Lebanese Association of Certified Public Accountants Examination Year June 2006 Auditing

1- The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the Answers A: Partner assigned to the audit engagement. B: Management of the company. C: Auditor in charge of the fieldwork. D: Ministry of Finance.

2- In developing a preliminary audit strategy, an auditor should consider

4- A basic premise underlying analytical procedures is that Answers A: Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. B: The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. C: Relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. D: These procedures can not replace tests of balances and transactions.

Answers A: Whether the allowance for sampling risk exceeds the achieved upper precision limit. B: Findings from substantive tests performed at interim dates. C: Whether the inquiry of the clients attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. D: The planned assessed level of control risk.

3- Inherent risk and control risk differ from detection risk in that inherent risk and control risk are Answers A: Elements of audit risk while detection risk is not. B: Changed at the auditors discretion while detection risk is not. C: Considered at the individual accountbalance level while detection risk is not. D: Functions of the client and its environment while detection risk is not.

5- Audit programs should be designed so that

Answers A: Most of the required procedures can be performed as interim work. B: Inherent risk is assessed at a sufficiently low level. C:The auditor can make constructive suggestions to management. D: The audit evidence gathered supports the auditors conclusions.

6- In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the Answers A: Timing of audit procedures. B: Cost-benefit of gathering evidence. C: Selected audit techniques. D: Financial statement assertions. 7- The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the Answers A: Audit has been performed by persons having adequate technical training and proficiency as auditors. B: Auditors system of quality control has been maintained at a high level. C: Results are consistent with the conclusions to be presented in the auditors report. D: Audit procedures performed are approved in the professional standards.

9- As the acceptable level of detection risk decreases, the assurance directly provided from Answers A: Substantive tests should increase. B: Substantive tests should decrease. C: Tests of controls should increase. D: Tests of controls should decrease. 10- In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate Answers A: $10,000 B: $15,000 C: $20,000 D: $30,000 11- Following the Professional Standards which of the following is not one of the assertions made by management in financial statements? Answers A: Completeness. B: Existence or occurrence C: Presentation and disclosure. D: Relevance and reliability.

8- Inherent risk and control risk differ from detection risk in that inherent risk and control risk are Answers A: Elements of audit risk while detection risk is not. B: Changed at the auditors discretion while detection risk is not. C: Considered at the individual accountbalance level while detection risk is not. D: Functions of the client and its environment while detection risk is not.

12- On the basis of 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 Answers A: Increase inherent risk. B: Increase materiality levels. C: Decrease substantive testing. D: Decrease detection risk. 13- After obtaining an understanding of an entity's internal control and assessing control risk, an auditor may Answers A: Perform tests of controls to verify managements assertions that are embodied in the financial statements. B: Consider whether evidential matter is available to support a further reduction in the assessed level of control risk. C: Apply analytical procedures as substantive tests to validate the assessed level of control risk. D: Evaluate whether the companys controls detected material misstatements in the financial statements. 14- A LACPA firm's personnel partner periodically studies the LACPA firm's personnel advancement experience to ascertain whether individuals increased degrees of responsibility. This is evidence of the LACPA firm's adherence to prescribed standards of

Answers A: Quality control. B: Due professional care. C: Supervision and review. D: Fieldwork. 15- The objective of quality control mandates that a public accounting firm should establish policies and procedures for professional development which provide reasonable assurance that all entry-level personnel Answers A:Prepare working papers which standardized in form and content.

are

B: Have the knowledge required to enable them to fulfill responsibilities assigned. C: Will advance within the organization. D: Develop specialties in specific areas of public accounting 16- An LACPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is Answers A: To enable the auditor to attest to the integrity or reliability of a client. B: To comply with the quality control standards established by regulatory bodies. C: To minimize the likelihood of association with clients whose management lacks integrity. D: To lessen the exposure to litigation resulting from failure to detect irregularities in client financial statements.

17- An LACPA in public practice must be independent in fact and appearance when providing which of the following services?

19- In which circumstance is the confirmation of receivables on October 31 most likely for a client with a December 31 year-end? Answers

Preparation of a tax return A. B. C. D. Yes No No No

Compilation of a financial forecast No Yes No No

Compilation of personal financial statements No Yes Yes No

A: Tests of controls have revealed that the disbursements cycle is operating effectively. B: The receivables balance is material. C: Accounts were confirmed as of December 31 for the preceding years audit. D: Appropriate audit tests indicate that control risk for receivables is low.

Answers A: A. B: B. C: C. D: D.

20- Use the audit risk model to calculate audit risk (to the closest percent) in the following circumstance: 40% 40% 40% Answers A: 1%. B: 6%. C: 13%. D: 40%. Control risk Inherent risk Detection risk

18- Auditing standards require that the examination of financial statements is to be performed by a person or persons having adequate technical training and Answers A: Independence with respect to the financial statements and supplementary disclosures. B: Exercising professional care as judged by peer reviewers. C: Proficiency as an auditor which likely has been acquired from previous experience. D: Objectivity as an auditor as verified by proper supervision .

21- An accountant who is not independent of a client is precluded from issuing a Answers A: Compilation report on historical financial statements. B: Compilation report financial statements. on prospective

23- What assurance does the auditor provide that errors, fraud, and direct effect illegal acts that are material to the financial statements will be detected? Errors Fraud Direct effect illegal acts A. Limited Negative Limited B. Limited Limited Reasonable C. Reasonable Limited Limited D. Reasonable Reasonable Reasonable Answers A: A. B: B. C: C. D: D. 24- The independent auditors plan for an examination in accordance with generally accepted auditing standards is influenced by the possibility of material misstatements. The auditor will therefore conduct the examination with an attitude of Answers A: Professional skepticism. B: Subjective mistrust. C: Objective indifference.

C: Special report on compliance with contractual agreements. D: Report on consulting services. 22- Which of the following factors is most important concerning an auditors responsibility to detect errors and fraud? Answers A: The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles. B: The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements.

D: Professional responsiveness. 25- Which of the following is an example of fraudulent financial reporting? Answers A: Company management improperly records as revenue the proceeds of a loan. B: The treasurer diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. C: An employee steals inventory and the
"shrinkage" is recorded in cost of goods sold.

C: The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts. D: The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

D: An employee bills his company for products not received, using the name of a fictitious supplier.

26- Which of the following is correct concerning a fraud risk factor? Answers A: Its presence indicates that the risk of fraud is high. B: It has been observed in circumstances where frauds have occurred. C: It requires modification of planned audit procedures. D: It is also a material weakness in internal control. 27- While obtaining an understanding of a clients risk assessment policies, an auditor ordinarily considers how management Answers A: Identifies risks. B: Eliminates significant risks. C: Assesses the likelihood of occurrence of subsequent events. D: Relates risk assessment to compliance with marketing objectives. 28- If internal control is properly designed, the same employee should not be permitted to Answers A: Sign checks and cancel supporting documents. B: Receive merchandise and prepare a receiving report. C: Prepare disbursement vouchers and sign checks. D: Initiate a request to order merchandise and approve merchandise received.

29- Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? Answers A: Preparation of monthly statements to customers and maintenance of the accounts receivable subsidiary ledger. B: Posting to the general ledger and approval of additions and terminations relating to the payroll. C: Custody of unmailed signed checks and maintenance of expense subsidiary ledgers. D: Collection of receipts on account and maintaining accounts receivable records. 30- For good internal control, which of the following functions should not be the responsibility of the treasurers department? Answers A: Data processing. B: Handling of cash. C: Custody of securities. D: Establishing credit policies. 31- Proper segregation of functional responsibilities calls for separation of the Answers A: Authorization, approval, and execution functions. B: Authorization, execution, and payment functions. C: Receiving, shipping, and custodial functions. D: Authorization, recording, and custodial functions.

32- Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations? Answers A: The internal auditors report to the audit committee of the board of directors. B: The controller reports to the vice president of production. C: The payroll accounting department reports to the chief accountant. D: The cashier reports to the treasurer. 33- An auditor would most likely be concerned with controls that provide reasonable assurance about the Answers A: Efficiency of managements decisionmaking process. B: Appropriate prices the entity should charge for its products. C: Methods of assigning production tasks to employees. D: Entitys ability to process and summarize financial data. 34- In connection with the element of inspection, a CPA firms system of quality control should ordinarily provide for the maintenance of Answers A: A file of minutes of staff meetings. B: Updated personnel files. C: Documentation to demonstrate compliance with its policies and procedures. D: Documentation to demonstrate compliance with peer review directives.

35- Which of the following procedures is not usually performed by the accountant in a review engagement of a nonpublic entity? Answers A: Communicating any material weaknesses discovered during the consideration of internal control. B: Reading the financial statements to consider whether they conform with IFRS. C: Writing an engagement letter to establish an understanding regarding the services to be performed. D: Issuing a report stating that the review was performed in accordance with standards established by the AICPA. 36- The auditors report should be dated as of the date on which the Answers A: Report is delivered to the client. B: Fieldwork is completed. C: Fiscal period under audit ends. D: Review of the working papers is completed 37- When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor should Answers A: Insist that the client issue revised financial statements. B: Inform the audit committee that the report cannot be relied upon. C: Take no action regarding the event. D: Inform the appropriate authorities that the report cannot be relied upon.

38-

The

Sarbanes-Oxley Act

of

2003

authorized creation of the

41- Which of the following procedures would provide the most reliable audit evidence? Answers

Answers A: Auditing Standards Board. B: Public Company Accounting Oversight Board. C: Financial Accounting Standards Center. D: Corporate Governance Institute.

A: Inquiries of the clients internal audit staff held in private. B: Inspection of prenumbered client purchase orders filed in the vouchers payable department. C: Analytical procedures performed by the auditor on the entitys trial balance. D: Inspection of bank statements obtained directly from the clients financial institution. 42- Which of the following is included as part of the definition of audit sampling? Answers A: Inquiry and observation procedures. B: Documentary evidence. C: Evaluation of some characteristic. D: Statistical techniques.

39-Which of the following audit risk components may be assessed in no quantitative terms? Inherent risk Yes Yes No Yes Control risk Yes No Yes Yes Detection risk No Yes Yes Yes

A. B. C. D. Answers A: B: C: D: A. B. C. D.

43- An auditor may decide to increase the risk of incorrect rejection when Answers A: Increased reliability from the sample is desired.

40-To be competent, evidence must be both

Answers A: Timely and substantial. B: Reliable and documented. C: Valid and relevant. D: Useful and objective.

B: Many differences (audit value minus recorded value) are expected. C: Initial sample results do not support the planned level of control risk. D: The cost and effort of selecting additional sample items is low.

44- The auditor faces a risk that the examination will not detect material misstatements which occur in the accounting process. In regard to minimizing this risk, the auditor primarily relies on Answers A: Substantive tests. B: Tests of controls. C: Internal control. D: Statistical analysis.

B: An auditor may select audit procedures that are not appropriate to achieve the specific objective. C: An auditor may fail to recognize errors in the documents examined for the chosen sample. D: The documents related to the chosen sample may not be available for inspection . 47- An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against a client except the Answers A: Period in which the underlying cause for legal action occurred. B: Probability of an unfavorable outcome. C: Jurisdiction in which the matter will be resolved. D: Existence of a situation indicating an uncertainty as to the possible loss.

45- Use the ratio method of sampling to calculate the year-end accounts payable audited balance from the following data: Number Book Audited of balance balance accounts Population 4,100 $5,000,000 ? Sample 200 $ 250,000 $300,000

Answers A: $6,150,000 B: $6,000,000 C: $5,125,000 D: $5,050,000 B: Failing to correct previously identified internal control deficiencies. 46- Which of the following best illustrates the concept of sampling risk? Answers A: A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. C: Depending on a single product for the success of the entity. D: Borrowing money at an interest rate significantly below the market rate. Answers A: Writing down obsolete inventory just before year-end. 48- Which of the following most likely would indicate the existence of related parties?

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49- After discovering that a related-party transaction exists, the auditor should be aware that the Answers A: Substance of the transaction could be significantly different from its form. B: Adequacy of disclosure of the transaction is secondary to its legal form. C: Transaction is assumed to be outside the ordinary course of business. D: Financial statements should recognize the legal form of the transaction rather than its substance. 50- When auditing related-party transactions, an auditor places primary emphasis on Answers A: Confirming the existence of the related parties. B: Verifying the valuation of the related-party transactions. C: Evaluating the disclosure of the relatedparty transactions. D: Ascertaining the rights and obligations of the related parties.

B: The omission of the procedure impairs the auditors present ability to support the previously expressed opinion. C: The source documents needed to perform the omitted procedure are still available. D: The auditors opinion on the prior periods financial statements was unqualified. 52- The primary objective of analytical procedures used in the final review stage of an audit is to Answers A: Obtain evidence from details tested to corroborate particular assertions. B: Identify areas that represent specific risks relevant to the audit. C: Assist the auditor in assessing the validity of the conclusions reached. D: Satisfy doubts when questions arise about a clients ability to continue in existence.

53- 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 primary reason for this request is to provide Answers A: Information concerning the progress of cases to date. B: Corroborative evidential matter. C: An estimate of the dollar amount of the probable loss. D: An expert opinion as to whether a loss is possible, probable, or remote.

51- An auditor concludes that a substantive auditing procedure considered necessary during the prior period's audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure? Answers A: There are no alternative procedures available to provide the same evidence as the omitted procedure.

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54- Which of the following statements concerning evidential matter is correct? Answers A: Competent evidence supporting managements 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 clients accounting data cannot be considered sufficient audit evidence to support the financial statements.

Answers A: Client accounting manuals. B: Written client representations. C: Vendor invoices. D: Minutes of board meetings. 57- Most of the independent auditor's work in formulating an opinion on financial statements consists of Answers A: Considering internal control. B: Obtaining and examining evidential matter. C: Examining cash transactions. D:Comparing assets. recorded accountability with

55 - The third standard of fieldwork states that sufficient competent evidential matter may, in part, be obtained through inspection, observation, inquiries, and confirmations, to afford a reasonable basis for an opinion regarding the financial statements under examination. The evidential matter required by this standard may, in part, be obtained through Answers A: Analytical procedures. B: Auditor working papers. C: Review of the internal control. D: Proper planning of the audit engagement. 56- In connection with the third generally accepted auditing standard of fieldwork, an auditor examines corroborating evidential matter which includes all of the following except

58- Management prepares accounting estimates and the auditor is responsible for evaluating the reasonableness of the estimates. Which of the following would not be an auditor's objective when evaluating estimates? Answers A: All accounting estimates which could be material to the financial statements have been developed. B: The accounting estimates developed by management are accurate with 100% certainty. C: The accounting estimates developed by management are reasonable. D: The accounting estimates are presented in accordance with International Financial Reporting Standards.

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59- Failure to detect material dollar errors in the financial statements is a risk which the auditor primarily mitigates by Answers A: Performing substantive tests. B: Performing tests of controls. C: Assessing internal control. D: Obtaining a client representation letter. 60- As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should Answers A: Include an explanatory paragraph in the audit report due to the inability of the client company to continue as a going concern. B: Evaluate managements performance in causing this decline. C: Require footnote disclosure. D: Consider the possibility of a misstatement in the financial statements. 61- Tests of controls are performed in order to determine whether Answers A: Controls are functioning as designed. B: Necessary controls are absent. C: Incompatible functions exist. D: Material dollar errors exist.

62- The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a Answers A: Test of a control. B: Substantive test. C: Dual-purpose test. D: Test of balances. 63- Of the following, which is the least persuasive type of audit evidence? Answers A: Documents mailed by outsiders to the auditor. B: Correspondence between auditor and vendors. C: Copies of sales invoices inspected by the auditor. D: Computations made by the auditor. 64- Of the following statements about internal control, which one is not valid? Answers A: No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B: Transactions must be properly authorized before such transactions are processed. C: Because of the cost/benefit relationship, a client may apply controls on a test basis. D: Controls reasonably ensure that collusion among employees cannot occur.

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65- Which of the following controls will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable? Answers A: Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. B: Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. C: Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected. D: Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers. 66- Which of the following statements concerning audit evidence is correct? Answers A: To be competent, audit evidence should be either persuasive or relevant, but need not be both. B: The measure of the validity of audit evidence lies in the auditors judgment. C: The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test. D: A clients accounting data can be sufficient audit evidence to support the financial statements.

67- Which of the following analytical procedures should be applied to the income statement? Answers A: Select sales and expense items and trace amounts to related supporting documents. B: Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. C:Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales. D: Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

68- Analytical procedures used in planning an audit should focus on identifying Answers A: Material weaknesses in internal control. 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 risks relevant to the audit.

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69- Assurance services performed decision makers may address the Quality of information Yes Yes No No Context of information Yes No Yes No

for

A. B. C. D.

72- As one of the year-end audit procedures, the auditor instructed the clients personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the clients treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? Answers A: The confirmation request was signed by the treasurer. B: Sending the request was meaningless because the account was closed before the year-end. C: The request was mailed by the assistant treasurer. D: The LACPA did not sign the confirmation request before it was mailed.

Answers A: A. B: B. C: C. D: D. 70- Which of the following is least likely to include a reference to the use of a specialist? Answers A: Unqualified opinion. B: Adverse opinion. C: "Except for" qualified opinion. D: "Subject to" qualified opinion. 71- In order to safeguard the assets through proper internal control, accounts receivable that are written off are transferred to a(n) Answers A: Separate ledger. B:Attorney for proceedings. evidence in collection

73- When counting cash on hand the auditor must exercise control over all cash and other negotiable assets to prevent Answers A: Theft. B: Irregular endorsements. C: Substitution. D: Deposits-in-transit.

C: Tax deductions files. D: Credit manager since customers may seek to reestablish credit by paying.

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74- During the process of confirming receivables as of December 31, 2000, a positive confirmation was returned indicating the balance owed as of December 31 was paid on January 9, 2001. The auditor would most likely

76- When an auditor concludes there is substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time, the auditors responsibility is to Answers A: Prepare prospective financial information to verify whether managements plans can be effectively implemented. B: Project future conditions and events for a period of time not to exceed 1 year following the date of the financial statements. C: Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. D: Consider the adequacy of disclosure about the entitys possible inability to continue as a going concern. 77- A material change in an accounting estimate Answers A: Requires a consistency modification in the auditors report and disclosure in the financial statements. B: Requires a consistency modification in the auditors report but does not require disclosure in the financial statements. C: Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency modification in the auditors report. D: Involves the acceptability of the generally acceptable accounting principles used.

Answers A: Determine whether there were any changes in the account between January 1 and January 9, 2001. B: Determine whether a customary trade discount was taken by the customer. C: Reconfirm the zero balance as of January 10, 2001. D: Verify that the amount was received.

75- Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

Answers A: Collectibility of the balances confirmed. B: Ownership of the balances confirmed. C: Existence of the balances confirmed. D: Internal control over balances confirmed.

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78- With respect to consistency, which of the following should be done by an independent auditor, who has not examined a companys financial statements for the preceding year but is doing so in the current year? Answers A: Report on the financial statements of the current year without considering consistency with the preceding year. B: Consider the consistent application of principles within the year under examination but not between the current and preceding year. C: Adopt procedures that are practicable and reasonable in the circumstances to obtain assurance that the principles employed are consistent between the current and preceding year. D: Rely on the report of the prior years auditors if such a report does not provide explanatory language as to consistency. 79- The prior years financial statements of YZ, Inc., which were audited by Pate, CPA, are presented for comparative purposes without Pates audit report. Jennings, CPA, the successor auditor, should indicate in the current year audit report that the prior years financial statements were examined by another auditor Answers A: Only if Pates opinion was other than unqualified. B: But should not indicate the type of opinion expressed by Pate. C: Only if the prior years statements have been restated. financial

80- Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit? Answers A: Time and expense summary. B: Engagement letter. C: Progress flowchart. D: Audit program. 81- Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when Answers A: The audit committee is active in overseeing the entitys financial reporting policies. B: External policies established by parties outside the entity affect its accounting practices. C: Management is dominated by one individual who is also a shareholder.

D: Internal auditors have direct access to the board of directors and entity management. 82- Which of the following computer documentation would an auditor most likely utilize in obtaining an understanding of internal control? Answers A: Systems flowcharts. B: Record counts. C: Program listings.

D: But should not name Pate as the predecessor auditor.

D: Record layouts.

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83- How are managements responsibility and the auditors responsibility represented in the standard auditors report? Managements Auditors responsibility responsibility A. Explicitly Explicitly B. Implicitly Implicitly C. Implicitly Explicitly D. Explicitly Implicitly Answers A: A. B: B. C: C. D: D. 84- A lawyer limits a response concerning a litigated claim because the lawyer is unable to determine the likelihood of an unfavorable outcome. Which type of opinion should the auditor express if the litigation is adequately disclosed and the range of potential loss is material in relation to the clients financial statements considered as a whole? Answers A: Adverse. B: Unaudited. C: Qualified. D: Unqualified. 85- Which of the following auditing procedures is ordinarily performed last? Answers A: Reading of the minutes of the directors meetings. B: Confirming accounts payable. C: Obtaining a management representation letter. D: Testing of the purchasing function.

86- Before performing a review of a nonpublic entity's financial statements, an accountant should Answers A: Complete a series of inquiries concerning the entitys procedures for recording, classifying, and summarizing transactions. B: Apply analytical procedures to provide limited assurance that no material modifications should be made to the financial statements. C: Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates. D: Inquire whether management has omitted substantially all of the IAS.

87- When compiling a nonpublic entity's financial statements, an accountant would be least likely to Answers A: Perform analytical procedures designed to identify relationships that appear to be unusual. B: Read the compiled financial statements and consider whether they appear to include adequate disclosure. C: Omit substantially all of the disclosures required by IAS. D: Issue a compilation report on one or more, but not all, of the basic financial statements.

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88- For effective internal control, the billing function should be performed by the Answers A: Accounting department. B: Sales department. C: Shipping department. D: Credit and collection department. 89- Which of the following procedures is usually performed by the accountant in a review engagement of a nonpublic entity? Answers A: Sending a letter of inquiry to the entitys lawyer. B: Comparing the financial statements with statements for comparable prior periods. C: Confirming a significant percentage of receivables by direct communication with debtors. D: Communicating reportable conditions discovered during the study of the internal control. 90- It would not be appropriate for the auditor to initiate discussion with the audit committee concerning Answers A: The extent to which the work of internal auditors will influence the scope of the examination. B: Details of the procedures which the auditor intends to apply. C: The extent to which change in the companys organization will influence the scope of the examination. D: Details of potential problems which the auditor believes might cause a qualified opinion.

91- Reportable conditions are matters that come to an auditor's attention, which should be communicated to an entity's audit committee because they represent Answers A: Material irregularities or illegal acts perpetrated by high-level management. B: Significant deficiencies in the design or operation of the internal control. C: Flagrant violations of the entitys documented conflict-of-interest policies.

D: Intentional attempts by client personnel to limit the scope of the auditors fieldwork.

92- As generally conceived, the "audit committee" of a publicly held company should be made up of Answers A: Representatives of the major equity interests (bonds, preferred stock, common stock). B: The audit partner, the chief financial officer, the legal counsel, and at least one outsider. C: Representatives from the clients management, investors, suppliers, and customers.

D: Members of the board of directors who are not officers or employees.

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93- In connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?

95- Which of the following is correct concerning an engagement to apply agreedupon procedures?

Answers A: A clear understanding of the terms of the engagement must be established through use of an engagement letter. B: Independence of the LACPA is not required. C: The procedures maybe as limited or as extensive as the LACPAs desire ranging from a mere reading of the information to performing search and verification procedures. D: Use of the report is restricted to the specified users.

Answers A: Selection of accounts receivable for confirmation, based upon the internal auditors judgment as to how many accounts and which accounts will provide sufficient coverage. B: Preparation of schedules for negative accounts receivable responses. C: Evaluation of the internal control for accounts receivable and sales. D: Determination of the adequacy of the allowance for doubtful accounts. 94 - In comparison to the external auditor, an internal auditor is more likely to be concerned with

96 - Which of the following professional services would be considered an attest engagement? Answers A: A management consulting engagement to provide accounting information systems advice to a client. B: An engagement to report on compliance with statutory requirements. C: An income tax engagement to prepare income tax returns. D: The compilation of financial statements from a clients accounting records.

Answers A: Internal control. B: Cost accounting procedures. C: Operational auditing. D: Reviewing interim financial statements.

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97- Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entitys expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as

99- Does an auditor make the following representation explicitly or implicitly when issuing the standard auditors report on comparative financial statements? Consistent Application of accounting principles Explicitly Implicitly Implicitly Explicitly Examination of evidence on a test basis Explicitly Implicitly Explicitly Implicitly

Answers A: Pro forma financial statements. B: Financial projections. C: Partial presentations. D: Financial forecasts .

A. B. C. D. Answers A: A. B: B. C: C. D: D.

98- Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion? Conformity with IFRS Explicitly Implicitly Implicitly Explicitly Adequacy of disclosure Explicitly Implicitly Explicitly Implicitly

A. B. C. D.

100- Skates, an independent auditor, was engaged to perform an examination of the financial statements of Apex Incorporated 1 month after its fiscal year had ended. Although the inventory count was not observed by Skates, and accounts receivable were not confirmed by direct communication with creditors, Skates was able to gain satisfaction by applying alternative auditing procedures. Skates auditors report will probably contain Answers A: An "except for" qualification. B: An unqualified opinion and an explanatory paragraph. C: Either a qualified opinion or a disclaimer of opinion. D: A standard unqualified opinion.

Answers A: A. B: B. C: C. D: D.

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