Auditing Theory Test Bank

1. Broadly defined, the subject matter of any audit consists of

a) Financial statements
b) Economic data
c) Assertions
d) Operating data

c) Assertions

2. The third standard of field work states that sufficient competent evidential matter may in part be
obtained through the following methods except
a) Inspection
b) Observation
c) Confirmation
d) Reconciliation

d) Reconciliation

3. If an auditor believes that material error or fraud exist, the auditor should
a) Consider the implications and discuss the matter with appropriate levels of management
b) Make the investigation necessary to determine whether errors or fraud have in fact occurred
c) Request that management investigate whether errors or fraud have in fact occurred
d) Consider whether errors or fraud where the result of employee's failure to comply with specific
controls

a) Consider the implications and discuss the matter with appropriate levels of management

4. Which of the following is not normally performed in the pre-planning or pre-engagement

phase?
a) Deciding whether to accept or reject an audit engagement
b) Inquiring from predecessor auditor
c) Preparing an engagement letter
d) Making a preliminary estimate of materiality

d) Making a preliminary estimate of materiality

5. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would

a) Decrease substantive testing

b) Increase inherent risk
c) Decrease detection risk
d) Increase materiality levels

c) Decrease detection risk

6. An effective internal control

a) Cannot be circumvented by management
b) Can reduce the cost of an external audit
c) Can prevent collusion among employees
d) Eliminates risks and potential loss to the organization

b) Can reduce the cost of an external audit

7. In auditing through a computer, the test data method is used by auditors to test the
a) Accuracy of input data
b) Validity of the output
c) Procedures contained within the program
d) Normalcy of distribution of test data

c) Procedures contained within the program

8. An auditor's working papers will generally be least likely to include documentation showing
how the
a) Client's schedules were prepared
b) Engagement had been planned
c) Client's system of internal control had been reviewed and evaluated
d) Unusual matters were resolved

a) Client's schedules were prepared

9. Which of the following sampling methods would be most appropriate in performing tests of
controls over authorization of cash disbursements
a) Attributes
b) Variables
c) Ratio
d) Stratified
a) Attributes

10. Analytical procedures used in the overall review stage of an audit generally include
a) Considering unusual or unexpected account balances that were not previously identified
b) Performing test of transactions to corroborate management's financial statement assertions
c) Gathering evidence concerning account balances that have not changed from the prior year
d) Re-testing control procedures that appeared to be ineffective during the assessment of control
risk

a) Considering unusual or unexpected account balances that were not previously identified

11. Results of the financial statement audit are communicated to users through
a) Financial statement
b) Written management assertion
c) Audit report
d) None of the above

c) Audit report

12. What is the primary difference between financial reporting risk and audit risk?
a) The application of accounting principles
b) Responsibilities of the respective parties involved
c) Demands of users of financial statements
d) Risks of being sued by third parties

b) Responsibilities of the respective parties involved

13. Relationship between control risk and detection risk is ordinarily

a) Parallel
b) Inverse
c) Direct
d) Equal

b) Inverse

14. A representation letter issued by a client

a) Is essential for the preparation of the audit program
b) Is a substitute for testing
c) Does not reduce the auditor's responsibility
d) Reduces the auditor's responsibility only to the extent that it is relied upon
c) Does not reduce the auditor's responsibility

15. The recruitment of senior management for an assurance client, such as those in a position to
affect the subject of the assurance engagement may least likely create
a) Self-interest threat
b) Advocacy threat
c) Intimidation threat
d) Familiarity threat

b) Advocacy threat

16. In reviewing the audit work performed, the engagement partner

a) Must review all audit documentation
b) Need not review all audit documentation, but may do so
c) Need not review all audit documentation
d) Must ask the staff performing the audit work to sign the audit report

b) Need not review all audit documentation, but may do so

17. The independent auditor lends credibility to clients financial statements by

a) Maintaining a clear-cut distinction between managements representations and the auditors
representation
b) Testifying under oath about clients financial statements
c) Stating in the auditors management letter that the examination was made in accordance with
generally accepted auditing standards
d) Attaching an auditors opinion to the clients financial statements

d) Attaching an auditors opinion to the clients financial statements

18. The most difficult type of misstatement to detect is fraud based on

a) The over-recording of transactions
b) The non-recording of transactions
c) Recorded transactions in subsidiaries
d) Related party receivables

b) The non-recording of transactions

19. Assuming a recurring audit, in which of the following situations would the auditor be unlikely
to send a new engagement letter to the client?
a) A recent change in partner and/or staff involved in the audit engagement
b) A change in the terms of engagement
c) A recent change of client management
d) A significant change in the nature or size of the client's business

a) A recent change in partner and/or staff involved in the audit engagement

20. When an auditor expresses an adverse opinion he/sheshould disclose the substantive reasons
for such anopinion in an explanatory paragraph
a) Within the notes to the financial statements
b) Preceding the opinion paragraph
c) Following the opinion paragraph
d) Preceding the introductory paragraph

b) Preceding the opinion paragraph

21. Tolerable error means

a) An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population
b) An error that the auditor expects to be present in the population
c) The maximum error in a population that the auditor is willing to accept
d) The possibility that the auditor's conclusion, based on a sample may be different from the
conclusion reached if the entire population were subjected to the same audit procedure

c) The maximum error in a population that the auditor is willing to accept

22. Examples of events or conditions, which individually or collectively, may cast significant
doubt about the going concern assumption include the following except
a) Net liability or net current liability position
b) Change from credit to cash-on-delivery transactions with suppliers
c) Labor difficulties or shortages of important supplies
d) Compliance with capital or other statutory requirements

d) Compliance with capital or other statutory requirements

23. Which of the following procedures is not included in a review engagement on a nonpublic
entity
a) Inquiries of management
b) Inquiries regarding events subsequent to the balance sheet date
c) Any procedures designed to identify relationships among data that appear to be unusual
d) A study and evaluation of internal control structure
d) A study and evaluation of internal control structure

24. In planning the audit engagement, the auditor should consider each of the following except
a) The kind of opinion that will likely be given
b) Matters relating to the entitys business and the industry in which it operates
c) The entitys accounting policies and procedures
d) Anticipated levels of control risk and materiality

a) The kind of opinion that will likely be given

25. What assurance is provided by the practitioner in an agreed-upon procedures engagement?

a) Reasonable
b) Absolute
c) Moderate
d) No assurance

d) No assurance

26. To test for unsupported entries in the journal, the direction of audit testing should be from the
a) Journal entries
b) Ledger entries
c) Original source documents
d) Externally generated documents

a) Journal entries

27. For good internal control, the purchasing department should not be responsible for
a) Authorizing the acquisition of goods
b) Finding the lowest cost vendor
c) Reviewing the vendors catalog descriptions and prices for standardized items
d) Designing the purchase order form

a) Authorizing the acquisition of goods

28. Involves tracing a few transactions through the accounting system

a) Test of controls
b) Walk-through test
c) Analytical procedures
d) Substantive procedures
b) Walk-through test

29. This exists, when other information, not related to matters appearing in the financial
statements, is incorrectly stated or presented
a) Material inconsistency
b) Material misstatement
c) Material misstatement of fact
d) Material error affecting the other information

c) Material misstatement of fact

30. Who appoints the members of the Board of Accountancy

a) The chairman of BOA
b) The president of the Philippines
c) The chairman of the PRC
d) The president of PICPA

b) The president of the Philippines

31. An auditor is required to obtain an understanding of the entity's business, including business
cycles and reasons for business fluctuations. What is the audit purpose most directly served by
obtaining this understanding?
a) To enable the auditor to accurately identify significant deficiencies in internal control
b) To assist the auditor in accurately interpreting information obtained during an audit
c) To allow the auditor to more accurately perform tests of controls
d) To decide whether it will be necessary to perform analytical procedures

b) To assist the auditor in accurately interpreting information obtained during an audit

32. Which of the following is not true about the report release date?
a) It is defined as the date after which existing documentation must not be deleted, and additions
to the documentation file must be documented as such
b) It is often the date on which the report is delivered to the client
c) It is the date on which the auditor grants the client permission to use the report
d) It is used to define the beginning of the retention period

a) It is defined as the date after which existing documentation must not be deleted, and additions
to the documentation file must be documented as such

33. An auditor should not issue a report on

a) Quarterly financial information
b) Internal control
c) Management performance
d) The achievability of forecasts

d) The achievability of forecasts

34. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
a) Confirming a sample of material accounts receivable established after year-end
b) Comparing the financial statements being reported on with those of the prior period
c) Investigating personnel changes in the accounting department occurring after year-end
d) Inquiring as to whether any unusual adjustments were made after year-end

d) Inquiring as to whether any unusual adjustments were made after year-end

35. To which of the following matters would materiality limits not apply when obtaining written
client representations?
a) Violations of state labor regulations
b) Disclosure of line-of-credit arrangements
c) Information about related party transactions
d) Instances of fraud involving management

d) Instances of fraud involving management

36. Who ultimately determines the scope of the audit?

a) The auditor
b) The client
c) Both a and b
d) Neither a nor b

a) The auditor

37. Financial statements prepared in accordance with a financial reporting framework designed to
meet the financial information needs of specific users are referred to as
a) Special purpose financial statements
b) Special purpose framework
c) General purpose financial statements
d) Specific purpose financial statements

a) Special purpose financial statements

38. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an
interim date rather than as of the balance sheet date. The auditor should be aware that this practice
a) Eliminates the use of certain statistical sampling methods that would otherwise be available
b) Presumes that the auditor will reperform the tests of the balance sheet date
c) Should be especially considered when there are rapidly changing economic conditions
d) Potentially increases the risk that errors that exist at the balance sheet date will not be detected

d) Potentially increases the risk that errors that exist at the balance sheet date will not be detected

39. Close family include the following, except

a) Parent
b) Sibling
c) Non-dependent child
d) Spouse

d) Spouse

40. A computer-assisted audit technique that is most likely to be effective in a continuous auditing
environment is
a) Parallel simulation
b) Controlled reprocessing
c) Embedded audit modules
d) Transaction tripping

c) Embedded audit modules

41. Which of the following is not prohibited by the Code of Professional Ethics for CPAs?
a) Advertising and solicitation of clients
b) Payment of commissions to obtain a client
c) Receiving a contingent fee on a tax case before the Bureau of Internal Revenue
d) Offering employment to a staff member of another CPA without first informing the CPA

c) Receiving a contingent fee on a tax case before the Bureau of Internal Revenue

42. The management's assessment of the entity's ability to continue as a going concern covers a
period of
a) Not longer than 12 months from balance sheet date
b) At least 12 months from the balance sheet date
c) Not longer than 12 months from the date of audit report
d) At least 12 months from the date of audit report

b) At least 12 months from the balance sheet date

43. To obtain evidential matter about control risk, an auditor selects tests from a variety of
techniques including
a) Inquiry
b) Analytical procedures
c) Calculation
d) Confirmation

a) Inquiry

44. The need for independent audits of financial statements can be attributed to all of the following
conditions except
a) Remoteness
b) Consequence
c) Complexity of subject matter
d) Validity

d) Validity

45. After issuing a report an auditor includes that an auditing procedure considered necessary at
the time of the examination was omitted from the examination. The auditor should first
a) Undertake to apply the omitted procedure or alternative procedures that would provide a
satisfactory basis for the auditor's opinion
b) Assess the importance of the omitted procedure to the auditor's ability to support the opinion
expressed on the financial statements taken as a whole
c) Notify the audit committee or the board of directors that the auditor's opinion can no longer be
relied upon
d) Review the results of other procedures that were applied to compensate for the one omitted or
to make its omission less important

b) Assess the importance of the omitted procedure to the auditor's ability to support the opinion
expressed on the financial statements taken as a whole

46. This quality control element requires a CPA firm to establish policies and procedures to
provide it with reasonable assurance that engagements are performed in accordance with
professional standards and regulatory and legal requirements, and that the firm or the engagement
partner issue reports that are appropriate in the circumstances
a) Ethical requirements
b) Engagement performance
c) Monitoring
d) Human resources

b) Engagement performance
47. Communication with a predecessor auditor is initiated by
a) Management
b) The successor auditor
c) The audit committee of the board of directors
d) The chair of the board of directors

b) The successor auditor

48. In which of the following may confidential information not be disclosed?

a) To comply with the quality review of a member body or professional body
b) To submit evidence in the course of legal proceedings
c) Acquiring information in the course performing professional services and use that information
for personal advantages
d) When consent to disclose information is given by the client

c) Acquiring information in the course performing professional services and use that information
for personal advantages

49. The auditor should perform the following risk assessment procedures to obtain an
understanding of the entity and its environment, including its internal control, except
a) Inquiries of management and others within the entity
b) Reperformance
c) Analytical procedures
d) Observation and inspection

b) Reperformance

50. The auditor should determine overall responses to address the risks of material misstatement at
the financial statement level. Such responses most likely include
a) Assigning less experienced staff
b) Performing predictable further audit procedures
c) Performing substantive procedures at an interim date instead of at period end
d) Emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidence

d) Emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidence

51. The need for assurance services arises for all of the following reason except
a) Potential bias in providing information
b) Closeness between a user and the organization
c) Complexity of the processing systems
d) Remoteness between a user and the organization

b) Closeness between a user and the organization

52. Which one of the following is not a key attribute needed to perform assurance?
a) Subject matter knowledge
b) Independence
c) Established criteria or standards
d) Accounting skills

d) Accounting skills

53. Which one of the following is not part of the attest process?
a) Providing the accuracy of the books and records
b) Gathering evidence about assertions
c) Evaluating evidence against objective criteria
d) Communicating the conclusions reached

a) Providing the accuracy of the books and records

54. Users of the audit report can reasonably expect the audited financial statements to be
a) Complete and contain many of the important financial disclosures
b) Presented fairly according to the substance of GAAP
c) Free from all errors
d) All of the above

b) Presented fairly according to the substance of GAAP

55. Which of the following services is the broadest and most inclusive
a) Audit
b) Attestation
c) Assurance
d) Compliance

c) Assurance

Apr 16, 2012

56. One reason why an auditor makes an analytical review of the clients operations is to identify
a) Improper separation of accounting and other financial duties
b) Weakness of a material nature in the system of internal accounting control
c) Unusual transactions
d) Non-compliance with prescribed control procedures

c) Unusual transactions

57. Analytical procedures used in planning an audit should focus on identifying

a) Material weaknesses in the internal control structure
b) The predictability of financial data from individual transactions
c) The various assertions that are embodied in the financial statements
d) Areas that may represent specific risk relevant to audit

d) Areas that may represent specific risk relevant to audit

58. An integrated test facility (ITF) would be appropriate when the auditor needs to
a) Trace a complex logic path through an application system
b) Verify processing accuracy concurrently with processing
c) Monitor transactions in an application system continuously
d) Verify load module integrity for production programs

b) Verify processing accuracy concurrently with processing

59. The rotation of senior accounting personnel can be regarded as a safeguard

a) Created by the profession
b) Within the clients systems and procedures
c) In the work environment
d) Created within the business community

c) In the work environment

60. If certain forms are not consecutively numbered

a) Systematic sampling may be appropriate
b) Selection of a random sample probably is not possible
c) Stratified sampling should be used
d) Random number tables cannot be used

a) Systematic sampling may be appropriate

Apr 16, 2012

61. A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?
a) Simultaneous confirmations
b) Simultaneous bank reconciliations
c) Simultaneous verification
d) Simultaneous surprise cash count

c) Simultaneous verification

62. Which of the following is most likely to indicate a significant deficiency relating to a client's
anti-fraud programs?
a) A broad scope of internal audit activities
b) A "whistle-blower" program that encourages anonymous submissions
c) Audit committee passivity when conducting oversight functions
d) Lack of performance of criminal background investigations for likely customers

c) Audit committee passivity when conducting oversight functions

63. Which of the following is not an attestation standard?

a) Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is
expressed in the report
b) The report shall identify the subject matter on the assertion being reported on and state the
character of the engagement
c) The work shall be adequately planned and assistants, if any, shall be properly supervised
d) A sufficient understanding of internal control shall be obtained to plan the engagement

d) A sufficient understanding of internal control shall be obtained to plan the engagement

64. Proper segregation of functional responsibilities calls for separation of the functions of
a) Authorization, execution, and payment
b) Authorization, recording, and custody
c) Custody, execution, and reporting
d) Authorization, payment, and recording

b) Authorization, recording, and custody

65. Control risk should be assessed in terms of

a) Specific controls
b) Types of potential fraud
c) Financial statement assertions
d) Control environment factors

c) Financial statement assertions

Apr 16, 2012

66. Which of the following is not a step in an auditor's assessment of control risk?
a) Evaluate the effectiveness of internal control with tests of controls
b) Obtain an understanding of the entity's information system and control environment
c) Perform tests of details of transactions to detect material misstatements in the financial
statements
d) Consider whether controls can have a pervasive effect on financial statement assertions

c) Perform tests of details of transactions to detect material misstatements in the financial

statements

67. Which of the following procedures would an auditor ordinarily perform first in evaluating
management's accounting estimates for reasonableness?
a) Develop independent expectations of management's estimates
b) Consider the appropriateness of the key factors or assumptions used in preparing the estimates
c) Test the calculations used by management in developing the estimates
d) Obtain an understanding of how management developed its estimates

d) Obtain an understanding of how management developed its estimates

68. An entity's income statements were misstated due to the recording of journal entries that
involved debits and credits to an unusual combination of expense and revenue accounts. The
auditor most likely could have detected this fraudulent financial reporting by
a) Tracing a sample of journal entries to the general ledger
b) Evaluating the effectiveness of internal control
c) Investigating the reconciliations between controlling accounts and subsidiary records
d) Performing analytical procedures designed to disclose differences from expectations

d) Performing analytical procedures designed to disclose differences from expectations

69. Which of the following is most likely to be unique to the audit work of CPAs as compared to
work performed by practitioners of other professions?
a) Due professional care
b) Competence
c) Independence
d) Complex body of knowledge

c) Independence

70. Which of the following would an auditor most likely use in determining the auditor's
preliminary judgment about materiality?
a) The anticipated sample size of the planned substantive tests
b) The entity's annualized interim financial statements
c) The results of the internal control questionnaire
d) The contents of the management representation letter
b) The entity's annualized interim financial statements

Apr 16, 2012

71. Which of the following conditions identified during fieldwork of an audit is most likely to
affect the auditor's assessment of the risk of misstatement due to fraud?
a) Checks for significant amounts outstanding at year-end
b) Computer generated documents
c) Missing documents
d) Year-end adjusting journal entries.

c) Missing documents

72. An auditor ordinarily uses a working trial balance resembling the financial statements without
footnotes, but containing columns for
a) Cash flow increases and decreases
b) Audit objectives and assertions
c) Reclassifications and adjustments
d) Reconciliations and tick marks

c) Reclassifications and adjustments

73. The risk that an auditor will conclude, based on substantive tests, that a material misstatement
does not exist in an account balance when in fact such misstatement does exist is referred to as
a) Detection risk
b) Sampling risk
c) Non-sampling risk
d) Inherent risk

a) Detection risk

74. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may
a) Be unaware of all the financial relationships that the bank has with the client
b) Not believe that the bank is obligated to verify confidential information to a third party
c) Sign and return the form without inspecting the accuracy of the client's bank reconciliation
d) Not have access to the client's cutoff bank statement

a) Be unaware of all the financial relationships that the bank has with the client

75. A material weakness is a significant deficiency (or combination of significant deficiencies) that
results in a reasonable possibility that a misstatement of at least 'what amount will not be
prevented or detected?
a) An amount greater than zero
b) An amount greater than zero, but at least inconsequential
c) An amount greater than inconsequential
d) A material amount

d) A material amount

Apr 17, 2012

76. The existence of audit risk is recognized by the statement in the auditor's standard report that
the auditor
a) Obtains reasonable assurance about whether the financial statements are free of material
misstatement.
b) Assesses the accounting principles used and also evaluates the overall financial statement
presentation.
c) Realizes some matters either individually or in the aggregate, are important while other matters
are not important.
d) Is responsible for expressing an opinion on the financial statements, which arc the
responsibility of management.

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

77. Which of the following services would be most likely to be structured as an attest
engagement?
a) Advocating a client's position in tax matter.
b) A consulting engagement to develop a new database system for the revenue cycle.
c) An engagement to issue a report addressing an entity's compliance with requirements of
specified laws.
d) The compilation of a client's forecast information.

c) An engagement to issue a report addressing an entity's compliance with requirements of

specified laws.

78. Which of the following is ordinarily considered to be a fraud risk factor?

a) The company's financial statements include a number of last minute material adjustments.
b) Management regularly informs investors of forecast information.
c) The company has experienced increasing earnings over the previous five years.
d) The company's president is included as a member of the board of directors.

a) The company's financial statements include a number of last minute material adjustments.
79. Which is least likely to be a question asked of client personnel during a walk-through in an
audit of the internal control of an issuer (public) company?
a) What do you do when you find an error'?
b) Who is most likely to commit fraud among your coworkers?
c) What kind of errors have you found?
d) Have you ever been asked to override the process or controls?

b) Who is most likely to commit fraud among your coworkers?

80. An auditor who uses the work of a specialist may refer to and identify the specialist ill the
auditor's report if the
a) Specialist is also considered to be a related party.
b) Auditor indicates a division of responsibility related to the work of the specialist.
c) Specialist's work provides the auditor greater assurance of reliability.
d) Auditor expresses an "except for" qualified opinion or an adverse opinion related to the work of
the specialist.

d) Auditor expresses an "except for" qualified opinion or an adverse opinion related to the work of
the specialist.

81. Which of the following statements concerning evidential matter is correct?

a) Appropriate evidence supporting management's assertions should be convincing rather than
merely persuasive.
b) Effective internal control contributes little to the reliability of the evidence created within the
entity.
c) The cost of obtaining evidence is not an important consideration to an auditor in deciding what
evidence should be obtained.
d) A client's accounting data cannot be considered sufficient audit evidence to support the financial
statements.

d) A client's accounting data cannot be considered sufficient audit evidence to support the financial
statements.

82. Confirmations of accounts receivable address which assertion most directly?

a) Completeness
b) Existence
c) Valuation
d) Classification

b) Existence

83. When performing a review of an issuer company, which is least likely to be included in the
CPA's inquires of management members with responsibility for financial and accounting matters?
a) Subsequent events
b) Significant journal entries and other adjustments
c) Communications with related parties
d) Unusual or complex situations affecting the financial statements

c) Communications with related parties

84. The adverse effects of events causing an auditor to believe there is substantial doubt about an
entity's ability to continue as a going concern would most likely be mitigated by evidence relating
to the
a) Ability to expand operations into new product lines in the future.
b) Feasibility of plans to purchase leased equipment at Jess than market value.
c) Marketability of assets that management plans to sell.
d) Committed arrangements to convert preferred stock to long-term debt.

c) Marketability of assets that management plans to sell.

85. One reason that an auditor only obtains reasonable, and not absolute, assurance that financial
statements are free from material misstatement is
a) Comprehensive basis reporting
b) Employee collusion
c) Material misstatements
d) Professional skepticism

b) Employee collusion

86. When an auditor concludes there is substantial doubt about a continuing audit client's ability to
continue as a going concern for a reasonable period of time, the auditor's responsibility is to
a) Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on
the financial statements.
b) Consider the adequacy of disclosure about the client's possible inability to continue as a going
concern.
c) Report to the client's audit committee that management's accounting estimates may need to be
adjusted.
d) Reissue the prior year's auditors report and add an explanatory paragraph that specifically refers
to "substantial doubt" and "going concern."

b) Consider the adequacy of disclosure about the client's possible inability to continue as a going
concern.

87. The accountant who is not independent may perform which of the following types of
engagements?
a) Audit
b) Agreed-upon procedures
c) Compilation
d) Review

c) Compilation

88. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
a) Analysis of balance sheet accounts
b) Analysis of income statement accounts
c) All matters of continuing accounting significance
d) Facts that might bear on the integrity of management

d) Facts that might bear on the integrity of management

89. Which is least likely to be a response when an auditor has obtained evidence indicating a risk
of material misstatement in the area of inventory?
a) Request inventory counts at the end of each month.
b) Discuss questions of inventory valuation with any other auditors involved with the audit.
c) Make oral inquiries of major suppliers in addition to written confirmations.
d) Perform inventory observations on an unannounced basis.

a) Request inventory counts at the end of each month.

90. The independent auditor selects several transactions in each functional area and traces them
through the entire system, paying special attention to evidence about whether or not the controls
are in operation. This is an example of a(n)
a) Application test
b) Test of controls
c) Substantive test
d) Test of a function

b) Test of controls

91. Accounting control procedures within computer processing may leave no visible evidence
indicating that the procedures were performed. In such instances, the auditor should test these
controls by
a) Making corroborative inquiries.
b) Observing the separation of duties of personnel.
c) Reviewing transactions submitted for processing and comparing them to related output.
d) Reviewing the run manual.

c) Reviewing transactions submitted for processing and comparing them to related output.

92. If information is for management's use only, which of the following forms of CPA association
with financial information is most likely to result in no report being issued?
a) An agreed-upon procedures engagement
b) An audit
c) A compilation
d) A review

c) A compilation

93. In obtaining an understanding of a manufacturing entity's internal control over inventory

balances, an auditor most likely would
a) Review the entity's descriptions of inventory policies and procedures.
b) Perform test counts of inventory during the entity's physical count.
c) Analyze inventory turnover statistics-to identify slow-moving and obsolete items.
d) Analyze monthly production reports to identify variances and unusual transactions.

a) Review the entity's descriptions of inventory policies and procedures.

94. When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test
to obtain evidence that
a) All goods owned at year-end are included in the inventory balance.
b) All goods purchased before year-end are received before the physical inventory count.
c) No goods held on consignment for customers are included in the inventory balance.
d) No goods observed during the physical count are pledged or sold.

a) All goods owned at year-end are included in the inventory balance.

95. A company has changed its method of inventory valuation from an unacceptable one toone in
conformity with generally accepted accounting principles. The auditor's report on the financial
statements of the year of the change should include
a) No reference to consistency.
b) A reference to a prior period adjustment in the opinion paragraph.
c) An explanatory paragraph explaining the change.
d) A justification for making the change and the impact of the change on reported net income.

c) An explanatory paragraph explaining the change.

Apr 17, 2012

96. An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning phase of the
audit by the use of
a) Tests of transactions and balances
b) A preliminary review of internal control
c) Specialized audit programs
d) Analytical procedures

d) Analytical procedures

97. Which of the following statements best describes the ethical standard of the profession
pertaining to advertising and solicitation?
a) All forms of advertising and solicitation are prohibited.
b) There are no prohibitions regarding the manner in which CPAs may solicit new business.
c) A CPA may advertise in any manner that is not false, misleading, or deceptive.
d) A CPA may only solicit new clients through mass mailings.

c) A CPA may advertise in any manner that is not false, misleading, or deceptive.

98. A note to the financial statements of a bank indicates that all of the records relating to its
business operations are stored on magnetic disks; and that there are no emergency back-up
systems or duplicate disks stored since the bank and their auditors consider the occurrence of a
catastrophe to be remote. Based upon this, one would expect the auditor's report to express
a) An adverse opinion
b) An "except for" opinion
c) An unqualified opinion
d) A qualified opinion

c) An unqualified opinion

99. Which of the following is not typically performed when accountants are performing a review
of the financial statements of a nonissuer?
a) Analytical procedures applied to financial data
b) Inquiries about significant subsequent events
c) Inquiries of the client's attorney about legal matters
d) Obtaining an understanding of the accounting principles followed by the client's industry

c) Inquiries of the client's attorney about legal matters.

100. Which of the following is least likely to be a restricted use report?

a) A report on financial statements prepared following a comprehensive basis of accounting other
than generally accepted accounting principles.
b) A report on internal control significant deficiencies noted in an audit.
c) A required communication with the audit committee.
d) A report on compliance with aspects of contractual agreements.

a) A report on financial statements prepared following a comprehensive basis of accounting other

than generally accepted accounting principles.