UL Refresher Course in Accountancy

AUD: ASSESSMENT TEST 1

1. Which of the following best describes the objective of an audit of financial statements?
a. To make recommendations for improving performance.
b. To express an opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework.
c. To give assurance as to the future viability of the firm.
d. To measure the efficiency and effectiveness with which the management has conducted the affairs
of the entity.

2. Which of the following is not a responsibility of the management?

a. Preparation of financial statements in accordance with applicable financial reporting framework.
b. Design and implementation of internal control
c. Providing the auditor access to all information, records and documents relevant to the audit.
d. Providing the auditor unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
e. Expression of opinion on the financial statements.

3. The auditor should make a critical assessment, with a questioning mind, of the validity of the audit
evidence obtained. This attitude is:
a. Professional competence
b. Professional behavior
c. Professional skepticism
d. Professional ethics

4. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of
an audit.
a. reasonable assurance
b. audit risk
c. scope of an audit
d. audit procedures.

5. It is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude
that there are no material misstatements in the financial statements taken as a whole.

a. reasonable assurance
b. absolute assurance
c. persuasive evidence
d. sufficiency of evidence

6. Reasonable assurance is obtained:

a. when the auditor has reduced audit risk to an acceptably low level.
b. when the auditor expresses an unqualified opinion.
c. when the auditor and the client have no material disagreement regarding application of
accounting principles.
d. All of the above.

7. The existence of audit risk is recognized by the statement in the auditor’s standard report that the
a. auditor is responsible for expressing an opinion of the financial statements, which are the
responsibility of management
b. financial statements are presented fairly, in all materials respects, in conformity with GAAP

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c. audit includes examining on a test basis, evidence supporting the amounts and disclosure in the
financial statements
d. auditor obtains reasonable assurance about whether the financial statement are free of material
misstatements.

8. The understanding between the client and the auditor as to the degree of responsibility to be
assumed by each is normally set forth in a(n)
a. Representation letter.
b. Management letter.
c. Engagement letter.
d. Comfort letter.

9. Arrangement concerning which of the following are least likely to be included in engagement letter.

a. A predecessor auditor
b. Fees and billing
c. CPA investment in client securities
d. Other services to be provided in addition to the audit

10. When an auditor believes that an understanding with the client has not been established, he or she
should ordinarily

a. Perform the audit with increase professional skepticism.

b. Decline to accept or perform the audit.
c. Asses control risk at the maximum level and perform a primarily substantive audit,
d. Modify the scope of the audit to reflect an increase risk of material misstatement due to fraud,

11. Which one of the following is not a quality control policy and procedure in acceptance of audit
engagements?

a. Consider whether the firm and the engagement team can comply with the ethical requirements.
b. Consider the integrity of the principal owners, management, and those charged with
governance.
c. Consider the competence of the clients’ management and staff.
d. Consider the competence of the engagement team.

12. Among the possible reasons why an auditor will discontinue servicing an audit client is:

a. Too many errors have to be adjusted to make the financial statements conform with GAAP.
b. The auditor has to use a specialist in verifying inventory valuation.
c. The auditor is also rendering at the same time, a management advisory engagement for the
same client.
d. A change in the client management and the auditor is worried about the integrity of the new
management.

13. A CPA firm establishes quality control policies and procedures for deciding whether to accept a
new client or continue to perform services for a current client. The primary purpose of establishing
such policies and procedures is

a. To enable the auditor to attest to the integrity or reliability of a client

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b. The comply with the quality control standards established by regulatory bodies.
c. To minimize the likelihood of association with clients whose managements lack integrity.
d. To lessen the exposure to litigation from failure to detect irregularities in client financial statement

14. Planning the audit does not involve which of the following?
a. development of an audit program
b. a planning meeting
c. preparation of management representations
d. consideration of materiality

15. An auditor engaged to audit the financial statements of a client obtains a sufficient understanding
of the client's internal control for all of the following reasons except:
a. Understanding the entity's internal control is a requirement of PSA.
b. The auditor must use the information to assess the risk of material misstatements arising from
the lack of internal control.
c. It is the primary basis for the audit report.
d. It assists the auditor in designing the nature, timing and extent of further audit procedures.

16. Which of the following procedures would an auditor most likely include in the planning phase of
a financial statement audit?
a. Obtain an understanding of the entity’s risk assessment process.
b. Identify specific internal control activities designed to prevent fraud
c. Evaluate the reasonableness of the entity’s accounting estimates.
d. Perform cutoff test of the entity’s sales and purchases

17. For an auditor to be independent, he or she must be independent in

a. fact.
b. appearance.
c. fact and appearance.
d. either fact or appearance.

18. Audit planning begins with which of the following events?

a. issuance of a management representation letter
b. accumulation of audit evidence
c. a discussion with the audit team, the client management and its audit committee
d. a determination of the audit report to be rendered

19. An auditor is concerned with materiality for which of the following reasons?
a. to assess internal control
b. to comply with the quality assurance standards of PSA
c. to determine the effects of misstatements on the users of financial information
d. to cut down on audit procedures and testing

20. An auditor meets with the audit client in the planning stage in order to discuss all of the following
except:
a. specific audit procedures and tests to be performed by the auditor
b. the scope of audit services to be performed
c. the use of the internal auditors by the external audit firm
d. responsibilities and expectations of each party

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21. Which of the following would an auditor perform in order to develop an effective audit program?
a. develop an understanding of the client's business and industry
b. test specific financial statement accounts and balances
c. obtain a management representation letter from the client management
d. disregard related party transactions

22. Independence is required for which of the following types of services?

a. audits.
b. tax work.
c. consulting.
d. always required of the CPA.

23. 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.

24. 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.

25. During audit planning, the auditor uses analytical procedures primarily to:
a. identify weaknesses in internal control.
b. determine if the company's financial statements appear reasonable and are free of material
misstatement.
c. determine the correspondence of the company's financial statements to the valuation and
accuracy audit objectives.
d. determine the nature, extent, and timing of audit procedures.

26. Two key concepts that underlie management's design and implementation of internal control are:
a. costs and materiality.
b. absolute assurance and costs.
c. inherent limitations and reasonable assurance.
d. collusion and materiality.

27. Which of the following statements best describes why the profession of certified public accountants
has deemed it essential to promulgate a code of conduct and to establish a mechanism for
enforcing the observance of the code?
a. A distinguishing characteristic of a profession is its acceptance of responsibility to the public.
b. A prerequisite to success is the establishment of an ethical code that stresses primarily the
professional’s responsibility to clients and colleagues.
c. A requirement of most state laws calls for the profession to establish a code of conduct.

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d. An essential means of self-protection for the profession is the establishment of flexible ethical
standards by the profession.

28. The conceptual framework approach for compliance with the ethical principles requires the
professional accountant to do the following, EXCEPT:
a. identify, evaluate and address threats to compliance with the fundamental principles.
b. comply with a set of specific rules.
c. evaluate and respond to threats to compliance with the fundamental principles.
d. if identified threats are other than clearly insignificant, a professional accountant should, where
appropriate, apply safeguards to eliminate the threats or reduce them to an acceptable level.

29. Which of the AASC engagements requires independence?

Assurance Engagement Agreed – Upon
Audit Review Other than Audit & Review Procedures Compilation
a. Yes Yes Yes No No
b. Yes Yes Yes Yes No
c. Yes Yes No Yes No
d. Yes No Yes Yes No

30. Which of the following statements is correct with regard to the reliability of audit evidence?
a. The auditor's direct personal knowledge, obtained through observation and inspection, is more
persuasive than information obtained indirectly from independent outside sources.
b. To be competent, evidential matter must be either valid or relevant but need not be both.
c. Accounting data alone may be considered sufficient competent evidential matter to issue an
unqualified opinion on financial statements.
d. Competence of evidential matter refers to the amount of corroborative evidence to be obtained.

31. One of the main objectives of performing analytical review procedures to obtain evidence in the
planning phase of the audit is to identify:
a. Transactions that have not been properly authorized.
b. Illegal acts undetected as a result of poor internal controls.
c. Inefficient operations.
d. Unusual changes that may signal possible account misstatements.

32. Which of the following factors most likely would cause a CPA to decide not to accept a new audit
engagement?
a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted
audit techniques.
b. Management's disregard of its responsibility to maintain an adequate internal control
environment.
c. The CPA's inability to determine whether related party transactions were consummated on
terms equivalent to arm's-length transactions.
d. Management's refusal to permit the CPA to perform substantive tests before the year end.

33. Which of the following is the primary difference between operational auditing and financial auditing?
a. Operational auditing does not emphasize compliance with specified accounting standards (e.g.,
GAAP).
b. Operational auditing is primarily concerned with whether management is making efficient use of
resources.

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c. Operational auditing focuses on specific activities of the organization rather than the
organization as a whole.
d. Operational auditing emphasizes compliance with laws and regulations.

34. Effective internal control in a small company that has an insufficient number of employees to permit
proper division of responsibilities can be enhanced by
a. Employment of temporary personnel to aid in the separation of duties
b. Direct participation by the owner of the business in the record-keeping activities of the business
c. Engaging a CPA to perform monthly “write-up” work
d. Delegation of full, clear cut responsibility to each employee for the functions assigned to each

35. Which of the following best describes the inherent limitations that should be recognized by an
auditor when considering the potential effectiveness of a system of internal accounting control?
a. Procedures whose effectiveness depends on segregation of duties can be circumvented by
collusion
b. The competence and integrity of client personnel provides an environment conducive to
accounting control and provides assurance that effective control will be achieved
c. Procedures designed to assurance the execution and recording of transactions in accordance
with proper authorizations are effective against irregularities perpetrated by management
d. The benefits expected to be derived from effective internal accounting control usually do not
exceed the costs of such control

36. A system of internal control, regardless of how carefully designed and implemented, contains
certain inherent limitations. Which of the following errors or irregularities is not caused by an
inherent limitation?
a. The president and chief executive officer, with the assistance of the corporate controller, inflated
earnings by recording fictitious sales at year-end.
b. A newly installed electronic data processing system failed to provide for a comparison of sales
order amount with prior customer balance and credit limit. This resulted in numerous sales to
customers who had already exceeded their credit limits
c. Numerous recording errors occurred because person analyzing and recording transactions did
not have the necessary accounting background
d. A computer programmer and a computer operator conspired to divert funds from the company
to an account controlled by the dishonest employees

37. The audit committee of a company which is responsible for the appointment of the independent
audit firm should consist of:
a. Members of the board of directors who are not officers or employees.
b. Representatives of major equity interests- i.e. common and preferred shareholders.
c. Representatives from management, suppliers, and shareholders.
d. Members of the board of directors who have a financial interest in the company.

38. Which of the following characteristics most likely would heighten an auditor’s concern about the risk
of material misstatements in an entity’s financial statements?
a. The entity’s industry is experiencing declining customer demand.
b. Employees who handle cash receipts are not bonded.
c. Bank reconciliations usually include in-transit deposits.
d. Equipment is often sold at a loss before being fully depreciated.

39. Internal control cannot be designed to provide reasonable assurance that

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a. Transactions are executed in accordance with management’s authorization

b. Fraud will be eliminated
c. Access to assets is permitted only in accordance with management’s authorization
d. The recorded accountability for assets is compared wit the existing assets at reasonable intervals

40. In planning an audit, the auditor’s knowledge about the design of relevant controls should be used
to
a. Identify the types of potential misstatements that could occur.
b. Assess the operational efficiency of internal control.
c. Determine whether controls have been circumvented by collusion.
d. Document the assessed level of control risk.

41. Financial statement audits:

a. Reduce the cost of capital
b. Report on compliance with laws and regulations
c. Assesses management’s efficiency and effectiveness
d. Overlook information risk

42. Which of the following procedures would an auditor most likely perform when planning an audit?
a. Review prior-year audit documents
b. Inquire about potential litigation, claims and assessments.
c. Obtain a representation letter from management
d. Determine whether internal controls are applied as prescribed.

43. After obtaining an understanding of internal control, an auditor may assess control risk at the
maximum for some assertions because the auditor:
a. Believes internal control activities are unlikely to be effective
b. Determines that internal control is not well documented
c. Perform test of controls to restrict detection risk to an acceptable level
d. Identifies control activities that are likely to prevent material misstatements

44. Detection risk differs from both control risk and inherent risk in that detection risk
a. Exists independently of the financial statement audit.
b. Can be changed at the auditor’s discretion.
c. Arises from risk factors relating to fraud.
d. Should be assessed in nonquantitative terms.

45. Which of the following is an inherent limitation of internal controls?

a. Judgmental sampling
b. Collusion
c. Segregation of duties
d. Employee peer review

46. Professional judgment is essential to the proper conduct of an audit. PSA 200 requires that auditor
shall exercise professional judgment in planning and performing an audit of financial statements. In
particular, the auditor shall exercise professional judgment in all of the following, EXCEPT:
a. In determining materiality and audit risk.

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b. In determining the nature, timing, and extent of audit procedures to be used to meet the
requirements of the PSAs and gather audit evidence.
c. Evaluating whether sufficient appropriate audit evidence has been obtained, and whether more
needs to be done to achieve the objectives of the PSAs and thereby, the overall objectives of
the auditor.
d. In making accounting estimates that are reasonable in the circumstances, as well as to select
and apply appropriate accounting policies to be used in preparing the financial statements.

47. The concept of reasonable assurance suggests that

a. the cost of an internal control should be less than the benefit it provides
b. a well-designed system of internal controls will detect all fraudulent activity
c. the objectives achieved by an internal control system vary depending on the data processing
method
d. the effectiveness of internal controls is a function of the industry environment

48. Which of the following is not a limitation of the internal control system?
a. errors are made due to employee fatigue
b. fraud occurs because of collusion between two employees
c. the industry is inherently risky
d. management instructs the bookkeeper to make fraudulent journal entries

49. Which of the following is not an element of the internal control environment?
a. management philosophy and operating style
b. organizational structure of the firm
c. well-designed documents and records
d. the functioning of the board of directors and the audit committee

50. Which of the following suggests a weakness in the internal control environment?
a. the firm has an up-to-date organizational chart
b. monthly reports comparing actual performance to budget are distributed to managers
c. performance evaluations are prepared every three years
d. the audit committee meets quarterly with the external auditors

51. Which of the following indicates a strong internal control environment?

a. the internal audit group reports to the audit committee of the board of directors
b. there is no segregation of duties between organization functions
c. there are questions about the integrity of management
d. adverse business conditions exist in the industry

52. Which of the following descriptions best describes inherent risk?

a. Auditors fail to discover a material misstatement in the course of their audit and do not modify
their audit opinion.
b. A company's internal control fails to identify a material misstatement in a timely fashion.
c. Auditing procedures fail to find a material misstatement.
d. The possibility that a material misstatement will occur in any given account before considering
internal control.

53. Further audit procedures include

a. Risk assessment procedures.
b. Audit planning

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c. Tests of controls.
d. Diagrams of transaction cycles

54. Control risk is most likely to be assessed at a level below the maximum when?
a. No tests of controls have been performed.
b. Tests of controls have been performed.
c. Externally generated evidence supports management's contentions relating to internal control.
d. The results of the consideration of internal control suggest that controls are not operating
effectively.

55. The results of the consideration of internal control are least likely to affect the auditors' decisions
pertaining to:
a. The use of analytical procedures.
b. The assessment of control risk.
c. The assessment of inherent risk.
d. Detailed tests of ending balance.

56. The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial
statements that are materially misstated is referred to as
a. Audit risk.
b. Detection risk.
c. Information risk.
d. Business risk.

57. Which of the following best describes what is meant by auditing standards in contrast to audit
procedure?
a. Acts to be performed by the auditor
b. Measures of the quality of the auditor’s performance
c. Procedures to be used to gather evidence to support financial statements
d. Audit objective generally determined on audit engagements.

58. ________ risk reflects the possibility that the information upon which the business decision was
made was inaccurate.
a. Client acceptance
b. Information
c. Business
d. Control

59. One objective of an operational audit is to:

a. determine whether the financial statements fairly present the entity's operations.
b. determine if the auditee is in compliance with GAAP.
c. make recommendations for improving performance.
d. report on the entity's relative success in attaining profit maximization.

60. Which of the following is not appropriate policy or procedure for monitoring a CPA firm’s quality
control system?
a. Ongoing consideration and evaluation of the firm’s system of quality control including, on a
cyclical basis, inspection of at least one completed engagement for each engagement partner.

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b. Require responsibility for the monitoring process to be assigned to a partner or partners or

other persons with sufficient and appropriate experience and authority in the firm to assume
that responsibility
c. Require that those performing the engagement or the engagement quality control review are
not involved in inspecting the engagement.
d. Require that before accepting an engagement, the firm has considered the integrity of the
client, and does not have information that would lead it to conclude that the client lacks
integrity.

END OF ASSESSMENT 1.

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