Professional Standards 8.

If the auditors discover illegal acts by a client, they ordinarily must

immediately resign from the engagement.
True / False Questions True False

1. To express an opinion on financial statements, the auditor obtains 9. An audit should be designed to obtain reasonable assurance of detecting
reasonable assurance about whether the financial statements as a whole are non-compliance with all laws.
free from material misstatement, whether due to fraud or error. True False
True False
10. The pronouncements of the International Auditing and Assurance
2. The auditors' report on a corporation's financial statements usually is Standards Board do not override the national auditing standards of its
addressed to the president of the company. members, even when financial statements are issued by a multinational
True False company.
True False
3. The auditors are primarily responsible for preparing the financial
statements and expressing an opinion on whether they follow generally Multiple Choice Questions
accepted auditing standards. 11. Audits of financial statements are designed to obtain reasonable
True False assurance of detecting misstatement due to:

4. Partners in CPA firms usually have the responsibility for signing the audit Fraudulent Financial Reporting Misappropriation of Assets
report. A. Yes Yes
True False B. Yes No
C. No Yes
5. An audit is more likely to detect tax evasion than violations of antitrust D. No No
laws.
True False A. Option A
B. Option B
6. The attestation standards do not supersede generally accepted auditing C. Option C
standards. D. Option D
True False
12. Financial statements are prepared following a(an)
7. A peer review is generally performed by employees of the AICPA. A. Applicable financial reporting framework.
True False B. Appropriate subject matter.
C. Generally accepted auditing standards.
D. Set of quality control standards.
13. An attestation engagement: 17. A procedure in which a quality control partner periodically tests the
A. Has as its primary source of standards the assurance standards. application of quality control procedures is most directly related to which
B. Includes a report on subject matter, or on an assertion about subject quality control element?
matter. A. Engagement performance.
C. Includes search and verification procedures for all major accounts. B. Human resources.
D. Is ordinarily an examination, review or compilation engagement. C. Leadership responsibilities for quality with the firm.
D. Monitoring.
14. An audit provides reasonable assurance of detecting which of the
following types of material illegal acts? 18. Requirements for training, independence and due professional care are
included in which group of the generally accepted auditing standards of the
Direct Effect Without a Direct Effect PCAOB?
A. Yes Yes A. Fieldwork.
B. Yes No B. General.
C. No Yes C. Reporting.
D. No No D. Quality control.

A. Option A 19. Which of the following is a principle underlying an audit conducted in

B. Option B accordance with generally accepted auditing standards?
C. Option C A. The audit provides reasonable assurance the client will remain in business
D. Option D for at least one year.
B. The audit report expresses an opinion on whether the financial statements
15. Which of the following is not a type of auditors' opinion? are free of material and immaterial misstatement.
A. Adverse. C. Auditors are responsible for, among other things, maintaining professional
B. Ordinary. objectivism, exercising professional engagement, and obtaining appropriate
C. Qualified. documentation.
D. Unmodified. D. An auditor's opinion enhances the degree of confidence that intended
users can place in the financial statements.
16. Which of the following is one of the elements of AICPA quality control?
A. Assurance of proper levels of association. 20. A set of criteria used to determine measurement, recognition,
B. Due professional care. representation, and disclosure of all material items appearing in the financial
C. Engagement performance. statements is referred to as a(n)
D. Supervision. A. Financial reporting framework.
B. Public Company Accounting Oversight Board Criteria.
C. Quality control presentation standard.
D. Special purpose audit standard.
21. An audit should be designed to obtain reasonable assurance of detecting 24. By definition, proper professional skepticism on an audit requires
material misstatements due to:
A. Errors. Questioning Mind Subjective Assessment of audit evidence
B. Errors and fraud. A. No No
C. Errors, fraud, and noncompliance with laws with a direct effect on financial B. No Yes
statement amounts. C. Yes No
D. Errors, fraud and noncompliance with all laws. D. Yes Yes

22. Which of the following is accurate, as indicated in the principles A. Option A

underlying an audit? B. Option B
Management is expected to provide the auditors with all needed evidence C. Option C
prior to the beginning of audit work. D. Option D
B. An auditor is unable to obtain absolute assurance that the financial
statements are free from material misstatement. 25. When a Statement Auditing Standards uses the word "should" relating to
C. Auditors are responsible for having appropriate competence to perform a requirement, it means that the auditor:
the audit without the assistance of outside specialists. A. Must fulfill the responsibilities under all circumstances.
D. Management is responsible for preparing accurate financial statement B. Must comply with requirements unless the auditor demonstrates and
amounts, while auditors are responsible for auditing those amounts and for documents that alternative actions are sufficient to achieve the objectives of
preparing note disclosures related to those amounts. the standards.
C. Should consider whether to follow the advice based on the exercise of
23. Which of the following is not an underlying premise of an audit? professional judgment in the circumstances.
A. Management must provide the auditor with all information relevant to the D. May choose to change responsibilities relating to various professional
preparation and fair presentation of the financial statements. standards that remain under consideration.
B. Management and the auditors have responsibility for the preparation of
financial statements in accordance with the applicable financial reporting 26. An unconditional responsibility to follow an AICPA professional standard
framework. exists when the professional standard uses the term(s)
C. Where appropriate, the auditor may obtain information from those charged
with governance. Must Should
D. The auditors should be provided unrestricted access to those within the A. Yes Yes
entity from whom the auditor determines it necessary to obtain audit B. Yes No
evidence. C. No Yes
D. No No
A. Option A 30. Primary responsibility for the financial statements lies with:
B. Option B
C. Option C Auditors Management
D. Option D A. Yes Yes
B. Yes No
27. Which of the following best describes a portion of the auditors' C. No Yes
responsibility regarding noncompliance with laws by clients? D. No No
A. The auditors have a responsibility to discover all material noncompliance.
B. If audit procedures reveal noncompliance, the auditors should take A. Option A
appropriate actions. B. Option B
C. If the auditors suspect noncompliance, they should conduct a legal audit C. Option C
of the company. D. Option D
D. The auditors' responsibility for the detection of all noncompliance is the
same as their responsibility regarding material misstatements due to errors 31. Which of the following is explicitly included as a part of the description of
and fraud. management's responsibility in an unmodified audit report?
A. Management is responsible for making a judgment on which
28. The auditors who find that the client has committed an illegal act would misstatements are material vs. immaterial.
be most likely to withdraw from the engagement when the: B. Management is responsible for providing auditors with all relevant
A. Management fails to take appropriate corrective action. evidence.
B. Illegal act has material financial statement implications. C. Management is responsible for the design, implementation, and
C. Illegal act has received widespread publicity. maintenance of internal control.
D. Auditors cannot reasonably estimate the effect of the illegal act on the D. Management is responsible for listing all illegal acts with a direct effect on
financial statements. financial statement amounts and disclosures.

29. Which of the following is not included as a part of the description of the 32. The auditors' report for a nonpublic company should indicate:
auditor's responsibility in a nonpublic company unmodified report? A. That the audit was made in accordance with auditing standards generally
A. The audit was performed in accordance with generally accepted accepted in the United States of America.
accounting principles. B. Any weakness in internal control observed by the auditors.
B. An audit involves performing procedures to obtain audit evidence about C. That accounting principles have been consistently applied.
the amounts and disclosures in the financial statements. D. That no illegal acts have been identified.
C. The procedures selected depend on the auditor's judgment.
D. An audit includes evaluating the appropriateness of accounting policies 33. A requirement that working papers be reviewed by the supervisor, and
used. any deficiencies be discussed with the preparer is an example of a quality
control procedure in the area of:
A. Acceptance and continuance of client relationships and specific
engagements. B. Be relied upon to disclose violations of truth in lending laws.
B. Engagement performance. C. Encompass a plan to actively search for all illegalities which relate to
C. Human resources. operating aspects.
D. Relevant ethical requirements. D. Not be relied upon to provide absolute assurance that all noncompliance
with laws will be detected.
34. A requirement to design recruitment processes and procedures to help
the firm select individuals meeting minimum academic requirements 38. When the auditors express an opinion on financial statements their
established by the firm is an example of a quality control procedure in the responsibilities extend to:
area of: A. The underlying wisdom of their client's management decisions.
A. Acceptance and continuance of client relationships and specific B. Whether the results of their client's operating decisions are fairly
engagements. presented in the financial statements.
B. Engagement performance. C. Active participation in the implementation of the advice given to their
C. Human resources. client.
D. Relevant ethical requirements. D. An ongoing responsibility for their client's solvency.

35. To present fairly in conformity with generally accepted accounting 39. An investor reading the financial statements of The Sundby Corporation
principles the financial statements must: observes that the statements are accompanied by an unmodified auditors'
A. Be consistently applied. report. From this the investor may conclude that:
B. Inform users of all matters that could materially affect a decision. A. Any disputes over significant accounting issues have been settled to the
C. Reflect transactions and events within a range of reasonable limits. auditors' satisfaction.
D. Be considered preferable to the users of those financial statements. B. The auditors are satisfied that Sundby is operationally efficient.
C. The auditors have ascertained that Sundby's financial statements have
36. Which of the following is not included in the auditors' standard unmodified been prepared accurately.
audit report? D. Informative disclosures in the financial statements but not necessarily in
A. The procedures selected by the auditor depend on the auditor's judgment. the footnotes are to be regarded as reasonably adequate.
B. An audit includes evaluating the appropriateness of accounting policies
used. 40. The auditors' report may be addressed to the company whose financial
C. An audit includes evaluating the overall presentation of the financial statements are being examined or to that company's:
statements. A. Chief operating officer.
D. Accounting principles have been consistently applied. B. President.
C. Board of Directors.
37. An audit performed in accordance with generally accepted auditing D. Chief financial officer.
standards generally should:
A. Be expected to provide absolute assurance that noncompliance with all
laws will be detected where internal control is effective.
Audit Planning, Understanding the Client, Assessing Risks, and 8. Confirming a bank account establishes existence but not rights to the cash
Responding balance.
True False
True / False Questions
9. The completeness of recording of assets is generally verified by tracing
1. Audit committees should be made up of the most qualified directors from the source documents to the recorded entry.
regardless of whether they are part of management of the company. True False
True False
10. Vouching the acquisition of assets is an audit procedure that is often
2. Analytical procedures are seldom used during the risk assessment stage performed to establish the valuation of the assets.
of an audit engagement because they are substantive procedures. True False
True False
Multiple Choice Questions
3. Preliminary arrangements with clients should be set forth in the 11. Which of the following factors most likely would cause a CPA to not
management letter. accept a new audit engagement?
True False A. The prospective client has fired its prior auditor.
B. The CPA lacks a thorough understanding of the prospective client's
4. An audit plan includes a detailed listing of the audit procedures to be operations and industry.
performed in the verification of items in the financial statements. C. The CPA is unable to review the predecessor auditor's working papers
True False due to a major fire that destroyed both hard and soft copy documentation.
D. The prospective client is unwilling to make financial records available to
5. The auditors' tests of controls are designed to substantiate the fairness of the CPA.
specific financial statement accounts.
True False 12. Which of the following factors most likely would heighten an auditor's
concern about the risk of fraudulent financial reporting?
6. At least a portion of the auditors' consideration of internal control usually is A. Large amounts of liquid assets that are easily convertible into cash.
performed at an interim date rather than at the balance sheet date. B. Low growth and profitability as compared to other entities in the same
True False industry.
C. Financial management's participation in the initial selection of accounting
7. The substantive approach to an audit is appropriate for many small principles.
businesses. D. An overly complex organizational structure involving unusual lines of
True False authority.
13. Which of the following factors would most likely cause a CPA to decide 17. The auditors' understanding established with a client should be
not to accept a new audit engagement? established through a(an):
A. Lack of understanding of the potential client's internal auditors' A. Oral communication with the client.
computer-assisted audit techniques. B. Written communication with the client.
B. Management's disregard for internal control. C. Written or oral communication with the client.
C. The existence of related party transactions. D. Completely detailed audit plan.
D. Management's attempt to meet earnings per share growth rate goals.
18. Which of the following would be least likely to be considered an audit
14. Which of the following matters is generally included in an auditor's planning procedure?
engagement letter? A. Use an engagement letter.
A. Limitations of the engagement. B. Develop the overall audit strategy.
B. Factors to be considered in establishing preliminary judgments about C. Perform the risk assessment.
materiality. D. Develop the audit plan.
C. Management's liability for all illegal acts committed by its employees.
D. The auditor's responsibility to obtain negative assurance relating to 19. While assessing the risks of material misstatement auditors identify risks,
non-compliance with laws and regulations. relate risk to what could go wrong, consider the magnitude of risks and:
A. Assess the risk of misstatements due to illegal acts.
15. Which of the following would heighten an auditor's concern about the risk B. Consider the complexity of the transactions involved.
of fraudulent financial reporting? C. Consider the likelihood that the risks could result in material
A. Inability to generate positive cash flows from operations, while reporting misstatements.
large increases in earnings. D. Determine materiality levels.
B. Management's lack of interest in increasing the dividend paid on common
stock. 20. Which of the following is correct concerning requirements about auditor
C. Large amounts of liquid assets that are easily convertible into cash. communications about fraud?
D. Inability to borrow necessary capital without obtaining waivers on debt A. Fraud that involves senior management should be reported directly to the
covenants. audit committee regardless of the amount involved.
B. All fraud with a material effect on the financial statements should be
16. To best test existence, an auditor would sample from the: reported directly by the auditor to the Securities and Exchange Commission.
A. General ledger to source documents. C. Fraud with a material effect on the financial statements should ordinarily
B. General ledger to the financial statements. be disclosed by the auditor through use of an "emphasis of a matter"
C. Source documents to the general ledger. paragraph added to the audit report.
D. Source documents to journals. D. The auditor has no responsibility to disclose fraud outside the entity under
any circumstances.
21. A predecessor auditor will ordinarily initiate communication with the management override.
successor auditor: C. Management continues to employ an inefficient system of information
technology to record financial transactions.
Prior to the Successor's Subsequent to theSuccessor's D. It is unlikely that sufficient evidence is available to support an opinion on
Acceptance of the Engagement Acceptance of the Engagement the financial statements.

A. Yes Yes 24. In using the information on the statement of cash flows while obtaining an
B. Yes No understanding of a profitable, growing company, which of the following would
C. No Yes ordinarily be least surprising to an auditor?
D. No No A. Decreases in accounts payable.
B. Decreases in accounts receivable.
A. Option A C. Negative cash flows from investing.
B. Option B D. Negative operating cash flows.
C. Option C
D. Option D 25. Audits of financial statements are designed to obtain reasonable
assurance of detecting material misstatements due to:
22. Which measure of materiality (or both) considers quantitative
considerations? Errors Misappropriation of Assets
A. Yes Yes
Planning Evaluation B. Yes No
A. Yes Yes C. No Yes
B. Yes No D. No No
C. No Yes
D. No No A. Option A
B. Option B
A. Option A C. Option C
B. Option B D. Option D
C. Option C
D. Option D 26. Which of the following is not one of the assertions made by management
about an account balance?
23. Which of the following factors most likely would lead a CPA to conclude A. Relevance.
that a potential audit engagement should not be accepted? B. Existence.
A. There are significant related party transactions that management claims C. Valuation.
occurred in the ordinary course of business. D. Rights and obligations.
B. Internal control activities requiring the segregation of duties are subject to
27. When a company has changed auditors, according to the Professional 31. Which of the following is an example of fraudulent financial reporting?
Standards: A. Company management falsifies inventory count tags thereby overstating
A. The successor auditor has the responsibility to initiate contact with the ending inventory and understating cost of goods sold.
predecessor auditor to ask about the client before the engagement is B. An employee diverts customer payments to his personal use, concealing
accepted; the predecessor has no responsibility to initiate this contact, even his actions by debiting an expense account, thus overstating expenses.
when aware of matters bearing on the integrity of management. C. An employee steals inventory and the "shrinkage" is recorded in the cost
B. The predecessor must always respond fully to all inquiries made by the of goods sold.
successor auditor. D. An employee "borrows" tools from the company and neglects to return
C. The successor must discuss with the predecessor matters bearing on the them; the cost is reported as a miscellaneous operating expense.
engagement prior to accepting the engagement.
D. The successor may choose not to attempt any communication with the 32. Which of the following is most likely to be considered a risk factor relating
predecessor auditor. to fraudulent financial reporting?
A. Low turnover of senior management.
28. Which of the following procedures is not performed as a part of planning B. Extreme degree of competition within the industry.
an audit engagement? C. Capital structure including various operating subsidiaries.
A. Reviewing the working papers of the prior year. D. Sales goals in excess of any of the preceding three years.
B. Developing an overall audit strategy.
C. Confirmation of all major accounts. 33. Which of the following conditions identified during the audit increases the
D. Designing an audit program. risk of employee fraud?
A. Large amounts of cash in the bank.
29. The risk of a material misstatement occurring in an account, assuming an B. Existence of a mandatory vacation policy for employees performing key
absence of internal control, is referred to as: functions.
A. Account risk. C. Inventory items of small size, but high value.
B. Control risk. D. Presence of reconciling items on a client prepared year-end proof of cash.
C. Detection risk.
D. Inherent risk. 34. Which of the following statements is accurate about "fraud risk factors"
considered when conducting an audit?
30. Which of the following is least likely to be considered a financial A. Factors whose presence indicates that fraud exists.
statement audit risk factor? B. Factors whose presence often have been observed in circumstances
A. Management operating and financing decisions are dominated by top where frauds have occurred.
management. C. Factors whose presence will require modification to planned audit
B. A new client with no prior audit history. procedures.
C. Rate of change in the entity's industry is rapid. D. Factors obtained during the audit which lead to required communications
D. Profitability of the entity relative to its industry is inconsistent. with the audit committee.
35. Which of the following is not an example of a likely adjustment in the conservative operating results.
auditors' overall audit approach when significant risk is found to exist? D. Management is interested in maintaining the entity's earnings trend by
A. Apply increased professional skepticism about material transactions. using aggressive accounting practices.
B. Increase the assessed level of detection risk.
C. Assign personnel with particular skill to areas of high risk. 39. A successor auditor is required to attempt communication with the
D. Obtain increased evidence about the appropriateness of management's predecessor auditor prior to:
selection of accounting principles. A. Performing test of controls.
36. Which of the following is least likely to be required on an audit? B. Testing beginning balances for the current year.
A. Evaluate the business rationale for significant, unusual transactions. C. Making a proposal for the audit engagement.
B. Make a legal determination of whether fraud has occurred. D. Accepting the engagement.
C. Review accounting estimates for biases.
D. Test appropriateness of journal entries and adjustments. 40. If the business environment is experiencing a recession, the auditor most
likely would focus increased attention on which of the following accounts?
37. Which of the following is (are) considered a further audit procedure(s) A. Purchase returns and allowances.
that may be designed after assessing the risks of material misstatement? B. Allowance for doubtful accounts.
C. Common stock.
Substantive Test of Details Substantive Analytical Procedures D. Noncontrolling interest of a subsidiary purchased during the year.
A. Yes Yes
B. Yes No 41. The risk that the auditors' procedures will lead them to conclude that a
C. No Yes material misstatement does not exist in an account balance when in fact
D. No No such a misstatement does exist is referred to as:
A. Account risk.
A. Option A B. Control risk.
B. Option B C. Detection risk.
C. Option C D. Inherent risk.
D. Option D
42. Which of the following statements is correct regarding the auditor's
38. Which of the following circumstances would an auditor most likely determination of materiality?
consider a risk factor relating to misstatements arising from fraudulent A. The planning level of materiality should normally be the larger of the
financial reporting? amount considered for the balance sheet versus the income statement.
A. Several members of management have recently purchased additional B. The auditors' planning level of materiality may be disaggregated into
shares of the entity's stock. smaller "tolerable misstatements" for the various accounts.
B. Several members of the board of directors have recently sold shares of C. Auditors may use various rules of thumb to arrive at an evaluation level of
the entity's stock. materiality, but not for determining the planning level of materiality.
C. The entity distributes financial forecasts to financial analysts that predict D. The amount used for the planning should equal that used for evaluation.
43. The auditors must consider materiality in planning an audit engagement. 47. Tests for unrecorded assets typically involve tracing from:
Materiality for planning purposes is: A. Source documents to recorded journal entries.
A. The auditors' preliminary estimate of the largest amount of misstatement B. Source documents to observations.
that would be material to any one of the client's financial statements. C. Recorded journal entries to documents.
B. The auditors' preliminary estimate of the smallest amount of misstatement D. Recorded journal entries to observations.
that would be material to any one of the client's financial statements.
C. The auditors' preliminary estimate of the amount of misstatement that 48. Tracing from source documents forward to ledgers is most likely to
would be material to the client's balance sheet. address which assertion related to posted entries:
D. An amount that cannot be quantitatively stated since it depends on the A. Completeness.
nature of the item. B. Existence.
C. Rights.
44. Which of the following topics is not normally included in an engagement D. Valuation.
letter?
A. The auditors' preliminary assessment of internal control. 49. Determining that receivables are presented at net-realizable value is
B. The auditors' estimate of the fee for the engagement. most directly related to which management assertion?
C. Limitations on the scope of the engagement. A. Existence.
D. A description of responsibility for the detection of fraud. B. Rights.
C. Valuation.
45. Which of the following is most likely to be an overall response to fraud D. Presentation and disclosure.
risks identified in an audit?
A. Only use certified public accountants on the engagement. 50. Which of the following is not a general objective for the audit of asset
B. Place increased emphasis on the audit of objective transactions rather accounts?
than subjective transactions. A. Establishing the existence of assets.
C. Supervise members of the audit team less closely and rely more upon B. Establishing proper valuation of assets.
judgment. C. Establishing proper liabilities relating to assets.
D. Use less predictable audit procedures. D. Establishing the completeness of assets.

46. Which of the following is not an assertion that is made in the financial 51.​What threat to independence may be created if fees due from an
statements by management concerning each major account balance? assurance client for professional services remain unpaid for a long time,
A. Completeness. especially if a significant part is not paid before the issue of the assurance
B. Rights and obligations. report for the following year?
C. Legality. A.​Advocacy threat​
D. Valuation. B.​Self-interest threat
C.​Intimidation threat
D.​Self-review threat
​ 2.​These are fees calculated on a predetermined basis relating to the
5 partnership of professional accountants in public practice, or of any alteration
outcome or result of a transaction or the result of the work performed. in the address of a practice.
A.​Contingent fees​ D.​ A professional accountant may develop and maintain a website on the
B.​Fixed fees Internet in such suitable length and style which may also include
C.​Predetermined fees announcements, press releases, publications and such other necessary and
D.​Commissions. factual information.

​ 3.​As defined in the Code of Ethics, what is the communication to the public
5 ​ 6.​A professional accountant in public practice is allowed to
5
of information as to the services or skills provided by professional A.​Refer to, use or cite actual or purported testimonials by third parties.
accountants in public practice with a view to procuring professional B.​ Publish services in billboard (e.g., tarpaulin, streamers, etc.)
business? advertisements.
A.​Advertising C.​Publish and compare fees with other CPAs or CPA firms or compare those
B.​Publicity services with those provided by another firm or CPA practitioner.
C.​Solicitation D.​ Inform interested parties through any medium that a partnership or
D.​Marketing professional services salaried employment of an accountancy nature is being sought.

​ 4.​As defined in the Code of Ethics, what is the communication to the public
5 ​ 7.​ After evaluating the significance of the threat created by an actual or
5
of facts about a professional accountant which are not designed for the threatened litigation, the following safeguards should be applied to reduce
deliberate promotion of that professional accountant? the threat to an acceptable level, except
A.​Advertising A.​Disclosing to the audit committee, or others charged with governance, the
B. ​Publicity extent and nature of the litigation.
C. ​Solicitation B.​ If the litigation involves a member of the assurance team, removing that
D.​Marketing professional services individual from the assurance team.
C. ​Involving an additional professional accountant in the firm who was not a
​ 5. ​Which of the following statements concerning publicity is incorrect?
5 member of the assurance team to review the work or otherwise advise as
A.​ Booklets and other documents bearing the name of a professional necessary.
accountant and giving technical information for the assistance of staff or D.​Withdraw from, or refuse to accept, the assurance engagement.
clients may be issued to such persons, other professional accountants or
other interested parties. ​ 8.​ The following statements relate to the provision of legal services to an
5
B.​ Professional accountants who author books or articles on professional audit client. Which is incorrect?
subjects may state their name and professional qualifications; give the name A. ​The provision of legal services to an audit client involving matters that
of their organization; and give any information as to the services that the firm would not be expected to have a material effect on the financial statements
provides. may create a self-review threat.
C.​ Appropriate newspapers or magazines may be used to inform the public B.​Legal services to support an audit client in the execution of a transaction
of the establishment of a new practice, of changes in the composition of a (e.g., contract support) may create a self-review threat.
C.​Acting for an audit client in the resolution of a dispute or litigation in such A.​Monitoring
circumstances when the amounts involved are material in relation to the B.​Inspection
financial statements of the audit client would create advocacy and self-review C.​Engagement quality control review
threats so significant no safeguards could reduce the threats to an D.​Supervision
acceptable level.
D.​The appointment of a partner or an employee of the firm or network firm as ​ 2.​Which element of a system of quality control is addressed by the
6
General Counsel for legal affairs to an audit client would create self-review establishment of policies and procedures designed to provide the firm with
and advocacy threats that are so significant no safeguards could reduce the reasonable assurance that it has sufficient personnel with the competence,
threats to an acceptable level. capabilities, and commitment to ethical principles?
A.​Monitoring
​ 9.​The following circumstances create advocacy threats for a professional
5 B.​Leadership responsibilities for quality within the firm
accountant in public practice except C.​Human resources
A.​Promoting shares in an audit client. D.​Engagement performance
B.​Acting as an advocate on behalf of an audit client in litigation or disputes
with third parties. ​ 3.​For audits of financial statements of listed entities, the engagement
6
C.​Acting as campaign manager for the president of a client who is running for partner should not issue the auditor’s report until the completion of the
a public office. A.​Engagement Quality Control Review
D.​A member of the assurance team having a significant close business B.​Management Review
relationship with an assurance client. C.​Engagement Team Review
D.​Engagement Partner Review
​ 0.​The primary purpose of establishing quality control policies and
6
procedures for deciding whether to accept a new client is to ​ 4.​Who should take responsibility for the overall quality on each audit
6
A.​Anticipate before performing any fieldwork whether an unqualified opinion engagement?
can be expressed. A.​Engagement quality control reviewer
B.​Enable the CPA firm to attest to the reliability of the client. B.​Engagement partner
C.​Satisfy the CPA firm’s duty to the public concerning the acceptance of new C.​Engagement team
clients. D.​CPA firm
D.​Minimize the likelihood of association with clients whose management
lacks integrity. ​ 5.​The engagement partner should take responsibility for the direction,
6
supervision, and performance of the audit engagement in compliance with
​ 1.​As defined in PSQC 1, what is a process comprising an ongoing
6 professional standards and regulatory and legal requirements, and for the
consideration and evaluation of the firm’s system of quality control, including auditor’s report that is issued to be appropriate in the circumstances.
a periodic inspection of a selection of completed engagements, designed to Supervision includes the following, except
provide the firm with reasonable assurance that its system of quality control A.​Tracking the progress of the audit engagement.
is operating effectively?
B.​Addressing significant issues arising during the audit engagement, C.​Enhancing the auditor’s understanding of the client’s business and
considering their significance, and modifying the planned approach identifying areas of potential risk.
appropriately. D.​Assessing the adequacy of the available evidential matter.
C.​Informing the members of the engagement team of their responsibilities.
D.​Identifying matters for consultation or consideration by more experienced ​ 9.​Which of the following would not be considered an analytical procedure?
6
engagement team members during the audit engagement. A.​Estimating payroll expense by multiplying the number of employees by the
average hourly wage rate and the total hours worked.
THE FINANCIAL STATEMENT AUDIT: CLIENT ACCEPTANCE AND B.​Projecting an error rate by comparing the results of a statistical sample
PLANNING with the actual population characteristics.
C.​Computing accounts receivable turnover by dividing credit sales by the
​ 6.​Which of the following would an auditor most likely use in determining the
6 average net receivables.
auditor’s preliminary judgment about materiality? D.​Developing the expected sales based on the sales trend of the prior five
A.​The anticipated sample size of the planned substantive tests. years.
B.​The entity’s annualized interim financial statements.
C.​The results of the internal control questionnaire. ​ 0.​Which of the following auditing procedures most likely would assist an
7
D.​The contents of the management representation letter. auditor in identifying related party transactions?
A.​Inspecting correspondence with lawyers for evidence of unreported
67. ​Which of the following statements concerning materiality is not correct? contingent liabilities.
A.​When establishing the overall audit strategy, the auditor shall determine B.​Vouching accounting records for recurring transactions recorded just after
materiality for the financial statements as a whole. the balance sheet date.
B.​If, in the specific circumstances of the entity, there is one or more particular C.​Reviewing confirmations of loans receivable and payable for indications of
classes of transactions, account balances or disclosures for which guarantees.
misstatements of lesser amounts than materiality for the financial statements D.​Performing analytical procedures for indications of possible financial
as a whole could reasonably be expected to influence the economic difficulties.
decisions of users taken on the basis of the financial statements, the auditor
shall also determine the materiality level or levels to those particular classes ​ 1.​Which of the following most likely would indicate the existence of related
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of transactions, account balances or disclosures. parties?
C.​Determining materiality involves the exercise of professional judgment. A.​Writing down obsolete inventory just before year-end.
D.​The materiality level for the financial statements as a whole determined in B.​Failing to correct previously identified internal control deficiencies.
the planning stage of the audit should not be affected by changes in the C.​Depending on a single product for the success of the entity.
circumstances of the engagement. D.​Borrowing money at an interest rate significantly below the market rate.

​ 8.​Analytical procedures used in planning an audit should focus on

6 ​ 2.​If the results of the auditor’s expert’s work do not provide sufficient
7
A.​Reducing the scope of tests of controls and substantive tests. appropriate audit evidence or are not consistent with other audit evidence,
B.​Providing assurance that potential material misstatements will be identified. the auditor should
A.​Report the matter to the appropriate regulatory agency of the government. ​ 6.​An auditor should consider two key issues when obtaining an
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B.​Resolve the matter. understanding of a client’s internal controls. These issues are
C.​Withdraw from the engagement. A.​The effectiveness and efficiency of the controls.
D.​Express an unqualified opinion with reference to the work of the expert. B.​The frequency and effectiveness of the controls.
C.​The design and implementation of the controls.
RISK ASSESSMENTS AND INTERNAL CONTROL D.​The implementation and efficiency of the controls.
​77.​Authorizations can be either general or specific. Which of the following is
​ 3.​A measure of how willing the auditor is to accept that the financial
7 not an example of a general authorization?
statements may be materially misstated after the audit is completed and an A.​Automatic reorder points for raw materials inventory.
unmodified opinion has been issued is the B.​A sales manager’s authorization for a sales return.
A.​Inherent risk. C.​Credit limits for various classes of transactions.
B.​Acceptable audit risk. D.​A sales price list for merchandise.
C.​Control risk.
D.​Detection risk. ​ 8.​An auditor should obtain sufficient knowledge of an entity’s information
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system, including the related business processes relevant to financial
74. ​Which of the following is not one of the three primary objectives of reporting, to understand the
effective internal control? A.​Policies used to detect the concealment of fraud.
A.​Reliability of financial reporting.​ B.​Process used to prepare significant accounting estimates.
B.​Efficiency and effectiveness of operations. C.​Safeguards used to limit access to computer facilities.
C.​Compliance with laws and regulations.​ D.​Procedures used to assure proper authorization of transactions.
D.​Assurance of elimination of business risk.
​ 9.​Which of the following controls most likely would provide reasonable
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75. ​Which of the following statements concerning the relevance of various assurance that all credit sales transactions of an entity are recorded?
types of controls to a financial statement audit is correct? A.​The accounting department supervisor controls the mailing of monthly
A.​All controls are ordinarily relevant to a financial statement audit. statements to customers and investigates any differences reported by
B.​Controls over safeguarding of assets and liabilities are of primary customers.
importance, while controls over the reliability of financial reporting may also B.​The accounting department supervisor independently reconciles, on a
be relevant. monthly basis, the accounts receivable subsidiary ledger to the accounts
C.​Controls over the reliability of financial reporting are ordinarily most directly receivable control account.
relevant to a financial statement audit, but other controls may also be C.​The billing department supervisor matches prenumbered shipping
relevant. documents with entries in the sales journal.
D.​An auditor may ordinarily ignore a consideration of controls when a D.​The billing department supervisor sends copies of approved sales orders
substantive audit approach is taken. to the credit department for comparison to authorized credit limits and current
customer account balances.
​ 0.​Which of the following control activities in an entity’s revenue/receipt cycle
8 ​ 3.​ An auditor may decide to assess control risk at the maximum level for
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would provide reasonable assurance that all billed sales are correctly posted certain assertions because the auditor believes
to the accounts receivable ledger? A.​Controls are unlikely to pertain to the assertions.
A.​Each shipment of goods on credit is supported by a prenumbered sales B.​The entity’s control components are interrelated.
invoice. C.​Sufficient appropriate audit evidence to support the assertions is likely to
B.​The accounts receivable subsidiary ledger is reconciled daily to the be available.
accounts receivable control account in the general ledger. D.​More emphasis on tests of controls than substantive tests is warranted.
C.​Daily sales summaries are compared to daily postings to the accounts
receivable ledger. ​ 4.​Which of the following statements is correct concerning an auditor’s
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D.​Each sales invoice is supported by a prenumbered shipping document. assessment of control risk?
A.​Assessing control risk may be performed concurrently during an audit with
​ 1.​Which of the following controls is not usually performed in the accounts
8 obtaining an understanding of the entity’s internal control.
payable department? B.​ Evidence about the operation of controls in prior audits may not be
A.​Indicating on the voucher the affected asset and expense accounts to be considered during the current year’s assessment of control risk.
debited. C.​The basis for an auditor’s conclusions about the assessed level of control
B.​Approving vouchers for payment by having an authorized employee sign risk need not be documented unless control risk is assessed at the maximum
the vouchers. level.
C.​Accounting for unused prenumbered purchase orders and receiving D.​ The lower the assessed level of control risk, the less assurance the
reports. evidence must provide that the controls are operating effectively.
D.​Matching the vendor’s invoice with the related purchase requisition,
purchase order, and receiving report. 85. ​In performing tests of the operating effectiveness of an entity’s controls,
an auditor selects from a variety of techniques, including
82. ​After gaining an understanding of internal control and assessing the risks A. ​Reperformance and observation.
of material misstatement, an auditor decided to perform tests of controls. B.​Inquiry and analytical procedures.
The auditor most likely decided that C.​Comparison and confirmation.
A.​ Additional evidence to support a further reduction in control risk is not D.​Inspection and verification.
available.
B.​ It is not possible or practicable to reduce the risks of material
misstatement at the assertion level to an acceptably low level with audit
evidence obtained only from substantive test procedures.
C.​ There were many internal control weaknesses that could allow
misstatements to enter the accounting system.
D.​ An increase in the assessed level of control risk is justified for certain
financial statement assertions.