financial information.

12. Which one of the following is more difficult to evaluate objectively?

a. Presentation of financial statements in accordance with generally accepted accounting principles. b. Compliance with government regulations. *c. Efficiency and effectiveness of operations. d. All three of these are equally difficult.

13. Attestation services on information technology include WebTrust services and SysTrust services. Which of the following statements most accurately describes SysTrust services?

a. SysTrust services provide assurance on business processes, transaction integrity and information processes. *b. SysTrust services provide assurance on system reliability in critical areas such as security and data integrity. c. ysTrust services provide assurance on internal control over financial reporting. d. SysTrust services provide assurance as to whether accounting personnel are following procedures prescribed by the company controller.

14. The criteria by which an auditor evaluates the information under audit may vary with the information being audited.

*a. True b. False

15. The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards.

a. True *b. False

16. The financial statements most commonly audited by external auditors are the balance sheet, the income statement, and the statement of changes in retained earnings.

a. True

*b. False

17. The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles.

a. True *b. False

18. Results of compliance audits are typically reported to someone within the organizational unit being audited rather than to a broad spectrum of outside users.

*a. True b. False

19. The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts.

a. True *b. False

20. CPA firms are never allowed to provide bookkeeping services for audit clients.

a. True *b. False

21. Which one of the following is not one of the three General Standards?

*a. Proper planning and supervision. b. Independence of mental attitude. c. Adequate training and proficiency. d. Due professional care.

22. The General Standards stress the importance of:

a. evidence accumulation. *b. personal qualities the auditor should possess. c. communicating the auditor's findings to the reader. d. general supervision of the audit.

23. Statements on Auditing Standards provide auditors of privately held companies with ________ guidance regarding the conduct of financial statement audits.

a. fairly extensive *b. some limited c. practically no d. specific and detailed

24. Which of the following statements most accurately captures the intent of the standards of field work?

a. Field work standards are primarily concerned with personal attributes necessary during the conduct of the audit. b. Field work standards provide extensive guidance regarding the conduct of an audit. *c. Field work standards are primarily directed at the auditor's planning, understanding of internal control, and evidence accumulation. d. Field work standards are primarily concerned with the conduct of substantive testing as opposed to testing of internal controls.

25. Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for establishing auditing standards?

a. Securities and Exchange Commission b. Public Company Accounting Oversight Board *c. Auditing Standards Board d. National Association of Accounting

26. Which of the following is the least likely form of business for a CPA firm?

a. General partnership. *b. General corporation. c. Limited liability company. d. Limited liability partnership.

27. The Statements on Auditing Standards issued by the Auditing Standards Board:

*a. are interpretations of generally accepted auditing standards. b. are the equivalent of laws for audit practitioners. c. must be followed in all situations. d. are optional guidelines which an auditor may choose to follow or not follow when conducting an audit.

28. An auditor need not abide by a particular auditing standard if the auditor believes that:

*a. the issue in question is immaterial in amount. b. more expertise is needed to fulfill the requirement. c. the requirement of the standard has not been addressed by the PCAOB. d. any of these three are correct.

29. The Public Company Accounting Oversight Board does not:

a. perform inspections of the quality controls at audit firms that audit public companies. *b. establish auditing standards that must be followed by CPAs on all audits. c. oversee auditors of public companies. d. perform any of these functions.

30. The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the:

*a. Form S-1. b. Form 8-K. c. Form 10-K. d. Form 10-Q.

31. Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

a. They are guides intended to set forth auditing procedures that are applicable to a variety of situations. b. They are procedural outlines that are intended to narrow the areas of inconsistency and divergence of auditor opinion. c. They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment. *d. They are interpretations that are intended to clarify the meaning of "generally accepted auditing standards."

32. The auditor's judgment concerning the overall fairness of presentation of financial position, results of operations, and changes in cash flow is applied within the framework of:

a. quality control. b. generally accepted auditing standards which include the concept of materiality.

c. the auditor's evaluation of the audited company's internal control. *d. generally accepted accounting principles.

33. A basic objective of a CPA firm is to provide professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is provided through:

a. continuing professional education. b. compliance with generally accepted reporting standards. *c. a system of quality control. d. a system of peer review.

34. Hansen Corporation's stock is listed on a national stock exchange and registered with the Securities and Exchange Commission. Hansen's management hires a CPA to perform an independent audit of Hansen's financial statements. The primary objective of this audit is to provide assurance to the:

*a. investors in Hansen Corporation's stock. b. stock exchange. c. Securities and Exchange Commission. d. management of Hansen Corporation.

35. Which of the following is not an essential component of quality control?

*a. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies. b. Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards. c. Policies to ensure that personnel maintain their independence in fact and in appearance. d. Policies that ensure that monitoring activities are effectively applied.

36. Which of the following statements is true as it relates to limited liability partnerships?

a. Only senior partners are liable for the partnership's debts. b. Partners have no liability in a limited liability partnership arrangement. *c. Partners are personally liable for the acts of those under their supervision. d. All partners must be AICPA members.

37. The SEC requirements of greatest interest to CPAs are set forth in the SEC's:

*a. Regulation S-X and Accounting Series Releases. b. S-1 through S-16 forms. c. Director's newsletter. d. Forms 8-K, 10-K, and 10-Q.

38. The AICPA has authority to establish standards and rules in all but which of the following areas?

a. Auditing standards applicable to financial statements of private companies. b. Compilation and review standards. c. Professional conduct. *d. Auditing standards applicable to financial statements of private and public companies.

39. Membership in the AICPA is mandatory for all licensed practicing CPAs.

a. True *b. False

40. Any public accounting firm can be a member of the AICPA if the firm meets the membership requirements.

*a. True b. False

41. Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board.

a. True *b. False

42. In a limited liability partnership, partners are personally liable for liabilities arising from negligent acts of other partners, but not for liabilities arising from acts of other employees.

a. True *b. False

43. Any CPA firm that audits more than 100 public companies is required to have an annual inspection by the PCAOB.

*a. True

b. False

44. The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.

*a. True b. False

45. International Standards on Auditing are issued by the International Auditing Practices Committee.

*a. True b. False

46. The objective of the ordinary audit of financial statements is the expression of an opinion on:

*a. the fairness of the financial statements. b. the accuracy of the financial statements. c. the accuracy of the annual report. d. the balance sheet and income statement.

47. If the auditor believes that the financial statements are not fairly stated or is unable to reach an conclusion because of insufficient evidence, the auditor:

a. should withdraw from the engagement. b. should request an increase in audit fees so that more resources can be used to conduct the audit. *c. has the responsibility of notifying financial statement users through the auditor's report. d. should notify regulators of the circumstances.

48. Auditors accumulate evidence to:

a. defend themselves in the event of a lawsuit. b. justify the conclusions they have otherwise reached. c. satisfy the requirements of the Securities Acts of 1933 and 1934. *d. enable them to reach conclusions about the fairness of the financial statements.

49. The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the:

a. board of directors. *b. company management. c. financial statement auditor. d. company's internal audit department.

50. The auditor's best defense when material misstatements are not uncovered is to have conducted the audit:

*a. in accordance with auditing standards. b. as effectively as reasonably possible. c. in a timely manner. d. only after an adequate investigation of the management team.

51. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can:

*a. b. c. d.

52. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can do all but which of the following?

a. Issue an adverse audit report. *b. Issue a disclaimer of opinion. c. Withdraw from the engagement. d. Issue a qualified audit report.

53. Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?

a. The auditor commonly examines a sample, rather than the entire population of transactions. b. Accounting presentations contain complex estimates which involve uncertainty. c. Fraudulently prepared financial statements are often difficult to detect. *d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

54. In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of:

a. GAAP. b. the Sarbanes-Oxley Act. *c. the Securities Exchange Act of 1934. d. GAAS.

55. Which of the following statements is true of a public company's financial statements?

a. Sarbanes-Oxley requires the CEO only to certify the financial statements. b. Sarbanes-Oxley requires the CFO only to certify the financial statements. *c. Sarbanes-Oxley requires the CEO and CFO to certify the financial statements. d. Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.

56. If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the:

a. completeness assertion. b. existence assertion. c. cutoff assertion. *d. classification and understandability assertion.

57. Fraudulent financial reporting is most likely to be committed by whom?

a. Line employees of the company. b. Outside members of the company's board of directors. *c. Company management. d. The company's auditors.

58. Which of the following would most likely be deemed a direct-effect illegal act?

a. Violation of federal employment laws. b. Violation of federal environmental regulations. *c. Violation of federal income tax laws. d. Violation of civil rights laws.

59. Which of the following is the auditor least likely to do when aware of an illegal act?

a. Discuss the matter with the client's legal counsel.

b. Obtain evidence about the potential effect of the illegal act on the financial statements. *c. Contact the local law enforcement officials regarding potential criminal wrongdoing. d. Consider the impact of the illegal act on the relationship with the company's management.

60. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead:

a. investors. b. management. *c. a prudent user. d. the reader.

61. When engaged to audit the financial statements, it is acceptable for the auditor to draft:

*a. b. c. d.

62. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to:

*a. provide reasonable assurance that material misstatements will be detected. b. be a guarantor of the fairness in the statements. c. be equally responsible with management for the preparation of the financial statements. d. be an insurer of the fairness in the statements.

63. "The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered." This is an example of:

a. unprofessional behavior. *b. an attitude of professional skepticism. c. due diligence. d. a rule in the AICPA's Code of Professional Conduct.

64. If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct:

a. bankruptcies could no longer occur. b. bankruptcies would be reduced to a very small number. c. audits would be much easier to complete. *d. audits would not be economically feasible.

65. The auditor's best defense when existing material misstatements in the financial statements are not uncovered in the audit is:

a. the audit was conducted in accordance with generally accepted accounting principles. b. the financial statements are the client's responsibility. c. the client is guilty of contributory negligence. *d. the client is guilty of fraudulent misrepresentation.

66. In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is:

a. greater for management fraud because managers are inherently more deceptive than employees. *b. greater for management fraud because of management's ability to override existing internal controls. c. greater for employee fraud because of the higher crime rate among blue collar workers. d. greater for employee fraud because of the larger number of employees in the organization.

67. Which of the following statements is correct with respect to the auditor's responsibilities relative to the detection of indirect-effect illegal acts?

*a. The auditor has no responsibility for searching for indirect-effect illegal acts. b. The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur. c. Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect. d. Discovery of indirect-effect illegal acts is usually easier than discovery of fraud.

68. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is:

*a. very low. b. very high. c. zero. d. none of these.

69. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should:

a. include audit procedures which have a strong probability of detecting illegal acts. b. still include some audit procedures designed specifically to uncover illegalities. c. ignore the issue. *d. make inquiries of management regarding their policies for detecting and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities.

70. When the auditor has reason to believe an illegal act has occurred, the auditor should:

a. inquire of management only at one level below those likely to be involved with the illegality. b. begin communication with the FASB in accordance with PCAOB regulations. *c. consider accumulating additional evidence to determine if there is actually an illegal act. d. withdraw from the engagement.

71. Why does the auditor divide the financial statements into smaller segments?

*a. Using the cycle approach makes the audit more manageable. b. Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces. c. The cycle approach is used because auditing standards require it. d. all of these are correct.

72. The most important general ledger account included in and affecting several cycles is the:

*a. cash account. b. inventory account. c. income tax expense and liability accounts. d. retained earnings account.

73. Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each account balance?

a. The specific audit objectives are applicable to every account balance on the financial statements. *b. The general audit objectives are applicable to every account balance on the financial statements. c. The general audit objectives are stated in terms tailored to the engagement. d. For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

74. Which of the following statements about the existence and completeness assertions is not true?

a. The existence and completeness assertions emphasize different audit concerns. b. Existence deals with overstatements and completeness deals with understatements. *c. Existence deals with understatements and completeness deals with overstatements. d. The completeness assertion deals with unrecorded transactions.

75. The occurrence assertion applies to:

a. presentation and disclosure matters. *b. classes of transactions and events during the period. c. account balances. d. proper classification of income statement accounts.

76. Which of the following statements is not true?

a. Balance-related audit objectives are applied to account balances. b. Transaction-related audit objectives are applied to classes of transactions. c. Balance-related audit objectives are applied to the ending balance in balance sheet accounts. *d. Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

77. In testing for cutoff, the objective is to determine:

a. whether all of the current period's transactions are recorded. *b. whether transactions are recorded in the correct accounting period. c. the proper cutoff between capitalizing and expensing expenditures. d. the proper cutoff between disclosing items in footnotes or in account balances.

78. The detail tie-in objective is not concerned that the details in the account balance:

a. agree with related subsidiary ledger amounts. *b. are properly disclosed in accordance with GAAP. c. foot to the total in the account balance. d. agree with the total in the general ledger.

79. Which of the following statements is not correct?

a. There are many ways an auditor can accumulate evidence to meet overall audit objectives. b. Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. c. It is appropriate to minimize the cost of accumulating evidence. *d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

80. Two overriding considerations affect the many ways an auditor can accumulate evidence:

*a. the first is more important than the second. b. the second is more important than the first. c. F they are equally important. d. it is impossible to prioritize them.

81. If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor:

a. can issue an unqualified opinion. *b. can significantly reduce other substantive tests. c. can write the engagement letter. d. needs to perform additional tests of controls so that the assurance level can be increased.

82. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on:

a. generally accepted auditing standards. b. the AICPA's Code of Professional Conduct. c. generally accepted accounting principles. *d. the auditor's professional judgment.

83. Which of the following combinations is correct?

a. Existence relates to whether the amounts in accounts are understated. b. Occurrence relates to whether balances exist. *c. Existence relates to whether amounts included exist. d. Occurrence relates to whether the amounts in accounts occurred in the proper year.

84. Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?

*a. Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization. b. Generally, the auditor is under an obligation to inform the PCAOB. c. Generally, the auditor is obligated to disclose the relevant facts in the auditor's report. d. Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

85. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of:

*a. transactions. b. authorizations. c. costs. d. cutoffs.

86. The auditor's evaluation of the likelihood of material employee fraud is normally done initially as a part of:

a. tests of controls. b. tests of transactions.

*c. understanding the entity's internal control. d. the assessment of whether to accept the audit engagement.

87. Most illegal acts affect the financial statements:

a. directly. *b. only indirectly. c. both directly and indirectly. d. materially if direct; immaterially if indirect.

88. Which of the following journals would be included most often in the various audit cycles?

a. Cash receipts journal. b. Cash disbursements journal. *c. General journal. d. Sales journal.

89. After general audit objectives are understood, specific audit objectives for each account balance on the financial statements can be developed. Which of the following statements is true?

*a. There should be at least one specific objective for each relevant general objective. b. There will be only one specific objective for each relevant general objective. c. There will be many specific objectives developed for each relevant general objective. d. There must be one specific objective for each general objective.

90. An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should:

*a. plan and perform the engagement with an attitude of professional skepticism. b. not rely on internal controls that are designed to prevent or detect errors or fraud. c. design audit tests to detect unrecorded transactions. d. extend the work to audit most recorded transactions and records of an entity.

91. Tests of details of balances typically involve the use of comparisons and relationships to assess the overall reasonableness of account balances.

a. True *b. False

92. When an auditor believes that an illegal act may have occurred, the first step he or she should take is to inquire of management at a level above those likely to be involved in the potential illegal act.

*a. True b. False

93. Audits are expected to provide a higher degree of assurance for the detection of material frauds than is provided for an equally material error.

a. True *b. False

94. Balance-related audit objectives are usually applied to the ending balance in income statement accounts; transaction-related audit objectives are usually applied to transactions reflected in balance sheet accounts.

a. True *b. False

95. The transaction-related audit objective of timing is related to the assertion of cutoff.

*a. True b. False

96. The effect of a violation of the completeness transaction-related audit objective for cash disbursements transactions would be an overstatement of cash disbursements.

a. True *b. False

97. The general balance-related audit objective that deals with determining that details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total in the general ledger is the detail tie-in objective.

*a. True b. False

98. The cutoff objective, "transactions near the balance sheet date are recorded in the proper period," is a balance-related audit objective.

*a. True b. False

99. The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company's financial position and results of operations.

a. True *b. False

100. The auditor's responsibility for uncovering direct-effect illegal acts is the same as for fraud.

*a. True b. False

101. Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence?

a. b. *c. d.

102. Which of the following forms of evidence is most reliable?

a. General ledger account balances. *b. Confirmation of accounts receivable balance received from a customer. c. Internal memo explaining the issuance of a credit memo. d. Copy of month-end adjusting entries.

103. Appropriateness of evidence is a measure of the:

a. quantity of evidence. *b. quality of evidence. c. sufficiency of evidence. d. meaning of evidence.

104. Which of the following statements regarding the relevance of evidence is correct?

*a. To be relevant, evidence must pertain to the audit objective of the evidence. b. To be relevant, evidence must be persuasive. c. To be relevant, evidence must relate to multiple audit objectives. d. To be relevant, evidence must be derived from a system including effective internal controls.

105. When auditors use documents to support recorded transactions, the process is often called:

a. inquiry. b. confirmation. *c. vouching. d. physical examination.

106. An example of an external document is:

a. employees' time reports. *b. bank statements. c. purchase order for company purchases. d. carbon copies of checks.

107. An example of a document the auditor receives from the client, but which was prepared by someone outside the client's organization, is a(n):

a. confirmation. b. sales invoice. *c. vendor invoice. d. bank reconciliation.

108. Often, auditor procedures result in significant differences being discovered by the auditor. The auditor should investigate further if:

*a. b. c. d.

109. Which of the following is not a purpose of analytical procedures?

a. Understand the client's industry. b. Assess the client's ability to continue as a going concern. *c. Evaluate internal controls. d. Reduce detailed audit tests.

110. Which of the following forms of evidence would be least persuasive in forming the auditor's opinion?

*a. Responses to auditor's questions by the president and controller regarding the investments account. b. Correspondence with a stockbroker regarding the quantity of client's investments held in street name by the broker. c. Minutes of the board of directors authorizing the purchase of stock as an investment. d. The auditor's count of marketable securities.

111. Which of the following statements is not true? "The evidence-gathering technique of inquiry:

a. cannot be regarded as conclusive." b. requires the gathering of corroborative evidence." *c. is the auditor's principal method of evaluating the client's internal control." d. does not provide evidence from an independent source."

112. Sarbanes-Oxley requires auditors of public companies to maintain audit documentation for what period of time?

a. Not less than 3 years. b. Not less than 5 years. *c. Not less than 7 years. d. Through the issuance of the financial statements.

113. Which of the following statements is not correct?

a. It is possible to vary the sample size from one unit to 100% of the items in the population. *b. The decision of how many items to test should not be influenced by the increased costs of performing the additional tests. c. The decision of how many items to test must be made by the auditor for each audit procedure. d. The sample size for any given procedure is likely to vary from audit to audit.

114. Auditors will replace tests of details with analytical procedures when possible because the:

a. analytical procedures are more reliable. *b. tests of details are more expensive. c. analytical procedures are more persuasive. d. tests of details are more difficult to interpret.

115. Which one of the following is not one of the primary purposes of audit documentation?

a. A basis for planning the audit. b. A record of the evidence accumulated and the results of the tests. c. A basis for review by supervisors and partners. *d. A basis for determining work deficiencies by peer review teams.

116. Which of the following is the most objective type of evidence?

a. A letter written by the client's attorney discussing the likely outcome of outstanding lawsuits. *b. The physical count of securities and cash. c. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable. d. Observation of cobwebs on some inventory bins.

117. Which of the following statements regarding documentation is not correct?

a. Documentation includes examining client records such as general ledgers and supporting journals. *b. Internal documents are documents that are generated within the company and used to communicate with external parties. c. External documents are documents that are generated outside of the company and are used to communicate the results of a transaction. d. External documents are considered more reliable than internal documents.

118. When making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so:

a. no matter the cost involved in obtaining such evidence. b. at any cost because the costs are billed to the client. *c. at the lowest possible total cost.

d. at the cost suggested in the engagement letter.

119. Which of the following is an example of vouching?

*a. Trace inventory purchases from the acquisitions journal to supporting invoices. b. Trace selected sales invoices to the sales journal. c. Trace details of employee paychecks to the payroll journal. d. all of these are examples of vouching.

120. Which of the following statements about confirmations is true?

a. Confirmations are expensive and so are often not used. *b. Confirmations may inconvenience those asked to supply them, but they are widely used. c. Confirmations are sometimes not reliable and so auditors use them only as necessary. d. Confirmations are required for several balance sheet accounts but no income statement accounts.

121. Traditionally, confirmations are used to verify:

a. individual transactions between organizations, such as sales transactions. *b. bank balances and accounts receivable. c. fixed asset additions. d. payroll expenses.

122. To be considered reliable evidence, confirmations must be controlled by:

a. a client employee responsible for accounts receivable. *b. a financial statement auditor. c. a client's internal audit department. d. a client's controller or CFO.

123. Indicate whether confirmation of accounts receivable and accounts payable is required or optional:

a. *b. c. d.

124. A benefit obtained from comparing the client's data with industry averages is that it provides a(n):

*a. indication of the likelihood of financial problems. b. indication where errors exist in the statements. c. benchmark to be used in evaluating a client's budgets. d. comparison of "what is" with "what should be."

125. The primary purpose of performing analytical procedures in the planning phase of an audit is to:

*a. help the auditor obtain an understanding of the client's industry and business. b. assess the going concern assumption. c. indicate possible misstatements. d. reduce detailed tests.

126. Which of the following is not a correct combination of terms and related type of audit evidence?

a. Foot - reperformance. b. Compare - documentation. c. Vouch - documentation. *d. Trace - analytical procedures.

127. Which of the following is not a correct combination of terms and related type of audit evidence?

a. Inquire - inquiries of client. b. Count - physical examination. *c. Recompute - documentation. d. Read - documentation.

128. Which of the following is not one of the major types of analytical procedures?

a. Compare client with industry averages. b. Compare client with prior year. c. Compare client with budget. *d. Compare client with SEC averages.

129. What is the overall objective of audit documentation?

a. Defend against claims of a deficient audit. b. Provide a basis for reviewing the work of subordinates.

*c. Provide reasonable assurance that the audit was conducted in accordance with standards. d. Provide additional support of recorded amounts to the client.

130. The permanent files included as part of audit documentation do not normally include:

*a. a copy of the current and prior years' audit programs. b. copies of articles of incorporation, bylaws and contracts. c. information related to the understanding of internal control. d. results of analytical procedures from prior years.

131. Evidence is generally considered appropriate when:

a. it has been obtained by random selection. b. there is enough of it to afford a reasonable basis for an opinion on financial statements. *c. it has the qualities of being relevant, objective, and free from known bias. d. it consists of written statements made by managers of the enterprise under audit.

132. Relevance can be considered only in terms of:

a. general audit objectives. *b. specific audit objectives. c. transaction audit objectives. d. balance audit objectives.

133. Audit documentation should possess certain characteristics. Which of the following is one of the characteristics?

a. b. *c. d.

134. Audit documentation should provide support for:

a. b.

*c. d.

135. Which of the following statements is not correct concerning audit documentation?

*a. Audit documentation is acquired to defend against claims that the auditor performed a deficient audit. b. The only time anyone has a legal right to examine audit documentation is when the documentation is subpoenaed by a court as legal evidence. c. Audit documentation is the primary frame of reference used by supervisory personnel to evaluate the sufficiency of evidence. d. The auditor may deny requests by the client to review audit evidence.

136. Which of the following statements is not true?

a. A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested. b. A large sample of evidence that is neither competent nor timely is not persuasive. c. A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness. *d. The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency.

137. Which of the following statements is not correct?

a. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively. b. For certain immaterial accounts, analytical procedures may be the only evidence needed. c. In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable. *d. Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.

138. Which of the following statements is not correct?

*a. The effectiveness of the client's internal control has little effect on the reliability of most types of evidence. b. Analytical procedures may be reliable even if tests of internal controls indicate control weaknesses.

c. Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control is effective. d. A specific type of evidence is rarely sufficient by itself to provide reliable evidence to satisfy any audit objective.

139. Which of the following statements is correct regarding the costs involved in obtaining evidence?

a. b. c. *d.

140. A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance. The auditor's expected account balance may be determined by:

a. using industry standards. b. using Dun and Bradstreet reports. *c. relating it to some other balance sheet or income statement account or accounts. d. inquiry of the client.

141. Cost should never be a consideration when making decisions about evidence for a given audit.

a. True *b. False

142. A canceled check written by the client, made payable to a local supplier and drawn on the client's bank account is one type of internal document.

a. True *b. False

143. Whenever practical and reasonable, the confirmation of accounts receivable is required of CPAs.

*a. True b. False

144. Inquiries of clients and reperformance normally have a low cost associated with them.

*a. True b. False

145. One of the primary determinants of the reliability of audit evidence is the quantity of evidence.

a. True *b. False

146. Ordinarily, audit documentation can be provided to someone else only with the express permission of the client.

*a. True b. False

147. Analytical procedures must be used in the planning and completion phases of the audit.

*a. True b. False

148. Confirmations are ordinarily used to verify account balances, but may be used to verify transactions.

*a. True b. False

149. Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size.

*a. True b. False

150. Analytical procedures can be used to provide reliable substantive evidence for all balance-related audit objectives.

a. True *b. False

151. Avoiding misunderstandings with the client is important for:

*a. b. c. d.

152. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:

a. inherent risk. *b. acceptable audit risk. c. statistical risk. d. financial risk.

153. A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

a. control risk. b. acceptable audit risk. c. statistical risk. *d. inherent risk.

154. Initial audit planning involves four matters. Which of the following is not one of these?

a. Develop an overall audit strategy. *b. Request that bank balances be confirmed. c. Schedule engagement staff and audit specialists. d. Identify the client's reason for the audit.

155. Which of the following is not correct regarding the communications between successor and predecessor auditors?

*a. The burden of initiating the communication rests with the predecessor auditor. b. The burden of initiating the communication rests with the successor auditor. c. The predecessor auditor must receive their former client's permission prior to divulging information to the successor auditor d. The predecessor auditor may choose to provide a limited response to a successor auditor.

156. If an auditor is requested to perform nonaudit services for a public company audit client, who is responsible for agreeing to those services with the audit firm?

a. The client's management. b. The client's chief executive officer. c. The client's chief financial officer. *d. The client's audit committee.

157. Investigating new clients with a focus on assessing the auditor's potential relationship with that new client is a critical element in determining:

a. inherent risk. *b. acceptable audit risk. c. statistical risk. d. financial risk.

158. One means of informing the client that the auditor is not responsible for the discovery of all acts of fraud is the:

*a. engagement letter. b. representation letter. c. responsibility letter. d. client letter.

159. Which of the following normally signs the engagement letter for an audit of a public company?

a. Corporate treasurer. b. Chief financial officer. c. Chairman of the board of directors. *d. Audit committee.

160. Which of the following normally signs the engagement letter for an audit of a private company?

*a. Management. b. Board of directors representative. c. Audit committee representative. d. Corporate treasurer.

161. An understanding of a client's business and industry and knowledge about operations are essential for performing an adequate audit. For a new client, most of this information is obtained:

a. from the predecessor auditor. b. from the Securities and Exchange Commission. c. from the permanent file. *d. at the client's premises.

162. An official record of meetings of the board of directors and stockholders is included in the corporate:

a. bylaws. b. charter. *c. minutes. d. license.

163. Which of the following is not likely to be a related party?

a. Affiliated companies. b. A major stockholder of the company. *c. A warehouse employee. d. The chief executive officer.

164. Which of the following is most likely to occur at the beginning of an initial audit engagement?

a. Prepare a rough draft of the financial statements and of the auditor's report. b. Study and evaluate the system of internal administrative control. *c. Determine the client's reason for an audit. d. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

165. An auditor should examine minutes of the board of directors' meetings:

a. through the date of the financial statements. *b. through the date of the audit report. c. only at the beginning of the audit. d. on a test basis.

166. The first standard of field work, which states that the work is to be adequately planned and that assistants, if any, are to be properly supervised, recognizes that:

*a. early appointment of the auditor is advantageous to the auditor and the client. b. acceptance of an audit engagement after the close of the client's fiscal year is generally not permissible. c. appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion. d. performance of substantial parts of the examination is necessary at interim dates.

167. Which of the following is correct with respect to a company's corporate charter?

a. The corporate charter is granted by the federal government and is required to recognize the corporation as a separate entity. b. The corporate charter includes the rules and procedures used to operate a corporation. *c. The corporate charter includes the exact name of the corporation, the date of incorporation, and the types of business the corporation is authorized to conduct. d. The corporate charter must be annually reviewed by the PCAOB.

168. Corporate bylaws include:

a. b. c. *d.

169. In what order should the following steps occur?

a. D, B, C, A. *b. B, A, D, C. c. B, D, A, C. d. D, C, B, A.

170. Which of the following statements is not correct with respect to analytical procedures?

a. Auditing standards emphasize the need for auditors to develop and use expectations. *b. Analytical procedures must be performed throughout the audit. c. Analytical procedures may be performed at any time during the audit. d. Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable.

171. The purpose of the requirement in SAS No. 84 of having communication between the predecessor and successor auditor is to:

a. allow the predecessor to disclose information which would otherwise be confidential. *b. help the successor auditor to evaluate whether to accept the engagement. c. help the client by facilitating the change of auditors. d. ensure the predecessor collects all unpaid fees prior to a change in auditor.

172. The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when:

a. the predecessor auditor has poor relations with the successor auditor. b. the client is dissatisfied with the predecessor's work. *c. there are actual or potential legal problems between the client and the predecessor. d. the predecessor believes that the client lacks integrity.

173. Which of the following is correct with respect to the use of analytical procedures?

a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption. b. Analytical procedures must be used throughout the audit. c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor's attention so that the auditor's understanding of the business is improved. *d. Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data.

174. Which of the following statements is not correct?

a. Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client's business and directing the auditor's attention to areas that may contain possible misstatements. *b. Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor's attention to areas that may contain possible misstatements. c. Analytical procedures must be used in the planning and completion phases of the audit, and are optional in the testing phase. d. Analytical procedures used in the completion phase are primarily aimed at directing the auditor's attention to areas

that may contain possible misstatements and secondarily aimed at assessing going concern.

175. When are auditors likely to encounter judgment problems in the use of analytical procedures?

a. Whenever the auditor places reliance on management's explanations for unusual fluctuations in account balances without first developing independent expectations. b. Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances. c. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them. *d. The auditor is likely to encounter judgment problems in each of these instances.

176. The major concern when using nonfinancial data in analytical procedures is the:

*a. accuracy of the nonfinancial data. b. source of the nonfinancial data. c. type of nonfinancial data. d. presence of multiple sources of nonfinancial data.

177. Early appointment of the independent auditor will enable:

a. a more thorough examination to be performed. b. a proper study and evaluation of internal control to be performed. c. sufficient competent evidential matter to be obtained. *d. a more efficient examination to be planned.

178. Whenever an auditor compares client data to client-prepared budgets, there are two special concerns. Indicate if the two items below are concerns.

*a. b. c. d.

179. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

a. engage financial experts familiar with the nature of the business entity. *b. obtain a knowledge of matters that relate to the nature of the entity's business. c. refer a substantial portion of the audit to another CPA who will act as the principal auditor. d. first inform management that an unqualified opinion cannot be issued.

180. Which is a liquidity activity ratio?

a. Profit margin. *b. Inventory turnover. c. Return on assets. d. Times interest earned.

181. Which is usually included in an engagement letter?

a. b. c. *d.

182. Which is usually included in an engagement letter?

*a. b. c. d.

183. Which is usually included in an engagement letter?

a. b. *c. d.

184. Which is usually included in the engagement letter?

a. *b. c. d.

185. Which is usually included in the engagement letter?

a. *b. c. d.

186. When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.

*a. True b. False

187. As acceptable audit risk is decreased, the likely cost of conducting an audit increases.

*a. True b. False

188. Before accepting a new client, most CPA firms investigate the company to determine its acceptability. However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties - namely the company's attorneys and bankers-during this investigation.

a. True *b. False

189. A predecessor auditor who has been contacted by a successor auditor for information about the client does not have to obtain permission from the former client before providing any confidential

information to the successor auditor because the confidentiality requirement does not extend to former clients.

a. True *b. False

190. Auditors should obtain copies of the client's articles of incorporation, bylaws, and minutes of the meetings of the board of directors to aid in their understanding of the company's management and governance structure.

*a. True b. False

191. An auditor must evaluate a specialist's professional qualifications and understand the objectives of the specialist's work.

*a. True b. False

192. An engagement letter establishes a clear understanding of the terms of the engagement between the client and the auditor, but it is optional for private companies.

*a. True b. False

193. If a prospective client has been audited in the past, the successor auditor will typically rely solely on the representations about the client by the predecessor auditor.

a. True *b. False

194. Inherent risks typically vary across industries.

a. True *b. False

195. Transactions with related parties must be disclosed in the financial statements if they are deemed to be material.

*a. True b. False

196. All known related parties must be identified and included in the auditor's permanent files related to the client.

*a. True b. False

197. Generally, auditors assess inherent risk as moderate for related party transactions because they expect clients to be aware of their scrutiny of such transactions.

a. True *b. False

198. The corporate charter typically establishes the company's fiscal year and frequency of stockholder meetings.

a. True *b. False

199. When a successor auditor requests information from a company's previous auditor, and there are legal problems or disputes between the client and the predecessor auditor, the predecessor auditor's response to the new auditor may be limited to stating that no information will be provided.

*a. True b. False

200. One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

a. True *b. False