CH 14 1.An auditor wants to determine that all sales adjustments are recorded.

This relates to which of the following audit objectives? A. the transaction class audit objective for occurrence B. the transaction class audit objective for accuracy C. the account balance audit objective for valuation D. the transaction class audit objective for completeness 2.If the auditor is concerned about the risk of fraud in the revenue cycle, which of the following best describes auditor concerns about eh potential for fraud related to credit sales? A. management fraud high risk; employee fraud high risk B. management fraud high risk; employee fraud low risk C. management fraud low risk; employee fraud high risk D. management fraud low risk; employee fraud low risk 3.The auditor is studying a ratio of accounts receivable growth rate to the growth rate of sales. Which of the following indicates a potential risk of collection problems in accounts receivable? A. Sales grew by 10% and receivables grew by 11% from year one to year two. B. Sales declines by 2% and receivables declined by 7% from year one to year two. C. Sales grew by 10% and receivables declined by 2% from year one to year two. D. Sales grew by 5% and receivables grew by 17% from year one to year two. 4.Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? A. Employees responsible for authorizing sales and bad-debt write offs are denied access to cash. B. Employees who review exception reports based on the computer matching of shipping information and data on sales invoices do not have the authority to write-off bad debts. C. Employees who approve credit limits included in a master customer file are separated from the sales function. D. The accounts receivable master file (accounts receivable subsidiary ledger) is reconciled with the general ledger control account by an employee independent of the authorization of credit. 5.Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? A. The computer compares sales orders with a customer's credit limit and current account balances. B. The accounts receivable master file (accounts receivable subsidiary ledger) is reconciled with the general ledger control account. C. The accounting department supervisor controls the mailing of monthly statements to customer and investigates any difference reported by customers. D. The computer prints a report of all shipments that have not been matched with a sales invoice. 6.Which of the following internal control procedures most likely would assure that no fictitious billings have been posted to the accounts receivable ledger? A. The computer compares the sum of daily sales with the total of posting (debits) to the accounts receivable master file. B. The computer compares each sales invoice with supporting shipping information. C. The accounts receivable master file (accounts receivable subsidiary ledger) is reconciled with the general ledger control account. D. Each shipment on credit is supported by prenumbered sales invoice. 7.An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of A. existence or occurrence. B. rights and obligations. C. valuation or allocation. D. completeness. 8.Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the A. accounts receivable supervisor. B. receiving clerk. C. sales management. D. sales clerk. 9.An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the A. prelist of individual checks. B. monthly bank reconciliation. C. daily deposit slip. D. remittance advices. 10.The questions below appear on an Internal Control Questionnaire. Which question, if answered NO, would have disclosed that the cashier diverted cash received over the counter from a customer to his or her own use and wrote off the receivable as a bad debt? A. Are aging schedules of accounts receivable prepared periodically and reviewed by a responsible official? B. Are journal entries approved by a responsible official? C. Are receipts given directly to the cashier by the person who opens the mail? D. Are remittance advices, letter, or envelopes that accompany receipts separated and given directly to the accounting department? 11.In updating a computerized accounts receivable file, which one of the following would be used as a batch control to verify the accuracy of posting cash remittances? A. the sum of net sales. B. the sum of cash deposits less discounts taken by customers

C. the sum of cash deposits plus discounts taken by customers D. the sum of net sales plus discounts taken by customers 12.An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using A. employee fidelity bonds. B. independently prepared mailroom prelists. C. daily check summaries. A. D.a bank lockbox system. 13.Immediately upon receipt of cash, a responsible employee should A. prepare a prelisting of cash received or a remittance listing. B. record the amount in the cash receipts journal. C. update the subsidiary accounts receivable records. D. prepare a deposit slip in triplicate. 14.An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions about A. presentation and disclosure. B. existence or occurrence. C. rights and obligations. D. valuation or allocation. 15.The negative request form of accounts receivable confirmation is useful particularly when the A. assess level of control risk for accounts receivable is high, the number of small balances is many, and the consideration by the recipient is likely B. assess level of control risk for accounts receivable is high, the number of small balances is few, and the consideration by the recipient is likely C. assess level of control risk for accounts receivable is low, the number of small balances is many, and the consideration by the recipient is likely D. assess level of control risk for accounts receivable is low, the number of small balances is many, and the consideration by the recipient is unlikely 16.Which of the following most likely would be detected by an auditor's review of a client's sales cutoff? A. unrecorded sales for the year B. lapping of year-end accounts receivable C. excessive sales discounts D. unauthorized goods returned for credit 17.Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable? A. Tracing amounts in the subsidiary ledger to details on shipping documents. B. Comparing receivable turnover ratios to industry statistics for reasonableness. C. Inquiring about receivables pledged under loan agreements. D. Assessing the allowance for uncollectable accounts for reasonableness. 18. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of A. presentation. B. completeness. C. rights. D. existence. 19.When sending positive confirmations, which of the following would NOT be an appropriate way to address non-response by a customer? A. Search for evidence of subsequent cash receipt from the customer. B. Match open invoices to underlying bills of lading and customer's orders. C. Send negative confirmations in the place of positive confirmations D. Assume that the non-response is 100% in error and project the misstatement on the population. CH 15 1.Which of the following industries would have the greatest concerns about purchases cutoff at month end, unrecorded liabilities, and accounting for advertising allowances provided by vendors? A. manufacturer of construction equipment. B. retail grocer A. C.a hotel B. D.a local school district 2.If the auditor is concerned about the risk of fraud in the expenditure cycle, which of the following best describes auditor concerns about the potential for fraud in the expenditure cycle? A. management fraud high risk; employee fraud high risk B. management fraud high risk; employee fraud low risk C. management fraud low risk; employee fraud high risk D. management fraud low risk; employee fraud low risk 3.The auditor is studying a ratio of accounts payable turn days. Which of the following indicates a potential risk of unrecorded liabilities? A. Accounts payable turn days increased from 28 days to 45 days from year one to year two. B. Accounts payable turn days increased from 28 days to 30 days from year one to year two.

C. Accounts payable turn days decreased from 28 days to 15 days from year one to year two. D. Accounts payable turn days decreased from 30 days to 25 days from year one to year two. 4.The internal document commonly used to authorize the recording and payment of a credit purchase in the purchases journal is a: A. purchase requisition. B. purchase order. C. vendor's invoice. D. voucher. 5.When goods are received, the computer would compare receiving information with information from which of the following documents and generate an exception report of any discrepancies? A. purchase order and purchase requisition information B. vendor's invoice information C. vendor's shipping document and purchase order information D. vendor's shipping document and vendor's invoice information 6.Describe the programmed control procedure that provides assurance that all the merchandise for which the client was billed was received. Assume that the computer prepares an exception report and that follow-up procedures are effective. Programmed edit checks compare: A. quantities and prices on the voucher with quantities and prices on the purchase order. B. quantities on the voucher with quantities entered in receiving. C. quantities and prices on the voucher with quantities and prices on the vendor's invoice. D. quantities times price on the voucher with the amount of cash disbursements. 7.Internal control is strengthened when the quantity of merchandise ordered is omitted from the purchasing information that can be accessed through the computer by the A. department that initiated the requisition. B. receiving department. C. purchasing agent. D. accounts payable department. 8.Which of the following programmed control procedure would be most effective in assuring that recorded purchases are accurately recorded for transactions that actually occurred? A. The computer compares the quantity ordered from purchase order information with the quantity received from the receiving department. B. Vendor invoice information is compared with purchase order information. C. Receiving reports require the signature of the individual who authorized the purchase. D. The computer matches voucher information with information supporting purchase orders, receiving reports, and vendor's invoices. 9.Which of the following programmed control procedures would be most effective in identifying unrecorded liabilities? A. An exception report identifies all purchase orders that have not been received. B. An exception report identifies all vendors' invoices that do not have a voucher. C. An exception report identifies all receivings that do not have a voucher. D. An exception report identifies all receivings that do not have a vendor's invoice. 10.An accounts payable terminal operator at a subsidiary company fabricated false invoices from a fictitious vendor, and entered them in the parent company's accounts payable / cash disbursement system. Ten checks totaling $155,000 were issued to the vendor. What internal control objective was not achieved to allow the fraudulent misstatement discussed above? A. completeness B. cutoff C. occurrence D. classification E. accuracy 11.Which of the following control procedures is not usually performed in the vouchers payable department? A. determining the mathematical accuracy of the vendor's invoice B. having an authorized person approve the voucher C. controlling the mailing of the check and remittance advice D. matching the receiving report with the purchase order 12.Which of the following programmed control procedures would be most effective in preventing duplicate payments? A. No checks can be made payable to cash or bearer. B. Prenumbered checks are used and the computer prints an exception report of any breaks in sequence. C. After cash disbursement information is compared with uncanceled voucher information the voucher is electronically canceled. D. Run-to-run totals compare the beginning balance of the accounts payable file, less cash disbursements, with the ending accounts payable file. 13.Which of the following auditing procedures is best for identifying unrecorded trade accounts payable? A. examining unusual relationships between monthly accounts payable balances and recorded cash payments B. reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date C. investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports D. reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period 14.Which of the following best describes the auditor's responsibility to confirming accounts payable? A. Confirmation of accounts payable is required by generally accepted auditing standards.

B. Confirmation of accounts payable is a matter of professional judgment and would normally be performed when detection risk is low. C. Confirmation of accounts payable is a matter of professional judgment and would normally be performed when detection risk is high. D. Confirmation of accounts payable is a matter of professional judgment and would normally be performed when control risk is low. 15.An auditor decided to confirm accounts payable to accomplish a low level of detection risk for the completeness assertion. Which of the following is the most reasonable sampling plan? A. Confirm accounts payable with an emphasis on all vendors including zero and small balances. B. Confirm accounts payable with an emphasis on the largest account payables. C. Confirm accounts payable using probability-proportionate-to-size sampling. D. Confirm accounts payable with an emphasis on new vendors, irrespective of the size of the account balance. 16.Which of the following procedures is least likely to be performed before the balance sheet date? A. testing of internal control over cash B. confirmation of receivables C. search for unrecorded liabilities D. observation of inventory CH 16 1.For which of the following companies would the auditor have the LEAST concern about the existence of inventory? A. manufacturer of construction equipment A. B.a retail grocer B. C.a computer manufacturer C. D.a hotel 2.Which of the following would NOT be a signal that an audit client might have a possible problem with phantom inventory (the existence assertion)? A. inventory increasing faster than sales B. decreasing inventory turnover C. cost of goods sold on the books not agreeing with tax returns D. shipping cost increasing as a percentage of inventory 3.Which of the following is NOT an important document that supports the recording of inventory in the production process? A. daily production reports B. material move tickets C. time tickets D. material issue slips 4.Which of the following is an important control over the valuation of inventory? A. The computer accounts for prenumbered materials issues slips and reconciles slips with recording in daily production reports. B. The computer accounts for hours worked and hours charged to daily production reports. C. Signed inventory move tickets are used to control movement of goods through production department, with tickets reconciled to daily production reports and completed production reports. D. Production planning and control approves all production orders. 5.Which one of the following controls will be most likely to discover that production costs are not recorded? A. The computer generates a report of all material issue slips, time tickets, and inventory move tickets that are not included in the daily production reports. B. The company has designed independent checks on the agreement of entries for the allocation of manufacturing costs to work in process with data on materials and labor usage in daily production activity reports. C. The company has designed independent checks on the agreement of entries for the transfer of work in process to finished goods with data in completed production reports. D. Management approves all overhead rates and standard costs 6.A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is low, an auditor would probably A. insist that the client perform physical counts of inventory items several times during the year. B. apply gross profit tests to ascertain the reasonableness of the physical counts. C. increase the extent of tests of controls of the inventory cycle. D. request the client to schedule the physical inventory count at the end of the year. 7.The primary objective of a CPA's observation of a client's physical inventory count is to A. discover whether a client has counted a particular inventory item or group of items. B. obtain direct knowledge that the inventory exists and has been properly counted. C. provide an appraisal of the quality of the merchandise on hand on the day of the physical count. D. allow the auditor to supervise the conduct of the count to obtain assurance that inventory quantities are reasonably accurate. 8.Which one of the following procedures would NOT be appropriate for an auditor in discharging his or her responsibilities concerning the client's physical inventories? A. confirmation of goods in the hands of public warehouses B. supervising the taking of the annual physical inventory C. carrying out physical inventory procedures at an interim date D. obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory 9.Assume that the auditor has observed the physical inventory and concluded that all inventory quantities are valid. Which of the following procedure represents the best test of the valuation of inventory at FIFO? A. The auditor randomly selects vendor's invoices for tracing prices from vendor's invoices at the beginning of the year to prices on the extended inventory listing.

The auditor focuses primarily on prices that have changed by more than 10% since the last year end, and on the pricing of all new products in inventory, and vouches prices on the extended inventory listing back to vendor's invoices near year-end. C. The auditor randomly selects items from the inventory list for vouching prices on an extended inventory listing back to prior year's working papers. D. The auditor randomly selects vendor's invoices for tracing prices from vendor's invoices near the end of the year to prices on the extended inventory listing. 10.If a client has a strong perpetual inventory system, the auditor is likely to plan: A. inventory observations at an interim date. B. inventory price testing at year-end. C. inventory tests of the lower of cost or market at an interim date. D. direct confirmations of inventory pledged as collateral for loans. 11.In the audit of inventory, selecting inventory items from a perpetual master file, going to the location, and obtaining test counts is intended to produce evidence for which audit objective? A. the transaction objectives that all transactions occurred B. the balance objective that inventory exists C. the balance objective that all inventory is recorded D. the balance objective that the client has rights to the inventory 12.Which of the following would represent the best evidence for testing the net realizable value of inventory? A. Investigate sale prices on sales of inventory made after year-end. B. Vouch inventory prices to vendor invoices at an interim date. C. Vouch inventory prices to the perpetual inventory. D. Investigate all prices that have decreased by more than 5% during the year. 13.Which of the following is NOT a significant concern about fraud in the payroll cycle? A. Employees involved in preparing and paying the payroll may process data for fictitious employees and then divert the paychecks to their own use. B. When there is frequent turnover of personnel in a company, there is the risk that a terminated employee is continued on the payroll. C. Management may overstate payroll costs as part of earning management. D. Management may overtly misclassify or pad labor cost in government contract work to defraud the agency. 14.A client just read about a business paying employees extraordinary sums of money to a variety of employees. Explain how the client company would use programmed controls to prevent this type of valuation problem. A. Test a check digit embedded in the employee number. B. Perform a limit test related to the class of employee. C. Check the employee number against the master payroll file. D. Compare the total number of payroll disbursements with a predetermined batch total. 15.If a programmed control over valuation of individual payroll items is going to be effective, which of the following controls must also be effective? A. controls over the completeness of payroll time cards B. controls over access to payroll reports C. controls over the processing of payroll taxes D. controls over access to the employee master file 16.In a computerized payroll system environment, an auditor would be most effective at finding weaknesses in internal controls over the occurrence of payroll transactions by submitting test data: A. incorrect hash totals. B. with total payroll that exceeds a predetermined limit. C. with an account number that does not match account numbers on job tickets. D. incorrect employee numbers that do not contain appropriate check digits. 17.The lower assessed level of control risk approach may be used by the external auditor in the personnel services cycle because, among other factors: A. the chance of employee fraud is remote. B. outside governmental auditors spend considerable time investigating the payroll area in most companies. C. audit risk in the area relates primarily to the hiring of competent personnel. D. payroll transactions are generally routine and processed in a high volume. 18.Which of the following audit objectives is LEAST LIKELY to be accomplished by vouching payroll transactions to supporting documentation (e.g., time cards and employee contracts)? A. the occurrence of payroll transactions B. the completeness of payroll transactions C. the accuracy of payroll transactions D. proper cutoff related to payroll transactions CH 17 1.From year one to year two the ratio of sales to fixed assets declined significantly. This is possibly an indication that: A. the client is over depreciating fixed assets. B. the client is capitalizing costs that should be expensed. C. the client has used debt to finance acquisitions of fixed assets. D. the client has treated operating leases as capital leases. 2.Internal controls that are most relevant to the acquisition of fixed assets are internal controls over:

B.

A. cash disbursements. B. purchase returns. C. purchases on account. D. cash receipts. 3.When auditing an account such as fixed assets or timber and timberlands, the auditor will normally: A. place the greatest emphasis on tests of transactions during the year. B. place the greatest emphasis on tests of balances at year-end. C. gain assurance that beginning balance agree to prior audited balances. D. both place the greatest emphasis on tests of transactions during the year and gain assurance that beginning balance agree to prior audited balances. 4.An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all A. noncapitalizable expenditures have been recorded. B. expenditures for property and equipment have not been charged to expense. C. noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. D. expenditures for property and equipment have been recorded in the proper period. 5.If an auditor performs analytical procedures on rent expense and finds that rent expense has increased 50%, he or she is most likely to perform which of the additional procedures? A. Test rent cutoff to ascertain if all rent has been recorded. B. Vouch larger items in rent expense in a search for unrecorded capital leases. C. Vouch rent payments to underlying documents to ascertain that all vouchers have receiving reports. D. Perform tests of controls to ensure that all rent transactions are authorized. 6.If an auditor vouches the gains and losses on the disposal of fixed assets and finds that the client regularly has significant gains on the disposal of plant and equipment, the auditor has raised a concern about the potential for misstatement in which of the following assertions? A. the existence of fixed assets B. the completeness of fixed assets C. the under depreciation of fixed assets D. the proper classification of fixed assets 7.An auditor's program to examine long-term debt most likely would include steps that require A. comparing the carrying amount of the debt to its year-end market value. B. correlating interest expense recorded for the period with outstanding debt. C. verifying the existence of the holders of the debt by direct confirmation. D. inspecting the accounts payable subsidiary ledger for unrecorded long-term debt. 8.Which of the following is NOT an important question to answer in the investing and financing cycles? Some auditors will have the same person audit both fixed assets and long-term debt because: A. What assets are necessary to support the operations of the entity, and what are management's long-range plans for growing the entity's asset base? B. What assets were acquired, or disposed of, during the period? C. How were newly acquired assets financed? D. How strong are internal controls over shareholder's equity? 9.If a company is able to generate a significantly greater return on assets than its incremental after-tax cost of debt it is likely that the company will: A. finance growth with operating cash flows. B. finance growth with debt. C. finance growth with a new issue of equity. D. it is unclear how an entity will finance it growth. 10.An auditor's program to examine long-term debt should include steps that require A. examining bond trust indentures every year. B. inspecting the accounts payable subsidiary ledger. C. investigating credits to the bond interest income account. D. confirming long-term debt with lenders and bond trustees. 11.An auditor should compare corporate stock issuances and treasury stock transactions with the A. numbered stock certificates. B. articles of incorporation. C. transfer agent's records. D. minutes of the board of directors. 12.When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning A. restrictions on the payment of dividends. B. the number of shares issued and outstanding. C. guarantees of preferred stock liquidation value. D. the number of shares subject to agreements to repurchase. 13.A common audit strategy for auditing the completeness of long-term debt involves: A. testing internal controls over the occurrence of long-term debt transactions. B. sending confirmations to the largest lenders. C. reading board of director minutes. D. sending confirmation of borrowing arrangements, including entities that have lent funds in the past but currently have zero balances.

14.The material misstatements at WorldCom involved: A. the use of special purpose entities that kept liabilities off of the balance sheet. B. the capitalization of rented phone lines that should have been expensed. C. the use of special purpose entities that kept both assets and liabilities off of the balance sheet. D. treating capital leases as operating leases. CH 18 1.Parmalat Finanziaria overstated cash by almost $3 Billion Euros. The auditors uncovered this fraud when they performed which of the following procedures? A. analytical procedures comparing interest income with invested principle balances B. vouching a sample of cash receipt transactions C. vouching a sample of cash disbursement transactions D. sending a bank confirmation 2.A higher than expect rate of return on trading securities might indicate a possible misstatement due to: A. an existence problem with trading securities. B. crediting interest earnings to interest expense. C. recording the unrealized gain from an increase in the fair value of trading securities in the income account for trading securities. D. amortization of the excess of the investor's cost over the underlying book value of the investment. 3.The primary document that supports the recording of a securities transaction is usually the: A. broker's advice. B. bond indenture. C. broker's statement. D. stock certificate. 4.Strong internal controls over the existence of securities transactions would compare recorded information about a securities transaction with A. the income from the securities on the broker's statement. B. the board of directors' minutes. C. the stock certificate. D. the broker's advice. 5.An auditor would most likely verify the interest earned on bond investments by A. vouching the receipt and deposit of interest checks. B. confirming the bond interest rate with the issuer of the bonds. C. recomputing the interest earned on the basis of face amount, interest rate, and period held. D. testing the internal controls over cash receipts. 6.To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or A. relies on the client's internal controls if the auditor has reasonable assurance that the control procedures are being applied as prescribed. B. confirms the number of shares owned that are held by an independent custodian. C. determines the market price per share at the balance sheet date from published quotations. D. confirms the number of shares owned with the issuing company. 7.Which of the following would NOT indicate an other-than-temporary impairment of a security exists? A. Fair value is significantly below cost. B. The decline in value is attributable to specific adverse conditions affecting a particular investment. A. C.A debt security has been upgraded by a rating agency. C. Dividends have been reduced or eliminated on a security. 8.If the auditor is concerned about the risk of fraud related to cash balances, which of the following best describes auditor concerns about the potential for fraud for cash balances? A. management fraud high risk; employee fraud high risk B. management fraud high risk; employee fraud low risk C. management fraud low risk; employee fraud high risk D. management fraud low risk; employee fraud low risk 9.The auditor should trace bank transfers using a bank transfer schedule primarily to determine if: A. cash has been understated due to kiting. B. cash has been overstated due to kiting. C. cash has been understated due to lapping. D. cash has been overstated due to lapping. 10.Which of the following cash transfers results in a misstatement of cash at December 31, 19X7? A. disbursement recorded in the books 12/31/X7; paid by the bank, 1/5/X8, cash receipt recorded in the book 12/31/X7, received by the bank 12/4/X7 B. disbursement recorded in the books 12/31/X7; paid by the bank, 1/4/X8, cash receipt recorded in the book 12/31/X7, received by the bank 12/31/X7 C. disbursement recorded in the books 1/4/X8; paid by the bank, 1/4/X8, cash receipt recorded in the book 12/31/X7, received by the bank 12/31/X7 D. disbursement recorded in the books 1/3/X8; paid by the bank, 1/5/X8, cash receipt recorded in the book 1/4/X8, received by the bank 1/4/X8 11.Which of the following would usually NOT be performed as part of the auditor's count of the client's cash?

A. Obtain a signed receipt from the custodian on return of the funds to the bank. B. Control all cash and negotiable instruments held by the client until all funds have been counted. C. Insist that the custodian of the cash be present throughout the count. D. Ascertain that all undeposited checks are payable to the order of the client, either directly or through endorsement. 12.Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A. review composition of authenticated deposit slips B. review subsequent bank statements and canceled checks received directly from the banks C. prepare a schedule of bank transfers from the client's books D. prepare year-end bank reconciliations 13.An auditor confirms a representative number of open accounts receivable as of December 31, 19X2, and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following? A. One of the cashiers has been covering a personal embezzlement by lapping. B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. C. One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file. D. The credit manager has misappropriated remittances from customers whose accounts have been written off. 14.When detection risk is low the auditor is likely to: A. prepare the bank reconciliation using bank data in the client's possession or audit the bank reconciliation using a bank cutoff statement obtained from the bank. B. scan bank reconciliations and test items on bank reconciliations on a sample basis. C. test the client's internal controls over the preparation of bank reconciliations. D. confirm bank balances with the FDIC. 15.Which of the following would be the best protection for a company that wishes to prevent the lapping of trade accounts receivable? A. Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B. Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C. Have customers send payments directly to the company's depository bank through a lockbox. D. Request that customers' payment checks be made payable to the company and addressed to the treasurer. CH 19 1.Which of the following procedures would an auditor ordinarily perform during the review of subsequent events? A.Review the cutoff bank statements for the period after the year-end. B.Read minutes of meetings of directors, stockholders', and other appropriate committees. C.Investigate reportable conditions previously communicated to the client. D.Analyze related party transactions to discover possible irregularities. 2.An auditor is concerned with completing various phases of the examination after the balance sheet date. This subsequent period extends to the date of the A.auditor's report. B.final review of the audit working papers. C.public issuance of the financial statements. D.delivery of the auditor's report to the client. 3.A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor's fieldwork. The auditor should A.advise management to adjust the balance sheet to reflect the acquisition. B.issue pro-forma financial statements giving effect to the acquisition as if it had occurred at year-end. C.advise management to disclose the acquisition in the notes to the financial statements. D.disclose the acquisition in the opinion paragraph of the auditor's report. 4.If an attorney's refuses to respond to an auditor as a result of a client's letter of audit inquiry, the auditor should: A.send a letter to another attorney. B.issue a qualified or disclaimer of opinion. C.issue a qualified or an adverse opinion. D.ask for a representation letter from the client. 5.Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The letter should address all of the following EXCEPT: A.the existence of a condition, situation, or set of circumstances indicating an uncertainty as to the possible loss to an entity arising from litigation, claims, and assessments. B.the period covered by the lawyers response. C.the degree of probability of an unfavorable outcome. D.the amount or range of potential loss. 6.Which of the following statements ordinarily is included among the written client representations obtained by the auditor? A.Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. B.Management acknowledges responsibility for the financial statements. C.Management acknowledges responsibility for illegal actions committed by employees. D.Management acknowledges that there are no material weaknesses in internal control. 7.The purpose of making performing analytical procedures as an overall or final review of the financial statements is to: A.perform final risk assessment procedures. B.evaluate the completeness of the representation letter. C.assist the auditor in assessing conclusion reached in the audit.

D.identify material subsequent events. 8.The auditor's determination of misstatements in an account balance should include: A.uncorrected misstatements specifically identified through substantive tests of details of transactions and balances (referred to as known misstatements). B.projected uncorrected misstatements estimated through audit sampling techniques. C.estimated misstatements detected through analytical procedures and quantified by other auditing procedures. D.all of the above. 9.The partner's review of the working papers is designed to obtain assurance about all of the following EXCEPT: A.the work done by subordinates complies with generally accepted accounting principles. B.the judgments exercised by subordinates were reasonable and appropriate in the circumstances. C.the audit engagement has been completed in accordance with the conditions and terms specified in the engagement letter. D.all significant accounting, auditing, and reporting questions raised during the audit have been properly resolved. 10.An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was A.limited to the specific event referenced. B.limited to include only events occurring before the date of the last subsequent event referenced. C.extended to subsequent events occurring through the date of issuance of the report. D.extended to include all events occurring since the completion of fieldwork. 11.Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first A.request the permission of the client to undertake the confirmation of accounts receivable. B.perform alternative procedures to provide a satisfactory basis for the unqualified opinion. C.assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion. D.inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion. 12.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next A.determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. B.notify the board of directors that the auditor's report must no longer be associated with the financial statements. C.request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. D.issue revised pro-forma financial statements taking into consideration the newly discovered information. CH 20 1.Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative auditing procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(an) A.except for qualified opinion. B.disclaimer of opinion. C.unqualified opinion with a separate explanatory paragraph. D.unqualified opinion with an explanation in the scope paragraph. 2.When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph A.preceding the opinion paragraph and referred to only in the scope paragraph of the auditor's report. B.following the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report. C.following the opinion paragraph and referred to only in the scope paragraph of the auditor's report. D.preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report. 3.An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that A.justifies the reasons for departing from generally accepted accounting principles. B.states whether the financial statements are fairly presented in conformity with another comprehensive basis of accounting. C.refers to the note to the financial statements that describes the basis of accounting. D.explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles. 4.An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following except A.an opinion as to whether the basis of accounting used is appropriate under the circumstances. B.an opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting. C.reference to the note to the financial statements that describes the basis of presentation. D.a statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles. 5.When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that A.emphasizes that the financial statements are not intended to have been examined in accordance with generally accepted auditing standards. B.refers to the authoritative pronouncements that explain the income tax basis of accounting being used. C.states that the income tax basis of accounting is a comprehensive basis of accounting other than generally accepted accounting principles. D.justifies the use of the income tax basis of accounting. 6.client asks the auditor to issue an opinion on Royalties payable as of December 31, 20X8. An auditor: A.should decline the engagement.

B.can accept this engagement and issue an unqualified opinion if the evidence supports the opinion. C.can accept this engagement and should qualify the opinion because it is intended only for specific parties. D.should accept the engagement only if the basis of accounting is GAAP. 7.Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards? A.The attestation standards provide a framework for the attest function beyond historical financial statements. B.The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards. C.The attestation standards, like generally accepted auditing standards, require a study and evaluation of internal control. D.None of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards. 8.An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that A.the prospective financial statements are also examined. B.responsibility for the adequacy of the procedures performed is taken by the accountant. C.negative assurance is expressed on the prospective financial statements taken as a whole. D.distribution of the report is restricted to the specified users. 9.The primary purpose of a SysTrust engagement is to provide assurance about A.an entity's business and information privacy practices. B.the security of a system used for electronic commerce. C.system availability, security, integrity, and maintainability. D.system security, transaction integrity, and information privacy. 10.WebTrust and SysTrust are engagements that are primarily performed under A.AU 623 on Special Reports. B.AT 201 on Agreed-Upon Procedure Engagements. C.AT 601 on Compliance Attestations. D.AT 101 on Attestation Standards. 11.Which of the following is NOT applicable to an agreed-upon procedures engagement? A.The practitioner's report is agreed upon between the practitioner and the specified parties. B.The practitioner is independent. C.The practitioner and the specified parties agree upon the procedures performed or to be performed by the practitioner. D.Criteria to be used in the determination of findings are agreed upon between the practitioner and the specified parties. 12.Which of the following is NOT an appropriate level of assurance related to a forecast or projection? A.examination B.review C.agreed-upon procedures D.compilation 13.Which of the following procedures is most likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement? A.gaining an understanding of the entity's business and its operating characteristics B.making a preliminary assessment of control risk C.obtaining a representation letter from the board of directors D.assisting the entity in adjusting the accounting records 14.Compiled financial statements should be accompanied by a report stating that A.a compilation is substantially smaller in scope than a review or an audit in accordance with generally accepted auditing standards. B.the accountant does not express an opinion but expresses only limited assurance on the compiled financial statements. C.a compilation is limited to presenting in the form of financial statements information that is the representation of management. D.the accountant has compiled the financial statements in accordance with standards established by the Auditing Standards Board. 15.When compiling the financial statements of a nonpublic entity, an accountant should A.review agreements with financial institutions for restrictions on cash balances. B.understand the accounting principles and practices of the entity's industry. C.inquire of key personnel concerning related parties and subsequent events. D.perform ratio analyses of the financial data of comparable prior periods. 16.The objective of assurance services is A.better management. B.better decision making. C.better outcomes. D.reliable information. 17.Which of the following would NOT be included as a service performed in CPA Risk Advisory engagement? A.reporting on the probability of occurrence of a potential business risk B.independent assessment of risk identified by an entity C.evaluation of an entity's systems for identifying and limiting risks D.identification and assessment of primary potential risks faced by an entity 18.Which of the following would be a direct service associated with an ElderCare engagement? A.evaluation of health care financing options for Medicare and Medicaid B.planning for housing and care alternatives C.helping family monitor the quality of care provided to an elderly family member D.protecting the elderly by controlling the checkbook and other assets

CH 21 1.Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. To that end, independent and objective means: A.not having an investment in the company. B.not reporting to management. C.being free of bias. D.reporting to the external auditors. 2.Which of the following best describes the IIA professional practices framework? A.It includes a code of ethics, attributes standards, performance standards, and implementations standards. B.It includes general standards, fieldwork standards, and reporting standards. C.It includes a code of ethics, general standards, fieldwork standards, and reporting standards. D.It includes a code of ethics, attribute standards, and fieldwork standards. 3.The IIA attribute standards: A.address the characteristics of organizations and individuals performing internal audit services. B.describe the nature of internal audit services and provide quality criteria against which services can be measured. C.provide an ethical framework for internal auditors. D.apply standards to particular types of audits (e.g., a fraud investigation). 4.Which of the following is NOT an IIA performance standard? A.engagement planning B.management's acceptance of risk C.purpose, authority, and responsibility D.monitoring progress 5.Which of the following is NOT an IIA ethical principle? A.independence B.integrity C.objectivity D.confidentiality 6.Auditing to determine whether an entity is managing and utilizing its resources economically and efficiently would most appropriately be classified as: A.compliance auditing. B.financial auditing. C.operational auditing. D.program results auditing. 7.A typical objective of an operational audit is to determine whether an entity's A.internal control is adequately operating as designed. B.operational information is in accordance with generally accepted governmental auditing standards. C.financial statements present fairly the results of operations. D.specific operating units are functioning efficiently and effectively. 8.Which of the following best describes the steps of an operational audit? A.(1) Accept client, (2) plan audit, (3) perform audit, and (4) report findings. B.(1) Perform risk assessment procedures, (2) assess the risk of material misstatement, (3) respond to assessed risks, (4) perform further audit procedures, (5) evaluate audit evidence, and (6) communicate audit findings. C.(1) Select auditee, (2) plan audit, (3) perform audit, (4) report findings, and (5) perform follow-up. D.(1) Plan audit, (2) perform audit, (3) report findings, and (4) perform follow-up. 9.Determining whether appropriate actions have been taken as a result of an operational audit is considered: A.reporting findings. B.performing follow-up. C.planning the next audit. D.confirming the auditor's understanding of potential problems. 10.Which of the following bodies promulgates generally accepted governmental auditing standards (GAGAS)? A.Governmental Accounting Standards Board B.Financial Accounting Standards Board C.General Accounting Office D.Governmental Auditing Standards Board 11.Which of the following best describes the types of governmental audits? A.financial audits and attestation engagements B.financial audit and performance audits C.attestation engagements and performance audits D.financial audits, attestation engagements, and performance audits 12.GAGAS is classified into which of the following categories? A.(1) general standards, (2) fieldwork standards, (3) reporting standards, and (4) standards for attestation engagements B.(1) general standards; (2) field work standards for financial audits; (3) reporting standards for financial audits; (4) general, field work and reporting standards for attestation engagements; (5) field work standards for performance audits, and (6) reporting standards for performance audits

C.(1) general standards; (2) field work standards for financial audits; (3) reporting standards for financial audits; (4) field work standards for performance audits, and (5) reporting standards for performance audits D.(1) general standards; (2) field work standards for financial audits; (3) reporting standards for financial audits; (4) general, field work and reporting standards for attestation engagements; and (5) general, field work and reporting standards for performance audits 13.Which of the following best describe the general standards of GAGAS? A.adequate training and proficiency, independence, and due professional care B.independence, professional judgment, and competence C.independence, professional judgment, competence, and quality control and assurance D.adequate training and proficiency, independence, due professional care, and quality control and assurance 14.Which one of the following is NOT part of reporting standards for financial audits under GAGAS? A.reporting auditors' compliance with GAGAS B.reporting views of responsible officials C.reporting privileged and confidential information D.reporting compliance with internal controls 15.As part of the Single Audit Act an audit of the financial statements: A.shall determine whether the financial statements of the auditee and are presented fairly in all material respects in conformity with generally accepted accounting principles, and that a schedule of expenditures of federal awards is presented fairly in all material respects in relation to the auditee's financial statements taken as a whole. B.shall determine whether the financial statements of the auditee and are presented fairly in all material respects in conformity with generally accepted accounting principles, and compile a schedule of expenditures of federal awards. C.shall provide review level assurance on the financial statements of the auditee, and compile a schedule of expenditures of federal awards. D.shall determine whether the financial statements of the auditee and are presented fairly in all material respects in conformity with generally accepted accounting principles, and perform agreed-upon procedures on a schedule of expenditures of federal awards.